The endowment effect on entrepreneurs: A risky attachment

Isabela Echeverry Peñón and Santiago Reyes Ortega ()

Estudios de Economia, 2018, vol. 45, issue 2, 231-249

Abstract: This paper presents evidence on the role of the endowment effect in shaping the risk-taking behavior of entrepreneurs, and how the potential of losing their firms lead them to take higher risks. This study uses an experimental design with 466 entrepreneurs in Cali, Colombia. Results show that entrepreneurs are more likely to accept riskier bets when those are related to the possession of their companies than in non-framed lotteries. The data shows that the existence of the endowment effect increases the certainty equivalent of a lottery, for the median entrepreneur, by 36.5%. This could explain why many entrepreneurs prefer to continue operating their underperforming firms, as well as why many entrepreneurs overvalue their firms during investment processes. This paper presents an alternate view on the drivers behind entrepreneurs’ risk-taking behavior and opens a door for future research on the role of biases on entrepreneurs’ decision-making processes.

Keywords: Endowment effect; cognitive biases; entrepreneurship; risk behavior; investment decisions; experimental design (search for similar items in EconPapers)
JEL-codes: C91 D91 G41 L26 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:udc:esteco:v:45:y:2018:i:2:p:231-249

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