REGULATORY FOCUS AND ENTREPRENEURIAL INTENTION: ACTION BIAS IN THE RECOGNITION AND EVALUATION OF OPPORTUNITIES
Jeffery
S. McMullen, University of Colorado at Boulder
Dean A. Shepherd, University of Colorado at Boulder
This paper investigates the effect of regulatory focus on entrepreneurial intention. We present a model of entrepreneurial intention as the product of entrepreneurial knowledge and entrepreneurial motivation. Through conjoint analysis, we use regulatory focus theory to examine entrepreneurial motivation while controlling for different levels of entrepreneurial knowledge. Regulatory focus theory describes two distinct self-regulatory systems used to organize complex behavior sequences: (1) promotion focus, concerned with advancement, growth, and accomplishment, and (2) prevention focus, concerned with security, safety, and responsibility. Both foci are a function of situation and person. We find that increasing benefits of action (high benefits for “hits” and low costs for “false alarms”) cause greater increases in entrepreneurial intention for people in promotion situations than for people in prevention situations. We also find that increasing costs of inaction (low benefits for “correct rejections” and high costs for “misses”) cause greater increases in entrepreneurial intention for people in prevention situations than for people in promotion situations. This suggests that the framing of a situation significantly influences both how attention is allocated and how likely one is to pursue entrepreneurial actions.
There is a growing consensus that entrepreneurship involves the recognition and exploitation of opportunities (Kirzner, 1997; Shane & Venkataraman, 2000). Although researchers have begun to examine the role of prior knowledge in the opportunity recognition process, little attention has been given to the equally important element of motivation. This neglect is disconcerting because regardless of whether entrepreneurship is conceptualized as innovation (Schumpeter, 1934), uncertainty-bearing (Knight, 1921), alertness (Kirzner, 1973), firm creation (Gartner, 1990), or opportunity-seeking (Shane & Venkataraman, 2000), action is required.
Because action takes place in the flux of time, it is inherently uncertain (Mises, 1949). Thus, for entrepreneurial actions (i.e., the creation of new firms, products, processes, markets, or combinations thereof [Smith, 2001]) to occur, one must exercise judgment under uncertainty (Cantillon, 1755). Although knowledge is an essential aspect of this judgment (Shane, 2000), it provides an incomplete picture without the concomitant consideration of motivation. In fact, Pfeffer and Sutton (1999), after a five year intensive investigation, found that a lack of knowledge was rarely the culprit behind a firm’s failure to exploit opportunities. Rather, their conclusions echoed Higgins’ and Kruglanski’s (2000:7) observation that “People take action because they want something.”
Therefore, although the investigation of entrepreneurship as opportunity recognition has allowed a paradigm of entrepreneurship research to emerge, and although examination of opportunity recognition as prior knowledge has advanced our understanding of the process, we suggest that this specialized approach may exclude valuable findings that can only be captured by examining knowledge and motivation simultaneously. Accordingly, this paper examines the role of entrepreneurial motivation in the decision to act entrepreneurially while controlling for different levels of entrepreneurial knowledge.
A MODEL OF ENTREPRENEURIAL INTENTION
We apply a simple model of action (see Figure 1) to the entrepreneurial phenomenon (see Figure 2). In doing so, the conceptual model was augmented to include the element of intention. Although scholars often discuss action as though it is a dependent variable (Ajzen, 1991), Greve (2001) points out that, because action is always dependent upon environmental conditions, the best that social scientists can achieve without abolishing the concept of freewill is a theory of intention. Accordingly, the intention to act entrepreneurially is the dependent variable of this study with the understanding that, barring any environmental obstruction, action will flow from intention, ceteris paribus. With this in mind, we now turn attention to the constructs comprising intention.
Entrepreneurial Knowledge
Without “wanting” one is lost in thought, whereas without “knowing” the outcome of any action is chance. Therefore, for prospective entrepreneurs, “knowing” is conceptualized as entrepreneurial knowledge, or objective and subjective knowledge regarding whether a signal constitutes an opportunity. A signal is defined as new information or new awareness to existing information that changes one’s evaluation of the desirability and feasibility of a future state (Fiet, 1996). Knowledge is considered objective when there is a difference in experience or training that makes one person more capable of noticing a signal than another person. Knowledge is considered subjective in the sense that two people with similar objective knowledge may have very different levels of confidence in their knowledge. One may be over-confident and another under-confident. This type of second-order knowledge, or knowledge about one’s knowledge is often conceptualized as self-efficacy or entrepreneurial-efficacy (Chen et al., 1998).
