Heurists and Biases with Habitual Entrepreneurs

Table of Contents

1 Introduction
1.1 Problem Statement, Research Objective and Motivation
1.2 Structure of the thesis

2 Literature Review Habitual and First-Time Entrepreneurs
2.1 Definitions of first-time, habitual, serial and portfolio entrepreneurship
2.1.1 Historical Classifications
2.1.2 Modern Classifications
2.2 The Habitual Entrepreneur Definition Ex-ante and Ex-post
2.3 Differences between First-time and Habitual Entrepreneurs

3 Literature Review Heuristics and Biases with Entrepreneuers
3.1 Introduction
3.2 Positions in Heuristics and Biases Research
3.2.1 The Heuristics and Biases Program
3.2.2 Fast and Frugal Heuristics
3.2.3 The Adaptive Decision Making Framework
3.3 Heuristics and Biases relevant for Entrepreneurs
3.3.1 Introduction
3.3.2 Reference-Dependent Behaviors
3.3.3 Biases in Probability Perception
3.3.4 Biases in Self-Perception
3.3.5 Other Heuristics and Biases associated with Entrepreneurs
3.3.6 Conclusion

4 The use of Heuristics and Biases by Habitual Entrepreneurs
4.1 Introduction
4.2 Habitual Entrepreneurs and the Status-Quo Bias
4.3 Habitual Entrepreneurs and the Representativeness Heuristic
4.4 Habitual Entrepreneurs and Overconfidence
4.5 Conclusion

5 Synopsis
5.1 Summary
5.2 Limitations and Future Research
5.3 General Discussion

References

1. Introduction

“When making a decision of minor importance, I have always found it advantageous to consider all the pros and cons. In vital matters, however, such as the choice of a mate or a profession, the decision should come from the unconscious, from somewhere within ourselves. In the important decisions of personal life, we should be governed, I think, by the deep inner needs of our nature.” Sigmund Freud (1856 – 1939)

1.1 Problem Statement, Research Objective and Motivation

For almost a century the dominant idea of man in economics has been the perfectly rational utility maximizer, subsumed Homo oeconomicus. In the late 1960s and 70s Amos Tversky and Daniel Kahneman conducted a serial of experiments whose results showed that individuals make judgements that systematically violate objective norms of rationality. The findings by Tversky and Kahneman confirmed, what has been theorised before by Herbert Simon (1955), that humans are boundedly or rather approximately rational. The work of these scholars has been a major impetus for the subsequent change in idea of man across various disciplines, including economics. Kahneman and Tversky (1974) identified several broad simplifying strategies, termed heuristics that have the great advantage of speed and adaptivity in decision making, though being less accurate than objective norms of rationality. Moreover, their use often results in cognitive biases, that may lead to systematic errors in judgement. Such an entry of non-rationality into human decision behavior has lead to a more realistic assessment of how decisions are actually made by individuals taking bounded rationality and uncertainty of the environment into account.

The entrepreneurial field is an environment in which these factors are particularly prevalent, and individuals especially unprotected against. This may manifest in a higher susceptibility to heuristics and biases than by other subpopulations. Studies on decision making have shown that entrepreneurs often do use approximate strategies. Experimental results show both a higher susceptibility to some biases than other individuals (Parlich, Bagby 1995; Busenitz, Barney 1997) and a lower susceptibility to other biases (Schade, Burmeister 2007). These findings allow for the assumption of a situation or domain-specific susceptibility to certain biases. However, entrepreneurs are known to be a quite heterogeneous group (Gartner, 1988), raising the question whether a type-specific proneness to certain heuristics and biases exists. To find out if this is the case it needs to be examined to what extent and why susceptibilities to certain heuristics and biases may differ between entrepreneurial types. Behavioral decision theory includes non-rational factors like experience in the set of factors that shape actual decision making behavior. Therefore it is likely that experience affects the subsequent use of heuristics and biases, which are used for entrepreneurial decision making. MacMillan (1986) introduced a typology that distinguishes between entrepreneurs, depending on their prior venture ownership experience. Founders without any previous start-up experience are termed first-time and founders who dispose of such are called habitual entrepreneurs. I am interested in if and if yes, to what extent prior start-up experience influences the use of heuristics and biases by entrepreneurs. Therefore the specific purpose of this study is to investigate differences in the use of heuristics and biases by habitual compared to first-time entrepreneurs. To my knowledge there is not any study existing, that deals specifically with this research question.

1.2 Structure of the thesis

My contribution can be summarized as follows: Building on a critical discussion of the definitions and classifications of habitual entrepreneurship, factors will be identified that may explain differences between habitual and first-time entre-preneurs (ch. 2). These are experience, network, motivation and traits, affect and performance. After a comprehensive literature overview of heuristics and biases, their relevance for entrepreneurs shall be examined and emphasized. Of particular relevance to repeat decision making, constitutive for habitual entrepreneurs, are found the status-quo bias, the representativeness heuristic and overconfidence (ch.3). Further, the findings from chapter 2 and 3 are merged in chapter 4. Hypotheses are derived for the susceptibility of habitual entrepreneurs to the heuristics and biases mentioned before. Results indicate that habitual entre-preneurs are more susceptible to the status-quo bias and representativeness heuristic, and less prone to overconfidence than first-time entrepreneurs. Chapter 5 gives a summary and general discussion of the major findings of this work.

