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The psychology of entrepreneurial strategic decisions

Objectives
Examine entrepreneurial strategic decision-making factors of risk and motivation Understand cognitive biases and heuristics common in entrepreneurship

What makes a decision strategic?


Involves the planning of actions in an uncertain and unpredictable future Requires significant allocations of resources Results in substantial gains or losses as a result of the decision and its subsequent outcomes

Traits and factors influencing decisionmaking


Personal attributes and characteristics Attitudinal Risk taking Motivational Emotional Cognitive

Entrepreneurial strategic decision-making


High-stake decisions that involve a high degree of uncertainty and complexity
Decision-makers behavior deviates from what normative theories predict
50% chance of winning $10 1% chance of winning $250 Est. = $5.00 Est. = $2.50

Entrepreneurs tend to accept risks, resist norms, and be less predictable in decisions
And may see things differently than others

Risk propensity
Risk propensity: attitudinal component referring to the tendency to take risks that varies across distinct decision contexts
Scenario driven + Individual tendencies
Win one round of golf to earn an A in the course?

The Story of Facebook


1. On February 4, 2004 Mark Zuckerberg launched The Facebook, a social network that was at the time exclusively for Harvard students. 2. The original idea for the term Facebook came from Zuckerbergs high school (Phillips Exeter Academy). 3. It was a huge hit at Harvard. In 2 weeks, half of the student body had signed up.

The Story of Facebook


4. Other schools Boston began demanding a Facebook network. Zuckerberg immediately recruited his friends to help grow Facebook, and within four months, Facebook added 30 more college networks. 5. With this success, Zuckerberg, Moskowitz and Hughes moved to Palo Alto, California for the summer and rented a sublet. 6. A few weeks later, Zuckerberg ran into the former cofounder of Napster, Sean Parker. Parker soon moved in to Zuckerbergs apartment and they began working together.

The Story of Facebook


7. Parker provided the introduction to their first investor, Peter Thiel, cofounder of PayPal and managing partner of The Founders Fund. Thiel invested $500,000 into Facebook. 8. With millions more users, Friendster attempted to acquire the company for $10 million in mid 2004. Facebook turned down the offer and subsequently received $12.7 million in funding from Accel Partners, at a valuation of around $100 million. 9. Facebook continued to grow, opening up to high school students in September 2005 and adding photo sharing.

The Story of Facebook


10. The next spring, Facebook received $25 million in funding from Greylock Partners and Meritech Capital, as well as previous investors Accel Partners and Peter Thiel. The premoney valuation for this deal was about $525 million. 11. Facebook subsequently opened up to work networks, eventually amassing over 20,000 work networks. Finally in September 2006, Facebook opened to anyone with an email address.

The Story of Facebook


12. Viacom attempted to acquire the company for $750 million in March, 2006. Zuckerberg declined. 13. In the summer of 2006, Yahoo attempted to acquire the company for $1 billion dollars. Zuckerberg declined. 14. In October 2007. Microsoft invested $240 million into Facebook for 1.6% of the company. Valuation of $15 billion. 15. In July 2010, Facebook members reach 500 million. 16. By August 2010, total capital raised is $836 million with estimated annual 2010 revenues of $1 billion.

Influence of risk propensity is debated by scholars


While the level of risk propensity in entrepreneurs vs. managers is arguable, common ground exists with:
Different types of risk exists
Financial, personal safety, ethical, etc.

Alertness perspective differentiates people


Entrepreneurs assess risks differently than managers

Company type and size brings different risks to managers, which can be complex and high-risk

Entrepreneurial motivation
Motivation: the factors through which goal-directed behavior is initiated, energized and maintained For entrepreneurial strategic decision-making, three factors are emphasized:
Self-efficacy Cognitive motivation Tolerance for ambiguity

Motivational factors: Self-efficacy


Set of individual beliefs concerning an individuals capability to mobilize and use cognitive and motivational resources in order to increase the sense of control over different life events
Related to control and confidence, but tied to a specific task or activity

Top predictor of individual performance in a wide variety of tasks

Motivational factors: Cognitive Motivation


Cognition: the process of thought Individuals high in need for cognition (thinking) tend to seek, acquire, think, and reflect on relevant information Individuals low in need for cognition tend to rely on experience, assumptions, and others expertise

Motivational factors: Tolerance for ambiguity


Defined as the tendency to perceive ambiguous situations as desirable rather than threatening Necessary factor for entrepreneurs based on dynamic nature of markets and competition Important to be able to make complex decisions quickly with limited information

Cognitive biases and heuristics common in entrepreneurship


Overconfidence Representativeness Counterfactual thinking

Overconfidence of entrepreneurs
Refers to an individual tendency to overestimate ones capabilities, knowledge and skills
Results in being overly optimistic of the future

Helps entrepreneurs to successfully face multiple hurdles of starting and managing Valuable to encouraging and persuading others Explains why most new ventures fail

Representativeness of entrepreneurs decisions


Defined as the tendency of judging the probability of an event based on how representative that event is for a class or category of events
Stereotyping

Willingness to generalize based on small and nonrandom samples of events Results in inaccurate perceptions of reality

Counterfactual thinking by entrepreneurs


Defined as the tendency to think about what might have been if.. or if only I would have.. Often negative in nature, with a sense of regret or disappointment due to missed opportunities Can result in pursuing mediocre opportunities for new ventures, for fear that they may miss out on a success

Summary
Entrepreneurial strategic decision-making involves complex psychological factors to include risk and motivation Cognitive biases and heuristics play a central role in identifying and analyzing entrepreneurial opportunities

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