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We examine the impact of positive (joy) and negative (fear) emotions on distinct phases of the entrepreneurial process. To analyze the effects of emotions on entrepreneurial opportunity evaluation and exploitation we use an experimental design completed by 146 participants from 40 young entrepreneurial firms. As predicted by the emotion-as-information theory and by the concept-priming theory, induced emotions change perception and decision-making of unrelated economic situations, namely entrepreneurial evaluation and exploitation. The results demonstrate that on the one hand, positive emotions affect opportunity evaluation positively and on the other hand, exploitation, negatively. Surprisingly, it is shown that negative emotions influence not only opportunity evaluation, but also opportunity exploitation negatively.

Traditionally, it is implied that people exhibit perfect rationality and have consistent preferences as they pursue the idea of expected utility maximization (Leiser and Azar, 2008). Therefore, cognitive biases and emotions are assumed to be non-existent. However, many studies challenge the assumption that the standard model is a perfectly rational decision maker (Ben-Shakhar et al., 2007). Researchers following the notion of new institutional economics have started to extend the basic model by assuming bounded rationality (Dequech, 2006, Casson, 2005, Shane, 2000, Shane, 2003 and Delfgaauw and Dur, 2007) and behavioral scholars are now broadening the model by incorporating robust psychological findings (Kräkel, 2008, Ben-Shakhar et al., 2007, Dew et al., 2008 and Hayton et al., 2002). Entrepreneurship research has only recently begun to focus more on the effect of cognitions and emotions. However, the theoretical and empirical research has been fragmented and limited (Brundin et al., 2008, Cardon et al., 2009, Corbett, 2007 and Corbett and Hmieleski, 2007). Nonetheless, several authors (e.g. Baron, 1998, Baron and Ward, 2004 and Mitchell et al., 2007) emphasize the importance of cognition within the entrepreneurial context. Defining entrepreneurship as a cognitive process (e.g. Shane and Venkataraman, 2000 and Shane, 2003), scholars have analyzed cognitive biases that distinguish entrepreneurs from other groups of people (Baron, 1998 and Sarasvathy et al., 1998). For instance, individuals who try to exploit a new opportunity have been shown to be more likely than others to assume that things will turn out well (Baron, 1998, Baron, 2004, Simon and Houghton, 2003 and Hmieleski and Baron, 2009). Many additional studies have analyzed other cognitive heuristics, such as the planning fallacy (e.g. Keh et al., 2002), the illusion of control (e.g. Keh et al., 2002 and Simon and Houghton, 2002), the belief in the law of small numbers (e.g. Keh et al., 2002 and Simon and Houghton, 2002), reasoning by analogy (e.g. Simon and Houghton, 2002), risk propensity (e.g. Forlani and Mullins, 2000 and Mullins and Forlani, 2005) and certain learning capabilities (Corbett, 2007). Therefore, it has been argued that non-rational decision-making caused by the use of heuristics may be, under certain conditions of environmental uncertainty and complexity, an effective and efficient guide to decision-making (Mitchell et al., 2007 and Busenitz and Barney, 1997). Furthermore, it has been argued that cognitive biases are relatively stable for individuals over time, situation and context (Schulman et al., 1993). Emotion, on the other hand, is said to be an affective experience that arises from an event (Côté, 2005). Emotions are relatively intense; however, they do not last very long (e.g. Frijda, 1986, Lazarus, 1991 and Levenson, 1994). Therefore, the assumptions of rationality, as well as that of consistent preference, are both challenged as soon as emotion is considered. The role of emotion and the importance of being emotional have attracted growing attention in economics over the past decade (Elster, 1996, Elster, 1998, Frank, 1988, Loewenstein, 1996 and Loewenstein, 2000). However, it is surprising that emotions have only recently been recognized to play a significant role in the entrepreneurial process (Goss, 2005a, Goss, 2005b, Goss, 2008, Cardon et al., 2005, Foo, 2010 and Foo et al., 2009). To overcome this lack of research and structure, Baron's (2008) recent theoretical contribution builds on existing general psychological research findings of emotions and cognitions to explain the effects of positive emotions in the entrepreneurial process. Leaning on a wide-ranging body of psychological research, it has been denoted that emotions provoke strong effects on cognition (e.g., Forgas, 2000 and Isen, 2002). Furthermore, two general explanations exist as to why emotions may play an even more important role in an entrepreneurial context, than in a general organizational setting. Firstly, the environments in which entrepreneurs act are usually unpredictable and uncertain. In such situations, emotion can determine specific actions or decision-effects, which it may not shape in environments that are less uncertain and less unpredictable (e.g., Forgas and George, 2001 and Hsu