Entrepreneurship Theories

“Who am I?” / “Who are we?” Social identity theory (SIT) has long been a mainstay of social psychological thinking about politics and human behaviour in general. SIT is at its core a theory about in-groups and out-groups, as easily formed social constructions that can manifest with real consequences. Consider football hooligans beating each other over their team colours. We all have multiple identities, and some scholars propose that the more central one's entrepreneurial identity, compared with family and other identities, the more likely they will start a venture, grow a startup, or develop a capability (Hayter et al., 2021). "I am an Entrepreneur" In entrepreneurship, SIT is pointed at the entrepreneurial identity (EI), defined as a set of attitudes, beliefs and behaviours reinforcing being an entrepreneur. According to Shepherd et al. (2018) "a meaningful self-identity is central to individuals’ psychological functioning and well-being." The li...

The Complex Link Between Entrepreneurship and Narcissism The relationship between entrepreneurship and narcissism has been a topic of intense interest among researchers and scholars for many years (Campbell et al., 2011). While the stereotype of the "arrogant visionary" is common, the data reveals a nuanced reality. While some studies suggest that narcissistic traits can drive entrepreneurial success, others argue they often result in negative outcomes for both the entrepreneur and their ventures (Leung et al., 2021). Do Entrepreneurs Score Higher in Narcissism? Generally, entrepreneurs tend to score higher on measures of narcissism than non-entrepreneurs. Researchers suggest that moderate levels of narcissism may actually be beneficial in specific scenarios. These traits are often associated with: Increased self-confidence. A higher tolerance for risk-taking. Charisma and the ability to persuade stakeholders. For example, a confident CEO may be m...

Neurodiversity in Entrepreneurship: Turning Mental Health Into an Asset Historically, mental health conditions were viewed solely as problems requiring medical intervention or counseling. A common misconception persists that neurodivergent individuals are less capable than their neurotypical peers. However, modern research challenges this view. While neurodivergent individuals often perceive and process information differently than what is considered "normal," this difference does not equate to inability. In fact, neurological variations have been linked to significant success, particularly in the world of entrepreneurship. The Link Between Mental Health and Business Research indicates a strong correlation between entrepreneurship and mental health conditions. In a landmark study, Freeman et al. (2019) surveyed 335 individuals, including 242 entrepreneurs. The results were striking: 49% of the entrepreneurs reported having one or more lifetime mental health conditio...

The External Enabler Framework (Davidsson, Recker & von Briel, 2020) is a conceptual toolbox developed for analyzing the strategic and fortuitous influence of changes to the business environment in entrepreneurial pursuits. External Enabler (EE) refers to significant changes to the business environment, such as new technologies, regulatory changes, macroeconomic shifts, demographic and sociocultural trends, changes to the natural environment, and the like. The basic assumption of the EE body of work is that every such change will benefit some entrepreneurial initiatives even if it disadvantages other economic activities. EE analysis focuses on those enabled; other frameworks are needed for analyzing negative consequences of change. Moving Beyond "Objective Opportunity" The EE concept was introduced as a more workable alternative to “objective opportunity” for realizing the idea of entrepreneurship as a nexus of enterprising agents and favorable ...

The Dark Side of Entrepreneurship: Can You Be Addicted to the Lifestyle? Could one become addicted to the idea of being an entrepreneur? Countries vary in terms of how their people view entrepreneurs and entrepreneurship as a career path. In some places, entrepreneurship may be viewed negatively or associated with corruption. However, the prevailing view of the entrepreneur in Western Media is the heroic entrepreneur meme . These figures are often portrayed as outsiders who manage to disrupt incumbencies and are associated with ideas such as democracy, freedom, and liberty. The Rise of the "Wantrepreneur" Perhaps the positive view of the practice has led to entrepreneurship becoming a desirable pursuit for individuals searching for a lifestyle and character to identify with. These types of individuals have been given names over time including: The "Wantrepreneur" The Veblenian Entrepreneur The "Untrepreneur" These labels refer to in...

