>v rrrr..L,tLl.

oI tle Grorvttt of ttrc r:i".

iilll]i. i;jlll];l[r?rco7 c)xforcr: Brackrveu.
anInterdiscipli^aryThcoryofEn,."pr",r"rr.r,ip:
Iirrtttrttttits,lo:loJ-lj. SrnallBusirtcss
I{rrrrrrrus, L. (rg.l:). j.lrc Nature ntt,t ti.,,:A-^-.-- r,.
sr;r*,ru, D. ,,r;;1. ,",i,,,ffi:l|:ti:i!,;i,:;!,:,:;:::i:,,::.,|::;::j,,j...;:,y;:_,,,.". CHAPTER
Sr:rruv'rrur, I. S. (rg:s). .1.he
tnstablliii;il;;,*,;, 4
j,rrr). rim,y'ol Eco,:,.,,;i;;:;Jr;;p:;:,;.
lii?l;f,.3"*r;lffli:il,;:;:.
- (rcrc). !t,e
Busirtcss
Cwlcs,vol. r. ru.*" r,o.l, in."I*"",,,
ouour.
-
SrNcn, J. and l. A. C. Be ut't (1994)'
oxford University press.
t-,ii't"lli;rt.led')
Evolutiorutry Dyrntrtics of

(zooo)' EttrrcPrc'rcursltip:
orgatizations. oxford:

|'hc sociar Stienct vitv.oxf<rrd:

COGNITIVE ASPECTS OF
TnounsoN, p. (zooz). .Surv
o.rrord
ENTREPRENEURSHIP:
- 1tu',*i:n:l;;ilrii,li:r'li,:11;ii?;::::jff:,:'f,i;il'ill,1::.ll;u' '.."
'iil[ri. l''H'(reee).'r'hesoiiology"rt'',..u*',"irship,.Arrrrr,ri Rcrieruoj,sociorogy,
Tsoux,rs, H. (ryg6). .l.lre
DECISION-MAKING
Approachl
f.
i,r,i,riir';;;,,;'tt"'
as a Distributed Knowlcdgc

,*nkl"ii;ii;';::,i:::;,i::;:,,:.y;;;y;,)i;,),li;,,;.,,",,,
systcr': A corrsrrucriorrisr
AND ATTITUDES TO
n;;:;;:;.,,
wrrr' u' (1998)' 'rnragination
tronary Theory of the Firml
and Leadership The Negrected
- Dinrension of an Evoru_
RISK
to"rua oJ iro,ior,,i irn')rir.,
Yevevun,! E., T. SoNoue ana organiznriott, 3s: t6t_77.
x. or.r*^ ir"";;;;;.;:,,,
"nd
in Innovarion. Inritarion and
rhe Motorcvcle inau,t'.i in
F;ilL:[:J;-:f ;;;
tu1tan" tournat of Evotutionary

NIGEL WADESON

1_l |Nrnon-r-"tlo* ''""""" 4 ""'

Cr.rrrcrrtly thcrc is signilicirnt in(crcst in rlre aPPli6llion oItltcories front cognitive

psychokrgy (l3arsalou,,r99:) ro thc of entrcprencurship (Forbs,jrSCS).
stucly
Ilntl'rusiasts of this approrch havc chinrcd that the 'trlits approxsh' to expiaining
why pcople choose to bccornc cntrcprencur.s, in rvhich psychologic:rl charactcristics
suclr as risk-propcnsity ancl neccl for achicvenrent are studied, hrs largcly fiiled to
Itroduce clcar-cut rcsults (Shavcr and Scott, r99r; Palich and llagbr r99i).iShaue.
and Scott (r99r: 3r) vic'rv lchicvcnrcnt rrrotivation as the only trait that sdents to
havc a convirrcirrg associatiorr rvitlr ncrv vcnturc crcltion. 1'hcy also nukq nrcth-
oclological criticisnrs oItr;rits rcscarclr. As firr as ri.sk is conccrncd, it appcals fronr
tltc cvidcrtcc tlut cntrcprcncurs consiclcr thcrnsclvcs to be no lcss risk aversc than
othcr Pcoplc.
j
 cocNrrrvE AsPEcrs ot
t:ll1ln*jtt"Tjltt-- 93
.-., .' nrrrSON
rvell' and rvhen they do
rvhen people u'itg fl:l'l'-'lll1l^1fornr
llecruse of the somewhat disappointing results of the traits approrch sonre . A failure to specify the adrptrtiorr of heuristics;
rcsc;rrcht'rs heve turnetl to studying horv entrepreneurs think. If the cognitivc arrcl not erlough ttt"'niion beinipaid to
not,
rhe cerrcrality of bi:rscsl at
lrr,r.,'.r.s of t'ntrepreneurs are different froru others, then this rvill ilffi.ct tlrcir . A tentlelrcy to overstatc
PeoPle the
tools thev need to arrive
:rss('ssrncn(s ofopportrrnities, and their perccptions ofthe risks that they involve. . Experiments on r"uti"ill'l'i;';;;i;"t
This chilptcl rvill revierv literature on the study ofthe cognitiorr ofentrepreneurs, the correct alrswers; rnust knorv rvhat the
'correct'decision
decision-nr:rking one
;rntl horv this lffects their attitudes to risk. The revierv begirrs rvith the heuristics . To ictentify a bils in nreasure biases relative to what is
arr<l birscs approilch. Variolrs decision-nraking biases relatetl to over-optinrisnt are rvould hrve beerr in t"i''-i^"-"']tarchers
ihcrr considered. Following this perceived self-eflicacy, intrinsic ntotivation, and
nrodels,of'the trnclcrlvins Proce's:es;
intentions-based nrodels are discussed. Sonre theories dealing specifically rvith . f'J:it;"itlT'"1;[:"'r' or sPecific illusiorrs and birses resulting
'-
trom
nttitudes to risk are then covered. These include prospect theory, Kahnerrran antl . Unjtrstiliccl analogies Otlt*t"ti*""ptual
l.ovalo's nrodel of risk-taking, and Drs and Tene's theory of risk horizons and subjects;
observccl rvith nrive
futtrre orientations. Finally, the option value and inlornration cost approflch to the . *;::::i^t not exhibit the biases to link it to arr irrdividurl heuristic' as nrany
lnalysis of entrepreneurs' decision-nrirkinc is discussed. Sorne rcle'vant rcfcrcrrccs -. tf n tri,rs is iclentihecl' it itthetf imtuf'
sr're trirs'
to culture reseirrch are also giverr in thc conclusion. i *tirit.t might leacl to

