
Are Entrepreneurs Pirates? 4min Test for HN by Behavioral Economist Dan Ariely - siglesias
https://danariely.qualtrics.com/SE/?SID=SV_6AsB0KdTTwU4yzy
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llimllib
I'm sure that my behavior does not reflect my answers on this test. Given the
numbers, I calculate expected value and answer rationally. In real life, a)
the values and percentages are much less clear and b) even if they weren't I
know I don't follow them as rationally.

~~~
rkosai
Based on all these "rational actor" responses, I take it none of you purchase
insurance?

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anamax
Actual rational actors understand that extreme loss has a disproportionate
effect. (In other words, losing $100k is more than 1k as expensive as losing
$100 for most of us.)

Naive rationality may be easy to analyse but that just means that the GIGO
transfer doesn't cost much.

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nkurz
I just went through it, choosing almost exclusively certainties. I'm
definitely an entrepreneur, although currently a very struggling one.

I fear the survey is going to be incredibly influenced by income level and
current financial security. If you had changed the magnitudes of the numbers,
my answers would have been completely different. I can do the math, but I also
know that my immediate financial needs are unmet and that my ability to
sustain losses is very limited.

~~~
TWAndrews
Without a doubt. For instance, I will always take a $50 loss over any chance
of a $1000 loss, because $50 one way or the other barely has in impact on my
day, let alone my life. $1000, on the other hand is significant.

If however, the questions had been about $500 vs. $10,000, I'd have to think a
bit more carefully.

~~~
orangecat
_For instance, I will always take a $50 loss over any chance of a $1000 loss_

That's almost certainly not true. 0.1%?

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cookiecaper
I didn't like this test very much. The financial questions are highly
dependent. I guess I was relating to a hypothetical situation rather than the
one I'm in now, but I don't think the choices here have anything to do with
entrepreneurship; they're all circumstantial.

As all entrepreneurs know, things can fluctuate quickly; there are times when
$50 today, little as it is, is more important than the potential of $5000 in
the distant future, there are times when you need all the fumes you can get to
keep things running. Then there are times when there is a lot of cushion
available and $50 today is almost so worthless it's not worth considering --
in that case, of course it's better to take the gamble.

This test has very little to do with entrepreneurship. I ruined it for
everyone and just chose random things.

~~~
radu_floricica
Just to ruin your day, choosing random answers doesn't do any damage :)

This is all about statistics, and also about comparing with a control group. I
assume the authors have (or can get) baselines for all the questions here.
They look like the kind of questions Dan Ariely would work a lot with.

So it doesn't matter that the questions are context dependent. If HNers
massively answer one way while the college student population doesn't, you
have a difference you can work with. Of course, it's not a definitive answer
but it's still valuable information.

As for the results, I'd guess entrepreneurs are more risk averse then average,
but also more inclined to chose rewards in the future.

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bambax
I'm really not sure it means much to say that people are "risk-adverse" or
not; humans (and monkeys! see <http://www.ted.com/talks/laurie_santos.html>)
are BOTH: they prefer to play it safe when they expect a gain, and prefer risk
when they expect a loss.

For example, people (in general) prefer $500 now than a 50% chance of $1000,
but the _same people_ prefer to take a 50% chance of losing $1000 than losing
$500 now with certainty.

Behaviorists call this "irrational" because the two cases are the same:
whatever you prefer, you should prefer the same, that is:

\- if you're "risk adverse", you should prefer the certain outcome in both
cases

\- if you have a preference for risk, you should take the chance every time.

But it's not what happens; to repeat, the _same individual_ usually prefers
the outcome that is certain when the expected outcome is a gain, and usually
prefers to take a chance when the expected outcome is a loss, even when those
options are mathematically identical.

So, if one wants to show that entrepreneurs are different from ordinary people
as regards to risk, they should study at least those two dimensions:
gain/loss. And since most people prefer risk when confronted with a possible
loss, then entrepreneurs would have to either

\- prefer risk always when confronted with a possible loss

\- prefer risk more often when confronted with a possible gain.

