Three distinct personality traits drive entrepreneurs to take risks

A woman answers a call while looking out the window in co-working space The Great Room's Centennial Tower location in Singapore, July 2, 2019. Picture taken July 2, 2019. REUTERS/Loriene Perera - RC122659CFA0

Entrepreneurs have a confidence that risks becoming cockiness. Image: REUTERS/Loriene Perera

Margaret Dalton
Research Associate, Harvard Business School
Sari Pekkala Kerr
Economist, Wellesley Centers for Women
William Kerr
Professor, Harvard Business School
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Despite obvious differences among entrepreneurs – ranging from those who start new construction firms to those launching internet marketplaces – we tend to think of them in strong terms. An entrepreneur is someone willing to take risks. Entrepreneurs love to be their own boss. They have a confidence that risks becoming cockiness. Entrepreneurs are idolised in many settings and pursued by policymakers. A quick Google search results in a plethora of online quizzes to see if you have the right mentality.

Previous empirical research has attempted to validate the existence of an entrepreneurial personality – a ‘homo entreprenaurus’ – but has struggled to find consensus due to the vast heterogeneity of the field (Åstebro et al. 2014). Greater risk tolerance has long been studied as a key trait of entrepreneurs (Kihlstrom and Laffont 1979, Hvide and Panos 2014, Kerr et al. 2014), with researchers consistently finding greater risk tolerance among those who choose the uncertain payoffs of a new venture over the more secure payoff of paid employment. Preferences and traits beyond risk have also been documented as important determinants of entrepreneurship (Uusitalo 2001, Hurst et al. 2011, Levine and Rubinstein 2016). We provide a review of the literature (Kerr et al. 2018).

Beyond entrepreneurs, research has recently turned to the motivations of employees in choosing to work in the less predictable environment of a startup as opposed to an established firm (Roach and Sauermann 2014, Sauermann 2017). Another research strand considers the backgrounds of inventors, who play a key role in many high-tech ventures (Aghion et al. 2017, Bell et al. 2017). As innovation and entrepreneurship help foster growth, understanding more about the types of people in these roles will aid efforts to stimulate local entrepreneurial ecosystems.

Our recent work takes advantage of our unique opportunity to study all members of an entrepreneurial venture. Individuals play many roles in a new firm: imagining and developing new products, fundraising, business development, sales and marketing, administrative support, etc. Our survey studied individuals in four key roles: entrepreneurs, non-founder CEOs/leaders, inventor employees, and non-inventor employees.

We conducted a survey in the spring of 2017 at four CIC locations in Boston, Massachusetts, and St. Louis, Missouri. CIC (formerly Cambridge Innovation Center), was founded in its current form in 2001 in Kendall Square, Cambridge, MA. Home to a wide variety of firms, CIC is the centre of Boston’s entrepreneurial and innovative ecosystem (Kerr et al. 2017). Well-known startup ventures from CIC include Android, Carbonite, and Hubspot. In total, CIC-based startups have raised over $7 billion in venture capital funding and produced thousands of patents. This level of venture investment into CIC-housed companies exceeds all but a few US states and many nations.

Survey respondents were assigned to one of four mutually exclusive and collectively exhaustive groups based on their role in the firm and their innovative experience: entrepreneurs (those who founded the firm), non-Founder CEO/leaders (firm leaders but not founders), inventor employees (employees who have personally filed for a patent), and non-inventor employees (employees with no personal patents). Our sample composition is 18.5% entrepreneur, 13.5% non-founder CEO/leader, 11.8% inventor employee, and 56.2% non-inventor employee. Our paper conducts detailed multivariate regressions of these personality differences while describing our survey’s limitations for conveying personality traits.

Our survey measured risk attitudes in three ways. We asked two self-ranking questions: the first concerned tolerance for risk overall and the second focused on financial risk. We also embedded into the survey a small behavioural test that recorded whether the respondent chose to enter a $2,000 lottery or receive a $5 Amazon gift card as a reward for survey completion. Entrepreneurs display the highest self-reported levels of risk tolerance, unmistakably accepting risk more than both employee groups and modestly more than non-founder CEOs/leaders. Non-founder CEOs/leaders are significantly more risk tolerant than non-inventor employees, but not statistically different from inventor employees.

Figure 1 reports variation on all three risk preferences, from non-inventor employees to entrepreneurs. The relative risk premium for each role is reported in comparison to non-inventor employees. A consistent rank ordering appears, which is remarkable given the differences between the self-assessment and the lottery. Our paper further documents how even among entrepreneurs, serial founders show a greater risk tolerance than first-time founders. The behavioural response (taking the lottery option) tapers faster across roles than perceptions of risk-taking by individuals.

Figure 1 Risk tolerance by venture role compared to non-inventor employees

The literature has found four additional traits important for entrepreneurship: self-efficacy, internal locus of control, need for achievement, and innovativeness. Each trait was measured through a standard self-assessment that follows earlier surveys and is described in more detail in the paper. Entrepreneurs and non-founder CEOs/leaders are consistently different from non-inventor employees on each of these traits. Entrepreneurs display the highest levels across all traits, with a meaningful difference from non-founder CEOs/leaders for self-efficacy. For employees, the only difference that registers between inventors and non-inventors is for innovativeness.

Finally, we tested the standard ‘big five’ personality traits: openness, conscientiousness, extraversion, agreeableness, and neuroticism. Like other studies, we do not find meaningful differences with respect to these five traits. Slight differences appeared in greater openness among entrepreneurs and non-founder CEOs/leaders, and less neuroticism among entrepreneurs compared to non-inventor employees.

Taken as a whole, our survey confirms that entrepreneurs have distinctive personalities. Indeed, they even look different from non-founder CEOs running nearby companies, and from their own employees. Sometimes these differences are substantial, as in risk tolerance and self-efficacy. In other categories – like the ‘big five’ personalities that have been pervasive in the literature – the surveys show little difference.

Looking forward, an important question remains: whether the personality traits of entrepreneurs, leaders, and teams are predictors of venture success. A fine line separates risk tolerance from gambling, or confidence in oneself from over confidence! CIC provides a potential setting for this by providing follow-up surveys and/or measurement of venture survival and growth over time. Additionally, it is worth considering how personality traits shape the degree to which entrepreneurs and leaders utilise CIC resources and/or receive spillover benefits from peers. Lastly, CIC is expanding to other countries, which will provide the opportunity for future cross-country comparisons to understand how the personalities of entrepreneurs and their team members differ internationally.

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