Using Cognitive Theory To Explain Entrepreneurial Risk-taking

Lesllie E Palich & D. Ray Bagby

BY GROUP 2 ANAND ANUDEEP AJIT SREE HARISH SAGAR

Introduction
SCHUMPTER 1973

KIRZNER 1973
KNIGHT 1921 CANTILLION 1755

GOVERNMENTS
MIXED OPINIONS COGNITIVE PROCESSES

DECISION DIMENSIONS
SPECIFIC HYPOTHESES

Categorization Theory
Acknowledges the power of cognitive heuristics to

explain human behavior & decision making. Categorization proves useful by allowing for efficient storage of information. Assessments are likely to be similarly skewed or distorted.

Entrepreneurs and Cognitive Process

Entrepreneurs are risk takers.

They are more optimistic in their assessments of

business situations. Categorization by entrepreneurs and non entrepreneurs.

Decision Dimensions
SWOT analysis
Strength Opportunities Weakness Threats

Provide a summary of business situations Measure for Optimism/Pessimism.

Specific Hypotheses

H1

There will be no difference between in risk propensity between entrepreneurs and non entrepreneurs

H2
H3 H4

When presented with identical situations, entrepreneurs will categorize them as having more Strengths versus Weakness than non entrepreneurs

When presented with identical situations, entrepreneurs will categorize them as having more opportunities versus threats than non entrepreneurs.

When presented with identical situations, entrepreneurs will categorize them as having more potential for gain versus loss than non entrepreneurs

Methods
Subjects
Scenario development

Random sample :548

members. Four page questionnaire with cover letter . Non response. 148 members responded out of 548 (27%).

Stimuli consisted of 3 scenario

Technologica Changes in Trends competitive l towards development environme international s ization nt

Measures

2 from faculty of a graduate business school

1 from practitioner highly familiar with entrepreneur s and firms

Panel of 3 entrepreneu rship experts

Cont..
Panel members assign subject in 2 groups according

to responses to 8 survey questions that captured information e.g. Founding new ventures . New innovations Rapid growth High profitability. Estimations of revenue growth.

Risk Propensity
Variables Mean S.D 1 2 3 4

Group Risk Propensity

Strengths/ weakness Opportunities /threat Improve/ deteriorates

1.62 5.84
1.09 1.45 1.07

.49 .92
1.29 1.71 1.31

-0.04
-0.25 -0.20 -0.38

0.14 0.11 0.10 0.23 0.68 .46

Results of ANOVA comparing Risk Propensity

Group Entrepreneurs Nonentrepreneurs F 35 57

Mean Risk Propensity 5.89 5.81 0.16 NS

Results of Multivariate and Univariate Analysis

Variables Multivariate Model Strengths/weakness Entrepreneurs Nonentrepreneurs Entrepreneurs Nonentrepreneurs Entrepreneurs Nonentrepreneurs 35 55 35 55 35 55 1.48 0.84 3.80 1.89 1.18 0.04 N Mean Scores Wilkes Lambda 0.86 F 4.79 5.75 0.06 R square

Opportunities/Threats

Improve/Deteriorate
1.71 0.67

14.58

0.14

Discussion
Entrepreneur is described as the risk propensity or

risk taking ability of an unique individual. According to cognitive theory entrepreneur actually do not take risk rather they tend to categorize the business situations by their schema accessibility (rose-colored glasses). Two condition necessary to support theory of entrepreneurial perception

Doesn't report greater risk propensity than their nonentrepreneur counterparts More optimistic cognitive structure

Implications
Lord and Maher 1990 stated that people do use simplified cognitive

process when they form perception. Categorization often lead to serious distortions in processing of information. This leads to two potential biases Excessive optimism (by entrepreneur) Pessimism (by non-entrepreneur) When trained to identify critical dimensions and important attributes in a business decision, both entrepreneurs and non-entrepreneurs may be alike Finally systematic differences in cognitive process helps to distinguish high growth entrepreneurs from those who are interested in lifestyle enterprises. Thus a small business owners can identify opportunities

Limitations
Heuristics such as availability, representativeness

were not considered. Response rate was less than ideal Sample is limited to certain geographical area The human perceptions are prone to distortion due to cognitive limitation of the observers. Hence it is impossible to get the SWOT for future performance. Hence researchers cannot know certain quality of an individual

Future research
Cognition affects entrepreneurship. Experience play

a vital role in decision making but still questions like, how an entrepreneur adjust his decision frames?, Do success and failure impact cognitive process? Remains un answered paving way for future research

Thank You