Perceiving and Managing Business Risks: Differences between Entrepreneurs and Bankers

Abstract

Enquiring about the "risk propensity" of entrepreneurs is misguided, because all economic actors deal with risk and uncertainty. The success of entrepreneurs is tied closely to the way in which they perceive and manage risk. This study compares bankers and entrepreneurs in their cognitive approaches to solving problems involving a variety of risks; relevant is not risk propensity, but feelings of control and responsibility and personal values. Verbal think-aloud protocols were used to analyze the responses and thought processes of four bankers and four entrepreneurs in Pittsburgh, to a set of problems. Five problems were posed, involving financial risk, risk to human life and health, and risk of natural disaster. Content analysis identified five variables: ability to control possible returns to the decision; ability to control risks involved in the problem; factors internal to the firm; factors external to the firm; and personal considerations in the decision. The various problem spaces were defined as issues of risk, issues of control, or a function of values and personal responsibility. Entrepreneurs were found to accept risk and focus on controlling outcomes at any level of risk; they frame problem spaces with personal values and assume greater personal responsibility for affecting outcomes. Bankers use target outcomes as reference points; they attempt to control risk within existing structured problem spaces to avoid situations where they are exposed to higher levels of personal responsibility. (TNM)

Keywords: Personal control, Decision making, Bankers, Risk orientation, Cognitive models, Problem solving, Risk management, Cognition, Personal values, Financial risks, Risk assessment