Why Employees Turn Entrepreneurs
Loss aversion or fear of losing one-'s salary at a full-time job, along with its prestige is what drives most entrepreneurs and not a love of risk.
Loss aversion or fear of losing one's salary at a full-time job, along with its prestige is what drives most entrepreneurs and not a love of risk.
According to a study, entrepreneurs are also concerned about what they might lose in the transition from steady employment to startup.
An entrepreneur's concern about loss aversion correlates with entrepreneurial effort.
In other words, entrepreneurs who put a high stake on avoiding loss - more so than acquiring new gains - worked harder.
"There is a view that entrepreneurs are often overconfident gamblers, who thrive on risk, yet there is little evidence to support this view," said professor John Morgan from the University of California - Berkeley in the US.
The study is based on a theoretical model the researchers developed and was inspired by the dramatic stories people like to tell about risk taking entrepreneurs.
"All entrepreneurs have a reference point, which defines how they feel about their salary or, say, happiness level, compared to others," Morgan said.
That reference point is not connected to profits and losses, but is directly linked to how much or little the entrepreneurs are willing to lose when starting a company.
Morgan used a winner-takes-all framework, which is common within the internet startup environment, for his study of entrepreneurs.
One of the most important traps entrepreneurs fall into is when they are not experiencing success and become increasingly willing to take risks because of where they are psychologically.