Investors Pay Close Attention
Much has been said about “the wisdom of the crowds”, but what about entrepreneurs? A common misconception of an entrepreneur is a risk-taker who is gambling their career on a product or service. What people don’t understand is that most entrepreneurs were highly successful in their previous careers and show a lifelong history of achievement. The only reason they can take this leap of faith is because they are confident in their abilities. Investing in their companies is not gambling – it’s funding the idea of a mastermind.
And not all entrepreneurs are motivated by the same thing, just ask Professor John Morgan of the Haas Business School at U.C. Berkeley. Professor Morgan specializes in entrepreneurship studies and recently co-authored a paper on entrepreneurship with Dana Sisak, a former grad student and now Assistant Professor of Economics at Erasmus University in Rotterdam, The Netherlands.
In the title of this paper, “Entrepreneurship and Loss-Aversion in a Winner-Take-All Society,” Morgan references loss aversion. According to Morgan, loss aversion is the fear of squandering your previous salary, status and potential at your full-time job. He directly links the level of loss aversion to the level of effort the entrepreneur will pour into his/her new venture.
Another motivation for entrepreneurs was taken from a paper Sisak wrote as a grad student of Morgan. In it she researched why some new realtors join a firm and others work alone. The result of the study showed the decisions were based on education background and work history. The ones who went into business on their own had stable, successful work histories which is why they were confident in their new endeavor. A track record of accomplishments and overachieving is actually what leads some people to want to be an entrepreneur.
Here is a quote from Morgan taken from a recent Forbes article:
“Our study says that the more glittering were your prospects when you became an entrepreneur, the harder you work and the more likely it is that you will succeed. Loss aversion is something like fear of failure. If you passed up something really really good, that is going to have a huge influence on how you behave.”
What Morgan is saying here is that most entrepreneurs become an entrepreneur when everything is going their way. They are on a professional high and are going to ride that wave into their new endeavor. Some of these men and women may be motivated by loss aversion, some may not. The bottom line is: entrepreneurs are stable, brilliant and hard working people who decided to work 80 hours a week instead of 40 hours to fulfill their dream.
That sounds like somebody I want to invest in.
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