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Using Cognitive Theory To Explain Entrepreneurial Risk-taking
Lesllie E Palich & D. Ray Bagby
Introduction
SCHUMPTER 1973KIRZNER 1973KNIGHT 1921CANTILLION 1755GOVERNMENTSMIXED OPINIONSCOGNITIVE PROCESSESDECISION DIMENSIONSSPECIFIC HYPOTHESES
Are you a self-starter?
Yes, I like to think up ideas and implement them.
If someone helps me get started, I will definitely follow through.
Frankly, I would rather follow than lead.
2. How do you feel about taking risks?
I really like the feeling of being on the edge a bit.
Calculated risks are acceptable at times.
I like the tried and true
3. Are you a leader?
Yes.
Yes, when necessary.
No, not really.
4. Can you and your family live without a regular paycheck?
Yes, if that is what it takes.
I would rather not, but understand that may be part of the process.
I do not like that idea at all.
5. Could you fire someone who really needed the job your business provided?
Yes, I may not like it, but that is the way it goes sometimes.
I hope so.
I really can't see myself doing that.
6. Are you willing to work 50 hours a week, or more?
Again, if that is what it takes, yes.
Maybe in the beginning.
I think many other things are more important than work.
7. Are you self-confident?
You bet!
Most of the time.
Unfortunately, that is not one of my strong suits.
8. Can you live with uncertainty?
Yes.
If I have to, but I don't like it.
No, I like knowing what to expect.
9. Can you stick with it once you have put your mind to something?
I usually will not let anything get in the way.
Most of the time, if I like what I am doing.
Not always.
10. Are you creative?
Yes, I do get a log of good ideas.
I can be.
No, not really
11. Are you competitive?
To a fault sometimes.
Sure, mostly.
Not really, my nature is more laid-back.
12. Do you have a lot of willpower and self-discipline?
Yes.
I am disciplined when I need to be.
Not really.
13. Are you individualistic or would you rather go along with the status quo?
I like to think things through myself and do things my way.
I am sometimes an original.
I think strongly individualistic people are a bit strange.
14. Can you live without structure?
Yes.
Actually, the idea of living without a regular job makes me nervous.
No, I like routine and structure in my life.
15. Do you have many business skills?
Yes I do, and those I don't have, I'll learn.
I have some.
No, not really.
16. Are you flexible and willing to change course when things are not going your way?
Yes.
I like to think so, but others may disagree.
No, I have a fairly rigid personality.
17. Do you have experience in the business you are thinking of starting?
Yes.
Some.
No.
18. Can you juggle multiple tasks?
Yes.
I think so.
I think not.
19. Are you willing to really hustle for clients and customers?
Sure.
If I have to.
I would rather not.
20. How well do you handle pressure?
Quite well.
Its not my strongest trait, but I can do it.
Not well at all.
Score of 80 to 100 - you have both temperament and skills to become an entrepreneur.
Score of 60 to 79 – you are not a natural entrepreneur but you can become overtime.
Score of less than 60 – it is advisable for you to take up any other profession than self employment.
Categorization Theory
Acknowledges the power of cognitive heuristics to explain human behavior & decision making.
Categorization proves useful by allowing for efficient storage of information.
Assessments are likely to be similarly skewed or distorted.
Entrepreneurs and Cognitive Process
Entrepreneurs are risk takers.They are more optimistic in their assessments
of business situations.Categorization by entrepreneurs and non
entrepreneurs.
Decision Dimensions
SWOT analysis
Provide a summary of business situationsMeasure for Optimism/Pessimism.
Strength Weakness
Opportunities Threats
Rashesh Shah – Edelweiss Capital
BSc ( Statistics)IIMA(PGP’89)Joined ICICI from
campus.Idea to start
investment bank in India.
Encouragement from his wife to take risk.
Started Edelwiss capital in February 1996.One parter – Venkat Ramaswamy, a colleague
at ICICIStarted with 1 Cr
Expected Actual
1st year Rs. 30 Lakhs Rs. 28 Lakhs
2nd year Rs. 50 Lakhs Rs. 35 Lakhs
3rd year Rs. 1 Crore Rs. 21 Lakhs
4th year Rs. 1.5 Core Rs. 1.5 Crore
5th year Rs. 11 Crores
Specific Hypotheses
•There will be no difference between in risk propensity between entrepreneurs and non entrepreneurs
H1•When
presented with identical situations, entrepreneurs will categorize them as having more Strengths versus Weakness than non entrepreneurs
H2
•When presented with identical situations, entrepreneurs will categorize them as having more opportunities versus threats than non entrepreneurs.
H3
•When presented with identical situations, entrepreneurs will categorize them as having more potential for gain versus loss than non entrepreneurs
H4
Methods
Subjects
Random sample :548 members.
Four page questionnaire with cover letter .
Non response.148 members
responded out of 548 (27%).
Scenario development
Stimuli consisted of 3
scenario
Technological
developments
Changes in
competitive
environment
Trends towards
internationalization
Measures
2 from faculty of a graduate
business school
1 from practitioner
highly familiar with
entrepreneurs and firms
Panel of 3 entrepreneurs
hip experts
Cont…..
Panel members assign subject in 2 groups according to responses to 8 survey questions that captured information e.g.
Founding new ventures .New innovationsRapid growthHigh profitability.Estimations of revenue growth.
