II-S1

SUMMARY

HOW DO ENTREPRENEURS VIEW OPPORTUNITIES: ROSE TINTED SPECTACLES OR THE REAL OPTIONS LENS?

Frank Cave, Lancaster University Management School
Alan Minty, Risk Management Research Institute

Principal Topic

Entrepreneurs have been characterised as seeing opportunities where others do not, being risk tolerant, comfortable handling uncertainty and pro-active in decision-making. These characteristics have also been shown to be evident in the use of real options, particularly in what is termed real option thinking. As in financial options, the benefits accrue from limiting the potential downside of an investment but welcoming the volatility of the upside. This background prompted an investigation of the opportunity selection processes of entrepreneurs. The research question was: can the opportunity selection processes used by entrepreneurs be mapped on to a real option thinking framework? A subsidiary question was, will the framework demonstrate a difference in the selection processes of entrepreneurs and those of other owner/managers?

Method

A qualitative approach was adopted to explore the decision processes of entrepreneurs. In depth interviews were conducted with a group of business founders some of whom were typified as entrepreneurs and others as owner/managers. The interviews were arranged to be coincident with decision events involving commitment of significant resources. An attempt was made to map the decision processes employed by the participants on to a framework characterising real option thinking which has been derived from the literature and the authors’ earlier work.

Results and Implications

The findings suggest that in selecting opportunities, both entrepreneurs and owner/managers identify and articulate a variety of real options present. In both cases emphasis is placed on limiting/controlling the perceived downside. However, preliminary findings suggest that owner/managers avoid volatility in returns, though the entrepreneurs seem more inclined to accept it. In each case it was found possible to match all the elements of the framework with the decision process, except the upside assessment element. Whilst evidence for an upside is carefully sought by both groups, the entrepreneurs make little attempt at formal quantification, though owner/managers seem to do so. This would imply that opportunity selection in the former group is not totally rationalised, as in this framework, but is justified in some other way. It is suggested that further research to examine the reasons underlying this behaviour is justified.

CONTACT: Frank Cave: Lancaster University Management School, Lancaster University, Lancaster LA1 4YX, UK; (T) +44 (0)1524 594057; (F) +44 (0)1524 592652; f.cave@lancaster.ac.uk