Trait and cognitive approaches cannot differentiate between the risk behaviors of entrepreneurs and non- entrepreneurs. Entrepreneurial Decision with risk connotation involves two attributes:• Risk Horizon• Individual future orientation of the entrepreneur Entrepreneurial trisk behaviour including two critical personality traits i.e. individual risk propensity and individual future orientation.
Nature of Entrepreneurial Risk BehaviorTrait Approach Entrepreneurs have distinctive personality characteristics and research based on this is know as trait approach. Psychological traits distinguishing entrepreneurs and non- entrepreneurs: need for achievement, locus of control, tolerance of ambiguity and risk propensity. Risk Propensity
Cognitive Approach “Entrepreneurial alertness which examines entrepreneurs unique ability to discover and exploit opportunities that others fail to see.” - Kirtzner Understand perceptions, cognitive and decision making styles, heuristics, biases and intentions of entrepreneurs affect their behavior. “Entrepreneurs risk perceptions tend to be more optimistic, willing to undertake entrepreneurial efforts which others see as risky”. – Palich & Bagby’s
Risk & uncertainty are about unpredictable futures. Acc. to Lopes, "the temporal element is what gives risk both savor & sting”. Researchers have found out that several risk behaviors are related to time. Discounting in time (Vlek & Stallen,1980) is the tendency of individuals to undertake risks when possible gains are relatively immediate & possible losses are relatively in the distant future. Strickland, Lewicki & Katz(1966) reported that subjects tend to be more risk-averse if a gamble is presented in an after-the - event fashion
Acc. to Drucker, short-range risk refers to variances in outcomes in near future, while long-range risk relates to variances in outcomes in the distant future. Short-range risk behavior is about taking or avoiding actions that may cause outcomes to vary significantly in the near future, from great gains to great losses, eg. Casino gambling, cheating in a test. Long-range risk behavior is about taking or avoiding actions that may cause outcomes to vary significantly in the distant future, eg. Long term investment, dropping out of school.
Dickson & Giglierano(1986) proposed two types of downside risk: Sinking-the-boat risk: it refers to the probability that the venture will fail to reach a satisfactory level of performance. It is associated with the costs of pursuing a false opportunity. Missing-the-boat risk: it is the risk of failing to undertake a venture that would have succeeded. It is linked with the opportunity cost of not making a potentially profitable move.
Craftsman Entrepreneur take short-range sinking-the-boat-risk, their initial performance outcomes will vary more than their goal, as compared to others. Opportunistic Entrepreneur avoid long-range missing-the-boat-risk, their long term performance outcomes vary less from their goal, as compared to that of others. Non-Entrepreneur avoids short-range sinking-the-boat-risk, their short term performance outcome will vary less from their goals, as compared to others. Since Non-Entrepreneur take long-range missing-the-boat-risk, their long term performance outcomes will vary more from their goal, as compared to others.
Near-Future Orientation Individuals with a near-future orientation and a risk-averting propensity are less likely to be entrepreneurs. Individuals with a near-future orientation and a risk-seeking propensity are more likely to be craftsman entrepreneurs.Distant-Future Orientation Individuals with a distant-future orientation and a risk-averting propensity are more likely to be opportunistic entrepreneurs. Individuals with a distant-future orientation and a risk-seeking propensity are less likely to be entrepreneurs
SHORT LONG RANGE RANGELOW RISK LOW RISKBEHAVIOR BEHAVIOR SHORT LONG RANGE RANGEHIGH RISK LOW RISKBEHAVIOR BEHAVIOR
What is important for the entrepreneurial process? Networks – Associations of individuals or groups that facilitate access to information or resources. Strategic Alliances – Integrative forms of inter-firm cooperation such as joint ventures and joint R&D.Importance:It gives access and connections that are not available from other sources.
Formal Networks: Based on business contracts and agreements, with clear rights and obligations for each involved party.Example: venture capitalists, banks, accountants, lawyers, creditors and trade associations.Informal Networks: They are trust based organizing vehicles which start with personal relationship.Example: friends, families and business contracts.Entrepreneurs primarily use informal networks and then turn to the formal networks only when their firms are in an established position. - Birley (1985)
A person who tend to take short range risk.Short range risk: If a person mainly relies on personal connection (informal networks) to start a new business, since entrepreneurial risks are internalized and not shared by external people.Why craftsman entrepreneurs depend mainly on informal networks? Willingness to take short range risks. Incompetence in dealing with a broad social environment. Low social awareness and involvement.
A person who tends to engage in long-range low-risk behavior. They constantly look for more opportunities untapped by the market. They are highly motivated to minimize their personal risk through involving outside sources. They venture into a business which is highly risk and sharing of this risk with formal networks makes the enterprise fairly attractive.
Besides networking, they are another means to access other’s resources and quickly build up their own operation. They are often formed by firms in the same industry and tend to have a relatively high level of inter-firm integration.What do they do? Opportunities to entrepreneurs in the short run. Serve as a stepping stone during the start ups.Problems: Many established firms harbor hidden agendas when they form alliance with start ups. Over the long run the new start up might find it difficult to survive on its own. It is risk taking in the long run for entrepreneurial firms.
Entrepreneurial risk behavior has been examined in personality trait approach and cognitive approach. Neither approach, however, has thus far yielded convincing evidence explaining entrepreneurial risk behavior in a parsimonious manner . Not all the entrepreneurial risks have the same temporal context. (short-range entrepreneurial risk and long-range entrepreneurial risk) Developing different entrepreneurial types by employing their distinct risk behavior in the short run and in the long run. (craftsman and opportunistic) The individuals may have either a risk-averting or a risk-seeking propensity.