The risk-prone entrepreneur : a study on the distinction of entrepreneurs with consideration of risk and reference points

The risk - prone entrepreneur: a study on the

distinction of entrepreneurs with consideration of

risk and reference points

Master’s Thesis

Master of Science in Business Administration

Amsterdam, January 13th_{, 2016}

Supervisor and first reader: Dr. Roel C. W. van der Voort Second reader: Dr. Wietze van der Aa

Statement of Originality

This document is written by Student N. Temor S. Aziz Paigham who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents

Acknowledgement

My sincere gratitude to my supervisor Dr. Roel C. W. van der Voort, for his continued and constructive cooperation and support, to Dr. G.T. Vinig, to my second reader Dr. Wietze van der Aa and the entire Amsterdam Business School for granting me such an outstanding and extraordinary opportunity.

With this the opportunity I would like to sincerely thank my family and my friends for their kind and encouraging support.

And a special thanks to my Zal for her enormous and countless support and for standing beside me throughout all ups and downs.

Table of Contents

Abstract... 1

Introduction ... 2

Theoretical background ... 3

Enterpreneurship ... 3

The concept of risk ... 5

Risk and decision making ... 6

Prospect Theory ... 6 Reference point ... 9 Hypothesis ... 11 Hypothesis 1: ... 11 Hypothesis 2: ... 13 Hypothesis 3: ... 15 Hypothesis 4: ... 17 Theoretical framework ... 18 Methodology ... 19 Variables ... 21 Evaluation of results ... 21 Descriptive statistics ... 21 Sex: ... 22 Age: ... 23 Level of Education: ... 23 Employment status: ... 25 Correlation test ... 26

Hypothesis 1 Correlation test: ... 26

Hypothesis 2 correlation test: ... 27

Hypothesis 3 correlation test: ... 28

Hypothesis 4 correlation test: ... 29

Regression analysis ... 30

Regression analysis for Hypothesis 4:... 32

Analysis of the results ... 33

Conclusion... 36

Limitations and future research ... 37

Questionnaire ... 38

Appendixes... 46

1

Abstract

Using findings from prospect theory and cognitive psychology a questionnaire was designed and directed to a group of 147 entrepreneurs and non – entrepreneurs in order to find distinctions in their behavior. Prior research has been suggesting a positive correlation between risk propensity and entrepreneurship which however could not be empirically proven. This research therefore has made the approach to implement the impact of the reference point of risk – assessment. This reference point was suggested to effect the human risk – taking behavior by a great margin and therefore believed by some to be the reason for the thus far missing empiric findings on account of risk – taking behavior which is a substantial factor in the divergence of people taking on entrepreneurial activities and those who refrain from it.

The findings of this research prove that there is empirical evidence for the correlation of entrepreneurship and risk – propensity and that this relationship relies on the reference point of risk assessment and that furthermore gain and loss perspectives here too play a significant role with regards to risk – taking even for risk prone people but that monetary gains alone as extrinsic motivation do not suffice to encourage the risky endeavor of entrepreneurship.

2

Introduction

In recent decades there have been manifold academic attempts to evaluate the positive impact of entrepreneurship on the economy (Wee, 2004). While there might be variations in the magnitude of the impact depending on the development stage of a country, a clear and confirming effect of entrepreneurship on the economic growth is shown for industrialized countries such as the Netherlands (Acs & Varga, 2005; Van Stel et al., 2005).

Given the importance of entrepreneurial activity in relation to economic growth, the question arises why just a relatively small portion of humans decide to become entrepreneurs. What is the difference between entrepreneurs and non – entrepreneurs and how can entrepreneurship be encouraged to stimulate the economy?

In order to answer these questions researchers previously have attempted to describe the differences examining character traits and risk propensity (Dalton & Dalton, 2005; Zhoa & Seibert, 2006). In a study looking at the big five character traits Zhoa and Seibert found that entrepreneurs show higher scores for openness to experience, conscientiousness and emotional stability, while non – entrepreneurs scored higher at agreeableness (Zhoa & Seibert, 2006). Much further research has shown that there is a strong correlation between entrepreneurship and risk propensity (Kraiczy, von Bieberstein & Hack, 2014). Looking at the Schumpeterian description of the as the “enforcer of change” one might see the reasoning for this correlation (Schumpeter, 1934). Since it is hitherto impossible to predict the future an entrepreneur always faces a certain amount of risk when “enforcing change” by setting up his or her own business. The entrepreneur invests money and time into a project with uncertain future. The path of employment is more structured and offers a higher probability of guaranteed income, whilst new businesses often come with high investments but struggle to even pass the threshold of the first year (Headd, 2003).

Taken the entrepreneur’s risk propensity into account many researchers tried to reason the existence of the prevailing behavior (Ahmad & Seymour, 2008; Shaver & Scott, 1991, Zahra & Dess, 2001; Gardner, 2001; Nicholson, 1998). Despite the relative high density of research in this field the main instruments for distinguishing between individuals who seek entrepreneurial activity and those who do not are yet unknown (Shane & Venkataraman, 2000).

Considering specifically the risk aspect of entrepreneurship this research aims to examine and compare the risk behavior of entrepreneurs and non – entrepreneurs using assumptions from prospect theory. Surprisingly, despite the high volume of academic research advising that in theory there seems to be an apparent correlation between risk propensity and entrepreneurship, as yet there has not been any empirical result to prove this correlation (Miner & Raju, 2004).

This research therefore aims to investigate what by some is believed to be the core reason why this salient correlation has hitherto been failed to be proven: studies thus far have been ignoring the contribution of

3 the reference point of risk assessment when looking at the different risk behavior of entrepreneurs and non – entrepreneurs (Hack, Von Bieberstein & Kraiczy, 2014).

When people take the decision to invest into an own business, their risk perception is not just dependent on their overall current monetary possessions but rather from the upshot and result compared to their reference point (Hack, Von Bieberstein & Kraiczy, 2014; Kahneman & Tversky, 1979).

Thus, for finding an answer to the research question “Is there a correlation between becoming an entrepreneur and being risk prone considering the reference point of risk assessment” a questionnaire was designed that evaluates both the risk behavior of a population of entrepreneurs and non – entrepreneurs taking into account the different risk assessments concerning loss and gain situations from prospect theory as well as the respective reference points.

Theoretical background

Enterpreneurship

New businesses pop up every year and while many of those businesses which were started with much ambition many of them deem down and vanish within the first year (Headd, 2003). Despite of the uncertainty and failure that in many cases chases the entrepreneurs, the question remains why some people venture entrepreneurial activities while others do not? In the course of human history as well as the new economy and human psychology, many researchers attempted to ascertain why this difference in risk seeking with regards to entrepreneurial activity prevails (Ahmad & Seymour, 2008; Shaver & Scott, 1991, Zahra & Dess, 2001; Gardner, 2001; Nicholson, 1998). Despite all the investigation and research the core of understanding this phenomenon remains unclear and so all factors that are the main instruments for distinguishing between individuals who seek entrepreneurial activity and those who do not are yet unknown (Shane & Venkataraman, 2000).

