The Dual Process Model of Reasoning and Entrepreneurial Decision-Making: A Field Study of New Childcare Ventures

Executive Summary Experimental research supports a dual process model of cognitive systems used for reasoning. One process is rapid and intuitive; the other is slow and deliberate. This study measured the extent to which entrepreneurs that started child care businesses displayed elements of each reasoning process for common new venture decisions. The study also assessed whether respondent's exposure to college-level business courses predicted the extent to which they reported using deliberative versus intuitive reasoning processes. Most respondents reported very limited amounts of information search and analysis before making these decisions. The amount of college-level business classes the entrepreneur completed was a significant predictor of deliberative logic-based decision-making. The significant positive relationship between the amount of formal business education and logic-based decision making supports the view that the entrepreneur is less likely to develop the necessary analytic skills required for proper decision-making outside of a formal business education. Introduction An entrepreneur must make a series of very important decisions before, during and after initiating a new venture. These include strategic decisions about what products and services to offer, how to promote them, and where to procure the resources that are needed to begin business operations. The entrepreneur must then implement the chosen strategy by making more decisions about items such as advertising expenditures, employee selection, equipment purchases and administrative procedures. The entrepreneur will likely need to also make decisions about altering previous venture creation decisions after obtaining performance feedback from operations after startup. The quality of these decisions can affect the profitability and even the survival of a new venture. Recent experimental decision-making research supports a dual system theory of reasoning (Sloman, 1996). One system of reasoning is a largely unconscious, intuitive one in which impressions drive judgments that are not reviewed and possibly modified by the other more rational rule-governed system (Kahneman, 2003; Kahneman & Fredrick, 2002). The intuitive or System 1 process of reasoning tends to be more rapid, automatic, intuitive, and more subject to emotional influences than the rational or System 2 system of reasoning. The System 2 process of reasoning tends to be slower and more deliberate and would be more likely to involve a reasonable amount of information search and analysis of alternative courses of action. The type of reasoning system that is employed in making business decisions such as those that are necessary during the new venture creation process will likely determine their accuracy and consequently affect the new venture's performance. Businesses operate in complex and dynamic environments. Several studies provide evidence of a positive relationship between the fit between the organization and its environment and organizational performance (Venkatraman & Prescott, 1990; Pelham, 1999; Beal, 2000). A higher degree of fit would likely result from a logic-based reasoning process utilizing a reasonable amount of due diligence than an intuitive reasoning process utilizing little or no information search or analysis. Understanding the extent that entrepreneurs make important initial business decisions either quickly and intuitively, or after an appropriate amount of information search and analysis is important because the accuracy of these decisions are likely to affect new venture performance and possibly their chances for survival. The present study assesses the extent to which entrepreneurs report using each system to make important decisions related to the creation of new childcare businesses in Florida. Knowing the extent actual new venture creation decisions are being made after appropriate amounts of information search, analysis of the information gathered and consideration of alternative courses of action available is an important step in formulating useful descriptive models of entrepreneurial decision-making. …