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Risk-Taking Propensity Significantly Contributes to Entrepreneurship

But only for those who view running a business as their life’s work

ISTOCK

Situation: Risk-takers are thought to be more likely to set up and grow their own ventures because business involves many risks.

In fact: This does not apply to all entrepreneurial situations, but only to those where people have realized that running their own business is something they really want, not something they are pushed to do.

Now in more detail

Entrepreneurship can be either voluntary or forced. For voluntary (or ‘pull’) entrepreneurs, a business is usually a dream that turns into a goal to be achieved. For forced (or ‘push’) entrepreneurs, running a business is a necessary measure to survive or provide themselves with sufficient income. Researcher Ariadna Gromova, HSE University, has found out that risk-taking propensity has different effects on the likelihood of doing business in these two cases. The analysis is based on the data from the Russian Longitudinal Monitoring Survey (RLMS-HSE). A research paper on the results of the study was published by the HSE Economic Journal.

What is it all about?

Studies show that risk appetite influences people's behavior in many economic and social spheres. This includes decisions to migrate, to smoke or give up smoking, to work for either public or private sectors, and the frequency with which people change jobs, says Ariadna Gromova. Naturally, this also includes entrepreneurship.

The propensity for risk or the preference to take risky decisions reflects a person's willingness or unwillingness to face uncertainty and its potential negative consequences.

There is a consensus in academic literature as to why people choose entrepreneurship. Entrepreneurs are believed to be agents who act in the face of uncertainty and have some degree of ‘love’ of risk, she argues.

Ariadna Gromova highlights research papers by foreign colleagues that show that attitudes to risk are formed at an early age. Both environmental and hereditary factors play a role. Although usually quite stable, this propensity can change with age or under the influence of various kinds of shocks—for example, natural disasters, illness, etc.

As for the connection between risk-taking propensity and entrepreneurship, research conducted outside Russia demonstrates that the propensity to take risks significantly and positively correlates with the probability of having one’s own business. This is confirmed by inter-country samples. The problem is that studies do not always distinguish between respondents who decided to start their own business and those who inherited experience, knowledge, and resources, the researcher says.

 

There are, however, results from samples of respondents who grew up under communist regimes in East Germany and Ukraine, where intergenerational transmission of this kind is unlikely. 'These results show that even when family influence channels are blocked, risk appetite has a positive and significant effect on the likelihood of becoming an entrepreneur,’ the author comments. Moreover, risk affects not only the likelihood of becoming an entrepreneur, but also of being an entrepreneur for a long time.

Although Russia was included in some inter-country experiments, it was not generally analyzed separately, so there is little or no research on Russian samples. A specific matter of interest is the influence of risk-taking propensity on different forms of entrepreneurship, namely push and pull entrepreneurship. This aspect was the focus of Ariadna Gromova's attention.

How was it studied?

The study relied on RLMS-HSE data for 2016–2018. The sample covered over 9,000 people—a total of 27,024 observations for three years—who participated in all three monitoring waves. The respondents were aged 20 to 65 years old, with the average age of 42.

The author used statistical analysis methods. Overall risk appetite in the RLMS was measured through a question asking the respondent to rate themselves on a scale from 0 to 10, where 0 meant ‘not at all willing to take risks’ and 10 meant ‘always willing to take risks.’ A similar scale was used for risk appetite in specific areas, such as health, finances, career, and safety rules.

There is no specific question regarding respondents' motivation to engage in entrepreneurship in the RLMS. As the author notes, the issue of dividing people into 'push' and 'pull' entrepreneurs does not have an unambiguous solution. A number of studies show that one criterion may be the presence or absence of subordinates. This criterion was used in the study. The presence of subordinates can correlate to the size of a firm, its turnover, and costs, which increases the regulatory risks and risks of potential losses.

 

The project's pool of entrepreneurs included respondents who were self-employed or individual entrepreneurs and who gave an affirmative answer to one of the questions that help respondents identify themselves as entrepreneurs. Self-employment and entrepreneurship were considered synonyms, because, as the author notes, many entrepreneurs start out as self-employed people.

What are the findings?

The results of the analysis showed that risk-taking propensity has a significant impact on the likelihood of pursuing entrepreneurial activity. 'The probability of choosing self-employment for an individual who is absolutely inclined to take risks is 3–5 times higher than for an individual with the same characteristics but absolutely not inclined to take risks,' says Ariadna Gromova.

However, this correlation does not apply to 'push' entrepreneurs. The author says that risk-taking propensity has no stable influence on the choice of entrepreneurial activity for 'push' entrepreneurs as opposed to 'pull' entrepreneurs.

 

'We can see a fairly steep upward curve in the conditional probability for ‘pull’ entrepreneurs, which confirms the positive relationship between attitudes toward risk and self-employment,’ the study reports.

The analysis reveals another curious result. The link between risk appetite and entrepreneurship is stable in the overall sample of men and women. However, when the respondents are divided by gender, this conclusion ceases to be true for women. As the author notes, this is a topic for further serious research into the influence of risk appetite on choice of employment, while taking into account gender specifics.

Why should we care?

According to Rosstat, the number of entrepreneurs in Russia declined after 2008 from 8.3 million to 5.5 million people and has stagnated over the past few years. The number of small businesses declined by almost 30% in 2017. 'According to the World Bank, self-employment in Russia accounted for 6.8% of all employment in 2019, which is half of the average for European countries,' says Ariadna Gromova.

At the same time, the RLMS data signals a low risk appetite among Russians. The average value of the attitude toward risk ranges from 3.66 in 2018 to 3.73 in 2017 on a 10-point scale for the combined sample. 'Risk values in different areas also show an aversion to risk: for the 2016–2018 sample, averages range from 2.06 for health risks to 2.71 for career advancement,' the researcher says.

Entrepreneurship, however, is considered a significant and positive factor in the country's economic growth. 'People who are more inclined to take risks choose entrepreneurial activity and influence the competitiveness of the economy, its investment potential, innovation and economic growth,' comments Ariadna Gromova.

She emphasizes the importance of creating an entrepreneurial culture, which should include teaching the basics of entrepreneurial activity, creating clear rules of play, ensuring property rights, etc. 'All of this should reduce excessive entrepreneurial risks and promote interest in entrepreneurship among young people,' she believes.
IQ
 

Study author:
Ariadna Gromova, Research Assistant at the HSE Centre for Labour Studies (at the time of the research project)
Author: Marina Selina, January 18