Cognitive Biases, Risk, Perception and Venture Formation: How Individuals Decide to Start Companies

Abstract

Previous research indicates that entrepreneurs do nothave a high propensity to willingly take risks. However decisions made byentrepreneurs often come with risks and entrepreneurs adopt differentstrategies that help them to cope with these risks. The cognitive strategiesadopted by individuals to perceive and cope with risks inherent in theirdecisions are explored in this study. One-hundred-and-ninety-one studentspursuing a Master's degree in Business Administration at a major publicuniversity participated in the study. The cognitive process that individualsemploy while evaluating a new business venture were studied. Participantsresponded to questions focusing on willingness to start a venture, theirperception of the risk involved in the venture and the extent to which theyexhibited cognitive biases in their decision-making process. The findings suggest that individuals start new ventures because they areless likely to perceive the risks involved, and not because they knowinglyaccept high level of risks. Individuals believed in the law of small numbers,which in turn lowered their perceptions of the level of the risk associatedwith a new venture, suggesting that some individuals are likely to drawconclusions from small samples. Participants also exhibited an illusion ofcontrol that effectively reduced their risk perception, suggesting thatindividuals starting new ventures may not acknowledge that outcomes of certaintasks and decisions important to the success of the venture are beyond theircontrol. (VRS)

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