Using Cognitive Theory To Explain
Entrepreneurial Risk-taking
Lesllie E Palich & D. Ray Bagby
Introduction
 SCHUMPTER 1973
 KIRZNER 1973
 KNIGHT 1921
 CANTILLION 1755
 GOVERNMENTS
 MIXED OPINIONS
 COGNITIVE PR...
 Are you a self-starter?
 Yes, I like to think up ideas and implement them.
 If someone helps me get started, I will de...
 2. How do you feel about taking risks?
 I really like the feeling of being on the edge a bit.
 Calculated risks are ac...
 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 ...
 5. Could you fire someone who really needed the job

your business provided?
 Yes, I may not like it, but that is the w...
 6. Are you willing to work 50 hours a week, or more?
 Again, if that is what it takes, yes.
 Maybe in the beginning.
...
 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.
 ...
 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 ...
 14. Can you live without structure?
 Yes.
 Actually, the idea of living without a regular job

makes me nervous.
 No,...
 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 ...
 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 ...
Categorization Theory
 Acknowledges the power of cognitive heuristics to

explain human behavior & decision making.
 Cat...
Entrepreneurs and Cognitive Process
 Entrepreneurs are risk takers.
 They are more optimistic in their assessments of

b...
Decision Dimensions
 SWOT analysis
Strength

Weakness

Opportunities

Threats

 Provide a summary of business situations...
Rashesh Shah – Edelweiss Capital
 BSc ( Statistics)
 IIMA(PGP’89)
 Joined ICICI from

campus.
 Idea to start investmen...
 Started Edelwiss capital in February 1996.
 One parter – Venkat Ramaswamy, a colleague at

ICICI
 Started with 1 Cr
Ex...
Specific Hypotheses

H1

H2

• There will be no difference between in risk propensity
between entrepreneurs and non entrep...
Methods
Subjects

 Random sample :548

members.
 Four page
questionnaire with
cover letter .
 Non response.
 148 membe...
Measures

2 from
faculty of a
graduate
business
school

1 from
practitioner
highly
familiar with
entrepreneur
s and firms
...
Cont…..
 Panel members assign subject in 2 groups according








to responses to 8 survey questions that captured...
Nirmal Jain
 Risk.
 MBA,CA,CWA.

 HLL 5 yrs ,1989-1994
 (Commodities oil).
 Probity Research &

service Pvt. Ltd. Wit...
Founding New Venture(IIFL)
 India Info line with R.Venkatraman in 1999.
 Core Business: Broking and Consultancy
 Utiliz...
New innovations

 Internet based Trading Model.
 Strong and Quality Research.
 Technology Includes Stock prices, charts...
Rapid growth & High profitability
Rs in Crore

1999

2003-2004

2007

2008

NPAT

10-20lakhs

7.5

400

1000
Analysis
Risk Propensity

Strength

 Stock Market and

 Strong Academic

NASDAQ
crashed.(2000)
 Taken risk at the time
...
Cont….
Weakness

Opportunity

 No capital in the Firm.

 FIIS Money(ADRS).

 Employees left the

 Infused in Indian

f...
Cont….

Strength

weakness

Nirmal Jain
Opportunity

Threats
Risk Propensity
Variables

Mean

S.D

1

2

3

4

Group

1.62

.49

-

-

-

-

Risk
Propensity

5.84

.92

-0.04

Strengt...
Results of ANOVA comparing Risk Propensity

Group

N

Mean Risk Propensity

Entrepreneurs

35

5.89

Nonentrepreneurs

57
...
Results of Multivariate and Univariate Analysis
Variables

N

Mean
Scores

Strengths/weakness

F

0.86

Multivariate Model...
Satyajith Singh
 Risk taker
 From Bihar (Jamui dist.)

