What makes entrepreneurs great?
A ton of research exists of this question, and two traits that frequently come up are low risk aversion and a high tolerance for ambiguity.
Breaking that down a bit...
Risk is something we intuitively understand as betting on the unknown. However, the specific definition of risk applied by economists (esp those of the Knightian variety) is directly linked to quantifiable expected outcomes. For example, a horse-racing track gives you the odds of your horse winning, and you know/can control the amount of money you will wager on the horse. With that information, you can calculate the expected outcome of betting lots of money on the long shot (hint: it's probably a very small number). You are taking a risk, but its a relatively known and well-understood risk.
Ambiguity, on the other hand, is tied to uncertainty, which Frank Knight was sage enough to help us understand as situations in which the odds of winning and expected outcomes can't be quantified. So having a tolerance for ambiguity is about an ability and willingness to move forward and make decisions despite lots of unknowns.
Ok, good stuff so far. But are both required for entrepreneurial success? Authors like Amar Bhide have shown us, using empirical research, that a willingness to take big risks is not something that most entrepreneurs are endowed with. Real-life entrepreneurs start with a simple idea that requires little investment and, therefore, does not constitute a major risk. To boot, entrepreneurs, even those who have founded Inc 500 companies, have low opportunity costs. They are generally not turning down great job opportunities and big money elsewhere in order to start their business. They tend to have limited experience/skills and often are creating a business as much out of necessity and a desire to be self-employed as out of raw ambition. In fact, a low risk aversion doesn't seem to be necessary for entrepreneurial success until massive inflows of cash are needed to scale and/or the business has grown to a size where future failure would destroy the entrepreneur's small fortune.
What about a tolerance for ambiguity? That does seem critical, as great entrepreneurs are generally operating in new and developing markets where unknowns abound and effective opportunism often determines success.
But there is one piece missing here - a critical one - that ties into that idea of opportunism. On the one hand, being opportunistic relates to making decisions and moving forward despite perfect information and a coherent strategy. It requires a leap of faith and tolerance for ambiguity.
On the other hand, opportunism is very much "destructive." It often requires throwing out a formulated plan of attack and way of thinking about the entire business. It requires a shamelessness and lack of pride in opinion/authorship that allows the entrepreneur to wholly re-design his/her company around new information and opportunities. Those are unique skills and traits that fall under the categories of "humility" and "adaptability" that traditional ideal types of the entrepreneur generally fail to fully explore and consider.
The lesson here is this...If you are interested in starting your own business but are the kind of individual who has a hard time changing course once you've committed (publicly or privately) to a plan, you've got a problem. It's not a downside that can't be overcome, but it's one that needs to be acknowledged, understood, and compensated for if you hope to make your company a success.
Some brilliant scholar has to write a comprehensive history of modern economics because the evolution of this field is clearly one of the most consequential things happening in the world today.
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I eagerly await the day that economics returns to its roots as a interdisciplinary social science rooted in lived experience and moral philosophy. Thank you, David Brooks!
I majored in sociology and anthropology in college. A couple of weeks before graduation, my academic adviser asked me, "What is the most significant thing that the major has taught you?"
Of course, he had to ask the question in a public venue, so I felt obligated to provide an intelligent-sounding answer (I believe I spouted off some B.S. about the role of identity in decision-making). However, I knew that I didn't really know. And so did my adviser, who informed me that my answer was unsatisfactory. The question has stuck with me since.
Now, in my defense, his question was entirely unfair. Nobody could provide a really good answer to such a fundamental question without some perspective. I've been thinking lately that my study of economics may be providing just that.
As I learn more about traditional economic theory and its corresponding mathematical models and methods, I can't help but envision a set of perfectly crafted boxes. These boxes are elegant and glossy. They are well structured, with clean lines and a logical size and form. And they are strong, capable of withstanding virtually any weight or impact.
These boxes have a single purpose in life - to get your personal possessions from point A to point B - and these boxes are designed to carry out that mission optimally, assuming the items in your home conform to particular "standards" and common assumptions. When that's the case, all of your items will fit in the minimal number of boxes, while also being maximally protected from damage during the move.
But your home doesn't quite fit the standard. It's full of third generation hand-me-downs, like your grandmother's kitchen table, and all of those unsolicited wedding gifts (ooh, another crystal bowl!). It includes various-sized mementos from international vacations and the six months you spent overseas in India after graduating from college (you were a child of the 60's, after all). And then there's the antiquated microwave - oh, and those baseball trophies from your high school glory days will need to come, too.
In this world, the econ boxes break down. You try your hardest to shove your belongings inside them, but despite their seemingly perfect design, their size and shape feels awkward and unaccommodating. Not only that, but a number of your items aren't even well-suited to boxes. Some plastic bubble wrap and duct tape would do just fine.
This is the world where sociological and anthropological theoretical models and methods thrive. As moving boxes, they come in all kinds of odd shapes and sizes. Some are neat, new, and glossy. Others you collected from the local grocery; they are a bit dirty inside and smell of rotting fruit, but they fit your old college textbooks just right. Several more you've been saving in your basement since your last move, as they worked perfectly for that mismatched set of pots and pans in the kitchen.
In this way, theoretical models and methods in social sciences like sociology and anthropology often lack the grace, elegance, and appearance of perfection in engineering of their economics counterparts. Yet, the "boxes" in which these disciplines organize their thinking and interpretations of human behavior are often better-suited to our messy and unpredictable world. Not only that, but the lack of a true canon in these fields makes problem-solving and research a much more creative and inductive, rather than prescriptive and deductive, process.
It's that open-ended manner of thinking and approach to understanding the world that makes these "other" social sciences so valuable, and why I am ultimately proud to have undertaken that course of study.
As the current economic and financial crisis is showing us, traditional economic theory is fragile, at best. While the mathematical rigor that economists bring to their work is admirable, it will only be through the intersection with "messier" social sciences that economics will truly realize its potential. I hope to be part of that movement.
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