United Academy

The Psychology of Entrepreneurship

Dr. Narendra Singh Thagunna

November 01, 2020
Last updated July 15, 2021
KMC Lalitpur


The psychology of entrepreneurship is a relatively young research field that has much to offer to the understanding of successful entrepreneurship in all of its facets like economic, social, personal, and societal. Entrepreneurs are significant for our economies as they contribute to job creations, productivity, and economic growth (Van Praag & Versloot, 2008). Entrepreneurship is defined as the identification and exploitation of business opportunities within the individual–opportunity nexus (Shane & Venkataraman 2000). Entrepreneurship is important for the creation of jobs, the economic and societal advancement of nations, and innovations (Van Praag & Versloot 2007). An entrepreneur is often motivated by innovation, growing their own business, and making a profit. A great deal of research has been done into the psychological characteristics commonly displayed by an entrepreneur. There is no such thing as an “entrepreneurial personality” and there are great variances in the psychological makeup of successful entrepreneurs. The most important drivers of entrepreneurship research came from economics, psychology, and sociology. The scholars credited to be the fathers of the field of entrepreneurship research, Schumpeter (1934) and later McClelland (1967), took a psychological perspective, with individuals being the major objects of entrepreneurship research.

There are three phases in entrepreneurship:

  • the prelaunch or opportunity identification phase in which the entrepreneur identifies viable and feasible business opportunities,
  • the launch or development and execution phase in which the entrepreneur assembles the necessary resources for starting a venture, and
  • the post launch phase in which the entrepreneur manages the new venture in such a way that it grows and survives (Baron 2007). 

Psychological concepts play a role in each of these phases, although the individual entrepreneur is probably most important in the first phases, and his or her influence probably becomes weaker as the enterprise grows (although an organization’s leader never becomes unimportant) (Hambrick 2007).

Commonly identified characteristics of an entrepreneur are as follows:

  1. Need for achievement: Entrepreneurs work hard at business activities that hold a moderate chance of success, or a great opportunity for personal achievement and satisfaction. In a successful entrepreneurial organization key individuals must agree on values, vision and business objectives.
  2. Internal locus of control: Locus of control refers to an individual’s perception of the causes for events in their life. Entrepreneurs believe that their environment, in this case the their business performance, is controlled by their actions. Thus the success or failure of the business is merely the result of the entrepreneur’s abilities and experience. 
  3. Tolerance for ambiguity and uncertainty: Entrepreneurs have to make decisions with incomplete or ambiguous information. Incomplete knowledge about markets, cash flows, and competitors is often common in almost every entrepreneurial enterprises. Things may seem boring for serial entrepreneurs if things are only ticking over.
  4. risk-taking tendency: Entrepreneur actively looks for risky ventures or assignments and has a greater tendency to take risks. However, taking calculated risks, not making immature or spur of moment thing actions is an important concept here.

Psychology of the entrepreneur: 

Entrepreneurs identify business opportunities. Entrepreneurial motivation is also due to the entrepreneur’s mental ability to bear the risks and his capacity to calculate the risks. Successful entrepreneurs are ready to bear ‘calculated’ risks only. 

The following motivational factors that influence entrepreneurs to become successful in their all types of business ventures: (i) demonstration effect, (ii) business background, (iii) technical knowledge, (iv) creating stable market, (v) availability of skilled labor, (vi) ancillarisation, (vii) self-determination about the target business, (viii) risk management bearing capacity and (ix) success stories.

Relationship Between Personality and Entrepreneurship:

Starting your own business is difficult because you have to put in long hours, to be prepared to fail, to be willing to change course if things are not working out as expected and a high percentage of new ventures do not succeed. According to Obschonka, M., Schmitt-Rodermund, E., Silbereisen, R. K., Gosling, S. D., & Potter, J. (2013), people with the personality profile to be entrepreneurs cluster in regions are The Big Five dimensions, which reflect the largest differences in behavior across people are 

  1. Openness to Experience (your willingness to consider new ideas), 
  2. Extraversion (your desire to be the center of attention), 
  3. Conscientiousness (your willingness to work hard and follow rules), 
  4. Agreeableness (your desire to be liked by others), and 
  5. Neuroticism (your lack of emotional stability).  

