Psychological characteristics associated with performence in entrepreneurial firms and smaller businesses

Abstract

This article examines the prevalence of five psychological attributes in a sample of established entrepreneurs. These attributes are need for achievement, locus of control, risk-taking propensity, tolerance of ambiguity, and Type A behavior. These characteristics are widely regarded as hallmarks of the entrepreneurial personality.

The focus of the study is twofold: 1) Do these attributes distinguish entrepreneurs (founders) from small business managers (nonfounders)? 2) Does the presence of these “entrepreneurial” attributes relate to the financial performance of the firm?

Survey questionnaires were completed by 239 members of the Smaller Business Association of New England. Founders in this sample score significantly higher than nonfounders for three of the five dimensions: need for achievement, risk-taking propensity, and tolerance of ambiguity. Both groups manifest an internal locus of control: that is, they share a perception that they can influence events in their lives and are thereby free from external forces such as destiny or luck. In terms of Type A behavior, founders and nonfounders alike score 60% above the midpoint on the Type A scale. Such Type A persons tend to be competitive, restless strivers who constantly struggle against the limitations of time.

The relationships between psychological attributes and financial performance are few, but suggestive. Among founders, internal locus of control relates to a low liquidity ratio. Among non- founders, high tolerance of ambiguity associates with high return on assets (ROA), and high need for achievement associates with a high liquidity ratio. A test for curvilinearity reveals a “threshold effect” : in three instances, a psychological attribute associates with corporate performance only to a certain point. Beyond this optimal level, the psychological pattern appears to become dysfunctional and financial returns falter. In the founders, for example, moderate risk-taking is associated with increased ROA. However, the ROA of these firms decreases when risk-taking becomes excessive. In similar fashion, founders may see their firms' ROA flourish if this attribute is present to a moderate extent. When too pronounced, the profitability of the firm may decline. The same pattern exists between tolerance of ambiguity and growth rate in the nonfounder group. Excessive ambiguity tolerance may lead to a lack of response mechanisms for dealing with environmental change. In assessing the leadership of established ventures, it might be prudent for bankers, investors, and entrepreneurs themselves to pay heed to the mix of these characteristics