Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno

entrepreneurs

OPPORTUNITY EVALUATION AMONGST SMES:

THE ROLE OF SELECT COGNITIVE CHARACTERISTICS OF TECHNO ENTREPRENEURS

P David Jawahar
Professor, Bharathidasan Institute of Management
Post Box No 12, MHD Campus, BHEL Complex, Trichy – 14, India
Phone: 0431 2583509 Fax: 0431 2520733 Email: dj@bim.edu
Nigama K
Assistant Professor, Bharathidasan Institute of Management
Post Box No 12, MHD Campus, BHEL Complex, Trichy – 14, India
Phone: 0431 2520796 Fax: 0431 2520733 Email: nigama@bim.edu

ABSTRACT
SMEs are the backbone of a nation’s economy. Entrepreneurs are the growth engines of SMEs who perceive
an opportunity and create an organisation to pursue it. Opportunity evaluation is a central theme of
discussion in behavioural finance and entrepreneurial literature. Though many studies have tried to
understand what really influences entrepreneur’s reason behind evaluating some ideas as opportunities,
there is no single answer. This study aims to understand the role of select cognitive characteristics or
cognitive biases that influences opportunity evaluation among techno entrepreneurs. Techno entrepreneurs
of 40 SMEs were identified in this study, by snow ball sampling method. Four cognitive characteristics,
namely Risk perception, Illusion of control, Belief in law of small numbers and Planning Fallacy were
identified as variables, and therefore the interest in finding out how these select cognitive characteristics
influence opportunity evaluation amongst SMEs in the Indian environment. To the best knowledge of the
researchers, no such study has been conducted in the yester years. The questionnaire was adopted as
inventory from Keh et al (2002) and it was modified to suit Indian context and the research objectives. This
study employed descriptive statistics, correlation and regression to interpret the data collected. All the tests
were performed with the help of SPSS Package, version 18. The results reveal that risk perception is highly
influential in the process of opportunity evaluation.
Key words: SME, Techno Entrepreneurs, Opportunity evaluation, Risk perception, Behavioural Finance,
Illusion of control, Belief in law of small numbers and Planning Fallacy

FIELD OF RESEARCH - Behavioural Finance and Entrepreneurship

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Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno
entrepreneurs

1. INTRODUCTION
The role of small and medium enterprises in a nation’s development needs no special mention. It is a well
known fact that small and medium enterprises (SMEs), particularly in developing countries, are the
backbone of a nation's economy. India is no exception. SMEs play a vital role in the growth of Indian
economy by contributing 45% of the industrial output, 40% of exports, 42 million in employment, create one
million jobs every year and produces more than 8000 quality products for the Indian and International
markets, as reported by SME Chamber of India (2010). India has nearly three million SMEs, which account
for the above statistics.
Entrepreneurs are the growth engines of SMEs. The performance and growth of an enterprise not only
depends on the respective environment but also on the entrepreneur. The success of the enterprise is
determined by entrepreneurs’ decisions which are influenced by his perceptions and evaluations of both
micro and macro level factors. Entrepreneurship is the key to growth and survival of firms in a volatile
environment, because entrepreneurial judgement is necessary for success in making complex decisions under
uncertainty (Casson, 1982, 2005). There is a positive effect of entrepreneurial knowledge and all its
dimensions on SME performance (Omerzel and Antoncic, 2008). Entrepreneurial competencies affect even
the long term performances of SMEs (Man and Lau, 2000). Thus decision making is a crucial characteristic
of an entrepreneur and entrepreneurs’ decisions determine the performance of the SMEs.
Opportunity is a central concept within the entrepreneurship field, and there is now a critical mass of
literature around the concept of opportunity in entrepreneurship research (Short, Ketchen and Shook, 2010).
Research in behavioural finance and entrepreneurship has consistently recognised the importance of the role
of opportunity and recognition of opportunity by entrepreneurs (Smith, Matthews and Schenkel, 2009).
Entrepreneurship involves the ‘knack’ for sensing an opportunity while others see chaos, contradiction and
confusion (Timmons, 1989). The Entrepreneurial Process involves all the functions, activities, and actions
associated with the perceiving of opportunities and the creation of organizations to pursue them. An
Entrepreneur is someone who perceives an opportunity and creates an organization to pursue it. (Bygrave
and Hofer, 1991). The literature suggests several distinguishing characteristics of entrepreneurial activity.
Chell (1997) summarizes these under three headings: the motivation or intention to create wealth and
accumulate capital, the ability to recognize opportunities for wealth creation, and judgement—knowing
which opportunities to pursue. Busenitz and Lau (1996) also draw attention to the importance of managing
in the face of uncertainty, coping with complexity, and make timely decisions before “windows of
opportunities” close. Kirzner (1973, 1979) has developed a theory of entrepreneurial alertness, which asserts
that entrepreneurs are more alert to new opportunities and use information differently (Allison, Chell and
Hayes, 2000).
Opportunity emerges as a result of perceived desirability and feasibility of any situation (Krueger, 2000). An
investigation of opportunity revolves around the information individuals possess and how they process it
(Vaghely and Julien, 2010). The reasons some people will discover opportunities while others will not is
contingent on two issues: “(1) the possession of prior information necessary to identify an opportunity and
(2) the cognitive properties necessary to value it.” (Shane and Venkatraman, 2000). Information processing,
knowledge creation, innovation, and opportunity identification are closely related to one another (Noteboom,
2000;Ward, 2004) and opportunity is a critical attribute of entrepreneurship (Shane and Venkatraman, 2000).
Therefore, identification of opportunity is one of the important steps in entrepreneurial process and
entrepreneurs identify opportunities not only because they possess relevant information but also because
they value them as opportunities in order to achieve their goals.
Focussing on the entrepreneur as an individual, both his personal traits and cognitive mechanisms explain
the reasons for such opportunity evaluation. Initial research efforts concentrated on identifying personal
traits and explained why some people alone perceived and pursued opportunities (Shaver and Scott, 1991)
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 Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno
entrepreneurs

