Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making

The purpose of this study was to further explore differences between entrepreneurs and managers in large organizations. However, rather than focusing on previously examined individual differences, this study examined differences in the decision-making processes used by entrepreneurs and managers in large organizations. Building on nonrational decision-making models from behavioral decision theory, we asserted that entrepreneurs are more susceptible to the use decision-making biases and heuristics than are managers in large organizations. To understand why entrepreneurs and managers in large organizations may vary in the extent to which they manifest biases and heuristics in their decision- making, it is important to understand the utility of nonrational decision-making. Under conditions of environmental uncertainty and complexity, biases and heuristics can be an effective and efficient guide to decision-making. In such settings, more comprehensive and cautious decision-making is not possible, and biases and heuristics may provide an effective way to approximate the appropriate decisions. The use of heuristics has also been found to be associated with innovativeness. Perhaps a critical difference between these sets of individuals is the extent to which they manifest biases and heuristics in their decision-making. We examined differences between entrepreneurs and managers in large organizations with respect to two biases and heuristics: overconfidence (overestimating the probability of being right) and representativeness (the tendency to overgeneralize from a few characteristics or observations). In this study, entrepreneurs are those who have founded their own firms and are currently involved in the start-up process with the average time since founding of 1.7 years. The analysis for this study involved responses from 124 entrepreneurs. Managers are individuals with middle to upper level responsibilities with substantial oversight in large organizations. To be included in this study, the managers had to oversee at least two functional areas (sample average was 4.55 functional areas). Usable responses were received from 95 managers. The results from the logistic regression analysis show strong support for both hypotheses. Even after controlling for numerous factors, such as several traits and demographic factors, enduring support was found for the way entrepreneurs and managers in large organizations make decisions. Our overconfidence and representativeness v