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Feb 10

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)