Cognitive Evaluation Theory of Entrepreneurship
Cognitive evaluation theory is a theory in psychology (part of self-determination theory) where it has been used to explain how external factors affect an individuals intrinsic or internal motivation. Events that increase (decrease) perceived confidence increase (decrease) intrinsic motivation.
Keh et al. (2002) borrow the theory to conduct a study of entrepreneurs and find that: "illusion of control and belief in the law of small numbers are related to how entrepreneurs evaluate opportunities." These authors propose that individuals that perceive a lower level of risk associated with an opportunity are more likely to judge it positively. Entrepreneurs exhibiting an illusion of control, will have higher overconfidence and will perceive less risk. This is related to the hubris theory of entrepreneurship.
Another finding is that entrepreneurs with stronger beliefs in "the law of small numbers" perceive lower risks. The law of small numbers refers to the fallacy that motivates some people to buy lottery tickets. It is a cognitive bias that leads to hasty generalizations based on too little information, anecdotal evidence and mere gossip.
Incidentally, there is an interesting anecdote provided by successful entrepreneur David Daneshgar who won his startup capital by playing poker. The same kind of logic that drove him to gamble helped him in his entrepreneurial career.
Sources:
Keh, H. T., Der Foo, M., and Lim, B. C. (2002). Opportunity evaluation under risky conditions: The cognitive processes of entrepreneurs. Entrepreneurship theory and practice, 27(2), 125-148.
Keh et al. (2002) borrow the theory to conduct a study of entrepreneurs and find that: "illusion of control and belief in the law of small numbers are related to how entrepreneurs evaluate opportunities." These authors propose that individuals that perceive a lower level of risk associated with an opportunity are more likely to judge it positively. Entrepreneurs exhibiting an illusion of control, will have higher overconfidence and will perceive less risk. This is related to the hubris theory of entrepreneurship.
Another finding is that entrepreneurs with stronger beliefs in "the law of small numbers" perceive lower risks. The law of small numbers refers to the fallacy that motivates some people to buy lottery tickets. It is a cognitive bias that leads to hasty generalizations based on too little information, anecdotal evidence and mere gossip.
Incidentally, there is an interesting anecdote provided by successful entrepreneur David Daneshgar who won his startup capital by playing poker. The same kind of logic that drove him to gamble helped him in his entrepreneurial career.
Sources:
Keh, H. T., Der Foo, M., and Lim, B. C. (2002). Opportunity evaluation under risky conditions: The cognitive processes of entrepreneurs. Entrepreneurship theory and practice, 27(2), 125-148.
