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21
Feb 10
Sun

How Entrepreneurs Really Succeed

Malcolm Gladwell’s New Yorker article, “The Sure Thing, examines the popular conception that entrepreneurs are risk-takers and concludes that successful entrepreneurs are actually risk-averse. Or, cast in another light, entrepreneurs only seem to be risk-takers, because they jump on hidden opportunities that everyone else is ignorant about (and what’s unknown is risky). However, they have done everything from their perspective to actually mitigate their risk.

“The risk-taking model suggests that the entrepreneur’s chief advantage is one of temperament – he’s braver than the rest of us are. In the predator model, the entrepreneur’s advantage is analytical – he’s better at figuring out a sure thing than the rest of us.”

Gladwell recounts the stories of various entrpreneurs, including Ted Turner (who was adept at getting good deals for himself), Sam Walton (who initially financed Walmart with money from his in-laws, which was less risky than a bank loan), and hedge fund manager John Paulson, who made $15 billion in profit in 2007 and $5 billion in 2008, by buying up credit default swaps on subprime mortgage bonds. In all of these cases, the decisions made by the entrepreneurs were not a seat of the pants thing, but bets made after careful calculation.

Entrepreneurs, or at least the good ones, may actually be quite risk averse.

“When the sociologists Hongwei Xu and Martin Ruef asked a large sample of entrepreneurs and non-entrepreneurs to choose among three alternatives – a business with a potential profit of five million dollars with a twenty-per-cent chance of success, or one with a profit of two million with a fifty-per-cent chance of success, or one with a profit of $1.25 million with an eighty-per-cent chance of success – it was the entrepreneurs who were more likely to go with the third, safe choice. They weren’t dazzled by the chance of making five million dollars. They were drawn to the eighty-per-cent chance of getting to do what they love doing. The predator is a supremely rational actor. But, deep down, he is also a romantic, motivated by the simple joy he finds in his work.”

And why do so many successful entrepreneurs keep working even though they never need to work in their lives again?

“…one undisputed finding in all the research on entrepreneurship [is that] people who work for themselves are far happier than the rest of us. Sane says that the average person would have to earn two and a half times as much to be as happy working for someone else as he would be working for himself. And people who like what they do are profoundly conservative.”

The founders of the company I work at sold most of their shareholdings in it for an amount that guaranteed that they would never have to work again in their lives. Yet, they are still working at the company, doing what they enjoy. Another insightful Gladwell article.

  4:51pm  •  Business & Finance  •   •  Tweet This  •  Comments (3)

This post has 3 comments

1.  Austin

Didn’t read the article, but I guess it all comes down to how one defines ‘risk’.

In the present case, it seems Gladwell equates risk with something else. His conception of risk reveals itself to be a phenomena which presents itself and increases in scope as people pursue more opportunities for enrichment.

But, risk is a very subjective term and in my opinion can very well be the opportunity cost of NOT pursuing a particular avenue for enrichment.

As you said, they jump on hidden opportunities that everyone else is ignorant of. And they have a better instinct for such overlooked opportunities because, as Gladwell points out, they’re better at figuring out a sure thing than the rest fof us. Given the limited resources that everyone starts out with, these entrepreneurs are not “risk-averse”, but rather, keen to employ their capital in more profitable ventures and in the process forgo what are legitimately profitable ventures (that everyone else goes along with) in their own right. THAT, to me is ‘risk’.

Hope that makes sense. Let me have your views though.

2.  Stu

Not sure that I follow you. In a business context, risk generally refers to the probability of success or failure. The concept is not subjective at all, although the way it is calculated can appear to be. (There are other types of risk which have slightly different definitions, such as financial risk, but it all comes down to probabilities.)

Let’s take blackjack at the casino. After being dealt a certain hand, a casual gambler may see that they have a chance of quadrupling their original wager by doubling down. But they don’t really know what the probability of winning the hand is. This uncertainty means that they have no way of really judging actual risk – it’s an unknown factor, which in itself increases risk. So, the so-called “risk averse” thing to do is to not double down, and not risk the extra cash. Then you have a professional gambler, who knows that, given a certain card combination, if they double down, they have a 55% chance of winning, so they do so. To the casual gambler, it may seem they have a greater risk appetite, but that would be a misconception. If the professional calculated 45%, then they would not double down.

So, Gladwell describes the theory of the successful entrepreneur being a person who can not only identify the actual risk, and sensibly decide, given the potential return, whether it’s one worth taking, but is also particularly good at discovering risks that are worth taking. To a “risk averse” outsider, it looks like the entrepreneur is risk seeking, because to the outsider the risk is uncertain and unquantifiable. (And therefore, they stay with the status quo, rather than “take the risk”.)

If I’m a blackjack player and I have no idea whether doubling down gives me a 10% chance of winning or a 90% chance of winning, then of course it seems like it’s risky. But if I do some statistical analysis and can narrow down the probability to, say, a 50-60% chance in winning, then through that lens, it becomes clearer that doubling down is not that risky after all. It’s a good deal.

3.  Hear Ye! » Manic entrepreneurs

[…] contrast this with Gladwell’s New Yorker article earlier this year, who say that successful entrepreneurs aren’t really risk-takers.   […]

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