Are most entrepreneurs reckless risk seekers hungry to bet their life savings on an untested venture? Are they driven by the same motivations that spur high-stakes gamblers to place million-dollar bets on the roulette wheel? Quite the contrary, says a new paper by John Morgan, a professor of entrepreneurship studies at U.C. Berkeley’s Haas business school. Instead, he contends, most entrepreneurs are motivated by what he calls “loss aversion.” That means the fear of losing the equivalent of the salary they had at their last full-time job along with the prestige and future prospects that came with the position. That fear is directly linked to the amount of effort the typical entrepreneur puts into a new business.
Morgan says he was prompted to write the paper because he had doubts about the conventional wisdom that entrepreneurs are over-confident people who engage in magical thinking about, for instance, the fact that 95% of restaurants fail. He also doubted the idea that entrepreneurs have a different taste for risk than most people. “A love of risk absolutely does not drive entrepreneurs,” he says.
Another motivation was an empirical paper produced by a Haas graduate student in 2012 that examined why some realtors go into business for themselves and others join established firms. Instead of an appetite for risk, the realtors’ choices were guided by their educational and work backgrounds and the extent to which they had other work opportunities. It turned out that the independent realtors were not inveterate gamblers but rather people who had a good track record at their past jobs, who were making a reasonable bet that they would succeed in a new vocation. Many independent realtors are women who had successful careers before taking time out to raise kids. When they go into business for themselves as realtors, rather than gambling, they are making a reasonable assumption based on past performance that they’ll do well.
For Morgan, Mark Zuckerberg and Bill Gates are not examples of people who went out on a limb and risked their livelihoods on untested ideas. Rather they were smart men who had a great deal of promise and earning potential, which was validated by the fact that they had gotten into Harvard. In Morgan’s view, to a large extent they were spurred by the knowledge that they would have great earning potential if they finished school and found a job in the tech sector. In other words, their motivation came less from the wild desire to make bets at the craps table. Rather they were talented, smart people who knew that they had a good chance at success.
“Our study says that the more glittering were your prospects when you became an entrepreneur, the harder you work and the more likely it is that you will succeed,” says Morgan. “Loss aversion is something like fear of failure. If you passed up something really really good, that is going to have a huge influence on how you behave.”
What is the paper’s message to would-be entrepreneurs? There are two take-aways, says Morgan. “One is you don’t have to be different to be an entrepreneur,” he says. “If you don’t feel some inner calling to entrepreneurship, that’s not a reason to abandon the path.” At the same time, he says, if your career has been mediocre to date, there’s a good chance that an entrepreneurial venture won’t bear a lot of fresh fruit. “If you had bad prospects outside the entrepreneurial market, your prospects within the entrepreneurial market aren’t very great either.”
Morgan co-authored the paper together with his former graduate student Dana Sisak, who is now an assistant professor of economics at Erasmus University in Rotterdam.
