Differences in Risk Assessment Ability between Entrepreneurs and Non-Entrepreneurs

Differences in Risk Assessment ability between Entrepreneurs and Non-Entrepreneurs

1.0  INTRODUCTION

There is a broadly held perception that entrepreneurs engage in risky behavior (Palich and Bagby, 1995). This perspective suggests differential predispositions and actions across entrepreneurs and non-entrepreneurs. Further research suggest that entrepreneurs tend to be more overconfident than managers (Busenitz and Barney 1997), which may cause them to frame business situations more favorably than non-entrepreneurs (Palich and Badgy 1995) and appear more competent (Anderson et al. 2012). The nature of entrepreneurship often involves the introduction of products. This research also suggests that entrepreneurs are not necessary more comfortable with risk. Rather, they may not perceive risks in the same way that non-entrepreneurs do which is different than aversions to risk (Petrakis 2007).

Throughout its history the literature on entrepreneurship has asserted that a critical economic role of the entrepreneur is risk bearing. One consequence of that perspective is that the theoretical and practitioner literature has assumed that entrepreneurs are risk seeking. To date, however, the empirical record indicates that entrepreneurs’ risk profiles are indistinguishable from those of wage earners (March and Shapira 1987)

One of the entrepreneur’s personality traits is risk taking. Many of people think risk taking is extreme risking, but entrepreneurs intend to receive medium and rational risks. Most of people intend to go to their own attitude extremes about risk and risk taking. Conservative person would select isn’t blamed because of it. But the entrepreneurs select the medium limit; it means they prefer the medium risk. This is because they feel their attempts and abilities would influence the result of the work. In general, the entrepreneurs wouldn’t consider every kind of risk, but they consider rational and certain risks. It means the entrepreneurs, not only follow the ideas as working situation, but also consider the current risks of these ideas. The risks are in the form of chance or uncertainty. When a work is high risk, it means its return is uncertain. In other words, there is the failure chance as success chance in that work, (Anderson et al. 2012).

Despite some literatures in all the dimensions of entrepreneurship, a common theme is found in the entrepreneurship literature which revolves around differences in the predisposition among entrepreneurs towards risk taking. It has been debated if entrepreneurs are in fact increasingly risk prone than the average individual (Parker, 2004). A further recurrent theme in the research of entrepreneurial personalities; some researches claim that personality traits are similar within the entrepreneurs as a group are as many as those that are differing, and some claim that there are actually personality traits that bind the entrepreneurs together as a group in comparison to non-entrepreneurs. Additionally it has been recognized that self-employment runs in the family and that individuals with self-employed fathers have a higher likelihood of becoming entrepreneurs themselves (M. Caliendo, 2007, Parker, 2004).

1.2  Significance/rationale of the study:

This study is significant to the researchers in a sense that it will develop an extensive knowledge about the area of research. The purpose of this study is to determine whether there was significance in the proposition that the ability of individuals to asses entrepreneurial risk difference between entrepreneurs and non-entrepreneurs. The different strategies of risk assessment with a particular focus on risk identification and perceive entrepreneurial opportunities. In so doing, the study highlights entrepreneurial inclination and success, in turn increasing the prominence of risk assessment in the context of entrepreneurship education as well.

1.3 Problem Statement:

This study tends to explore risk assessment ability: Risk assessment ability of entrepreneurs compared to non-entrepreneurs. The premise of this research report relates to the suggestion that an important part of risk assessment relies on the ability to identify risks in an entrepreneurial situation. Entrepreneurial risk has been part of the literature for several decades, focusing mainly on elements such as, risk propensity and risk perception with an increasing focus on the cognitive aspects in this regard (Brandstatter, 2010).

Norton and More (2006) appear to be one of the first empirically prove that risk assessment is an element that distinguishes entrepreneurs from non-entrepreneurs (Bank managers in their study.) their study however did not sufficiently take in to account the different elements within risk assessment, as its intention was to prove that risk assessment instead of risk propensity distinguishes entrepreneurs from non-entrepreneurs.

1.4 Research objectives:

• To investigate the risk assessment ability between entrepreneurs and non-entrepreneurs.
• To examine how entrepreneurs and non-entrepreneurs perceive opportunities.

