Frank Plumpton Ramsey Professor of Political Economy
The Decisions of Entrepreneurs and Their Agents: Revealed Levels of Risk Aversion and Betrayal Aversion
Dreber, Anna, David Rand, Nils Wernerfelt, Peter Worrell, and Richard Zeckhauser. "The Decisions of Entrepreneurs and Their Agents: Revealed Levels of Risk Aversion and Betrayal Aversion." HKS Faculty Research Working Paper Series RWP13-016, May 2013.
This paper studies decision making by successful entrepreneurs and their agents. Since entrepreneurs decisions are often influenced by their agents’ advice, understanding the behavior of both involved parties is crucial in analyzing observed decisions. To this end, a sample of successful American entrepreneurs and their agents made a high-stakes decision in a real-world context, albeit in an experimental setting offering experimental-scale payoffs. They were asked whether to accept a contract in what was essentially a trust game. A monetary gamble measured economic risk taking; and the difference between the two measured betrayal aversion. All entrepreneurs assumed the professional role as principal. All individuals playing agent were real world agents. We also have some agents play the role of the principal, and thus test whether subjects’ roles affect the decisions they make.
Consistent with most prior studies, our subjects proved both economically risk-averse and betrayal averse. Little difference in behavior emerged between entrepreneurs and agents in their respective professional capacities, or with agents acting as principals. These results imply that, under our realistically framed business scenario with aligned incentives, agents could be relied upon to be “faithful,” to act according to their principals’ proclivities. Importantly, however, they do not advise against what many expert observers believe to be principals’ excess aversion to risks. That is, they fail to act as “correcting agents.”