Behavioral finance FAQ / Glossary (Entrepreneur)

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Year/month, d: developed/ discussed,
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Entrepreneur psychology and behavior, Entrepreneurship

08/11i + see risk tolerant,
behavioral corporate management

What makes entrepreneurs tick?

The psychology of business creation (start up) stays largely in the realm of
rules of thumbs and heuristics.

One reason is that there are many possible roads to entrepreneurship, thus
it is not too easy, it might even be reductive and simplistic to believe in clear
paradigms... or recipes.

=> Better leave the question open.

Which does not exclude to study the issue closely, even scientifically,
whenever possible.

The existing approaches come often from practitioners.

They have their operational value (even if they might seem shallow and
conventional, as seen below).

They bring some interesting hints about:

What might make successful entrepreneurs,

But also what behavioral biases, with  damaging or at least non-optimal

results, entrepreneurs should better avoid.

Preliminary findings

No stereotype about them.

Don't even call them capitalists, managers or whatever!

The main findings are that...

...not too surprisingly, entrepreneurs are a very diverse bunch of people,
   with very different idiosyncrasies.

Two explanations here:

They tend to be independent minds
     (a common trait, see below).

Thus they cannot match a unique stereotype.

There are various types of businesses, every 
    one with different skills.

To take examples, equipment manufacturing does not need the
same  talents than show business or pastry making..

Entrepreneur's traits should not be too closely confused with manager's

traits (see behavioral corporate management).

Entrepreneurs and managers have a few similarities but also some deeply
opposite traits.

They are rarely capitalists themselves either (they often have too little
    savings to invest in their project), but they need to find capital

* Anyway they usually have to put at risk the money they own,
   if not who will trust them?
* But they also have to convince investors and lenders
   that they will use their money wisely and in their best interest.

Some rather common psychological traits

Straying from the herd to find new pastures.

But does it explain all?

Whatever the differences between entrepreneurs, as seen above, a few
exists in their attitudes and abilities, even if they cannot be

Many entrepreneurs have been found to be:

1) Active and non conventional

Independent minds, as already stated, even rebellious for
    some of them.

Favoring (practical) innovation more than 

      status quo, an attitude verging on (creative) rebellion,

Biased towards action , even on the basis of simplified
analysis (heuristic),

Persistent at going around obstacles that others consider
    signals of impossibilities (here also as contrarians / rebels)

Curious , eager to understand situations and evolutions,

Able to detect new techniques, hidden opportunities, problems
to solve, needs to fill,

Able to communicate with people that could bring the needed
(scientific, business...) knowledge and...the needed money

In other words, opportunistic and reactive:
able to seize ...luck when it passes by,
and to adapt when the situation needs it.

2) Self-confident

Obviously more risk / uncertainty tolerant than other
professionals, i.e. managers.

     They are abler to take risky decisions under stress.

This has something to do with their dopamine level
as neuroeconomic experiments have shown.

Or at least more confident about themselves (sometimes
    overconfident, as statistics show a very high rate of failure, for

    new businesses particularly) and more optimistic
the situation,

Although maybe, deep inside themselves, rather insecure.

Let us not get too far into Sigmund-like interpretations, but this
feeling might explain their drive to take initiatives: their insecurity
can make them eager to prove to themselves that they are
better than what they feel.

3) Professional

Good at numbers and arithmetic ...obviously.

Perfectionist and persistent, and totally committed,
verging on obsession. Therefore eager to control things,

Able to compete but also to cooperate.

Business creation takes more and more place inside networks
in which
many firms bring their specific abilities into the value

Extravert, even sometimes charismatic and manipulative  .

Some potential biases or limitations

They think they can do it.
Is it enough?

They tend to be overoptimistic, or at least overconfident:

The rate of failures of new businesses in their first years is
statistically high.

Luckily, those business creator attempts are good for the general
economy, as it progresses mainly via successes / errors.

Maybe some behavioral biases and heuristics are necessary
     traits for business creation.

Many of them get bored with organization and management


They usually prefer creative activities.

A more general approach:
    the psychology of initiative

Is there a good kind of madness?

Initiative cannot be totally rational and emotionless, as it needs often
go astray
from the proven track, the one that is narrowly seen as
"rational" just because it is traditionally followed.

It is true that probabilities are against success for new things...
...but on the other hand, a status quo also cannot prosper eternally!

Initiative supposes a belief that the fundamental uncertainty (see
uncertainty) can be defeated, a Promethean bias.

Initiative needs often some overconfidence, some exaggerated hope
(or greed), some imprudence in activities such as entrepreneurship,
scientific research (also a permanent rebellion against academic

paradigms), other explorations, and also social and political initiatives.

Now about its results, the dilemma is how to make the difference between

"good madness" and
"bad madness".

Initiatives have their dangers, many of them are based on narcissist
and pure illusions (see illusion).

Many just fail. Well, people with a taste for initiative and positive
thinking try new ones!

Something less positive is that some wild initiative can bring chaos.

On the other hand, without the will to start or find something

 different, the system would decay and die thanks to a general
 status quo bias

Also, initiatives, even positive ones are not enough for progress. There
are further steps.

Not all initiators are good at developing and managing their initiative.

Other kinds of people might be needed in that phase for those "chores".

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This page last update: 09/08/15  

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