Behavioural Finance , Entrepreneurial Cognition and Sme Financial Management

The principal purpose of this review article is to discover what insights on the financial management of small and medium-sized enterprises the rapidly emerging field of Behavioural Finance can provide. The evolution of Behavioural Finance as a scholarly field is first reviewed. Thereafter, the growing literature in the relatively new field of Entrepreneurial Cognition is also reviewed. The paper culminates in examining the financial management of small and medium-sized enterprises through the combined lenses of Behavioural Finance and Entrepreneurial Cognition. The paper closes with recommendations for further scholarly inquiry into the financial management of small and medium-sized enterprises. Looking out at the world through completely rational eyes, entrepreneurs might well never get started – the odds would appear, realistically, far too daunting. Baron (1998, p. 290) Introduction The principal purpose of this review article is to discover what insights on the financial management of small and medium-sized enterprises (SMEs) the rapidly emerging field of Behavioural Finance can provide. A central concern of Behavioural Finance is the degree of rationality of realistic, as opposed to idealised, financial agents, and how this impacts upon their decision-making practices and behaviours. Behavioural Finance introduces the possibility that, in their real world decision-making, financial agents are less than fully rational and they employ heuristics and exhibit certain systematic cognitive biases that together lead to significant departures from the tenets of Modern Finance Theory. If SME financial management is to be considered from a Behavioural Finance perspective, it is necessary to establish that decision-making heuristics and cognitive biases are typically employed or exhibited by SME owner-managers. For such evidence, the paper draws on a growing literature in the relatively new field of Entrepreneurial Cognition which is at the scholarly intersection of entrepreneurship and cognitive psychology. The structure of the paper is as follows. In the following section, a background review of the evolution of Behavioural Finance is presented. The literature on Entrepreneurial Cognition is then reviewed to the point of