4.2.r Heuristics will deal

and then the next section
section rvill norv discttss sorne heuristics' their relevance to
4.2 COCNITIVE HEURISTIcS AND BIASES This
:ii:t:; "ttiii,o,n tneir use' and
rvith sonre of the biases r'rnder this approach
entrepretreurship' The
th';;;;:1";'"n heuristics tontiattta and anchoring and
ituttutt'
Kahnenran and Tversky laid out the heuristics antl biases al)lrroach to cogrritive are the avaihbitity tt"u'i'iitl tnt'"p"""tutiveness
psychology in the r97os. This approach clainrs that people trse heuristics in ona Kahn'm""'e74)'
detision-making. Heuristics are mental shortcrrts that are usecl to reduce informa-
":;J;;;[""'tY
tion overload, and yield qtrick decisions. However, according to this approach, the
Avnilability lrcuristic ,^,"\ neoole their
use of heuristics can result in systenratic lrirses. Evidcncc of thc existencc o[ biirses
hctrristic (rverskvll"0 *:l':l';llJ;lill]Hl]:tlTl'"'-'"
'ase
is clainred as proofofthe usc ofheuristics. TIrc approrch diflcrs frorn autlrors suclr Untrer trre avrirrrbiritv on horv
as Sinron (r957) and Cie'gererrzer lnd'lirckl (rqgq), irr thrt it strcsscs rrot just thc usc Jr*n'i',t estinrate an outconre
for "ttt^l:,,1'.';:;t;';;.t;ti
Sonre outcomes areo" rn'to"
'tutittt'ttl'tt t' tcl thcir PcrcePtiorrs'
ofheuristics as an efli'ctivc nrcrrns olnrrkirrg rlccisions, but also bilscs that nright other lvords ttn* noticcrblc whiliH:5:,:::"'ltt[ill:
result fronr the use of pirrticular heuristics. availrtrlc sir'plv uccatrsc:;:').;'';';;e
Blron (r998) argucs tllat entreprcncurs nrlkc dccisiorrs in contlitions likcly to ;::; ;;'i'l*'
"''""
p r'ba'lrre

nraxinrize the irrprrct of cognitive birscs. 'l'lrcsc corrclitions involvc hiqh levcls of i: J*i ilt: mn ::, :T,T:,11
a
i:lil'll$ ht' hacl little exposttre' For

uncertainty, novelty, errrotion, tinrc-prcssure, irrrcl inftrrnration ovcrload. Iluscrritz 'l'hcse cirrr inclucle tftt"t''o *hitt-t Prrticuhr'pc"n''tin"nt"ta in an acroplane crash
tnnt" r'"i'to because
arc fartly
arrd,Barney (r997) put a positive spin on hcuristics ancl bilscs in critrcpretrcurs' itrst:ttrce, """"t:tt;;;;:"'itt' n,.,.lr i-r',nr. dangcrous'
decision-nraking, in particuhr in thc stlrt-Lrp ycars of a vcnturc.'l'lrcy notc thrrt thc r'irrr a r.ir<r .r..rr, a".p,ttttr,l"i ,",".iir"t"t
'co'lc
llcws story'
use of heuristics Inay bc crtrcill irr spcctling-rrp and sirnplilying dccisiorr-rnrking, .,.t aiat""t crlsh is a setrsati<ltral
ancl thirt ovcrconfidcnce nrrry be bencficill both in inrplcrlcntirrg a rlccision, arrcl irt
encouraging enthusirsm in others.
Note that there have been significant criticisnrs of the lrcuristics :rrrtl lrilscs
appro:rch, though the approilch is noncthelcss vcry poprrlar in psychology. ffi::::i::::;:::':i:'JJ:l:,,"r "r":::'.:*::i::':t\*:,'il'lJ:il,:.":,',T:
dcgree to v
propertics' rnd the
,,,rlt ul ,,' csscntial
Shanteau (rq8g) givcs a rcvicrv of the dcbirtc. Anrong tlrc criticisnrs arc:

t.

:
 94 Nl(;t I tvAl)Iis()N
COCNII'IVE ASPECTS OIJ ENl'REPRENEURSHIP 95

r)r()(('ss rrr'rt'gc.criltc.s it (Kahne'ran and Tversky, ry72: the represc.-

l'tlivt'ttcss lrctrristic 'ur).under
l)c()Ple nlake decisions according to conrparisons Bclief in the law of stnall rrttttrbcrs
si I rr.rt ions .rlr c,rtly knrlrvrr rvith sirrilar
atrout. Bcliel in the larv of snrall nunrlrers relers to peolrlc' overestirnating the dc'giree to
(ircrlrcr (r98,) r.tcs
rri*vs in experi.rental evide'ce rvhich snrirll sitnrplcs of inlirrnrittiorr rescnrble the population fronr rvhich they are
in psychorogy literaturc. He
t'rrrit'tl.rrt cxl)cri'rcrrtsthat confirnred p.adiatio,ra basecr clrarvn (Tvcrsky lnti Kahncnrar), l9Zl, r98l). People do tl'ris rvhen they follbrv the
rurivc'cs's lrcrrrisric for inexperien..d on use oftrre represe'_
lirurrtl tlrc cvidcncc rvas lcss.l.r.
;r ;,r;,;.i.tty unnroiiunli',"i;..,r, u", rePrescr.rtirtiveness heuristic. Entrc'preneurs nlay tend not to use large sanrples
fo. o,fr.rr.^".." because they are not avail:rble, and because they often do not have the resources
neccssirry to collect thenr (Busenitz and Barney, 1997). ,

