Rationality and Persistence.
Research Paper Title:
“Persist or let it go: Do rational entrepreneurs make decisions rationally?”
Authors:
Nidthida Lin (Macquarie Business Schoo, Macquarie University)
Ralf Wilden (Macquarie Business Schoo, Macquarie University)
Francesco Chirino (Macquarie Business Schoo, Macquarie University)
Elahe Ghasrodashti (Macquarie Business Schoo, Macquarie University)
Background:
Understanding how entrepreneurs “think” and therefore “do” is essential to better comprehend rationality in entrepreneurial decision-making. This study explicates the role of entrepreneurs’ cognitive process of information gathering and processing on the entrepreneurial decision of whether to persist with an underperforming venture. The findings from three experimental studies show that self-proclaimed highly rational entrepreneurs do not always behave rationally as the authors observed them creating a decision rule comprising a limited set of factors and selectively focusing on these factors while paying less attention to others. This to some extent poses a challenge to the application of rationality theory in entrepreneurial decisions. Our findings also show that entrepreneurs with a high need for cognitive closure put more emphasis on backward-looking factors while paying less attention to forward-looking factors which involve uncertainty and require further judgment on credibility and accuracy. Together, the authors highlight the tendency of entrepreneurs to deviate from rational decision-making by forming a simple decision rule based on readily available and easily processed determinate information.
Highlights:
Theory highlights that entrepreneurs draw on backward-looking and future-looking factors when making persistent decisions.
These decisions are affected by entrepreneurs’ rationality and the need for cognitive closure.
Contrary to expectations, the authors find that self-proclaimed highly rational entrepreneurs do not (always) behave rationally.
Entrepreneurs with a high need for cognitive closure put more emphasis on backward-looking factors.
Methodology:
Number of Studies: 3 (Study 1: Original, Study 2: Narrow replication, Study 3: Quasi-replication)
Sample Description: In all three studies, the authors targeted entrepreneurs with at least 2 years of experience in founding SMEs (a business has between 5 and 199 employees). Study 1 and 2 are Australian entrepreneurs while Study 3 includes UK entrepreneurs.
Sample Size: Study 1: n = 186, Study 2: n = 128, Study 3: n = 157
Analytical Approach: Studies were conducted using the Discrete Choice Experiment (DCE). The data collected from the DCE were analyzed using mixed logit to examine how entrepreneurs distribute their attention differently across decision factors. The individual decision-making models were then used as input for the covariate analyses using weight least square (WLS) to investigate how entrepreneurs’ rational decision-making style and need for cognitive closure (NFCC) explain heterogeneity in their decision-making model.
Hypothesis:
When deciding whether to persist with an underperforming venture, entrepreneurs with a higher rational decision-making style put more emphasis on retrospective factors than those with a lower rational decision-making style. (not supported)
When deciding whether to persist with an underperforming venture, entrepreneurs with a higher rational decision-making style put less emphasis on prospective factors than those with a lower rational decision-making style. (partially supported)
When deciding whether to persist with an underperforming venture, entrepreneurs with a higher need for cognitive closure put more emphasis on retrospective factors than those with a lower need for cognitive closure. (partially supported)
When deciding whether to persist with an underperforming venture, entrepreneurs with a higher need for cognitive closure put less emphasis on prospective factors than those with a lower need for cognitive closure. (partially supported)
Results:
The findings show that both information gathering and information processing patterns, as driven by entrepreneurs' decision-making style and cognitive motivation (NFCC), affect how entrepreneurs put more or less emphasis on particular information when making decisions on whether to persist with their underperforming venture.
First, our work reveals that contrary to our expectations, entrepreneurs who claim to be highly rational decision-makers do not always demonstrate rational behavior. The results from our three experiments imply that when making a choice, entrepreneurs create a decision rule comprising a limited set of factors (e.g., the potential for growth) and selectively focus on these factors while paying less attention to and/or ignoring others (e.g., risk of going into default, period of underperformance).
Furthermore, our findings reveal that entrepreneurs who see themselves as highly rational decision-makers do not seem to pay more attention to prospect factors when making persistent decisions. These findings do not fully align with what rationality theory predicts, thus making us question whether entrepreneurs who perceive themselves as highly rational make actually rational decisions.
Second, the findings suggest that entrepreneurs with a higher NFCC focus strongly on retrospective factors while paying less attention to prospective factors as these involve uncertainty and require further judgment on their credibility and accuracy. This emphasizes our arguments regarding the tendency of entrepreneurs to form a simple decision rule based on readily available and easily processed determinate information.
Conclusion:
The authors believe this study serves as a foundation to disentangle the decision-making of entrepreneurs and encourages future work on cognitive style, motivational factors, and entrepreneurial persistence, especially when experiencing or approaching firm underperformance.