Entrepreneurs With High Tolerance For Ambiguity Need example essay topic

Current economic research denies the innate characteristics of the entrepreneur. Rather than attributing economic growth and innovation to personality traits, economists would rather advocate a form of economic determinism: if an aggressive personality dominated an industry, economists try to explain the characteristics of the industry that made aggression a successful strategy. Economic models are contrived to remove the personality from the entrepreneur, to make all entrepreneurial decisions predestined, given enough time. However, to deny Bill Gates's or Steve Jobs's role in economic history is equivalent to denying Hitler's role in creating a Nazi Germany or Castro's role in creating a Communist Cuba. Claiming that history or economics is deterministic is silly.

Entrepreneurs are people who make decisions; their decisions need not fall out of dry economic models, just as no literary model could predict the words of Shakespeare and no historical model could predict the future. However, we must be systematic in our approach to identifying entrepreneurial characteristics and not fatuously assert that entrepreneurs drive economic change. Instead, we must link specific entrepreneurial tasks to specific entrepreneurial traits with the goal of understanding how these traits crucially affect the evolution of a business from a startup to Fortune 500 company. This paper will explore current economic views of the entrepreneur and assert that there are common entrepreneurial traits that affect both the decision to become an entrepreneur and the level of entrepreneurial success. We must first debunk the idea, advocated by Knight and Mises, of the entrepreneur as risk-bearer (Peter Swoboda, 1984).

Aside from making every stock market participant an entrepreneur, this definition simply does not describe actual entrepreneurs and must be discredited. In Amar Bhide's 1989 study of Inc. 500 companies, where an Inc. 500 company grows its sales on average by 170 percent per year from 1983-1988, Bhide found that they have a low scale for profitable operation, in most cases less than $10,000.

With low fixed costs and a small profitable scale, the risk of failure is minimized and the expected distribution of profits is skewed. Further negating the risk faced by the entrepreneur, the founders were predominantly college-educated middle class men with low opportunity costs (see charts below). By starting a company with a small scale of profitable operation, they faced a "heads I win, tails I don't lose much" scenario. If they failed, they could place the attempt on their resume. Entrepreneurs are not betting the family fortune or making their years spent earning an MBA worthless; instead, we find that an Inc. 500 founder is just about as likely to have only a high school education as to hold an MBA and as likely to be very poor as very affluent.

The entrepreneur need not be less risk averse than the average human being. As Jeff Bezos famously noted, it would have been far riskier for him to not have started Amazon. com than to have started it. If Bezos had spent 12 years at medical school studying neurosurgery or had to give up a $3 million a year position at his father's company, he would not have faced an incentive structure that would have made founding a company the least risky option. What is noteworthy is just how wrong Knight and Mises are with their conception of entrepreneur as risk-bearer. Not only is the entrepreneur not necessarily a risk-bearer, he is more akin to an arbitrageur with his "heads I win, tails I don't lose much" incentive structure.

Inc. 500 entrepreneurs tend to serve niche markets with high market turbulence, which lead to many arbitrage opportunities in so far as the founder can satisfy the wants of an uncertain market. The arbitrage is not risk less, but it is nearly so. For the author, himself an entrepreneur with $300 K annual revenue and a business that serves a niche market with high uncertainty, the opportunity cost of starting a business while a student at college is trivially low. However, all people with low opportunity costs do not found companies. Many, many people face this same "heads I win, tails I don't lose much" situation, yet only a handful become entrepreneurs.

Bhide believes that ambiguity aversion discourages many would-be entrepreneurs. Most successful entrepreneurs face uncertainty on all aspects of their business, with only a minority having written a detailed business plan, and those probably only in response to an education system that teaches business plans are necessary to starting a business (see chart below) (Bhide 16). Bhide defines ambiguity as known-to-be missing information, which includes missing information about probability distributions. Founding a company puts people in situations where nothing is known with certainty and even the probabilities of outcomes are not known.

