A micro-foundational model of real options reasoning: the roles of individual search propensity and perceived uncertainty

Abstract

Research Summary: To explain heterogeneity in real options reasoning (ROR) across entrepreneurial ventures, we propose a microfoundational model to explore the relationships between a firm leader's search propensity, perceived uncertainty and the firm‐level ROR‐based behaviors. Using a panel survey of 134 founder‐CEOs of new ventures, we find that founder‐CEOs' search propensity is positively related to ROR‐based behaviors in their ventures. Moreover, we find that founder‐CEOs' perceived effect uncertainty is positively related to the ROR‐based behaviors, but perceived response uncertainty is negatively related to the ROR‐based behaviors, revealing the importance of considering distinct types of uncertainty in entrepreneurs' ROR. Our microfoundational model advances the ROR literature by delineating how individual‐level factors may drive ROR in firms that face uncertainty. Managerial Summary: Flexibility is key to startup success. However, entrepreneurs craft and embed flexibility to different degrees and under different situations. In order to explain this heterogeneity, we study the roles of entrepreneurs' individual characteristics. Particularly, we study search propensity and perceived uncertainty (distinguishing among different types) in relation to flexibility, formally known as real options reasoning (ROR). Analysis of 134 founder‐CEOs of new ventures in Start‐Up Chile showed that founder‐CEOs' search propensity is positively related to ROR in their ventures. Moreover, founder‐CEOs' perceived uncertainty is related to ROR in ways that depend on the type of uncertainty the entrepreneurs perceive; thus, not all types of uncertainties relate positively to ROR. Such findings carry managerial implications to those who want to understand why certain startups are more flexible.