Prior to approaching an answer for this long standing question it essential to look at entrepreneurial activities and to find out about the status quo of research in this field.

Along its history entrepreneurship has gone through different phases of definition and explanation (Seymour & Ahmad, 2008). Still there is no singular and definitive definition for entrepreneurship (Shane, Locke & Collins, 2003). Within the context of microeconomic theory (traditional neoclassical microeconomics), there was no place for the entrepreneurial concept (Barreto, 1989, Bianchi & Henrekson, 2005). The reason behind this was that the traditional microeconomic theory explained price as a constant and singular instrument with no difference as there was no place for uncertainty (Mahoney & Michael, 2004). Neoclassical microeconomics seemed to be very resistant in ignoring the term and context of entrepreneurship. Scholars like Baumol argue that neglecting entrepreneurship based on the price argument as well as the market uncertainties are like “excising the prince of Denmark from the discussion about Hamlet“(Baumol, 1968). Despite of the obvious feeling about the lack of the entrepreneurial activities, the neoclassical microeconomic theory has the deficiency of explaining this

4 phenomenon (Seymour & Ahmad, 2008). This is believed to be related to the absence of the indicators that can explain entrepreneurship on a national level (Seymour & Ahmad, 2008).

The major definitions that mostly refer to entrepreneurship are driven from the Schumpeterian creative destruction, as that view considers the concept of ceaseless innovation and production in which new products replace prior ones (McCraw, 2007). However despite the absence of a commonly agreed definition related to the concept of entrepreneurship, most researchers use the concept that has been put forward by Schumpeter (Van Praag, 1999; Gartner, 1985).

Different definitions have emerged in terms of defining the concept of entrepreneurship, however it can be said that every definition is circled around the opportunity, new replacing old, creating new businesses and so forth (Reynolds et al, 2005).

Schumpeter has defined entrepreneurial activity as enforcer of change (Schumpeter, 1934). He describes that change takes place in five different ways, namely the introduction of improved or entirely new good, the method of production, the exploitation of new resources and reshaping the business management and interdicting new market (Schumpeter, 1934).

Despite Schumpeter’s explanations some further scrutinizing of entrepreneurial activities remains. Innovation is among the terms which are believed to have a very close relationship with entrepreneurial activity and are not entirely explained (Drucker, 1985; Seymour & Ahmad, 2008). In terms of the characteristics of an entrepreneur Knight claims that an entrepreneur is someone who is kin to taking risks and has a higher willingness for taking risks than a non-entrepreneur (Knight, 1921). Drucker disregards this idea and emphasizes on the topic that that an entrepreneur is someone who is merely willing to open a new business and/or an organization and that this could be done by any individual (Drucker, 1985, 1999). Drucker’s explanation of an entrepreneur is closer to the Schumpeterian definition that refers to starting a new market (Schumpeter, 1934) rather than Knight’s consideration of risk in this matter (Knight, 1921). Assuming the position of Drucker and Schumpeter about the entrepreneur the question arises why some people become entrepreneurs while others are satisfied with their status of being employed?

Several researches have been conducted in past few years related to the characteristics of the entrepreneurs contradict with the traditionally argued reviews related to entrepreneurs (Dalton & Dalton, 2005). According to the latest findings scholars emphasize on the differences of the characteristics of the entrepreneurs rather than the non-entrepreneurs (Dalton & Dalton, 2005). Researchers like Roth and Stewards argue that entrepreneurs have an enormous will to engage in risky and uncertain activities unlike managers and other employees (Roth & Steward, 2004). Similar to their risk taking behavior and attitude they also score higher in being ambitious and motivated at achieving their goals in comparison to non-entrepreneurs (Locke, Hanges & Collins, 2004). The root of entrepreneurial activities has been traced back to some other factors by some researchers such as the entrepreneur’s personality trait (Zhao et al, 2010), as well as the exploitation and evaluation of the opportunities (Haynie, Shepherd & McMullen, 2009; Welpe et al., 2012). Zhao and Seibert have conducted a personality research on entrepreneurs by doing a meta-analysis. They used the five personality model to understand the behavioral characteristic of the entrepreneurs (Zhoa & Seibert, 2006). The result of their study showed

5 that entrepreneurs had scored higher in characteristics such as emotional stability, openness for experiences and consciences, while they scored lower than non-entrepreneurs in agreeableness (Zhoa & Seibert, 2006). Despite all the research on understanding the characteristics of entrepreneurs, scholars still suffer from a lack of theoretical understanding of the fundamental differences between entrepreneurs and non - entrepreneurs (Frese & Rauch, 2007).

Here however one of the recently much researched topics is the study of risk propensity as main difference between entrepreneurs and non – entrepreneurs (Kraiczy, von Bieberstein & Hack, 2014). In order to further investigate this possibility it is necessary to clarify: what is risk?

The concept of risk

Risk is a ubiquitouspart of the human daily life (Knight, 1921). Whether we are to decide about effecting an insurance policy, undergoing surgery, alternating the respective workplace or simply leaving the house without an umbrella, human beings are constantly faced with situations in which risk evaluation is inevitable.

Despite risk being omnipresent to this extend, no potent and fundamental definition of it exists thus far (Damodaran, 2008). Current definitions have been formulated in accordance with different situations and based on specific needs and assumptions. Risk has been diversified and classified in different segments among which the most adequate and famous ones are about the objective and subjective quantified risk (Holton, 2004). In most cases risk has been classified as lack of information and knowledge about the status quo which leads to unpredictable steps (Knight, 1921).

In the light of this predisposition it is obvious that such considerations of risk within the concept of business and entrepreneurial activities have also been approached. When taking business related decisions factors like the lack of symmetrical and homogenous data lead to the occurrence of risk moments (Holton, 2004, Fiegenbaum & Thomas, 1988).

The concepts of risk and uncertainty are strongly correlated, thus when one of them is taken into account the other element needs to be considered to complement other (Damodaran, 2008). In particular consideration of this correlation, researchers like Frank Knight argue that risk is a measurable uncertainty which is different from an absolute uncertainty and he called it un-measurable uncertainty (Knight, 1921). According to Knight for understanding the concept of risk and being able to distinguish it from uncertainty, understanding the nature of probability is very crucial (Knight, 1921; Friedman, 1976). He characterizes the notion of probability into two segments and argues that probability can be obtained in two different procedures (Knight, 1921). One of the manners is that probability can be traced from are the inherent symmetries, through which the priori probability would be obtained (Knight, 1921; Singell & Le Roy, 1987). The other type of probability, statistical probabilities, can be acquired by an analysis of homogenous data (Knight, 1921; Friedman, 1976). Knight emphasizes that even when data for symmetries and homogeneity is missing, people still would be able to quantify the perception of uncertainty (Knight, 1921). Hence our information is not tied to the existence of a homogenous or symmetric information flow rather in the

6 absence of such information we will still pose an estimation of probability (Knight, 1921; Singell & Le Roy, 1987). Based on this argument he expounds that in cases where we lack homogenous and symmetric information, the objective knowledge which we possess would create our perception of the probability based on the information we obtain (Knight, 1921; Holton, 2004). In the business world where symmetrical or homogenous data lacks, such opinions build the base of our decision makings (Holton, 2004, Fiegenbaum & Thomas, 1988). Business decisions are considered to be unique and deal with situations which own distinct and unstable characteristics and hold different values in different statistical tabulations (Bowman, 1980; Holton, 2004).

