Psychological theories of entrepreneurship

By Jaideep Bhattacharjee & Priya Chetty on March 14, 2019

Psychological theories of entrepreneurship put emphasis on the emotional and mental aspects of the individuals that drive their entrepreneurial activities (Baum, Frese, & Baron, 2014). Three of the most popular psychological theories of entrepreneurship today include:

  1. McClelland’s theory,
  2. Rotter’s locus of control theory and,
  3. Action regulation theory.

McClelland’s theory explains the need for achievement that often regulates the actions of an entrepreneur. Consequently, Rotter’s theory puts light on the locus of control whether internal or external that influences entrepreneurial actions. Finally, the action regulation theory elucidates that the performance of entrepreneurs depends on their actions.

David McClelland’s theory

David McClelland, a Harvard psychologist formulated the Theory of Achievement Motivation in 1967. McClelland through his theory had tried to outline why few communities are more economically booming as compared to others. Furthermore, according to him, entrepreneurs are classified on the basis of their need for achievement which is the driving factor for their economic growth (Miner, Organizational behaviour 1: Essential theories of motivation and leadership, 2015). According to McClelland, an entrepreneur works in a structured and creative way which eventually leads to better decision-making in predicaments. McClelland’s theory also states that traits of entrepreneurship are incorporated by individuals through learning and this learning can be motivated them to achieve a higher level.

As seen from McClelland’s need-based theory on motivation, three motivators or needs have been prioritized:

  1. affiliation,
  2. achievement and,
  3. power.

Furthermore, individuals possess these three dominant motivators irrespective of their age, gender or culture. These three motivators are directly proportional to life experiences and culture experienced by individuals (Khurana & Joshi, 2017). Entrepreneurs use these motivators to influence the performance of employees by setting goals for them and offering motivation and rewards.

Characteristics of the entrepreneurs

  • Individuals who are encouraged by the sense of achievement often seek challenges and they like to thrive on them. They like to evaluate and act on feedback to perform better.
  • On the contrary, individuals who are motivated by affiliation are comfortable in a group and do not prefer taking risks and uncertainty in their tasks. They prefer to take limited feedback and most likely will not act on it (Miner, Organizational behaviour 4: From theory to practice, 2015).
  • Individuals with a strong want for power perform at optimum conditions when they are put in charge. Competition motivates them and they perform well in goal-oriented tasks (Miner, Organizational behaviour 4: From theory to practice, 2015).

Finally, McClelland concluded that individuals with a need to succeed are more likely to become entrepreneurs as they are not motivated by money or other benefits and profits are just other sources to highlight their success.

David McClelland’s theory critics

Over the years many authors have criticised this theory. Casrud and Johnson (1989) opined that it is poor in the application. As newer measures of achievement motivation were developed, McClelland’s theory became less versatile in application. Moreover, the authors state that McClelland’s opinion that achievement motivation drives people to entrepreneurship is “naïve”. Furthermore, this theory focuses on the “stable” characteristics of entrepreneurs, whereas since the market conditions are dynamic, entrepreneurial behaviour also keeps changing.

Rotter’s locus of control theory

Rotter’s locus of control has garnered prominent attention among personality theories of entrepreneurship (Lefcourt, 2014).  This theory was formulated in 1954 by Julian Rotter. Furthermore, locus of Control offers people the belief that control resides within them i.e. internally or can be created externally.

Locus of control theory of entrepreneurship; Source: (Lefcourt, 2014)

Figure 2: Locus of control theory of entrepreneurship; Source: (Lefcourt, 2014)

  • High internal locus of control: In this case, people believe that they are in charge of their actions and fortune. Events would be determined on the basis of their qualities and conduct.
  • High external locus of control: In this scenario, individuals believe that outcomes are out of their control and it completely depends on external factors such as fate, change etc.

Individuals who have a high tendency towards risk are more likely to become an entrepreneur (Bodill & Roberts, 2013). Furthermore, risk-taking is the most elementary action that entrepreneurs do to achieve high-level performance and success. Therefore, this theory manages to explain that entrepreneurs with internal locus believe that emergence of success is due to their capabilities and actions. While entrepreneurs with external locus assume chances of success or survival are driven by institutional and external forces.

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Rotter’s theory critics

Like McClelland’s theory, this theory too faced criticism with time mainly methodological and theoretical. In methodological limitations, the flaws in the scales of measurement of the theory were pointed out. Whereas, in the theoretical aspect, researchers pointed out that other personality dimensions such as self-efficacy have been ignored (Üzümçeker, 2016).

Action regulation theory

Michael Frese outlines the application of Action theory in relation to entrepreneurship. It is elaborated as the meta-theory which regulates goal-directed behaviour (Baum, Frese, & Baron, 2014). This theory explains how individuals control their cognitive behaviour with the help of cognitive processes which consist of selection and development, orientation, monitoring and planning and processing feedback.

In order to examine human action according to this theory there are three dimensions:

  1. sequence highlights the path taken from goals to feedback.
  2. the focus extends from activities to self and,
  3. the structure outlines the level of actions which are often regulated.

The basic application of this theory to entrepreneurship is seen in terms of planning. In order to describe entrepreneurial planning behaviour, four action processes have been suggested; opportunistic, complete planning and review (Baum, Frese, & Baron, 2014). Based on Frese’s theory, early-stage entrepreneurs are likely to observe a new task. Also, this occurs repeatedly and this occurrence of the action is likely to feature in the coming few years. Furthermore, it highlights the fact cognitive ability is much more crucial to entrepreneurs. Compared to the other two theories, this theory is significantly less criticised.

Psychological traits of entrepreneurship

There are several other psychological theories of entrepreneurship such as:

  • McCrae and Costa’s Big Five Traits approach,
  • Entrepreneurial Personality System and,
  • Hagen’s Theory of Entrepreneurship.

Understanding entrepreneurship from the psychological perspective helps to determine whether society has a healthy supply of individuals possessing entrepreneurial characteristics. It also helps develop the overall concept of entrepreneurship which is dynamic and changes as per the market conditions.

References

  • Baum, J., Frese, M., & Baron, R. e. (2014). The psychology of entrepreneurship (1 ed.). NY: Psychology Press, ISBN: 9780415652667.
  • Bodill, K., & Roberts, L. ( 2013). Implicit theories of intelligence and academic locus of control as predictors of studying behaviour. Learning and Individual Differences, 27(1), 163-166, doi: 10.1016/j.lindif.2013.08.001.
  • Carsrud, A. L., & Johnson, R. W. (1989). Entrepreneurship: a social psychological perspective. Entrepreneurship & Regional Development, 1(1), 21–31. doi:10.1080/08985628900000003
  • Hajirnis, R. (2013). Evolution of Entrepreneurship Development Theories. Journal of Commerce and Management Thought, 4(2), 245-250, doi: 10.4135/9781452231280.n7.
  • KHURANA, H., & JOSHI, V. (2017). MOTIVATION AND ITS IMPACT ON INDIVIDUAL PERFORMANCE: A COMPARATIVE STUDY BASED ON MCCLELLAND’S THREE NEED MODEL. Clear International Journal of Research in Commerce & Management, 8(7), 110-116.
  • Lefcourt, H. (2014). Locus of control: Current trends in theory & research (1 ed.). NY: Psychology Press, ISBN-13: 978-0898592221.
  • Miner, J. (2015). Organizational behavior 1: Essential theories of motivation and leadership (1 ed.). London: Routledge, ISBN 10: 0765615231.
  • Miner, J. (2015). Organizational behavior 4: From theory to practice (1 ed.). NY: Routledge, ISBN-10: 9780765615305.

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