The Decline of Entrepreneurial Intent and the Case for Social Risk Absorption

Posted by Ahmad Barirani in Blog      No comments

May
14

It is often said that entrepreneurship and risk aversion do not go hand in hand. Often, management gurus argue that entrepreneurs have to be optimistic and self-confident or else they would never be willing to take the risks inherent to starting new ventures. Alas, optimism will not make risks disappear, that is the probability of the occurrence of a negative event will always be the same no matter one’s subjective perception of it. Therefore, entrepreneurs always put themselves at risk of failing because of that same feature which makes them be entrepreneurs: optimism and self-confidence. Given the fact that there is no study quantifying the proportion of entrepreneurs who succeed, is it correct to say that entrepreneurs are in fact nothing but fools that put themselves in situations where they could incur losses without guarantees for rewards?

In my view the answer to this question lies in the presence of social risk sharing mechanisms. It is known that new ventures have social benefits: they create around 50% of jobs and represent a quarter of national GDP in industrialized countries. Of course, this contribution comes from successful businesses as new ventures that fail do not contribute as much if any to productivity. However, unlike the banking sector where benefits are privatized and losses socialized, entrepreneurs are the ones who absorb the losses for their risk taking attitude. Therefore, they take the risks personally but share the benefits socially. I believe that this mismatch in the distribution of risk among entrepreneurs and society is at the core of the decline in entrepreneurial intent in advanced economies.

If societies desire to appropriate some of the returns associated with a human behavior commonly known as entrepreneurship, they must also share some of its risks with entrepreneurs. In my view, this principle was so far neglected in advanced economies because they were so far managed economies that heavily relied on the well being of their manufacturing sector. Entrepreneurship was a cute little thing that existed along the manufacturing sector which sometimes, if not most of the time, was the real thing that allowed new ventures to be created around it. Nowadays, with the decline of traditional industries in advanced countries, entrepreneurship is increasingly recognized as an engine rather than a peripheral component or byproduct for economic growth. This calls for setting up policies that encourage risk taking behavior by sharing part of it with entrepreneurs.