2 Literature Review Habitual and First-Time Entrepreneurs

2.1 Definitions of first-time, habitual, serial and portfolio entrepreneurship

Since Richard Cantillon (1732/1755) established the notion of the entrepreneur as a risk-taking arbitrageur, academic research could not conclusively agree upon, neither the constituents of the ‘archetypical entrepreneur’ nor the desideratum between entrepreneur and non-entrepreneur. Manifold endeavors^[1] were undertaken to fill this definitory gap and to date researchers are exerting effort to obtain a comprehensive understanding of what comprises the entrepreneurial function, to consequently create “a conceptual framework for the entrepreneurial field” (Shane and Venkataraman, 2000, p.218).

Chapter 2 is structured as follows: The craftsman-opportunist (2.1.1) and the first-time/habitual (2.1.2) typology of entrepreneurship are presented, complemented by a brief examination of the habitual entrepreneurship definition from an ex-ante and an ex-post perspective (2.2). In section (2.3) an overview of the dimensions accounting for differences between first-time and habitual entrepreneurs is given.

2.1.1 Historical Classifications

One frequently recurring typology presented by Smith (1967) (see also Smith & Miner, 1983; Wright et al., 1997) distinguishes two fundamentally contrasting entrepreneurial types: the craftsman and the opportunist.^[2] They differ with respect to their time orientation, education and training, social involvement and awareness as well as the level of self-confidence in dealing with the social environment. With respect to these dimensions the craftsman is located at the possibly “less desirable” end of the continuum in relation to the opportunist. Correspondingly, the craftsman is associated with ‘blue-collar’, technical work, lack of managerial experience, low adaptivity and autonomy orientation. According to Smith and Miner (1983) these “craftsmen entrepreneurs must change dramatically or be replaced for company growth and development to occur” (p.326). Contrastingly, the opportunist is described as being growth-oriented, highly educated and experienced, future-oriented and extremely adaptive, possessing a strong managerial motivation. Further Smith (1967) suggests that the more opportunistic qualities an entrepreneur holds, the higher the probability of firm survival, along with a higher growth rate of the firm, moderated by its increased ability to adapt to the environment.

Albeit this typology’s inherent convenience its practicability is limited (Woo et al., 1991; Ucbasaran et al., 2001). In particular, since explanatory variables are numerous and quite diverse (traits, behavior, socio-cultural variables etc.), predominantly related to the entrepreneurial motivation and background.

Such an extensive number of factors may increase the difficulty to control for differences among entrepreneurs. Moreover, several of the explanatory variables may not allow for identifying all existent types of entrepreneurs (Wright et al.,1997, p. 252). Nevertheless, this typology may be one of the most prominent, early acknowledgments of precisely the entrepreneur’s characteristical heterogeneity (e.g. Gartner, 1988) anchoring craftsmen and opportunists as well-proven concepts within the sphere of entrepreneurship-related academic research (Smith & Miner, 1983; Davidsson 1988). A different aspect of the entrepreneurial heterogeneity is his/her potential involvement in more than one business (e.g. Macmillan, 1986; Donckels et al., 1987; Kolvereid & Bullvag, 1993). MacMillan suggested, over two decades ago, to study habitual entrepreneurs to “really learn about entrepreneurship” (MacMillan, 1986, p.241), since these individuals have already acquired entrepreneurship-related experience – in contrast to the hitherto mostly studied “one-shot” founders (for exceptions see Cross, 1981 and Storey, 1982). Potentially following his plea, academic research experienced a paradigm shift towards a classification of entrepreneurship based on venture ownership-experience.

2.1.2 Modern Classifications

This reorientation led to the development of another two essential types of entrepreneurs, the first-time and the habitual entrepreneur. First-time entre-preneurs are subjects who have prior business-ownership experience in one or none venture. Habitual entrepreneurs are individuals that have analogous experience in more than one business venture. First-time entrepreneurs can be subdivided further into nascent entrepreneurs: subjects that are planning to develop a new business or are taking action related to organizational emergence (cf. Katz & Gartner, 1988; Carter, Gartner & Reynolds, 1996; Honig et al., 2005) and novice entrepreneurs: individuals running their first venture “ with no prior minority or majority business ownership experience either as a business founder, an inheritor or a purchaser of an independent business” (Westhead et al., 2005b, p.73; cf. also Westhead and Wright, 1998; Westhead et al., 2003).

