The Endowment Effect on Entrepreneurs: A Risky Attachment

Estudios de Economía. Vol. 45 - Nº 2, Págs. 231-249, Diciembre 2018

20 Pages Posted: 13 May 2019

See all articles by Isabela Echeverry

Isabela Echeverry

Cámara de Comercio de Cali

Santiago Reyes

Inter-American Development Bank

Date Written: December 1, 2018

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

JEL Classification: L26, G41, D91, C91

Suggested Citation

Echeverry, Isabela and Reyes, Santiago, The Endowment Effect on Entrepreneurs: A Risky Attachment (December 1, 2018). Estudios de Economía. Vol. 45 - Nº 2, Págs. 231-249, Diciembre 2018, Available at SSRN: https://ssrn.com/abstract=3370945

Isabela Echeverry (Contact Author)

Cámara de Comercio de Cali ( email )

Colombia

Santiago Reyes

Inter-American Development Bank ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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