1.5 Research questions:

1-      What happen to the Entrepreneurs and non-entrepreneurs and when risk is involved in Entrepreneurship?

2-      How entrepreneurs and non-entrepreneurs perceive entrepreneurial opportunities?

2.0 LITERATURE REVIEW

 Concepts & definitions:

2.1 Concept of Entrepreneurship:

Entrepreneur previously defined as individual working for levering life standards by founding personal job may differ from entrepreneur of today in terms of risk carried, risk coefficient an ability to generate an idea and to convert the idea into output. Traditionally, definition of entrepreneurship is based on activity of undertaking risk. First issue emphasized, when professional managers are discriminated from entrepreneurs particularly in business activities, is that on the contrary to managers, entrepreneurs undertake profit/loss risk themselves. However, economic risk is only a dimension for entrepreneurs; in uncertain environments, career risk, social risks, psychological and physical risks are often associated with economic risks (Brochaus, 1980:510; Pandeliau, 1998; Busenitz, 1999; Littunen,2000:295).

Entrepreneur is an individual who combines a business idea in the form of creating a new market or benefiting from an opportunity caused by deficient aspect of present market with components of risk and capital. Moreover, entrepreneur manages a particular process. This process involves a production range starting with entrepreneur and completing with staff. As a consequence of all risk undertaken, entrepreneur waits for success or wants to reach initially defined targets. Nevertheless, failure is also a possibility and in this case, risk may convert into dark face of entrepreneurship (Kuratko and Hodgetts, 1998:106). Therefore, endurance to the uncertainty is one of basic roles played by entrepreneur (Teoh and Foo, 1997).

One of most significant features of entrepreneur individual is the ambition to take risk. Entrepreneurship is regarded as principal factor for economic growth, creating employment and social progression. Camphell stated that entrepreneurship activities involve risk and uncertainty due to its very nature and decision to be an entrepreneur is alone more risky than other alternatives and added that the event is not shaped solely by psychological factors, but external factors promoting start of the entrepreneurship activities are also important (Erdem, 2001).

2.2 Risk and Risk Taking:

Despite the variance in all the definitions of entrepreneurship, one common theme found in the entrepreneurship literature revolves around differences in the predisposition among entrepreneurs toward risk-taking. Risk-taking propensities differ from business to business and from individual to individual, although it is clear that without it, entrepreneurship would not be an object of fascination to the same extent as it is today. Risk-taking propensity could effectively be conceptualized as an individuals’ orientation toward taking chances in any decision-making scenario.

The total risk management in a business could be seen from a number of different perspectives; strategic-, tactical- and operational risk management. The strategic focuses on risks from the business’ strategic goals which could include new types of risks in itself (launching a new product on a new market, new innovations, etc.). The tactical risk management aims to handle the tactical decisions of the business and thereby takes responsibility for handling the risks associated with the yearly planning. The operational risk management is related to the daily operations of the business (Wendestam, 2008).

For the sociologist Niklas Luhmann the term 'risk' is a neologism that appeared with the transition from traditional to modern society. "In the Middle Ages the term residuum was used in highly specific contexts, above all sea trade and its ensuing legal problems of loss and damage." In the vernacular languages of the 16th century the words rischio and riezgo were used. This was introduced to continental Europe, through interaction with Middle Eastern and North African Arab traders. In the English language the term risk appeared only in the 17th century, and "seems to be imported from continental Europe." When the terminology of risk took ground, it replaced the older notion that thought "in terms of good and bad fortune." Niklas Luhmann (1996) seeks to explain this transition:

"Perhaps, this was simply a loss of plausibility of the old rhetoric's of Fortuna as an allegorical figure of religious content and of prudential as a (noble) virtue in the emerging commercial society." Risk-taking refers to the tendency to engage in behaviors that have the potential to be harmful or dangerous, yet at the same time provide the opportunity for some kind of outcome that can be perceived as positive. Driving fast or engaging in substance use would be examples of risk-taking behavior. They may bring about positive feelings in-the-moment. However, they can also put you at risk for serious harm, such as an accident.