Based on the definition Knight has elaborated and in contradiction to other definitions of risk and uncertainty as well as subjectivity and objectivity, risk is a measured uncertainty which simultaneously also is an objective probability. Uncertainty is the other form of probability which is based on subjective perception and it is not measurable (Knight, 1921; Friedman, 1976; Holton, 2004).

Naturally predisposed humans are ignorant about the future, information we possess about it partial and incomplete and the references given are imperfect (Knight, 1921). All these instruments create a state of difficulties for making an objective classification of instances. In this regard Knight argues that despite the lack of knowledge we have about the classification of outcomes, it does not mean that we do not know about the probabilities of the outcomes (Knight, 1921; Boudreaw, Randall & Holcombe, 1989; Langlois & Cosgel, 1993).

Risk and decision making

Risk as mentioned previously is related to the degree of uncertainty which lacks the control on the outcomes and the consequences of risk based action. It is obvious that in many cases it leads to the emergence of new risk (Fiegenbaum & Thomas, 1988; Kahneman & Tversky, 1979). The decision making process indicates to what extent the risk has been taken into account in the assessment of a situation (Holton, 2004). Hence, risk is the main instrument for constructing the bottom line of the decision making process which simultaneously would state the nature of the risk (Boudreaw, Randall & Holcombe, 1989). Thus a decision maker assigns probabilities according to his or her perception of the risk’s nature (Holton, 2004). In decision making, risk also can be considered as in instrument that accelerates a cautious search for additional alternatives that help the decision maker to averse a risky condition (Kahneman & Tversky, 1979; Langlois & Cosgel, 1993).

Prospect Theory

For a comprehensive understanding of risk and decision making this thesis consults the findings of prospect theory. Prospect theory is a theory on making decisions under conditions of risk, where the judgment on the risk depicts the base for the decisions being made (Kahnemann & Tversky, 1979). These judgments are driven by the knowledge one has about one’s environment, in other words the judgments about the risk are one’s appraisals of the external world (Jarvis, 2004; Kahnemann & Tversky, 1979).

7 Judgments are the most critical steps for making a decision, because it is the process of taking a decision in a uncertain and unclear condition where very little is known about the consequences of the decision being made (Kahnemann & Tversky 1979). The other ambiguity that an uncertain condition adds to the judgment for the decision is the existence of contradictory and diversified values and goals which emerge from internal conflicts of those goals and values (Wu & Knott, 2006; Weber & Milliman, 1997; Kahnemann & Tversky, 1979). Thus prospect theory is an attempt to explain the measurement of the decision making process and how those values and goals can be evaluated in that process. In other words prospect theory tries to deliver a distinction between gamble and prospect (Kahnemann & Tversky, 1979).

Prospect is an essential and pressing instrument in the identification process of risk (Kahneman & Tversky, 1979). Decisions which are taken under a risk condition are referred to as those among the most uncertain decision of their kind. Therefore a decision under the influence of risk is similar to attributes of gambling (Kahneman & Tversky, 1979).

Kahneman and Tversky thus refer to decisions under risk as choices that swirl between gambling and prognoses (Kahneman & Tversky, 1979). Under a risk condition when an individual wants to make a decision the risk defines and heightens the consideration of all available alternatives which can be assumed feasible (Sitkin & Pablo, 1992).

Looking at risk aspect in economics, the prospected outcomes are waged on their financial payoffs and to the references of time or asset resulting in net amplification or profits. Another condition that is significant when taking decisions under risk is to quantify the number of related probabilities that occur to the decision maker. Judgment and its relatedness to the probability of the outcomes are also crucial ingredients to shape the ultimate strategy related to those prospects of outcome.

When a person takes a decision, the most important aspect which requires attention in this process is to consider the sensitivity of the strategy which is required for such decision making. Optimal strategies and their sensitivity can be examined thorough the factors which are considered as crucial for the decision making process. For such an examination the knowledge about the state of nature is very significant, because based on that knowledge a decision maker can assign his or her own subjective knowledge of probability and estimate the amount of risk and uncertainty that a state of nature poses. Hence the subjective knowledge that a decision maker has about the probabilities constitutes the base for evaluating the state of the nature of risk or uncertainty.

In order to understand the foundations of these findings it is necessary to go back to rational choice theory from which the prospect theory has been derived (McDermott, 2001). Rational choice theory is an optimization oriented approach (Levin & Milgrom, 2004). Within the framework of rational choice the decisions are based on the judgment of the available choices and options. According to this theory the decision maker is observing and sorting the available options and determines the most prominent and beneficial option based on its criterion (Levin & Milgrom, 2004).

When it comes to the subjective expected utility theory, it is something that prospect theory elaborates on and whose components and maxims are being breached in an uncertain situation when decisions are being made pragmatically (Kahnemann & Tversky, 1979). Subjective expected utility theory distinguishes

8 between the actual reality and an uncertain future, something that is not done in prospect of every individual (McDermott, 1998).

Psychophysically driven, prospect theory also deals with a mathematical and precise measurement of the relationship between psychological as well as physical mechanisms (Mc Dermott, 1999). The aim of studying such a relationship is to regulate changes that occur in the physical part and that can be received psychologically as a change in that subject (Mc Dermott, 1999). In other words this model that prospect theory has been built upon measures the psychological reaction as a sensory change which results from the change that took place within the physical part of the object (Fowler, Smirnov & McDermott, 2008). Monetary outcomes as well as probabilities related to them effect the actors’ choices and decision making and were the main instrument that caused prospect theory to be developed (Hack, Bieberstein & Kraiczy, 2014; Tversky and Kahneman, 1981). Prospect theory explains two stages of choices being made. These two phases are sequent and start from the editing phase which includes the choices that are made based on preferences and when a decision-maker is facing a frame of different outcomes (Tversky & Kahneman, 1981). Differently said it is the phase in which prospects of a certain decision are being framed and the prospect of the possible outcome being weighted and analyzed (Schwartz & Goldberg, 2008). Most anomalies take place in the editing phase which is seen as the most crucial (Levy, 1992).

The later stage is called the evaluation phase in which the entire editing stage is being evaluated with regards to the prospect of each decision (Tversky & Kahneman, 1981). At the end, the prospect of the outcome which is believed to be more beneficial and valued is chosen based on the analyzed information (Tversky & Kahneman, 1981). Conditions of the choices that are offered to people are the backbone of the decisions they make (Tversky & Kahneman, 1981; McDermott, Fowler & Smirnov, 2008).

For instance, looking at a medical treatment despite the fact that the probability of the outcome of a treatment remains identical, the decision people take differs and the differences are most clearly observed between cases where the treatment would offer a general improvement versus where it would actually be the only available cure for someone facing death (McDermott, Fowler & Smirnov, 2008). This indicates that where there is a gain-frame, decisions are made based on risk aversion while in a loss frame in which there is the matter of survival, people tend to take very risky decisions (Sox, Tversky & Mc Neil, 1982; Kahneman & Tversky, 1979).