Entrepreneurial Motivation
In addition to entrepreneurial knowledge, there is a second construct of importance, entrepreneurial motivation. Entrepreneurial motivation in this context refers to a preference for tolerating one type of error over another type of error. Because entrepreneurship involves both the recognition and exploitation of opportunity, action is always required. Therefore, for a person to become an entrepreneur, he or she must choose action over inaction. Finally, because action is inherently uncertain, this choice requires a person to tolerate one form of error or another.
As shown in Figure 3, there are always a minimum of four possible outcomes to any uncertain decision. If one chooses to act, then there is the potential for an error of commission, or “false alarm.” That is, the prospective entrepreneur may decide to pursue what he believes is an opportunity only to realize that he was sadly mistaken. In contrast, if one chooses not to act, then there is the potential for an error of omission, or “miss.” In this scenario, the prospective entrepreneur chooses to forgo what could possible be an opportunity only to find that her assessment was wrong and that she did indeed miss the opportunity.
Therefore, given that entrepreneurship requires action and that action requires a preference for “false alarms” over “misses,” the question becomes: “Is there any theoretical rationale for why a person might be more motivated to prefer ‘false alarms’ over ‘misses’?” Fortunately, regulatory focus theory provides an answer.
REGULATORY FOCUS THEORY AND ENTREPRENEURIAL MOTIVATION
The hedonic principle states that people approach pleasure and avoid pain. However, Higgins (1997) argues that the hedonic principle is moderated by a principle of self-regulation called regulatory focus. Self-regulation is the manner by which people organize complex behavior sequences. It influences their standards and goals as well as their evaluation of outcomes. Regulatory focus theory suggests that two different self-regulatory foci exist (promotion focus and prevention focus) such that two people with similar goals can possess different ways of going about them. A promotion focus emphasizes nurturance, (i.e., hopes, aspirations, accomplishments, and gains) and is closely aligned with the ideal self, or the type of person that someone would ideally like to be. In contrast, a prevention focus emphasizes security needs, (i.e., duties, safety, responsibilities, and loss aversion) and is closely aligned with the ought self, or the type of person that someone feels that they ought to be.
Everyone experiences both foci but has a predisposition for one or the other. Individuals can exhibit a chronic focus that is either promotion-oriented or prevention-oriented. These differences can arise from alternative parenting approaches (see Higgins & Silberman, 1998). For example, an upbringing that is heavy in parental protection and punishment produces strong “oughts,” representing duties and obligations and an emphasized concern for safety and security. In contrast, parenting that encourages accomplishments and that disciplines by withdrawing love produces strong ideals, representing hopes and aspirations and an emphasized concern for accomplishments and advancements (see Higgins & Silberman, 1998).
Regulatory focus can also be induced temporarily in momentary situations. For example, task instructions can be framed to communicate either gain/nongain (promotion-focus) or nonloss/loss (prevention focus) information. Another example is that thoughts about hopes and aspirations (ideals) can induce a promotion focus, whereas thoughts about duties and responsibilities (oughts) can induce a prevention focus. Thus, through framing a situation can temporarily induce either a promotion focus or prevention focus regardless of an individual’s chronic self-regulatory disposition.
Regulatory focus theory suggests that promotion focus and prevention focus induce different strategic inclinations for attaining desired end states (Crowe & Higgins, 1997). Because promotion focus exhibits a sensitivity to positive outcomes (i.e., their presence and absence), it typically encourages people to approach matches to desired end states (i.e., pursue all means of advancement). In contrast, because a prevention focus exhibits a sensitivity to negative outcomes (i.e., their absence and presence), it typically encourages people to avoid mismatches to desired end states (i.e., carefully avoid any mistakes).
These distinctions of regulatory focus theory can be applied to a signal detection situation, such as deciding whether or not an action is worth pursuing (Tanner & Swets, 1954; McFall & Treat, 1999). Because it strategically involves approaching matches to a desired end state, a promotion focus should relate to ensuring hits and ensuring against errors of omission or misses (i.e., a loss of an opportunity for accomplishment). In contrast, a prevention focus should relate to ensuring correct rejections and ensuring against errors of commission or false alarms (i.e., making a mistake) because it strategically involves avoiding mismatches to a desired end state.
