Academic journal article Academy of Entrepreneurship Journal

Exploring Cognitive Bias in Entrepreneurial Startup Failure

Academic journal article Academy of Entrepreneurship Journal

Exploring Cognitive Bias in Entrepreneurial Startup Failure

Article excerpt

INTRODUCTION

Due to its contributions to economic growth, scholars and policy makers have sought to stimulate entrepreneurial activity. In attempting to increase rates of startup and rates of startup success, they have adopted the assumption that as startup rates increase, startup success rates will remain the same or even increase. However, many of those with the best entrepreneurial abilities may have already undertaken the process, thus leaving a disproportionate number of lower potential entrepreneurs next in line.

We view this assumption as an empirical question rather than an article of faith. We ask: What if increasing rates of entrepreneurship beyond a certain point produces an inordinately high number of poorly qualified entrants? Are efforts to promote entrepreneurship giving many hopefuls unrealistic expectations, thus encouraging them to undertake financially risky and damaging startup behaviors? Is investing resources to improve startup chances of success always the best strategy? Is it possible instead that investing resources to discourage incipient entrepreneurs with poor prospects might be a more cost effective strategy?

A focus on increasing business startup rates may overlook the reality that not everyone who wants to be an entrepreneur should be. Despite a surfeit of desire, some people lack the competencies to succeed. The benefits to society of entrepreneurial development might be enhanced if those bound for failure were discouraged from making the plunge. Poorly prepared entrepreneurial candidates may well receive low returns and employ resources that could be used more productively elsewhere (Holtz-Eakin, 2000). If we can identify these people, we may be able to warn them of the perils that await. We believe that two related topics, how to recognize entrepreneurs with low probability of success and how to give them pause for thought before launching a business, deserve scholarly attention.

In this paper, we begin by asking what contributes to business startup failure rather than what contributes to its success. In attempting to answer it, we claim a major role for cognitive biases, and identify multiple stages where the startup process can derail. Next, we present evidence from interviews with experts that support the role of cognitive biases. Finally, we present the results of a quasi-experimental field study with entrepreneurial hopefuls that tests a key link in the theory, that between cognitive bias and assessments of startup feasibility.

RELEVANT LITERATURE

Most literature focuses on factors of entrepreneurial success rather than identifying entrepreneurial candidates with high likelihood of failure (e.g., Chaterjee & Das, 2015; Kumar & Sihag, 2012). However, several studies have examined contributors to smaller business failure after a business has started. These studies have investigated a host of factors believed to affect failure, including previous business experience, education, financial capital, and age (see Lussier & Pfeifer, 2001, for a summary of an extensive list). They have indicated that older, less educated owners with low managerial competence, little financial capital, and inadequate use of accounting expertise have shown higher failure rates (e.g., Hall, 1994; Gaskill, Van Auken, & Manning, 1993). Separate, largely independent streams have developed in the fields of entrepreneurship studies (Lussier & Pfeifer, 2001) and economics (e.g., Brüderl, Preisendörfer, & Ziegler, 1992; Holtz-Eakin, Joulfaian, & Rosen, 1994; see Bates, 1990, 1995, for an exception).

Researchers have started to identify other sources of entrepreneurial failure related to cognitive issues. For example, Von and Bressler (2011) acknowledge that entrepreneurial optimism is an important characteristic of successful entrepreneurs, but that excessive optimism can lead to business failure. Cognitive processes, including passion, was investigated by Envick (2014) concluding that honing and training passion, rather than emphasizing it, is an important component of entrepreneurial intelligence. …

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