Atrcltoritrg atul atljustrttcnt lrcuristic Ithirs bcen clainrccl th:rt crrtrcPrcneurs'stirrt-up decisions nray be based on
birsctl inlornratiort lrccirusc [rusiness fiilures are less rvell publicized than srrccesses
A'choring ref'ers to a te'dency to'anchor'on so're
i'itiar rcferc'ce poirt, lvhicrr (Sinron et ll., rooo), lnd the-y exist for a shorter time. Sinrou and Hou.qhton, (roor:
nray be suggested by t^c rvay a problenr is formulared
or by so're i,,i;;i':"",pr- tt5-t6) arguc thrt bclicf in thr' llr' oI snrlll nurnbers nray exlrlain rut"ny .nir.pr.-
tation' f-he anchor inrruc'.., j.,..ption;,
ciently tronr ir' For insrarce
;;;r, esrir'ares fail to adjust sulli_ ltcurs oftc'rt ovcrcstinrlte clcurlnrl. Accorcling to Busenitz and Brtrnel, (r997) entre-
if peopre are ii,n"
cor-rccr price for a good is.less preuerlrs oftcn usc biasetl sanrPlcs such as l snrall nunrber offriends or potential'
tlran or greater than r30, "rr.J
they "r',d
aie then asked
will tetrd to give an answer to
r*
ir,"t. best guess ofthe co-rrect price, custonrers.
the latter question that is close
to f,3o.

