The Risk Tolerance of Entrepreneurs
Interesting paper – based on personal experience the primary risk for an entrepreneur is often times market risk. By market risk, I mean the risk inherent in not fully understanding your market (demand, customer behavior, etc). From a Buffett point of view; “risk would come from not knowing what your doing” Buffett’s concept also make sense for entrepreneurs. Most successful entrepreneurs have a very deep understanding of their market(place). Often times entrepreneurs work in a field for many years and then leave to start their own companies. It is this market knowledge that determines most of their financial decision making (and success..assuming a successful market fit). Thus I wouldn’t find it surprising for most of these decisions to be relatively conservative.
Then again look at me, using the surviorship bias to talk about successful entrepreneurs. Better to talk about how entrepreneurs fail when there’s a lack of market fit. Remember instead of looking at “traits or attributes” of successful entrepreneurs its much more profitable to look at their initial circumstances.
Abstract (Via SSRN)
Using 1989 to 2007 Survey of Consumer Finances data, this paper addresses three questions: 1) Are entrepreneurs are generally more or less financially conservative than their non-entrepreneurial counterparts?; 2) Do entrepreneurs accumulate more wealth?; and 3) Do entrepreneurs hold a smaller share of their financial assets in risky stock holdings? Results indicate that entrepreneurs are financially conservative based on borrowing and savings questions but are more likely to assume risk for financial gain. Consistent with earlier evidence that entrepreneurs save more, they also accumulate more wealth over time. Entrepreneurs do not systematically invest smaller portions of their financial portfolios in safe assets based on results from instrumental variables regression. This indicates that risk may not be a major factor in their entrepreneurial decision making.