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Fear of Loss Drives Many Entrepreneurs

Fear of Loss Drives Many Entrepreneurs
Credit: eelnosiva/Shutterstock

New business owners aren't the highly confident risk takers many think they are.

While starting a business can be a risky venture for entrepreneurs, many are driven to succeed by a fear of losing what they're giving up by transitioning from steady employment to a startup, according to a new study from the University of California, Berkeley's Haas School of Business and Erasmus University Rotterdam in the Netherlands.

Loss aversion is what drives most entrepreneurs, not a love of risk, the study's authors said. Loss aversion, or the fear of losing one's salary at a full-time job, along with its prestige, is directly linked to the amount of effort an entrepreneur puts into a startup, the research revealed.

"There is a view that entrepreneurs are often overconfident gamblers, who thrive on risk, yet there is little evidence to support this view," Josh Morgan, a UC Berkeley professor and one of the study's authors, said in a statement.

When leaving a job to start a new business, entrepreneurs have a "reference point," which defines how they feel about their salary, or happiness level, Morgan said. Instead of being connected to profits and loses, that reference point is directly linked to how much, or how little, entrepreneurs are willing to lose when starting a company. [In Business, Risk-Taking Doesn't Always Start at the Top ]

The researchers discovered that entrepreneurs who put a high value on avoiding loss, more so than acquiring new gains, work harder.

The study was based on a theoretical model the researchers developed and said was inspired by the dramatic stories people like to tell about risk-taking entrepreneurs.

The study's results can help entrepreneurs gain a better understanding of their own feelings and behaviors so they make better decisions and have a clear understanding of "why they're doing what they're doing," Morgan said.

“One of the most important traps entrepreneurs fall into is when they're not experiencing success they become increasingly willing to take risks because of where they are psychologically," Morgan said. "One lesson from the research is to be careful when you are behind. It’s not necessarily the best decision to double down."

The study,  recently presented at the Summer Institute in Competitive Strategy, was co-authored by Erasmus University Rotterdam assistant professor Dana Sisak.

Originally published on Business News Daily

Chad Brooks

Chad Brooks is a Chicago-based writer and editor with nearly 20 years in media. A 1998 journalism graduate of Indiana University, Chad began his career with Business News Daily in 2011 as a freelance writer. In 2014, he joined the staff full time as a senior writer. Before Business News Daily, Chad spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including local and state government, crime, the legal system and education. Chad has also worked on the other side of the media industry, promoting small businesses throughout the United States for two years in a public relations role. His first book, How to Start a Home-Based App Development Business, was published in 2014. He lives with his wife and daughter in the Chicago suburbs.