Concerning habitual entrepreneurship several varying definitions exist, which are all originating from the one explicated above (Westhead and Wright, 1998). Such definitorial diversity is typically ascribed to the growing empirical proof of habitual entrepreneurs being heterogeneous in many respects themselves (Westhead and Wright, 1998; Wright et al, 1997; Westhead et al., 2003; Anokhin et al., 2008).^[3] MacMillan (1986) introduced the habitual entrepreneur as “business generator …build[ing] an experience curve for entrepreneuring…through correcting previous mistakes in subsequent ventures” (p.242). Additionally, the author has couched the notion of an “incubator” facility, that “breeds” the ‘unborn chicks’ (the embryonic business units) until they develop their ‘flight’ skills and leave the nest, thus implying the existence of a parallel involvement in multiple ventures. In a nutshell, MacMillan (1986) hence, suggested two important subconcepts of habitual entrepreneurship - later elaborated on by various scholars - namely serial and portfolio entrepreneurship. These subconcepts are basically distinguished by the sequence in which involvement in ventures occurs (subsequent vs. simultaneous business venturing). Besides that, habitual entrepreneurs have been explicitly defined as “multiple business starters” (Donckels et al., 1987), “experienced business founders” (Kolvereid and Bullvag, 1993), or subjects that show a ”simultaneous involvement in multiple entrepreneurial activities” (MacMillan and Katz, 1992). Further, comparable definitions were formulated by e.g. Schollhammer (1991), Birley and Westhead (1993), Starr et al.(1993), Hall (1995), Scott and Rosa (1997), and Iacobucci (2002)^[4]. However, the common feature of habitual entrepreneurs, as emphasized before, is the prior establishment of at least one venture before the current business start-up (Birley and Westhead, 1993). Later extensions (Wright et al., 1997) included alternative modes of venturing like inheritance and purchase, or corporate entrepreneurship. Wright et al. (1997) have also developed a typology of habitual entrepreneurship that included serial and portfolio entrepreneurs in the narrower sense of the term as well as purchase and multiple corporate entre-preneurship. Serial entrepreneurs were defined “as those entrepreneurs who exit one venture before entering into a subsequent one” (p. 252), whereas the portfolio entrepreneur was associated with portfolio acquirement and parallel founding of new ventures. A variety of other researchers has also come to explicitly define serial as well as portfolio entrepreneurship; for example Alsos and Kolvereid (1998), Westhead and Wright (1998), Shane and Venkataraman (2000), Pasanen (2003), Westhead et al. (2003), Alsos and Carter (2006), and Ucbasaran et al. (2006a,b, 2009). Ultimately, the failed entrepreneurs, who decided to attempt a subsequent start-up (the restarter entrepreneurs) are to be mentioned as well, since they account for a noteable part^[5] of the entrepreneurial community, too (cf. e.g. Wagner, 2003).

Table 1 provides a synoptical overview of the different entrepreneurial positions within the entire complex of entrepreneurship.

illustration not visible in this excerpt

TABLE 1 Overview of the entrepreneurial classification (derived from Wright et al. 1997;

Westhead and Wright 1998; Wagner 2002)

Since the focus of this paper is on exploring the use of heuristics and biases by habitual and first-time entrepreneurs, their respective definitions are adjusted in the following way: First-time entrepreneurs are defined as pure novice entrepreneurs (subjects running their first venture with no prior business ownership experience) because they actually assume business ownership risk and decision making (Fama and Jensen, 1983) in contrast to nascent entrepreneurs. Habitual entrepreneurs are examined further as being composed of serial and portfolio founders in the narrower sense (sequential or parallel founders with previous business ownership experience), excluding MBOs/MBIs and multiple intrapreneurship. Since in these types the managerial rather than the entre-preneurial component prevails and significant differences in assuming residual risk and decision making exist. Moreover, there is some evidence (Ucbasaran et al., 2003a) that e.g. habitual acquirer and habitual starters differ significantly in their motivations as well as in the way opportunities are identified and exploited. Such operationalized definitions have been selected to receive two entrepreneurial clusters as consistent as possible based on differences in venture ownership experience. Potential differences in the use of heuristics and biases among these two main clusters are related in chapter 4 to these differences in experience and other dimensions distinguishing between habitual and first-time entrepreneurs.

Finally, since habitual entrepreneurship is one future of first-time entrepreneurs, to paraphrase Aragon, and apparently an appealing one, the actual distribution of this phenomenon is of particular interest. Studies showed that about 37 % of all entrepreneurs in the United Kindgdom (Westhead and Wright, 1998) and 54 % of all entrepreneurs in the U.S. were habitual entrepreneurs (Hsu, 2007). In addition, 20 – 30 % of all german founders have been already “self-employed” before taking on their current venture activities (IfM Bonn, 2007). The next section deals with the potential fuzziness of the habitual entrepreneurship definition depending on a beforehand and after the fact perspective, respectively.