and (Das and Teng, 1997). Research on those lines did not yield answers to complete satisfaction, hence
research shifted to another possible source of explanation – cognitive mechanisms, that tried to explain why
and when entrepreneurs think differently than others (Baron, 1998). Cognitive approach suggested that it
better explained entrepreneurial behaviour and perception. But researchers suggest entrepreneurs exhibit
systematic cognitive biases and they overestimate their chance of success (Cooper et al, 1988) and (Palich
and Bagby, 1995). Various cognitive factors influence opportunity evaluation as studied by the opportunity
evaluation model (Keh et al, 2002).
‘Opportunities emerge from a complex pattern of changing conditions – changes in technology and in
economic, political, social, and demographic conditions. They come into existence at a given point in time
because of a juxtaposition or confluence of conditions that did not exist previously but is now present’
(Baron 2006, p107). Recognising opportunity is no accident. It requires a unique talent to see the
relationships between what Baron called ‘seemingly unrelated events or trends’ (Paul Charles Light, 2008).

This study is therefore interested in finding out how select cognitive characteristics influence opportunity
evaluation amongst SMEs in the Indian environment because to the best knowledge of the researchers, no
such study has been conducted in the yester years. Also, this study focuses on the influence of select
cognitive characteristics of techno entrepreneurs because it is a well known fact that SMEs in India provide
enticing opportunity for Information and Communication Technology enterprises (ICTs). Though they are
constantly and rapidly evolving, when we look at how small- and medium-sized enterprises (SMEs) use
technology, there has been only a limited adoption of the various new technologies.

2. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT

This study identifies four variables, namely Risk perception, Illusion of Control, Belief in Law of Small
Numbers and Planning Fallacy. The theoretical base for these variables and the hypotheses formulated are
proposed as follows:
RISK PERCEPTION
Psychologically, people prefer more deterministic world in which there are known explanations for things
that happen (Messick and Bazzerman, 1996). But in reality, there is always some degree of uncertainty in
decision making. As an entrepreneur is constantly required to make decisions in an
indefinite environment, risk is one principal features characterizing entrepreneurship
(Kendirli and Tuna, 1999). Scientists differentiate risk from uncertainty as the former is measurable
and the latter is immeasurable (Knight, 1921). Literature supports the fact that entrepreneurs risk perceptions
influence their choice of new ventures (Forlani and Mullins, 2000, Mullins and Forlani, 2005). Palich &
Bagby (1995) have pointed out that individuals will start a new venture because they perceive less risk than
most people. Risk taking is not a feature, approach or a response, but it is the way an entrepreneur perceives
the world and entrepreneurs usually have more optimistic perceptions for risky conditions than others
(McCarthy and Leavy, 1999). Entrepreneur’s level of risk preferences could affect individual’s decision of
venturing into new business opportunities (Brockhaus, 1980).

