A large proportion of our positive activities depend on spontaneous optimism rather than on mathematical expectation…if animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die…
-J.M. Keynes
Why do entrepreneurs settle for lower pay, as opposed to taking a salaried job? Barton Hamilton finds a 35% less earnings differential for individuals who have owned their business for ten years. In other words, if you’re an entrepreneur for ten years, chances are your net worth is 35% less than your salaried friend’s bank account.
Similiarly, for venture capitalists, Moskowitz and Vissing-Jorgensen find that private equity yields no higher returns than public equity.
Photo by Snoober
Why are people undertaking these risks?
Logically, two reasons make sense to me:
- Being your own boss: Life is too short to toil away, crunching numbers like a peon.
- Confidence: By definition, entrepreneurs, are those that undertake risk. Thus, start-ups, private equity investors and gamblers are entrepreneurs. Cooper, Wo and Dunkelberg surveyed 3,000 entrepreneurs. They found that the number one trait was: confidence. Over three-fourths saw their odds of success at 7/10. Amazingly, 33% saw their odds of success as 10/10.
Josh Kopelman wrote a post about risk-tolerance as a competitive advantage. He’s absolutely right. Yet, it’s not just an advantage for the specific entrepreneur, it’s also good for society.
In 2001, in the midst of the dot-com crash, two researchers found that overconfidence is actually good for society. If our society didn’t have entrepreneurs, everyone would imitate one another–adopting a herd mentality (like angel investors…heh, heh, heh). Nothing would develop or evolve.
While their over-optimism is not warranted, and many entrepreneurs fail, the information that is produced through risk-taking provides a positive externality for society and fosters a more rapid rate of innovation in the world.
Press on.
{ 2 comments… read them below or add one }
Terrific post Scott. That 33% of 10/10 is amazing. It would be interesting to see what % of those that have that level of belief succeed.
Thanks, Charlie — I’ll definitely have to look into that for you. That stat is a dual-edge sword. It helps people, but I could imagine that it also serves as a violent veil of disillusionment