Entrepreneur in Economics
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The Entrepreneur in Economics
Current economic research denies the innate characteristics of the entrepreneur. Rather than attributing economic growth and innovation to personality traits, economists would rather advocate a form of economic determinism: if an aggressive personality dominated an industry, economists try to explain the characteristics of the industry that made aggression a successful strategy. Economic models are contrived to remove the personality from the entrepreneur, to make all entrepreneurial decisions predestined, given enough time. However, to deny Bill Gatess or Steve Jobss role in economic history is equivalent to denying Hitlers role in creating a Nazi Germany or Castros role in creating a Communist Cuba. Claiming that history or economics is deterministic is silly. Entrepreneurs are people who make decisions; their decisions need not fall out of dry economic models, just as no literary model could predict the words of Shakespeare and no historical model could predict the future. However, we must be systematic in our approach to identifying entrepreneurial characteristics and not fatuously assert that entrepreneurs drive economic change. Instead, we must link specific entrepreneurial tasks to specific entrepreneurial traits with the goal of understanding how these traits crucially affect the evolution of a business from a startup to Fortune 500 company. This paper will explore current economic views of the entrepreneur and assert that there are common entrepreneurial traits that affect both the decision to become an entrepreneur and the level of entrepreneurial success.
We must first debunk the idea, advocated by Knight and Mises, of the entrepreneur as risk-bearer (Peter Swoboda, 1984). Aside from making every stock market participant an entrepreneur, this definition simply does not describe actual entrepreneurs and must be discredited. In Amar Bhides 1989 study of Inc. 500 companies, where an Inc. 500 company grows its sales on average by 170 percent per year from 1983 Ð- 1988, Bhide found that they have a low scale for profitable operation, in most cases less than $10,000. With low fixed costs and a small profitable scale, the risk of failure is minimized and the expected distribution of profits is skewed (as in the figure below) (Amar V. Bhide, 2000).
Further negating the risk faced by the entrepreneur, the founders were predominantly college-educated middle class men with low opportunity costs (see charts below). By starting a company with a small scale of profitable operation, they faced a “heads I win, tails I dont lose much” scenario. If they failed, they could place the attempt on their resume. Entrepreneurs are not betting the family fortune or making their years spent earning an MBA worthless; instead, we find that an Inc. 500 founder is just about as likely to have only a high school education as to hold an MBA and as likely to be very poor as very affluent. The entrepreneur need not be less risk averse than the average human being. As Jeff Bezos famously noted, it would have been far riskier for him to not have started Amazon.com than to have started it. If Bezos had spent 12 years at medical school studying neurosurgery or had to give up a $3 million a year position at his fathers company, he would not have faced an incentive structure that would have made founding a company the least risky option (Bhide, 2000).
What is noteworthy is just how wrong Knight and Mises are with their conception of entrepreneur as risk-bearer. Not only is the entrepreneur not necessarily a risk-bearer, he is more akin to an arbitrageur with his “heads I win, tails I dont lose much” incentive structure. Inc. 500 entrepreneurs tend to serve niche markets with high market turbulence, which lead to many arbitrage opportunities in so far as the founder can satisfy the wants of an uncertain market. The arbitrage is not riskless, but it is nearly so. For the author, himself an entrepreneur with $300K annual revenue and a business that serves a niche market with high uncertainty, the opportunity cost of starting a business while a student at college is trivially low.
However, all people with low opportunity costs do not found companies. Many, many people face this same “heads I win, tails I dont lose much” situation, yet only a handful become entrepreneurs. Bhide believes that ambiguity aversion discourages many would-be entrepreneurs. Most successful entrepreneurs face uncertainty on all aspects of their business, with only a minority having written a detailed business plan, and those probably only in response to an education system that teaches business plans are necessary to starting a business (see chart below) (Bhide 16). Bhide defines ambiguity as known-to-be missing information, which includes missing information about probability distributions. Founding a company puts people in situations where nothing is known with certainty and even the probabilities of outcomes are not known. Experiments by Becker and Brownson have shown that ambiguity is a significant deterrent for many individuals and is uncorrelated with risk. Entrepreneurs with high tolerance for ambiguity need not have high tolerance for risk. Instead, entrepreneurs may have high tolerance for ambiguity because they have very high self-confidence, which counteracts ambiguity aversion. Following Bhide, “entrepreneurs apparently have the confidence that they
can make their own luck and can cope with some bad throws” (Bhide, 2000).
While a moderate degree of human capital, low opportunity costs, high self-confidence, and a tolerance for ambiguity might together motivate an entrepreneurs propensity to found a business, Bhide also identifies the following three essential traits that entrepreneurs must have to adapt to unforeseen circumstances: decisiveness, open-mindedness, and managing internal conflict. As