As an entrepreneur and economist, I would like to dispel the myth that entrepreneurs are risk takers. Why do we associate an entrepreneur as someone looking for risks, rather than someone which is looking towards making decisions in order to achieve a higher return while reducing risk? Essentially, the question is: can we say entrepreneurs incur higher risks by taking more predetermined economic calculations? The answer towards this is both yes and no, depending if you examine the question from either a subjective, or an objective perspective. This article will explore why entrepreneurs are more suited to be decision makers, rather than risk takers.
Theoretical Reasons Why Entrepreneurs Make Predetermined Economic Calculations
Let’s study the positions of entrepreneurs and investors; what do they desire the most? They desire to improve their standards of livings (like everyone else) by seeking a high return on their investments and decision. However, to earn high returns, usually higher risks must be assumed. One could say that investors and entrepreneurs are taking risks by making investments. However, I assert investors and entrepreneurs want to reduce their risks as much as possible while earning their desired returns.
When looking through this perspective, entrepreneurs and investors are economic actors who don’t take risks. Rather, they accept risks as a factor of their predetermined economic calculation, like every other economic agent. Thus, entrepreneurs and investors don’t take risks as a means to obtain an end goal, but that their predetermined economic calculation carries an acceptable associated risk.
Shouldn’t we associate the possibility of losing money from an investment as a form of risk, compared to, let’s say, one that works, which has a lower chance of losing money such as a laborer who invests only his time instead of his capital? That depends. If one looks through an objective lens, then yes, investors and entrepreneurs essentially make risk-taking decisions compared to the worker. However, if we look through the subjective sense, then all economic agents (from workers to investors and entrepreneurs) all technically make predetermined economic calculations in order to obtain the highest end based on their available means. This means that even the worker has an associated risk by employing his resources towards his employers. What if the workers’ employer is the only employer within the area, or what are the opportunity costs associated by choosing one employer over the other? By looking at the associated opportunity costs, the worker has chosen the employer which he perceives to achieve his end goal with the least risk associated, when also taking into consideration opportunity cost as well. Thus, the worker (an economic agent), like the entrepreneur and investor, must make predetermined economic calculations in order to achieve his end goal.
Who would lose more if the business fails, the employer or the employee? The answer to this can go both ways depending on a subjective or objective perspective. When looking at the objective sense, then yes, the employer has more to lose as if we measure it in a monetary sense; the employer has much more to lose as he’s invested his time and capital, and would also lose his income at the same-time. However, when taking the subjective, it rather depends on the situation. Let’s assume that what satisfies the entrepreneur is his love for money. Assuming this is his 20th business, which the loss on investment and income of is relatively small for the entrepreneur. This means as a whole, the entrepreneur has little to lose altogether. But, assuming that other options for the employee are limited the employee has lost more of his subjective valuation.
Limitations of Looking Through a Subjective Lens
Risk cannot be measured in a subjective manner; you usually cannot pay your creditors with love if your business fails. Therefore, to measure and understand risk, we must use an objective point of view. How can we directly relate this towards how entrepreneurs and investors making predetermined economic calculations? By looking through an objective lens, we can derive a figure for the risks associated with predetermined economic calculations, and thus have measurable data on the variable risks found within such calculations. With measured data, we can show which type of risks investors and entrepreneurs associate with different types of economic activities and business ventures.
The reason why we should look at decision making and risk through a subjective lens is only to understand the importance of entrepreneurial decision making within an economy. As we know, in order for economic calculation as a whole to take place, we must know who and what are making economic calculations. Fundamentally, investors and entrepreneurs are the most important economic agents in an economy. If we continue to label investors and entrepreneurs as risk takers, we will miss the importance on the decision making processes made by these two economic agents. By labeling investors and entrepreneurs as actors making predetermined economic calculations, we can further enhance and understand the vital role of investors and entrepreneurs.
This essentially shifts the view of investors and entrepreneurs as a single actor which produces an output within an economy, towards them as key players who determine the organizations and structures required to supply the demands of consumers. Thus, we can have some insight into the minds of who I like to call the Superheroes of our Society. By studying the thought processes of entrepreneurs and investors, we will understand why a free market, with an easy flow of essential resources, is vital for sustainable economic growth.
This post was written by Baland Rabayah.
The views expressed here belong to the author and do not necessarily reflect our views and opinions.
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