“Wealth Loss and Entrepreneurial Entry”
by Görkem Aksaray
This paper explores the relationship between loss aversion and venture creation. We model a loss averse individual who is risk averse in the domain of gains, but risk seeking in domain of losses. The model predicts that the individual is more likely to transition from wage-employment to entrepreneurship following losses in wealth. In empirical tests, consistent with the model, we find that individuals who recently experienced losses are more likely to become self-employed. Furthermore, we decompose the change in wealth into expected and unexpected components. Only the latter affects the likelihood of self-employment. This relationship is distinct from the positive association between level of wealth and entrepreneurial entry documented in the prior literature. Our finding that potential entrepreneurs are loss averse has implications for the understanding of new ventures.