Evidence of biascs attrcng utrepretrcurs

4.2.2 Resulting biascs and entrepreneurs Sinron ct al. (rooo), in a survey oftr4llA students'rvillingness to start businesses,
found support lor thc vicrv.thirt bclief in the larv of srnall numbers, and illusion of
Over-confdence corrtrol both rcducc pcrccptions of risk. This vierv is further supported by Keh et al.
over-confident pcople atrach higher (zooz) in a studl' of orvncrs of top SMEs in Singapore. They followed a sinrilar
probabilities to particular outcor)res
warranted by rvhat they knorv than are reseirrch rncthoclology, but also tested for planning fallacy bias. In their study',
(llu.ro i.t,oernaker,
sheperd' zoor)' ovcr-crnfiae'ce ",ra ","o't,nuing r99z; Zacharakis and
ir .;r";;d illusion oIcorrtrol rvls hrlly nrctliirtccl by risk perception while Sinron et al. found'
which is the case rv^cre p; it rr'as only pirrtirrlly nrccli:rtccl by risk pcrception. Both studies failed to find support
'';;;-i,,"r"lo*",
-arecro not know wrrat trrey do, or dr rror, k11err,,.
Ev.idencc s'orvs trr:rt lor tlrc significrrncc o[ovcr-conlitlcrrcc, antl Kch ct al. also failed to find support for
'co're g"n..orry'o**o'ficrcrrt irr
.e.rrrc
relercnces ro gcncrill trrcir bcriefs. Iirr thc significarrcc ofthe lrlarrning lrrll;rcy. llorvcvcr lluscnitz rncl llarrrey (r997), in:r
rcscarch o,., oJ.r-.onfi.l;;;;"
llrcnrrcr ct al. (r996).
Accorcling r. and Sclrocnrak.r (;;;i;;
I{usso stutly of st;trt-u[) cntrcprcpctl's, {irultl stronq support lirr tfie view t[1t the e1(reprc-
availability hcuri.stic, tlrc a'crrori'g.,,j.j;..,ri,,*,rtco'lidcrrce can rcsulr frorrr rhc ttcttrs tctttlctl to [rc' ovcr-colrliclcnt lncl tlrlt tlre-y ernplol'ed thc rcprcserrtativcncss
a'd lronr hi'tlsight hcuristic, c.rr'rr':rtion bias,
bias- .l.hc.u,llir,.,.,nti,r, ti,,r'f hcu rist ic.
Xfuy,',,",r a.ci FIa, r9g7) is a
tendency ro scek r'orc'
a.rd arrach *r*,;; ;;;;;, t.
irrf<rrrr*rri.rr
Notc tlr:rt it is pirrticul:rrly crucial in this tleld to tltorouglrly consitlcr the
beliefs' ard r. rrrar c..firr.s
rerrd ro [rir r...;a;,;;,';;
;";;,,:,r. crisc.'{irrrirg i.r.'rari.rr. rnctlrorlologies of stuclics bclorc clccitlirrg horv nruch rveight to give to thc results
Klayrrran and tla sug.qcsr of circlr stu(ly. S()nlc ol the lutlrors cxplicitly rccognize rncth<lt.lological concerns,
t'ar. p".,-pt" ..,r" ;;r;;'* rcsr str:rrcry a.s a rlc{aulr
heuristic, and t^at rhis hcrrristic
ot'i"n *,rrk. '."ii, n", rcatrs,ro but lirrthcr criticisrns are llso possiblc. I:or instarrcc, both Kch et al. (zoqr) and
used in thc wro'g circurrstanccs.'r'hc rrindsight rvrrerr Sitrtott ct al. (rooo) ftrllorv tlrc tttctltotkrlogr'ol'l{usso arrcl Schocrnirkcr (r99r) in
lraving bcc' rr<>re bi,,r'i, u tcrdcrrcy to'r.trrenr.s
scc pa.st cvc.t.s
as
|rctlicralrlc ,1''",, ,i.,"/"".,,,:;;;'*"r.. tcstirtg lor ovcrcorrlitlcrrcc. 'l'lris irrvolvcs lsking e:rch rcsPondctrt to givc 9o $.r..nt
Note that it is not ncccs.sariry cotrlltlcrrcc lirrrits lor tcn tlilli'rcrrt statistics such as Sirrgapore's uncrnpltlynrcnt
a'[rias'to cotc.l il., iniur,,.,nti.'whcrr
It is rational to artach rcss varuc c.'rrcrc'r. ratc in 1999 (Kch ct al., zoor: rqr). 'l'hc rcspondent is judged over-confidcnt if
ru i,',r.rr,rrJonl,,ii.,,." rvrrcrr
(Hirschlcifcr arrcl I{ircy' corrficrc'cc i.s'igrr
rg7.g: r3g4-7). Howcvcr, nrorc thiur orrc of thc truc l-rgurcs lics outside thc corrfidcnce lirrrits givcn. orre
justified' thcn this itscrf wiil if t'c lcvcr of confidencc i.s nor
rrias irrf<rrrnati<r., ."ri..,,.r,r, intcrprctrtion of this rvoulrl bc thlt pcoplc place too nruch wcight on their-icntral
collectecl is optinral givc' cvc, if thc irrf<rrnrari'rr
rhc i,,iri"f f.*i ,,i..,,;;;;:;.". cxpcctittiotrs. Ilorvcvcr it could bc arguetl that such statistical, gcncral knorvlcdge
itrclgcrrrcrrts Ircirr littlc rclirtion t() thosc conccrning cntrcprcncurial opport'.rnitics,
 strgliest th'lt entrePreneurs nray
:lnd so the relevance ofthe results to cntreprcrreurill decision-rlaking rcnrlins to pirrtly reflect a nced for self-jtrstilication' Cooper et aI'
in
bc proved. The assunrption seerns to lrc thrt if a person exhibits a cognitive [rirts in engrge irr rvhrt psychoiogists hr*e tein'ecl 'pott-decisional lrolstering"
the attrrctiverress of an option once it
nrakirrg one type of judgenrent, then he rvill exhibit tlre sanrc tri;rs i1 nlrkilr: rvhich clecision-mlkers tend'to ex'lgg'erate
h:rve a nltttrrl telldclrcy to speakPositively
t'ntrcpreneurial decisions. Notc also thrrt psychologists have founcl rhat rvhilc hirs Scen chosen. Etrtrc'rellcttrs ntry
"lso
ellcourirge others' srtch as finlnciers'
pcoPle tend to [rc' over-conficlent in gcnerrl knorvlctlge over-conliclcncc tests, abotrt their efltrrts <lue to rn incentive to
rvhen asked after a test to estinratc tlre nunrber ofquestions tlrey hlve rrrsrvcretl elrrployees,andcttstotttcrstobelievetlrrttlreyrvilllresttccessftrl.Ifentrepreneurs
correctly the estimate given tends to be correct, or too low (Gigcrenzer, r99r; Griffin areover.optillristicinnrlkingthedecision-tostflrta'venttlre,andinmakinginitial
aclclitional implications as compared to
a
and Tversky, r99z). decisions on the venture, thln this hrs
Another possible criticisnr of sorre studies is tlrat in prcsenting people surveyeti sittratiorrilrrvlriclrth.yontyb..on-,eover-optinlisticonceaninitialconrnritnrenthas
rvith short case studies many detrils are lelt out about which respon6lgnl, might nrake been mrde.
Iloclels that attribttte over-
varying:rssumptions, rvhich they mieht or nright not stirte in their rePlies. For Note thrt a trttntber of atrthors hirve prol'osed
exanrple, entrepreneurs nright think in terms oienrploying dilferent striltecies in ()ptittlistl.llnclrelatccllrilrscstoration.rlbehirviourrirtherthalrcognitivefactors.
I:or i.stl'ce Virn tlc. Stccu (roo4) assunres
thrt ilgents sonretinles ttnderestimate'
exploiting an opportunity. Sonre nrisht think, for irrstlnce, irr tcrrtrs of irrvcsting on a
of sttcccss of an action' In selecting
signifcant scale at the outset to exploit an.opportunity quickly; rvhile others nriglrt rtrcl souretitles ovcrestinute the likelihooct
they are likely to choose those rvhose
think in terms of makine irreversible investments step by 51sp to gather infornration actions with high probrrbilities of success'
herrce they rvill tend to be over-
on Iikelv success. Different strategies rr'ould errtail different levels of risk ancl potentitl probabilities thcy have overestimxte(l' and
of control also form part of his model'
returns. Further, as ntentioned by Shrver lnd Scott (rggt), in their conrnrents on optimistic. Over-cotrficletrce, and illusion
the option to conduct tests of their
traits research nrethodologies rvhen asked to give advice on rvlrat sonreone else should Zabojnik (zoo4) assumes thrt people have
costs' In his model this leads to a
do, a respondent nlily not necessarilv eivc advice that hc/she rvould follorv hinrscll/ abilities, and that srrch tests I''tut op1'o'tr'tnity
herself. i.,ta",,.y for people to hlve over-positive self-evaltrations'
Such criticisnts problbly reflect thc inhcrent difficulty of unrnrbiguously nreas- DcMezann,lSo,'th"y('nnuln'gutthatrllostfirctscharacterizingsmallbusi-
and that
f'f tending to be over-optimistic'
nesscs catr be cxplirinccl
uring individual cognitive biases in conrplex arrrl judgenrentll dccision franrervorks "t*-tttitt"ts
in deciding rvhich new entrants should be given
such as those faced in entrepreneurial opporturrity evaluirtiorr. banks have arr irrtl.lortarr-t 'ole
credit.Irrtlrcirrlroclcl,t,..,k..,.nrorerellisticintheirestitrratesoftheProsPectsof
tetld.to rate t:lelr Otcltf::i:-:1:
.ntr.P..,,.urs, as the ctrtrcprctretrrs therrrselves
(roo4) take ir sinrilrrr vicrv,.poirrrirrg out rhirt over-oPtrmrsnr
irilrrry. co.rr.,n ct rrl.
in orclcr to corrcct rvhlt is trsually
inrpllc5 tltltt gol'crtltncnts shcltrltl not itltcrvcnc oflcrctl by
Atrothcr Pcrspectivc is
trtkctr tttrtlcr-provisiort of llnnrlcc lor st:trt-ttps'
ats
ltttty vi$v ovcr-confl(lcllt entrcPrcneurs as prov-iding a
llcrnirrtlo arrtl \Vclclr (tnt")'
to thcir -socirrl group try treing nrore likely
ttr
: 4.3 OvpR-opTrMrSru AND Rtrr.ATED BTASES |ositivc infornration .*t.rn*titi ilre sigrrificirnt enotrglr thcn social
cxplorc thcir crrvirorrntcnt. lfstich extcrtrillitics
throtrgh lrirvitrg sotle ovcr-cotlfidctrt Pcople rllrong the
rvcllare rvill bc incrcasccl
4.3.r Optimistic bias poPulatiorr, evcn tlrotrgh ru.t.r ir.upt.
*ill n,rt bc bchrvirrg irr an oPtinral firshion
Optinristic bias is the tcndcncy to bclicvc tlrirrss rvill trrnr out rvr'll. Accordin{r to ,uiih ,"g.r.1:; to thcir <lrvn Privnte rvclhrc'
Taylor and Brorvn (r988), olitinristic bils lrrs thrcc nrain forrns.'l-ttese ilrc ()vcr-
positive sell-evaluntion, ovcr-optirnisrn atrout futurc Plirrrs arrrl cvcnts, arrcl <lvcr-
optintisrr due to the illusion of corrtrol trias.
Coopcr et al. (r9g8) fotrnd in a survcy of crrtrcprcrrcurs that, rvhilc orrly arountl
2j percent of ncrv busincsscs survive frrr nrore thtn fivc years, 8r pcrcent <lf
4.3.2 I-lctrristics and biascs
faced, btrt
lclcrs to irrcorrcct estinrates of risks
the entrcprcneurs believed that thcir charrccs of strcccss wcrc at lcirst 7o Pcrccnt, ovcr-corrrjcrcncc, rs dcfinccr rrbgvc, on
firvotrrablc or t<lo pessinristic' elepending
and 33 percent believed thcy rvcre ccrt.tin to strccccd. 'l'hc intcrprctirtiorr of strclr cxpcctilti()r)s nriglrt llc cithcr too or negative
rvhcthcr a Pcrson,s p",b.i;iiiy-;irilrrcs
rrc birrsetl torvrrrls Positivc
rcsults rcquires sorlle carc horvcver. l:or irrstarrcc, srrctr positivc slirtcnrcnts nlay
 99
98 NIGEL WADESON COGNI'I'tVD ASPECTS OF ENTREPRENEURSTIIP

