The Mediated Effect of Bounded Rationality on the Relationship between National Cultural Psychology and Irrationality in Financial Decision Making of Entrepreneurs: An empirical study on the evidence from Ethnic Minority Business (EMBs) Entrepreneurs in West Midlands, UK.

Abstract

Entrepreneurs’ irrational financial decision making behaviour is presumably triggered by the combined effect of their cultural and cognitive factors. However, these factors and their influences on entrepreneurial behaviour are remained under-researched to date. Therefore, this paper for first time aims to explain how entrepreneurs deviate from rationality when making crucial financial decisions based on empirical evidence gathered from ethnic minority business (EMBs) entrepreneurs (Sri Lankan) in the UK. A questionnaire consisting five point Likert scaled questions was used to collect data. Based on Kline’s (2005) 10:1 rule of thumb sampling method, two hundred (200) Sri Lankan entrepreneurs in the UK were selected. Structural Equation Modelling (SEM), Exploratory and Confirmatory Factor Analyses (EFA and CFA) were used to examine the tripartite relationship among the underlying constructs. EFA results show the associations among National Cultural Psychology (NCP), Bounded Rationality (BR) and Irrationality in Financial Decision Making (IFDM). CFA further proved a statistically significant direct effect in between NCP and IFDM (standardised estimation =0.403, p=0.002<0.05), and Indirect effect via BR (standardised estimation = 0.301, p=0.001<0.05) simultaneously. Accordingly, it can be interestingly discovered a ‘Partial Mediation’ among these three constructs. This study offers a new knowledge for entrepreneurship literature examining the entrepreneurial behaviour through the lens of national culture and cognitive biases of entrepreneurs for first time. The paper introduces a novel theoretical model named as ‘The mediation effect theory of cultural and behavioural finance in Financial Decision Making’ which explains how national cultural and cognitive factors divert entrepreneurs from the rationality when making crucial financial decisions. For the first time, this paper provides strong empirical evidence how entrepreneurial behaviour is influenced by national cultural attributes and cognitive biases simultaneously. This research further bridges entrepreneurship with the cultural finance discipline which is an emerging field under the umbrella of behavioural finance. Entrepreneurs and authorities are recommended to consider cultural attributes that trigger cognitive biases and eventually, divert from rational decision-making.