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The entrepreneurial decision-making : a complex choice
where taste, risk, endowments, necessity, opportunity,
personals traits and behaviour matter
Jean Bonnet (CREM-CNRS-University of Caen)
Thomas Brau (CREM-CNRS-University of Caen)
Pascal Cussy (CREM-CNRS-University of Caen)
08 jan 2008
Series : Industrial Economics
WP 2008-01
Research Center in Economics and Management
UMR CNRS 6211
University of Caen
University of Rennes 1
Working paper
1
The Entrepreneurial decision-making: a complex choice where
taste, risk, endowments, necessity, opportunity, personals
traits and behaviour matter.
Jean Bonnet,
Assistant professor,
Faculté de Sciences Economiques et de Gestion,
++33-(0)231565423
jean.bonnet@unicaen.fr
Thomas Brau,
PHd’s student
++33-(0)687675499
brau.93003939@etudiant.unicaen.fr
Pascal Cussy,
Assistant professor,
Faculté de Sciences Economiques et de Gestion,
++33-(0)231565426
pascal.cussy@unicaen.fr
UFR de Sciences Economiques et de Gestion,
CREM-CAEN, UMR CNRS 6211,
Université de Caen, esplanade de la Paix,
14032 Caen cedex,
France
In economic theory, decision-making is supposed to result from an optimization
calculation that any economic agent performs under the essential hypotheses of rationality. It
means that agents seek to maximize their utility function (if households) or to maximize their
profit (if businesses) using efficiently the available resources to achieve these objectives
within the constraints they face (budget constraint for households, costs constraints for
businesses1). There is therefore no waste of resources. Tastes and preferences are the first
elements of choice in economics. In daily life it enables us to understand the specialization of
some economies since in their research of the maximal satisfaction consumers adapt their
budget to their hierarchy of taste. For instance the history and culture of French emphasis on
the quality of life have developed a taste for "eating well" and "good drinking" in the French
population. French consumers then have a share of spending on food which remains higher
than the American (also due to the fact that the level of life is higher in the US). Nevertheless
the smaller share of the American is more devoted to eating out (Jany-Catrice, 2004)2 and
includes mainly franchisees restaurants. Because of the French culinary tradition, one finds,
however, that the catering branch of activity in France is more than in the US the result of
1 For each possible level of production, the company will seek the optimal amount of each factor to be used, that
is to say the quantities that can minimize the total cost.
2 About 50% of total spending on food against 28% in the case of France in 1997.
2
individual independent small entrepreneurs. However, the choice of becoming an
entrepreneur in the catering sector is not such a simple choice. We can identify the steps
which will constitute an illustration of decision-making in economics. One must have a taste
for this job compared to salaried jobs. For example, one needs to accept to manage a team. It
is also necessary to identify for which kind of restaurants and in which area opportunities for
profit for this type of activity exist. This is a problem of information (identification of needs,
unmet demand), which requires according to Kirzner (1973) a particular key ability,
alertness… Becoming an entrepreneur also requires committing individual resources like
specific managerial abilities (Lucas, 1978) or financial resources. Each individual is not
similarly endowed with these resources which could explain that some are prevented from the
entrepreneurial venture. Entrepreneurial decision-making always involves individuals and
their resources in a risky process, since one anticipates on the basis of current information the
future development of the activity while a large number of uncertainties can intervene
(economic conjuncture, attractiveness of the restaurant etc…). Then the choice to be an
entrepreneur also depends on the risk attitude of the individual. Moreover the optimizing
calculation refers to complex methods that only few people are able to carry out (Simon,
1950). Profit opportunities are thus partly built by entrepreneurs according to their
perceptions. For example it is often argued that entrepreneurs show an excessive confidence
in the success of their businesses due to patterns of simplified decision-making. In this way
non-economic factors such as personal characteristics of the new entrepreneur have an
influence both on the propensity and the success of the new firm. The "need of achievement"
and the "locus of control" are the psychological characteristics that resulted in a large number
of studies in the population of managers or entrepreneurs (Hansemark, 2003). Because setting
up a firm is also creating his own job, one can argue that the decision to set up a new firm can
be viewed as a self employment choice. In such a case, it is necessary to link entrepreneurship
with some individual characteristics (such as human capital level or psychological traits) but
also with some characteristics on the labor market (nature of rigidities, level of
unemployment) and more globally on the structure of rewards of the economy (Baumol,
1990). Overall it appears that the choice to become an entrepreneur is complex and takes into
account tastes of individuals, imperfect information on both opportunities for profit but also
on the skills of individuals, different access to a certain initial resources, risk‟ attitudes,
patterns of simplified decision-making, change in the situation of individuals and search for
personal achievement.