 MA in History
 University topper and

got 2 times rejected in
...
Founding New Venture
 Started the project for makhana by late 2003
 His project was rejected at many panchayats, no


...
New innovations
 Changed the pattern of selling makhana
 Reduced the rely on middleman
 Started to tap unused cultivabl...
Rapid growth & High profitability
 By 2006 end there were 7000 registered farmers in

his company
 By 2007-08 the compan...
Saurabh Vyas and Gaurav Rathore
 Risk taker
 Saurabh From Jaipur,






Rajasthan
Gaurav from Kanpur, UP
Both are gr...
Founding New Venture
 Started the venture in May 2005 and later registered






as InfoEDGE on June 2005
Both are p...
New innovations
 In India, political consultancy is a new concept
 They made the election candidate to know his

positiv...
Growth
 Extended their service to social sector
 They currently have 18 NGO projects
 First year there were 8-10 client...
Discussion
 Entrepreneur is described as the risk propensity or

risk taking ability of an unique individual.
 According...
Implications
 Lord and Maher 1990 stated that people do use simplified cognitive

process when they form perception.
 Ca...
Limitations
 Heuristics such as availability, representativeness

were not considered.
 Response rate was less than idea...
Future research
 Cognition affects entrepreneurship. Experience play

a vital role in decision making but still questions...
Thank You
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Cognitive theory