The coding of losses and gains depict the main essence of the outcome after every decision is being made rather than the conclusion of the end as an absolute and final state (Tversky & Kahneman, 1981). This perception standpoint related to the outcome which might result in gain or loss defines the reference point of risk assessment and will be further in the next segment (Kahneman & Tversky, 1979).

9

Reference point

The reference point of risk assessment depicts the perception point related to the future result of an action that might end in loss or (Kahneman & Tversky, 1979). The comparison of wealth and gain is the motive for some to take risky decisions or have risk taking characteristics (Kahneman & Tversky, 1979). The reference point can be elaborated as the point which defines the relationship between welfare and the instinct of risk taking behavior (Baucells, Welfens & Weber, 2011). Based on the above mentioned arguments prospect theory emphasizes on the position of the reference point as the main point which ascertains the risk taking behavior, because the same point can be acknowledged as loss or gain based on the reference and one’s behavior would be set accordingly (Kahneman & Tversky, 1979). It is argued that a similar condition can have contrasting definitions of loss and gain by different individuals who deal with similar circumstances (Baucells, Welfens & Weber, 2011).

Fig. 1. S – Shape Curve of the Value function (Tversky & Kahneman, 1992; Wang, L. et al. 2015).

In order to illustrate the function of the reference point the above shown diagram can be considered. In prospect theory the value function differs from the value function in the utility theory (Tversky & Kahneman, 1992). The origin of the function thus where the x – and y – axis cross demonstrates the reference point. An increase in value compared to this point is considered a gain while a decrease in value is seen as loss. The novelty from prospect theory was that changes in the loss domain create a steeper value change than differences in the gain domain (Tversky & Kahneman, 1992). The happy feeling induced by a stranger giving us 5 EUR is weaker than the negative emotions inflicted by someone taking 5 EUR from us for no reason.

10 As can be seen in the diagram above, x denotes gains and/or losses, while α and β are parameters for gains and losses and can be assumed to have values between 0 ≤ α, β ≤ 1. λ is the parameter that represents the steeper course in the loss domain and its value is always higher than 1 (Tversky & Kahneman, 1992).

At this point this thesis aims to investigate whether this different reference point setting is an attribute of entrepreneurs who are known to be more prone to risk taking than non – entrepreneurs.

Prospect theory as the theory of decision making enables us to study the decision making process of entrepreneurs and might be able to assist in explaining the various ways of reference point setting that sometimes leads to loss (Baron, 2004). Decisions that are tied with highly set reference points tend to be more risky ones that often result in loss (Baron, 2004).

Despite the fact that there have been arguments that the risk taking behavior is one the main factor that distinguishes the entrepreneur from the non-entrepreneur (Tversky & Kahneman, 1992), there has been no vivid empirical research that can approve that claim (Hack, Von Bieberstein & Kraiczy, 2014). The argument of the reference point as the significant determinant of the entrepreneur’s risk taking behavior has been approached in some other research (Hack, Von Bieberstein & Kraiczy, 2014). The aim behind applying the prospect theory’s reference point on empirical studies has been seen as an indicator of the current and or initial status quo (Samuelson & Zeckhauser, 1988; Genesove & Mayer, 2001; Kahneman & Tversky, 1979).

Some researchers state that one’s life, vison, aims and perspectives have a strong influence on shaping one’s reference point (Heath, Larrick & Wu, 1999; Baucells et al., 2011). However, taking into account that different people under similar circumstances have different and contradicting references points, one can conclude that the elements mentioned above are mere instruments in shaping one’s reference point and it is rendered highly difficult to extract the referent point from those (Hack, Von Bieberstein & Kraiczy, 2014).

One of the reasons why people make risky decisions could be the factor of inherence, as people who are believed to inherent low risk perception take more risk than those who do not (Kahneman & Lovallo, 1993). From this it would follow that in a situation where every individual has been introduced to the same risky condition those who inherent a low risk perception unknowingly would end up with more risky decisions than those who are not (Simon et al., 2000). Thus risk perception as the main aspect of shaping the reference point plays a significant role in entrepreneurial decision making and the starting of a new business (Palich & Bagby, 1995). The evaluation of opportunities has also been believed to play a significant role in grasping the reference point, as prior researches indicate that those who inherent a lower risk perception tend to evaluate the opportunities more positively and get involved in grasping those opportunities more than others (Keh et al., 2002; Simon et al., 2000).

11 Considering these different influences on the reference point it is not surprising that some scholars believe that the reason behind the hardness of studying the reference depends on it not being directly perceptible and discernible (Arkes et al., 2008).

Regarding entrepreneurial risk taking prospect theory emphasizes that situational elements influence the risk taking behavior, thus loss and gain conditions and perceptions are not dependent from an individual’s overall monetary possessions but from the upshot and result compared to his or her reference point (Hack, Von Bieberstein & Kraiczy, 2014; Kahneman & Tversky, 1979). Thus, those who have a higher outcome reference point face more loss than those who are not (Iyigun & Owen, 1999; Kahneman & Tversky; 1979). Since many theories argue that entrepreneurs are in seek of higher outcomes than non-entrepreneurs, entrepreneurs are stronger risk takers with enthusiastic reference points, which in many cases end up with losses (Kihlstrom & Laffont, 1979). The point is that the practical testing of such theories does not show support for the matter of risk taking by entrepreneurs in comparison to non-entrepreneurs (Miner & Raju, 2004). The difference between the theories’ claims and empirical results are assumed to be related to the way those experiments have been conducted in which the reference point may or may not played role (Hack, Von Bieberstein & Kraiczy, 2014). Researchers still believe that entrepreneurs in comparison to non-entrepreneurs, hold a more aspiring, enthusiastic and highly expected reference point which leads them to perceive more loss and accordingly to engage in risky decisions (Baron, 2004). This research renews the attempt of testing the theories claiming that the risk propensity is one of the main distinctive factors between entrepreneurs and non – entrepreneurs taking into account that the reference point setting might play a role in the behavior differences and might indeed be the cause why previous empirical research was unable to proof this point.

Hypothesis

According to Kahneman and Tversky the method of choice is the source of understanding the procedure of decision making and is also the source for finding an answer to many theoretical questions in this regard (Kahneman & Tversky, 1979).

Based on the assumptions from prospect theory and mentioned concepts of risk, four hypothesis were formulated which are to be tested in a questionnaire directed to entrepreneurs and non – entrepreneurs to test their different propensity towards risk. As specifically monetary outcomes stipulate the perception of loss and gain and thus relevantly affect the risk propensity (Kahneman & Tversky, 1979) the questionnaire will use examples testing the hypothesis concerning decision making with regards to financial assets.

Hypothesis 1:

According to prospect theory people use possibilities and overweight the outcomes rather than simply to rely on probabilities (Kahneman & Tversky, 1979). Entrepreneurs are described as people who are strongly proponent to achievements and higher gains (Venkataraman, 1997) but actors evaluate the outcomes

12 differently based on the outcome certainty and/or uncertainty (Kahneman and Tversky, 1979; Holm, Opper & Nee, 2011).

