Entrepreneurial Risk and Strategic Decision Making: It’s a Matter of Perspective

Abstract

Risk taking has long been a central theme of the entrepreneurship literature. However, research on the risk propensity of entrepreneurs has met with virtually no empirical support even though entrepreneurs consistently engage in risky events. This article attempts to resolve this paradox by examining entrepreneurial risk through the lens of cognitive psychology and decision making. The author proposes that entrepreneurial risk may be explained by recognizing that entrepreneurs use biases and heuristics more, which is likely to lead them to perceive less risk in a given decision situation. The data indicate that entrepreneurs do indeed use representativeness more in their decision making and are more overconfident than managers in large organizations. These findings provide a new perspective for understanding how entrepreneurs deal with the inordinate amount of risk associated with starting new ventures.