Malcolm Gladwell’s piece in this week’s New Yorker (subscription required) deflates the conception of entrepreneurs as risk-takers. The entrepreneurs who succeed, he says, get ulcers worrying about potential losses and do everything they can to minimize their risk.
Gladwell writes that successful entrepreneurs are
businessmen whose insights and decisions have transformed the economy, but their entrepreneurial spirit could not have less in common with that of the daring risk-taker of popular imagination. Would we so revere risk-taking if we realized that the people who are supposedly taking bold risks in the cause of entrepreneurship are doing no such thing?
He focuses on two dealmakers — Ted Turner’s acquisitions and hedge fund manager John Paulson’s now famous bet against the housing market that earned his fund $15 billion in 2007. Both recognized profitable opportunities with minimal risk. Paulson paid pennies on the dollar to buy credit default swaps — essentially insurance policies that would pay off if mortgage-backed bonds soured — only when he was certain that housing prices were inflated. Instead of being gamblers, entrepreneurs are “predators” who recognize opportunity and act on it, Gladwell writes, citing research by Michel Villette and Catherine Vuillermot.
We explored entrepreneurs’ attitudes toward risk in two posts over the summer. From the comments and my discussions with business owners, I don’t think Gladwell’s conclusion will surprise people who actually run their own businesses. When people have their own livelihood on the line, they’re obviously going to be concerned about managing the downside.
One interesting nugget from the piece: While entrepreneurs want to minimize their financial risk, they’re often more willing to take social risks. During the housing bubble, people thought Paulson was crazy — including the people on the other side of his trades. Sam Walton, another of Gladwell’s examples, borrowed money from his in-laws rather than go to a bank. The willingness to risk reputation and social standing is “just another manifestation of their relentlessly rational pursuit of the sure thing,” he writes.