The Underdog Advantage: Does Childhood Adversity Create Entrepreneurs? While researchers have long studied resilience in adults, few have examined how childhood adversity specifically affects entrepreneurial entry later in life. Does early trauma break a person, or does it forge the skills necessary to build a business? Recent studies suggest the latter, pointing to a biological and psychological link between hardship and business creation. The Underdog Theory of Entrepreneurship To explain this phenomenon, scholars utilize the ‘Underdog Theory’ proposed by Miller and Le Breton-Miller (2017). The core premise is that life challenges require the development of adaptive skills that inadvertently make individuals better suited for entrepreneurship. "Negative personal circumstances of an economic, sociocultural, cognitive, and physical/emotional nature may have a … powerful role to play in getting people to become effective entrepreneurs" (...

Risk Compensation Theory: Do Safety Nets Fuel Startups? What is the Risk Compensation Theory of entrepreneurship? It stems from a counter-intuitive economic principle: When people feel safer, they take more risks. This concept originated with Sam Peltzman’s (1975) pioneering study of automobile accidents. He argued that safety regulations (like seatbelts) didn't always reduce fatalities because drivers, feeling safer, compensated by driving more aggressively. This phenomenon, now dubbed the ‘Peltzman Effect,’ extends to NASCAR racing, hockey visors, and bike helmets. But does it also explain why strong social safety nets might actually increase entrepreneurship? The Safety Net Hypothesis There is emerging evidence that social safety nets function like seatbelts for aspiring founders. By reducing the catastrophic risks associated with failure, they encourage individuals to leave stable employment and start ventures. Evidence from the Field Several studies support ...

Attribution Theory: Why We Blame Entrepreneurs for Failure Why do we blame founders when a startup crashes, but blame the economy when our projects fail? The answer lies in Attribution Theory . Developed by Austrian psychologist Fritz Heider in the 1950s, the fundamental assumption of this theory is that humans are driven to find causes for success and failure. However, we rarely do this objectively. We use cognitive shortcuts that lead to specific biases. The Two Core Biases Attribution theory identifies two main ways we distort reality regarding success and failure: Self-Serving Bias: Individuals attribute their own success to internal factors (talent, hard work) but attribute their failures to external forces (bad luck, the economy). Fundamental Attribution Error: When we watch others fail, we attribute it to internal causes (laziness, incompetence) rather than considering the environmental conditions that may have caused the failure. The Impact on Entr...

Self-Competition Theory: Why Entrepreneurs Compete Against Themselves Why do successful entrepreneurs, who have already made their millions, continue to risk their capital again and again? Elias Khalil (1997) at Monash University posed this question. Logic suggests that once an entrepreneur has achieved financial security, they should retire to protect their wealth. Yet, many do the opposite. They double down. Beating the "Former Self" Self-Competition Theory offers a psychological explanation. It posits that high-performing individuals are not necessarily trying to beat competitors in the market; they are trying to beat their former selves . The theory's main assumption is that individuals keep a mental scorecard of their "personal bests." Entrepreneurship becomes a vehicle for self-improvement, where the goal is to exceed previous metrics. For example, an entrepreneur might try to: Obtain an ROI (Return on Investment) double that of their pr...

Resilience Theory: The Art of Getting Back Up What is the single most important trait for a founder? Many argue it isn't intelligence or funding, but Resilience . Resilience is defined as the ability to recover quickly from difficulties—to "get up after you fall down," whether physically, psychologically, financially, or socially. Because entrepreneurs typically face numerous failures on their way to eventual success, resilience is expected to be a critical capability. More Than Just "Toughness" The idea of resilience is appealing because it soothes the failing entrepreneur. It reinforces the belief that continuing on despite setbacks is better than withdrawing. In the startup world, this is often manifested as the "Pivot" —the ability to change directions rapidly as reality comes into focus, rather than quitting. Evidence from the Field Academic research supports the link between resilience and business survival: Ayala and Manzano...