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1) The standard model of choice (choice in a model of competition
with perfect information and without uncertainty)
The entrepreneurial choice in a competitive economy without uncertainty and with
perfect information may be interpreted as any economic choice, for example a consumer
choice. In the standard model each individual is supposed to express coherent choices and so
to rank all the considered baskets of goods. His preferences are then represented by a utility
function that depends on the quantity of each consumed good and that expresses the ranking
by the consumer of different options. The rational consumer chooses, among all the baskets
that he is able to buy taking into account his budget constraint, his preferred basket of foods,
the one that maximizes his utility. A set of properties about demand of goods may then be
deduced from this analysis.
This reasoning can be applied in the entrepreneurial choice without uncertainty.
Suppose that in society there are only two job‟s situations, being employed or being an
entrepreneur and that these situations can be distinguished by four characteristics
(management, accountability, independence, sociability etc…). The job of the entrepreneur is
characterized by high levels of management, accountability, independence and sociability and
vice versa for the employee. In this case, the agents must make a discrete choice between both
options depending on their preferences i.e. how they value characteristics of each of these
options. If the occupational choice (being self-employed or employee) was along a
continuum, then individuals would have to reason at the margin. An optimal decision would
be such as a small variation would not add anything more. Typically each status presents an
opportunity cost which depends on the preferences of agents i.e. how they value each of these
attributes. A person who values the four characteristics of the entrepreneur prefers the
situation of the entrepreneur because he will get more utility from the entrepreneur status than
from the employee status. In this case, the choice is easily done but it is nevertheless
extraordinary that such situations arise because there are actually many more features that in
our simplified example. One can imagine people who dislike the task of management, but
who appreciate the sense of responsibility and independence. Some will choose to become
entrepreneurs because, consistent with their preferences, the cost for them (to bear the
management‟s responsibilities) is less than the benefits they obtain from responsibility and
independence. Another way to express it is to say that the opportunity cost of giving up
independence and responsibility is greater than the benefit of employee status that does not
have to bear the responsibilities of management. Other people with different tastes will prefer
the opposite employee status. For them the benefits of non-management will more than offset
the disadvantages of the loss of independence and responsibility.
It is necessary to signal that among different type of firms, it is possible to choose
between different baskets of characteristics.
For example, being a franchisee gives to the entrepreneur the possibility to relax the
characteristics of independence and responsibility. To have a partner in the firm is also a way
to share out responsibility.
4
Being on piecework relaxes the characteristic of sociability and accounting; some
individuals like independence but dislike the relationships with the clients and also some
accounting work.
Evans and Leighton (1989) show that individuals that prefer autonomy are more likely
to become self-employed. Lazear (2005) shows that students that will become entrepreneurs
have chosen to acquire a diversity of skills in their education program because it is the
minimum level of the required skills that determines the earnings of the entrepreneur. For
instance Lazear (2005) shows that the creation of a restaurant requires mobilization of
numerous different skills; the entrepreneur must certainly do good cooking, but also must
have taste for decoration, must like to welcome guests, must be able to keep accounts … At
least if the entrepreneur cannot perform all these skills he needs to know to hire the right
people in the labor market.
Yet the choice of setting-up a firm does not come down to the choice of the
characteristics of a certain status, but also deals with having a project and achieving it in a
complex and risky world where information is not perfect. One of the first problems is to
identify a project that is to say, to seize market opportunities.
5
2) The entrepreneur and the market: foremost a problem of
information and adjustment
Schumpeter in his seminal work (1911) has noted the predominant role of the
innovative entrepreneur that drives the growth and that breaks the economic circuit otherwise
indefinitely reproducible. For that purpose bank loans are necessary to divert intermediate and
investment goods in order to realize the innovation (at the end added value by innovation
overcome prices‟ increase due to bank loans). Yet the role of the entrepreneur is so linked
with growth that he appears to be more driven by personal traits (cf. below) and that all the
explanation is embedded in the innovation characteristic without any more explanation about
the functioning of the market. A great deal of debates around market equilibrium and planned
versus market functioning of economies arose in the twenties/thirties (Mises/Lange).
