Risk-Taking Propensity - Essay Example

RISK TAKING PROPENSITY by Course Professor Institution City and state Date Risk Taking Propensity Introduction Entrepreneurial risk taking propensity is a current matter looking at how entrepreneurs approach new ventures in business. The idea of risk taking propensity looks at the willingness of an individual to accept and embrace risk rather than avoiding it. Entrepreneurs differ in that some are more likely to accept risk in entrepreneurship and embrace chances in comparison to those who shy away from risks. Several observations have been made like the argument that such entrepreneurs take the benefits of the process and pass the risks to others or the ones seen to take risk normally take calculated risks with fewer possibilities of disastrous results. The observations of some scholars note that people who tend to be successful in business are not the ones that take high risks but moderate risks. However, some schools of thought are of the idea that lack of innovation and creativity is a risky affair in entrepreneurship as the success of entrepreneurship relies on the ability to take a risk and develop new inventions to fill a need or a gap in the needs of consumers. The kind of risk that entrepreneurs take does not only translate to financial loss but other pertinent losses such as the loss of reputation or image, relationships among other losses tied to the risks in business. This paper is going to look at risk taking propensity in light of different scholars and publications in a bid to understand this theoretical issue conclusively. Risk Taking Propensity Entrepreneurs are generally perceived as more risk prone that other people. However, the level of comfort in taking risks varies from one entrepreneur to another due to a difference in variables. Entrepreneurial risk-taking propensity is the probability of getting rewards related to the success of a proposed circumstance, which is needed by an individual before they subject themselves to the penalties associated with failure. Entrepreneurs venture into new territories with risk prospects as ideas fail every day. According to Brockhaus (1980), the use of psychological testing to determine the extent to which entrepreneurs can take risks is directed towards measuring an individual’s perception of risk and how they can handle risk when presented with risky situation in entrepreneurship. This research aims to determine whether new entrepreneurial individuals, managers or recently promoted managers and new managers show a difference in handling risk or their risk-taking propensity. Kraiczy, Hack, & Kellermanns (2015) notes that to understand the risk situation in entrepreneurship, it is important to understand what the term entrepreneur means in the first place. According to Webster International Dictionary, an entrepreneur is an organizer of an economic venture: they organize the venture, own it, manage it and take risks associated with the particular venture García-Granero et al, 2015). Other dictionaries also define an entrepreneur in a similar manner such as the Oxford Dictionary with little variation in the use of words. Therefore, an entrepreneur is the owner of a business venture who assumes the role of managing the business and taking the risks associated with the business. According to Carland III et al (1995), the aspect of risk taking and bearing separates an entrepreneur from a manager. The differences in what makes an entrepreneur have variations according to different scholars. Yu, Xiong & Cao, (2015) notes that, some present day scholars believe that an individual who provides capital but does not take part in the active management of the venture does not qualify as an entrepreneur as they are not directly linked to the risks taken in the business by those actively managing the business. Horcajo et al (2014) observes that it is important to note an entrepreneur has to be an active manager who not only owns the venture but participates in decision making processes and taking active risks. I could agree with this point of view as the provider of the capital can sit in the sidelines and collect the benefits of the business while passing the risks to others such as line managers. KISH-GEPHART (2015) observes this does not qualify them as entrepreneurs. Craig (2014) observes that herein, an entrepreneur is an active owner and manager of a business venture and a full participant of all the venture’s processes majorly the risk taking aspect. An entrepreneur is also not employed somewhere else, as this is their primary venture. This gives a clear distinction between an entrepreneur and a manager who is employed to manage someone else’s venture (KARCISKY, 2014). Entrepreneurship Risks Masters and Meier (1988) notes that numerous risks are associated with entrepreneurship and some are positive while others negative. Stewart Jr et al (2001) notes that venturing into business, an entrepreneur risks being broke, financial loss, relationship loss, homes loss, trust, the possibility of debt and failure. Alternatively, an entrepreneur also risks financial prosperity, wealth, good business, good relationship, success, career opportunities, job creation, and satisfaction among others (Schwer and Yucelt, 1984). Therefore venturing into entrepreneurship could sway either way. The major risk an entrepreneur makes is the financial obligation that goes into initial start-up (Brown, 1970). Block, Sandner, and Spiegel, (2015) stipulate that this is because of the risk of failure and loss. Markiewicz & Weber (2013) say that most people look at only this negative aspect of risk in entrepreneurship, as it is the most catastrophic. When a venture is unsuccessful, the owner suffers loss which will affect every other area if their life (Kuo-Ting and Chanchai, 2010). The immense dedication an entrepreneur devotes to his venture means that failure of the venture is directly equated to failure of the entrepreneur as an individual. The result is adverse emotional repercussions and can result in illnesses like depression (Acar & Göç, 2011). Every venture features a level of risk an entrepreneur should be aware of. Capital firms undergo closure as well as small firms that get swallowed up due to risk taken. According to Brockhaus (1980), it is important to have the realization of what failure of a venture can have on an individual. An entrepreneur or a potential entrepreneur needs to conduct a careful and thorough analysis of the risk associated with the specific line of business they would like to venture into. Yangyang (2015) advices second and third opinions and conduction of studies relevant to the likely outcome of the venture an individual is interested in. This means the entrepreneur is going to be taking risks but with sufficient