Note On Decision Making, Emotions and Entrepreneurship

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908M58
A NOTE ON DECISION MAKING, EMOTIONS AND

ENTREPRENEURSHIP
Colleen Sharen wrote this note solely to provide material for class discussion. The author does not intend to provide legal, tax,
accounting or other professional advice. Such advice should be obtained from a qualified professional.
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Copyright © 2008, Ivey Management Services Version: (A) 2008-08-15
As observers of the business world, many of us have read stories of business failures and attributed these
failures to obviously flawed decisions. We all like to play Monday morning quarterback. Many decisions
that seem so obviously wrong after the fact are not nearly so clear when they are being made. It is true that
many bad decisions have been made as a result of poor reasoning, inadequate analysis of the situation or
poor decision making processes that encouraged biased decisions. But it turns out that decision making is
more complex than we thought. Emotion plays a significant role in any decision making process and may
also have an impact on the effectiveness and quality of decision making.
We tend to think of decision making as highly rational. Collect the right information, analyze it and come
to a logical conclusion. Emotion is often believed to reduce rationality and contribute to poor decision
making. It can be perceived as weak, incompetent or inappropriate.
However, decision making involves more than just intellect. Research from psychology, neuroscience and
organizational behaviour shows that feelings play a fundamental role in the way we make decisions. In
fact, lack of emotion appears to reduce our ability to make good decisions. Neurological studies show that
people with damage in the area of the brain that manages emotion tend to make inappropriate or bad
decisions.1
It may not be possible for humans to operate in a purely logical way. Our brains have developed a highly
complex thought process that interweaves both logic and feelings to make decisions. Feelings help us make
decisions in numerous ways.2 They help us:
1. Direct our attention to highly important things

