Behavioural economics and entrepreneurial decision making: two tax measures to help

Abstract

Empirical findings of the behaviour of small firms in several countries and of large firms in two countries, indicate that risk taking by some businesses differs from that indicated by the Prospect Theory. Enterprises headed by entrepreneurs are more risk-taking/risk-neutral in the area of gains, and successful large corporations are more risk-averse overall because of the possibility of adverse factors, such as bankruptcy, than the Prospect Theory would imply. This leads to the proposal of a familiar tax incentive to spur investment. Another tax proposal is aimed at overcoming the disinclination of those who use heuristics to aid in decision making, to record those heuristics, the contexts in which they are made, and the biases involved (which contrasts with their care in recording more traditional and sometimes less influential data). The oversight limits their ability to improve the heuristics, which are often highly influential in the decisions they and other enterprises make.