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Keywords
Entrepreneurship, Decision making,
Conjoint analysis, Heuristics
Al-be
The representativeness heuristic generates a decision-bias encouraging over-estimation of the probability of low likelihood events when they are associated with strongly context representative propositions. An experimental investigation into decision making by final year business undergraduates demonstrates that this heuristic operates and consistently affects subjects' judgement of the probability of probe details about an entrepreneur in the representativeness-generating context of the future success or failure of a proposed venture by that entrepreneur. The results suggest that the
representativeness heuristic could hinder the quality of managerial decision making, especially decisions involving investment in new ventures. Evidence is generated in favour of a specifically cognitive source for this bias as opposed to a semantic mechanism proposed by some workers. This study adds to the growing literature on the representativeness bias in managerial decision making but is believed to be the first to consider it in an entrepreneurial context.
I Introduction Managers are often called upon to make decisions under conditions where information about the future is limited and knowledge of which particular outcome out of a set of possible outcomes will pertain is incomplete. However, there are degrees of ignorance. Knight (1921) distinguished between conditions of risk, where the probabilities of a set of outcomes are known, and uncertainty, where the outcomes are known but not their probabilities. Risk and uncertainty represent the ends of a knowledge spectrum with ambiguity (where probabilities are known, but not with certainty) as a bridging condition (Hogarth, 1989). These distinctions are important. As risk may be subject to actuarial evaluation it can be insured against. Uncertainty cannot. Most managerial situations reflect uncertainty and ambiguity rather than formal risk. Managerial (expert) judgement in assigning subjective probabilities to different eventualities reduces ambiguity and so increases the insurability of a business project. This is important in many decisional contexts, the financing of new entrepreneurial ventures where external investment is sought for example.
A manager usually makes a decision without expressing a specific judgement of the subjective probability (set) he or she is using unless a formal decision support tool (say a decision tree) is being adopted or if a request is made to make the judgement explicit. Modern decision theory, following Savage (1954),...