1 Introduction
This seminar paper deals with the descriptive decision theory, which tries to show the actual decision behavior especially of ENTREPRENEURS. The question I particular examine is whether research and development activities and patenting is influenced by prior gain or loss experiences of entrepreneurs. This paper objective is to attain an empirically confirmation for this hypothesis. To make this possible I will turn out the evolutionary steps of strategic choice behavior models and show in an experimental study that prior gain or loss experiences have a considerable and significant impact on entrepreneurial risk taking and, as I will show later, as well on research and development activities.
2 Motivation
To examine entrepreneurial decision behavior under risk and after personal gain or loss experiences, we should take into account that research and development activities, in sense of developing a new product or product idea and the following placing of the innovation within the market, is obviously quite more risky then a `simple´ product-innovation. Empirical studies show that success of innovative product ideas is indicated by exceptionally low success probabilities about 3 – 5 %. (Perlitz / Löbler 1985, p 426) This gives an idea about the fact that research and development activities involve very high risks. If an Entrepreneur further chooses to patent the Innovation or the new product it produces additional costs and thereby increases the risk, because the potential loss if the venture fails is increasing as well. However, patenting is sometimes necessary to protect innovations against failure or to enlarge the possible outcome. But if entrepreneurs only accept increasing risks if there is an increasing expected gain as well, it raises a problem. The R & D activities involve high risks which reduce the expected profit and a small expected profit is not a very good reason for taking big risks. So what is the explanation for this phenomenon?
Table of Contents
1 Introduction
2 Motivation
3 Definitions
4 Explanations for Entrepreneurial Risk taking
4.1 Agency Theory
4.2 Expected Utility Theory
4.3 Risk Return Paradox
4.4 A Crisis as Incentive Constraint for Innovativeness
4.5 Prospect Theory
4.5.1 Reference Points and Aspiration Levels
4.6 Mental Accounting
4.7 Starting Points´ Effects on Risk taking Behavior
5 Questionnaire Experiment
5.1 Mode of operation of the Questionnaire
5.1.1 Part A
5.1.2 Part B: Certainty Equivalent
5.1.3 Part C:The socio-demographic Part
5.2 Evaluation of the Data
5.3 Multinomial Logistical Regression
5.4 Results
6 Conclusion
7 Table of Literature
8 Appendix
Research Objectives & Topics
This study investigates how personal gain or loss experiences influence the entrepreneurial decision-making process, specifically regarding risk-taking in research and development activities and patenting. By utilizing an experimental questionnaire approach, the research aims to provide empirical confirmation that prior financial performance significantly alters an entrepreneur's propensity for risk.
- Descriptive decision theory applied to entrepreneurship
- Impact of prior gains and losses on strategic risk behavior
- Analysis of R&D investment and patenting decisions
- Evaluation of Prospect Theory and Mental Accounting
- Use of multinomial logistical regression to analyze decision-making patterns
Excerpt from the Book
4.4 A Crisis as Incentive Constraint for Innovativeness
Other authors discussed the statement that an economical crisis is a necessary incentive constraint for the willingness to innovate and thus as well for the risk prone behavior of entrepreneurs.
Schumpeter approves this declaration and argued that a crisis is the triggering moment for innovations. (see Schumpeter 1947, p 149) This hypothesis is also supported in a study done by Perlitz and Löbler. They show that a crisis has a considerable initial effect for process- and product innovations. Furthermore they argue that the classical risk return paradox is not able to explain risk taking behavior of enterprises or entrepreneurs, because it takes only the chances of success into account and this is not enough to make clear why high risk involving innovations are realized. Within the carried experiment the individuals (230 managers) are confronted with two possible environmental states. The first one was a chance situation and the second one economical crisis. It is shown that most of the individuals within the situation of chance prefer the safe option and within the economical crisis the risky innovation instead of the safe option. In addition they could proof that people prefer the less risky process innovation (with 25 % probability to lose) toward the quite more risky product innovation (with 75 % probability to lose). They argue that these results stay in harmony with the
Summary of Chapters
1 Introduction: This chapter defines the core focus on descriptive decision theory and presents the hypothesis that entrepreneurial risk-taking behavior is influenced by prior experiences.
2 Motivation: It establishes the high-risk nature of R&D and patenting, highlighting the discrepancy between low expected profit and the high risks entrepreneurs must manage.
3 Definitions: This section provides clear definitions of "Innovation" and "Risk" to ensure a scientifically sound basis for subsequent analysis.
4 Explanations for Entrepreneurial Risk taking: This chapter reviews various theories—including Agency Theory, Prospect Theory, and Mental Accounting—to explain decision-making under risk.
5 Questionnaire Experiment: The author describes the methodology, scenario design, and the use of multinomial logistical regression to analyze the data collected from participants.
6 Conclusion: This chapter summarizes the findings, confirming that prior gain or loss experiences significantly impact the risk-taking behavior of entrepreneurs.
Keywords
Entrepreneurship, Risk Taking, Innovation, Research and Development, Patenting, Prospect Theory, Mental Accounting, Decision Theory, Crisis, Aspiration Levels, Reference Points, Multinomial Logistical Regression, Gain Experiences, Loss Experiences
Frequently Asked Questions
What is the core subject of this seminar paper?
The paper examines how entrepreneurs make decisions under risk, specifically focusing on whether prior personal gain or loss experiences influence their willingness to invest in R&D and patenting activities.
What are the central thematic fields covered?
The study integrates themes of descriptive decision theory, innovation management, and behavioral economics, particularly focusing on risk-return associations and the effects of psychological reference points.
What is the primary research goal?
The objective is to attain empirical confirmation that prior gain or loss experiences have a significant and measurable impact on entrepreneurial risk-taking behavior.
Which scientific methodology is utilized?
The study employs an experimental questionnaire design followed by a multinomial logistical regression analysis to process the survey data.
What is addressed in the main part of the paper?
The main part evaluates existing theoretical frameworks like Agency Theory and Prospect Theory, introduces the "Starting Point Formula," and presents the results of the questionnaire experiment.
Which keywords characterize this work?
Key terms include Entrepreneurship, Risk Taking, R&D, Innovation, Prospect Theory, and Mental Accounting.
How does the "Starting Point Formula" contribute to the study?
It corrects the valuation of subsequent lotteries by accounting for prior gains or losses, allowing for a more accurate comparison between different financial situations.
What is the significance of the "pain reduction principle"?
Within the framework of Mental Accounting, it explains why individuals tend to segregate gains and integrate losses to maximize their utility or minimize perceived pain.
What does the experiment suggest about troubled firms?
The study supports the finding that firms experiencing losses (troubled firms) tend to act more risk-prone in an attempt to recover from those losses.
- Quote paper
- Robert Flöting (Author), 2005, Risk taking in research and development activities and patenting after gain or loss experiences, Munich, GRIN Verlag, https://www.grin.com/document/71047