According to the market hypothesis of pure and perfect competition, which constitutes the
general framework of analysis in economics, all information is available at no cost nor any
delay for every firm or consumer so that:
“For a society, then, we can speak of a state of equilibrium at a point of time-but it
means only that the different plans which the individuals composing it have made for action
in time are mutually compatible”.
(Hayek, [1937],1948, p.41).
But the view of the market is obviously more complex. According to Hayek's notable
works on the role of information and the discovery process in the market (1937, 1945, 1948,
1968), the market is a process in perpetual adjustment where the building of the needs,
preferences and production plans are themselves inseparable from interaction, demonstration
and learning‟s effects (Heertje, 1979).
For example businesses adjust over time the features of their products according to the
information that they can get on the satisfaction of their customers (restaurants and cafes fill
their slack periods thanks to happy hours, usually they renew their menu in order to adapt
themselves to fashion and also to stimulate a new interest among their clients). The
entrepreneur has therefore an important place, but his role does not predominate over the
customer‟s one.
Kirzner (1979, 1985) retains the ability of alertness for defining the entrepreneurial
function. It is the ability to perceive opportunities for profit for new needs or to offer products
best suited to the tastes of consumers3. These opportunities are seized by entrepreneurs
because:
“If one has become sufficiently alerted to the existence of an opportunity –that is, one
has become sufficiently convinced regarding the facts of a situation- it becomes virtually
impossible to imagine not taking advantage of the opportunity so discovered”
(Kirzner, [1985], p.22).
The alertness acts thus positively on the coordination of plans of supply and demand in
the market.
3 It can also be the implementation of new more efficient production techniques.
6
“In the course of this entrepreneurial process, new products may be introduced, new
qualities of existing products may be developed, new methods of production may be ventured,
new forms of industrial organization, financing, marketing or tackling risk may be
developed”.
(Kirzner, [1985], p.30).
As a result the entrepreneur generates knowledge shared by economics agents and
therefore reduces their ignorance. Entrepreneurial profit is a pure profit that is not to be
related to the use of any factor of production whatsoever. It follows a simultaneous decision
to buy and sell in the wake of discoveries of price differences advantageous whose existence
is based on the ignorance of agents about accurate supply and demand. According to Kirzner,
discovering profit opportunities hitherto ignored by economic agents would therefore require
no specific investment.
This is an extreme position on the entrepreneurial function theorization which will be
taken over by Casson (1982) in a more applied way. Individuals differ not only in their tastes,
but also in access to information for various reasons related to their characteristics (social
environment, education, occupation, etc…). The entrepreneur believes that the totality of the
information available to him is unique; then he builds his decision alone and expects a profit
by taking positions vis-à-vis others. It is only because he is the only one to start the project
that he can expect a profit. His dilemma is to convince finance providers that he is right while
revealing partial information because the others are also potential competitors and thus profits
reducers‟.
Recent researches (Fairlie, Robb, 2006) show that the capture of market opportunities
is not independent of a kind of « entrepreneurial human capital ». This latter, linked to
relatives‟ environment may explain a larger propensity of entrepreneurship in families of
business owners. Yet successful entrepreneurship is nevertheless insured only if these new
entrepreneurs have acquired a management experience in the enterprise of their parents. This
management‟s experience allows them probably to move easily in a risky environment.
This leads us to consider the initial endowments that an entrepreneur must have, the
managerial and financial endowments he must have if he wants to launch a project with great
chances of success.
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3) Entrepreneurial abilities and resources access
Decision-making in economics commits resources in order to achieve a single goal
(maximizing the usefulness of the consumer, profit maximization of the company). In some
cases the non-availability of certain resources even prevents the project from happening. The
firm has theoretically no entrepreneur, as it makes choices among alternative values for a
small number of well-defined variables: price, production, advertising expenses ... according
to repetitive codified mathematical processes of maximization. Nevertheless Baumol (1968)
noted that there is room for clever ruses, ingenious schemes, brilliant innovations, charisma
that differentiate the entrepreneurs...