2.3 Entrepreneurship and Risk taking:

Entrepreneurship is a process in which the entrepreneur establishes new jobs and firms, new Creative and growing organizations associated with risk – taking by new and creative ideas and entrepreneurship identification of the new opportunities and resources mobilization. It results in introducing a new product or service to society. In Britain encyclopedia entrepreneur means "a person who organizes and manages a job or economic association and receives its risks". The origin of word entrepreneurship is French. This word is equivalent of French Enterprendre and English undertake that was translated to Entrepreneurship in English by John Stewart Mill.

2.4 Risk Perception:

At the individual level, risk reflects the degree of uncertainty and potential loss associated with the outcomes which may follow from a given behavior or a set of behaviors (Forlani & Mullins, 2000). Yates and Stone (1992) identify the basic element of risk construction: potential losses and the significance of those losses.

The point of research focuses on how entrepreneurs cope with the risks inherent in their decisions, what determines the way they perceive the riskiness of their decisions, and whether they possess character traits which predispose them to engage in uncertain behavior or assess opportunities and threats differently from non -entrepreneurs (Norton & Moore, 2002).

The ‘expected utility’ theory found in psychology and information economics has often been taken as the theoretical background for the basics of the explanation of decision-making under risk. However its predictive ability is questionable (Cherry & Fraedrich, 2002). A viable alternative is ‘prospect theory’ (Kahneman & Tversky, 1979) which regards the individual as risk averse in the domain of gains and puts risk seeking in the domains of losses. In any case, the process whereby entrepreneurs make decisions about risk-taking is extremely complex (Ray, 1994).

Risk perceptions involve the way individuals make sense of the degree of uncertainty and the possibility for loss associated with particular actions (Knight 1921; Forlani and Mullins 2000). This cognitive construct is often viewed as the potential for loss and tends to be more closely associated with negative outcomes (Sitkin and Weingart 1995), as opposed to potential for gain. Some describe risk perceptions as “the extent to which there is uncertainty about whether potentially significant and/or disappointing outcomes of decision will be realized” (Sitkin and Pablo 1992: 10). Essentially, risk perceptions are not limited to economic variability, but also are more closely linked to undesired outcomes.

Every individual’s perception of risk in a given decision will differ; some will weigh in a higher risk factor in the generated profit, some will evaluate the higher risk factor in the strategic outcome. To choose to take the risk although the perception of the aggregative risk in a decision is high is to have high risk propensity. This will always have to be compared to this individual’s own evaluation of different risk related decisions

Risk perceptions, in turn are expected to influence choices among risky alternatives. Choices among alternatives in a decision set by a decision maker who perceives the set as less risky are expected to be riskier than for those who perceive the set as riskier (Yates 1990).

2.5 Risk Propensity:

Sitkin and Pablo (1992) offer definitions critical to this trait perspective: risk propensity as the tendency to take or avoid risk: risk perception as the assessment of risk inherent in a situation: risk behavior as decisions with varying degrees of uncertainty. They propose two, alternative models of risk behavior. One suggests that risk propensity and risk perception mediate risk behavior (1992,p. 15). The other suggests a moderated relationship, explicitly, that risk propensity moderates the relationship between risk perception and risk behavior (1992, p. 26). Sitkin and Weingart (1995) test the mediated model and report promising results. However, the debate is not closed. Mediation is suggested when there is a demonstrably strong relationship between predictor and criterion (Baron and Kenny, 1986), and empirical results in this domain are mixed (Busenitz and Barney, 1997; Sitkin and Weingart, 1995). In a study that examines the relationships between anticipated venture outcomes and differences in risk propensities, Forlani and Mullins (2000), find that risk propensities did not influence perceptions of venture risk. That empirical result directly contradicts the Sitkin and Pablo (1992) prediction.