Since there are a lot of arguments regarding entrepreneurs and their propensity towards risk and uncertainty (Venkataraman, 1997; Bager & Schøtt, 2004) the majority of those who are involved in entrepreneurial activities tend to be in favor of taking actions in uncertain situations (Zhou & de Wit, 2009) as return for gain (Simons & Åstebro 2010).

These previously elaborated points add credibility to the argument that entrepreneurs’ preferences differ in terms of uncertainty from non-entrepreneurs, but whether their risk propensity is strong enough to even opt for risky terms when they specifically are in a situation in which either option would offer gain is a yet not regarded question.

Fig. 2

Fig. 2 For the reference point (green dot) the gain domain in quadrant I is considered. Losses do not play a role.

Looking at the graph in figure one, the situation described by hypothesis one is given in quadrant I where both the x – axis value as well as the y – axis value are positive. One could imagine the entrepreneur standing on the origin of the graph, facing only the right gain side. His or her reference point is his/her status quo with a tendency which is considered to very likely improve. The entrepreneur does not consider the loss values and thus has a relatively high reference point.

13 Will entrepreneurs when facing a gain situation chose the riskier option while according to prospect theory humans overestimate their chances and opt for risky options only in loss situations due to their loss aversion? To find the answer to this question following hypothesis was posed:

H1. The majority of the entrepreneurs, when given the prospect of gain will always choose the more risky option with the lower chance of gain.

Hypothesis 2:

As previously discussed there are many different factors that are considered to be relevant with regards to entrepreneurial activities. When looking at a firm’s or any entrepreneurial activity’s success or failure, it is frequently believed to be dependent from the entrepreneur directly. Erstwhile researches elaborate that the entrepreneur’s motivation, perspective, vision, personality trait and environment have a very influential effect on taking risks and taking decisions in an uncertain condition (Shane, Locke & Collins, 2003).

Since the instinct and opt for achievement distinguishes entrepreneurs from non-entrepreneurs (McCelland, 1965) the need for achievement drags people with this instinct to decisions with risky consequences and higher responsibility (McCelland, 1965). In a meta - analytical review out of more than 20 studies, Johnson mentions a positive relationship between entrepreneurial activities and the need for achievement (Johnson, 1990) supporting the previous claims. Recent studies in this field also affirm the positive relationship and significance of the will and need for achievement on entrepreneurial activities and decision related to that (Collins, Locke & Hanges, 2000). However, the studies have not been the only ones to study the relationship and influence of need for achievement on entrepreneurial activities but also the success of a firm is believed to be influenced by need for achievement (Lau and Busenitz, 2001). Those individuals who have high avidity in achievement tend to become involved with activities which require more responsibility and risk (McClelland, 1961). Some of the studies which have been conducted observed a consistent importance for the need for achievement in the individuals’ personality trait is showing that those with such instincts end up engaging in entrepreneurial activities more than those who lack such desires (Collins, Hanges & Locke, 2004). In a study McClelland along with his colleagues found that those who have high desire for achievement are getting involved in tasks that contain risk and challenges (McClelland, Clark, Roby, & Atkinson 1958, McClelland, 1961).

Scholars have often argued that the entrepreneurs’ personality traits show a high zeal for achievement and getting involved in risky and uncertain activities (Johnson, 1990; McClelland, 1961). Nonetheless the matter of risk in their work is not defined to the extent that it would describe the willingness an individual has to take risks in order to achieve something. For instance, McClelland and his colleagues refer to moderate risk in need for achievement (McClelland, Clark, Roby, & Atkinson 1958), while some other scholars including Johnson refer to a strong relationship between motivation for achievement and entrepreneurial activities (Johnson 1990; Mazur & Rosa, 1977; Finison, 1976).

14 However, despite of the evidence that have been found that explains the relationship between entrepreneurial activities and motivation for achievement still there are some problems like low internal consistency in these researches (Collins, Hanges & Locke, 2004). Another issue is the measurement of the risk that individuals take to achieve something. Hence it is assumed to give a level for the risk in order to understand the relationship between risk taking characteristics which is believed to be a very significant aspect of entrepreneurial activities (Simons & Åstebro 2010; Zhou & de Wit, 2009) and motivation for achievement. In other words, when we argue about the relationship between motivation for achievement and entrepreneurial activities then it is perceivable to designate the level of risk that an individual is willing to bear in order to achieve something. Risk and uncertainty are two different factors that Knight argues the sense of first might be measurable while the second is impossible to be measured (Knight, 1921) hence for understanding the sense of fair from risk we need a level that can explain it. Thence taking risk to lose “it all” in order to achieve something can be taken into account as a level for understanding of risk to which extend an individual is eager to go for in order to achieve something. Thus based on this argument the next hypothesis would cover the issue of taking huge risk in which the entrepreneur may lose all investment in order to satisfy his quench for achievement would be tested:

H2. Entrepreneurs are willing to take huge risks in order to achieve an improvement faster risking to lose “it all”.

The reference point is not taken into consideration in this hypothesis. Nevertheless, if the perspective is illustrated one would imagine the entrepreneur’s reference point to have a loss bias. He or she compares the reference point as the status quo as loss to what his or her goal value is. Thus, the current situation, status quo or reference point are already biased with the loss domain due to which the entrepreneur is more likely to take higher risks.

15 Fig. 3 The Reference point (red dot) is looked at from the loss domain (quadrant III)

Hypothesis 3:

Personal interests and perspectives have a strong influence on intrinsic motivation which enhance the motivation to perform an entrepreneurial activity (Zhou & de Wit, 2009). Personal preferences and values which tend to be important for an individual are believed to be the conception for the activities that an entrepreneur gets involved with (Delmar & Shane, 2006; Delmar, 1996). Those conceptions in general as well as in an organized form create the core element of influence on the entrepreneur’s behavior and motivation (Delmar, 1996). Delmar has written a description of those individuals who have intrinsic motivations, thus the ones who experience beneficial returns and those individuals who have innovative motivation (Delmar, 1996). He elaborates that intrinsic motivation is as important in motivating entrepreneurs to engage in new businesses as their innovation instinct or growth experience (Delmar, 1996). Entrepreneurs in most of the cases do not behave very loyally with the business or firm they establish, meaning that when the income becomes static they tend to get rid of their business and jump into another fruitful activity (Zhou & de Wit, 2009; Glancey, 1998). There are other intrinsic motivations that encourage entrepreneurial activities, for instance being your own boss, however these are not strong enough to keep an entrepreneur motivated in a business for a long run (Glancey, 1998).

Intrinsic values in other words weigh less as motivator when it comes to creating an own business, rather one distinction between entrepreneurs and non-entrepreneurs (employees) is the relationship between effort and outcome (Morgan & Sisaky, 2010).