information on the likelihood of failure or success (Halko and Kaustia, 2015). According to Fourati and Affes (2014), this is called a feasibility study on the line of business, weighing the pros and cons, taking calculated risks and making informed decisions. This enables decision on the willingness to pursue a line of interest or if there is avenue for change. The end decision of such a process is largely reliant on the perception of the person in relation to the risks involved (Ahmed 1985). Different risks present differently to different individuals as some people are generally inclined to high-risk situations, others moderate and other low risk. Preference of Risk The risk preference of people is related to variables as noted by Atkinson, an expectance theorist. There are individuals who are motivated to achieve and there are those who have a strong motive to avoid failure (Barone and DeCarlo, 2012). People who have a strong desire to achieve are prone to more risk taking ventures while those afraid of failure tend to be easy in their risk taking ventures. However, people with a motive for achievement should go for intermediate risks compared to those who were afraid to fail as they should avoid intermediate risk and go for low risk ventures. This theory is based on the thought that people who avoid failure are likely to succeed when they venture into low risk situations or they are likely to succeed if they undertake extremely risky ventures as they are going to work extremely hard to ensure that they do not fail (Ahmed, 1985). Geppert (2013) stipulates that there are three levels of risk preferences among entrepreneurs: low risk, moderate or intermediate and high-risk preference. These preferences are bound to affect an individual’s decision to venture into entrepreneurship. It is purported that people who tend to start business venture are more in the moderate or intermediate preference to risk category rather than low or high-risk categories (Saini and Martin 2009). It is however important to note that further studies need to be conducted on this area as there are situations that change after the venture is underway. For instance, an individual may start a venture that they believe to be of moderate risk only to come to the realization that the venture is more risky than what they had initially perceived. Kuang and Qin (2013) observe that some moderate risk takers become high-risk takers after such a realization as they try to keep the venture running while others may resort to low cost measures in order to save on any perceived impending losses that they deem inevitable. Gibb and Haar (2010) note that the risk propensity of individuals needs to be further studied in terms of entrepreneurs who started high-risk ventures and failed or succeeded, those that took moderate ventures and failed or succeeded and those that took low risk and also either failed or succeeded. Block, Sandner and Spiegel (2015) observe that this would make it easier to understand the most viable risk propensity and what makes an ideal entrepreneur. It would be eye-opening in determining the level of risk preference among individuals and how such preference affect the running of an venture to produce either favorable or unfavorable results. However, it is also important to note that there are many other factors apart from risk propensity that affect the success or failure of an entrepreneurial venture (Christensen et al, 2015). According to Gardiner and Jackson (2012), some managers hold jobs with entrepreneurial characteristics and as such, it is important to assess their risk preferences. Studies conducted have concluded that managers with job descriptions that had entrepreneurial traits were more likely to prefer moderate levels of risk (Fargher, Jiang and Yu, 2014). They tended to lean towards risks with a high chance of success than high risks with unpredictable outcomes. Sripirabaa and Maheswari (2015) note that this is attributable to the fact that they are answerable to someone else and may be guarding their legacies in terms of success rate and results. Risk Propensity and Decision-Making in Entrepreneurship Extensive research has been conducted according to Huang and Pearce (2015) concerning human risk taking tendencies related to decision making in entrepreneurship. Human risk taking patterns contribute towards the manner in which they make decisions. Xiao et al (2001) point to individual’s relation to perception of risk propensity and its contribution to risky decision-making. Shouming et al (2012) observe that risk propensity reconciled by perception of risk led to risky behavior in decision-making. Baird and Thomas (1985) stipulate if an individual perceives a situation as low risk, they are bound to make decisions suitable to perceived situation such as not thinking or investing heavily in the process of decision making. Alternatively, a situation that is perceived to be highly risky will engage the individual’s full attention as they analyze suitable solutions to the perceived risk (Nicholson et al, 2005). Conclusion Entrepreneurial ventures feature a level of risk across the spectrum. Risk taking propensity in entrepreneurship looks at risk approaches that individuals take in their need to venture into entrepreneurship. Risk propensity is therefore, a comprehensive look at the willingness of individuals to take, accept, and embrace risk in relation to the outcome they expect and the onethey get. Some are more likely to take risks in venturing into business than others. Others are more inclined to take calculated risk or moderate risk situations to spread the idea of loss evenly. Individuals who embrace risk readily are more likely to be self-employed. This brings the comparison between an entrepreneur and what difference this has from a manager. Entrepreneurs are active managers of a business venture and the owners. They are the initial capital providers. Someone who provides capital but no participation in running the venture is not fully termed an entrepreneur. Risk propensity shows the difference in risk taking levels and how their effect on entrepreneurship. People are low, moderate or high-risk in line with their motivation towards achievement and failure. Risk taking propensity affects decision-making process entrepreneurs. More research needs to be conducted to the different levels of risk preferences. References Acar, E, & Göç, Y 2011, 'Prediction of risk perception by owners’ psychological traits in small building contractors', Construction Management & Economics, Vol. 29, no. 8, pp. 841-852. Ahmed, SU 1985, ‘nAch, risk-taking propensity, locus of control and entrepreneurship’, Personality and Individual differences, vol. 6, no. 6, pp.781-782. 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