Cognitive Biases in Sustainable Energy Venture Investment
Type
fundamental research project
Start Date
June 1, 2009
End Date
April 30, 2012
Status
completed
Keywords
sustainable energy
venture investment
cognitive biases
sustainable energy investment
sustainable development
behavioural finance
venture capital
discrete choice analysis
Description
An increasingly important theme in management research is how corporations should address sustainable development. It is widely recognized that innovation will play a key role as corporations move toward sustainable development, and that substantial investment will be required to align important infrastructure sectors with its requirements. Two important actors in this process are the traditional funding agents of innovation, professional and corporate venture capitalists. And herein lies a puzzle: until very recently, these investors had departed from the traditional "rational" model for investment in sustainable energy technology, foregoing tremendous opportunities for return. Yet over the past twenty-four months, the tables have turned. So much capital has poured into the energy sector that total investment in that sector now ranks third behind software and biotechnology, and that amount is still rising.
We are left with the question: Why do investment boom-bust cycles exist and persist? The predominant view in research to date is that the volatility of the venture capital industry stems not from irrational over- or under-reaction, but from the inherent volatility of fundamentals. In this view, venture capital investors are simply responding rationally to changes in investment opportunities.
Our research draws from insights from behavioural finance, which starts from the presumption that investors-venture capital investors included-are less than fully rational. We propose that what is missing from our understanding of venture capital decision-making is the undisclosed criteria used to evaluate investments, the ones "beyond the business plan" and the presumably "rational" risk/return calculus of Homo Economicus.
The project proposed here will identify and test for a collection of individual and group level behavioural criteria that influence venture capital investment decision-making. To verify our hypotheses we will conduct a stated-choice survey among a dedicated group of 75 VCs and corporate investors in Switzerland and other European countries investing in sustainable energy ventures, with a control group of 75 non-energy VCs. We will use discrete choice analysis to determine the relative importance of certain attributes of the investment context.
The proposed research makes important contributions to the literature on behavioural finance by focussing on high-uncertainty investments in new technology firms; to the venture capital literature by shedding light on behavioural aspects that influence the evolution of venture capital markets; and to sustainability management literature by increasing the understanding of clean technology innovation. It has significant practical implications for the financing of entrepreneurial firms in Switzerland and Europe.
We are left with the question: Why do investment boom-bust cycles exist and persist? The predominant view in research to date is that the volatility of the venture capital industry stems not from irrational over- or under-reaction, but from the inherent volatility of fundamentals. In this view, venture capital investors are simply responding rationally to changes in investment opportunities.
Our research draws from insights from behavioural finance, which starts from the presumption that investors-venture capital investors included-are less than fully rational. We propose that what is missing from our understanding of venture capital decision-making is the undisclosed criteria used to evaluate investments, the ones "beyond the business plan" and the presumably "rational" risk/return calculus of Homo Economicus.
The project proposed here will identify and test for a collection of individual and group level behavioural criteria that influence venture capital investment decision-making. To verify our hypotheses we will conduct a stated-choice survey among a dedicated group of 75 VCs and corporate investors in Switzerland and other European countries investing in sustainable energy ventures, with a control group of 75 non-energy VCs. We will use discrete choice analysis to determine the relative importance of certain attributes of the investment context.
The proposed research makes important contributions to the literature on behavioural finance by focussing on high-uncertainty investments in new technology firms; to the venture capital literature by shedding light on behavioural aspects that influence the evolution of venture capital markets; and to sustainability management literature by increasing the understanding of clean technology innovation. It has significant practical implications for the financing of entrepreneurial firms in Switzerland and Europe.
Leader contributor(s)
Member contributor(s)
Wuebker, Robert
Funder
Topic(s)
sustainable energy investment
venture investment
sustainable energy
renewable energy
Method(s)
discrete choice analysis
stated choice survey
Range
Institute/School
Range (De)
Institut/School
Eprints ID
53650
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Item type:Publication, Handbook of Research on Energy EntrepreneurshipThe Handbook of Research on Energy Entrepreneurship is a snapshot representing our most current understanding of the most important facets of energy entrepreneurship research. As global resource and climate challenges continue to make headlines, there is a significant increase across the curriculum in energy entrepreneurship. This emerging domain is set to have a significant and lasting impact on the scholarly agenda in entrepreneurship research in the way that information technology and biotechnology have: as a context from which to test existing theory, and a platform from which to develop new insights. This volume serves as an introduction to this domain, filling an important gap in the publication stream for scholars, instructors, investors, and policymakers seeking insight into the latest thinking in this emerging, dynamic field. The authors' list represents those who have inaugurated this research as well as those that are pushing it forward, and has been planned to guide, inform, and provoke. The book opens with a thorough survey of energy entrepreneurship as a research field; conceptual, theoretical and geographic aspects are explored, and its pioneers revisited. The focus then shifts to specific aspects of energy entrepreneurship. Two sections investigate the respective roles of energy entrepreneurship in start-ups and large incumbent firms. A fourth section looks at commercialization of energy innovation, including entrepreneurial marketing. Section five turns to aspects of financing entrepreneurial firms and energy innovation. The final section investigates the interface between public policy and energy entrepreneurship. Across the different sections, the book provides a variety of insights on theoretical, conceptual and methodological approaches that may be fruitfully applied to the emerging research field on energy entrepreneurship. We expect that this Handbook will prove to be an invaluable reference tool for academics and practitioners with an interest in policy, business management, innovation, entrepreneurship, and the financing of new and growth-oriented energy firmsType:book - Some of the metrics are blocked by yourconsent settings
Item type:Publication, When energy policy meets free-market capitalists: The moderating influence of worldviews on risk perception and renewable energy investment decisionsWhether or not targets to increase the share of renewable energy will eventually be met critically hinges upon the effectiveness of policies to mobilize private investment. However, just as energy policy can create opportunities, it can also create risk. This paper adds to a growing stream of literature at the intersection of energy research and social sciences that empirically investigates investor perceptions of regulatory risk, and their influence on investment decision-making. Based on choice experiments with 29 venture capital investors from Europe and the United States conducting 1,064 investment decisions, we show that high levels of regulatory risk have a negative effect on the likelihood to invest in renewable energy. Furthermore, we find that investors' worldviews moderate the impact of perceived regulatory risk: respondents who expose strongly individualistic "free-market" worldviews are less likely to invest in renewable energy ventures with high regulatory exposure than other investors.Type:journal articleJournal:Energy Research & Social ScienceVolume:3Issue:-Scopus© Citations 64
