In a new research paper, Entrepreneurship and Loss-Aversion in a Winner-Take-All Society, John Morgan and Dana Sisak found that “loss aversion, or the fear of losing one’s salary at a full-time job, along with its prestige, is directly linked to the amount of effort an entrepreneur puts into a startup.”
Loss aversion is what drives most entrepreneurs, not a love of risk.
Morgan, who is a professor at the Haas School of Business, told Haas Now: “There is a view that entrepreneurs are often overconfident gamblers, who thrive on risk, yet there is little evidence to support this view. Entrepreneurs aren’t Steve Jobs. They’re just ordinary people who want to start a business. I wanted to try to understand a little better what motivated those individuals.”
“Morgan and Sisak found an entrepreneur’s level of ongoing concern about loss aversion correlates with entrepreneurial effort. In other words, entrepreneurs who put a high stake on avoiding loss – more so than acquiring new gains – worked harder.”
Said Morgan: “One of the most important traps entrepreneurs fall into is when they’re not experiencing success and they become increasingly willing to take risks because of where they are psychologically. One lesson from the research is to be careful when you are behind. It’s not necessarily the best decision to double down.”
In other words, risk aversion can be a good thing.