The endowment effect on entrepreneurs: A risky attachment

  • Isabela Echeverry Peñón
  • Santiago Reyes Ortega

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
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How to Cite
Echeverry Peñón, I., & Reyes Ortega, S. (2018). The endowment effect on entrepreneurs: A risky attachment. Estudios de Economía, 45(2), 231-249. Retrieved from https://estudiosdeeconomia.uchile.cl/index.php/EDE/article/view/51349/53733
Section
Articles
Published
2018-10-25