Applying prospect theory to predict new venture creation

Hack, Andreas; von Bieberstein, Frauke; Kraiczy, Nils Daniel (August 2014). Applying prospect theory to predict new venture creation. Academy of Management Proceedings, 2014(1), p. 15228. New York: Academy of Management 10.5465/AMBPP.2014.156

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Although prior research on new venture creation has identified several antecedents that differentiate entrepreneurs from non-entrepreneurs, scholars still have an incomplete understanding of the factors and decision processes that lead an individual to become an entrepreneur. By applying prospect theory, we introduce the reference point as an important antecedent of new venture creation. Testing our research model and hypotheses with entrepreneurs and employees, results show that entrepreneurs set more aspiring reference points and therefore find themselves more often in a perceived loss situation. Results are also robust when testing for entrepreneurial intention of business graduate students. According to prospect theory, the perceived loss triggers more risk-seeking behavior. Summing up, the reference point has a positive effect on new venture creation and differentiates entrepreneurs from nonentrepreneurs. We discuss theoretical and managerial implications of the findings and develop avenues for future research.

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