THE EFFECTS OF THE SMALL BUSINESS FOUNDER'S NEED FOR COGNITION ON EARLY STAGE PERFORMANCE

Small businesses, frequently owned and managed by a single individual with few employees, constitute a large segment of the U.S. economy. The decisions these owner-managers make to configure their businesses to fit their environments are likely to affect performance. Because environmental assessment and configuration involve substantial cognitive activity, the owner's cognitive characteristics can influence early stage performance. This study examines the relationship between need for cognition—a stable tendency to engage in and enjoy effortful cognitive activity—and organizational performance measured by sales growth in small childcare businesses.

Prior research links environmental fit and organizational performance, showing that misalignment from normative strategic profiles relates negatively to performance and that alignment of strategy and competencies with environmental conditions is necessary for superior outcomes (Venkatraman and Prescott, 1990; Pelham, 1999; Beal, 2000; Forte et al., 2000; Dobni and Luffman, 2003). Dual-process theories of reasoning distinguish intuitive, heuristic-driven System 1 processes from analytic, effortful System 2 processes (Epstein, 1994; Kahneman, 2003; Stanovich and West, 2000; Sloman, 1996, 2002). Factors impairing logic-based reasoning include time pressure and multitasking; facilitators include intelligence, statistical training, and need for cognition (Finucane et al., 2000; Gilbert, 1989, 1991, 2002; Stanovich and West, 2002; Agnoli, 1991; Agnoli and Krantz, 1989; Nisbett et al., 1983; Cacioppo and Petty, 1982). Need for cognition is defined as a stable individual difference in engaging in and enjoying effortful cognitive activity (Cacioppo et al., 1996) and is associated with seeking more information, endorsing effortful rather than heuristic processing, and greater external information search (Verplanken, 1993; Verplanken et al., 1992). In small business contexts where many owners lack formal business education (Schweitzer, 2007), higher need for cognition should motivate more thorough information gathering and analysis. Entrepreneurial cognition research indicates that cognitive differences and learning affect opportunity assessment and venture configuration, with experience shaping knowledge structures (Baron, 2004; Baron and Ensley, 2006; Krueger, 2007; Karp, 2006; Mitchell et al., 2007; West, 2007). For single-owner ventures, the owner's cognition is likely to dominate decision-making. Empirical work shows higher need for cognition is linked to reduced framing effects and more normative responses in cognitive tasks (Smith and Levin, 1996; Stanovich and West, 1999). Collectively, these studies support the hypothesis that higher need for cognition fosters logic-based reasoning, better environmental fit, and improved performance.

Sample: Licensed daycare providers in Florida during 2004–2005 were targeted to minimize industry effects and maximize single-owner decision-making relevance. The licensing roster (public information) was obtained from the state agency. Businesses with assumed names and not obviously nonprofit were selected; nonprofit-owned centers were excluded due to board governance. A small financial incentive was offered. An initial mailing to 403 subjects yielded a 6.5% response (26/403), prompting a revised protocol: 1,897 calls attempted, 955 completed (942 unreachable). Of completed calls, 293 declined participation and 14 identified as nonprofit. Surveys were sent to 648 owners; 187 responses were received (28.9%). Substantially all businesses had fewer than 10 employees. Analyses used N=116 (as reported in Tables). Measures: Need for Cognition was assessed using the current short-form scale (18 items) on a five-point Likert response from “extremely uncharacteristic” to “extremely characteristic.” Example item: “I prefer complex to simple problems.” Reported internal consistency in this study was Cronbach's alpha = .82 (prior work ~.90; unitary factor structure with top factor accounting for ~37% of variance). Sales Growth operationalized performance as the percentage change in sales from the first full twelve months to the second full twelve months, measured via a single item in 10% increments from a 91–100% decrease to more than 100% increase; respondents were encouraged to use tax returns. The scale results were converted to Z-scores for analysis. Control variables: Initial capital invested was measured with a one-item, eight-choice scale ranging from "under $5,000" to "$500,000 and over," included due to its link with information search and due diligence requirements (Cooper et al., 1995). Years of formal education were measured on a six-point scale from "didn't finish high school" to "doctoral degree." Number of college-level business classes completed was measured on a five-point scale from "none" to "4+." Statistical analysis: Hierarchical regression predicted percent change in sales (Z-scores) from control variables and need for cognition. Correlations, means, and standard deviations were also reported.

Need for cognition was significantly and positively related to sales growth (t = 2.50; p < .05), supporting the hypothesis that higher need for cognition predicts better early-stage performance. Initial capitalization was a significant positive predictor of sales growth (t = 2.95; p < .01). Years of formal education (t = 1.15; n.s.) and number of college business classes completed (t ≈ 0.03; n.s.) were not significantly related to sales growth. Correlation matrix (N = 116) indicated: Need for cognition correlated with percent change in sales at r = .30 (p < .01), initial capitalization with percent change in sales at r = .27 (p < .05), and need for cognition correlated with education (r = .33, p < .01) and business classes (r = .25, p < .01). Reliability for the need for cognition scale was Cronbach's alpha = .82. Hierarchical regression summary: Step 1 (Initial Capitalization) ΔR² = .07; Step 2 (Years of Formal Education) ΔR² = .01; Step 3 (No. of College Business Classes) ΔR² = .05; Overall R² = .13; Adjusted R² = .10; Model F = 4.18 (p < .01); N = 116.

Results indicate that small business owners with higher need for cognition are more likely to engage in effortful information gathering and analysis (System 2 reasoning), leading to better alignment between the venture and its environment and to higher early-stage performance. In single-owner firms where decisions are concentrated, cognitive characteristics can have pronounced effects on outcomes. Practically, owners high in need for cognition may be more adept at accessing diverse information sources (including Internet search) and maintain intrinsic motivation for analytic work even when short-term extrinsic rewards are limited. Advisors (e.g., CPAs, SBDC personnel, bankers) can enhance decision quality by providing informed viewpoints, expediting information search, and supporting analysis, especially since sophisticated analytic proficiency often requires formal training that many owners lack. The findings underscore the relevance of dual-process reasoning frameworks to small business decision-making and suggest that fostering logic-based reasoning and comprehensive environmental scanning can improve performance.

The study demonstrates a significant positive relationship between small business founders' need for cognition and early-stage organizational performance, measured by sales growth, in the childcare industry. By linking an individual cognitive trait to economic outcomes, it contributes to entrepreneurial cognition research and highlights the importance of logic-based, effortful decision processes in configuring and adjusting ventures to fit their environments. Future research should refine measures of reasoning processes and intermediate behaviors (e.g., environmental scanning, analytic practices), test the model across diverse industries and venture sizes, and explore how education, experience, and team-level cognition interact with individual cognitive traits to influence performance.

Dual-process reasoning theory has limited field validation, and criterion measures for System 1 vs. System 2 processes are still developing; future work could incorporate normative models of scanning and analysis as intermediate variables. Data collection from small business owners often relies on self-report and recall, with busy entrepreneurs reluctant to participate, constraining survey length, variable coverage, and the use of multiple measures for single constructs. Limiting the sample to a single industry reduces industry effects but also constrains generalizability. Many small businesses have varied accounting practices, necessitating the use of sales growth rather than income-based measures; while practical, this approach may omit profitability nuances.