When Do Entrepreneurs Exit Failing Ventures? Evidence From Randomized Controlled Trials

Abstract

When does an entrepreneur concerned with financial performance decide to close a failing venture, and why? While much of the existing literature focuses on whether entrepreneurs exit, relatively little attention has been paid to the timing of exit, particularly under conditions of risk and uncertainty. Traditional economic models, such as expected utility theory (EUT), predict that entrepreneurs taking care of financial performance should maximize financial value when deciding to exit. However, this thesis challenges that assumption by examining how entrepreneurs make exit-timing decisions. This study employs an experimental approach to examine exit-timing behavior. An incentivized online experiment involving 422 adult participants, comprised of entrepreneurs and non-entrepreneurs, challenges the conventional wisdom that risk attitudes and optimism explain observed behavior. These insights contribute to ongoing debates in entrepreneurship and behavioral decision-making by uncovering cognitive mechanisms that shape exit decisions beyond financial optimization. I advance the research on exit-timing behavior by proposing a new, abductivelyderived theory of exit timing, called “Dual Threshold Theory,”(DTT). DTT matches important aspects of the data and appears to be a promising basis for future research in entrepreneurship and management. By shifting the focus from whether entrepreneurs exit to when they exit, this thesis contributes to research on entrepreneurial exit, decision-making under risk and uncertainty, and behavioral finance. The findings offer theoretical and practical implications for understanding how individuals abandon declining ventures. The theoretical contributions of this study extend beyond entrepreneurship, offering potential applications in strategic management, behavioral finance, and corporate decision-making, particularly in contexts where individuals must determine when to abandon declining projects.