  1. 1. Using Cognitive Theory To Explain Entrepreneurial Risk-taking Lesllie E Palich & D. Ray Bagby
  2. 2. Introduction  SCHUMPTER 1973  KIRZNER 1973  KNIGHT 1921  CANTILLION 1755  GOVERNMENTS  MIXED OPINIONS  COGNITIVE PROCESSES  DECISION DIMENSIONS  SPECIFIC HYPOTHESES
  3. 3.  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.
  4. 4.  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
  5. 5.  3. Are you a leader?  Yes.  Yes, when necessary.  No, not really.
  6. 6.  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.
  7. 7.  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.
  8. 8.  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.
  9. 9.  7. Are you self-confident?  You bet!  Most of the time.  Unfortunately, that is not one of my strong suits.
  10. 10.  8. Can you live with uncertainty?  Yes.  If I have to, but I don't like it.  No, I like knowing what to expect.
  11. 11.  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.
  12. 12.  10. Are you creative?  Yes, I do get a log of good ideas.  I can be.  No, not really
  13. 13.  11. Are you competitive?  To a fault sometimes.  Sure, mostly.  Not really, my nature is more laid-back.
  14. 14.  12. Do you have a lot of willpower and self- discipline?  Yes.  I am disciplined when I need to be.  Not really.
  15. 15.  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.
  16. 16.  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.
  17. 17.  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.
  18. 18.  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.
  19. 19.  17. Do you have experience in the business you are thinking of starting?  Yes.  Some.  No.
  20. 20.  18. Can you juggle multiple tasks?  Yes.  I think so.  I think not.
  21. 21.  19. Are you willing to really hustle for clients and customers?  Sure.  If I have to.  I would rather not.
  22. 22.  20. How well do you handle pressure?  Quite well.  Its not my strongest trait, but I can do it.  Not well at all.
  23. 23.  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.
  24. 24. 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.
  25. 25. Entrepreneurs and Cognitive Process  Entrepreneurs are risk takers.  They are more optimistic in their assessments of business situations.  Categorization by entrepreneurs and non entrepreneurs.
  26. 26. Decision Dimensions  SWOT analysis Strength Weakness Opportunities Threats  Provide a summary of business situations  Measure for Optimism/Pessimism.
  27. 27. 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.
  28. 28.  Started Edelwiss capital in February 1996.  One parter – Venkat Ramaswamy, a colleague at ICICI  Started 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
  29. 29. Specific Hypotheses H1 H2 • There will be no difference between in risk propensity between entrepreneurs and non entrepreneurs • When presented with identical situations, entrepreneurs will categorize them as having more Strengths versus Weakness than non entrepreneurs H3 • When presented with identical situations, entrepreneurs will categorize them as having more opportunities versus threats than non entrepreneurs. H4 • When presented with identical situations, entrepreneurs will categorize them as having more potential for gain versus loss than non entrepreneurs
  30. 30. 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 Technologica Changes in Trends competitive l towards development environme international s ization nt
  31. 31. Measures 2 from faculty of a graduate business school 1 from practitioner highly familiar with entrepreneur s and firms Panel of 3 entrepreneu rship experts
  32. 32. Cont…..  Panel members assign subject in 2 groups according      to responses to 8 survey questions that captured information e.g. Founding new ventures . New innovations Rapid growth High profitability. Estimations of revenue growth.
  33. 33. 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
  34. 34. Founding New Venture(IIFL)  India Info line with R.Venkatraman in 1999.  Core Business: Broking and Consultancy  Utilize the opportunity e.g. Liberalization.
  35. 35. New innovations  Internet based Trading Model.  Strong and Quality Research.  Technology Includes Stock prices, charts ,streaming quote etc.
  36. 36. Rapid growth & High profitability Rs in Crore 1999 2003-2004 2007 2008 NPAT 10-20lakhs 7.5 400 1000
  37. 37. Analysis Risk Propensity Strength  Stock Market and  Strong Academic NASDAQ crashed.(2000)  Taken risk at the time when no capital.. Background.  Mind set in Financial Services.
  38. 38. Cont…. Weakness Opportunity  No capital in the Firm.  FIIS Money(ADRS).  Employees left the  Infused in Indian firm. Markets to make Money.
  39. 39. Cont…. Strength weakness Nirmal Jain Opportunity Threats
  40. 40. 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
  41. 41. Results of ANOVA comparing Risk Propensity Group N Mean Risk Propensity Entrepreneurs 35 5.89 Nonentrepreneurs 57 5.81 F 0.16 NS
  42. 42. Results of Multivariate and Univariate Analysis Variables N Mean Scores Strengths/weakness F 0.86 Multivariate Model Wilkes Lambda R square 4.79 5.75 3.80 35 55 0.14 1.48 Nonentrepreneurs 0.04 14.58 Entrepreneurs 0.06 0.84 Opportunities/Threats Entrepreneurs 35 1.89 Nonentrepreneurs 55 1.18 Improve/Deteriorate Entrepreneurs 35 1.71 Nonentrepreneurs 55 0.67
  43. 43. Satyajith Singh  Risk taker  From Bihar (Jamui dist.)  MA in History  University topper and got 2 times rejected in IAS interview  BPL dealer for 2 years  Got good knowledge in distribution, supply chain and marketing.
  44. 44. Founding New Venture  Started the project for makhana by late 2003  His project was rejected at many panchayats, no     support from government 2004 Sakthi Sudha Industries was formed with his investment of 1.5 crore Mid – 2005 got to top 3 finalist in Business baazigar in Zee TV By this time Nitish Kumar Govt. came into power. The firm got good support from Govt.
  45. 45. New innovations  Changed the pattern of selling makhana  Reduced the rely on middleman  Started to tap unused cultivable land, take it into lease and start cultivating on it
  46. 46. 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
  47. 47. Saurabh Vyas and Gaurav Rathore  Risk taker  Saurabh From Jaipur,     Rajasthan Gaurav from Kanpur, UP Both are graduate from IIT Saurabh has worked in a stastical company called Fractal Analytics Gaurav started his professional career at Deloitte and later shifted to schlumberger
  48. 48. Founding New Venture  Started the venture in May 2005 and later registered      as InfoEDGE on June 2005 Both are passionate about politics Started with 10 – 12 people 3 guys were technicians 7 to 9 people were engaged in collecting data First client was Milind Deora the young educated MP from south Mumbai
  49. 49. 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
  50. 50. Growth  Extended their service to social sector  They currently have 18 NGO projects  First year there were 8-10 clients and till date it counts to over 225  The 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
  51. 51. 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 nonentrepreneur counterparts More optimistic cognitive structure
  52. 52. 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
  53. 53. Limitations  Heuristics such as availability, representativeness were not considered.  Response rate was less than ideal  Sample is limited to certain geographical area  The 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
  54. 54. 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
  55. 55. Thank You

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