Abstract
In this article, we critically evaluate what the existing research shows regarding the individual determinants of entrepreneurship. We begin by documenting a set of facts that seem to pose a challenge for interpretations of entrepreneurship based on the standard expected utility framework. Drawing on research in behavioral economics we then review three sets of possible interpretations — risk aversion, overconfidence, and non-pecuniary, taste-based factors — for understanding the empirical facts related to the entry into, and persistence in entrepreneurship. The central thesis of this article is that while all these candidate explanations have merit and can account for some aspects of the facts above, there is little evidence of a “smoking gun” that can completely account for all the puzzling patterns we observe.
Highlights
Widely held popular interpretations of entrepreneurial entry often appeal to behavioral explanations, such as those involving high degrees of risk loving among entrepreneurs who “don’t need to be rewarded for risk, because they get utility out of risk itself” (Harrington 2010); overconfidence and “endemic optimism” in the startup world (Surowiecki 2014); or entrepreneurs who forgo pecuniary rewards because of the genuine pleasure they obtain from creating and controlling a business (Wasserman 2008)
Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship
Hall and Woodward calculate that, for normal degrees of risk aversion, the very low probability of success and high probability of zero exit value combined with the below market salary makes the expected utility of entrepreneurial ventures presumptively negative—meaning that people should prefer not to engage in entrepreneurship
Summary
Thomas, Holger Herz, Ramana Nanda, and Roberto A. 50 Journal of Economic Perspectives to enter and persist in entrepreneurship despite earning low risk-adjusted returns This finding has led, in turn, to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. 175 firms or 0.03 percent achieved more than $100 million in sales, making them extremely valuable (and rare) business endeavors These failure rates are broadly consistent with Kerr and Nanda (2010), who document that 50 percent of all startups founded in the United States between 1976 and 2001 exited within the first four years following entry and 70 percent failed by their tenth year, suggesting there was nothing different about startups founded in 1996
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
