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2011 | OriginalPaper | Chapter

8. Applications of Behavioral Finance to Entrepreneurs and Venture Capitalists: Decision Making Under Risk and Uncertainty in Futures and Options Markets

Authors : Fabio Mattos, Philip Garcia

Published in: Advances in Entrepreneurial Finance

Publisher: Springer New York

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Abstract

A key dimension of entrepreneurship is risk-taking behavior, and often it is assumed that entrepreneurs exhibit a higher tolerance for risk than non-entrepreneurs. However, empirical evidence provides mixed findings, raising the question whether entrepreneur’s judgment is influenced by emotion and heuristics which leads them to misperceive the risk in the market. Our findings support this idea. Empirical results indicate these investors generally take more risk than would be anticipated. Higher risk propensity is due to probability weighting and is also consistent with the idea that entrepreneurs and possible venture capitalists perceive risky situations more optimistically than non-entrepreneurs.

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previous chapter The Changing Landscape of Small-Firm Finance
next chapter Insights into the Psychological Profiles of Entrepreneurs
Appendix
Available only for authorised users
Footnotes
1
Former trader and chairman of the Chicago Board of Trade.
 
2
Figure 8.1 assumes that the reference point is zero.
 
3
In empirical studies, a variety of shapes have been identified.
 
4
By construction, EV G > 0 and EV L > 0.
 
5
Answers to utility-elicitation questions were invalid for traders 9 (gains) and 12 (losses). Therefore 14 utility functions were elicited for each domain in the experiment, even though there were 15 traders. This problem will also affect the calculation of risk and uncertainty premiums for these two traders.
 
6
This means behavioral premiums are less positive or more negative than EU premiums. In our sample two traders switch from risk aversion to risk seeking, five become less risk averse, and two become more risk seeking.
 
7
This means behavioral premiums are more positive or less negative than EU premiums. In our sample, all become more risk averse.
 
8
For traders who take more risk, one switches from risk aversion to risk seeking, two are less risk averse and four are more risk seeking. For traders who take less risk, two switch from risk seeking to risk aversion, one is more risk averse and four are less risk seeking.
 
9
For traders who take more risk, two switch from risk aversion to risk seeking and five become less risk averse. For traders who take less risk, two switch from risk seeking from risk aversion, three become more risk averse, and two become less risk seeking.
 
10
For traders who take more risk, three switch from risk aversion to risk seeking, five become less risk averse, and two become more risk seeking. All traders who take less risk become less risk seeking.
 
11
Recall under uncertainty traders had to make their own assessment of probabilities, since no specific probability was provided.
 
12
For traders who take more risk, two switch from risk aversion to risk seeking, five become less risk averse, and three become more risk seeking. All traders who take less risk become more risk averse.
 
13
For traders who take more risk, three become less risk averse and three become more risk seeking. Among traders who take less risk, two switch from risk seeking to risk aversion, two become more risk averse, and three become less risk seeking.
 
14
For traders who take more risk, two switch from risk aversion to risk seeking, three become less risk averse, and one becomes more risk seeking. For traders who take less risk, five switch from risk seeking to risk aversion, one becomes more risk averse, and two become less risk seeking.
 
15
For traders who take more risk, five switch from risk aversion to risk seeking and six become less risk averse. For traders who take less risk, one switches from risk seeking to risk neutrality, one becomes more risk averse, and one becomes less risk seeking.
 
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Metadata
Title
Applications of Behavioral Finance to Entrepreneurs and Venture Capitalists: Decision Making Under Risk and Uncertainty in Futures and Options Markets
Authors
Fabio Mattos
Philip Garcia
Copyright Year
2011
Publisher
Springer New York
Book
Advances in Entrepreneurial Finance

Print ISBN: 978-1-4419-7526-3

Electronic ISBN: 978-1-4419-7527-0

Copyright Year: 2011

DOI
https://doi.org/10.1007/978-1-4419-7527-0_8