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A recent Wall Street Journal article notes that the percentage of young Americans who are business owners has dropped to its lowest level in 24 years. The story suggests that one reason may be that financially strained Millennials are less risk-tolerant than previous generations.

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However, a 2004 paper in Strategic Organization finds that U.S. entrepreneurs are surprisingly resistant to the idea of risking money on investments that might not pan out. Authors Hongwei Xu of Stanford University and Martin Ruef of Princeton University looked at the Panel Study of Entrepreneurial Dynamics to compare people in the process of starting businesses with a control group, considering the reactions of 1,261 participants to vignettes concerning business investment decisions.

The results? “We find that entrepreneurs are significantly more risk-averse than the general population in pursuing pecuniary benefits,” the authors write.

That means people who start businesses aren’t simply confident gamblers, willing to risk everything on a slim chance at being the next Bill Gates. In fact, Xu and Ruef argue, they’re not particularly interested in getting rich at all.

To find out what was important to nascent entrepreneurs, Xu and Ruef asked survey participants to indicate the significance of various motivations. They asked if nascent entrepreneurs wanted money (“a chance to build great wealth” or “to earn a larger personal income”), autonomy (“greater flexibility for my personal and family life” or “freedom to adapt my own approach to work”), or identify fulfillment (to “grown and learn as a person,” “to challenge myself,” or “to fulfill a personal vision”). Turns out, the potential startup founders rated both identified fulfillment and autonomy as “much more important than material motivations.” The control group didn’t—at least not to the same extent.

Xu and Ruef conclude that entrepreneurs—who are aware of how common it is for new ventures to fail—may be particularly worried about taking on too much risk because they don’t want to lose their chance to chase their dreams.

“In order for entrepreneurs to obtain those non pecuniary benefits, they need to be risk-averse in pursing profit so that they can lower the risk of business closure,” they write. “… Instead of assuming that entrepreneurs are profit-maximizing agents, future research must also look at the multidimensional nature of the motivations that entrepreneurs have in founding business ventures.”



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Strategic Organization, Vol. 2, No. 4 (November 2004), pp. 331-355
Sage Publications, Ltd.