As a result, action cues (i.e., increasing benefits of “hits” and decreasing costs of “false alarms”) should cause increases in entrepreneurial intention when a person is in a promotion frame. In contrast, inaction cues (i.e., decreasing benefits of “correct rejections” and increasing costs of “misses”) should cause increases in entrepreneurial intention when a person is in a prevention frame. Thus, both situations describe an “action bias” in which the individual prefers action to inaction, either as the result of focusing upon the benefits of acting or the cost of not acting. Therefore, according to the above arguments we propose the following hypotheses:
Hypothesis 1: Increases in the benefits of action (i.e., increases in the net benefit of a “hit” and decreases in the net cost of a “false alarm”) cause increases in entrepreneurial intention.
Hypothesis 2: Increases in the costs of inaction (i.e., decreases in the net benefit of a “correct rejection” and increases in the net cost of a “miss”) cause increases in entrepreneurial intention.
Hypothesis 3: Increases in the benefits of action (i.e., increases in the net benefit of a “hit” and decreases in the net cost of a “false alarm”) cause greater increases in entrepreneurial intention for people in promotion situations than for people in prevention situations.
Hypothesis 4: Increases in the costs of inaction (i.e., decreases in the net benefit of a “correct rejection” and increases in the net cost of a “miss”) cause greater increases in entrepreneurial intention for people in prevention situations than for people in promotion situations.
Sample and Design
To test these hypotheses, we conducted a conjoint experiment using 142 graduating seniors who were enrolled in a capstone business strategy course. All 142 participants were provided the following situation:
Imagine that you are the CEO of your simulation company and currently contemplating whether or not to enter a new market segment. This new market segment is a sixth segment introduced for the first time ever by the simulation game and active this round. Entry will require the creation and production of a new product. Moreover, the various new processes associated with the new segment and product will require the recruitment of experienced employees and a re-training of your existing employees.
In this study you will be asked to evaluate a series of hypothetical conditions and then assess how likely it is that you would act upon the potential opportunity to enter the new market segment. Your response for each and every assessment must be circled [underlined] on the following scale:
Very Unlikely 1 2 3 4 5 6 7 8 9 10 Very Likely
Very unlikely—based upon the conditions presented by the scenario, you find it very unlikely that you would act upon the potential opportunity to enter this new market segment. You have no intention of acting now.
Very likely—based upon the conditions presented by the scenario, you find it very likely that you would act upon the potential opportunity to enter this new market segment. Your intention is to act immediately.
Promotion-Focused Version of the Experiment
Of these 142 participants, 71 were primed to be in a state of promotion-focus as a result of their instructions being prefaced with the gain/non-gain statement that, “Your grade depends upon your decision. If you make the right decision, you will receive an ‘A’ for the course instead of a ‘C’.” A similar wording effect was used by Higgins, Roney, Crowe, and Hymes (1994), who found that participants primed with promotion focus ideals better recalled episodes that exemplify approaching a match to a desired end state (e.g. “Because I wanted to be at school for the beginning of my 8:30 psychology class, which is usually excellent, I woke up early this morning”) than those exemplifying avoiding a mismatch to a desired end state (e.g. “I wanted to take a class in photography at the community center, so I didn’t register for a class in Spanish that was scheduled at the same time”).
This primed state was then reinforced through the framing of the experiment in terms of the net benefit of action or inaction. For example, the cues of action and inaction were worded, respectively, as follows: “Expected Benefit if You Act and the Situation Does Represent an Opportunity” and “Expected Benefit if You Do Not Act and the Situation Does Not Represent an Opportunity.” In addition, two “entrepreneurial knowledge” cues were also included so that the knowledge construct could be controlled. These cues were identical in both versions of the experiment and read as follows: “Confidence that the Situation Represents an Opportunity” and “Confidence in Your Ability to Exploit This Type of Situation Successfully.” See Table 1 for a summary of the definitions of the attribute levels in the experiment.
Prevention-Focused Version of the Experiment
The remaining 71 participants completed an instrument identical to the promotion-focused experiment except that they were primed to be in a state of prevention-focus. For example, their instructions were prefaced with the non-loss/loss statement that, “Your grade depends upon your decision. If you make the wrong decision, you will receive a ‘C’ for the course instead of an ‘A’.”
This priming was again reinforced by the framing of the experiment. However, the cues employed this time were in terms of the costs of action or inaction. For example, “Expected Cost if You Act and the Situation Does Not Represent an Opportunity” and “Expected Cost if You Do Not Act and the Situation Does Represent an Opportunity.” The same “entrepreneurial knowledge” cues applied in this version of the experiment as in the promotion-focused version of the experiment.