outconles. H.orvevcr, it rnay rvcll be that pcoplc rvho are optinlistic enough to of commitment
undcrtrrke entreprcneurill vcntures have tendcd to have becn biased by over-
4.3.5 Self-justification and escalation
justily dc'cisions' even if they had uegative
conficlcrtce torvards urrderestinrating the risks that they facc. Sinrilrrrly, belicf in Sclf-justification is thc tendency to
tlrc larv ofsnrall nunrbers nray lcad to over-conliclence iIa snrall sanrple is rrscc] that outcotrles'Fcclirlgsoflrerstrnal,respolrsibilityfordecisionsleadiotheneedfor
his need
to justiiy his actio's by
is biascd in a pe5iliys direction. Anchoring nlay lead to ovcr-oPtinrisnr about a scit-lustitication. i.h. d".i.io,.,-n.,"ke, is inllue.ced
vcllture as it progrcsscs, in cascs lvhere e.xpectations are anchorcd on lorecasts thirt botl.rtoprovelriscolrlPctelrcearrtlratiorrallitytohirrrself(psychologicalself-
(social self-justification)' This can lead to escalations
progress so far suggests are too optinristic. ;rr,,f,."tio"l, oni to otl'"'s (Brockner' rggz)' This rvould increase
of cotnnritmctrt to frriling cor'trscs of actioll
losses'
fhc lisk of entrePreneurs rlraking substirntiirl

4.3.3 Illusion of control

The illusion ofcontrol is the tendency for people to believe thlt they,can control, or 4.3.6 lr{ood
influence, outcomes over which they actually have no control, or to overenlphasize tl're influence of affective states on
the level ofcontrol that they do have. It results from trvo nlain factors. First, it crn
Affcct lnfusion (l:orgirs, r99i; Blron' 1998) is
to the Affcct lnfusion Model' mood influences
be diflicult to judge the relative imporrance of skill and chance. Secondly, pcople
.t.cirio,,-n,.ki,tg. A,.cordittB
ti" tn'ploytd' and rvhetr detailed decisions are being
are nrotivated to ctltttrol their cnvironments. If cntreprcncurs have an illusion of clccisiorts whcn hcrrristic'
nrade, for cxrnrple rvheu mood aflects recall
frotu memory' Complexity and uncer-
control, then they rvill pcrceive less risk because thcy will believc thirt they rvill be People in a good mood.are more
able to nrininrize the occurrence of negativc outcolltes. i.i,r,y i,t.r..r. the rolc of mootl in decisiou-tuaking'
(lohnsort and Tversk-y' 1983)'
Sinron ancl IJor'rghtorr (zoor: rr4-r5) suggcst that thc illusi<-rn of control nrly be optinlistic ltx)ut cvcnts, so alicctirrg risk lietceptions
society (Loewenstein et al., zocl).
associatcd rvith cntrcprcncurs undcrestinrating conrpctitors' respoltscs to thcir lr,lootl uriry also to sorilc cxtent bc.li.rc.l across
initiatives. They cite Kerin et al. (1992) who argue that pionccrs may firil to
recognize that conrpctitor responses are beyond thcir control, and Zajac and
Bazerman (1991), who argue that cog.itive biases lead to a bclief that compctitor
responses will not alfect thcir chances ofsuccess.

