Economists teach students that entrepreneurs take risks. The idea is that outcomes are never certain but that the payoffs are big. So the only way to explain why so few people choose an entrepreneurial path is that there’s a good chance that the gamble won’t pay off and that the founder will be left penniless.
This hypothesis, however, doesn’t reflect how the real world works – like so many other things in economics. But unlike other ideas in the subject, even the principle of this one is wrong. Entrepreneurs don’t usually take risks. They’re not gamblers. In fact, many of them are the most risk-averse people you’ll ever meet in your life.
The difference between entrepreneurs and regular workers isn’t their risk appetite – it’s knowledge. Business founders will often look at opportunities that others consider uncertain and be able to see how they might work.
Why is it, for instance, that so many entrepreneurs set up businesses in industries in which they already have experience? It’s not just a matter of skills – you can hire those. Instead, it’s because they’ve found a way to improve on an existing business model. They can see how a particular company is failing its customers, and ways they can improve things.
Sometimes these tweaks are incredibly subtle. But they work. And that’s what allows the business to grow and attract customers.
Risk Is Becoming A Thing Of The Past
Insurance companies are also beginning to learn that risks are becoming a thing of the past. Vendors such as Artificial, for instance, are using machine learning to better characterize likely liabilities, allowing them to adjust premiums accordingly.
This new technology essentially means that a lot of the customer-specific variation is going to go away. Insurers will be able to look at a particular customer, calculate their expected value, and then charge the premium that covers their losses. Real uncertainty, therefore, looks like it will diminish considerably.
Entrepreneurs are essentially doing the same thing when they weigh up a business opportunity. They’re using their knowledge to get a better handle on whether a particular business idea will work. And they’re then using those insights to give themselves the confidence to pursue business opportunities.
How Do You Know That You Know?
Of course, all of this depends on the individual’s entrepreneur’s capacity to assess whether a particular idea will work or not. And that requires a deep commitment to rationality and evidence.
However, there are some entrepreneurs who know intrinsically that they have this skill too. And that’s fundamentally what gives them confidence when they see a new business opportunity. They think it through, weigh up the evidence for whether it will work, and then go for it. It might seem risky to people on the outside, but that doesn’t matter. In fact, that’s precisely the difference in knowledge that makes entrepreneurship worthwhile. You’ve seen something that other people haven’t.
So, in summary, smart entrepreneurs don’t take risks. Instead, they delve into the evidence and try to discover paths to success that nobody else can see.
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