Risk Perception in Entreprenours and its Solution

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).