4.4 Pe ncE,MD SELF-EFFICACY

to thc dcgrce to rvlriclr solllcorle

rclcrs
l,crccivecj sclf-cliicircy, or sinrply'sclf-cl1-rcacy',
4.3.4 Planning fallacy bclicvcs hc/she hrls thc abilitf to succcssltrlly conrplcte a task' Thcre is evidcnce ofa
to lre an elrtrcpre-
The planning fallacy (Kahncnran ancl 1'vcrsky, r979a) is a tcr)clcncy for pcoirlc to positivc corrclatiotr bctrvcct.t pcrccivctl sclf-cllicacy and the dccision
underestinrlte thc artxrurrt of tintc thlt it will takc to cortrplctc tasks. lr tctr(ls to [)c rlcur(ChcIrctill.'r99tt;Sltarrc,ztl<1.]:rrr-r).[:rltrcprcrrcurs'self.cfliclcyhlsalsobccn
lcvcls (\Vcstcrbcrg, r99tl)'
particularly strong itr rrnique and higlrly uncertain sitr,utions. liruncl to allcct tlrcir busincss strirtcg,ics and pcrftrrruiltrcc
The plannirrg [allircy ntrry bc partly the result oIpeoplc ftrcusing on plan-birsed sclf-cllicacy (Birndrrru, 1tt77, 1986, r995; Cist and Mitchcll' r99r) is
l,crccivctl
scenarios rathcr thiln rclcvarrt prst expericnccs (lSuchlcr ct al., r994). Krugcr antl closcly rcl:rtccl to thc couccpt oIpcrccivccl bchrviourll cotltrol, which forrils plrt of
lrclicvc therlrsclvcs
Evans (zoo4) arguc that thc Plirnning lirllacy is tlrc rcsulr.la r:rilure of pcoprc ttr the'l.hcory <lf l,latrrrctl l}clraui.,.,r. l)coplc rvitlr lrigh self.cfficacy
break nrultilacctcd t:rsks ckrwn in thcir nrinds into (lrcir c()nl[)oncnt parts. 'l'hcy capirllleofsucccssftrllytirkingatlaptivcilctiolrasclrlllcngcsunfold.l.hcytclldto
find that when pcoplc arc prornptcd to unpack thc tasks, thc plir1111i11g firllacy is c5<losc t. trrltlcrtlke ,,t.,,..litllt"gitl8 tasks' atrd are less likely to tre deterred front
nrore likcly to.succced in
rcduced. The planning fallacy lcacls to risks bcing underestirnatccl, as it i.s likcly tlrat thcrn.,l.hc lrrttcr point nrakes thosc wirh high sclf-cfficacy
costs will turn out to bc higher than expected. ir task' but als<l carrics tlrc risk ofovcr.optirlristtr,
rtrd ofescalatilrgc<)lrllrritnrelrts to
failirrg courscs of action (Glcn ct rrl', r997)'
 an action' or
rervarcl for carrying out
lnotivation such as the receipt ofa intrinsic
extrinsic Hence
The correlation bctrveen self-elficacy and actual abilitics is inrperfect. peoplc not frvourxl)le enough'
who are clearly capatrle can percei'e thenrselves as h.r'ing low self-eflicacy, while thc thrc:rt of heinc' 0""";;';;;;;;lti "t ttn.crtake entrepreneurial
activities
' those rvho objectively clearly have poor caplbilities for a task can be very confident. motivittiotrs prot,ide ttlolt;"":i;;:tn'*tt 'o
(Dclrrr:rr, inoo)' lcople-"''ty
bttun''t :lt*Pt:"1:::i:::*Ll*I;,]:tiilil::.
The strongest sources ofself-efficacy perccptions are nrastery t'xpcricnces, rvhich rre
predictor::':1:'il,;:,'""' t
interprslxlion5 ofthc results ofone's own past cfforts. Vicirrious experiences (observing ;;.'i;;;;,t' n'..v be a
'l'o
good.
t.*'"8 to cre-
;;il;g"na utiti'lv''na
others) also have an imprct, as do sociirl persuasions (the conrnrents ofothers), and
somatic and emotional states. Emotional states impact through the ernotional reac- llf .t.r.t,
,o t,
U*r;;;li:ilf:,:';:IHJl'll:i:'il
self-efficacy'
linked to perceived , the introduction of extrinslc
extr'
tions people feel to the prospect ofcarrying our any specific task, and also through
Olti in sonre circunrstrnces
general emotional states, rvhich affect people's overall lcvels ofoptintisnl. Eviclence suggests is knorvn as the overiustification
rewarcls can reclttce
;;;;;"*t' This systems for
A variety of cognitive factors inrpact orr pcople's interpretirtions of infornrrtion . '";';t to'be relevant to incentive
tt tl" in
affecting their perceptions of their self-elficacies. For instirnce people nriry selcct- effect (Greene 'e;;;"; ';;;i; "tt withirr oreaniz.tions' suggestingandthat
ively recall failtrres. Inaccurxte assessnrents oIsclf-efficrrcy nmy also rcsult lionr plst e.cotrrirging tnt"r"nttll't'';t;;;'.,tt' motivation' to be

sonle c.rses it nrry tre

better to locus on tntou'ngi''tgoiutrinsic Discussions' of eco-
perforrrrance havirrg lreen partly the result of group inlql6ll.pcrrdencies. A further
atn''tgt t"n'"ttn extrinsic'nr"otivations' (crowding-out)
factor is a Person's attributional style. Sorncone rvith an optinristic attritrrrtionrl careftrl not ontl oit'lustifrcntion
'o ;il;';:i;ntion
nomic apprlications of
style explains negative events in ternrs of external cruses, and expl;rirrs positive
events in terms of interrral causes (Raron, r998). :;.';; ilil':'l
"ht"'
i,?:,4,;ili":l'J.^llJ ::::,,ff ?*. n1 ent oned above wa rd i

