Strategic and Natural Risk in Entrepreneurship: An Experimental Study

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• John Morgan - Professor of Business Administration at the Haas School of Business and Department of Economics UC Berkeley
• Friday 27 March 2015, 12:00-13:30
• Judge Business School, KH107.

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We report on the results of experiments where participants choose between entrepreneurship and an outside option. Entrepreneurs enter a market and then make investment decisions to capture value. Payoffs depend on both strategic risk (i.e. the investments of other entrepreneurs) and natural risk (i.e. luck). Absent natural risk, participants endogenously sort themselves into entrepreneurial types and safe types and both types earn the same expected payoff. Adding natural risk fundamentally changes these conclusions: Here we observe excessive entry and excessive investment so that entrepreneurs earn systematically less than the outside option. These payoff differences persist even after many repetitions of the task. When the outside option becomes risky, we observe a “democratization” of entrepreneurship — the average individual enters and exits several times over the course of the experiment. Exit is hastened by unlucky outcomes: When realized payoffs fall below expected payoffs, subjects are more likely to exit the market. On the other hand, skill at the investment task plays little role in determining the likelihood of entrepreneurship. Finally, we examine an environment where an individual must become an entrepreneur but chooses the stakes over which she will compete. Here, we observe under-entry and under-investment in the high-stakes market, while the opposite is true in the low stakes setting. As a result, returns to entrepreneurship are positive under high stakes and negative under low stakes, even after subjects have considerable experience at the task

This talk is part of the Finance & Accounting Seminar Series series.

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• CERF and CF Events
• Finance & Accounting Seminar Series
• Judge Business School, KH107

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