The East End, the West End, and King's Cross: On clustering in the four-player hotelling game

This article investigates whether decision makers intuitively optimize close to the normative prediction in entrepreneurial decision situations where their time must be allocated between a wage job and a newly formed venture. We offer an analytical model based on maximizing expected utility, and derive an optimal time allocation strategy for decreasing, constant and increasing returns from time invested in the venture. The model's predictions are tested in a simple questionnaire experiment where respondents have to detect corner solutions, that is, they should allocate to the venture either the maximum or the minimum possible time. Respondents are found to allocate time relatively close to the normative predictions, although with systematic deviations that are consistent with well-known decision anomalies. Risk propensity is found to have an impact on the decisions, but it should not according to the model. Respondents appear to use an anchoring and adjustment procedure and are influenced by the so-called affect heuristic, which may explain why those who do not mathematically optimize have their decision partially driven by their risk propensity. Implications of our findings for entrepreneurs and institutions dealing with entrepreneurs are discussed.