Stajkovic and Luthans (1998) provide a nreta-anrlysis ofrcscnrch on self-efiicacy. A link betrveerr intrinsic
":'11:':,:,::'1"i.,""*t,r, noting rhe importance of
There is much evidence shorving a link between self-cflicacy and success, although
there is clearly an isstre with causality in intcrprcli69 511ch evidcrrce as success breeds :',,"."'ilii:tr:,ll;:::ru;',::::'THli""il"'lio"'"'iin'reisevidence
that entrep'"ntu""tntt
to be relatively creative
higher self-eflicacy, while high self-efficacy crn brced success. Note that Hrwkins supPorting the proposition
(1992) argues that self-eflicacy is a predictor rathcr thrn a causc ofbchaviour. (Shane, zoo3: 56-8)'
A further concept refers to tlre perceived sclf-efficacy ofa group. This is terrred
collective efficacy (Bandtrra, r995). This is the level ofcollective beliefrvithin a team
ofits orvn effectiveness in carryine out a task. Teanrs rvith high collective eflicacy
choose nrore ch:rllengine eoals, put in more elfort, and ilre ntore lrcrsistent. Studies
have found support for a link betwcerr pcrccivecl collcctivc efficacy rrrd terrl TIIINKING AND
perfornrance (Shcperd lrrtl Krtrcgcr, zoor: r7r-r). 4.6 COUNTERFACTUAL
A problent rvith thc corrcept olself-cfficlcy is tlrut it crtrr bc'usctl in a rvry thrt REGRET TI{EORY
docs little nrore thirtr sirlply 5n[151i1rrtc lor tlrc tcrrrr'sclf-corrfjdcncc', rvhich is
done
; already rvell used in errtrcprcncurship tlreory. It rvoultl, in firct, lre entirely possible things nright have becn
is e't posr thinking *:"':]l:::
i to model lirrks lretwccn self-corrficlcnce, the tlccision to bccontc rtr entreprcneur Cotttrterfrctttitl thinking "ulg
ilil;,,; ; n. i"", jil;i:f i.,l',,li, Jli i ].',LL,iff
, and entrepreneurial lrchirviour as rational rcsporrses to sclf-krrorvledgc, anrl scll:
learning. lt is perhaps in thc nrorc dctailcd irrsights irrto horv scll'-corrfitlcnce f<rrrns
;;,,,,,
", [i
be rer.rccr rror. iil;:::l[
cx1'cric'lrcc '
:[::$:H'li]:L:T::::;.;l;;;;';;'i"ies.can
" thnt self-efficacy thc()ry ctn contrit)utc ntost. r", t l''ti':;;;-t",.1""t xl11;;::*n:il.:fi
Gall io a rr.l -n' Hiffi in:l
- fi'
::,il:}il':''f: ;Hil'
n * it v
u"
m
n

:il*' Iil::],,i,Ti1.ill;'ilt;;tl''o" " "'"' "' events'

itr rcsp.nsc to novel
urertttl schct.ir' tito "h"ntt'
oItheir
["ri.'t,,,,0irr,,",ry.,;::.::ff x;1;l;,:::;1,*'n:T::t$ii"1,1,'1,1
4.5 INTRINSTC MorrvATroN nND cREATrvrry
11 iil:illllfi iilil
Tffi :ili::*:
pasl Ti.il;:.;:1[T:f;
:l;':::i
adtrllt
anci
Irrr5rd^! "'t""
lind it cirsicr to
'.*:il::
lntrinsic nrotivatiotr (l)cci lnd ltyrn, rytli) is tlrc rrrotiv:rtion to rlo s()lncthing for ,rti.r"a uppo"trrlitics'
its <lwn sake: becattsc it is intcrcstirrg arrtl crrjoyirlllc.'l'his is irr c()trtrilst t<l sourccs of arrtl to otlrcrs'
 cocNlll!L A5l'LUl5 vr'!1\
N IGh,L WADT,SON
,]
FRAI{ING:
Note that '<regret' plays a sonrewhat tlilli'rcnt role in regret theory (Loomes and
Sugden, rqSz). In rcgret thcory thc ovcrirll lcvcl ofsatisfaction gained from follorv-
4.8 PnosPEcr THEoRY AND
ing a particular decision option is a conrbinirtion of the bas.ic utility fronr the acttral
ATTITUDES TO RISK
consequence, plus an decrenrcnt or increnrent due to regrct or 'rejoicing' over
avoiding the conscquerrccs ofalternative decision optious. In rcgret theory, regret is nr'ry have a tetldency to fralne decisions
llirron (roo4) sttggcsts thrtt ctrtrepretlcurs
taken into accor.rnt ex nnte whert nraking the decision. to if they do lrot becoure entreprerleurs'
i,, ,.rnls of ttt. l.in, thcy rvill fail nrake
if they do' and that this therefore-makes
rirther tllan the losscs tf"y "'igl''t nrake
risk sccking' ut'l" ot'o that the overweighting of sr'all
the'r 'uggt'i'
'rore
probabiliticsnraylc:rclpcopletobecolrreentrepreneurs(tlrerveightingfutrction
very lorv probabilities)'
employctl in original p'o'ptt' theory overrveights
that.entrepreneurs frame equivocal
Palich ancl U,,gby 11995) found evidence
positively.than others' Entreprelleurs were
t urin.rl; scen,rrios signilicantly tltorc
4.7 INTENTTONS-BASED MoDELS nruch ttrorc likcly to vicrv scctrilrios 'ls
oPPortunities rvhere others lvould see
theur