et al., 2005). Secondly, specific tasks that entrepreneurs perform, such as decision-making and judgment (Ireland et al., 2003) are ones that have been previously shown to be strongly affected by emotion (Baron, 2008). Hence, economic models that allow for bounded rationality and incorporate the effect of emotions are more appropriate within the entrepreneurial context. Thus, on the one hand, the relevance of emotions in entrepreneurship seems even more important than in many other organizational settings. On the other hand, very little theoretical and empirical work exists concerning the notion of emotion and its influence on entrepreneurship. Hence, to exploring such relationships to gain a better understanding in an entrepreneurial context seems crucial. Existing literature and research examining these issues so far has been limited in three important ways. The first of these is to explain the effect of emotions on opportunity exploiting. Baron (2008) focuses on the effects of emotion on stress tolerance and the ability to acquire new resources. Although these aspects may be important, it has remained virtually unchallenged that resource allocation and risk-taking is at least as important in order to exploit new ideas successfully. Accordingly, it seems essential to expand on Baron's theoretical model by including these elements. Moreover, other theoretical explanations such as the emotion-maintenance hypothesis that may explain the influence of emotion on certain entrepreneurial cognitive processes have not yet been presented by Baron (2008). The second of these limitations is that despite the growing theoretical interest among scholars, very little empirical economic research on emotion has been conducted (Bosman et al., 2005). Although more specific psychological research links emotion with cognitive processes, this relationship has to date been documented in only a few narrow experimental setups. There have not been many complementary analyses in more realistic settings (e.g. Kliger and Levy, 2003 and Chuang and Lin, 2007). To our knowledge there has been very little work so far that examines the relationship between emotions and entrepreneurship empirically and almost no experimental approaches to studying entrepreneurship and emotions. For instance, Brundin et al. (2008) analyzes how and why emotional displays of managers influence the willingness of employees to act entrepreneurially. Although this work offers an interesting starting point, it is limited in one aspect. It does not distinguish between the different aspects of the entrepreneurial process. This is a troubling oversight given that opportunity evaluation and exploitation may not always be correlated with emotional states in the same direction. Thus, there is the need for additional empirical research that is more entrepreneurially focused than that of past research and that would enable a differentiated analysis of the effect of emotions in distinct entrepreneurial phases. The third limitation is that the effect of emotion and entrepreneurship so far has been analyzed only on the basis of correlations from self-reported data (Brundin et al., 2008 and Foo et al., 2009). However, to identify causal interactions between emotions and the entrepreneurial processes, it is necessary to induce emotions in an experimental setting. Nonetheless, it is important to provide the utmost flexibility to non-student participants, and therefore it might be necessary to offer an online experimental tool. Although psychological research uses various tools to induce emotions such as mood-suggestive photographs, autobiographical recalls, film clips and music tracks, not all of these methods seem feasible to induce positive and negative emotions via an online experiment (Göritz and Moser, 2006). The goal of this investigation is to address these gaps to gain greater understanding of distinct entrepreneurial phases by focusing on the effects of positive and negative emotions in opportunity evaluation and exploitation, and to assess them through an experimental online research setting. Hence, this research makes some important contributions to previously conducted research. First, it offers additional support for the general need to incorporate emotions in economic modeling. Furthermore, it expands on Baron (2008), proposing a certain influence of emotions incorporating additional aspects of the entrepreneurial process that have not yet been addressed. The second contribution it offers through the empirical setting. It endeavors to overcome some of the shortcomings of past empirical research by focusing on entrepreneurship and distinguishing between the distinct phases of entrepreneurship. We examine these relationships utilizing an online experiment with entrepreneurs which induces positive and negative emotions and which presents a case study in the context of entrepreneurship. Hence, third, it contributes to future research, because it offers an experimental approach to inducing positive and negative emotions via an online experiment. In doing so, we seek to establish the theoretical and practical value of analyzing emotions present in the entrepreneurial setting.