There is therefore some skills to entrepreneurs. In this regard Lucas (1978) challenges
the standard theory for which the U-shape of the curve production costs determines both the
size, the number of companies and entry and exit of the firms on the market4. It is more
appropriate to postulate that there are individuals with various managerial capacities and that
the distribution of managerial capacity is explanatory of the various sizes of companies. A
few individuals have then a high level of managerial leadership that allows them to launch
and conduct large companies (recent examples: Bill Gates and Microsoft, Richard Branson
and Virgin…). With the development, many small individual entrepreneurs will find most
interesting to take a job in an existing business than to engage them in an entrepreneurial
venture. As real wages have increased, a number of low endowed managerial abilities
entrepreneurs will prefer to work as employees. The fact remains that this relationship is not
linear, as we find that the development of the economy of innovation has created new
opportunities for enhancing entrepreneurship (Audretsch, 2006). That's what demonstrates the
high level of entrepreneurial activity observed on the North American continent.
Some authors put forward access to financial capital as a prerequisite for any
entrepreneurial commitment. A set of theoretical articles show that new entrepreneurs are
financially constrained (Jaffee and Russell (1976), Stiglitz and Weiss (1981)). The empirical
results do not, however, lead to a clear conclusion.
For instance, Evans and Jovanovic (1989), Evans and Leighton (1989), Holtz-Eakin,
Joulfaian and Rosen (1994) show that start-ups suffer from capital gap: they show a positive
relationship between individuals‟ wealth and their probability to become self-employed.
Nevertheless financial capital could be correlated with unobservable factors such as
managerial skills, or more generally human capital of the entrepreneur. Hence the
introduction in some work (Lindh and Ohlsson (1996), Blanchflower and Oswald (1998)) of
exogenous events such as inheritances, gifts, income from the lottery confirms the positive
influence of wealth on the entrepreneurial commitment. Financial constraints would exist and
would tend to exclude those who have insufficient funds.
According to Parker (2004) this leads to the endogeinity problem:
“Whereby the self-employed are wealthy because of previous success in self-
employment”.
4 The motivations of his work is based on the fact that companies are often multi-products and that external
growth strategies are complex and not only axed on the pursuit of the optimum size.
8
S.C. Parker shed a light on several alternative explanations also consistent with the
previous results on financial constraints.
Berger and Udell (1992) adopt an intermediate position: they argue that while the
macro effects of credit rationing may be small, there is evidence to suggest that when credit is
rationed to some firms it may be more readily available to others.
In French survey Sine (information system on new firms) we have found that a
majority of new firms is not facing credit rationing, but also that a non-negligible share is
“self-constrained” (Bonnet, Cieply, Dejardin, 2005). Yet the study refers to entrepreneurial
projects that are concretized in new firms. General entrepreneurial intentions in the French
population that are aborted due to financial constraints are not reported.
We confirm on the French case the result given by Cressy (1996) concerning British
new firms:
“We conclude that firms self-select for finance (rather than being selected by the
banks), those with greater human capital being more likely to take up the bank’s offer. Thus,
there is no credit rationing of startups”
(Cressy, 1996, 1254).
In a recent research (Hurst and Luzardi, 2004) show in the USA that there is no
relationship between wealth and entrepreneurship for much of the distribution of wealth. The
rate of entry is almost constant between the 1st and 9th decile and significantly increases for
individuals only at the 95th percentile or below the 5th percentile because of a low
opportunity cost.
Of course these results, especially the French results, shed a light on the lack of
entrepreneurship spirit and opportunities (see below) that have more to do with the
functioning of a “wage society” than with the availability of financing. Specifically this
accounts for the low development of venture capital in France5.
The choice to become an entrepreneur can also be analyzed as an arbitrage between a
wage occupation and a risky firm‟s project. The project is risky because the future earnings
that can be negative or positive are not known in advance.
5 However we can notice than in the third world the financial constraints are often binding. For instance it has
been noticed that it is often too risky in these countries to change ones‟ way of life. One cannot transfer the
minimum financial provision in order to engage in a production detour. This effect is counterbalanced thanks to
microfinance and small business lending which allow people to get into entrepreneurship.
9
4) Entrepreneurship: decision-making in uncertainty
Indeed, the economy is continually affected by shocks that play a role on the
enterprise‟s performance. For example our individual that opens his restaurant engages his
personal assets in the goal to obtain in the future a profit that is uncertain and depends on
different probabilities on the states of the world (economic conjuncture, attractiveness of the
restaurant, new law about the VAT, new rules about smoking/no smoking areas etc…).