Prospect Theory: Why Founders Fear Loss More Than They Value Gain Why do some entrepreneurs take reckless risks while others play it too safe? The answer often lies in Prospect Theory . Developed by Nobel Prize-winning psychologists Daniel Kahneman and Amos Tversky in the 1970s, this behavioral economic theory changed how we understand decision-making. Its most famous hypothesis is Loss Aversion : the psychological pain of losing is about twice as powerful as the pleasure of gaining. The Two "Frames" of Risk The theory posits that humans are not rational calculators. Instead, our risk tolerance changes entirely based on whether we feel like we are currently "winning" or "losing." The Gain Domain (Winning): When individuals think they are ahead, they become Risk-Averse . They want to protect what they have won. The Loss Domain (Losing): When individuals think they are behind, they become Risk-Seeking . They are inclined to take bigger...

Cognitive Evaluation Theory: Why Entrepreneurs Ignore Risk Why do entrepreneurs often pursue ventures that statistics say are doomed to fail? The answer may lie in Cognitive Evaluation Theory (CET) . A sub-theory of Self-Determination Theory , CET explains how external factors affect an individual's intrinsic motivation. The core premise is simple: Events that increase an individual's perceived competence and autonomy will increase their intrinsic motivation to act. [Image of Self-Determination Theory diagram] Evaluating Opportunity Under Risk Keh et al. (2002) borrowed this psychological framework to study how founders evaluate business opportunities. They found that entrepreneurs do not assess risk objectively. Instead, their cognitive processes alter their perception of reality. The researchers identified two specific cognitive biases that lead entrepreneurs to judge risky opportunities more positively than they should: 1. Illusion of Control Entrepreneurs ...

Social Identity Theory originated from the experiments of Henry Tajfel and John Turner (1979), which showed that the slightest priming of group membership creates prejudice. “Blue eyes, a preference for the paintings of Wasily Kandinsky over those of Paul Klee... were sufficient to produce a preference for fellow group members and to elicit discrimination against outsiders” (Huddy, 2001:132). The Core Concept Social identity theory explains why human personalities and behaviors seem to be context-specific. A given individual may act differently depending on which groups they perceive themselves to belong to. The theory suggests that personal identity plus environmental conditions shape social identity, which in turn leads to the categorization of others into in-groups and out-groups . Application to Entrepreneurship Obschonka et al. (2012) argue that individual beliefs and attitudes are unlikely to be the only drivers of entrepreneurship. Rather, they use social identity ...

Mathew Hayward and colleagues (2006) introduce a Hubris Theory to entrepreneurship. Their aim is to explain why so many new ventures are started despite a very high background failure rate. After all, most businesses fail within the first few years of founding. So why do entrepreneurs keep trying to create new ones? The theory suggests that individuals overestimate the personal wealth they may attain by starting new ventures. [Image of Dunning-Kruger effect graph] The Mechanism: Overconfidence The theory assumes that individuals have information about their likelihood of success, but think that they can "beat the odds." The theory hangs on the idea of confidence. More confident individuals have the bravado to be able to start businesses and allocate resources in challenging situations, while less confident individuals may not be moved to start ventures or grow them. The Double-Edged Sword While confidence drives entry, it can be detrimental to operations. ...

Actualization Theory of Entrepreneurship: Bridging Discovery and Creation Actualization Theory: Bridging the Gap in Entrepreneurial Opportunity The Actualization Theory of entrepreneurial opportunities, introduced by Ramoglou and Tsang (2016), is intended to resolve one of the biggest debates in the field: the gap between Discovery and Creation theories. The Great Debate: Discovery vs. Creation To understand Actualization, we must first understand the two opposing views it attempts to reconcile. The debate centers on whether business opportunities exist objectively (realism) or are imagined subjectively (constructionism). 1. The Discovery Perspective This view argues that opportunities exist "out there" in objective reality, waiting to be found and exploited. This implies that if an opportunity does not exist, no amount of effort will be fruitful. The Edison Analogy: Denying objective existence is like arguing that if Thomas Edison had ...