The purpose of our study has been to investigate how positive emotions (joviality) and negative emotions (fear) shape opportunity evaluation and opportunity exploitation. Rational choice models would have argued that the evaluation and exploitation of a new opportunity is based on rational decisions (Leiser and Azar, 2008). Contrary to this assumption, past cognitive research has shown that entrepreneurs have stable tendencies to behave irrationally. So far, recent work has concentrated on these stable tendencies, such as optimism, status quo bias, illusion of control and avoidance of sunk costs (Baron, 2004, Mitchell et al., 2007, Burmeister and Schade, 2007 and Hmieleski and Baron, 2009). We argued that entrepreneurial behavior is not only influenced by stable cognitive biases, but also by short-term emotional experiences. Based upon existing psychological research on emotion and cognition, we have argued that positive emotions impact opportunity evaluation positively and the exploitation negatively. Vice versa, we have predicted that negative emotions influence opportunity evaluation negatively and the exploitation positively. We have used an experimental design to test the hypotheses empirically and find agreement between these theories that consider the importance of being emotional and the empirical data. Consistent with the concept-priming theory, findings indicate that positive emotions foster a positive evaluation of a new opportunity, whereas negative emotions rather negatively influence the evaluation of a new opportunity. However, only the influence of positive emotions on opportunity evaluation was statistically significant, while the effect of negative emotions on opportunity evaluation was negligible. Furthermore, when predicting the willingness to exploit new opportunities by positive and negative emotional states, the results show that positive and negative emotions significantly decrease the preferences of entrepreneurs to allocate additional time and resources to the exploitation of new opportunities. Some of these findings are both counter-intuitive and intriguing. They are counter-intuitive, because one might suppose, due to the emotion-maintenance hypothesis that positive emotions influence entrepreneurial opportunity exploitation negatively and negative emotions influence opportunity exploitation positively. In contrast, from our study, the participants in the fear condition were less willing to exploit these opportunities than the participants in the control condition, although one might also assume this effect to be reserved only for the participants in the joy condition. These findings are intriguing because they seem to be inconsistent with prior theoretical and empirical research that indicates no relationship (rational choice models) or a linear relationship between emotional state (emotion-as-information and concept-priming theory) and the effect on distinct phases of the entrepreneurial process. Furthermore, these findings are intriguing because they show not only that stable cognitive biases, such as optimism (Hmieleski and Baron, 2009) or risk propensity (Palich and Bagby, 1995) influence entrepreneurship, but relatively short-term emotional experiences also have the power to increase irrational behavior. Opportunity evaluation has been successfully explained by the emotion-as-information theory. However, opportunity exploitation could not be completely explained by the emotion-maintenance hypothesis. We had expected that when negative emotions increased the willingness to exploit opportunities, positive emotions would decrease the willingness to exploit opportunities. Hence, the theory did not offer an explanation as to why positive and negative emotions might both lead to less opportunity exploitation. Interestingly though, our findings are somewhat in line with Davis’ (2009) recent meta-analysis of the relationship between emotions and creativity. Thus, the positive effect on creativity of positive emotion is strongly significant in contrast to neutral emotional states, but the effect shrinks when weighed against negative emotional states. Hence, if negative emotions are induced, opportunity recognition might be positively influenced (George and Zhou, 2002). This effect, however, seems to be weaker than the effect of positive emotions. The fact that Davis (2009) could not significantly prove that negative emotions improve creativity is in line with our results. Nonetheless it is important to note, that this meta-analysis has been about the effect of emotions on creativity. This line of argument might also hold for the effect of emotions on opportunity exploitation. In addition, an article by Foo et al. (2009), investigating the link between proactive behaviors and emotions, endeavors to explain the surprising positive effect of positive and negative emotions on proactive behaviors by expanding on the emotion-as-information theory. In line with their argument, one might assume that the willingness to allocate resources to exploit a new opportunity in the near future would be negatively influenced by negative emotions as these negative emotions turn the attention of the individuals toward tasks that require immediate attention. Furthermore, we have used joy and fear as explicit examples of a positive and a negative emotion. These two emotions, although distinct in valance, may have certain similarities that might have lead to an equal effect on opportunity exploitation. Smith and Ellsworth (1985) show that joy and fear are quite similar in the appraisal tendency category of attentional activity. On the one hand, assuming that attentional activity is key to the decision to exploit an opportunity, one might not be too surprised to find that joy and fear both decrease the willingness to exploit. On the other hand, joy and fear differ in their appraisal tendency of control and certainty. These are definitely two important aspects that influence, for example, the willingness to allocate financial resources. Thereby a similar effect of joy and fear on exploitation seems doubtful. To increase our understanding of this surprising finding, it would therefore be helpful