2.2 The Habitual Entrepreneur Definition Ex-ante and Ex-post

As Westhead and Wright (1998) observed “it should also be borne in mind that a subset of current novice entrepreneurs will become portfolio or serial entre-preneurs, which may blur the distinction between types” (p.176). In other words, “call no man happy till he dies”, since it cannot be known ex-ante, to what extent first-time entrepreneurs will remain with their current founding, or exit their venture and pursue a different career path, or eventually strive for a subsequent or parallel entrepreneurial activity. Thus, a selective definition of habitual entrepreneurship cannot be extracted from an ex-ante view. In retrospect only, a conclusive, general classification of habitual entrepreneurs can be determined.

It must be remembered though, that the focus of this work is to study the use of heuristics and biases by habitual entrepreneurs and it is crucial to understand, whether the aforementioned differentiation has any relevant impact on this issue.

The obvious problem is to determine whether the examined use of heuristics and biases by a current habitual entrepreneur has changed between his/her first and the subsequent venture(s). In other words, does the current habitual entrepreneur use the same heuristics and biases compared to the point in time in which the same person has been a mere first-time entrepreneur?

To mitigate the effects of such a possible dilemma some dimensions are explicated in section 2.3 that may explain a significant part of the variance between first-time and habitual entrepreneur decision making. It is of particular interest to ascertain if at least one of the dimensions identified allows for a reliable prediction of the likelihood of a specific first-time entrepreneur to become a habitual entrepreneur within his or her total life span. If this propensity to ‘climb up the entrepreneurial ladder’ could be measured, entrepreneurial research would surely benefit from this, for example in terms of policy implications.

Ultimately, as far as it concerns the use of heuristics and biases by habitual entrepreneurs, the distinction between ex-post and ex-ante perspective may be not particularly relevant. Because some of the major dimensions, assumed to influence how and which heuristics are used by entrepreneurs, can be identified and matched with the dimensions distinguishing between first-time and habitual entrepreneur. Consider for example entrepreneurial experience, which basically results from learning out of business mistakes and adapting to a dynamic environment. If one separates the knowledge of the dance steps from the dancer, i.e. entrepreneurial experience from the entrepreneur, assuming such knowledge to be codifiable, one could examine which heuristics and biases are used at discrete learning/experience intervalls from beginner to professional by for example using neural nets. Such an endeavor might consequently yield insights into the systematic use of heuristics and biases depending on changes in experience, which in turn could be matched with changes in experience between first-time and habitual entrepreneur to predict their use of heuristics and biases.

Additionally, since “entrepreneurship commonly maniftests as a multi-level phenomenon” (Busenitz et al. 2003, p.302) it may be that there is an evolutionary evolvement in the use of heuristis and biases. Basically, habitual entrepreneurs may apply the same ‘old’ heuristics like they did as first-time entrepreneurs, though refined and adapted to current needs, reflecting their inner development. One occurrence of such an evolvement could eventually be the development of a meta-heuristic that yields a more specific use of heuristics and biases. For a further examination of this point and its implications for the theory of heuristics and biases see the general discussion in section 5.3.

2.3 Differences between First-time and Habitual Entrepreneurs

There is general aggreement among scholars on the heterogeneity of habitual (e.g. Westhead and Wright, 1998) and first-time entrepreneurs. In the following section an overview of the main dimensions, accounting for differences in the use of heuristics and biases of these two entrepreneurial types, is presented.

Traits & Motivation

According to Wright et al. (1997) “motivations and actions change[d] between the first and subsequent ventures” (p.256). Several other studies show identical findings and present motivational and trait differences between habitual and first-time entrepreneurs. Habitual entrepreneurs tend to rather stress ‘ perceived instrumentality of wealth’, need for personal development and role models (Westhead and Wright, 1998), organizational routines (Ucbasaran et al., 2008), self-achievement and materialistic reasons (Donckels et al., 1987; Birley and Westhead 1993) or passion and boredom (Mueller and Neergaard, 2009) as reasons for starting-up in comparison to novice entrepreneurs.

On the other hand, first-time entrepreneurs express a higher drive for independence compared to habitual entrepreneurs (Donckels et al., 1987) or serial entrepreneurs (Westhead and Wright, 1998). They also show a higher materialistic tendency than serial (Wright et al., 1997) and a higher need for approval than portfolio entrepreneurs (Westhead, Wright, 1998). Serial entrepreneurs are, compared to first-time founders, triggered more strongly by the desire for a challenge, to develop an idea (Wright et al., 1997), and by personal development (Westhead, Wright, 1998). Portfolio entrepreneurs place more focus on security through wealth and tax benefits than novices and serial entrepreneurs, as well as higher materialistic reasons than serial entrepreneurs (Westhead, Wright, 1998). Additionally, Westhead and Wright (1998) find that portfolio and serial entrepreneurs have a higher growth orientation than first-time entrepreneurs.

A possible explanation for this might be that first-time entrepreneurs tend to downsize their venture and accordant aspirations, due to the lack of resources and the potential liabilities of yet absent entrepreneurial experience.

