COGNITIVE CONTROL BIAS AND DECISION-MAKING IN CONTEXT: IMPLICATIONS FOR ENTREPRENEURIAL FOUNDERS OF SMALL FIRMS

ABSTRACT Quality decision-making for founders of small firms can be critically important for firm success and survival. Using a longitudinal sample of 164 small firm founders, we examine the main and moderating effects of illusions of control, time stress, and prior industry experience on the decision quality associated with a business decision. As predicted, illusions of control have a negative effect on decision quality. Additionally, both time stress and prior industry experience significantly enhance this relationship, such that higher levels of stress and experience lead to much lower decision quality for founders of small firms. INTRODUCTION Humans tend to exaggerate the degree of control they have over events, discounting the role of luck (Lovallo & Kahneman, 2003). Entrepreneurs are particularly susceptible to these “positive illusions” (Simon, Houghton, Aquino, 2000; Taylor & Brown, 1988). The entrepreneurial situation is characterized by risk and uncertainty (Knight, 1921; McMullen & Shepherd, 2006; Miller, 2007), with illusion of control constituting a very effective mechanism to reduce this uncertainty (Baron, 1998). Moreover, entrepreneurs face high novelty, strong emotions, high time pressure, and fatigue (Baron, 1998). These conditions lead to an increased susceptibility to biases and heuristics when entrepreneurs make critical decisions regarding their businesses. Many of the decisions that the entrepreneur makes can be characterized as “hot” decisions (Janis & Mann, 1977), which represent decisions that are either vital and/or affect-laden in contrast to routine problem solving within their businesses. These types of “hot” decisions exist because they can represent critical instances that could potentially involve the survival of the firm (Altman, 1968), with the entrepreneur generally invested emotionally into their venture (Baron, 2007; Baron, 2008). Friedland, Keinen and Regev (1992) explain that the need to compensate for the stress produced through loss of perceived control leads to increased illusion of control. Specifically, those authors claim in reference to Anderson (1976) and Vroom (1964) that stress effects a narrowing of attention and leads to an inward focus. This internally-oriented perspective can lead to a number of negative effects when it comes to making decisions, plans and predictions (Kahneman & Lovallo, 1993; Kahneman & Tversky, 1979). Additionally, this stress-induced inward focus may result in the entrepreneur ignoring a number of important factors, such as competitors. Moreover, the particular cognitive make-up of the entrepreneur affects these decisions. Entrepreneurs have been shown to be different in their cognitive make-up from the rest of the population (Baron, 1998), with research indicating that entrepreneurs are subject to a number of cognitive biases such as overconfidence, representativeness, and optimism (e.g., Cooper, Woo, Dunkelberg, 1988; Baron, 1998; Busenitz & Barney, 1997). In this paper, we are particularly interested in the effects of illusion of control (Langer, 1975) on the quality of decisions that 1Carr and Blettner: IMPLICATIONS FOR ENTREPRENEURIAL FOUNDERS OF SMALL FIRMSFrontiers of Entrepreneurship Research 2010