Entry into Entrepreneurship: Risk Loving, Optimism or Overweighting of Small Probabilities?
32 Pages Posted: 12 Nov 2009 Last revised: 3 Mar 2013
Date Written: September 2, 2010
Abstract
In a controlled laboratory experiment we use one sample of students and one of mature individuals participating in an executive education entrepreneurship seminar to examine how positive skew influences risky choices. Both groups are found to respond positively to skew. We estimate decision models to explore three explanations for the preference for skew: risk-loving (convex utility), optimism (concave probability weighting), and likelihood insensitivity (inverse s-shape probability weighting). Somewhat surprisingly, decision making by students and executives is not much different. Both students and executives have concave utility, are optimists, and display likelihood insensitivity. Executives have more concave utility and are more optimistic, but this is found to be largely due to them being older. This change in behavior with age may be part of the explanation why older people are more likely to enter into entrepreneurship.
Keywords: Entrepreneurship, Decision Making under Risk, Skew
JEL Classification: M13, D81, C91
Suggested Citation: Suggested Citation
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