Wicklund and Shepherd (2003) found a positive relationship between experience and realization of growth mediated by growth aspirations, reinforcing the findings of Westhead and Wright (1998). Rosa (1998) interpreted already the sole decision to repeatedly start-up as a growth strategy. Gordon et al. (2009) suggested that such a growth motivation may actually leads to a perceived pull into habitual entrepreneurship. The decision to initially start-up may increase the motivational propensity to repeatedly start-up mediated by growth aspirations.

First-time entrepreneurs are hypothesized to experience a push into entrepreneur-ship by external, situational factors like job dissatisfaction, the perception of monitoring and lack of career chances (Brockhaus, 1980). These external factors may activate certain motivational needs like to prove self-esteem, inducing the intitial start-up decision. The decision for repeat venturing is less likely to be the result of a push, since the above mentioned factors typically disappear or are perceived as less severe after the initial venture start-up. Thus habitual entrepreneurs seem more intrinsically motivated than first-time entrepreneurs (Gordon et al., 2009). Furthermore, it may be that, following the motivational theory by Maslow (1943), certain motivational needs are activated after certain motivational fulfillment on antecedent steps has been reached. Such an idea again points into the direction of habitual and first-time entrepreneurs being different in their motivation, contingent on levels of fulfillment reached. In summary, evidence presented suggests that monetary gains as motivational factor are a decreasing function of the number of ventures, and that non-monetary benefits, like broader autonomy, self-development, the possibility to develop and pursue own ideas, as well as role models play a more dominant role in the decision for subsequent venturing^[6]. Such motivational differences may account for a differing use of heuristics and biases by habitual and first-time entrepreneurs.

Performance

Despite the considerable increase in entrepreneurial experience adopted by subjects in their transit from first-time to habitual entrepreneurs various studies did not find any significant performance differences between the two (Kolvereid and Bullvag, 1993; Westhead et al., 2005; Wright, Robbie, and Ennew, 1997; Westhead and Wright, 1998). Moreover, it is not clear whether aggregating firms of habitual entrepreneurs would lead to observable performance differences in comparison to one-shot firms (Rosa, 1998; Anokhin et al., 2008), though there is some evidence of lower failure rates of business clusters connected to a single entrepreneur (Rosa, 1999). There are a few possible explanations for this finding.

First, as has been stated in the motivational section – monetary gains are not the only, often not even the most relevant motivator for entrepreneuring, but rather non-pecuniary benefits resulting from e.g. the realized desire to be independent (Vivarelli, 1991). Further, monetary rewards are often understood as a performance measure and success appraisal, but overall entrepreneurial utility may depend as well on psychic income. That is despite higher earnings total utility may be lower because of for instance accompanying higher perceived boredom with the venture (Mueller and Neergaard, 2009). This may lead to the willingness of an individual to accept lower firm profits in return for a more chal-lenging and interesting work, yielding a lower measurable firm performance.

Second, success in the aforementioned studies is measured on a firm level.

However, a firm level failure is not necessarily a failure on the entrepreneurial level (Sarasvathy and Menon, 2002; Sarasvathy, 2004). This means in reverse that entrepreneurial success may consist of non-monetary components and thus be partially independent of firm level monetary success. Furthermore, even entrepreneurial monetary success may be partially independent of the firm’s financial success. Thus, Sarasvathy (2004) suggests to study “firm failures…as important inputs into entrepreneurial success” (p.521).

Though performance differences have not been found (yet), it does not necessarily mean that they are non-existent. However, the lack of performance differences, despite an experiential evolvement of the entrepreneur, might be interpreted as manifestation of a different use of heuristics and biases or a higher susceptibility to certain biases, resulting from biased market feedback about prior ventures. On the other hand, using alternative, non-firm-level, financial performance measures, incorporating psychic income, may do help to discriminate better between the use of heuristics and biases by both first-time and habitual entrepreneurs.

Experience

Cognition influences human perception and comprehension, embodied in expectations, goals or perceptual frameworks (Starbuck, 1996). Further, experience is likely to form a subject’s (entrepreneur’s) cognition (Baron, 2004), thus potentially mediating between subjects’ differences in cognition and their varying behavior (Ucbasaran, 2008). An important role in explaining differences between first-time and habitual entrepreneurs’ cognition is attributed to experience in a domain (Abelson and Black, 1986). Thereby the effect of experience can be manifold: It reduces noise (Camerer, 1995), leads to faster decision making (Forbes, 2005), can temper comparative optimism (Fraser and Greene, 2006; Ucbasaran et al., 2009b) and thus lead to a more realistic assessment of the difficulties of entrepreneuring (Gordon et al., 2009). Though prior business ownership experience is not solely associated with benefits like reputation, expertise and network of contacts. Starr and Bygrave^[7] (1991) identify potential downsides of experience, like reduced motivation to work hard, risk-aversion, and focus on success factors which do not take the differing context of the new venture into account. There is some evidence that shows a positive relationship between prior entrepreneurial experience and subsequent venturing (Ronstadt, 1988; Vesper, 1980), potentially accounting for entrepreneurial success. Reuber and Fischer (1999) on the other hand state, that “no consistent, direct relationship between the experience of the founder…and the venture’s success...have been found” (p.31). The lack of consensus on a definition of experience may partially account for such findings.