\- - -

If there actually is a difference between "entrepreneurs" and other people, it
may be that entrepreneurs have a higher confidence in their own capacities, so
that they think that they can influence the future in a good way.

~~~
groby_b
That's a rather important point. Loss and gain are not symmetrical in most
cases. I actually wonder if there's a study that looks at that in relation to
actual wealth - it's easier to risk a loss if it doesn't materially affect
you.

HN, anybody know of something like that?

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kilian
I'm sure my choices here have been completely spoiled by all the pop-science
books I read, in that my first thought upon each type of question was "Ah,
that's from this and this research, where they found out that..." They need an
"are you familiar with these types of questions?" question, because both the
statistically expected answer and the rational answer were already known to
me. I assume this is the case for more entrepreneurs, so I doubt this
questionnaire will display a large discrepancy between entrepreneurs and non-
entrepreneurs.

All I can say is, Pop-science books are fun, everyone should read more of
them.

~~~
smithbits
Yeah, I'm afraid I also did the "I'm a rational economic actor" answers,

~~~
TWAndrews
That's funny--I had no trouble figuring out what I'd actually prefer, and even
though I'm familiar with the various stories about risk-aversion and such, I
think my answers make sense in the context of my income and finances.

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grandalf
The questions are flawed because many entrepreneurs have already used up all
their risk seeking "slack" and might quite rationally prefer to lose $50 over
a 1% chance of losing $1500, since a $50 loss could be dealt with more easily
in the context of a ramen budget... while a $1500 loss might destroy the
company entirely.

In other words, just because you are in a casino and put all your money on
double zero doesn't mean that you should also play russian roulette with a
pistol while the roulette wheel is spinning.

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crocowhile
These tests are flawed because the absolute value of the money we're dealing
with is too much of a variable between subjects. $1500 is not much for subject
A to lose or gain but it is for subject B.

A test should account for that if we want results to be comparable across
subjects.

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mmorris
Mr. Ariely's book, Predictably Irrational, is a great read for those who
aren't familiar with Behavioral Economics. It contains a lot of solid insights
that entrepreneurs should understand, particularly relating to how consumers
think.

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pg
A lot more people will complete it if you give them some idea how long it is.
You should use Wufoo.

~~~
siglesias
Thanks for the advice, Paul. I've updated the title and first page with more
information about length and structure.

I also cannot show the entire survey on one page out of concern that its
structure might influence the earlier responses.

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amirmc
Lawrence et al (2008), Nature 456, p168-169

<http://dx.doi.org/10.1038/456168a>

Some snippets from the above:

 _"...when subjects were introduced to the hot components of the task,
differences were observed. We found that entrepreneurs behaved in a
significantly riskier way, betting a greater percentage of their accrued
points (63%) than their managerial counterparts (51%)."_

 _"… risk-taking performance in the entrepreneurs was accompanied by elevated
scores on personality impulsiveness measures and superior cognitive-
flexibility performance. We conclude that entrepreneurs and managers do
equally well when asked to perform cold decision-making tasks, but differences
emerge in the context of risky or emotional decisions"_

 _"... the entrepreneurs (mean age 51) are comparable to the young adults aged
17–27, whereas the managers (mean age 50.5) resemble their age-appropriate
group"_ [with respect to risk tolerance]

 _"There are courses that teach the 'know-how' of entrepreneurship and, within
this, teach how to mitigate risk through extensive business planning and
market research. Yet given this new evidence, courses teaching the opposite —
risk-tolerance in both behaviour and personality — may also be desirable"_

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cal5k
Very interesting. I think loss aversion will turn out to be just as prevalent
for self-professed entrepreneurs as for the general population, if not more
so.

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seabassII
I'm working on a paper about entrepreneurial traits and such mdoells. I'm
still not sure if an entrepreneur si risk avers. Some scholars argue, he likes
risks, because he is quiting his job to get an uncertain "payment". Others
argue, entrepreneurs don'tlike risks. If they go for an opportunity, they know
the risk quite well and soforth have already evaluated the risk and decided,
it is doable. Is their any new thought on this?

i have to agree with the others, I just calculated the value and chose the
higher one. Interesting could be the outcome of the last questions where no
probability, or intrest rate was given.

Additionally, I think, even if all of us are entrepreneurs (there's still now
agreed definition of the term see <http://bit.ly/amULry> ) we decide
different. We decide different, depending on our situation or the environment
(see Gartner 1989ab 1989b, 1990) we are in. I'm a student my self, perhaps
getting $150 now could get me through the month, but one million in two month
isn't. So I would take the 150 bucks.

