Why Entrepreneurs Are Freaks Of Nature

August 16th, 2007

I think entrepreneurs are freaks of nature. They completely ignore an aspect of human decision-making that everyone else follows: risk aversion. Risk aversion is the tendency to choose the less risky option even if the payoff is lower. For example, someone offers you the following two choices:

$100 with a 40% chance to win
$1000 with a 5% chance to win

If you are like most people, you would take the first option, even though the first option is worth $40 and the second option is worth $50. Entrepreneurs however, aren’t like this. I imagine they see the choice as something like this:

Work for someone else (steady salary, high chance of success)
Start your own business (highly variable profits, low chance of failure)

Only in this case it’s even worse because the working for someone else probably has a higher expected value than starting your own company. This is why I think entrepreneurs are weird, they aren’t risk averse at all! If anything, they are risk seeking, a term we usually reserve for addictions and behaviors we can’t explain.

I know what you’re saying though: Entrepreneurs aren’t risk seeking, they just have a value structure that makes the second option worth more than the first. A lot more. Enough that the higher risk of the second option is outweighed by it’s higher value. You’re probably right, and it’s why people refer to entrepreneurs as innovative, passionate, and intelligent, but mostly excited.

I also think you can use the PCF framework I discussed inWhat Am I Doing With My Life? to predict whether an entrepreneur will succeed. Basically, if they are motivated to start their company because the other option is full of negatives (e.g. they don’t want to work for someone else) then they aren’t going to succeed. On the other hand, if their motivation is based on the positives of starting their own business (e.g. loving their work) then they will. The reason I think this is simply that when things get really tough, the negative options of working for someone else will pale in comparison, and that option will start to look pretty good. However, the positive reasons for starting your own business won’t ever be matched by working for someone else, and so starting your own business will always look like the better choice (assuming the positive reasons are good and are still there). Here’s my list of reasons and whether I consider them a positive for starting your own business or a negative for working for someone else:

Complete buy-in and emotional investment in my business (+)
Not working for someone else (-)
Direction of the business is up to me (+)
Constantly learning new things (+)
No required hours at the office (-)
Could make a lot of money (+)
Could do meaningful socially conscious work (+)
Freedom of location (-)

Looks like 5 to 3 in my favor, though I think this is sort of arbitrary since a lot of these statements can be reworked to be either against working for someone else or for starting your own business. I guess what’s important if whether you feel the reason is inherently a criticism of working for someone else or not. If not, then it’s a positive for starting your own business.

I’d love to hear your reasons for wanting to start your own business.

-zot

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