Entrepreneurship and Risk

As the saying goes, No Risk, No Reward––but not everyone handles risk the same. We know entrepreneurship and risk go hand in hand, so let’s dive into the details of this correlation.

Entrepreneurs take risks

Entrepreneurs tend to gravitate towards higher risk opportunities in hopes of achieving higher rewards (Xu & Ruef, 2004). This means that there is greater variability between reward and risk––when you put in more time and money, there tends to be more to gain and more to lose. The general population tends to gravitate towards a low variability of risk and reward. This low variability is expressed as less risk of losing money but less potential for high earnings. The result is a more reliable direction that is consistent (and predictable) with regards to risks.

Risk tolerance varies

As there is variation in risk tolerance between entrepreneurs and the general population, there is also variation within entrepreneurs (Stewart & Roth, 2001; Miner & Raju, 2004). For example, entrepreneurs who were more oriented to growing a business venture had a higher risk tolerance (risking it all for the big business bucks and the Lamborghini) than entrepreneurs who were more oriented to ensuring financial sustainability for their families (risking just enough to consistently put food on the table and drive a Honda Accord).

Risk is unavoidable 

No doubt every individual, from a clerk at a post office to an Elon Musk, is in some way or another reluctant to take risks. It can be scary not knowing the future, especially if the bulk of your savings is on the line! The fact is, taking risks is part of the entrepreneur’s journey to success. Being an entrepreneur, you may handle risks better than others, but it is important to surround yourself with mentors and resources that can help you manage the risks involved with starting a new business and ultimately achieve in your venture!

References

Miner, J. B., & Raju, N. N. (2004). Risk propensity differences between managers and entrepreneurs and between low- and high-growth entrepreneurs: A reply in a more conservative vein. Journal of Applied Psychology, 89(1), 3–13. https://doi.org/10.1037/0021-9010.89.1.3

Stewart, W., H., & Roth, P., L. (2001). Risk propensity differences between entrepreneurs and managers: A meta-analytic review. Journal of Applied Psychology 86(1), 145–153. https://doi.org/10.1037/0021-9010.86.1.145

Xu, H., & Ruef, M. (2004).  The myth of the risk-tolerant entrepreneur. Strategic Organization, 2(4), 331–355. https://doi.org/10.1177/1476127004047617