Risk Taking Differences - Entrepreneurs vs Managers

Risk Taking Differences Entrepreneurs vs Managers Page 3 of 28 After decades of study, there is no consensus as to whether entrepreneurs have a higher risk propensity than do managers. We overcome a variety of limitations in narrative reviews by using psychometric meta-analysis to mathematically cumulate the literature on entrepreneurial risk propensity. The results indicate that entrepreneurs have at least a moderately higher level of risk propensity than do managers, a finding with important implications for further research. Entrepreneurial dispositions are a fundamental element in the development of a theory of the entrepreneur (Carland, Hoy, Boulton, & Carland, 1984; Johnson, 1990). Accordingly, inquiry has attempted to isolate and explain the psychological antecedents of entrepreneurial behavior. One of the most prominent themes is the entrepreneur’s propensity for risk taking (Carland et al., 1984; Long, 1983), or risk propensity, an individual’s willingness to take or avoid risk. While rich conceptualizations of entrepreneurial risk propensity have permeated the literature since Cantillion’s (circa 1700) description of the entrepreneur as a bearer of risk (Kilby, 1971), empirical evidence concerning the distinctiveness of the entrepreneur’s risk propensity appears inconsistent. Reviews of the literature (e.g., Brockhaus & Horwitz, 1986; Chell, 1985; Perry, 1990) have described the contradictory results in individual studies concerning hypothesized differences in the risk propensities of entrepreneurs and managers. As a result, reviewers have often concluded that entrepreneurs do not have a distinctive risk propensity profile. Such narrative summaries, however, are prone to major methodological limitations stemming from methodological complications in the literature and human information processing restrictions in dealing with the methodological issues. Studies of entrepreneurial risk propensity have been disparate in operational definitions, in type and size of population sampled, and in instrumentation, producing concerns about comparability, statistical power and reliability of instrumentation. Therefore, conclusions about an entrepreneurial propensity for risk taking may be premature unless there is systematic consideration of the methodological variations (Ginsberg & Buchholtz, 1989). There has been no rigorous assessment which satisfactorily incorporates these methodological complexities in examining differences in the risk propensities of entrepreneurs and managers. As a result, discordant theoretical positions and divergent empirical findings have recently culminated in an impasse in the development of a theory of entrepreneurial risk taking. Our purpose is to examine risk propensity in samples of entrepreneurs versus managers to test whether entrepreneurs have a higher risk propensity than do managers. Instead of relying on a narrative review, with the concomitant difficulty in accurately processing all of the aforementioned methodological considerations, we use metaanalysis to examine the risk propensities of entrepreneurs and managers, and to determine if sampling issues and the choice of instrumentation affect the obtained relationship. Accurately discerning and summarizing the role of individual risk propensity in entrepreneurship would provide an important contribution to the cultivation of a theory of the entrepreneur, particularly in how the entrepreneur differs from the corporate manager, a delineation salient to a better understanding of behavior in both fields. RISK PROPENSITY AND THE ENTREPRENEUR Risk taking may be conceptualized as an individual’s orientation toward taking chances in a decision making situation (Sexton & Bowman, 1985). In classic decision theory, risk is often viewed as a function of the variation in the distribution of possible outcomes, the associated outcome likelihoods and their subjective values, with the decision choice entailing risk and expected reward trade-offs (March & Shapira, 1987). Scholars have long acknowledged that risky decisions are not based exclusively on rational calculations (Bromiley & Curley, 1992). Confronted with uncertainty in general equilibrium conditions, it is an individual’s predisposition toward risk that affects the decision to pursue an entrepreneurial career (Kihlstrom & Laffont, 1979). Thus, a stream of research has emerged which examines the effects of psychological processes on decision making. The resulting risk propensity studies are Risk Taking Differences Entrepreneurs vs Managers Page 4 of 28 predicated on support that risk taking is predispositional rather than simply situational (Jackson, Hourany, & Vidmar, 1972; Plax & Rosenfeld, 1976), and on strong evidence for a general propensity for risk taking (Jackson et al., 1972). Although questions remain about the persistence and stability of risk propensity, the tendency to take risks is causally related to making riskier decisions (Sitkin & Weingart, 1995). From this theoretical underpinning, predictions about risk propensity differences between entrepreneurs and managers diverge. Theoretical Positions The literature is replete with conceptualizations of entrepreneurial risk taking, typically grounded in one of two theoretical positions. The first is that entrepreneurs have a higher risk propensity than do managers. While the task roles of the entrepreneur and the manager both entail taking risks, entrepreneurs are generally believed to take more risks than do managers because the entrepreneur faces a less structured, more uncertain set of possibilities (Bearse, 1982), and bears the ultimate responsibility for the decision (Gasse, 1982; Kilby, 1971; Knight, 1921). Accordingly, entrepreneurs are more risk accepting in their pursuit of opportunity, while relatively more risk averse individuals choose contractual employment, a proposition with substantial empirical support (e.g., Ahmed, 1985; Begley & Boyd, 1987; Carland, Carland, Carland & Pearce, 1995; Hull, Bosley & Udell, 1980; Sexton & Bowman, 1985; Stewart, Watson, Carland & Carland, 1999). This theoretical posture suggests that there will be marked risk propensity differences between entrepreneurs and managers. The second, competing, theoretical position is grounded in classic motivation theory (Atkinson, 1957; Atkinson, Bastian, Earl, & Litwin, 1960; McClelland, 1961), where the focus is achievement motivation and the concomitant fear of failure or desire for success as determinants of risk taking. High need for achievement results in setting goals of moderate difficulty, accomplishing these goals through effort and skill, and taking personal responsibility for decisions (McClelland, 1961). Persons high in need for achievement set challenging goals of intermediate difficulty and are moderate risk takers (Atkinson, 1957). Because entrepreneurs and managers are both high in achievement motivation (Perry, 1990; Sexton & Bowman, 1985), the precepts of motivation theory suggest that entrepreneurs do not differ from managers in their dispositions toward risk, a proposition that also has empirical support (e.g., Brockhaus, 1980; Brockhaus & Nord, 1979; Litzinger, 1963; 1965; Masters & Meier, 1988; Meyer, Walker & Litwin, 1961). Therefore, according to the tenets of motivation theory, there should be small or no differences in the risk propensities of entrepreneurs and managers. Methodological Considerations There are a number of key issues in the entrepreneurial risk propensity research that are problematic from both theoretical and methodological viewpoints. These factors include operational definitions of the entrepreneur, sampling error, statistical power and instrumentation issues. We believe, as subsequently discussed, that these considerations contribute to the confusion in the entrepreneurial risk propensity literature. The Definitional Dilemma. Definitional quandaries have plagued entrepreneurship research (cf. Stewart, Carland & Carland, 1996). Research definitions of "entrepreneur" have spanned a range of economic actors. Early research often focused on "entrepreneurial" managers, for instance, shop operations managers (Meyer, Walker, & Litwin, 1961), salespeople (McClelland, 1961) and decentralized branch bank managers (Litzinger, 1963). More recently, research definitions of entrepreneurs have focused on founders of new ventures (e.g., Ahmed, 1985; Begley & Boyd, 1987; Gartner, 1985) or owners of small businesses (e.g., Masters & Meier, 1988; Schwer & Yucelt, 1984), although some researchers have also used growth aspirations as a definitional criterion (e.g., Carland et al., 1984; Smith & Miner, 1983; Stewart et al., 1999). Researchers have also used choice of college major as a surrogate for "potential entrepreneurs" and "potential managers" (Sexton & Bowman, 1983, 1984, 1986). Finally, the distinction between entrepreneurs and managers has been blurred with the growing interest in intrapreneurs, entrepreneurial managers in a corporate context (Pinchot, 1985). Risk Taking Differences Entrepreneurs vs Managers Page 5 of 28 This plethora of operational definitions has complicated the accurate discernment of the role of entrepreneurial risk propensity, and requires great care in interpretation. We suggest two approaches to minimize definitional difficulties. First, we explicitly focus on the research question, "Do entrepreneurs have higher levels of risk propensity than do managers? " This allows us to frame the relevant boundaries, for instance, excluding branch bank managers, salespeople, etc., from the samples of entrepreneurs. Second, we view the potentially different categories of entrepreneurs as an empirical issue. In other words, in keeping with Carland et al. (1984), we suggest that there may be differences in the risk propensities of founders who primarily focus on profit and growth, owners of small businesses who focus on more personal goals and family income, and corporate managers. Explicitly drawing u