This document discusses using cognitive theory to explain entrepreneurial risk-taking. It begins with an introduction to previous literature on the topic. The document then presents specific hypotheses that entrepreneurs and non-entrepreneurs will categorize business situations differently. It describes the methodology used to test these hypotheses, involving scenarios presented to entrepreneurs and non-entrepreneurs. The results found no difference in risk propensity, but found that entrepreneurs categorized situations as having more strengths/opportunities and less weaknesses/threats. Case studies of entrepreneurs are also provided. The discussion analyzes the results and implications, and addresses limitations and opportunities for future research.

1. Using Cognitive Theory To Explain
Entrepreneurial Risk-taking
Lesllie E Palich & D. Ray Bagby

2. Introduction
 SCHUMPTER 1973
 KIRZNER 1973
 KNIGHT 1921
 CANTILLION 1755
 GOVERNMENTS
 MIXED OPINIONS
 COGNITIVE PROCESSES
 DECISION DIMENSIONS
 SPECIFIC HYPOTHESES

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.  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.  3. Are you a leader?
 Yes.
 Yes, when necessary.
 No, not really.

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.  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.  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.  7. Are you self-confident?
 You bet!
 Most of the time.
 Unfortunately, that is not one of my strong suits.

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.  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.  10. Are you creative?
 Yes, I do get a log of good ideas.
 I can be.
 No, not really

13.  11. Are you competitive?
 To a fault sometimes.
 Sure, mostly.
 Not really, my nature is more laid-back.

14.  12. Do you have a lot of willpower and self-
discipline?
 Yes.
 I am disciplined when I need to be.
 Not really.

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.  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.  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.  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.  17. Do you have experience in the business you are
thinking of starting?
 Yes.
 Some.
 No.

20.  18. Can you juggle multiple tasks?
 Yes.
 I think so.
 I think not.

21.  19. Are you willing to really hustle for clients and
customers?
 Sure.
 If I have to.
 I would rather not.

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.  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. 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. 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. Decision Dimensions
 SWOT analysis
Strength
Weakness
Opportunities
Threats
 Provide a summary of business situations
 Measure for Optimism/Pessimism.

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.  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. 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. 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. 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. 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. 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. Founding New Venture(IIFL)
 India Info line with R.Venkatraman in 1999.
 Core Business: Broking and Consultancy
 Utilize the opportunity e.g. Liberalization.

35. New innovations
 Internet based Trading Model.
 Strong and Quality Research.
 Technology Includes Stock prices, charts ,streaming
quote etc.

36. Rapid growth & High profitability
Rs in Crore
1999
2003-2004
2007
2008
NPAT
10-20lakhs
7.5
400
1000

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. Cont….
Weakness
Opportunity
 No capital in the Firm.
 FIIS Money(ADRS).
 Employees left the
 Infused in Indian
firm.
Markets to make
Money.

39. Cont….
Strength
weakness
Nirmal Jain
Opportunity
Threats

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. Results of ANOVA comparing Risk Propensity
Group
N
Mean Risk Propensity
Entrepreneurs
35
5.89
Nonentrepreneurs
57
5.81
F
0.16 NS

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Thank You