The non-compensatory relationship between risk and return in business angel investment decision making

Abstract

By analyzing observed interactions between entrepreneurs and business angels (BAs) on the Canadian reality TV show Dragons’ Den, we find that BAs use a non-compensatory decision-making process when evaluating anticipated risk and return. This is consistent with our hypotheses that BAs use decision heuristics (shortcuts) to conserve cognitive effort when deciding whether or not to invest in business opportunities proposed by entrepreneurs. Our results further our understanding of how and when behavioral decision theory can inform real-life BA investment decision processes. Additionally, the results offer practical implications for entrepreneurs interested in pitching proposals to BAs.

Keywords:

• Investment decision
• entrepreneur
• business angel
• heuristics
• (non-)compensatory decision-making

Notes

1. The CIC is a national, not-for-profit organization located in Waterloo, Canada that helps entrepreneurs and innovators with the creation and commercialization of innovation. The CIC was instrumental in the development of the Dragons’ Den show in Canada.