F. Knight (1921) is considered one of the first to justify the existence of the firm by
uncertainty. It distinguishes the risk that is measurable from the uncertainty that is not
measurable by probabilities. The entrepreneur is then the one who endorses this uncertainty,
makes decisions (hierarchical position) and control (he assumes the role of responsibility in
particular in giving a fixed return to the factors of production). The entrepreneur earns profit
as a counterpart of his management of uncertainty. Yet according to Knight the risk is not the
source of profit because the firm can avoid it by an insurance mechanism. It represents only a
cost. Nowadays the choice entrepreneur/wage earner is often analyzed in the frame of the
standard analysis of choice in uncertainty. This analysis considers the preferences of
individuals represented by a function of expected utility, known as the Von-Neumann and
Morgenstern function (1944), based on objectives probabilities. L. Savage (1954) also showed
that under a number of assumptions, preferences can be represented by a function of expected
utility based on subjective probabilities. As a result, the distinction between risk and
uncertainty then presents little interest.
Khilstrom and Laffont (1979) apply this analysis to the choice of individuals between
working as an employee in a competitive job market or becoming an entrepreneur. The
second choice is viewed as more risky. While an employee may lose his job, his salary is at
least partly independent of the results of the firm in which he is working.
The gain of entrepreneurship can be measured by the certain equivalent income that
the individuals assigned to this activity. This is the monetary valuation of possible future
gains. It depends on their risk‟s attitude and decreases when individuals show risk aversion. It
is sufficient then to compare this equivalent to the salary that some people perceive to
understand their decision assuming that wage is perceived without uncertainty. The authors
show that, at the equilibrium, the individuals demonstrating the greatest risk aversion become
employed while those who are less averse become entrepreneurs. In addition, among the
entrepreneurs, those who have the least amount of risk aversion lead larger companies6.
Stewart and Roth (2001) in a meta-analysis show that entrepreneurs have a greater
level of risk-propensity. Yet this result is challenge by Miner and Raju (2004) that claim that
the result is not so clear because some relevant studies have not been taken into account.
Moreover these last authors think that it is necessary to control for some variables as
6 Some also define the risk premium of entrepreneurship (entrepreneurship premium). This is the difference
between the evaluation of future profits (certain equivalent) by a given individual and an individual neutral with
respect to the risk.
10
Brockhaus (1987) in a previous study has already recognized like gender, cultural
background, stage of business development and type of business owned.
Liles (1974) has identified four main negative occurrences of risk-taking in case of
failure. The financial difficulties that could lead to a significant reduction in living standards,
the psychological well-being of the person who committed himself to the creation, the
professional career which can be compromised and the familial risk that could also exist if the
firm survives because being an entrepreneur requires investing a lot of time.
It was also observed that in most cases a greater propensity for risk (for entrepreneurs)
is tempered by a deep judgment that prevents them from taking extreme risks (Mueller,
Thomas, 2001).
The representation of the behavior of individuals with an expected utility function is
nevertheless contested, partly as a result of the complexity of the environment in which
decisions must be taken or because experience shows that individuals do not always act
rationally but by relying on their intuition.
11
5) The limit of rationality in the decision-making
The complexity refers to situations in which the decision-maker is not sure what the
probability distribution of a future event will be because of too complex interactions. In fact
the decision is often taken with the help of simplified mechanisms (with deformation of
probabilities by the agents). Herbert Simon (1955, 1956) highlighted the bounded rationality
of decision makers who are limited in both knowledge and the capacity to calculate. The
implementation of means to achieve the ends and its consequences are poorly known.
Compared to the optimal decision, alternatives choices are found. The opportunities for profit
are partly built by entrepreneurs based on their perceptions (mental constructs in a repetitive
non optimizing cognitive process). Entrepreneurs have a strong tendency to consider the
opportunity as unique and that the situation decision could not be replicated.
They resort to heuristics simplifying assumptions (Kahneman, 2003) and are subject to
bias decision because:
“People rely on a limited number of heuristics principles which reduce the complex
tasks of assessing probabilities and predicting values to simpler judgmental operations”
(Tversky and Kahneman, [1974], p.1124).
For instance two individuals will attribute a different success‟s probability to a typical
restaurant (restaurant with Cuban food and Cuban musical entertainment) according to their
perception of the reality. One of them will attribute a higher probability than another one
because such an establishment is opened and works close to his home. His estimation does not
rely on a rational calculus but more on a subjective perception.