2. Make choices between options
3. Be flexible, create multiple options to choose from and widen our point of view
1
Jennifer George, “Emotions and Leadership: The Role of Emotional Intelligence,” Human Relations, 53, August 2000, p.
1030.
2
Ibid, pp. 1035-1036.
This document is authorized for use only in Prof. Promila Agarwal's PGP II (Term : 4) Games People Play: Psychology of Human Resource Management (GPP) 2023 - 24 at Indian Institute of
Management - Ahmedabad from May 2023 to Sep 2023.
Page 2 9B08M058
4. Be creative and aware of the opportunities that surround us
Both positive and negative feelings enhance our decision making ability. Positive feelings have been
associated with increased creativity, integrative thinking and inductive reasoning. Negative feelings have
been associated with greater attention to detail, detection of errors, problem solving and detailed
information processing.3 Feelings may also reduce our decision making effectiveness by reinforcing biases.
Thus, positive or negative, feelings contribute to the effectiveness or lack thereof of our decision making
processes. Awareness of these feelings may help us manage their impact on our decisions.
DEFINING FEELINGS: MOODS AND EMOTIONS
Moods and emotions are expressions of feelings or “affect.” Moods are low level, non-specific feelings
that we may not even be conscious of. Emotions tend to be sharp, short-lived specific responses to specific
events.4
Moods and emotions are differentiated by their level of energy. Moods tend to be low energy while
emotions tend to be higher energy. Negative moods and emotions are more unpleasant, while positive
moods and emotions are more pleasant.5 The following table gives some examples of moods and emotions:
Table 1
DESCRIBING EMOTIONS AND MOODS
Mood Emotion
Positive Content Alert
Serene Excited
Relaxed Enthusiastic
Calm Elated
Happy
Negative Sad Tense
Depressed Nervous
Lethargic Stressed
Fatigued Upset
Angry
Source: Adapted from Sigal Barsade and Donald Gibson, “Why Does Affect Matter in Organizations?” Academy of
Management Perspectives, 21:1, February 2007, p. 39, Figure 1, “The Circumplex Model of Affect.”
Research shows that people have a predisposition to either positive or negative moods and that these
predispositions stay with us over the long term.6 Several studies have shown that our overall disposition,
the way we see the world from a positive or negative perspective, influences our managerial performance.
3
Ibid., p. 1036.
4
Gary Johns and Alan Saks, Organizational Behaviour: Understanding and Managing Life at Work, 7th ed., Pearson
Prentice Hall, Toronto, 2008, p. 130.
5
Sigal Barsade and Donald Gibson, “Why Does Affect Matter in Organizations?” Academy of Management Perspectives,
21:1, February 2007, p. 39.
6
Johns and Saks, Organizational Behaviour: Understanding and Managing Life at Work, p. 47, and Sonja Lyubomirsky, The
How of Happiness, Penguin Press, Toronto, 2007.
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Positive disposition is correlated to greater decision making effectiveness, better interpersonal relationships
and higher ratings of potential.7
HOW MOODS IMPACT OUR DECISIONS
Much of the research on decision making has focused on the effect of moods rather than emotions on
decision making. Our moods have a great influence on our judgments. For example, we tend to store
information that is consistent with our mood. If we are in a negative or bad mood, we tend to notice and
store negative information. If we feel positive or good, we tend to notice and store positive information.8
The same goes for our memory. We tend to recall information that is consistent with our mood.9 As a
result, when decision making, we may selectively remember information that does not provide a balanced
assessment of the situation — it can be either skewed to the negative or positive depending on our mood at
the time.
As well, we tend to make assessments or judgments that are consistent with our feelings. For example,
people in a good mood tend to provide more positive performance appraisals than people in a negative
mood.10
Good moods increase susceptibility to decision making biases such as planning fallacy11 and optimistic
bias.12 People experiencing positive feelings are more likely to underestimate the amount of time it takes to
accomplish tasks, which is known as planning bias. “Optimistic bias” occurs when people in positive
moods overestimate the likelihood of positive outcomes and underestimate the likelihood of negative
outcomes.
Positive feelings may also result in a greater belief in the likelihood of future success as well as a greater
belief in one’s own abilities.13 Positive emotions are also linked with higher levels of creativity in both
individuals and organizations.14 It is possible that people experiencing highly positive moods might take on
excessive risk as a result of these biases.
Our moods even influence how we approach a task. Positive mood is associated with a more internally
driven process, flexibility and the gathering of new knowledge. Negative mood is associated with an
external orientation, systemic thinking and use of existing knowledge.15
Although people usually tend to avoid negative moods and try to retain positive moods,16 negative moods
may have some useful outcomes. For example, strong negative emotions can refocus a leader’s attention.17
7
Barsade and Gibson, “Why Does Affect Matter in Organizations?” Academy of Management Perspectives, 2007, p. 43.
8
Robert Baron, “The Role of Affect in the Entrepreneurial Process,” Academy of Management Review, 33:2, April 2008, p.
330.
9
Baddeley, 1990, and Eich, 1995, in Baron, “The Role of Affect in the Entrepreneurial Process,” Academy of Management
Review, 2008, p. 330.
10
Joseph Forgas and Jennifer George, “Affective Influences on Judgments and Behavior in Organizations: An Information
Processing Perspective,” Organizational Behavior and Human Decision Processes, 86:1, September 2001, p. 15.
11
Buehler, Griffin and Ross in Baron, “The Role of Affect in the Entrepreneurial Process,” Academy of Management Review,
2008, p. 336.
12
Busenitz and Barney in Baron, “The Role of Affect in the Entrepreneurial Process,” Academy of Management Review,
2008, p. 336.
13
Forgas et al., 1990, in George, “Emotions and Leadership: The Role of Emotional Intelligence,” Human Relations, 2000, p.
1037.
14
15
Bless, 2000, and Fielder, 2000, in Forgas and George, “Affective Influences on Judgments and Behavior in Organizations:
An Information Processing Perspective,” Organizational Behavior and Human Decision Processes, 2000, p. 8.
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Moods may act as inputs. Negative feelings can alert us that something is wrong and focus our attention on
the issue at hand. On the other hand, positive feelings can indicate that everything is fine and that no
additional work or attention is required.18
Negative moods can also improve attention to detail, identification of errors and problem solving. Feelings