Nevertheless, Stuart and Abetti (1990) for example, identified several types of experience apparently relevant for entrepreneurship: namely, prior start-up experience, industry experience, founder’s age and education. Per definitionem, habitual and first-time entrepreneurs differ in the scope of venturing experience.

According to Politis (2005) previous start-up experience “provides tacit knowledge that facilitates decision-making about entrepreneurial opportunities under uncertainty and time pressure” (p.405). Prior start-up experience is the result of entrepreneurial learning, that is internalizing market information on previously success- or unsuccessful ventures created. In contrast to other-directed employees, who typically receive immediate and direct feedback from their supervisor or employer, entrepreneurs may not have such a tight feedback loop. They are rather forced to rely on “feedback from earlier ventures” (Ucbasaran et al. 2008, p.331), that is market feedback. Such feedback however, may be slow, noisy or incomplete, potentially accounting for the biases and blinders associated with the liabilities of experience (Starr and Bygrave, 1991).

Experienced decision-makers “are also limited capacity, heuristic-driven processors, but the heuristic principles involved are likely to be different than those of novices” (Lord and Maher, 1990, p.13), in particular when dealing with the entrepreneurship typical information-poor but interpretation-rich system. So are, for example, “more experienced entrepreneurs…theorised to not actively search for information as much as novice entrepreneurs (Cooper et al., 1995) …[which has been partly attributed] to the use of heuristics” (Gordon et al., 2009, p.3). Moreover, expert decision-makers are more sophisticated in recognizing patterns in noisy or incomplete information flows, and more effective in finding adequate responses in accordant decision-making contexts.

Prior start-up experience, per definitionem a core competence of habitual entrepreneurs, is also strongly related to “gathering the right information and making effective decisions about opportunities” (Politis, 2005, p.405). Moreover, creating ventures is the prerequisite to developing organizational routines that can not only reduce mortality risk (Shepherd, Douglas and Shanley, 2000) but also the need to utilize heuristics and biases (Busenitz and Barney, 1997, p.14). As has been emphasized above, entrepreneurial experience influences opportunity recognition, information collection as well as its use, and is more likely to lead to an active choice towards further entrepreneuring, rather than the push typically experienced by novice entrepreneurs (Gordon et al,. 2009). Experience seems to play a role in deciding on the entrepreneneurial organization mode as well, since Gordon et al. (2009) found a “significant habitual-team, novice-solo tendency” (p.7; also Alsos et al., 2006). It must be intimated again though, that not all types of experience prove equally fruitful and as Kirschenhofer and Lechner (2005) conclude: “it might be that the experience effect does not start[ed] by the second venture, it might be that it start[ed] later” (p.11).

In summary, the habitual-novice entrepreneur difference is per definitionem a prior start-up experience difference, and to be more precise a difference in tacit venturing knowledge. These differences manifest in entrepreneurial decision making and are particularly relevant in understanding the potentially varying use of heuristics and biases by habitual and first-time entrepreneurs, as shall be shown in chapter 4.

Social Context

“People and experiences are embedded in a social context” (Seligman and Csikszentmihalyi, 2000, p.8). Therefore the emphasis of this section is to underline the relationship between social context and subsequent entrepreneurial decision making, though there is only sparce literature on this topic available. According to Ucbasaran (2008) social context is important since it influences heavily the (potential) entrepreneur’s aspirations and career decisions. As network theory implies the entrepreneurial context is shaped by broad, comprehensive and dynamic social processes (Low and MacMillan, 1988). That is, social context may influence economic context and habitual entrepreneurs typically face a differing social environment than novices in many respects. I suggest to specifically focus on the aspect of social, entrepreneurial networks (Aldrich and Zimmer, 1986) here, taking into account their role as performance factor for habitual entrepreneurs (Ucbasaran et al., 2008; Havnes and Senneseth, 2001). These now experienced entrepreneurs previously exerted effort to change size, structure (types of connections), density and their position (centrality) in the business network they are part of, thereby assumingly aware of its role in innovation and new information diffusion (Granovetter, 1973). Without much doubt the structure of such a network changes between the first venture and subsequent ventures. These structural differences may impact on opportunity recognition and exploi-tation, information search, business strategies, access to financing, human capital and advice, etc. (Low and Macmillan, 1988; Shane and Venkataraman, 2000; Ucbasaran et al., 2001). Whereas the lack of such sophisticated network structures proves most likely to be detrimental to the first-time entrepreneur. “Individuals’ characteristics and heuristics affect their network behavior, which in turn impacts firm organization and performance” (Busenitz et al. 2003, p.302). It is however also true, that differing social contexts may as well lead to different heuristics being used by novices and habitual entrepreneurs (Ucbasaran et al., 2001).