Kahneman and Tversky have also shown that economic agents do not have a constant
behavior with regard to risk. More precisely, a same individual manifests less risk-aversion
when he has to choose between losses than when he has to choose between gains (reflection
effect). This lower risk-aversion in the field of losses may then conduct some long term
unemployed people to entrepreneurship (self-employment). In effect unemployment that lasts
may be analyzed as a situation of a certain loss of wealth and then decreases the degree of
risk-aversion of individuals.
Moreover in the standard analysis, the entrepreneur is considered as a passive game
player that considers the success or failure‟s probabilities as exogenous. Yet the entrepreneur
plays a more important role. The essential difference is that the game player cannot exercise
any control on the gain while the entrepreneur may influence by his acts the becoming of his
decision. According to Byers, Kist, and Sutton (1998) the entrepreneurs often estimate that
their decisions are based on facts and that their returns rely more on their perspicacity and
their judgment than on their luck. They have a tendency to overestimate the influence of their
competences. Then another bias that is documented in some studies is the entrepreneurial
overconfidence (the fact that in participating himself to the action the entrepreneur
overestimate his chance of success).
According to Cooper, Dunkelberg and Woo (1988), 68% of the entrepreneurs estimate
their own probabilities of success to be more important than for similar enterprises directed by
others. 33% of them think even that their probability of success is of 100%. For De Meza and
12
Southey (1996), the population of new entrepreneurs has a tendency to overestimate the
occurrence of future favorable events. Then the entrepreneurial overconfidence intervenes in
the level of indebtedness if the wealth of the entrepreneur is insufficient to cover the initial
investment project. Camerer and Lovallo (1999) have built an experiment where subjects have
choice to entry on the market. In the case of subjects that self select themselves (the returns of
their risky decisions depend on their competencies) they have observed more entrants on the
market. Self-selection reinforces overconfidence because participants think they can beat the
bets. This optimism behavior tends to persist even in case of bad results (Ross and Anderson,
1982), because individuals show some difficulties in accepting they have made errors.
Carrillo and Mariotti (2000) show that this behavior leads to a preference for ignorance. At
best the revision process of the probabilities is incomplete according to Bénabou and Tirole
(2002).
This capability to shoulder the true uncertainty needs a high degree of self-confidence,
the belief in his effective power of control, in his good fortune that rely on some personality
traits.
13
6) The inclusion of non-economic factors: the example of the
entrepreneur personality
The classic utility function does not include a number of psychological characteristics
or personal enjoyment that drives the economic agent in his decision-making. The importance
of psychological variables has been for a long time sustained by numerous research works
(McClelland, 1961, Shapero, 1975, Koh, 1996).
Among psychological variables the locus of control (Mueller and Thomas, 2000) and
the need of achievement (Johnson 1990) are key variables.
The locus of control (Rotter 1971) reflects the disposition to act for an individual, that
is to say the degree with which he thinks that he can have an influence on his environment.
Some individuals are then said external because they are inclined to think that the awards they
received in their life are outside their own control and they rely on luck, on the benevolence
of a mentor, or the control of a powerful person. Others think that they can modify for good or
bad the course of these events. This latter psychological characteristic, qualified as internal
locus of control, has been found in the entrepreneurial involvement and in the opportunity to
exploit some effective abilities of leadership (Shapero 1975). It expresses one thing we often
find in the surveys on the motives to set up or to take over a new firm as the notion of
« willingness to control his destiny ». Praag, Sluis and Witteloostuijn, 2004 have then
demonstrated that a positive link exists between this characteristic and the earnings of two
populations (employees and entrepreneurs) of the National Longitudinal Survey of Youth
(NLSY). They find that the coefficient is stronger for entrepreneurs (in comparison with
salaried people).
Mac Clelland (1961) has resumed the concept of Achievement Motivation defined in
Murray (1938) in his personality system. Along this latter a need is “strength in the spirit
region which organizes the perception, the intellectual activity and the action”; the specific
need of achievement is then defined as the accomplishment of something difficult in fields as
large as to manage, operate or organize the physical objects but also human behaviors and
ideas. An individual responding to a need of achievement motive is going to try to achieve his
goal as quickly and independently as possible. He is going to try to excel in the clearing of
obstacles and especially he is going to try to go into competition with other individuals to try
to outdo them and this with the goal to increase his satisfaction in the setting up of his
successful talent, the entrepreneur field is then a field of excellence of the exercise of the need
of achievement. Collins, Hanges and Locke (2004) in the frame of a meta-analysis show the
link between the Need of Achievement and the choice to follow an entrepreneurial orientation
but also the level of performance of the entrepreneur.