may provide signals about ethical issues. Whistle-blowers often report being motivated to report ethical
violations by strong emotions.19
Mood also appears to influence the likelihood of escalation of commitment. Typically, escalation of
commitment occurs when someone continues to invest resources into a failing course of action in order to
change the anticipated outcome to a success. The likelihood of escalation of commitment increases when
the person making the second investment decision also made the first investment decision. They continue
to invest in an unsuccessful course of action because they believe that the failure of the first decision would
reflect negatively on their performance. Interestingly, a recent study shows that the people experiencing
negative moods are less likely to escalate commitment. This may be because they wish to avoid the further
stress or negative feedback that would occur if the second round of investment also failed to rescue the
decision.20
Strong emotion may increase the escalation of commitment, especially in highly pressured contexts. For
example, auction-like situations such as hostile takeovers or bidding for rights tend to increase the impact
of emotions. Factors such as having an audience witnessing the events, time pressure and intense rivalry
may also increase the likelihood of escalation of commitment. These situations may lead to paying too
much for a particular asset.21
Moods appear to have a greater influence on a decision when the decision is more complex and
ambiguous.22 Uncertain situations lead us to use feelings to interpret information.23 When we lack facts or
evidence to help us guide our thinking processes, we are more likely to rely on emotion. We fill in the
missing pieces with our “guesses” to create an explanation or complete the picture. As a result, when a
decision is particularly challenging we are more likely to rely on our emotions as input into the decision
making process.
Increased urgency may also increase the likelihood that we will rely on emotion as a “rule of thumb” or
heuristic to guide our decision making. If we don’t have time to gather data and develop an informed,
reasoned decision, we may resort to emotion or intuition, since it is easily available to us. “How do I feel
about this?” may become part of our decision making process.
It also takes more time for us to come to a decision when our mood is inconsistent with our decision or
judgment.24 In order to come to a decision or judgment of a situation that is different than our current
16
George, “Emotions and Leadership: The Role of Emotional Intelligence,” Human Relations, 2000, p. 1038.
17
Frigda, 1988, in George, “Emotions and Leadership: The Role of Emotional Intelligence,” Human Relations, 2000, p.
1036.
18
19
Johns and Saks, Organizational Behaviour: Understanding and Managing Life at Work, p. 386.
20
Kin Wong, Fai Ellick, Michelle Yik and Jessica Kwong, “Understanding the Emotional Aspects of Escalation of
Commitment: The Role of Negative Affect,” Journal of Applied Psychology, 91:2, 2006, pp. 291-292.
21
Johns and Saks, Organizational Behaviour: Understanding and Managing Life at Work, p. 384.
22
Forgas and George, “Affective Influences on Judgments and Behavior in Organizations: An Information Processing
Perspective,” Organizational Behavior and Human Decision Processes, 2000, p. 4.
23
Ibid., p. 7.
24
Ibid., p. 19.
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mood, we have to work harder and think longer. This may be because we have to work against our
tendencies to make assessments and decisions that are consistent with our moods.
EMOTIONAL INTELLIGENCE
In recent years, emotional intelligence (EI) has emerged to take centre stage in our concept of the way that
we understand, use and express emotion. The theory suggests that EI can contribute to our understanding
of human behaviour in organizations, leadership effectiveness and productivity. Emotional intelligence
may also mitigate the biases that emotion brings to decision making.
“Emotional intelligence essentially describes the ability to effectively join emotions and reasoning, using
emotions to facilitate reasoning and reasoning intelligently about emotions.”25 EI appears to work with
other forms of intelligence and personality traits in decision making processes.26
There are several models of EI. Daniel Goleman, a leading EI researcher, developed one of the major
models of emotional intelligence. In an article in the Harvard Business Review, he summarized research
that supports the importance of emotional intelligence in organizations:27
1. Emotional intelligence is twice as important as both technical skills and IQ (or cognitive intelligence)
in terms of performance
2. EI is more important at higher levels within an organization, accounting for 90 per cent of the
difference between average and high performers
3. When management teams had “a critical mass” of EI, they exceeded their earnings goals by 20 per
cent while those teams that did not have this EI critical mass missed their goals by almost the same
amount (84)
Assuming that improved performance is the result of better decision making, then it is possible that higher
EI helps us to make better decisions. It appears that how “smart” (i.e. IQ) we are and what technical skills
we have are only a part of the recipe for effective decision making.
Goleman’s model of EI consists of five dimensions, as described in Exhibit 1. A more detailed list of social
and emotional competencies or behaviours comes from the Emotional Competence Inventory.28 These
competencies include emotional self-awareness, accurate self-assessment, self-confidence, self-control,
transparency, adaptability, achievement orientation, initiative, empathy, organizational awareness, service
orientation, developing others, inspirational leadership, change catalyst, influence, conflict management
and teamwork.
A recent study showed that successful managers were more likely to demonstrate certain emotional and
social competencies than “typical leaders” within one specific company. Success was determined using
annual performance review scores and management potential scores. Since these two measures were used
to determine salary increases, bonuses and other behavioural rewards, they were seen to reflect managerial
success. Successful managers were significantly more likely to exhibit emotional self-awareness, self-
25
Mayer and Salvovey, 1997, in George, “Emotions and Leadership: The Role of Emotional Intelligence,” Human Relations,
2000, p. 1033.
26
27
Daniel Goleman, “What Makes a Leader?” Harvard Business Review, 82:1, January 2004, p. 82-91.
28
Boyatzis in Margaret Hopkins and Diana Bilimoria, “Social and Emotional Competencies Predicting Success for Male and
Female Executives,” Journal of Management Development, 27:1, 2008, p. 18 and 21.
Page 6 9B08M058
confidence, organizational awareness, inspirational leadership, change catalyst and achievement

