The need for entrepreneurs’ risk literacy: evidence from Italian SMEs and a call to arms

Previous studies in the literature have shown that entrepreneurs tend to overinvest in their own firms and that small and medium enterprises are typically underinsured. In this contribution, I gather the results of two “twin†analyses on Italian entrepreneurs’ attitudes toward risk and behavioral biases, to stress the importance of risk literacy among them and the associated policy implications to reduce the issues of underinsurance and under-diversification. The first analysis (Cervellati, Corea and Zanghieri, 2019) shows that entrepreneurs underinsure their firms, exposing them, and in some cases also themselves and their households, to specific risk that they could otherwise avoid through a better diversification or transfer to insurance companies. The second one (Cervellati, Pattitoni and Savioli, 2019) shows that entrepreneurs tend to underestimate corporate risks, overinvesting in their own firm, thus bearing an excessive amount of specific risk. The two analyses are complementary not only because they are based on the same dataset, but also because they show that a major role in the entrepreneurs’ choices about risk is played by behavioral biases. Over optimism and especially overconfidence seem to distort entrepreneurs’ risk perception, distorting their choices and leading to both under-diversification and underinsurance. Several policy implications are advances to reduce the negative impact of entrepreneurs’ behavioral biases, to improve their choices and eventually foster innovation and growth in Italy.