The Eternal Sunshine of the Entrepreneurial Mind
Tyler Cowen points to an interesting article on how entrepreneurs think, and quotes the following passage:
That is not to say entrepreneurs don’t have goals, only that those goals are broad and—like luggage—may shift during flight. Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle Sarasvathy calls affordable loss. Repeatedly, the entrepreneurs in her study expressed impatience with anything that smacked of extensive planning, particularly traditional market research. (Inc.’s own research backs this up. One survey of Inc. 500 CEOs found that 60 percent had not written business plans before launching their companies. Just 12 percent had done market research.)
…Sarasvathy explains that entrepreneurs’ aversion to market research is symptomatic of a larger lesson they have learned: They do not believe in prediction of any kind. “If you give them data that has to do with the future, they just dismiss it,” she says. “They don’t believe the future is predictable…or they don’t want to be in a space that is very predictable.”
While I have some quibbles – for example, many failed entrepreneurs share this frame of mind, and there are other characteristics joined with this one that tend to characterize successful entrepreneurs – the gestalt of this is, in my experience as a technology entrepreneur, exactly right.
At root, what’s so fascinating to me here is the distinction between risk and uncertainty. By “uncertainty,” I mean non-quantifiable lack of predictability. For example, we could roughly say that there is a 50% risk of getting heads if I flip this quarter, but that the probability that Egypt will experience a military coup this month is uncertain – somebody might venture to place odds on it, but it is not reliably quantifiable in the same sense.
I think that this distinction points to a fundamental cleavage in worldviews in economics that turns on the role of the entrepreneur. This meaning of the term uncertainty is, in fact, often referred to as “Knightian” uncertainty, after the great early twentieth century American economist Frank Knight, who used it to try to explain the role of the entrepreneur.
Entrepreneurs choose to operate in sectors in which uncertainty dominates. This is inherent to what entrepreneurship is. The kind of predictive tools that work well for the U.S. aluminum market don’t work very well when you’re inventing the Software-as-a-Service business model. What works better is trial and error learning, or more formally, experimentation. As an entrepreneur, you throw yourself into an evolutionary competition, and use whatever resources you have to succeed. You don’t believe that you (or anybody else) can predict the multi-step game in advance.
There is a heterodox tradition of economists who focus on the centrality of these issues for the long-run growth of the economy. Frank Knight, Joseph Schumpeter, F.A. Hayek, Vernon Smith and Douglas North are obvious examples. This focus leads to an emphasis on uncertainty, experimentation and evolution, and stands in contrast to the currently-dominant paradigm within university economics departments of risk, quantification and equilibrium.
I believe that entrepreneurship, broadly defined, is central to economic growth, and that determining public policy using economic models that inherently under-emphasize this is a very bad idea. Professional economists, in my view, have a class interest in obscuring this. One that is as powerful as the class interest of entrepreneurs in conflating luck and skill.
(Cross-posted at The Corner)
P.S. As commenter Jeff Singer points out, blogger / economist / entrepreneur Arnold Kling writes about this kind of thing all the time, and with great insight. If this topic interests you, you should be reading his blog.
Jim,
Arnold Kling is a modern economist that likes to think about these issues as well:
http://econlog.econlib.org/archives/2011/02/the_entrepreneu_1.html
— Jeff Singer · Feb 9, 11:02 PM · #
Jeff,
Thanks – yes, I’ve recommended his blog here many times.
Thanks,
Jim
— Jim Manzi · Feb 10, 12:12 AM · #
Jim,
Someone else I think you need to check out is Professor McCloskey, whose work is focused more on the history of capitalism and economic growth, rather than entrepreneurs in the here and now:
http://cafehayek.com/2011/02/deirdres-virtue-and-dignity.html#
I tend to think McCloskey is too quick to dismiss the importance of genetics (she and Greg Clark go at it on this topic) but McCloskey’s thoughts on how innovation is nurtured by a culture are fascinating.
— Jeff Singer · Feb 10, 06:28 PM · #
Jim, you wrote:
I believe that entrepreneurship, broadly defined, is central to economic growth, and that determining public policy using economic models that inherently under-emphasize this is a very bad idea.
You are obviously, a very bright man with an unusual combination of business success and tremendous writing ability. But I have one thing to say to the above paragraph: Well, duh! The fact that you felt compelled to write that paragraph means that you think there are a number of professional economists who don’t hold that view. The truth of your statement is so obvious, yet we have an administration that doesn’t get it. And I’m beginning to think it’s almost criminal not to get it.
Professional economists, in my view, have a class interest in obscuring this. One that is as powerful as the class interest of entrepreneurs in conflating luck and skill.
Two questions:
1. Do you really mean to imply that luck is on par with skill in determining success?
2. In view of your mention of class, do you disagree with most of the contributors here regarding Angelo Codevilla’s take on The Ruling Class?
— jd · Feb 12, 02:48 PM · #
I should clarify (since I am not gifted with tremendous writing ability), that I don’t have anything against economists. Economists and experts in general can help entrepreneurs and businessmen in innumerable ways. However, what we have had for the last 80 years is economists and the professorial class running the economy— with devastating consequences. Economists should be tools of the economy, not the rulers. Angelo Codevilla wrote The Ruling Class. Thomas Sowell wrote another book and called it something else: …the Anointed. His take is that a truly vibrant economy like ours is too big for anyone to run, and that government’s entry into the economy, for the largest part, has been disastrous.
— jd · Feb 12, 04:00 PM · #
A lot of this rings true to me as a serial entrepreneur.
I don’t know how many times I’ve told people, when they talked to me about their business ideas or business plans, “This is great. But when it comes down to the one key number in the plan — how much are we going to sell? — you’re not even throwing darts. You’re throwing dice.”
And yes, as you start to get some historical business intelligence on what sells, what works — which is solid gold, manna from heaven for an entrepreneur — you start using it to analyze, predict, and plan.
One thing that stuck out oddly for me in the Inc. article: they talk about 60% of S&P 500 CEOs not writing business plans.
1. S&P 500 CEOs are (with some exceptions) not entrepreneurs (and they shouldn’t be paid like they are).
2. Their failure to write business plans — given their resources — smacks to me of nothing more than ego-driven irresponsibility and incompetence.
— Steve Roth · Feb 13, 04:42 PM · #