An employee that is not part of the upper tier management usually does not take decisions that drag all the risks, challenges and uncertainties in the market that determine the company’s future (Morgan & Sisaky, 2010). The entrepreneur does carry such risks. Despite of the fact that entrepreneurial activities are accompanied with uncertainties and risk, still when some people tend to get involve into an entrepreneurial activity is related to beside their personality and other context and environment bounded issues also to the outcome (Morgan & Sisaky, 2010). In most cases entrepreneurs even invest overwhelmingly in their business and take high risks based on their will for financial return (Arabsheibani et al., 2000).

Robet Cressy has developed a model of target income (the income target is the expectation based on pre-entrepreneurial experiences) in which he tested startup survivors and their growth (Cressy, 1996). In his model he describes that the objective of entrepreneurs among different factors is also to produce an independent source of income in order to be able to substitute with previous employment income (Cressy, 1996). In the model he describes further that the satisfaction of an entrepreneur from his income level is dependent from pre-entrepreneurial income (Cressy, 1996; Simon, 1979). In that model Cressy concludes that the income target comprises an important motivation for starting a business (Cressy, 1996).

Another approach which is called the theory of income choice also explains the objectives behind deciding to be self-employed in comparison to being employed (Grilo & Thurik, 2008). This model explains that the

16 probability of becoming an entrepreneur is related to the income related to that activity (Grilo & Thurik, 2008).

The occupational choice model too aims to test the factors that influence self-employment and entrepreneurship and it attempts to explain the causes for people to become self-employed (Parker, 2004). Scholars who worked on expounding the occupational choice model argue that beside some other factors for instance capital constrains, the income differences between salary during employment and self-employment play a significant role in turning an individual to an entrepreneur (Rees & Shah, 1986; de Wit & van Winden, 1989).

The factor of assuming a monthly based salary in employment to be below one’s value dependents from one’s self-efficacy and self-evaluation (Brockhaus and Horwitz, 1986). If an individual believes his or her salary to be below his or her value it logically could be concluded that each month of receiving the lower salary that is attributed to one’s own value, a loss is created. This loss perception leads humans to take risky decisions in order to escape the deteriorating situation (Kahneman & Tversky, 1979). Hence, looking at it the other way round employees who are satisfied with their salary do not perceive it as loss and thus are not triggered to engage in a risky activity, such as entrepreneurship (Hamilton, 2000).

In order to test if the logic conclusion does apply to this concrete human behavior, the following hypothesis is going to be tested:

H3. People are more likely to initiate an own business if they believe their salary (before becoming entrepreneur) to be below their value as they thus perceive the low salary as ever growing loss.

Looking at the value curve graph, it can be said that the reference point for this hypothesis, thus the value the entrepreneur considers as status quo when considering to take a risk is a high one. When salary is defined as value, then they compare their current salary with some high salary that they consider to be rightfully theirs. From that perspective they look from the high value curve down to their current status quo and thus their situation is perceived to be in the loss domain and the entrepreneur is therefore motivated to take huge risks to change his situation.

Fig. 4

17

Hypothesis 4:

In the academic world it has been agreed that when taking about entrepreneurs, we refer to those groups within our societies who tend to be more risk prone (Knight, 1921). Approaches like the occupational choice model presume that entrepreneurs are distinguished from non-entrepreneurs based on their low risk aversion characteristics (Kanbur, 1979, Blanchflower & Oswald, 1998).

As previously mentions factors such as cognitive information and the heuristic availability of the information impact the risk evaluation although they have received very little attention in contrast to what is called the personality trait of entrepreneurs (Palich & Bagby, 1995, Baron, 2004, Tversky & Kahneman, 1992).

The reference point is the main instrument that weights the outcome whether it is a loss or gain (Tversky & Kahneman, 1979). It can evaluate the loss or gain based on the status of the investment and it will have a tremendous impact on taking risks (Tversky & Kahneman, 1979).

Despite of being considered the neutral point, it is not objective as the reference point differs according to the different individuals’ assumptions (Baucells, Weber & Welfens, 2011).

According to the assumptions of prospect theory, entrepreneurs would hold wishful reference points and therefore they would compose a circumstance with a high chance of losses, that in turn would incline their risk taking tendency (Kraiczy, von Bieberstein & Hack, 2014; Baron, 2004).

Research conducted so far differences between entrepreneurs and non-entrepreneurs based on their risk taking propensity and character traits and still there is no complete understanding with regards to the elements that lead people to be more prone to take risk (Kraiczy, von Bieberstein & Hack, 2014). The reference point as such important element of risk perception has not been worked on to evaluate this difference.

The fourth hypothesis therefore was chosen to enhance the understanding of the reference point’s influence on this matter.

H4. The effect of a reference point on becoming an entrepreneur will be stronger for those who are more risk prone than for those who are less risk prone.

In this fourth hypothesis, the generally high reference point of entrepreneurs in comparison with non – entrepreneurs in relation with the risk propensity is thus taken into consideration. A shift of the reference is not the matter at hand here, all subject should have a similarly high reference point, and therefore it is the aim to see how people with the same reference point act differently when their general risk propensity differs. On the value/gain-loss graph one would not see any difference as the reference point remains the same for all test subjects.

18

Theoretical framework

Schumpeter had described the entrepreneur as an agent of “creative destruction” and the coordinator of production and change (Schaumpeter, 1961). The entrepreneur plays a significant role in the economic growth particularly in later stages where it is governed by knowledge and competition to which the entrepreneur contributes (Ács & Naudé, 2012). Due to the decrease of transportation and communication costs worldwide and on the other hand more capital – intensive methods of production, there has been an increase of service based small-scale firms when entrepreneurs where able to exploit profitable opportunities that were created by technologic improvements (White, 1984; Parker, 2004). Through their self – employment, entrepreneurs have become a fundamental means for production organization and thus constitute an important part of the economy (Parker, 2004). With this coordination role, they assume the part of what was the Walrasian auctioneer in neoclassical economic models (Casson & Wadeson, 2007). Especially those entrepreneurs that dedicate their work on innovation in products, markets and production techniques play a key role in economic growth (Baumol & Strom 2007). Casson and Wadeson have created a model which projects and explains the impact that entrepreneurial activities have on macroeconomic performance through establishing new markets for new products (Casson & Wadeson, 2007). According to them, the entrepreneur’s judgment about innovations has a significant impact on the performance of the economy. Consequently, their model illustrates how a lack of entrepreneurship would lessen the economic growth (Casson & Wadeson, 2007). Another theory that adds value to the already mentioned scholars’ views on economic growth through entrepreneurship is the knowledge spillover theory. The knowledge spillover theory of entrepreneurship describes how mechanisms of knowledge contributions through individual or corporal entrepreneurship result in venture creation and thereby in economic growth of regions and industries (Agarwal et al. 2007).