Lee and Tsang (2001) have then demonstrated that a positive link exists between the
need of achievement and the venture growth. Like the need of achievement, the internal locus
of control shows the same result for larger firms of their sample.
These traits of personal characteristics and also moral attitudes have been historically
recognized by the greatest economists as being favourable to entrepreneurial decision-making
14
and success of the new company. Van Praag (2006) provides an admirable summary of the
findings from which we are indebted in the following paragraph.
To Say (1803) a successful entrepreneur must demonstrate prudence, probity and
regularity. Marshall (1890) defines general ability for a successful entrepreneur as:
"To be able to bear in mind many things at a time, to have everything ready when wanted, to
act promptly and show resource when anything goes wrong, to accommodate oneself quickly
to changes, to be steady and trustworthy, to have always a reserve of force... " (Marshall
[1890] 1930, p. 206-207).
According to Schumpeter, the entrepreneur should not feel reluctant to do something
new (Van Praag, 2006).
“This mental freedom ...is something peculiar and by nature rare” (Schumpeter [1911] 1939,
p. 86). The entrepreneur should “be strong enough to swim against the tide of the society in
which he is living” (Heertje, 1982, p. 86). He must have leadership skills, a special interest in
creativity “the joy of creation”, “a taste for the competition”, the will to win “and wants to
achieve a certain social distinction”.
For Knight (1921) the ability to deal with uncertainty requires a high degree of self-
confidence, a disposition to act on one‟s own opinion and belief in his good fortune. Kirzner
(1973) puts forward the concept of alertness which is the only character trait that the
entrepreneur needs.
“The kind of knowledge required for entrepreneurship is knowing where to look for
knowledge. ... The word, which captures most closely this kind of “knowledge”, seems to be
alertness”.
Baumol (1968) thinks it is not possible to integrate all these qualities in a formalized
theory. It may, however be possible to examine what can be done to encourage this activity
which is essential for economic development, (Leibenstein, 1968). And to do that requires
putting more interest in the pay off of the activity of entrepreneurs ... ie looking for
occupational choices.
7) Entrepreneurial decision-making: also a decision to create his
own job
The decision to become an entrepreneur is to a large extent a microeconomic decision
about the proper allocation of one‟s human capital, balancing an opportunity cost of
entrepreneurship with a reward expectation (monetary, symbolic, social reward, psychological
reward). According to Moskowitz and Vissing-Jorgensen (2002), the returns of the financial
initial investment of the entrepreneur are not higher than the one he would obtain on the
financial markets while the risk (due to the non-diversification) is important:
“About 75 percent of all private equity is owned by households for whom it constitutes
at least half of their total net worth. Furthermore, households with entrepreneurial equity
invest on average more than 70 percent of their private holdings in a single private company
in which they have an active management interest”
(Moskowitz and Vissing-Jorgensen, 2002, p.745)
15
The decision to start a business is most of the time associated with a decision to
become self-employed. Two main individual motives drive the decision to set up a firm:
- A constrained motive (or push motive): new entrepreneurs are motivated by a low
opportunity cost of entrepreneurship. This may be due to an individual situation of failure in
the labor market (unemployment or employed with a bad match) or to perceived
dissatisfactions in a salaried position (insufficient independence, not satisfying his need of
achievement, partial control of his own fate)7.
- An opportunity motive (or pull motive): new entrepreneurs are positively drawn to
entrepreneurship. It corresponds to a strategy for an individual to obtain better rewards on his
human capital, which may be undervalued by the labor market due to information
asymmetries or work incentive considerations8. It can also result from the individual
capability to perceive and to seize market opportunities, to transform an idea in an innovative
project.
Both reasons are not independent. An economy that creates a lack of jobs (low growth
rate) and that suffers from the malfunctioning of the labor market - for example a high
average duration of unemployment - strengthens entrepreneurship for reasons rather negative
and especially discourage entrepreneurial venture for positive reasons. In France the share of
unemployed new entrepreneurs is high because the propensity to set up a firm when employed
or being a student is low.
At the European level, Wennekers (2006) shows that there is a negative relationship
between the unemployment rate and the propensity to set-up a firm. This result confirms the
fact that labor market considerations have an influence on the total entrepreneurial activity.