ICT is growing at a rapid pace in India. Techno entrepreneurs therefore make decisions in a highly risky and
competitive environment. Hence, to study the relationship between their risk perception and opportunity
evaluation, the following hypothesis is constructed.
H1 : There is a significant relationship between risk perception and opportunity evaluation.
ILLUSION OF CONTROL

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Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno
entrepreneurs

The concept of locus of control refers to a generalised belief of a person’s control over his destiny. People
are classified along a continuum from very internal to very external (Rotter, 1966). Illusion of control is a
bias often suggested as a characteristic of entrepreneurs because research shows that they show strong
preference for exerting control over their outcomes as they believe they can exert control over people and
events (Shaver and Scott, 1991). Boyd and Vozikis (1994) argued that an individual’s belief in his ability to
control a venture’s outcome affects his intentions to form a venture. Simon et al. (2000) found that an
illusion of control decreases one’s perception of the level of risk associated with forming a venture. Almost
three decades of research consistently shows that internals are alert, discover opportunities and scrutinise
their environment to find information needed to formulate the optimal approach to developing those
opportunities Gilad (1982).

Illusion of control can also play a greater part in Indian entrepreneurial decisions. Hence it is felt important
to study the relationship between Illusion of control and Opportunity evaluation. Therefore, it is
hypothesised,
H2 : There is a significant relationship between illusion of control and opportunity evaluation

BELIEF IN LAW OF SMALL NUMBERS

People regard a sample randomly drawn from a population as highly representative, that is, similar to the
population in all essential characteristics, this characteristic is termed as belief in law of small numbers
(Tversky and Kahneman, 1971). Entrepreneurs neither use large random samples nor do they engage in
systematic data collection (Busenitz and Barney, 1997). Furthermore, literature suggests that entrepreneurs
frequently make judgement on what is called as ‘gut feeling’ or the subjective factors that induce high
optimism in the entrepreneur to decide about any venture as opportunity (Palich and Bagby, 1995; Cooper et
al, 1988; McCarthy et al, 1993; Kahneman and Lovallo, 1993).

First generation techno entrepreneurs are generally constrained with time, money and infrastructure.
Therefore, they are always not in a position to conduct extensive research before entering new ventures. To
validate the influence of belief in law of small numbers, it is hypothesised that
H3: There is a significant relationship between belief in law of small numbers and opportunity evaluation

PLANNING FALLACY
The planning fallacy refers to the systematic tendency to hold a confident belief that one's own task will
proceed as planned. Entrepreneurs overestimate how much they can accomplish in a given period of time or
turning the question around, how long will it take for them to complete a specific project, this effect is called
planning fallacy (Baron, 1998). This planning fallacy invariably arises because people ignore distributional
information available in related past outcomes and instead focus only a single plausible scenario for
completion of the current specific task (Kahneman and Tversky (1979). Decision makers may isolate their
past experiences with similar circumstances to treat the current situation unique or they may anchor the plans
of successes rather than past results, on the future plans or scenarios, and may even be possibly be overly
optimistic (Kahneman and Lovallo, 1993).

Thus, planning fallacy may have its influence on the decisions of Indian techno entrepreneurs. Hence the
hypothesis,
H4: There is significant relationship between planning fallacy and opportunity evaluation.