Risk taking propensity has limited implications for the discovery and exploitation of wealth generating ideas. Brockhaus (1980) studies entrepreneurs and managers with a view toward assessing risk taking propensity. He finds no significant differences across these groups. Masters and Meier(1988) extend this research. They use the same instrument (the Choice Dilemma Questionnaire, hereafter, CDQ) and ask essentially the same question: Do entrepreneurs differ in their risk taking propensity from non-entrepreneurs? They report no significant differences between entrepreneurs and managers. This empirical evidence on risk propensity runs counter to conventional wisdom and suggests that entrepreneurs exhibit the same propensity to take or avoid risks as the general population. However, other scholars are not as sanguine. Shaver and Scott (1991) critique the CDQ as inappropriate for this research question. The instrument was developed to study individuation, the diffusion of responsibility often found in mob behavior. Moreover, it was designed to measure changes in expressed levels of riskiness. Consequently, Shaver and Scott assert that its use as an index of a relatively stable personality trait is methodologically unsound (1991, p. 29). Sitkin and Pablo (1992) extend the discussion of risk taking propensity, and we take advantage of their indirect support for our competing, theoretical perspective. They argue that risk taking propensity has three determinants: risk preferences, a somewhat durable predisposition to accept or decline risk; inertia, a habituation of sorts in which the decision maker employs processes and criteria used in past situations; outcome history, a phenomenon in which the decision maker attributes outcomes to his or her actions. Further, they propose that risk propensity may be a moderator variable, explicitly, that it influences the relationship between risk assessment and risk behavior (1992. p. 26). We seize upon their conceptualization of risk propensity as a moderator and substitute ‘‘priors.’’ Priors are information gained by decision makers from prior immersion in a similar context (Venkatraman, 1997).

Brandstatter (2010) stated that, during the last two decades entrepreneurship has become a very active field of research in various social science and economic policy.

 Janny & Dess (2006) attempted to summarize the literature on risk in three dimensions:

1. Risk as variance.
2. Risk as downside loss.
3. Risk as opportunity.

Sitkin & Weingart (1995) describe risk perception as, “The decision maker’s evaluation of the level of risk inherent in a situation, associated with its uncertainty and the control that individuals perceive they have over such uncertainty”.

It is argued that in order to increase risk perception, risk identification needs to increase.

Norton & Moore (2002) summaries previous literatures and upcoming researches on entrepreneurs in quite simple way “entrepreneurs hold a dissenting view of the future which often permits the discovery of arbitrage opportunities overlooked by others. In the field of entrepreneurship there have been a huge number of researches looking at the opportunity recognition element of entrepreneurship.

In the field of research many studies had been done on entrepreneurial risk and their assessment abilities and opportunities so far, now question arise here whether these entrepreneurs are born or made their distinguishing factors, personalities and attitudes and source of their relentless drive and their different creativity have been topics of many studies, researches undertaking around the world. (Pieter Ernst 2012).

3.0 THEORETICAL FRAMEWORK

The two different variables will be used for the research such as risk identification and risk perception. These variables will be considered independent variables and risk behavior is dependent variable.

 

 

 

4.0 RESEARCH METHODOLOGY

This study attempts to explore the differences in risk assessment ability between entrepreneurs and non-entrepreneurs. The area of study was entrepreneurs and non-entrepreneurs of Gilgit-Baltistan. After extensive review of the literature risk perception, risk propensity and demographics characteristics have been identified that differentiate entrepreneurs from non-entrepreneurs in assessing risk behavior. Quantitative techniques of research have been employed to find out the answer of research question. This research is primarily exploratory in nature. The data was collected through questionnaires from the sample of 40 respondents out of which 30 questionnaires were adopted to complete the research.

4.0 Data Analysis:

4.1 Gender Analysis:

This table shows the frequencies of Gender:

GENDER
		Frequency	Percent	Valid Percent	Cumulative Percent
	MALE	31	100.0	100.0	100.0

According to the given table, the study is conducted among male entrepreneurs and non-entrepreneurs.

The graph of gender is as follow:

4.2 Age Analysis:

This table shows the age distribution of entrepreneurs and non-entrepreneurs:

AGE
		Frequency	Percent	Valid Percent	Cumulative Percent
	LESS THAN 20	2	6.5	6.5	6.5
	21-30	28	90.3	90.3	96.8
	31-40	1	3.2	3.2	100.0
	Total	31	100.0	100.0

According to this table there are 2 entrepreneurs less than 20, 28 entrepreneurs belong to 21-30 age and 1 respondent is the age of 31-40.