Many macroeconomic and institutional causes can explain the differences in
entrepreneurial intensity between countries and areas. They include the economic growth, the
rate of unemployment, the development and the operation of the financial system, the
intensity of the administrative barriers, specificities of the labor market, legal consequences of
the failure of the firm, the entrepreneurship‟s spirit and the collective perception of the failure
of the firm … This set of causes refer to what William J. Baumol names in a notable 1990
article9 the rules of the game - i.e. the structure of reward in the economy-. He notes that
certain societies historically favored rather unfavorable structures of reward to the
development of entrepreneurship. These structures divert the national or local elites from the
exercise of the entrepreneurial function and prove indirectly harmful to the diffusion of
technical progress (ancient Rome with the valorization of the political office, medieval China
with the mandarin system…). Over the recent period, they enable us to understand the
“unhooking” of certain European countries in reference to the difference which exists
between an entrepreneurial society which develop the private initiative and a wage society
7 Professional dissatisfaction of the entrepreneur in respect of the jobs held prior to the establishment of his
company are wider than simple wage claims. They cover such considerations as more autonomy (Cromie, 1987)
problems with co-workers or the hierarchy (Brockhaus, 1980, Greenbank, 2006), career prospects (Dyer 1994).
8 This imperfect valuation of human capital in the labor market can result from an insufficient functioning of the
internal labour market in the enterprise for different reasons (small size of firms, imperfect observability of the
individual productivity, or firm‟s strategy to restrict the scope of wages in the goal of preserving the social
cohesion).
9 Baumol William J., 1990, « Entrepreneurship, Productive, Unproductive and Destructive», Journal of Political
Economy, Vol. 98, October, pp. 893-921.
16
which increases the opportunity cost to undertake. In an entrepreneurial society, being a wage
earner does not give the insurance of a stable situation because of the greatest latitude for the
employers to lay off. On the other hand the flexibility of the labor market can more easily
encourage the individuals to undertake insofar as this action constitutes a positive signal for
the future employers even if the company fails.
Conclusion
The entrepreneurial commitment can be considered as decision-making by excellence
in economics. Indeed, it implies uncertainty and risk-taking because the entrepreneur is fully
responsible for the development of the new company, and in general he has committed a
significant part of his personal savings to the firm. Also from a microeconomic point of view,
entrepreneurial involvement is complex. It refers to the desire of a better recognition
(valuation of his human capital) but also to some personal aspirations to address professional
dissatisfaction or in search of better met some characteristics of the work of entrepreneur.
From a macroeconomic point of view, labor market rigidities combined with
institutional inefficiencies may lead in some European countries to a strong entrepreneurship
for depreciation or opportunity costs motives (push motives) but globally to a weak
propensity of setting-up a firm for innovative motives –valuation of a new idea- (pull
motives). Too strong a rigidity of the labor market and the stigmatization of the
entrepreneurial failure discourage a certain number of qualified and experienced employees to
value their human capital in the entrepreneurial option. In most European countries, the
unemployed population is very much overrepresented in the population of new entrepreneurs.
Some cultural aspects may also be put forward. For example Hostede (2001) notices
that uncertainty-avoidance is not equally distributed among the cultures. It is in countries
where the uncertainty-avoidance is higher that we find the lower levels of self-employment.
In these countries individuals like to follow rules and procedures, have a taste for the
administrated organization. A recent study from Noorderhaven, Thurik, Wennekers and Stel
(2004) show that the level of self-employment in 15 European countries is partly explained by
dissatisfactions with life and the way democracy works. These two dissatisfactions according
to the authors are close to professional dissatisfaction.
The insufficient pull motives for entrepreneurship in Europe refer to what Audretsch
calls the European paradox (Audretsch, 2007). The lack of entrepreneurship capital in
Europe leads to a high level of knowledge investments for a poor result in terms of growth
and reduction of unemployment.
“Barriers to entrepreneurship can impede knowledge spillover entrepreneurship. Such
barriers range from legal restrictions and impediments to the existence and availability of
early stage finance, or to social and institutional tradition discouraging entrepreneurship and
a stigma associated with failed attempts as entrepreneurship. The capacity of an economy to
generate entrepreneurial behaviour is shaped by the extent of its underlying entrepreneurship
capital”,
(Audretsch, 2007, p.69)
17
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