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Loss aversion and risky entrepreneurship

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  • Bonilla, Claudio A.
  • Fica, Diego

Abstract

The rise of experimental economics has made us wonder if the traditional approach to studying economics under risk (expected utility and risk-averse agents) is the best way to represent actual behavior. In this paper, we introduce an alternative model of economics of entrepreneurship under risk using reference-dependence preferences and analyze if the basic comparative static results from the traditional model still hold under loss averse preferences. We find minor differences between what we know under risk aversion and what we get under loss aversion. This is a positive result, if we expect policies that promote entrepreneurship to be effective, no matter if the individual is risk or loss averse.

Suggested Citation

  • Bonilla, Claudio A. & Fica, Diego, 2022. "Loss aversion and risky entrepreneurship," Finance Research Letters, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322002331
    DOI: 10.1016/j.frl.2022.102985
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    References listed on IDEAS

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    Cited by:

    1. Fang, Hongxing & Chen, Linghong & Xiong, Jiacai & Zhu, Yushu, 2024. "Social Trust and Entrepreneurship: Insights from China's Social Credit System," Finance Research Letters, Elsevier, vol. 62(PA).

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    More about this item

    Keywords

    Entrepreneurship; Risk; Loss aversion; Reference-dependence preferences;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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