Variables and Measures
In both the promotion-focused and prevention-focused versions of the experiment the dependent variable was entrepreneurial intention, defined in the experimental excerpt provided above. To make sure that the effects captured were a function of situation rather than person, we also controlled for each participant’s chronic regulatory predilection. The regulatory focus questionnaire, or “RFQ” (Higgins et al., 2001), was administered to capture the strength of the participant’s chronic promotion-focus and chronic prevention-focus. Accordingly, these scores were included in our model as independent variables.
In both the promotion-focused and prevention-focused versions of the experiment the payoff of action and the payoff of inaction were identical. By knowing the value of a “hit” and “correct rejection,” the participant had all the information necessary to determine the value of a “false alarm” and “miss” and vice versa. Therefore, the scenarios merely accentuated different aspects of the same decision.
To identify the factors, which are statistically significant for the respondents as a group, t-statistics derived from OLS regression at the individual level of analysis were aggregated to form a Z-statistic (Dechow et al., 1994).1 As detailed in Table 2, each factor was significantly used by the sample (p<.001). A positive sign for the action coefficient indicates that as the benefits of a “hit” increase and the costs of “false alarm” decrease then entrepreneurial intentions increase. This provides support for hypothesis 1. There was also a positive sign for the inaction coefficient indicating that as the costs of a “miss” increase and the benefits of a “correct rejection” decrease then entrepreneurial intentions increase, providing support for hypothesis 2.
To interpret the moderating role of a promotion or a prevention frame on an individual’s decision policy and entrepreneurial intention, we conducted a regression analysis with situational regulatory focus as the dependent variable and the regression coefficient for each factor as the independent variables. The means, standard deviations, and correlations of the variables are displayed in Table 3. Overall, the correlations among the independent variables are relatively modest, ranging from -0.142 to 0.209. However, to ensure that multicollinearity was not an issue, multicollinearity diagnosis was applied. Due to space limitations, individual figures are not reported, but a calculation of the variance inflation factor (VIF) finds figures below 3.0, which is well below critical values (Hair et al., 1998).
To test the hypotheses, we used hierarchical regression. We first added the control variables (results reported in column 2 of Table 4), then the independent variables (main-effects-only model in column 3). The control variables of personal promotion and prevention predilection and the decision weights for confidence in one’s knowledge of the opportunity and of exploitation do not explain a significant portion of the variance in entrepreneurial intention (p > 0.05). The introduction of the main-effects in the full model explain a significant amount of the variance in entrepreneurial intention over and above the control variables (Delta R2= 0.465, p < 0.001). Within the full model, the use of the action cue in determining entrepreneurial intention is significantly different depending on the frame used (B= .184, p<.001). The positive sign indicates that increases in the benefits of action (i.e., increases in the net benefit of a “hit” and decreases in the net cost of a “false alarm”) cause greater increases in entrepreneurial intention for people in promotion situations than for people in prevention situations. This provides support for hypothesis 3. The use of the inaction cue in determining entrepreneurial intention is also significantly different depending on the frame used (B= -.190, p<.001). The negative sign indicates that increases in the costs of inaction (i.e., decreases in the net benefit of a “correct rejection” and increases in the net cost of a “miss”) cause greater increases in entrepreneurial intention for people in prevention situations than for people in prevention situations than for people in promotion situations. This supports hypothesis 4.
Shane and Venkataraman (2000) suggest that the discriminating elements for why some people and not others discover particular entrepreneurial opportunities are: “(1) the possession of the prior information necessary to identify an opportunity and (2) the cognitive properties necessary to value it” (p. 222). They further point out that discovery is a necessary but insufficient condition for entrepreneurship unless accompanied by a decision to exploit it. Although discovery alone does not constitute entrepreneurship, the same may not be true for exploitation. If one acts upon what he or she believes to be an opportunity, that individual can be labeled entrepreneurial regardless of the outcome. In fact, to argue otherwise would eliminate the possibility for entrepreneurial loss (Casson, 1982). Shane and Venkataraman (2000) do mention a few explanations for why some people are more likely to act than others, i.e., a willingness to bear risk (Knight, 1921) or positive framing (Palich & Bagby, 1995) but they fail to address in depth the motivation behind these cognitive propensities. In other words, what causes some to be more willing than others to bear risk or what leads some to frame situations more positively than others?
