Academic journal article Academy of Entrepreneurship Journal

The Dark Side of Entrepreneurship: A Conceptual Framework of Cognitive Biases, Neutralization, and Risky Entrepreneurial Behaviour

Academic journal article Academy of Entrepreneurship Journal

The Dark Side of Entrepreneurship: A Conceptual Framework of Cognitive Biases, Neutralization, and Risky Entrepreneurial Behaviour

Article excerpt


The value of entrepreneurship to society has been well-documented in the extant literature (Smith,1776).Entrepreneurship stimulates employment, investment, and wealth creation opportunities by supplying products and services to consumers. Knowing the value of entrepreneurship, governments and universities are attempting to foster entrepreneurial behaviour in society. Although valuable if successful, but when ventures fail, the negative effects on the entrepreneur and their investors can be detrimental to society through the loss of employment, savings, and assets, leading in some cases to bankruptcy.

Indeed, one of the central issues with entrepreneurship is the high failure rates among new ventures. According to statistics from the extant literature, 20% of new ventures fail in the first year, 66% fail within the first six years (Hartcher, Hodgson, & Holmes,2003), and typically only 25% last more than 5 years (Kannadhasan, Aramvalarthan, & Kumar,2014). In general, it can be said that half of all new ventures fail (Simon, Houston, & Aquino,2000). However, approximately 95% of entrepreneurs believe that their ventures will succeed whereas at least 35% are certain of their success (Kannadhasan et al.,2014; Simon et al.,2000). Perhaps most concerning is that when new ventures are on the verge of collapse, the founders, for the most part, are unable or unwilling to perceive the risks. As a result, approximately 30% of entrepreneurs continue to spend resources on their failing ventures and over 50% continue spending after they receive sound advice that they should cease their operations (Astebro, Jeffrey, & Adomdza, 2007).

Compared to the average person, entrepreneurs are often more optimistic (Astebro et al., 2007) and, in general, have been shown to think differently (Busenitz & Barney, 1997; Kannadhasan et al., 2014; Palich & Bagby, 1995; Saravathy, Simon, & Lave,1998). Indeed, it appears that entrepreneurs are overconfident in their abilities (Kannadhasan et al., 2014; Keh, Foo, & Kim,2002). As a result of their overconfidence and optimism, entrepreneurs are often unable to perceive the risks associated with their ventures and enter risky ventures unwittingly (Kannadhasan et al. 2014).

In their efforts to understand this problem, researchers have suggested that entrepreneurs perceive less risk as a result of cognitive biases, defined as systematic errors in human decision-making" (Fleischmann, Amirpur, Benlian, & Hess 2014, p. 2) or mental shortcuts used by individuals to make decisions (Simon et al.,2000). As a result of these cognitive biases, entrepreneurs make decisions based on subjective factors, such as their perceptions, and not necessarily objective facts (Busenitz & Barney, 1997; Kannadhasan et al.,2014), which contributes to the establishment of risky entrepreneurial ventures (Baron, 2004; Hayward, Shepherd, & Griffin, 2006; Kannadhasan et al., 2014; Simon et al.,2000). Put differently, entrepreneurs are overconfident and optimistic in their chances of success (Astebro et al., 2007; Baron, 2004; Kannadhasan et al., 2014; Keh et al., 2002) and make risky entrepreneurial decisions based on imperfect information (Busenitz & Barney, 1997; Otuteye & Siddique, 2013) using heuristics, which are "practical tools for simplifying decision making in a complex environment due to uncertainty, limited information and bounded rationality" (Otuteye & Siddique,2013, p.1). Indeed, the dark side of entrepreneurship is the cognitive processes of entrepreneurs that lead them to develop their ventures. Therefore, it can be said that entrepreneurs do not knowingly take high-risks, they, as a result of their cognitive biases; perceive less risk than other people (Simon et al., 2000).

In addition to cognitive biases, in this research, I argue that entrepreneurs neutralize the riskiness of their ventures through various techniques, namely the techniques of neutralization (Sykes & Matza, 1957). …

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