PROPOSED RESEARCH MODEL

Risk Perception
This study has conceptualised a research model based on the literature review and the identified research
gap. The research model is proposed in Figure 1
Illusion of Control
Figure 1 – Research Model Opportunity
Belief in law of Evaluation
small numbers
4

Planning Fallacy
Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno
entrepreneurs

Risk Perception

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Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno
entrepreneurs

3. DATA AND METHODOLOGY

This section first describes the sample, sampling procedure and then explains the constructs in the
questionnaire which was used to collect data.
SAMPLE AND SAMPLING PROCEDURE
Techno entrepreneurs of 40 SMEs were identified in this study, by snow ball sampling method. The techno
entrepreneurs were from the ICT sector where the business activities included manufacturing and assembling
of ICT equipment, testing, designing, R&D, and a variety of service activities, ranging from
telecommunications to software development, and from provision of interconnectivity services to IT-related
consulting. They also included activities that were highly dependent upon access to ICT technologies or, at a
minimum, that have operating modalities that have been significantly affected by the introduction of ICT
technologies.
The questionnaire was administered and responses were collected personally by the researchers from every
identified techno entrepreneur, who had designations such as CEO or MD or Director of their own
enterprise. All of them were first generation founders, owner managers of their enterprise who uniformly
exhibited the desire to grow business and continuously pursue opportunities. Response rate was 100%, since
the method adopted for identifying the respondents was through referrals and the data collection was a
success because the respondents were met in person to get their answers for the questionnaire.

Examining the demographics of the respondents, all of them were male and 50% of them possessed either a
graduate or a post graduate degree. The average age of the businesses is 15 years. Also it was found that
these entrepreneurs, on an average spend 66 hours per week on their business.

MEASUREMENT OF VARIABLES
The questionnaire adopted was an inventory developed by Keh et al (2002) and it was modified to suit
Indian context and the research objectives.

Risk Perception
Four questions measured the perceived risk on a seven point scale from very strongly disagree to very
strongly agree. The four items measured the probability of loss, level of uncertainty in the situation, size of
possible loss and overall risk of the venture. The four questions were summed to measure risk perception.

Belief in law of small numbers

To measure these responses were given a case, at the end of which they were asked to state the issues that
influenced their evaluation of a given situation as opportunity. A code of 1 was given if they had not
employed any statistical reasoning but relied on subjective opinions or heuristics. A code of -1 was assigned
if they had given importance for statistical reasoning, including importance for market research.

Illusion of control
This variable had a three dimensional measure, on a seven point scale from very strongly disagree to very
strongly agree. The items measured the ability to predict uncontrollable outcomes and also the individuals
belief about their skills to control business events

Planning Fallacy
Two items captured the planning fallacy on a seven point scale from very strongly disagree to very strongly
agree. They measured the use of entrepreneurial experience in assessing the new venture and use of past
experience in business of different nature.

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Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno
entrepreneurs

ANALYSIS
This study employed descriptive statistics, correlation and regression to interpret the data collected. All the
tests were performed with the help of SPSS.
RELIABILITY
This study has used the well known method of reliability test, namely Cronbach’s alpha (Cronbach, 1951).
The reliability scores for the variables Opportunity Evaluation, Risk Perception, Illusion of Control, and
Planning Fallacy are 0.876, 0.807, 0.660, and 0.53 respectively. Many alpha values are within the specified
levels as proposed by Nunally (1979)
3.1 HYPOTHESES TESTING
This section presents the results obtained from analysing the proposed research model.
In order to test the research model, this study used multiple regression.
TABLE 1 – DESCRIPTIVE STATISTICS

Mean Std. Deviation N

OE 4.4583 1.50154 40
PF 5.8000 1.06096 40
IC 4.0500 1.48410 40
BLSN .60 .810 40
RP 4.4188 1.12288 40
The mean values of the variables namely, Opportunity Evaluation, Planning Fallacy, Illusion of Control and
Risk Perception was 4.4583, 5.8, 4.05, 4.4188 respectively. The mean value of Belief in law of small
numbers was found to be 0.60.
TABLE 2 – RESULTS OF CORRELATION BETWEEN THE VARIABLES

HYPOTHESIS BETWEEN r VALUE SIGNIFICANCE RESULTS

VARIABLES
H1 RP and OE -0.579 0.000 Significant
H2 IC and OE 0.185 0.126 Insignificant
H3 BLSN and OE 0.295 0.032 Significant
H4 PF and OE -0.056 0.365 Insignificant

