Myth Buster: We've Got the Relationship Between Risk and Entrepreneurship All Wrong
Entrepreneurs are uniquely comfortable with risk. That’s part of what makes them entrepreneurs, and the rest of us… not.
Except that commonly-held belief isn't actually true, at least according to a new research paper. The authors, Matthias Brachert and Walter Hyll, both of the Halle Institute for Economic Research, say that those who study entrepreneurs have long made two classic errors: They assumed that people's preferences (in this case, risk-tolerance) don't change, and they mistook correlation (entrepreneurs are comfortable with risk) for causation--that is, comfort with risk is part of what causes certain people to become entrepreneurs.
The relationship between risk and entrepreneurship may instead be quite different. Risk-tolerant people don't seek out entrepreneurship. Instead, entrepreneurs learn how to handle risk as part of running their companies, and in the process, become relatively comfortable with it. "Personal willingness to take occupational risks changes over time, [and] it changes differently for people who become entrepreneurs than for non-entrepreneurs," write the authors. That conclusion also suggests that people who aren't particularly comfortable with risk can adapt or train themselves to embrace it.
To figure all this out, the researchers used data from the German Socio-Economic Panel Study, a representative survey of 22,000 Germans that began in 1984 and has been conducted every year since. Of course, it's a major caveat for those interested in U.S. entrepreneurship that the study uses data from Germany. But frankly, we’re unlikely to ever have access to this same kind of data in the U.S. Even the American Community Survey portion of the Census--which Congress has recently threatened to de-fund--doesn't collect information at all comparable to that of the German, Danish, or Swedish governments.
The survey asks respondents how comfortable they are with risk. It also asks if they work for another company or are self-employed, and if they work for themselves, what share of their income comes from that endeavor. And in some years, the survey has asked people if they anticipate becoming self-employed in the next year or two.
The researchers found no differences in risk tolerance between people who continued to work for other companies and those who went on to become entrepreneurs. They checked to make sure that their entrepreneurial respondents didn’t know they were about to become self-employed, to ensure that they didn’t somehow train themselves to become more risk-tolerant before starting their new ventures.
But five years later, those who had become entrepreneurs were nonetheless more comfortable with risk than those who didn't. That suggests it's the act of becoming an entrepreneur, and learning how to work with massive ambiguity, that makes one comfortable with risk. Not the other way around.
There are many other factors, of course, that might affect how happy one is to take on risk. But because the German data is so extensive, the researchers were able to rule out the significance of many of them: gender, what part of Germany (or other country) the respondent originally hails from, education, age, work experience, whether the survey-taker has been unemployed, disability, marital status, income from investments, number of children, height (!), the length of the person's work history, and whether at age 15 the survey taker's father was an entrepreneur.
Of course, the researchers couldn't ask if the respondents had taken any particular measures to make themselves comfortable with risk. But maybe that's something risk-fearing would-be entrepreneurs should consider.