UE 6: Entrepreneurship and Risk-Propensity

Question 1

What are the main findings of Holm, Opper & Nee (2013)?

Answer 1

The study reports findings from the first large-scale experiment investigating whether entrepreneurs differ from other people in their willingness to expose themselves to various forms of uncertainty.

Findings suggest that …

1. … in economic decisions, entrepreneurs are more willing to accept strategic uncertainty related to competition and trust.
2. … entrepreneurs do not differ from non-entrepreneurs under nonstrategic uncertainty, such as risk and ambiguity.

Question 2

What is the main question regarding the propensity of entrepreneurs to expose themselves to a highly uncertain environment?

Answer 2

Two standard explanations:

1. Entrepreneurs are better in dealing successfully with uncertainty through development of certain strategies.
2. Entrepreneurs are more comfortable with high levels of uncertainty and therefore accept uncertainty, even if their strategies may not be better suited to deal with it.

Standard risk is not seen as a difference between entrepreneurs and non-entrepreneurs, but uncertainty is.

Question 3

What are some conclusions of Holm, Opper & Nee (2013)?

Answer 3

When exposed to nonstrategic forms of uncertainty such as situations involving standard risk or ambiguity, entrepreneurs act similarly to ordinary people.

Entrepreneurs seem to be more willing to bear uncertainties involving strategic uncertainty.

• Significantly more willing to enter situations involving multilateral competition
• More willing to accept uncertainties related to trusting another (Trust may therefore provide the glue that makes business networks actually work.)

Question 4

What is the certain equivalent (CE) of a lottery L, and how do we use it to define risk-neutral, risk-averse, and risk-seeking behavior?

Answer 4

It is an outcome that has the same utility as that produced by the lottery.

RP(L) = E(L) - CE(L)
CE(L) = E(L) implies that RP(L) = 0, or neutral

CE(L) < E(L) implies that RP(L) > 0, or averse

CE(L) > E(L) implies that RP(L) < 0, or seeking

Question 5

What are the shapes of utility functions under neutral, averse, and seeking risk behaviors?

Answer 5

• Neutral is a line function
• Averse is strictly concave (faces down)
• Seeking is strictly convex

Question 6

What is the Arrow-Pratt Measure, r, and how can it be used to measure the degree of risk-propensity?

Answer 6

It’s the negative of the ratio between the second derivative of the utility function and the first derivative.

r = 0 implies neutrality
r > 0 implies averse
r < 0 implies seeking