In addition, if the Heraklitian notion of panta rhei holds, change is inevitable. Social networks may act as a ‘buffer’ to the liabilities of external change, by facilitating habitual entrepreneurs’ quicker/better adaptation to external ‘challenges’ through detailed, otherwise unavailable information or a newly evoked, moderating “outside view” (Kahneman and Lovallo, 1993). First-time entrepreneurs on the other hand may be less sheltered against such a change, due to the lack of numerous weak ties and of assets of experience (Starr and Bygrave, 1991).

Since the transit from first-time to habitual entrepreneur is typically accompanied by a notable change in the characteristics of the business network, it is expected to explain a significant part of the differences in the use of heuristics and biases by habitual and first-time entrepreneurs.

Affect

As research has shown the decision to take entrepreneurial action may be negatively correletated with the individual’s health, financial well-being, social life and formal career prospects. Furthermore, pursuing one’s own idea is generally accompanied by high levels of commitment and certainly – including the aforementioned factors – affect. Entrepreneurial affect has to date not been studied extensively (for a noteworthy exception see Baron, 2008). Though it appears that its influence on entrepreneurial cognition is highly relevant (Mitchel et al., 2007).

There is some evidence for a positive relationship between (positive) affect and creativity (Isen, 1993), as well as (positive) affect and productive working relationships (Harker and Keltner, 2001). Moreover, Baron (2008) suggests an influence of affect on memory, the way stress and major life events are dealt with and the interpretation of motives of others (Mitchel et al., 2007). Affect has been in addition suggested to be a “potential mediator between individual-level and macro-level variables” (Baron, 2008, p. 336). Shepherd (2003) stresses that past failure may evoke a negative emotional response that hinders learning from the loss, which may negatively influence the motivation to restart. Additionally, the fear of failure after an initial success may increase as well. In particular if subjects feel to be “biting off more than they can chew”, negative affective impressions can arise that may lower self-esteem, resulting in a lower confidence in own decision making. Of interest for this work is also that “positive affect has been shown to increase susceptibility to various cognitive errors or biases - errors that can prove quite costly to entrepreneurs and their new ventures” (Baron, 2008, p.336). Affect is a crucial element of the entrepreneurial life. Evidence presented leads to the expectation that affect experienced by habitual entrepreneurs differs from the affect perceived by first time entrepreneurs, possibly influencing their use of mental ‘short-cuts’.

Summary

The contribution of this chapter is the extraction of an operationalized definition of habitual entrepreneurship. Moreover, dimensions have been identified that allow for a differentiation between habitual and first-time entrepreneurs. Habitual and first-time entrepreneurs appear to differ on the dimensions of motivation and traits, experience, social context (network), and affect. Performance differences have not been found. This may be related to the firm-level performance measure used or to an increased susceptibility of habitual entrepreneurs to certain biases, which may indeed reduce performance.

3 Literature Review Heuristics and Biases with Entrepreneuers

3.1 Introduction

It is the unhurried transit of economical research, from homo oeconomicus to homo sapiens (Minniti and Levesque, 2008; Koppl, 2006; Thaler, 2000), that makes the current research emphasis placed on entrepreneurial cognition (Busenitz and Lau, 1996) intuitively appealing. One of the recent approaches to further our knowledge and comprehension of the entrepreneurial cognition in the broader sense is the theory of heuristics and biases (Mitchel et al., 2007). These “simplifying strategies” (Tversky, Kahneman,1974), “mental shortcuts” or “rules-of-thumb” (Gigerenzer et al.,1999) allow entrepreneurs to make decisions under uncertainty and in light of limited cognitive capabilities, time-pressure or affect (Baron, 1998), thereby yielding ‘good-enough’, sometimes quite accurate solutions. In the following these decision making strategies are termed heuristics, when yielding reasonable outcomes, and biases when resulting in cognitive errors.

The next section (3.2) consists of an overview of the three distinctive positions in heuristics and biases research, including some important points of criticism. It is followed by a review of heuristics and biases found to be explicitly relevant for entrepreneurs (3.3).

3.2 Positions in Heuristics and Biases Research

3.2.1 The Heuristics and Biases Program

Tversky and Kahneman initiated the heuristics and biases program^[8] in their widely cited article from 1974. They proposed, that “people rely on a limited number of heuristic principles that reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations…these heuristics are quite useful, but sometimes they lead to severe and systematic errors” (emphasis mine; p.3).