as ofiering lorv returtls in rclirtiolr

to thcir risks' \

a decision-maker is presented with' or

Krueger (zooo) espor.rses intentions-based theory as a nleans of undcrstanding rvhat Franring refers to the rvay in rvhich
a positive way of frarrring a gamble is
triggers entrepreneurirl activity. He argues tl'rat organizations influence attitudes pcrceivcs, a decision probleru' For instilnce
towards erltrePreneurial initiatives among their nrenrbcrs, that orglniz:rtionirl cr.rlture to tell a persotr lte h., " 55 1""tnt chance.
oi rvinning' rvhile a negative rvay of
chance of losing' There is evidence
that
helps to deternrine subjective nornrs, and that organizations can take steps to inrprove framing it is to tcll hin', hc-ltts a 45 Percent (Wang'
it is positively franred
their tnenrbers'perceived self-efficary (rvhich he uses instead ofpcrceived bchaviorrral pcople are nrore likely to accePt a lxoposition-when
1998). i;'otpttt it'to'y it often used to explain framing effects'
control) and perccived collective eflicacy. For instance, hc suggcsts that organizations 1996; Kuhbcrgcr,
ond Tversky' r9z9b)' the prospect of a
should provide their nrenrbers with multiple low-risk nrastery opportunitics in order r\ccorcling to ProsPect tf,.o,y (X"tlntn'on
of a gain when making.a.decision'
to enhancc pcrceived sclfl-eflicacy. Shepherd and Krucger (zooz) [urther consi(.ler the loss is ntore licirvily rveiglrttti tl'tn the Prospect
'l'his is tcrnred lor, ,ut"ion' Grins yieid i'''t"a" in the level of utility that is
cognition of entreprencurial teanrs from an intentions-bascd pcrspcctivc. "n
According to intentions-based models, intentions are thc best predictor of lorvertlrltrthcrccluctiorrinutilityyieldedbylossesofthesarrrenragnitude.In
voluntary behaviour. Fishbein and Ajzen (1975) proposed thc Theory of Reasoned aclditiontlredecisiolr-rrrirlierisriskaverselvhetrchoosirrgbetrveengains,andrisk
Action. According to this theory, intention to act is dcternrined by thc dccision- scckingrvlrenclroosingbctrvcetrlosscs.Clroosirrgbetweerrgairrsissubjecttowhatis
nrakert attitudes torvards thc bchaviour ancl by his strbjcctivc nornrs. Attitrrdcs tcrtrrcclthcccrtlilttycilcct.]-lrcccrtairltycffcctislvlrcrethediffcrcncebctweerr
towards the bchaviour arc'its expected consequcrrccs. Subjcctivc nornrs are rvhrt ..,..ing.in.irrrtlprobilblcgirirrsisgivcnalrighcrlvciglrtbyadccisiorr.nrakerthln
the dccision-nrlkcr lrclicvcs pcopls \a,h.r. viervs hc carcs atrout rvill think aborrt thc r6c sanrc sizccl di(lcrcnce iri unccrtrinty
bctrvcc' problblc gains'

bchaviour. Shcppald ct al. (1988) givc a mcta-aualysis ofstutlics on thc theory. Loss avcrsi.. is orre rcirsou for stirtus quo biirs (Krhnenran et al', r99r), undcr
The Thcory o[ ['l:rnnccl l]clrlviour (Ajzcn, r99r) is an cxtcrrsion of tltc 1'hcory ol rvlrichpcoplclrar,eabilrsttrrvardsprclcrrirrgihingsastlrcyarc.L<rssrvcrsitrtrtlreirns
Reasoned Action. It aclds a third factor into the dctcrrtrin:rtion of intcntions. l'his is thltlrctlplcgivcagrcltcrnucigl.'ttothcrrcgirtivecollscquellccsolclrangetlulrtlrey
perccived bchrvioural cotrtrol. It is the decision-rnakcr's bclicfs ab6ut Irorv nruclr clo to tltc positivc collscqtlcllccs'
Krhncnurn (1991) to
control he will havc ovcr clrryirrg out the bchaviour. origirui prospcct thcory ru,rs nrodi{ic.cl by'l'vcrsky lrrcl
a rtrodifictl tttlthcrllittical nlodcl"l'hc
Tcsts of thcsc nroclcls irr psychology havc nriri'ly bccn birsccl un sclf-rcirorts. crcirtc cr,lnruLlti"c pr,,spcct thcory. lt cnlploys
orr thc P;rralrlctcr valucs
Howcvcr evidcncc has suggcsted that self-reports may not bc rcliable (l{os.s ct al., cxict bchilvi()ur prcdictcd try thc thcory dcpcnds
cvidctrcc Tvcrsky
r986; Manfrcdo lrrd Shclby, r988). Sce Iludd and Spcncer (tgtt6), ancl Evans (r99r) (Ncilson ,rntl Sto've, zoor)' but citing cxpcrinlcntll
",,tpluy"t.l of risk avcrsion: risk avcrsiotl for lligh
for critical assclsnrcnt of the ntoclcls, rnd of tcsts on thcrn. irrrrl Kalrncuriru clirinr tlrc lollowing pilttern
"n"
Fazio (r986) proplv5gd an alternative intcntiorrs-ba.scrl thcory clllcd thc n ttitudc ;;;;i;'i,i; s;ri's, risk sccking to* probabilitv gains' risk sceking for
low probability losses' Evidcncc in
Acccssibility'l'hcory. Accorcling to tlris, thc laster sonrconc cilt) cxl)rcss iln itttitudc, high probrbility losscs, rntl ri'i avcrsion for
by Canrercr (zooo)' Horvever sonte
thc strongcr it.is. Thc ttxrrc acccssiblc an attitutlc is, tlrc rnorc likcly it is to guiclc r;uirpor, of pr,rspcct tltcory rvits clisctrssed
behaviou r. stuclicsltitvclrr<lducctlrcsultstlrirtarcctrtrtrit<lict<lrytoit(Sitkinrndl)ablo,r99z).