

Entrepreneurs are not unusually risk tolerant; rather, they are overconfident. - amichail
http://www.businessweek.com/smallbiz/content/feb2005/sb2005021_6109_sb013.htm

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pmichaud
First, the few rich guys that I know (north of $10m) are shitheads. Not that
they are personally offensive, or even necessarily morally bankrupt. Instead
they are willing to ask for asinine things from people who should rightly be
offended by the request. They try to make deals that favor them without regard
to the interests of the other person, and it turns out to be a winning
strategy because they'll get rejected over and over, but in the 10 or 20% of
cases where they win, they get ridiculously good deals.

That tendency to ask for too much could be seen as a type of over confidence,
but it's also a riskier strategy on average.

Then, these people are almost indifferent to the details of whatever deal
they've made. They will make a deal that is exactly what it needs to be to get
signed, but which is utterly impossible to deliver. They don't care: "it'll
work out."

That's another form of over confidence: the belief that impossible things will
work out well enough. It also turns out to be true enough to get someone into
the multimillionaire range. One has to be a little more careful to break much
higher than that, but it's a good starting strategy. And again, it's a risk to
make a deal you might not be able to deliver on.

I didn't read the paper, but I know that dissertations necessarily have to be
very limited, so they tend to be simplistic when they are original research,
so I wonder:

1) Who was in the entrepreneur group? Successful serial entrepreneurs, or just
some undergrad kids in the entrepreneur club?

2) How risk measured? A little psychological battery designed to measure
general risk-taking won't capture the mindset of a person who does shaky
deals. Is it risky to do try for a deal that'll probably fall through and you
probably can't deliver on, or is it safer to do lots of quick and dirty deals
so the volume makes up for the instability? How could this paper have measured
that?

If anyone has access to this database, let us know the answers:
[http://mansci.journal.informs.org/cgi/content/abstract/52/9/...](http://mansci.journal.informs.org/cgi/content/abstract/52/9/1315)

~~~
kirse
_They try to make deals that favor them without regard to the interests of the
other person_

I don't see how exactly this makes one a "shithead" though. Don't you always
try to get the best deal for yourself first and then if the other person
doesn't budge you compromise a bit? I pretty much always start out with any
deal ridiculously in my favor because you don't lose anything if the other
person rejects it...

My rule is typically "make an offer that is just before the point of being
offensive and then compromise from there if the deal is needed." That way you
can usually reach a "midpoint" that is still mostly on your favorable side of
the deal.

I'm not a multi-millionaire, but I'll call ya in 10 years and let you know if
I am ;)

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tdavis
As an entrepreneur, I disagree. If anything, I'm under-confident. I give
pretty much every other developer (and designer) the benefit of the doubt that
they're better than me. I just make websites; it's not kernel hacking or
compilers, you know.

And it isn't unusual risk tolerance. You know what's _really_ risky? Depending
on a salary to pay your mortgage. Having kids. From my perspective, multi-
decade obligations are risky. _Compromise_ is risky. Making my own way is the
only risk-free thing I can do in a society which exists to remove its own free
will.

Perhaps some people are confusing "overconfidence" with a lack of belief in
absolutes like "failure", "success", and "mistakes".

~~~
julien
I fully agree with that. As an entrepreneur as well, I will definetly that I
am very very under-confident.

I love this saying : "Everybody knew it was impossible, then an idiot came and
did it". I feel like an idiot : I don't _know_ anything and I doubt
everything; starting with myself.

------
lionheart
I think sometimes you need a little overconfidence.

After all, used to be taking even financial risks could get you killed very
easily. Nowadays, what's the worst that can happen? You end up broke and
living at your parents until you're 25.

Take the risk. It's worth it. Not enough people are taking them.

~~~
edawerd
I don't really have the numbers to back it up, but I think if you compute the
expected value of starting a venture, the numbers will show you that you that
taking the risk is _not_ worth it (vs. getting a normal salaried job), since
most ventures fail.

With that stated, I think that entrepreneur overconfidence is a features and
not a bug. The fact that entrepreneurs are overconfident may, in most
instances, be to their detriment, but it also will engender great
breakthroughs that have huge payoffs and make society much better. Without
overconfidence, this wouldn't even be possible.

~~~
colins_pride
Expected utility is probably a more appropriate gauge for these decisions,
rather than expected value

------
wooster
The paper is here: <http://ideas.repec.org/p/sba/wpaper/05bwmk.html>

He's generalizing from banking industry data from 1984-1997, which seems like
a tenuous proposition. Recent events suggest the risk in the banking industry
was not properly understood during that period.

Further, when examining risk tolerance, it might be good idea to look at an
industry where expected returns can't be accurately forecast in advance.
Banking seems like an exception to the rule here.

There are a couple of subtle misdirections in the paper. In one place he says:
"This risk of failure is considerable. Approximately 10% of all firms in the
United States fail each year (U.S. Small Business Administration 1999)."
Actually, the risk of failure of banking institutions is in Table 3, which he
doesn't textually mention is 1%.

He also mentions "Furthermore, even though the banking is one of the oldest
industries, it has been growing at 6.5% rate over the past ten years (roughly
three times GDP growth)." which is irrelevant as it's over a different time
period than his data and analysis. Further, the chart he inserts directly
after this sentence shows a decreasing rate of entry over his studied period.
Also, notice the numbers: this whole paper is premised on the entry of between
50 and 400 new companies per year.

~~~
wooster
"risk of failure" -> "rate of failure", of course.

------
grandalf
Maybe everyone else is underconfident... Who's to say what the optimal amount
of confidence is. Tenured academics? Non-entrepreneurs? Salaried lifers in big
firms?

~~~
randomwalker
I don't think you understood the article. Overconfidence is a well-defined and
measurable term, a systematic tendency to estimate one's future performance in
excess of expectation. In one widely quoted study, 95% of a cohort of MIT
students expected to graduate in the top half of the class. (That might well
be apocryphal, but it serves to illustrate the point just the same.) It also
illustrates the point that while you may not always be able to determine that
an individual is overconfident, you can point to a group and say that its
members are overconfident on average.

This is completely unrelated to the question of whether or not overconfidence
is a good thing. For example, there are studies showing that students who are
slightly overconfident -- but not too much -- improve the most in the long
term. (Not able to find a link right now, unfortunately.) As another commenter
pointed out, the consequences of failure have changed dramatically (for the
better) in recent times. In my opinion, a lot more people should be taking up
entrepreneurship than the current levels.

~~~
wheels
To make the subtlety more clear -- I think that over-confidence could have
three slightly divergent definitions:

\- Too much confidence to accurately predict personal outcomes

\- So much of the first that it becomes harmful

\- So much of the first that it deviates significantly from the norm

As I recall, most people fall into the first, and I presume the article is
suggesting that entrepreneurs are the third.

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amichail
And maybe the reason they tend to be young is that those who are older have a
more realistic assessment of their abilities due to extensive experience?

~~~
knightinblue
Not to mention responsibilities. As a 24 yr old guy, if I put everything on
the line and lose - big deal, I can wipe the slate clean and start over. My 34
yr old brother with a wife, 3 kids and a mortgage can't take the same risk as
easily as I would.

~~~
sho
Well, not to criticise your bro, but that's the life he signed up for. He
willingly took on those responsibilities.

It's not generally thought of as a risk, but he definitely took one - by
locking himself into multiple, multi-decade commitments he tossed the dice on
continuing to be perfectly satisfied with his current lot, and there would be
a lot of pain if he was wrong. After all, what is commitment phobia other than
a special type of risk aversion?