Thereby the beauty of their approach lies above all in offering “a cognitive alternative [to the rational choice model] that explained human error without invoking motivated irrationality” (insertion mine; Kahneman and Frederick, 2002, p.1). Initial impetus for such research has been ascribed to the fact that Tversky and Kahneman observed in a series of experiments in the late 1960s and early 1970s, that even very experienced professionals, in various domains, were susceptible to certain heuristics and biases, when judging intuitively (Gilovich and Griffin, 2002). They moreover found subjects in general to be apparently unable “to infer from lifelong experience fundamental statistical rules, as regression towards the mean or the effect of sample size on sampling variability”(p.18). Such observations have most likely induced the authors not to view the individual as a rational actor (any longer), but rather as a subject that makes judgments and decisions deliberately rational, while being restricted by its cognitive limitations. This concept has been named Bounded Rationality by Herbert Simon (1955). Bounded rationality is assumed by Tversky and Kahneman to evoke a reliance on intuitive, heuristic judgment where normative theory should be employed instead.

It shall be emphasized, however, that intuitive, heuristic judgment according to the authors is not just “merely simpler than rational models demanded [but] categorically different in kind…[thus, Kahneman and Tversky] developed their own perspective on bounded rationality” (insertion mine; Gilovich and Griffin, 2002, p.3). As a reaction on expected utility theory, the methodological focus of the heuristics and biases program has been placed on when and why humans systematically err, whereas normative theory predicts decision makers to err only sometimes and non-systematically. Due to such methodological focus experiments conducted by Kahneman and Tversky often resulted in mediocre outcomes of human decision making behavior, potentially imposing the wide-spread negative connotation on heuristics. Inspite of heuristic processing leading sometimes to biased outcomes, being irrational in such cases, the heuristics themselves are according to Gilovich and Griffin (2002) not irrational, because “they draw on underlying processes, that are highly sophisticated”(p.3). Complementing this view the authors emphasize that heuristics in the sense of Kahneman and Tversky are “normal intuitive responses to even the simplest questions about likelihood, frequency, and prediction" [own emphasis; p.3] instead of being solely evoked by task-complexity or information overload (cf. Baron, 1998).

Tversky and Kahneman (1974) recognize three basic, general purpose heuristics, namely adjustment and anchoring, representativeness, and availability, that are associated with specific biases. These biases are suggested to explain deviations from normative theory. In 2002, Kahneman and Frederick replaced anchoring and adjustment by the affect heuristic. They argued that the former would not be in accordance with their definition of a judgmental heuristic (anymore), since it does not work through attribute substitution (“intuitive substitution of a complex attribute with a simpler heuristic attribute for judgment”). However, Gilbert (2002) notes that “anchoring and adjustment describes the process by which the human mind does virtually all of its inferential work” (p.167). Therefore all four heuristics mentioned are included in the brief overview following. All of them are broadly applicable, simplifying procedures and normally do reduce mental effort and time needed for judgment, yielding “quick and dirty”, though sometimes erroneous, results.

Adjustment and Anchoring

This often applied estimation procedure involves using relevant or sometimes random information, received externally or by own partial computation, as an initial value (“anchor”) and starting point from which on estimates are adapted successively. Thereby, final judgments of the same estimation problem will vary with different anchor values. Additionally, when using this heuristic, adjustments from the anchor are typically insufficient, yielding a bias towards the anchor.

Representativeness

The representativeness heuristic, also called law of small numbers, describes the process of intuitive, categorical judgment by individuals based essentially on similarity. This heuristic examines to what extent a subject, object or situation is representative of a specific stereotype or comparable focal point that can be retrieved from memory. Due to such (over-)reliance on similarity, biases in judgments may occur that are based on the ignorance of relevant information like base-rates or the tendency to generalize from non-random samples like personal experience. Additionally, the use of the representativeness heuristic may entail a misconception of chance and regression, the illusion of validity and insensitivity to predictability.

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^[1] For a comprehensive, historical overview of entrepreneurial theorists cf. e.g. Herbert and Link (1989).

^[2] These are the two extrema, which span the definitorial continuum; intermediate forms are explicitly allowed for in this framework.

^[3] Undeniably, first-time entrepreneurs as well present a quite diverse group. But due to the explicit focus on habitual entrepreneurs, this will not be subject of my work.

^[4] A comprehensive overview of operationalized definitions of habitual entrepreneurship is presented by Ucbasaran et al. (2008).

^[5] According to the IfM Bonn (2007) between 11 – 18 % of all german founders have previous failure and up to 2 % prior insolvency experience.

^[6] For a comprehensive overview cf. Anokhin (2008).

^[7] Starr and Bygrave (1991) identify the following assets and liabilities of business ownership experience. 1) Assets: expertise and wisdom, network of relationships / access to resources, reputation / legitimacy - reduce liabilities of newness and smallness. 2) Liabilities: biases and blinders (e.g. over-confidence), strong ties, success syndrome - increase liabilities of "staleness", "sameness", "priciness" and "costliness".

^[8] Though the impact of gestalt psychology, mathematics and artificial intelligence on research in heuristics theory cannot be underestimated, these historical roots are, for the sake of brevity, not covered in this work.