Loss aversion and risky entrepreneurship

Abstract

The rise of experimental economics has made us wonder if the traditional approach to studying economics under risk (expected utility and risk-averse agents) is the best way to represent actual behavior. In this paper, we introduce an alternative model of economics of entrepreneurship under risk using reference-dependence preferences and analyze if the basic comparative static results from the traditional model still hold under loss averse preferences. We find minor differences between what we know under risk aversion and what we get under loss aversion. This is a positive result, if we expect policies that promote entrepreneurship to be effective, no matter if the individual is risk or loss averse.