The myth of the risk-tolerant entrepreneur

Abstract

Entrepreneurs have long been assumed to be more risk-tolerant than the general population. In this article, we analyze the financial risk propensity of business founders using a unique, representative dataset of nascent entrepreneurs in the United States. We deploy two models of entrepreneurial behavior: a strategic model of risk tolerance, based on investment choices; and a non-strategic model of risk tolerance, based on information bias about business success. For both models, our empirical results consistently show that nascent entrepreneurs are more risk-averse than non-entrepreneurs. To reconcile the financial risk aversion of entrepreneurs with the high risk of financial loss among startups, we suggest that many of the motivations that individuals have for founding business ventures are non-pecuniary in nature.

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