When the amount of research that has been conducted to tackle the issue of risk-taking characteristics and behavior of the entrepreneur is taken into account, then it is possible to speculate that it is an unending and inconclusive process. Among the overwhelming researches and empirical analyses there has been also a lot of approaches which are the sources of contradictions. For instance scholars like Hartog, Van Praag and their colleagues like many others who have been conducting researches in this matter argue that risk aversive characteristics deter entrepreneurial activities (Cramer, Hartog, Jonker & Van Praag 2002). Similar to them others also argue that risk taking aptitude is a significant instrument for entrepreneurship (Baron, 2007). In contrast to their argument there are other researchers who have totally different views and standpoints about the role of risk aversion on entrepreneurial activities. In their research Morgan and Sisak’s model their entrepreneurs are neither risk seeking and nor overwhelmingly optimistic (Morgan & Sisak, 2012). Different to the mentioned arguments Ruef and Xu elaborate that entrepreneurs at the beginning and in their dawning are way risk averse than non-entrepreneurs (Ruef & Xu, 2004). Beside the contradiction of the analysis there have been many meta-analysis as well, even them to our surprise have diversified and different conclusion from each other. For instance Zhao, Seibert and Lumpkin argue, risk taking behavior is one of the main attributes of the entrepreneurs (Zhao, Seibert and Lumpkin). Similar to them are those meta-analysis were done by Stewart and Roth emphasize on the risk seeking instinct of the entrepreneurs than those who are not (Stewart and Roth, 2001). In contrast

19 Raju and Miner argue the opposite by putting them in higher risk averse position than others for instance managers (Miner and Raju, 2004).

However despite of the inconsistency and negation, some have tried to accommodate and harmonize the contradictory approached regarding the risk propensity of the entrepreneurs (Hack, Von Bieberstein & Kraiczy). In this process understanding the magnitudes entrepreneurial activities which are forming the knowledge towards entrepreneurial actions, which they call it entrepreneurial cognition ((Baron, 1998; Forbes, 2005; Morse & Smith, 2002; Williams & Grégoire, 2012; Hack, Von Bieberstein & Kraiczy). For understanding the propensity of an entrepreneur in risk it is also important to know their risk perception and risk evaluation (Weber & Milliman, 1997).

Both perception as well as the propensity towards risk is correlated to each other’s and are making the base for decision makers determination of the risk in an uncertain and risk inherent circumstance (Weber & Milliman, 1997; Sitkin & Pablo, 1992).

In applied psychology, this risk taking behavior was studied further and some scientists such as Zhao and Seibert tried to attribute characteristics from the big five dimensions to entrepreneurs (2006). Others made attempts to evaluate differences via genetic techniques and looked at the behavior of different pairs of mono- and dizygotic twins in order to find a genetic cause for entrepreneurship considering the big five characteristics of entrepreneurs, however their findings could not account for a conclusive argument as only few phenotypic correlations could be found (Shane et al. 2010).

Methodology

In order to find an answer to the research question “To what extend does the reference point of risk assessment moderate entrepreneurial thinking?” hypothesis are formulated according to the theoretical framework. In order to test the hypothesis a number of questions were formulated for a questionnaire that would indicate according tested variables.

The findings from the state of the art research in this field have been used to create a questionnaire in which the subject’s liability to take risks in a situation that should simulate similar feelings such as those someone would feel when taking an entrepreneurial action as close as possible is tested.

Secondly, questions were formulated in the questionnaire that identify the subjective reference point. In order to have empirically meaningful results, there must be a certain amount of questions that ensures the validity of the findings. Due to the limited budged of the research project however, it will not be realistic to include too many elaborated questions identifying the reference point when the questioned person will not receive any monetary reward for his or her time to answer all the questions. One part of creating the questionnaire was find a balance between the maximum amounts of time people will need to invest into answering all questions and the empirical validity of the results.

For the research those who had been approached were mainly alumni from different universities and expats who are living and working in the Netherlands and/or holding their own business. Beside entrepreneurs were approached through the social media groups which were merely stablished for the

20 entrepreneurs, self-employed and business owners mainly from European countries. The total number of participants was 145 responses. Among whom 51% (74) of the participants were male and 49% (71) of them were female. The highest number of the participants were between 25-30 years which made the 38% of the whole participants’ population.

The next biggest range of ages was between 20-25 years with a percentage of 27.5% which was followed by participants with a range of 30-40 years which were making the 21.1% of the entire participants’ population. There were also participants raging between 40-55 years with a frequency of 8 which was making the 5.6% of the population, followed by those who were under 20 years old with a frequency of 7 which was making 4.9% of the population and 4 of the participants were people above 55 with a percentage of 2.8%. the highest number of people were holder of a university degree with a frequency of 81 which was making the 57.9% of the entire population which was followed by those who have a degree in applied science with a number of 28 people making 20% followed by those who hold a high school diploma 8.4% and people with a diploma from vocational educations with a percentage 8.4% and about 7% did not hold any diploma. 2 respondents did not answer thus 1.4% are missing.

The mean respondents age is 30.3, there is similarity in vast majority of participants are holding a university degree or at least a high school degree.

The employment status of the participants was as such, 52 people have indicated that they are full-time employed which was 35.9% of the population. Followed by 32 of the respondents were self-employed or holding own business 24.8%, 32 were part-time employed which were making 22.1% of the population. There were also 25 people who were not employed with a 17.2%.

There is heterogeneity between the participants in terms of their employment status than their educational background. As far as the gender is concerned there is almost similarities between the different sexes in terms of their participation in the survey. Since researchers like Baron argue that in a research there might be some essential difference between those who are already active as entrepreneurs and those who are in the process to become entrepreneurs (Baron, 1998). The role of risk propensity and reference point are very crucial about the evaluation of risk by the individuals who want to start their own business or get involve with entrepreneurial activities from each other (Kahnemann & Tversky, 1979, Simon et al, 2000). Thus based on these approaches the participants would be split into the groups of those who have started their own business and those who are willing to initiate their own business. The core of the difference between these groups would be based on their evaluation of the risk according to their reference points and risk propensity.

The program which used for analyzing the relationship between independent, dependent as well as moderation and mediation test is used to examine the relationship between the control and response variables.

21

Variables

The independent of control variable for testing the first hypothesis is the prospect of gain and the response or dependent variable is choosing risky options. In this section the impact of the prospect of gain is aimed to be tested on the risk propensity (Choosing risky options). The role that independent variable as the predictor variable plays is to explain the significance and elaborate the extent to which it affects the dependent variable (Baron & Kenny, 1986).

Prospect of Gain Choosing risky options

For testing the second hypothesis the predictor variable (independent) is desire for fast change, which’s effect is tested on entrepreneurship. In other words to test the impact of the willingness for a rapid change to become an entrepreneur by taking into account the effect of the tendency for risk.

Desire for Fast change Entrepreneurship

For testing the hypothesis three the low salary has been chosen as reference point in order to examine its effect on the motivation as increase in income (drive to increase income). In this step the concern is to examine the extent to which low income can affect the motive for changing the financial situation. In other words does financial situation can be a factor for being risk-seeker or not is being examined. Low Salary (Reference point) Drive to increase income

For testing the forth hypothesis the independent variable is risk seeking. The effect of the instinct or propensity for risk seeking is the hypothesized as the medium to become an entrepreneur. Hence the aim is to understand the dependence and relationship between risk seeking and becoming entrepreneur. Risk Seeking Becoming entrepreneur

Evaluation of results

In pursuance of seeking and analyzing any correlations between the survey results, I will use the book “Methods for Testing and Evaluating Survey Questionnaires” by Presser et al. (2004) after designing my questionnaire to find academically correct results. The book is a guideline and has specific chapters focusing on questionnaires that theme on cognitive psychology.

