Abstract

Recent legislative changes (e.g. Title II of the JOBS Act) and technological advances (e.g. crowdfunding) are creating new opportunities for non-sophisticated investors to participate in private equity investments. Nonprofessional investor participation on a mass scale may have several implications for entrepreneurial finance. Using regulatory focus theory (Higgins, 1997; Lockwood, 2002), we explore individual psychological foundations that underlie nonprofessional crowdfunding investment decisions to enhance our understanding of this nascent private equity landscape.

Regulatory focus theory is a widely cited psychological theory which explains goal pursuit, motivation, and individual decision making processes. Individuals operate in two distinct orthogonal modes known as promotion focus or prevention focus. Prevention focused individuals have been shown to be more likely to avoid acts of commission and inherently risky investments (Bryant & Dunford, 2008; Burmeister-Lamp, Lévesque, & Schade, 2012; Higgins, Shah, & Friedman, 1997). However, by conceptualizing a new dimension within the regulatory focus framework (i.e., absolute/relative focus) our study hypothesizes that certain prevention-focused individuals are more willing to invest in risky ventures. We explore this dimension in an equity crowdfunding setting.

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