Relationship among cognitive biases, risk perceptions and individual’s decision to start a venture

Abstract

The study examines the relationship among the cognitive biases (viz., overconfidence, illusion of control, optimism and planning fallacy), risk perception and individual’s decision to start a venture. To understand the relationship, this study developed and tested a model by partial least square—structural equation modelling. The study collected responses from 136 post graduate students after teaching discussion of a Harvard Business School case titled ‘Optical Distortion, Inc (Clarke 1988)’.This study found that planning fallacy and illusion of control have direct as well as indirect influence on new venture formation. Conversely, overconfidence and optimism have influenced new venture formation through risk perception. The study also indicates the overall preparation of management graduates for being an entrepreneur. It would act as an indicator of entrepreneurial orientation. All these understandings would be used as a base for the teaching of business skills as well as increasing the understanding the potential Indian entrepreneur’s minds towards the entrepreneurship and risk perception in particular.