Descriptive statistics

Sex, age, education and employment status of the participants:

The data has been collected from 147 people who participated in a survey, that contained questions related to reference point, risk evaluation, risk propensity and entrepreneurship. Participants mainly

22 university alumni and international expats who are living in the Netherlands, who have initiated their own business or willing to do so. The number of those who participated in the survey was 147 individuals however the number of responses on different variables varied from each other.

Number of the participants

Table1

Sex:

The gender gap was not very huge and considerable between the participants, with a cumulative percentage of 51% of males in comparison to female had participated in the survey. Differently said there was almost equality between male and female participants by merely 1% difference male participants were preceding the female participants. It is worth to mention that both sexes have been approached synchronized and equality.

The central tendencies of the gender were as such: The mean for sex was almost 1.5 with a standard deviation of 0.5 and skewedness is normally distributed

Table2

What is your sex?

Frequency Percent Valid Percent Cumulative Percent Valid Male 75 51,0 51,0 51,0 female 72 49,0 49,0 100,0 Total 147 100,0 100,0 Chart1 Valid 147 Missing 0

23

Age:

38.8% of all participants, thus the highest number were aged between 25-30 years. The next biggest range of age was between 20-25 years with a percentage of 27.5% which was followed by participants aged of 30-40 which were making the 21.1% of the entire participants’ population. There were also participants raging between 40-55 years with a frequency of 8 which constitute 5.4% of the population, followed by those who were under 20 years old with a frequency of 8 which was making 4.8% of the population and 4 of the participants were people above 55 with a percentage of 2.7%. The more heterogeneity is in a survey which covers different course of ages and proportional admixture of gender it foster the validity of the survey (Lee and Farh, 2004) related to the characteristics of the survey.

Table3

Chart 2

The mean for the age was approximately 3.0 and standard deviation was 1.1. The chart as it already mentioned indicates a high number of the participants age are falling between -2 and mean ((μ, -2δ) standard deviation and it is not a normal distribution.

Level of Education:

Considerable majority of the participants were holding a university degree with a frequency of 82 which was making the 56.6% of the entire population. This number was followed by 28 other participants who

How old are you?

Frequency Percent Valid Percent Cumulative Percent Valid under 20 7 4,8 4,8 4,8 20 – 24 40 27,2 27,2 32,0 25 - 29 57 38,8 38,8 70,7 30 - 39 31 21,1 21,1 91,8 40 - 55 8 5,4 5,4 97,3 above 55 4 2,7 2,7 100,0 Total 147 100,0 100,0

24 possess a degree in applied science (HBO)* who are making 19.3%, 13 people 8.3% had intermediate vocational education (MBO), ** similar to them 12 other participants hold a high school degree which make 8.4% of the entire population, at least 10 participants did not indicate their level of education which make up 6.9% and at the very end 2 are added as missing, 1.4%. Based on the information provided by the participants about their level of education, the vast majority of the participants possess a university degree.

Table 4

Chart 3

The mean for the participants’ education was 3.45 and the standard deviation equaled to 1.03. The chart above indicates, that it is not a normal distribution, the highest population are falling between Mean and 1 standard deviation (μ, 1δ) and as it already been mentioned the vast majority of the participants are university graduates.

Please indicate your highest level of education.

Frequency Percent Valid Percent

Cumulative Percent

Valid High School Diploma 12 8,2 8,3 8,3 MBO/ Intermediate

Vocational Education

13 8,8 9,0 17,2

HBO/ University of Applied Sciences

28 19,0 19,3 36,6

WO/ Research University 82 55,8 56,6 93,1 none of the above 10 6,8 6,9 100,0

Total 145 98,6 100,0

Missing System 2 1,4

25

Employment status:

The employment under participants was quite heterogeneous, 52 of those have indicated to be fulltime employed which made 35.4% of the entire participated population. They were followed by group of the participants who were the self-employed with 36 participants with a percentage 24.5% the third group were part-time employed with 34 individuals that were making slightly above 23.1% of the whole population. The last group by 25 people with a percentage of 17% were currently unemployed.

Table 5

Which best describes your employment status?

Frequency Percent Valid Percent Cumulative Percent Valid Full - Time Employed 52 35,4 35,4 35,4

Part - Time Employed 34 23,1 23,1 58,5 Self - Employed 36 24,5 24,5 83,0 Unemployed 25 17,0 17,0 100,0

Total 147 100,0 100,0

Chart4

The mean of the participants employment status was 2.3 with a standard deviation SD=1.1. the chart above shows that employment status among the participants was normally distributed because the majority of those were self-employed, hence lying between Mean and 2 and -2 Standard Deviation (-2 δ, μ, 2δ).

26

Correlation test

Hypothesis 1 Correlation test:

In this step the hypothesis 1 has been taken into account, The majority of the entrepreneurs, when given the prospect of gain will always chose the more risky option with the lower chance of gain.

In this hypothesis the vast majority of entrepreneurs are hypothesized to be risk takers when it comes to a gainful return. For testing this hypothesis the predictor variable is the “prospect of gain” and the outcome variable is the extent to which an individuals is prone to risk seeking or taking.

Since the value of measurement was categorical (Dichotomous) rather than continuous or ratio, hence Spearman’s correlation test has been used instead of Pearson correlation to measure the correlation between predictor and outcome variables (Taylor, 1987). The participants have been split into two categories of entrepreneurs and non-entrepreneurs in order to test the correlation between dependent and independent variables in both groups. Table 6 is elaborates the correlation between independent variable (Prospect of gain) and the dependent variable (Risk seeking) for the entrepreneurial categories of the participants.

Table 6*

Correlationsa

Prone to Risk Prospect of gain Spearman's rho Prone to Risk Correlation Coefficient 1,000 ,251

Sig. (2-tailed) . ,086

N 48 48

Prospect of gain Correlation Coefficient ,251 1,000 Sig. (2-tailed) ,086 .

N 48 48

a. Did you initiate founding a business and/or were involved as leading figure until it was established? = yes

The table (6) indicates that there not a strong or crucial (0.251) correlation between the independent variable (Prospect of Gain) and the dependent variable (Prone to Risk). In other words by each unit of the Prospect of Gain that increases the dependent variable (Prone to Risk) also increases with a correlation coefficient of r=0.251. The correlation coefficient ranges between -1 and +1, indicate the ultimate correlation between the variables based on their positive or negative characteristics (Hauke & Kossowski, 2011). Hence when the correlation between the two variables is taken into account the predictor variable is not a strong predictor of the outcome variable however the relationship is positive. The level of significance is also higher than p<0.05, for having a statistically significantrelationship thep-value must

*_{The total responds for the independent variable were 92 from which were 48 entrepreneurs, (the non-entrepreneurs 44 table}

would be added in the appendix, Missing N=55). The total responds for the dependent variable was 92 from which 48 were entrepreneurs, (The non-entrepreneurs 44 table would be added in the appendix), Missing N=55).