Eliminations Of Entrepreneurial Risk Essay Example | Topics and Well Written Essays - 1500 words

Eliminations Of Entrepreneurial Risk - Essay Example Enterprises and entrepreneurs minimize the risk of their operation by managing diverse portfolios of investments and assets. However, risk mitigation may, in turn, decrease the chances of a bigger reward. The risk is what separates a salaried job from a business venture. Businesses flourish in short periods of time because they undertake risk and uncertainty that turns out in their favor. The risk is not the same as gambling. It infects much more complex. Risk calculation involves global assessment of economic and financial indicators. These indicators are run through financial models to predict the possibility of a favorable outcome. The will to take risk is dependent upon certain psychological factors. The prospect theory presented in 1979 by Kahneman explains what kind of individuals or entrepreneurs would show risk-seeking behavior and on what grounds. The theory talks about a reference point which is essentially a mark that defines the cases under which an entrepreneur would fee l like winning and losing (The Open University 2012). This behavior defines whether an individual will show risk-averse or risk-seeking behavior. How an entrepreneur defines lose and profit defines his/her behavior. In the graphical representation of the theory, the portion of the curve above the reference point shows risk-averse behavior while the portion below the curve shows risk-seeking behavior. This essentially means that entrepreneurs show risk-seeking behavior in the domain of loss that is when they expect more. More expectation leads to a higher reference point. Entrepreneurs generally set higher reference points than other people. A higher reference point over a particular distribution of outcomes suggests more potential outcomes of loss and according to the prospect theory, people under the domain of loss tend to show risk-seeking behavior.