The Economic Psychology of Entrepreneurship and Family Business

• DOI: http://doi.org/10.1111/jems.12013
• Date: 01 June 2013
• Author: David T. Robinson,Manju Puri
• Published date: 01 June 2013

The Economic Psychology of Entrepreneurship

and Family Business

MANJU PURI

Duke University and NBER

100 Fuqua Drive

Durham NC 27708

mpuri@duke.edu

DAVID T. ROBINSON

Duke University and NBER

100 Fuqua Drive

Durham NC 27708

davidr@duke.edu

This paper studies the attitudes of entrepreneurs, both how they differ as a group from others

in the economy, as well as how they differ from one another according to the mode of entry into

entrepreneurship and whether or not the firm is a family business. We use data fromt he Survey of

Consumer Finance to measure and isolate the enjoyment of private benefits, attitudes toward risk,

and optimism for these groups. Entrepreneurs are more optimistic and enjoy the nonpecuniary

benefits of work more than wage earners. They embrace risk, but perhaps less so than commonly

believed, as their risk-bearing is tempered by longer planning horizons. Family business owners

share optimism and nonpecuniary benefits with other entrepreneurs; their tolerance for risk is not

different than wage earners. In contrast, those who inherit businesses are significantly less risk

tolerant than nonentrepreneurs, areno more optimistic than nonentrepreneurs, but seem to derive

more nonpecuniary benefits from work than others. Simply possessing these entrepreneurialtraits

translate into actions, increasing the amount of time spent at work, even among those who are

not entrepreneurs.

1. Introduction and Overview

Entrepreneurs make seemingly peculiar financial choices. They hold poorly diversified

portfolios, concentrating their wealth more in their own private business than would

be prescribed by financial theory (Heaton and Lucas, 2000; Moskowitz and Vissing-

Jorgensen, 2002; Gentry and Hubbard, 2004). They bear excessive risk for the returns

they earn; indeed, Moskowitz and Vissing-Jorgensen(2002) show that they earn low risk-

adjusted returns, documenting a private equity premium puzzle. In addition, they tend

to receive lower annual earnings than similarly skilled wage-earners (Hamilton, 2000).

These facts are even more puzzling when we consider the demographics of en-

trepreneurship in the United States. Of the roughly 13 million households who run their

own business, around 40%—nearly five million households—employ a spouse or adult

Wewould like to thank seminar participants at DePaul, Michigan State, the LBS Entrepreneurship conference,

and the RICAFE 2 conference for helpful comments. Comments and suggestions by Werner DeBondt, Simon

Gervais, Ahmed Khwaja, Rick Larrick, TimLoughran, AnnaMaria Lusardi, Cade Massey, David de Meza, Toby

Moskowitz, John Payne, N.R. Prabhala, and Luca Rigotti are gratefully acknowledged. The usual disclaimer

applies.

C2013 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume22, Number 2, Summar 2013, 423–444

424 Journal of Economics & Management Strategy

child full-time in the business. Thus, not only is the financial capital of many households

heavily concentrated in idiosyncratic investments, often the human capital of the entire

household is too.

Why do entrepreneurs and family business owners make these choices? More

generally, what attitudes separate entrepreneurs from others in the economy? Previ-

ous scholars have offered a range of explanations for the peculiar behavior of en-

trepreneurs.1Perhaps entrepreneurs either derive substantial nonpecuniary benefits

from self-employment (Benz and Frey, 2004), or some of their pecuniary benefits are

unobserved (Sarada, 2010). Perhaps entrepreneurs are risk-takers (Khilstr¨

om and Laf-

font, 1979). Or perhaps they are optimistic—maybe too optimistic—about their en-

trepreneurial prospects (Coelho et al., 2004).

In this paper, we provide distinct measures of the private benefits of self-

employment, optimism, and risk preferences, and show that each are important for

understanding entrepreneurship. Variation in these traits distinguishes wage earners

from both family and nonfamily business owners.

Nonpecuniary benefits of self-employment, attitudes toward risk, and optimism

are difficult to isolate empirically. For this purpose we use a well-established database,

The Survey of Consumer Finances (SCF). The SCF provides data on entrepreneurial

actions, such as effort and productivity. Moreover,the SCF also tracks information about

family structure and work activity that allows us to relate family business characteristics

to attitudes and actions.

Our analysis proceeds in three steps. Since we are concerned with the attitudes of

self-employed individuals and the distinct attitudes of those who operate family and

nonfamily businesses, we begin by operationalizing our definitions of self-employment.

The SCF allows us to measure whether an individual owns a private business, as well

as whether that person also actively manages that business. We require both to classify

someone as an entrepreneur. We further classify family businesses as those businesses

in which a spouse or an adult child works in the business. Separately, we build on the

mode-of-entry analysis of Parker and van Praag (2012), and also study businesses in

which the entrepreneur entered the business. These classifications and the motivations

behind their choice are presented in Section 2.

Then, in Sections 3 and 4, we lay out our empirical measures of optimism, self-

employment, and attitudes toward risk in the SCF data. To capture the nonpecuniary

benefits of self-employment, we make use of questions in the SCF that elicit attitudes

toward reti rement.2The SCF asks respondents when they expect to stop working. Most

people report that they intend to stop around age 65, however,some respondents report

that they never intend to stop working at all. We use this as an indication that the

respondent derives nonpecuniary benefits from work.

To measure risk preferences we make use of survey questions that elicit the re-

spondent’s self-perceptions about the amount of financial risk they are willing to bear

for a commensurate level of return. This question provides modest evidence that en-

trepreneurs are more willing to embrace risk than the rest of the population. The mag-

nitudes, however, may be lower than commonly believed: family business owners are

no more risk-tolerant than wage earners, and respondents who entered entrepreneur-

ship through business inheritance are less tolerant of risk than the general population.

1. Forexcellent recent surveys, see Parker (2009, chapter 4) and van Praag and Versloot (2008).

2. See Parker and Rougier (2007) for a detailed analysis of the retirement behavior of self-employed

individuals in Britain.