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Reference point formation and new venture creation

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Abstract

In this study, we introduce reference point formation as an important antecedent of new venture creation. Based on considerations from prospect theory, we hypothesize that individuals who generally and consistently set more aspiring reference points have a higher intention to form a new venture. Testing our hypothesis with entrepreneurs and managers, results show that entrepreneurs indeed set more aspiring reference points. Therefore, they might find themselves more often in a perceived loss situation which in turn increases their risk-taking behavior, following the predictions of prospect theory. In testing entrepreneurial intention of business graduate students, results are shown to be robust. We discuss theoretical and managerial implications of the findings and develop avenues for future research.

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Acknowledgments

We gratefully acknowledge support from the Volkswagen Foundation, Grant no. 85487.

Author information

Authors and Affiliations

  1. Institute of Organization and Human Resource Management, University of Bern, Engehaldenstrasse 4, 3012, Bern, Switzerland

    Andreas Hack, Frauke von Bieberstein & Nils D. Kraiczy

  2. Witten Institute for Family Business, Witten/Herdecke University, Alfred-Herrhausenstr. 50, 58448, Witten, Germany

    Andreas Hack

Authors
  1. Andreas Hack
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  2. Frauke von Bieberstein
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  3. Nils D. Kraiczy
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Corresponding author

Correspondence to Nils D. Kraiczy.

Appendix

Appendix

See Table 6.

Table 6 Scale items and reliabilities
Full size table

1.1 Start-up scenario

Two years ago you founded a company and invested 30.000 €. After one year, you were delighted to learn the value of the company was higher—at 36.000 €. Today, another year later, you decide to check the value of the company again. At what value would the company need to be today to make you just as happy with the value of the company today as you were when you learned the value of the company had risen from 30.000 € to 36.000 € one year ago?

After reading the scenario, we asked participants to indicate the value of the company generating the same utility as the previous increase of the company value.

1.2 Short case adapted from Keh et al. (2002) to measure opportunity evaluation

Mr. Mueller is a successful manager with 4 years of experience at a large German company. Before that he worked in a medium-sized local company for 5 years. The idea of being his own boss, taking calculated risks, and making a fortune all appeal to him. Hence he is thinking of starting his own business.

He has an idea for a new business and decides to ask around to see if it is a good idea. He has some very positive feedback from some potential customers and some associates who know the industry well. Mr. Mueller does not have the resources to do an in-depth market research to find out whether the business is going to work and published data are too general to be useful.

However, he feels that there is money to be made based on the positive feedback from potential customers and his associates. He is enthusiastic about starting the business even though he has no experience in this industry or starting his own business.

There are a few large companies in the same industry, but they have not targeted the market segment that Mr. Mueller is aiming for. He feels that the large companies are likely to move into the market as long as the new business is successful, and he will not be able to fend off this major threat. He is unsure whether the market is still growing or matured. If the market has reached maturity, it is likely for a new business to be squeezed out of the market. If the market is still growing, the new business will be able to survive the entry of large companies into this market segment. He finds out that there are only a few small businesses that are still surviving in the industry. Mr. Mueller estimates he will need at least 100,000 € to finance the new business. As he has only 30,000 € in savings, he has to borrow from the bank or find partners to get the rest of the investment funds needed.

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Hack, A., von Bieberstein, F. & Kraiczy, N.D. Reference point formation and new venture creation. Small Bus Econ 46, 447–465 (2016). https://doi.org/10.1007/s11187-015-9694-5

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