The age distribution is shown in the graph as follow:

4.3 Education Analysis:

The education analysis as follow:

EDUCATION
		Frequency	Percent	Valid Percent	Cumulative Percent
	GRADUATION	30	96.8	96.8	96.8
	MASTERS	1	3.2	3.2	100.0
	Total	31	100.0	100.0

This table shows that there are 30 entrepreneurs (96.8%) belong to graduation and 3.2% of total respondent belong to masters.

The graph is shown below:

4.4 Reliability Analysis:

The reliability analysis is as follow:

	Reliability Statistics
Variables	Cronbach's Alpha	N of Items
Risk Perception	.815	3
Risk Propensity	.707	2
Risk Behavior	.991	3
	.703	3

All the variables which are taken in the study take the value greater than 0.70. The variables are reliable if they take the value equal to or greater than .70.

4.5 Correlations Analysis: Correlation is shown below:                                                        Correlations
		RPEN	RPYEN	RPNE	RPYNE	RBH
RPEN	Pearson Correlation	1
RPYEN	Pearson Correlation	.715**	1
RPNE	Pearson Correlation	1.000**	.715**	1
RPYNE	Pearson Correlation	.051	-.084	.051	1
RBH	Pearson Correlation	.687**	.634**	.687**	.238	1
**. Correlation is significant at the 0.01 level (2-tailed).

There is a significant relationship between dependent variables and independent variables. The correlation ship are .687, .634, .687 respectively. There is no relationship between risk propensity of non-entrepreneurs and risk behavior. The greater the risk propensity and risk perception, the greater the risk behavior.

4.6 Regression Analysis:

Model Summary
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
	.756a	.572	.524	.36053
a. Predictors: (Constant), RPYNE, RPNE, RPYEN

ANOVAb
Model		Sum of Squares	df	Mean Square	F	Sig.
	Regression	4.684	3	1.561	12.012	.000a
	Residual	3.509	27	.130
	Total	8.194	30
a. Predictors: (Constant), RPYNE, RPNE, RPYEN
b. Dependent Variable: RBH

Coefficientsa
Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.
		B	Std. Error	Beta
	(Constant)	.748	.585		1.278	.212
	RPYEN	.339	.176	.352	1.925	.065
	RPNE	.371	.160	.422	2.314	.029
	RPYNE	.142	.074	.246	1.919	.066
a. Dependent Variable: RBH

The R square is perfect positive (R2= .572). It means the R square lie in the critical region between 0 and 1.

The sig. values of risk propensity, risk perception and risk propensity of non-entrepreneurs are .065, .029 and .066. The hypothesis of risk propensity of entrepreneurs and non-entrepreneurs are greater than the value of P (.05). These hypotheses are rejected because the value is greater than .05. The value of risk perception is less than .05. This hypothesis is accepted because the p value is less than .05.

5.0 Conclusion

5.1 Introduction:

The basic purpose of this research was to determine risk assessment ability between entrepreneurs and non-entrepreneurs, with a specific focus on risk perception and risk propensity as two independent variables. The study is conducted among male entrepreneurs and non-entrepreneurs. In the research most of the entrepreneurs and non-entrepreneurs belong to graduation and a few were masters.

5.2 Main Findings:

Through the help of research instrument, it is identified that both the respondents entrepreneurs and non-entrepreneurs did not identified the key risks in minor level due to two specific business discipline namely marketing and personal. Differences in risk assessment strategies used between the two samples were not established due to lack of insufficient data in this regard.

It was also found that participants in both samples were not able to answer the question given in the questionnaire on risk perception efforts as required in the study. It is acknowledged that the wording of the question may have influence this outcome. Only a few participants were able to answer the question with some form of risk propensity.

On the other hand one could now argue that risk assessment will not be required to have a not prominent place with a entrepreneurship curriculum as both entrepreneurs and non-entrepreneurs identify the same risk in any case.

The study also confirmed that entrepreneurs also perceived the entrepreneurial opportunity to be more favorable.

5.3 Future Recommendations:

The risk assessment topic on an individual and level has most significant potential to be studied in future.

Based on this research and the results of the study a few specific research suggestions can be made that could built further research.

·         The influence of other risk assessment variables such as, risk identification, the profitability and survival of the venture could be studied.

·         The large sample could be studied for more accurate results.

·         Similar research could be done on a specific sector.