orientation than less successful managers.29
It appears that the more effectively someone can manage both their own emotions and those of others, the
more likely they are to make effective decisions and be perceived as an effective and successful leader.
FEELINGS AND ENTREPRENEURSHIP
Although feelings appear to influence decisions in all situations, emotions and moods may have particular
impact on entrepreneurship. Entrepreneurs have a unique emotional bond with their businesses, perhaps
because it is essential to have passion and personal attachment to a business idea in order to be successful
in a start-up environment.
In order to understand where feelings might have an impact on the entrepreneurial process, we’ll first
consider the elements of entrepreneurship. Stearns and Hills summarized these elements of
entrepreneurship:30
• Creating organizations including the creation and operation of a business
• Identifying opportunities
• Evaluating opportunities
• Innovating by creating new ways of delivering value and making ideas viable propositions
• Assuming and managing risk
• Obtaining resources including the creative sourcing of resources — people, supporters, capital and
knowledge
• Adding value for the entrepreneur and society
These dimensions of entrepreneurship may vary in importance depending upon the context, but many of
them may be influenced by feelings.
Baron noted that feelings might have an impact on the entrepreneurial process in three key ways.31 First,
emotions may have an impact on opportunity identification, since positive feelings have been linked to
greater awareness of the external world, which encourages creative thinking and arranging different ideas
in new combinations or ways. People experiencing positive moods might be more alert to opportunities
and more actively seeking those opportunities. Positive emotions and moods are also associated with
greater creativity, which should likely increase innovation.
Second, Baron suggests that emotions have an impact on an entrepreneur’s ability to attract both financial
and human resources. In order to attract people (and their money), entrepreneurs must demonstrate
enthusiasm to persuade people to participate in the new venture. Research has shown that emotions are
“contagious,” that is they can be transferred from one person to another.32 Positive moods assist
entrepreneurs in spreading enthusiasm about their ventures to others, increasing the likelihood of obtaining
resources.
29
Ibid, p. 26.
30
Timothy Stearns and Gerald Hills, “Entrepreneurship and New Firm Development: A Definitional Introduction,” Journal of
Business Research, 36:1, 1996, pp.1-4.
31
Baron, “The Role of Affect in the Entrepreneurial Process,” Academy of Management Review, 2008, pp. 332-335.
32
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Research has also shown that the greater their social network, the higher the likelihood that an
entrepreneur’s new venture will be successful. People predisposed to positive feelings tend to have wider
social networks.33
Thirdly, “positive affect tends to encourage flexibility in solving various problems and thinking generally,”
skills that are crucial to entrepreneurs as they build their businesses.34
In addition to Baron’s discussion of the potential influences of emotion on the entrepreneurial process,
feelings may also influence opportunity evaluation and risk assumption. As noted earlier, people
experiencing positive moods are predisposed to the “optimistic bias,” that is, overestimating the likelihood
of a positive outcome and underestimating the likelihood of a negative outcome, potentially resulting in
ineffective opportunity evaluation and assumption of risk.
Emotional intelligence skills such as self-awareness may help entrepreneurs be aware of the impact of their
emotions and mitigate the risks of their emotions driving them to high risk choices.
Empathy is an important EI skill for entrepreneurs, especially in providing customer service and retaining
talent. Social skills are also important in persuading others to support the venture and for forming and
leading teams, which enables entrepreneurs to build their businesses effectively.
Motivation is also a key ingredient in the entrepreneurial mix. Entrepreneurs need to be self-starters, have a
commitment to the organization they are trying to build, be resilient in the face of difficulty and have
passion, and a need for accomplishment.
Recently a small study of highly successful Australian entrepreneurs concluded that the participants
possessed very high levels of EI in all of the key dimensions. They found that the small sample of
entrepreneurs interviewed were strong in self-awareness, expression of emotions, self-control of their
emotions, the ability to identify and manage emotions in others and the ability to persuade others. They
were also more tolerant of stress, persistent while facing failure and more effective problem solvers.35 This
small study provides a glimpse into the important role that emotion plays in entrepreneurship, but it isn’t
conclusive. More research will have to be done in this area.
MANAGING EMOTION IN DECISION MAKING
Knowledge is power. As we have seen, feelings can have both negative and positive influences on decision
making processes. When it comes to managing emotions in a decision making situation, awareness of our
feelings can help manage these potential risks.
Practice in identifying emotions and understanding the effect they might have on our decisions appears to
help manage the influence of both negative and positive moods.36 People appear to self-correct their
emotional biases when they are made aware of their moods.37
33
Baron, “The Role of Affect in the Entrepreneurial Process,” Academy of Management Review, 2008, p. 333.
34
Ibid., p. 334.
35
Bernadette Cross and Anthony Travaglione, “The Untold Story: Is the Entrepreneur of the 21st Century Defined by
Emotional Intelligence?” International Journal of Organizational Analysis, 11:3, 2003, pp. 225-227.
36
Forgas and George, “Affective Influences on Judgments and Behavior in Organizations: An Information Processing
Perspective,” Organizational Behavior and Human Decision Processes, 2000, pp. 24-25.
37
Ibid.
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There is much debate as to whether it is possible to improve our emotional competencies. However, recent
research supports the idea that many emotional skills (as compared to personality traits) may be learned. A
series of studies showed that graduate management education can increase emotional intelligence skills and
that these skills can be maintained for up to seven years. However, difficult and challenging organizational
situations may erode these skills.38
Another study of fully employed undergraduate business students showed that exposure to a 12-week
emotional intelligence program significantly increased emotional intelligence among those who
participated, while there was no difference in a control group whose members were not exposed to the
program.39 The program used a number of elements such as self-assessments, self-development plans,
coaching, role playing, interviews of others, critiques, readings, journaling and reflection.
While you may not be able to take a 12-week course to develop emotional intelligence, there are ways to
practise identifying managing your feelings. Here are some questions that you can ask yourself to help
mitigate the influence of feelings in decision making:
1. Am I feeling negative or positive?

