Perceptions and Framing of Risk, Uncertainty, Loss, and Failure in Entrepreneurship

Perceptions and Framing of Risk, Uncertainty, Loss, and Failure in Entrepreneurship

Kimberly M. Green
Copyright: © 2015 |Pages: 19
DOI: 10.4018/978-1-4666-8468-3.ch008
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Research indicates that perceptions of risk and loss affect decision-making. Entrepreneurship presents a context in which risk, failure, and loss frequently frame decisions. This paper presents a review of the entrepreneurship literature that is grounded in Kahneman and Tversky's 1979 article on prospect theory. The theory's contribution to the understanding of how the framing of losses affects decisions offers a useful foundation for considering streams of research in entrepreneurship and small business, given that the prospects for loss and failure are high in these endeavors. This review identifies 79 articles and organizes them into four broad themes: risk-taking perspectives of the entrepreneur and stakeholders, aspirations and reference points, organizational innovation and change, and learning from failure. The review concludes by considering the future research potential in the topics of regret, mental accounting, and an understanding of competitors.
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Because this review is focused on entrepreneurs’ perspectives on loss and failure, the findings of prospect theory (Kahneman & Tversky, 1979) serve as a key foundation. In short, prospect theory suggests that a decision-maker faced with losing prospects will pursue a risky alternative in an effort to avoid the loss. This cognitive bias toward risk-taking is an example of the bounded rationality of decision-makers. The entrepreneurship research that is covered in this review indicates that there are different ways in which the outcome of “loss” or “failure” can be manifest. Of course, a business can suffer a financial loss or a series of financial losses severe enough to cause the business to close.

Some businesses, however, close without experiencing an actual financial loss, but they were not sufficiently successful to be sustainable and survive. A part of a business – such as a unit or a product line – may fail while the rest continues. The business may fail to meet an objective set by the entrepreneur, falling short of growth or profit expectations, for example. In addition to the business-specific losses, the business owner may experience some psychological or emotional loss since an owner’s identity or reputation may be closely tied to the business. Or the owner may close the business because more highly-valued alternatives exist and the business represents an opportunity cost.

Kahneman and Tversky (1979) examined the prospects for failure, referring to a future outcome. But research in prospect theory also considers that we look at future prospects based on current conditions and our past experiences. For instance, research covered in this review examines behaviors of entrepreneurs making decisions about businesses that are currently under-performing but have not failed yet. Thus, in addition to having application to entrepreneurs contemplating the gamble on starting a new business that may fail, the research covered in this review is relevant to a broad set of entrepreneurs. For instance, serial entrepreneurs may be making a decision about a new undertaking in light of a recently failed business. Individuals may not have a failed business or losses in their own past, but perhaps they are considering partnering with an entrepreneur who has overseen a failed or poorly performing business.

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