The above table shows the relationship between the variables and their significance. The relationship
between risk perceptions, belief in law of small numbers were significantly related to opportunity evaluation
(p<0.05). Though the relationship between illusion of control and opportunity evaluation was positive, it was
not statistically significant.
TABLE 3 – CO-EFFICIENTS OF THE REGRESSION MODEL

Unstandardised
Model t Sig. Collinearity Statistics
Coefficients
B Std. Error Tolerance VIF
(Constant) 7.661 1.361 5.628 .000
PF -.153 .186 -.818 .419 .951 1.051
IC .228 .138 1.651 .108 .885 1.130
BLSN .260 .250 1.039 .306 .904 1.106

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 Opportunity Evaluation amongst SMEs: the role of select cognitive characteristics of techno
entrepreneurs

RP -.769 .176 -4.361 .000 .950 1.053

R = 0.650, R2 = 0.422, F(4,35) = 6.396, p < 0.01

Table 3 shows the coefficients of regression model that was used to test the hypotheses. The regression
model showed that the independent variables collectively explained a statistically significant proportion of
the variance in Opportunity Evaluation at 5 percent level (R2 = 0.422). Among the above mentioned four
independent variables, risk perception is the only factor that has a significant contribution to the model (β =
-0.769 , p < .05). The other variables such as planning fallacy (β = -0.153, p > .05), Illusion of control (β =
0.228 , p > .05), belief in law of small numbers (β = 0.260 , p > .05) have not contributed significantly to the
model.
3. FINDINGS AND DISCUSSION
This study uses a cognitive approach to explain the extent of cognitive biases and its effect on opportunity
evaluation. The findings of the study are as follows:
As mentioned earlier, perceiving lower level of risk is associated with more positive opportunity evaluation.
Findings of this study are consistent with earlier studies (Keh et al, 2002; Sitkin & Pablo, 1992; Sitkin &
Weingart, 1995; Forlani & Mullins, 2000) that concluded that, there is an inverse relationship between risk
perception and Opportunity evaluation. Therefore it supports our hypothesis that risk perception of an
entrepreneur has a significant effect on opportunity evaluation. Techno entrepreneurs prefer to enter a
particular business opportunity when they perceive low level of risk associated with the same.
Though illusion of control showed a positive relationship with Opportunity evaluation, it was not statistically
significant. This may be due to the entrepreneurs’ feeling that they have control over the business, but they
do not have absolute control over the market. This is in contrast to earlier findings where the entrepreneurs
perceive that they are able to influence the future outcomes (Keh et al, 2002). Indian entrepreneurs generally
believe that though they have good control over their business, they are not in a position to accurately
forecast, when larger competitors will enter the market.
The variable belief in law of small numbers showed a positive relationship, it did not contribute significantly
to the model as a whole. The positive relationship may be explained as entrepreneurs exhibiting greater
belief in law of small numbers perceiving greater possibilities of opportunity. But the insignificant
contribution of this variable may be due to entrepreneurs looking at the potential benefits of the opportunity
more salient than any other reason to evaluate the opportunity as suggested by Das and Teng, (1997).
Planning fallacy also did not contribute significantly to the model. Earlier studies showed positive
relationship between planning fallacy and opportunity evaluation (Keh et al, 2002). Entrepreneurs with high
influence of planning fallacy will perceive greater opportunities. But this study finds that there is a negative
relationship between planning fallacy and opportunity evaluation. This may be because entrepreneurs
believe past experiences helps in evaluating new opportunities. They do not see the circumstances in
isolation and they believe that key issues that are found in different businesses are similar.
4. CONCLUSION AND IMPLICATIONS
This research is only a preliminary attempt to understand the influence of cognitive biases that influence
opportunity evaluation. Scope for further research exists in this area such as the study could be carried out on
entrepreneurial characteristics across countries, across gender and across industries. Other cognitive
characteristics could be incorporated to find out their influence on decision making of entrepreneurs. Impact
of environment, both external and internal to the organisation and entrepreneurs could be considered for
further study. The end goal would be to render a better developed knowledge base to entrepreneurial society
that will help them in whatever manner possible, to take good decisions.

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entrepreneurs

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