Enterprise and Small Business Principles
Individual characteristics of entrepreneurs
This section describes some of the individual characteristics that are supposedly related to entrepreneurs and the intention to pursue an entrepreneurial career:
■ risk-taking propensity
■ need for achievement
■ locus of control
■ over-optimism
■ desire for autonomy.
The first four concepts are closely related to each other as they affect our decision making under risk and uncertainty (Mellers et al., 1998). The fifth concept is closely related to the choice of becoming an entrepreneur as autonomy and freedom are often quoted as among the most important reasons to start a business. Whilst these five characteristics are often seen as positive characteristics of entrepreneurs, some research has also been undertaken on the more negative characteristics of entrepreneurs, and the section is concluded by an overview of the ‘entrepreneur’s dark side’.
According to economic theory, one of the important roles of the entrepreneur is the role of economic risk taker or risk bearer of the economic system (Buchanan and Di Pierro, 1980; Knight, 1921). Can it therefore be assumed that the entrepreneur is attracted to risk taking more than others are? The answer is clearly no, as a number of studies have found no significant differences between entrepreneurs and others when measuring general risk propensity (Brockhaus, 1980; Masters and Meier, 1988; Peacock, 1986). Schere (1982) found, when examining tolerance for ambiguity, which is a concept related to risk taking, that entrepreneurs have a somewhat greater degree of tolerance than managers. Tolerance of ambiguity is an emotional reaction to ambiguity and uncertainty, and low tolerance results in stress and unpleasantness in a complex situation. Individuals with high tolerance, on the contrary, find such situations desirable and challenging. Therefore, individuals with high tolerance would expose themselves to higher risks than individuals with low tolerance who prefer well-understood situations.
Whilst these studies assume that risk taking is independent of the situation, it has been found that risk taking is extremely dependent on either a perception of the situation
(Hogarth, 1987; Mellers et al., 1998) or if decision makers perceive themselves as experts in the field (Heath and Tversky, 1991). One of the most well-known studies in the field of decision making under risk is the work of Kahneman and Tversky (1979). In their book Prospect Theory, they suggest that a person’s willingness to take risks is dependent on the perception of the situation. Individuals will be risk averse if they perceive themselves in a win situation, but will be risk seeking in a loss situation. Heath and Tversky (1991) have also suggested that individuals take considerably more risks in situations in which they feel competent.
Studies in entrepreneurship taking the context into consideration have found that risk taking was dependent on the entrepreneur’s age, motivation, business experience, number of years in business and education (Schwer and Yucelt, 1984). In similar studies, Ray (1986, 1994) found that entrepreneurs are able to give up job security and take specific risks because they have the confidence that they will succeed. To sum up, results from research on risks and entrepreneurs are mixed, but apparently the perceived context (knowledge and situational characteristics) is a more important determinant of risk taking than personality.
Dickson and Giglierano (1986) propose another perspective on entrepreneurial risk taking. In their conceptual work they argue that the concept of risk can be divided into two separate components, namely the likelihood of a new venture failing and the likelihood of missing out on a strategic opportunity. According to this research, management and marketing research has mainly focused on the likelihood of failing and not on the search of new opportunities to explore. However, entrepreneurs may weigh the likelihood of missing out on a strategic opportunity higher than the likelihood of a new venture failing. Mullins and Forlani (2005) tested these hypotheses on a sample of 75 CEOs from fast-growing public firms in the US. They found that the entrepreneurs in the sample in general preferred the risk-averse choice. That is, when asked to choose between two ventures with different risks, they preferred the venture with the lower probability of losses. Furthermore, they would rather miss out on a strategic opportunity than jeopardise an existing venture. Das and Teng (1997) have also proposed a more detailed view on risk behaviour by proposing that risk is closely related to the time perspective, and an entrepreneur has to balance short-term risks against longterm risks. This has been empirically tested by Tsur et al. (1990) who found that risk- averse individuals were prepared to accept great risk in the short term if they believed it would minimise their long-term risk exposure. In other words, an entrepreneur will accept the risk of launching a new venture, if it is believed that the venture will minimise long-term risks (e. g. being unemployed and not having a satisfactory income).