Experiments by Becker and Browns on have shown that ambiguity is a significant deterrent for many individuals and is uncorrelated with risk. Entrepreneurs with high tolerance for ambiguity need not have high tolerance for risk. Instead, entrepreneurs may have high tolerance for ambiguity because they have very high self-confidence, which counteracts ambiguity aversion. Following Bhide, "entrepreneurs apparently have the confidence that they can make their own luck and can cope with some bad throws'.

While a moderate degree of human capital, low opportunity costs, high self-confidence, and a tolerance for ambiguity might together motivate an entrepreneur's propensity to found a business, Bhide also identifies the following three essential traits that entrepreneurs must have to adapt to unforeseen circumstances: decisiveness, open-mindedness, and managing internal conflict. As noted above, few entrepreneurs write business plans and execute against them as many of them operate in small, uncertain niche markets. In such an environment, the forecasts and numbers would be quickly proved irrelevant. An entrepreneur must be able to make quick decisions under conditions of high ambiguity. Entrepreneurs must not waste time with indecision, and they have no option to run an expensive cost-benefit analysis or conduct market research. While entrepreneurs must be decisive, they must also be open-minded.

These two personality traits can cause an entrepreneur, who seems to have his mind made up, to reverse his opinion immediately when new information comes to light and push with equal conviction for his new opinion. This trait is necessary for success in turbulent niche markets where satisfying uncertain wants is the secret to success. With the discovery of new information, the entrepreneur may have to reverse previous policies and completely alter his existing business plan. If the entrepreneur possesses "confirmation biases", i. e., the tendency to only consider information that confirms one's ideas, he will likely not be able to satisfy the uncertain wants of an uncertain market and will fail as an entrepreneur. Bhide claims that "the tolerance for extended sacrifices in the pursuit of a deep inner conviction shown by a Galileo or a religious prophet does not serve most entrepreneurs" (Bhide, 2000). Entrepreneurs must be adaptive, and following Schultz's definition, must have "the ability to deal with dis equilibria".

In the typical Inc. 500 startup, the founder does not have oversight from a boss or outside investors and thus monitoring of the entrepreneur's activities becomes problematic. The entrepreneur must be his own fiercest skeptic and his own staunchest believer. While simultaneously convincing others of his views, he must question them and possibly abandon them.

Moreover, previous errors must not undermine the entrepreneur's self-confidence, which is essential to his success in facing highly ambiguous market outcomes. Noticeably absent from our list of essential entrepreneurial personality traits are creativity and high-risk tolerance. While we already addressed the issue that entrepreneurs need not be risk-loving, it may be surprising that they also need not be creative. The press and pop culture seem to view entrepreneurs as exceedingly creative individuals who take advantage of unnoticed opportunities by creating an innovative product or service.

This is not accurate. Entrepreneurs need not be creative. In fact, of the Inc. 500 founders surveyed by Bhide, 71 percent of them conceived of their idea by replicating or modifying an idea encountered through previous employment. In this way, we have arrived at an interesting and unconventional portrait of the successful entrepreneur who managed to make the Inc. 500 by growing revenue 160% per year for five years.

He is not an MBA, not necessarily creative, not necessarily risk-loving, and not necessarily an excellent planner. Most successful entrepreneurs found companies with ideas they encountered in previous employment, do not write business plans, and have only a college education. The successful entrepreneur will have a high propensity to start a business if his opportunity costs of doing so are low, if the business has a very small-scale of profitable operation, and if the potential entrepreneur has a high tolerance for ambiguity. The level of entrepreneurial success in the first few months will depend on whether or not the entrepreneur possesses the decisiveness and open-mindedness to adapt business strategy to the prevailing market needs while at the same time monitoring his own ideas for validity and promoting his ideas as truth.

The successful entrepreneur is an arbitrageur facing a "heads I win, tails I don't lose much" scenario, and his success crucially depends on his personal characteristics. ( ( (

Bibliography

Bhide, Amar V. The Origin and Evolution of New Business. New York: Oxford, 2000.
Swoboda, Peter. "Schumpeter's Entrepreneur in Modern Economic Theory". From Se idl, Christian, ed. Lectures on Schumpeter ian Economics. Berlin: Springer-Verlag, 1984: 17-29.