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Why would anyone leave a perfectly good, stable job to start a new company that could fail utterly? Researchers have long known entrepreneurs are different-they just haven’t figured out quite how.In a new paper, Wharton finance professor Nikolai Roussanov proposes a rather unconventional explanation: Entrepreneurs look at status differently than the rest of us. They don’t want to just keep up with the Joneses. They want to get a teensy bit ahead of them.
Roussanov embarked on comprehensive mathematical modelling of the investment portfolios of individuals of widely varying degrees of wealth. He also reviewed other research on entrepreneurial behaviour, risk-return analysis, and social aspirations.
Roussanov was struck by the number of relatively less-wealthy individuals whose portfolios were highly concentrated. Those were the entrepreneurs. Financially, they were doing something that appeared to make no sense. And they showed little desire for the luxuries money can by.
That led Roussanov to his view that entrepreneurs really don’t want to get ahead of the Joneses so they can buy more stuff. He says that entrepreneurs typically are big savers, and spend less as a portion of their incomes than other people. They want more money because of the status that comes with it. And if it’s more important for entrepreneurs to get ahead of the Joneses than it is for other people, then they’re also willing to take unusual risks to do it.
Fighting the Market
Economically, Roussanov says, this may seem irrational. Entrepreneurship is indeed a high-risk activity, and if entrepreneurs really care about return, as a group, they’re probably better off putting the money into the stock market. But entrepreneurs have great faith in themselves, says Roussanov. “They see the idiosyncratic risks-the ones specific to their business and skills-as easier to bear than the aggregate risk in the stock market or the broader economy.”
Roussanov suggests that entrepreneurs re-think their motivations.
Is [an entrepreneur] doing it only because he wants to get rich, or he wants to see his product succeed, or to work for himself or to have a better quality of life? If it’s just [about] getting rich, he should rethink things.
But he also asks the family and friends of entrepreneurs to give these individuals a break. Atypical thinking is not necessarily irrational, Roussanov says.
[Entrepreneurs] just weigh the potential outcomes differently and are willing to take risks others might not… Optimism and overconfidence are often used interchangeably, but they’re not the same thing.”
What has your experience been? Do you think entrepreneurship is a ‘rational’ career choice?
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