The public image of entrepreneurs is that they're a little, well, crazy. The risks of starting up are huge (though maybe not as huge as non-entrepreneurs think), the lifestyle punishing, and -- if that weren't enough to dissuade most people -- the financial payoff uncertain. According to several previous studies, take a snapshot of the working population at any point in time and founders are probably making less than their salaried peers.

So is starting up just a particular form of madness then? Nope, argues a heartening recent piece on BloombergView. The article by Noah Smith contends entrepreneurs aren't as irrational as they might first appear and is built upon new research showing that, over a lifetime, business owners tend to earn more than employees.

The study was done by UC Berkeley business professor Gustavo Manso and builds on a simple but powerful idea -- the value of entrepreneurship isn't just in the financial success of the business, but also in the lessons learned from the experience.

"In his paper, Manso considered not just the current situations of entrepreneurs versus salaried workers, but their lifetime earnings," Smith explains. "This is an important distinction, because most of the entrepreneurs we see at any point in time are simply experimenting with their new ideas. If the idea fails, they go back to a regular job, having lost only a few years of higher salary. If the venture succeeds, they can make a lot. In terms of lifetime earnings, that might not be such a bad gamble."

To test out this idea, Manso looked at a longitudinal survey that tracked the same people over three decades. It turned out the data bore out both parts of his hypothesis -- that even short spurts of entrepreneurship would prove valuable, and that over time those with entrepreneurial experience would earn more.

"Comparing the lifetime earnings of entrepreneurs and salaried workers, [Manso] found that entrepreneurs actually make more, on average. Sure enough, self-employment tends to last only a short time, maybe two years on average -- people who fail get out quickly," Smith reports.

Or as Steve King, a partner at consultancy Emergent Research, put it in his blog post analyzing the study (and what sets it apart from other analyses of the costs and benefits of entrepreneurship), "the bottom line is self-employment allows experimentation and learning opportunities that lead to higher lifetime earnings. This advantage of becoming self-employed is not captured in cross sectional studies, which only look at one time period."

So maybe you're not so crazy after all. Even if your current venture fails, science suggests you'll take away valuable lessons from your entrepreneurial experience and earn more later thanks to that wisdom. So go ahead and start that business. Research shows you won't regret it.

Published on: Oct 15, 2015