Nirmal Jain
Risk.MBA,CA,CWA.HLL 5 yrs ,1989-
1994(Commodities oil).Probity Research &
service Pvt. Ltd. With Motilal Oswal & Ramdev Agrawal.95-99
Founding New Venture(IIFL)
India Info line with R.Venkatraman in 1999.Core Business: Broking and ConsultancyUtilize the opportunity e.g. Liberalization.
New innovations
Internet based Trading Model.Strong and Quality Research.Technology Includes Stock prices,
charts ,streaming quote etc.
Rapid growth & High profitability
Rs in Crore 1999 2003-2004 2007 2008
NPAT 10-20lakhs 7.5 400 1000
Analysis
Stock Market and NASDAQ crashed.(2000)
Taken risk at the time when no capital..
Strength
Strong Academic Background.
Mind set in Financial Services.
Risk Propensity
Cont….
Weakness
No capital in the Firm.
Employees left the firm.
Opportunity
FIIS Money(ADRS).Infused in Indian
Markets to make Money.
Cont….
Strength
weakness
Opportunity Threats
Nirmal Jain
Risk Propensity
Variables Mean S.D 1 2 3 4
Group 1.62 .49 - - - -
Risk Propensity
5.84 .92 -0.04
Strengths/weakness
1.09 1.29 -0.25 0.14
Opportunities/threat
1.45 1.71 -0.20 0.11 0.23
Improve/deteriorates
1.07 1.31 -0.38 0.10 0.68 .46
Results of ANOVA comparing Risk Propensity
Group NMean Risk Propensity
Entrepreneurs 35 5.89
Nonentrepreneurs 57 5.81
F 0.16 NS
Results of Multivariate and Univariate Analysis
Variables N Mean Scores
Wilkes Lambda
F R square
Multivariate Model
0.86 4.79
Strengths/weakness 5.75 0.06
Entrepreneurs 35 1.48
Nonentrepreneurs
55 0.84
Opportunities/Threats 3.80 0.04
Entrepreneurs 35 1.89
Nonentrepreneurs
55 1.18
Improve/Deteriorate 14.58 0.14
Entrepreneurs 35 1.71
Nonentrepreneurs
55 0.67
Satyajith Singh
Risk takerFrom Bihar (Jamui
dist.)MA in HistoryUniversity topper and
got 2 times rejected in IAS interview
BPL dealer for 2 years
Got good knowledge in distribution, supply chain and marketing.
Founding New Venture
Started the project for makhana by late 2003His project was rejected at many panchayats,
no support from government2004 Sakthi Sudha Industries was formed
with his investment of 1.5 croreMid – 2005 got to top 3 finalist in Business
baazigar in Zee TVBy this time Nitish Kumar Govt. came into
power.The firm got good support from Govt.
New innovations
Changed the pattern of selling makhanaReduced the rely on middleman Started to tap unused cultivable land, take it
into lease and start cultivating on it
Rapid growth & High profitability
By 2006 end there were 7000 registered farmers in his company
By 2007-08 the company got a turnover of 22 crores and in the following year the fig shot up to 50 crores
Saurabh Vyas and Gaurav Rathore
Risk takerSaurabh From Jaipur,
Rajasthan Gaurav from Kanpur, UPBoth are graduate from
IITSaurabh has worked in a
stastical company called Fractal Analytics
Gaurav started his professional career at Deloitte and later shifted to schlumberger
Founding New Venture
Started the venture in May 2005 and later registered as InfoEDGE on June 2005
Both are passionate about politicsStarted with 10 – 12 people 3 guys were technicians7 to 9 people were engaged in collecting dataFirst client was Milind Deora the young
educated MP from south Mumbai
New innovations
In India, political consultancy is a new concept
They made the election candidate to know his positive and negative
They analyzed the gap between voters and politicians
Growth
Extended their service to social sectorThey currently have 18 NGO projects First year there were 8-10 clients and till
date it counts to over 225The maximum number of clients exists within
India is 5000 and there is a long way to go for them
The venture in 2008 had some internal thoughts mismatch and hence the venture got separated as PoliticalEDGE and the parent company is NDimensions
Discussion
Entrepreneur is described as the risk propensity or risk taking ability of an unique individual.
According to cognitive theory entrepreneur actually do not take risk rather they tend to categorize the business situations by their schema accessibility (rose-colored glasses).
Two condition necessary to support theory of entrepreneurial perception Doesn't report greater risk propensity than their non-
entrepreneur counterparts More optimistic cognitive structure
Implications
Lord and Maher 1990 stated that people do use simplified cognitive process when they form perception.
Categorization often lead to serious distortions in processing of information. This leads to two potential biases Excessive optimism (by entrepreneur) Pessimism (by non-entrepreneur)
When trained to identify critical dimensions and important attributes in a business decision, both entrepreneurs and non-entrepreneurs may be alike
Finally systematic differences in cognitive process helps to distinguish high growth entrepreneurs from those who are interested in lifestyle enterprises. Thus a small business owners can identify opportunities
Limitations
Heuristics such as availability, representativeness were not considered.
Response rate was less than idealSample is limited to certain geographical areaThe human perceptions are prone to distortion
due to cognitive limitation of the observers. Hence it is impossible to get the SWOT for future performance. Hence researchers cannot know certain quality of an individual
Future research
Cognition affects entrepreneurship. Experience play a vital role in decision making but still questions like, how an entrepreneur adjust his decision frames?, Do success and failure impact cognitive process? Remains un answered paving way for future research
Thank You