2. Is my mood influencing my assessment of this situation?
3. Do I dislike this person or am I assuming something about them?
4. What is the real likelihood of failure? Is my estimate realistic? Am I overestimating or underestimating
the likelihood of success?
5. Have I allocated enough time and resources in my plan to achieve my objectives?
6. Have I considered alternatives to my preferred decision?
7. Have I asked questions that “disconfirm” my preferred decision or opinion?
8. Have I considered the “worst case scenarios?” What challenges might I be able to plan for?
9. Have I given myself enough time to consider all of the alternatives? Am I putting unnecessary time
constraints on my thinking process? Is my sense of urgency creating stress and increased emotion?
It is important for entrepreneurs to have a sounding board, someone who may help the entrepreneur
identify when emotion is creating bias in their decision making processes. External advisors, including
accountants, lawyers or consultants as well as independent investors and family members may be able to
provide valued perspective to an entrepreneur in difficult and potentially emotional decision making
situations.
It may not be possible or even desirable to eliminate emotion from the human decision making process.
With practice, however, we may be able to cultivate an awareness of our emotions and their influence on
our decision making processes and by doing so improve the quality of our decisions.
38
Richard Boyatzis and Argun Saatcioglu, “A 20-Year View of Trying to Develop Emotional, Social and Cognitive
Intelligence Competencies in Graduate Management Education,” The Journal of Management Development, 27:1, 2008, p.
93.
39
Kevin Groves, Mary Pat McEnrue and Winny Shen, “Developing and Measuring the Emotional Intelligence of Leaders,”
The Journal of Management Development, 27:2, 2008, p. 233.
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Exhibit 1
GOLEMAN’S MODEL OF EMOTIONAL INTELLIGENCE
Dimension Definition Hallmarks

