The risky prospects of entrepreneurial initiatives: Bias duality and bias reversal in established firms

In their landmark study on the differences between entrepreneurs (founders of companies) and managers in established organizations, Busenitz and Barney (1997) use prospect theory (e.g., Tversky and Kahneman, 1974) to argue that entrepreneurs are much more likely than managers to exhibit biases of overconfidence and over-generalization on the basis of limited information, leading them to select simple decision rules or heuristics. In contrast Busenitz and Barney view managers in established firms as driven by company routines and organizational structures that reduce uncertainty and complexity, thereby allowing them to be more analytical in their decision-making practices. The implication of their work is that entrepreneurs differ from managers in their willingness to take risks in making resource allocation decisions based upon partial and uncertain information on the likely outcomes of entrepreneurial opportunities. Although Busenitz and Barney's (1997) comparison of the traits that differentiate independent entrepreneurs from corporate managers may be valid as a general rule, the literature on corporate entrepreneurship is devoted to the exceptions, in the sense of managerial behavior that goes beyond implementing prevailing routines or relying on existing organizational structure in large established firms (e.g., Burgelman, 1991, 1994). Furthermore, some managers and some established companies are more entrepreneurial than others (e.g., Covin and Slevin, 1991). In this chapter we use the precepts of prospect theory to help explain how the frames of reference of managers at different levels in an established company will create stable or shifting biases..

ISBN:978-1-84844-044-9

Keywords:entrepreneurial initiatives