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herf
The experimental setup isn't great: the HN population almost certainly has an
elevated level of education in areas like math and statistics. I don't think
you should ever compare subjects who can compute "expected value" with ones
who can't. Personally, I don't believe I can give great answers for this,
because I'm conscious there's an experiment going on.

~~~
siglesias
Here's a question: how does this assertion sync with Arrington's claim that
entrepreneurs would choose low-to-negative expected value projects simply for
the thrill of gambling, as it were? What's going on here?

~~~
zzleeper
Hi Samuel,

I think entrepreneurs are not so enthused over gambling as you would believe
(gambling as in casinos & slots, or an online questionnaire).

I think that what matters more is the intrinsic value of building something,
but I'm not sure about how to measure it..

~~~
JoeAltmaier
I abhor gambling - risk assumed for Nothing - except entertainment. Shudder.

I'm a serial lifetime Entrepreneur.

------
joshu
The magnitude of the numbers matter -- significantly!

I actually tested this out, too: <http://joshua.schachter.org/2008/09/amateur-
economist.html>

See also: prospect theory.

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bugsy
The questions are so abstract that they don't say much about me other than if
I understand standard economics theory.

In real world situations I always have a measure of difficult to quantify
control over the situation, which is completely different than the raw random
chance gambling the test checks for.

For example, I would never buy a lottery ticket because that is stupid, but I
would definitely spend 3 years of my time working obsessively on something
that everyone in the world other than my self says has a one in a billion
chance of succeeding, because the fact is that I will succeed.

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danbmil99
It would make more sense to ask things like "the following situation will
occur exactly once in your lifetime. How would you decide? -- 100% chance of
getting $1M, or 10% chance of getting $7M?"

By making the amounts small, the expectation is that you could run the bet
multiple times, in which case it's just an odds game. The real question is
what chances do you take that have such volatility, the deviation dwarfs the
expectation for a single lifetime.

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Locke1689
Interesting. I'm not sure if my moves were right mathematically. I basically
played as though I had one shot i.e., I pull a lever with a 5% chance once and
I either win or get nothing. Similarly for the losing position. However, if I
get to play a lot my answers would be completely different. While the expected
value of $1000 with a 13% chance and multiple plays is $130, the probable
value for a 13% chance and one play is zero dollars.

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mswen
I find that I sometimes choose the start-up (pure or within a larger corp.)
because it is fundamentally more interesting to make something new or
innovative than to do work that would be financially more certain.

It is not that the financial reward for a big hit wouldn't be exciting, but it
certainly isn't the only reason I tend to gravitate toward start-ups or start-
up like situations.

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samd
Creating a successful startup confers more than just financial rewards. There
are a myriad of other rewards like recognition and professional freedom that
factor into the risk calculation. Depending on how much people value those
non-monetary things it could be perfectly rational to take the option with a
lower expected monetary value.

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dfranke
You should have asked some questions with larger amounts of money at stake,
and also asked our current net worth, income, and savings rate. I have enough
savings now that my preference for certain outcomes over $2500 intervals is
pretty small. If I were living paycheck-to-paycheck I would have given very
different answers.

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malandrew
It would also be interesting to see this survey conducted using natural
frequencies instead of percentages. Humans are notoriously bad at reasoning
with percentages.

Compare the following:

"I prefer a 1% chance of losing $1000"

"I prefer a 5% chance of losing $1000"

with this:

"I prefer a 1 in 100 chance of losing $1000"

"I prefer a 1 in 20 chance of losing $1000"

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barnaby
Am interested to see the results, and more importantly, the HN discussions
about the results!

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kmcloughlin
Just went through it and feel, as it seems many here do, that my financial
risk-aversion quotient will be no higher than that of the general population.

Does anyone else think that what really makes us entrepreneurs wasn't touched
upon by the survey?

~~~
skillachie
I agree, feels more of a financial responsibility/risk ...will you prefer the
money now or later which depends on the situation

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ScotterC
As an entrepreneur who needs a quick buck to invest in my startup I feel that
this survey is a better gauge of how much one desires money now so as to
invest in whatever they're doing.

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biznickman
Yeah, the percentages questions are kind of nuts. Would you expect to
determine an exact threshold of the percentage odds an entrepreneur is willing
to take?

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Swizec
Is it just me or was choosing a 5% chance at a bigger reward more
interesting/fun than choosing a 13% chance at a bigger reward?

Dunno, maybe I'm just weird.

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AlexBlom
I am very interested to see the result of this one. Completed + tweeted.

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louisalley
Isn't this just a survey of whether you know about expected value?

