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Risk Taking in Entrepreneurial Decision Making

Risk Taking in Entrepreneurial Decision Making

Risk is the element often associated with entrepreneurship. We want to talk about that, we want to break this down a bit, we want to talk about risk in the context of entrepreneurs' risk appetite, we want to examine why entrepreneurs engage in risk, and we want to discuss some ways to accurately assess and manage risk.

Decision risks


So strategic entrepreneurial decisions are inherently risky. We are doing new things we don't know the results.

We try to solve difficult problems, when working in environments with high consequences. We also want to realize that danger is often in the eye of the beholder. And we'll talk about what that means.

Do entrepreneurs display a higher natural inclination to take risks? In other words, do entrepreneurs seek to take risks at a higher rate than anyone else? Good research, over and over again, tells us no.

The consensus among researchers is that there is no difference and risk propensity to pursue risky activities among entrepreneurs versus managers or non-entrepreneurs.

What is different is the perception of risk. Therefore, there are other factors that motivate entrepreneurs to start projects, besides their tendency to take risks.

Now we can look at entrepreneurs like Elon Musk who saw an opportunity with PayPal he was a huge success and took over $200 million in his own assets, almost all of his fortune from PayPal and invested that in Tesla and at one point in 2010 he financially collapsed. collapsed several times? Well, they put all their money into a risky venture.

But again, what he's done since then is growing the company in the eye of the beholder.

We see that he got back on track a few years after the crash and even became a billionaire based on the success of Tesla.


Why do we take risks?


So why do you do this? Well, in his case, he saw an opportunity. He saw the opportunity for electric cars, not a risky proposition, and many others would.

Why did they take the risk? Well, they may lack the information needed to make a good decision.

They may have an inner view, or some ideas that make them believe that they can achieve what others cannot.

They may not be discouraged by past situations in which others have failed and we tend to have some inclination to achieve a positive outcome.

So when you look at this and think about it with Elon Musk, why not make electric cars? Why not a good-looking car that performs better than a petrol car, is cheaper to maintain, and may be cheaper to build over time when many of the parts associated with your petrol car are removed? If you remove the gas powered engine and replace it with a battery, and if you remove the transmission, an electric vehicle is a lot like a light switch on or off and not a transmission.

If you eliminate the need to put gas in the car every week, or every two weeks, it makes sense if you can predict that they will come up with a less risky proposition than they have for others.

So the main factors affecting entrepreneurs when they look at this:

  • How high is the risk?
  • What are the rewards?
  • What are the consequences?
  • Were all the complex elements considered?

So when we think about how we make entrepreneurial decisions, and we think about the role of cognitive complexity, it's very much related to an individual's information-processing capabilities. It's related to how we as an entrepreneur view and calculate risks.

There are a number of influencing factors. This element of industry dynamism, while perhaps a complex term, is really connected to something that is changing. How dynamic is the industry? And what can we do as entrepreneurs to recognize and catalyze change?

Context of multiple perspectives


Another key element to think about is the context of multiple perspectives. Who can look at the opportunity to work as an entrepreneur, as a founder, but also think about it from the perspective of potential customers and partners, as well as competitors.

Not everyone will be sitting idly by while we launch our project. So we want to think about what we're going to do, what they're going to do, what we're going to do. So it's a chess mindset and think a few steps ahead.

We want to incorporate these viewpoints into our decision. This helps us manage risk when we anticipate what will happen. We also want to use some complex thinking, and take a broad and deep look at the challenges ahead.


When we think of risks, entrepreneurs are not by nature looking for risks. Instead, they engage in risks for a variety of different reasons that concern them personally, and are governed by how they perceive the risks.

How they analyze risks, how they assess risks, and what they think they can do to mitigate those risks and achieve success in their project.

See: Entrepreneur: Definition, important and How to Become

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