Risk-taking in entrepreneurial decision-making: A dynamic model of venture decision

Abstract

On the basis of the seminal work of Kahneman and Tversky Econometrica, 47(2): 263–292 (1979), this research extends the boundaries of prospect theory in investigating determinants and temporal variation of risk-taking in entrepreneurial decisions, such as creating a new business organization or investing a risky business project. The two experimental studies (1) identify entrepreneurial risk-taking in the gain situation and find reversal of risk preference after a dynamic entrepreneurial learning process, indicating that the framing effect of prospect theory in explaining entrepreneurial risk-taking is conditional; (2) instead of weights, subjective judgment of the possibility of success of a risky project (subjective probability) consistently plays central moderating role in entrepreneurial decisions under uncertainty, and (3) the different effects of subjective probability in the two studies reveal that novice decision-makers are more value-driven, whereas experienced decision-makers, particularly under low probability conditions, tend to be more risk averse regardless of the value of a risky project perceived as long as they have a lack of confidence in eventual success.

Appendices

Appendix 1: Experiment 1

Scenario: Here is a decision scenario about a start-up business. Please just make a decision based on your own judgment. Note that there is no correct or wrong decision.

Assuming that you are working in a company with a stable salary (US$ 30,000/year), you discover one business opportunity in your work. If you start a firm to realize this opportunity, you can gain US$ 90,000 at the first year if you execute it well and are successful; your gain will be zero if you fail. By your personal investigation, you know the possibility of start-up firm successfully is 33.3%, in other words, you will have one third possibility of success in executing this business opportunity; two third possibilities of failure. You are required to make a decision between the two choices:

• A: Start up a new firm (33.3% chance of earning US$ 90,000)

• B: Keep working at the company (certain income of US$ 30,000)___

Before you make the decision, please answer these questions on the below.

Subjective Value:

1. How attractive is this business opportunity for you?

2. How do you desire to realize this business opportunity?

3. What is your preference of this start-up opportunity in comparison to the stable work option?

Weights: 4. How important do you think this business opportunity is for you in comparison to the stable work option?

Subjective Probability:

5. Please estimate the possibility that you can execute this business opportunity successfully.

0 (not at all)	20%	40%	60%	80%	100%
○	○	○	○	○	○

You are now asked to make a choice from the two options, please rate your intensity of experienced anxiety, upset, and fear on making this decision.

	not at all	little	a little	bit	quite a bit	extremely
Fear	○	○	○	○	○	○
Anxiety	○	○	○	○	○	○
Upset	○	○	○	○	○	○

Now, please make a choice between A and B,

• A: Start up a new firm (33.3% chance of earning US$ 90,000)

• B: Keep working at the company (certain income of US$ 30,000)

Appendix 2: Experiment 2

Section 1: Introduction

You are a CEO of a company and you have to make 20 decisions on project investment. For each decision you have two choices. One is a certain return and one is a risky choice. A certain choice is denoted with one monetary return, e.g. Project A: $100 K, which means if you invest project A, you will be certain to get a $100 K return. A risky choice is denoted with a range of monetary returns, e.g. Project B: $400 K↔0, which means if you select Project B and it succeeds, you will get a $400 K return; but if this project fails, your gain will be zero.

After you choose between Project A or B, you will be informed whether the project succeeded and the amount of money you received from this investment.

As a CEO you have two goals: (1) make as much money as possible; and (2) make correct decisions in your investments. After the 20 decisions, you will have a break and answer 1 question; then you will make one additional investment decision-making task. Your performance in these decision-making tasks is not related with your ability. Just complete the series of decision-making tasks using your own judgment.

Section 2: Questionnaire (Manipulation Check)

Manipulation check

1. Do you think that the risky choice has many chance of winning?

Section 3: One Addition Decision Making Task

Please make one addition decision. The outcome of this task is very important. Please try your best to make a correct decision.

Please make a choice between:

Section 4: Questionnaires

Immediate Anxiety:

Please describe the intensity of your emotions on making this decision,

	not at all	a little	moderately	quite a bit	extremely
Fear	○	○	○	○	○
Anxiety	○	○	○	○	○
Upset	○	○	○	○	○

Subjective Value:

As for the risky choice (6900 K↔0), please answer these questions on the below.

• 1. How attractive is the risky choice for you?

• 2. How do you desire to choose the risky choice?

• 3. What is your preference of the risky choice in comparison to the sure return option?

Subjective Probability:

Please estimate the possibility that the risky choice (6900 K↔0) will win.

0 (not at all)	20%	40%	60%	80%	100%
○	○	○	○	○	○

Appendix 3

Table 5 Decision tasks in Study 2