One of the most popular characteristics associated with entrepreneurs is McClelland’s ‘Need for Achievement’ (1961, 1969). This characteristic is also closely related to risk taking as it takes into account the perceived risk of the situation as well as the perceived level of competence. According to McClelland, entrepreneurs are individuals who have a high need for achievement and that characteristic makes them especially suitable to create ventures. McClelland’s theory identifies the situations preferred by individuals high in need for achievement, and which situations arouse the achievement motivation. Individuals who are high achievers will choose a situation characterised by:
■ individual responsibility,
■ moderate risk taking as a function of skill,
■ knowledge of results of decisions,
■ novel instrumental activity,
■ anticipation of future possibilities.
It is the prospect of achievement satisfaction, not money, that drives the entrepreneur. Money is important primarily as a measure of how well one is doing in business. McClelland’s theory has received consistent empirical support suggesting that there is a relationship between entrepreneurship and achievement motivation (Begley and Boyd, 1987; Bellu, 1988; Davidsson, 1989a; Delmar, 1996; Johnson, 1990; McClelland, 1961; Perry et al., 1986).
Recently Miner and his associates have developed McClelland’s achievement motivation theory by developing five motive patterns instead of the single achievement motive. This task motivation theory suggests that it is not possible to predict behaviour or performance on the basis of a single value, as is the case of need for achievement, but that performance can be predicted by a complex set of values or motive patterns. Miner’s five motive patterns form an overall index of task motivation. They are:
■ self-achievement
■ risk-taking
■ feedback of results
■ personal innovation
■ planning for the future.
Results show that the ‘Miner Scales’ have consistent validity, in that scores (especially total score on all scales combined) correlate significantly with entrepreneurial performance, particularly growth (Bellu, 1993; Bellu and Sherman, 1995; Miner et al., 1989; Miner et al., 1992; Miner et al., 1994).
The concept of ‘Locus of Control’ can be traced back to Rotter’s social learning theory (Rotter, 1966) of how individuals’ perception of control affects their behaviour. The theory assumes that individuals categorise events and situations based on their underlying, shared properties. One such category concerns whether a potential end or goal can be attained through one’s actions or follows from luck or other uncontrolled external factors. A person believing that the achievement of a goal is dependent on his own behaviour or individual characteristics believes in internal control. If, on the other hand, a person believes that an achievement is the result of luck and external factors, they believe in external control. Therefore, locus of control is conceived as one determinant of the expectancy of success (Weiner, 1992).
To date, some empirical results have found a low to moderate positive correlation between internal control and entrepreneurs, and there is a weak tendency that a high internal orientation is associated with better performance (Brockhaus, 1982; Miller and Toulouse, 1986). However, a number of studies have reported no significant differences between entrepreneurs and managers with respect to locus of control (Sexton and Bowman-Upton, 1985). In psychology, the concept and measurement of locus of control has been heavily criticised (Furnham and Steele, 1993), and the concept has been more or less abandoned in favour of attribution theory, which has a more complex view on causality orientation (Anderson and Strigel, 1981; Weiner, 1985). As a result, locus of control is a concept which should probably not be included in future empirical research on entrepreneurial behaviour.
Over-optimism is closely related to locus of control, because both are related to expectancy of success. Cooper et al. (1986) have studied entrepreneurs’ perceived chances of success shortly after they became business owners. Their responses were then compared with the actual success rate in the respective industries. When asked about the chances for a business resembling their own to survive, most of the entrepreneurs were optimistic (78% considered the chances of survival as 50:50 or higher). When asked about their own success chances the entrepreneurs were extremely optimistic (81% considered the chances of survival to be 70:30 higher). Egge (1987) also found that a majority of entrepreneurs were over-optimistic about their success rates.