Passion in Entrepreneurship: Fuel, Obsession, or Side-Effect? We have all seen motivation memes about passion. Some popular ones include: "passion never fails", "I live my passion", "follow your passion", "passion is priceless", "passion is purpose", "make your passion your paycheck", "your passion is your success", "ignite your passion", "find your passion", "your passion will find you." We have also witnessed entrepreneurial passion on display when entrepreneurs pitch their ideas to potential investors. TV shows like Dragon's Den and Shark Tank have helped to place passion at the center of our attributions of potential entrepreneurial success. "I like your passion" is a hallmark comment preceding made-for-TV deal-making. Passion and Entrepreneurship Research Over the last two decades, entrepreneurship researchers have started to unpack the concept of entrepreneu...

Ambiguity tolerance theory can be traced back to Polish psychologist Else Frenkel-Brunswik , whose work in 1949 focused on authoritarianism and ethnocentrism in children. Ambiguous information is everywhere. For many, it leads to the conclusion that there is "no way out," no way to understand, or no viable way to proceed. The decision-making process can become paralyzed by ambiguity that prevents conclusive prescriptions. The Entrepreneurial Advantage When there exist high levels of uncertainty about a particular entrepreneurial venture, those individuals who exhibit higher levels of tolerance of ambiguity are more likely to succeed. The ability to tolerate conflicting information and deal with missing information makes the difference. The more uncertain a particular business opportunity, the more important this trait becomes: Traditional Industries (e.g., Restaurants): Market information is generally consistent and known. New Industries (e.g., Tech): Marke...

What is the Disagreeableness Theory of Entrepreneurship? In his book David and Goliath (2013) , Malcolm Gladwell introduces disagreeableness as a key attribute of entrepreneurs. Gladwell explains this not as being rude, but as a psychological capability: not needing the social approval of peers . Most people are naturally influenced by critical feedback. If a friend or family member says "that is a bad idea" and you stop, you are demonstrating "agreeableness." In contrast, a successful entrepreneur often requires a specific kind of social resilience to ignore that feedback. The IKEA Example: Risking Disapproval Gladwell cites Ingvar Kamprad, the founder of IKEA , as a prime example. Kamprad pioneered outsourcing production to Soviet periphery states during the height of the Cold War. At the time, this was seen as unpatriotic and a terrible idea by his peers in Sweden. In this case, the entrepreneur was not afraid of being criticized or soc...

What is the Impulsivity Theory of Entrepreneurship? Impulsiveness refers to taking action without thinking about it first and without considering all available data before deciding. In the context of business, Wiklund, Patzelt and Dimov (2016) state that: "Acting without thinking is characterized by rapid decision making in situations that would seem to require extensive analysis and deliberation." They explain that individuals need to act impulsively in some entrepreneurial conditions because deep analysis is often impossible due to uncertainty, ambiguity, and urgency. Rather than succumbing to analysis paralysis , impulsive entrepreneurs take leaps of faith that others are not willing to take. The Link Between ADHD and Entrepreneurship Attention-Deficit/Hyperactivity Disorder (ADHD) is usually considered a problem that needs to be treated. For instance, many parents medicate their children to combat the negative effects of the disord...

Locus of Control Theory: Are You the Master of Your Fate? Do you believe you create your own luck, or do things just happen to you? In the psychology of entrepreneurship, this distinction is known as the Locus of Control . Developed in the 1950s by psychologist Julian Rotter , this concept has received considerable attention because it attempts to explain the fundamental worldview of the founder. Internal vs. External: The Continuum Locus of control refers to an individual’s perception of the underlying causes of events in their life. It is viewed as a continuum with two extremes: External Locus of Control: The belief that life is determined by forces outside of one's control, such as fate, luck, deities, or powerful institutions. ( "I failed because the economy is bad." ) Internal Locus of Control: The belief that one is the master of their own destiny. Success or failure is determined by one's own efforts and abilities. ( "I failed becau...