Behavioral finance FAQ / Glossary (Entrepreneur)
This is a separate page of the E section of the Glossary
Dates of related message(s) in theYear/month, d: developed/ discussed, i: incidental
Behavioral-Finance group (*):
Entrepreneur psychology and behavior, Entrepreneurship
08/11i + see risk tolerant,
behavioral corporate management
What makes entrepreneurs tick?
The psychology of business creation (start up) stays largely in the realm of rules
of thumbs and heuristics.
One reason is that there are many roads to entrepreneurship, therefore it is not
too easy, it might even be reductive and simplistic to believe in clear paradigms...
=> Better leave the question open.
Which does not exclude to study the issue closely, scientifically whenever
The existing approaches come often from practitioners.
They have their operational value (even if they might seem shallow and conventional,
as seen below).
They bring some interesting hints about:
What might make successful entrepreneurs,
But also what behavioral biases, with their damaging or at least non-optimal results,
entrepreneurs should better avoid.
No stereotype about them.
Do not even call them capitalists, managers or whatever!
The main findings are that...
Not too surprisingly, entrepreneurs are a very diverse bunch of people, with very
Two explanations here:
They tend to be independent minds
(a common trait, see below).
Thus they cannot match a unique stereotype.
There are various types of businesses, every one with
To take examples, equipment manufacturing does not need the same skills
than show business.
Entrepreneur's traits should not be too closely confused with manager's traits
(see behavioral corporate management).
Entrepreneurs and managers have a few similarities but also some deeply opposite
They are rarely capitalists themselves either (they often have too little
savings ), but they need to find capital
* Anyway they usually have to put at risk the money they own, if not who
will trust them?
* But they also have to convince investors and lenders that they
will use their money wisely and in their best interest.
Some rather common psychological traits
Straying from the herd to find new pastures.
But does it explain all?
Whatever the differences between entrepreneurs, as seen above, a few similarities
exists in their attitudes and abilities, even if they cannot be generalized.
Many entrepreneurs have been found to be:
1) Active and non conventional
Independent minds, as already stated,
Prone to (practical) innovation more than to status
quo, verging on (creative) rebellion,
Biased towards action , even on the basis of simplified analysis
Curious , eager to understand situations and evolutions,
Able to detect new techniques, hidden opportunities, problems to solve,
needs to fill,
Able to communicate with people that could bring the needed
(scientific, business...) knowledge and...the needed money
In other words, opportunistic and reactive:
able to seize ...luck when it passes by,
and to adapt when the situation needs it.
Obviously more risk / uncertainty tolerant than other
professionals, i.e. managers.
They are abler to take risky decisions under stress.
This has something to do with their dopamine level
as neuroeconomic experiments have shown.
Or at least more confident about themselves (and sometimes
overconfident, as statistics show a very high rate of failure, for new
businesses particularly) and more optimistic about
Although maybe, deep inside themselves, rather insecure.
Let us not get too far into Sigmund-like interpretations, but this feeling might
explain their drive to take initiatives: this insecurity can make them eager to
prove to themselves that they are better than what they feel.
Good at numbers and arithmetic ...obviously.
Perfectionist and persistent, and totally committed, verging
on obsession. Therefore eager to control things,
Able to compete but also to cooperate.
Business creation takes more and more place inside networks in which
many firms bring their specific abilities into the value chain.
Extravert, even sometimes charismatic and manipulative .
Some potential biases or limitations
They think they can do it. Is it enough?
They tend to be overoptimistic, or at least overconfident:
The rate of failures of new businesses in their first years is
Luckily, those business creator attempts are good for the general
economy, as it progresses mainly via successes / errors.
Maybe some behavioral biases and heuristics are necessary traits
for business creation.
Many of them get bored with organization and management "chores".
They usually prefer creative activities.
A more general approach: the psychology of initiative
Is there a good kind of madness?
Initiative cannot be totally rational and emotionless, because it needs often
to go astray from the proven track, the one narrowly considered "rational"
just because it is traditionally followed.
It is true that probabilities are against success for new things...
...but on the other hand, a status quo also cannot prosper eternally!
Initiative supposes a belief that the fundamental uncertainty (see uncertainty)
can be defeated, a Promethean bias.
It needs often some overconfidence, some exaggerated hope (or greed), some
imprudence in activities such as entrepreneurship, scientific research (which
has to be conceived as a permanent rebellion against academic paradigms),
other explorations, and also social and political initiatives.
Now about its results, the dilemma is
how to make the difference between "good madness" and
Initiatives have their dangers, many of them are based on narcissist excess and
pure illusions (see illusion).
Many just fail. Something worse is that some bring chaos.
On the other hand, without the will to start or find something different,
the system would decay and die because of a general status quo bias.
Also, initiatives, even positive ones are not enough for progress.
Not all initiators are good at developing and managing their initiative.
Other kinds of people might be needed for those "chores".
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