Journal of Economic Perspectives: Vol. 28 No. 3 (Summer 2014)

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Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

Article Citation

Astebro, Thomas, Holger Herz, Ramana Nanda, and Roberto A. Weber. 2014. "Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics." Journal of Economic Perspectives, 28(3): 49-70.

DOI: 10.1257/jep.28.3.49

Abstract

There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences—in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.

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Authors

Astebro, Thomas (HEC Paris)
Herz, Holger (U Zurich)
Nanda, Ramana (Harvard U)
Weber, Roberto A. (U Zurich)

JEL Classifications

D03: Behavioral Microeconomics: Underlying Principles
J23: Labor Demand
L25: Firm Performance: Size, Diversification, and Scope
L26: Entrepreneurship
M13: New Firms; Startups

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