to repeat our study using a number of other distinct emotions and compare them to our results. This study contributes to the literature mentioned above in several ways. First, existing studies provide compelling evidence that cognitive factors influence entrepreneurship (Mitchell et al., 2002, Mitchell et al., 2004 and Mitchell et al., 2007). While this research is essential, factors beyond cognition impact the entrepreneurial process (Baron, 2008). Scholars (e.g., Sarason et al., 2006) have called for a more complete theorizing of the entrepreneurial process that is able to incorporate the dynamic interaction of the individual and the opportunity. Our work builds on the theoretical work of Baron (2008), who has suggested, but not proved, a number of propositions regarding the role of positive emotions in the entrepreneurial process. We have extended on this conceptual work by including the effect of negative emotions to entrepreneurial opportunity evaluation and exploitation, and by clarifying additional mechanisms that correspond between emotion and the willingness to allocate resources to exploit new opportunities. Drawing on the emotion-maintenance hypothesis, we argue theoretically that positive emotions decrease the willingness to exploit new opportunities and negative emotions increase the willingness to exploit new opportunities. Second, our study answers the call of Cardon et al. (2009), Goss (2007) and Shepherd (2004) for empirical investigation into the role of emotions in the entrepreneurial process. In order to account for different effects of emotions on distinct phases of the entrepreneurial process, our study distinguishes between opportunity evaluation and exploitation. In addition, it is one of the first empirical investigations that is specifically focused on an entrepreneurial setting investigating relatively short-term emotional experiences, instead of seemingly stable affective affairs, such as entrepreneurial passion or optimism. Consistent with the arguments of Baron (2008) evaluation is positively influenced by positive emotions. Surprisingly, exploitation seems also to be negatively related to negative emotions. Hence, it has shown that more additional theoretical work is required to examine the effect of negative emotions on opportunity exploitation. Third, since it is difficult to schedule meetings with entrepreneurs, as they tend to work in a very time restricted environment, our online experiment proved to be an ideal way to interrogate entrepreneurs. The online experiment approach adds to the flexibility of gaining data and, in our case, enabling the entrepreneur to squeeze the survey into an already hectic day. When it comes to analyzing emotions by inducing emotional states, a complete variety of emotion induction methods does not seem feasible (Göritz and Moser, 2006). Presenting a short film sequences has here proved to be a suitable and reliable method of inducing positive and negative emotions (Gross and Levenson, 1995, Gross and Levenson, 1997 and Tiedens and Linton, 2001). Though too, not without its limitations, such as the need for appropriate infrastructure (access to high-speed internet with audio compatibility), the induction of emotion though the online film clip has its advantages over existing procedures, since it ensures the possibility of inducing positive and negative emotions. Previous online methods did not always succeed in inducing positive emotions. Hence, we succeeded in offering a compelling tool that can be used in future research with entrepreneurs. Past research had often to rely on student samples, and therefore it was sometimes weak in external reliability. For instance, this weakness of external reliability might have been disproportionately high when effects of emotion in entrepreneurship are correlated with certain cognitive biases, which are said to be typical characteristics for entrepreneurs. To research these types of questions, an online experiment for entrepreneurs seems ideally appropriate. Several limitations of this study should also be considered. First, we have asked participants to report on their emotional state before and after having seen the video clip and it can be argued that this procedure might have reduced the effect of the emotion induction (Keltner et al., 1993 and Schwarz and Clore, 1983). Although we used film clips that have been proven to be effective (e.g. Gross and Levenson, 1995), we wanted to be able to show that the positive and negative emotion induction also held ground in an online experimental setting. Prior research has offered some doubts as to the effectiveness of inducing positive emotions through the means of an online survey (Göritz and Moser, 2006). We felt the need to test for the efficiency of the emotion induction was higher than the risk to decrease the effect of the induction. Furthermore, using the PANAS enabled us to undertake a more detailed analysis of the effect of emotions in opportunity evaluation. Second, participants self-reported their emotional states and it can be argued that these states have not been objectively measured (e.g., Nisbett and Wilson, 1977). However we are confident in the generalizability of our findings; nonetheless, more extensive tests could be useful. Hence, the use a Magnetic Resonance Imaging (MRI), for example, could measure responses more accurately. Nonetheless, there are two reasons why we have decided to use the Watson and Clark's (1994) scale. It would have been very difficult (if not impossible) to persuade our participants to come to a certain facility, do an MRI and answer our questions. In addition, most studies on positive and negative emotions have utilized the PANAS, and we have been eager to use a commonly accepted measure so that our findings can be compared to existing research results. Third, this study has utilized a questionnaire experiment with a short case study. Participants have been confronted with an entrepreneurial situation that provides information about a potential new product innovation. Although this approach offers a greater amount of information and more complexity than the hypothetical scenario technique (e.g. Burmeister and Schade, 2007 and Brundin et al., 2008), it is still a simplification of what would normally be entailed. Hence, as emotions are shown to play a more important role in complex settings than in less uncertain and less unpredictable ones (Forgas and George, 2001), our results should be generalized with caution. Nonetheless, they offer a promising first insight into the importance of emotions in distinct phases of the entrepreneurial process. Even so, it is important to note that one main advantage of the hypothetical scenario technique is the possibility to define the optimal choice. With our case study, we could only show shifts in choice, but not the optimizing effects. If other researchers would want to find out more about the optimizing effect of emotions on decision, then they could ask an expert group to evaluate the case study (Corbett, 2007). However, even an expert group would not be free of biases to some degree. Fourth, some additional external validity concerning our experiment has to be raised (Croson and Gächter, 2010). Apart from simplifying reality (Campbell and Ogden, 2006), our experiment tends to measure reported behavioral intentions to the presented situations, rather than actual behavior (Martin et al., 2007). Furthermore, decision in the hypothetical situation may differ from a decision in a real life situation, as the former does not have real life consequences for the participants (Greitemeyer and Weiner, 2006). Although these concerns cannot be ignored, decisions in a hypothetical situation are found to be a proxy for real life decision-making (Douglas and Shepherd, 2002). Lastly, in order to measure opportunity exploitation, we have used a construction that measures behavioral intention as a proxy for future behavioral choices. Behavioral intentions are said to be the last step before the actual behavior is conducted (i.e., before resources are allocated). They have been defined as the subjective probability that an individual will perform a certain behavior (Fishbein and Ajzen, 1975). Thereby, intentions capture all motivational factors that affect behavior. Hence, they indicate the amount of effort and determination being exercised to act upon the future behavioral action. These intentions have constantly been found to be significantly precise for predicting behavior (Ajzen et al., 2009) and are commonly used in entrepreneurship research for studying future entrepreneurial behavior (e.g. Thompson, 2009, Linan and Santos, 2007 and Krueger et al., 2000). Future work could build on the results of this study in a number of ways. This study provides a promising starting point towards understanding the effects of emotion on different phases of the entrepreneurial process. Future research could get to the bottom of moderating factors that influence the effect of positive and negative emotions on the different phases of the entrepreneurial process. One promising path could be to investigate different supportive contexts (e.g. family support: Madjar et al., 2002, VC support or other work-related individuals: Madjar, 2008 and McColl-Kennedy and Anderson, 2002) that may influence the effect of emotion. For instance, supportive contexts for creativity provided by supervisors have been shown to play a significant role in the impact of emotions on creativity (George and Zhou, 2007). Hence, it can be assumed that supportive contexts such as family support and VC support might play a crucial role in the effect of emotions on entrepreneurship. Another promising avenue to investigate may be to incorporate recent research on entrepreneurial passion (Cardon et al., 2009 and Chen et al., 2009). Passion, compared to positive emotions, is said to be relatively stable over time, rather than to vary based on situational stimuli. It would be very interesting to analyze to what degree entrepreneurial passion may contribute to the effect of positive and negative emotions on the entrepreneurial process. Does a high level of passion reduce negative effects of negative emotions on opportunity evaluation? Or does a high level of passion reduce positive effects of positive emotions on opportunity evaluation? So far, the relationship between passion and emotion has not been analyzed in entrepreneurship research. As opposed to passion, the effect of possible punishment could also shed some light on the intriguing results of this study. Dohmen (2008) shows, that threat of punishment does not only increase the willingness to exert high levels of effort, but also creates pressure. This pressure has been shown to cause paradoxical performance effects. It would be equally interesting to analyze the effects of optimism on the effect of emotions on entrepreneurial opportunity evaluation and exploitation. Finally, the role of emotion in the entrepreneurial process should be investigated further. Present entrepreneurship literature and behavioral economics in general (e.g., Koellinger et al., 2007, Lee et al., 2005, Shepherd, 2004 and Sternberg et al., 2006) provide clear evidence that emotion has a systematic influence on entrepreneurship. Future research should investigate the influence of a greater variety of emotions. Rather than just differentiating between positive and negative emotions as presented here in this study, it may be fruitful to compare a range of negative emotions such as fear sadness and anger and a broader spectrum of positive emotions too, such as joy, self-assurance and hope. To conclude, this study indicates that emotions do indeed play a role in the entrepreneurial process. Most notably, it has been shown that this effect differs within the different phases of entrepreneurship. In fact, it appears that positive emotions influence opportunity evaluation positively and negative emotions influence opportunity evaluation negatively. Opportunity exploitation is affected negatively by positive emotions. Surprisingly, the findings suggest that negative emotions do not enhance opportunity exploitation. Future research could respond to the call to explore moderating factors that might explain these surprising results regarding the effect of emotions on the entrepreneurial process.