Entrepreneurs I think I can

If entrepreneurialism has a motto it should be I think I can. Entrepreneurs are no more likely to want to stick their necks out than wage earners, they just have an unusual amount of self-confidence, according to results of a recent research paper, Entrepreneurial Risk and Market Entry. Study findings debunk a common stereotype about entrepreneurs namely that they are inherently more comfortable with risk.

The paper received the Best Doctoral Paper award from the Small Business Administrations Office of Advocacy in January. It was written by Brian Wu, a doctoral candidate at Wharton, and his advisor Anne Marie Knott, visiting assistant professor of management at the University of Marylands Robert H. Smith School of Business.

Everyone assumes that entrepreneurs are these cliff-jumpers able to take a leap of faith and confront unknowns that would deter the rest of us from even trying, said Knott. In fact, it is more likely that they are skilled hang-gliders, with confidence that they can tackle any conditions.

The paper addressed a long-standing puzzle regarding entrepreneurs. Why is it they undertake ventures with substantially greater risk (51 percent of new firms fail by their fourth year), while most psychological studies show they have no better tolerance for that risk?

The paper answers this question by identifying the two components of uncertainty that make up risk: market demand and individual ability. Wu and Knott examined entrepreneurial startups with respect to both. They found that considerable ability uncertainty (opportunity for overconfidence) led entrepreneurs to be willing to enter risky markets with high demand uncertainty.

These results were interesting, said Knott, because they suggest market conditions that may inhibit entrepreneurship. For example, in industries where there is high demand uncertainty and low ability uncertainty, we see one-tenth the entry rates that we see in the economy generally. In those industries there may not be sufficient competition or innovation.

The data also gives hope to those of us who dont think were made of the right entrepreneurial stuff. Just remember that we are all susceptible to believing we are better at something than we really are. For example 60 percent of high school seniors believe that they are in the top 10 percent in their ability to get along with others; while 25 percent believe they are in the top 1 percent said Knott. If we want more entrepreneurs, we may just need to better match people with the situations where they believe they excel.