The Decisions of Entrepreneurs and Their Agents: Revealed Levels of Risk Aversion and Betrayal Aversion

27 Pages Posted: 11 May 2013

See all articles by Anna Dreber

Anna Dreber

Stockholm School of Economics - Department of Economics

David G. Rand

Massachusetts Institute of Technology (MIT)

Nils Wernerfelt

Harvard University - Harvard Kennedy School (HKS)

Peter R. Worrell

The Bigelow Company LLC

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: May 10, 2013

Abstract

This paper studies decision making by successful entrepreneurs and their agents. Since entrepreneurs decisions are often influenced by their agents’ advice, understanding the behavior of both involved parties is crucial in analyzing observed decisions. To this end, a sample of successful American entrepreneurs and their agents made a high-stakes decision in a real-world context, albeit in an experimental setting offering experimental-scale payoffs. They were asked whether to accept a contract in what was essentially a trust game. A monetary gamble measured economic risk taking; and the difference between the two measured betrayal aversion. All entrepreneurs assumed the professional role as principal. All individuals playing agent were real world agents. We also have some agents play the role of the principal, and thus test whether subjects’ roles affect the decisions they make.

Consistent with most prior studies, our subjects proved both economically risk-averse and betrayal averse. Little difference in behavior emerged between entrepreneurs and agents in their respective professional capacities, or with agents acting as principals. These results imply that, under our realistically framed business scenario with aligned incentives, agents could be relied upon to be “faithful,” to act according to their principals’ proclivities. Importantly, however, they do not advise against what many expert observers believe to be principals’ excess aversion to risks. That is, they fail to act as “correcting agents.”

Keywords: risk taking, betrayal aversion, agents, principals, entrepreneurs, experiment

Suggested Citation

Dreber, Anna and Rand, David G. and Wernerfelt, Nils and Worrell, Peter R. and Zeckhauser, Richard J., The Decisions of Entrepreneurs and Their Agents: Revealed Levels of Risk Aversion and Betrayal Aversion (May 10, 2013). Available at SSRN: https://ssrn.com/abstract=2263282 or http://dx.doi.org/10.2139/ssrn.2263282

Anna Dreber

Stockholm School of Economics - Department of Economics ( email )

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David G. Rand

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
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HOME PAGE: http://www.daverand.org

Nils Wernerfelt

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Peter R. Worrell

The Bigelow Company LLC ( email )

One Harbour Place
Portsouth, NH 03801
United States

Richard J. Zeckhauser (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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Cambridge, MA 02138
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617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

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