Researches suggest that the ideal entrepreneurial profile is someone high in openness, extraversion, and conscientiousness and low in agreeableness and neuroticism. 

Psychological Burdens of Being an Entrepreneur

It's not often talked about, but entrepreneurship is incredibly lonely.

  1. Accountability- As the organization's leader, you are the one who takes the ultimate decision and you are the one that will be most influenced by its outcomes.
  2. Financial stress and uncertainty- Many successful entrepreneurs have to struggle through moments of emotional turbulence. Entrepreneurship can increase the level of stress and many entrepreneurs are often caught in the relentless cycle of stress and despair.
  3. Trust Issues- As an entrepreneur, it's tempting to trying to do all the things on your own rather than delegating the tasks. But you need to trust others, delegate the tasks and let others help you if you wanna grow. Similarly, you would also have to listen to other's people's advice and they won't always tell you what you wanted to hear. 
  4. Work-life balance- According to research from NodeSource, work-life balance is the biggest challenge faced by entrepreneurs. As an entrepreneur, you are more likely to see your family and friends less, get a few hours of sleep every night, end up skipping meals, eating junk food, and acquiring some bad habits to keep yourself going. These may seem harmless but have detrimental effects in the long run.

Mental Health Issues and Entrepreneurship

Mental health is defined by the World Health Organization (WHO) as not merely the absence of mental health problems but as a "state of well-being in which every individual realizes his or her own potential, can cope with the normal stresses of life, can work productively and fruitfully, and is able to make a contribution to her or his community” (WHO, 2014).

According to the National Institute of Mental Health(NIMH), 72% of entrepreneurs are directly or indirectly affected by mental health issues compared to just 48% of non-entrepreneurs. 49% of entrepreneurs deal with mental health issues directly while only 32% of others experienced them. Similarly, 23% of entrepreneurs have family members who face these issues compared to just 16% of others with family members who face these same types of issues. Entrepreneurs are twice as likely to develop depression and three times more likely to engage in substance abuse than the general population. 

An study conducted by Michael A. Freeman from the University of San Francisco showed that 49 percent of entrepreneurs will suffer from at least one mental health condition in their lifetime compared to the 25 percent of the general population who will share the similar mental health concerns.

Mental disorders may impact entrepreneurial action by influencing individuals’ preferences for an entrepreneurial career, by bestowing them with characteristics conducive to entrepreneurial tasks (e.g., creativity, risk tolerance), and by triggering coping and resilience to stressors associated with the entrepreneurial process.

Getting help: Professional Supervision

Your mental health influences how you think, feel, and behave in daily life and affects your ability to cope with stress, overcome challenges, build relationships, and recover from life’s setbacks and hardships. If you’re an entrepreneur struggling with these psychological burdens, you'll need to get help. You’re dedicated to your company, I know, and you may either be in denial that you’re experiencing these burdens or feel that you’re too busy to address them. Building positive mental health focused on the following things-

  • Creating Healthy Routines
  • Connecting with Others
  • Owning Your Feelings
  • Eliminating Toxic Influences
  • Supporting Others
  • Take time off
  • Go on vacation
  • Spend more time with your friends and loved ones
  • Talk to your peers
  • Engage a therapist
    Whatever you have to do, prioritize your self-care.

References

  • Obschonka, M., Schmitt-Rodermund, E., Silbereisen, R. K., Gosling, S. D., & Potter, J. (2013). The regional distribution and correlates of an entrepreneurship-prone personality profile in the United States, Germany, and the United Kingdom: A socioecological perspective. Journal of Personality and Social Psychology, 105(1), 104–122. https://doi.org/10.1037/a00322...
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