This can be compared with the research undertaken on personal and general risk. Personal risk is defined as ratings made by the respondents of a risk as pertaining to themselves; ratings of a risk pertaining to people in general are called general risk ratings. Personal risks are often rated as lower than general risks as individuals have a tendency to believe that a risk (such as being hit by a car or abusing alcohol) is larger for others than for themselves. The difference between these two types of risk is related to perceived control (Sjoberg, 1993). Consequently, these differences between personal and general risk perception are of a general nature and not unique to entrepreneurship and the business setting.
Entrepreneurs have been found to have a high need for autonomy (Sexton and Bowman - Upton, 1985) and fear of external control (Smith, 1967). Entrepreneurs value individualism and freedom more (i. e. the possibility to make a difference for oneself) than the general public or managers, even if those values imply some inequalities in society (Fagenson, 1993; McGrath et al., 1992). This desire to manage one’s own business is a central feature of entrepreneurship, but it is difficult to explain the causal order. That is, do individuals with a high desire for autonomy start a venture because they want autonomy, or do they want autonomy because they do not want others to take control of what they have once created? Differently stated, desire for autonomy can result in venture creation, but can also be a result of having created a business.
8.5.6 The dark side of entrepreneurship
Any review of the psychological approach would be incomplete without mentioning the contribution of Kets De Vries (1977) on the dark side of the entrepreneur. The reason Kets De Vries is included in this chapter is his psychoanalytical approach to entrepreneurship, despite the fact that the study was undertaken more than 20 years ago. When most researchers see entrepreneurial behaviour as the result of positive characteristics or drives, Kets De Vries takes an opposite stand-point. Entrepreneurial behaviour is the result of negative characteristics and drives. According to him entrepreneurial behaviour and its resulting financial benefits do not always lead to personal satisfaction and happiness. Quite the contrary, the entrepreneur is: ‘an anxious individual, a non-conformist poorly organised and not a stranger to self-destructive behaviour’ (Kets De Vries, 1977:41).
Furthermore, he suggests that financial success is often followed by personal crises and even poverty. Basically, what goes up must come down. This behavioural pattern is explained by experiences related to a troublesome and very disturbed childhood where the father is often absent. As a consequence, the entrepreneur becomes a person with low self-esteem and lacks self-critical reflections, always dreaming of becoming a person in total control and independent of everything and everyone. This would then explain why entrepreneurs become engaged in high-risk situations and choose to create their own organisation instead of working within an established one.
However, there are doubts about this research. Entrepreneurs are not more troubled than anyone else, and there is substantial evidence that entrepreneurs come from financially and emotionally stable families. For example, a substantial number of studies have pointed out that positive role models, and especially parents, are of central importance for fostering future entrepreneurs (Aldrich et al., 1997; Matthews and Moser, 1995; Scherer et al., 1991), which is obviously in conflict with Kets De Vries’ study. His main contribution is the acknowledgement that entrepreneurs are not some kind of superhuman heroes, but that they are people like the rest of us with faults and merits, and that their behaviour can be explained by more or less noble goals. Furthermore, Kets De Vries points at the fact that entrepreneurs encounter problems they cannot solve and that they may therefore fail. Therefore, it is clear that the psychological perspective has been far too interested in success, and that behaviour in crisis and failure situations is an under-researched field.
8.5.7 Summing up individual characteristics of entrepreneurs
A large number of traits or characteristics have been proposed to describe entrepreneurs. With the exception of the need for achievement, the results have in general been poor and it has been difficult to link any specific traits to entrepreneurial behaviour. Nevertheless, recent research leads to more optimism; with more updated theories and better knowledge of when personality traits are expected to have an effect we tend to find some basic relationships. The reasons for this are complex but what can be seen is that these traits now seem to collapse into broader areas - risk taking, need for achievement, locus of control and over-optimism are all closely related to decision making under risk. Therefore, those researchers still interested in risk and entrepreneurship tend to rely more and more on cognitive decision theories. However, the problem with cognitive decision theories is that they do not take into account individual differences and this is still the main objective of the field. There is still a need to understand why some engage in entrepreneurial behaviour and others do not. Cognitive motivation models offer both the ability of explaining highly complex behaviour and differences in choices and performances. The next section of this chapter will discuss the most recent advances in the field.