Self-awareness The ability to recognize and understand Self-confidence
your moods, emotions and drives, as Realistic self-assessment
well as their effect on others Self-deprecating sense of
humour
Self-regulation The ability to control or redirect Trustworthiness and integrity
disruptive impulses and moods Comfort with ambiguity
The propensity to suspend judgment — Openness to change
to think before acting
Motivation A passion to work for reasons that go Strong drive to achieve
beyond money or status Optimism, even in the face of
A propensity to pursue goals with failure
energy and persistence Organizational commitment
Empathy The ability to understand the emotional Expertise in building and
makeup of other people retaining talent
Skill in treating people according to Cross-cultural sensitivity
their emotional reactions Service to clients and customers
Social Skill Proficiency in managing relationships Effectiveness in leading change
and building networks Persuasiveness
An ability to find common ground and Expertise in building and leading
build rapport teams
Source: Daniel Goleman, “What Makes a Leader?” Harvard Business Review, 82:1, January 2004, p. 88.

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S w

A NOTE ON DECISION MAKING, EMOTIONS AND

Copyright © 2008, Ivey Management Services Version: (A) 2008-08-15

1. Direct our attention to highly important things

4. Be creative and aware of the opportunities that surround us

DEFINING FEELINGS: MOODS AND EMOTIONS

DESCRIBING EMOTIONS AND MOODS

HOW MOODS IMPACT OUR DECISIONS

confidence, organizational awareness, inspirational leadership, change catalyst and achievement

FEELINGS AND ENTREPRENEURSHIP

MANAGING EMOTION IN DECISION MAKING

1. Am I feeling negative or positive?

GOLEMAN’S MODEL OF EMOTIONAL INTELLIGENCE

Dimension Definition Hallmarks

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