We attempt to fill this void with regulatory focus theory. In the process we find that recognition and exploitation may not be as conducive to mutually exclusive conceptualization as many scholars would like them to be. Our findings suggest that increases in the benefits of action (whether defined as increases in the net benefit of a “hit” or decreases in the net cost of a “false alarm”) do lead to higher entrepreneurial intentions. Moreover this effect is stronger for people in promotion-focused situations than for people in prevention-focused situations. Therefore, as the benefits of action increase, they will be much more compelling to prospective entrepreneurs who are in a promotion-frame because these people will be considering options in terms of gains and gain maximization. This would be analogous to “pull” motivation (Shapero & Sokol, 1982).
However, we also find less intuitive results that are best conceptualized as “push” motivations (Shapero & Sokol, 1982). These findings suggest that increases in the costs of inaction (whether defined as decreases in the net benefit of a “correct rejection” or increases in the net cost of a “miss”) also lead to higher entrepreneurial intentions. Moreover this effect is stronger for people in prevention-focused situations than for people in promotion-focused situations. Therefore, as the costs of inaction increase, they will be much more compelling to prospective entrepreneurs who are in a prevention-frame because these people will be considering options in terms of losses and loss minimization.
Although these findings are consistent with regulatory focus theory, the truly interesting observation is that lucrative opportunities (i.e., high benefits and low costs) appear to resonate more with people when a situation is promotion-framed than when a situation is prevention-framed. Less intuitive, but perhaps equally important, are our findings that, when inaction is perceived as “costly” to people in a prevention-framed situation, it too will resonate enough to significantly increase entrepreneurial intention. This implies that entrepreneurial action is not the exclusive domain of lucrative opportunities perceived through promotion-focused frames. Rather, regulatory focus theory provides an explanation for why “push” situations, such as those with high costs of inaction—e.g., forced immigration, can also produce the motivation necessary to pursue entrepreneurial actions. In fact, these findings suggest that the same situation can have a greater or lesser influence upon the entrepreneurial motivation of people depending upon whether the situation is framed promotionally (i.e., conceived and evaluated in terms of benefits) or framed preventionally (i.e., conceived and evaluated in terms of costs).
Therefore, although our study establishes that the manner in which a decision is framed has a substantial impact on the likelihood of entrepreneurial action, it also accentuates the need to address whether chronic disposition dictates how the situation is framed in the first place. Regulatory focus influences where attention is allocated, triggers different types of needs, and activates different ways of thinking about how to fulfill such needs. Our model of entrepreneurial intention primarily conceives RFT as motivational in nature, but a second look at the model reveals that entrepreneurial motivation influences entrepreneurial knowledge as well. This suggests that it may be inappropriate to consider opportunity recognition as nothing more than a function of entrepreneurial knowledge and that the linear conceptualization of entrepreneurship in terms of step one—opportunity recognition and step two—opportunity evaluation may be overly simplistic.
This study takes an important step towards an increased understanding of how people recognize and evaluate opportunities. Although “lucrative” opportunities, i.e. those with high benefits and low costs, cause increases in entrepreneurial intention, this relationship is dependent upon the regulatory focus of the situation. Indeed, when a situation is perceived through a promotion-focused frame—a scenario common to individuals who possess a chronic disposition for promotion focus—“lucrative” opportunities appear to be more compelling than when a situation is perceived through a prevention-focused frame—a scenario common to individuals who possess a chronic disposition for prevention focus. However, when the same situation is contemplated in terms of the costs of inaction, i.e. low benefits of “correct rejections” and high costs of “misses,” the likelihood of entrepreneurial action is significantly higher for prevention-framed situations than for promotion-framed situations.
Given the importance of opportunity recognition and exploitation to the emergence, transformation, and impact of organizations, such findings and the future research possibilities they imply appear to be fruitful not only to the field of entrepreneurship in particular but also to the managerial and organizational sciences in general.
1. The aggregation method is as follows:
where tj = t-statistic for individual j; kj = degrees of freedom in regression
for individual j; N = number of firms in sample. The Z-statistic is distributed
asymptotically as a standard normal variate (Anderson, 1971; Dechow, et
al., 1994) and computed under the assumption of independence among individuals,
that is, r = 0.
CONTACT: Jeff McMullen, Leeds School of Business, Campus Box 419, Boulder, Colorado 80309; (T) 303-492-1175; (F) 303-492-5946; jeffery.mcmullen@colorado.edu
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