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Who takes risks?

November 22, 2011

One of my readers sent me a link to this blogpost by James Wimberley, which talks intelligently about safety nets and their secondary effects (it also has a nifty link to the history of bankruptcy laws in the U.S.).

I want to hone in on one aspect he describes, namely how, in spite of people in the U.S. considering themselves entrepreneurial, we are not so much. His theory is that it’s because of a lack of safety net: people are worried about losing their health insurance so they don’t leave the safety of their job. Here’s Wimberley’s chart of entry density, defined as the rate of registration of new limited liability companies per thousand adults of working age, by country:

The question of who takes risks is interesting to me, and made me think about my experiences in my various jobs. In fact this dovetails quite well with another subject I want to post on soon, namely who learns from mistakes; I have a theory that people who don’t take risks also don’t learn from mistakes well. But back to risktakers.

It kind of goes without saying that people in academics are not risk-taking entrepreneurs, but I’ll say it anyway – they aren’t. In fact it was one reason I wanted out- I’m much more turned on by risks than the people I met inside academics. In particular I don’t want to have the same job with the same conditions for the rest of my life, guaranteed. I want adventure and variation and the excitement of not knowing what’s next. When I went to a hedge fund I thought I would find my peeps.

However, most of the people I worked with at D.E. Shaw were really not risk takers at all, in spite of the finance cowboy image that they are so proud of. In fact, these were deeply risk averse people who wanted total control over their and their children’s destinies.

Moreover, the students I meet in finance programs (I took a few classes at Columbia’s when I knew I was leaving academic math) and who hope to someday work at JP Morgan are some of the most risk averse people ever. They are essentially trying to lock in a huge salary in return for working like slaves for a huge system.

Fine, so finance attracts people who are risk averse (and love money). That may be the consequence of its reputation and its age. So where are the risk takers? They must be some other field. How about startups?

What has surprised me working at a startup is that a majority of them are also not what I’d consider risk takers. There are a few though. These few tend to be young men with no families. Kind of the “Social Network” model of college aged boys working out of their dorm rooms. The women tend to be unmarried.

This is completely in line with Wimberley’s theory of safety nets, since it seems like once these men find a wife and have a kid they settle (speaking in general) into a risk averse mode. Once the women get married they tend to leave altogether.

In fact I’m kind of an oddball in that I’m married and have three kids and I actually love risk taking. Part of this is that I get to depend on my husband for health insurance, but that’s clearly not the only factor, since you’d expect lots of women whose husbands had steady jobs to be joining startups, but that’s not true.

I also have a feeling that the enormous amount of effort people tend to put into proving their credentials has something to do with all of this- when you take risks you are without title, you win or lose on your own luck and hard work. For a culture with a strong desire to be credentialed that’s a tough one.

I don’t really have a conclusion today but I’m thinking that the story is slightly more complicated than just safety nets. I feel like maybe it starts out as a safety net issue but then it becomes a cultural assumption.

Categories: hedge funds, rant
  1. JSE
    November 22, 2011 at 9:38 am

    Of course, academics think of themselves as risk takers too! What I mean when I refer to a project as being “risky” is that a mathematician might spend years on a project which ends up producing nothing, and the mathematician would lose status by virtue of not having proved any theorems during those years. Of course the mathematician, assuming tenure, would still be employed, so you might not classify this as a real risk — same goes for the I-banker who might perceive the possibility of losing a few million bucks as a “risk” — to an outsider, that doesn’t seem like much of a risk since the I-banker would not be meaningfully less rich after a $5m loss.

    I’m not sure why you would expect to find risk-takers anywhere in well-paying New York industry! The hungry young unmarried guys with no kids aren’t necessarily any less risk-averse than tenured professors; it’s just that they don’t yet have anything to risk!

    Where are the risk-takers? The ones who are really putting their livelihoods or their physical well-being on the line? I can think of some. People who invest their life savings in a restaurant or a hair salon. People who drop out of college to tour with their band. People who enlist in the military.

    • November 22, 2011 at 10:27 am

      Thanks very much for your comments- I’ve got two things to say. First of all, I agree that academics think of themselves as risk takers, and they are in a certain sense, but of course there are different levels of risk. Academics (with tenure I’ll assume) are risking more their reputation than their life or limb, or even their health insurance. Indeed I would argue that a reputational risk feels more like a risk because there is really so little else they can risk. On the other hand, I also think that reputational risk is partly why we don’t see more risk taking in general (this goes back to the idea of being a society overly dependent on credentials).

      Second, I’d like to differentiate between someone in a risky job (like the military) and someone who takes risks by choice. The unfortunate truth is that we get lots of enlistments from people whose choices are actually pretty bad- they may in fact be choosing a less risky path by going into the army. Of course we’d like this not to be true but I think it is. When I talk about taking risks, and being risk loving, I’m assuming there’s real choice involved.

      Having said that, I agree that people who invest their life savings in a venture or who drop everything to join a band or a political movement or the army are serious risktakers. For that matter, so are politicians; they are putting themselves on the line and taking huge risks. They also tend to enjoy taking other kinds of risks, which is why we get to see so many of their penises. By the way it’s my opinion that, in 40 years, any politician running for office that doesn’t have a dick pic online somewhere will be greeted with suspicion.

  2. Blue cat
    November 22, 2011 at 11:16 am

    Nice post.

  3. November 22, 2011 at 3:49 pm

    I think that an academic has shifted the risk profile during their life. Entering the tenure game is an extremely risky proposition in some cases. First, you give up a potentially large earning stream by choosing to do a PhD, as opposed to going into industry after a Masters. Second,there is also a perception (don’t know what the facts on the ground are) that after doing a PhD, you are limiting yourself in the class of non-academic jobs you are even qualified for. Thirdly, the number of moves from post-doc to post-doc to tenure track, to failing to get tenure and going somewhere else means that one’s social networks are often weaker by the time one is tenured than would be the case if one could change jobs in the same city or metro area. Four: You take a risk in more intimate relationships. Will your partner travel across the country or globe with you as you flit from institution to institution? What if you want to have a family? What do you do with your young one(s)?

    These are all risks academics take, and prices academics pay (consciously or not) early in their career as they try to shoot for a good tenured position, the ultimate risk free job. I don’t know if this makes an academic more or less risk averse than the average person of their social class/education level. I certain think the risk profile of an academic is different over their lifetime than for people in other careers.

  4. November 22, 2011 at 5:47 pm

    Given what a small proportion of the US faculty are tenured these days, and how little job security there is for the untenured, I’d have to say that becoming an academic is a fairly risky proposition. Not as risky as starting a restaurant, perhaps, but far more risky than the average employee.

  5. November 23, 2011 at 4:30 pm

    I consider myself risk averse. However I keep taking big risks.

    10 years ago I met a Jamaican lady and fell in love at first sight. When I married her I didn’t know whether it was a ‘marriage of convenience’ (and I now know, neither did she). The risk paid off – we are still together.

    4 years ago I decided that I was no longer happy with my employer of 23 years, so I left them and my profession as a software engineer to become a transport planning consultant. I thought I was succeeding; I had three wonderful years working for London and for Sunderland. Unfortunately, my new profession imploded in the economic crisis following 2008 and I found myself jobless for six months.

    Now I am starting a new job (as a software engineer again) far from home. It is early days yet; I do not know if I will succeed in relocating and supporting my wife and step-children. There are still hurdles to overcome: it feels like a big risk because if I fail, I could end up hungry and homeless (but it is better to take the risk than to be certain of that outcome).

    I do not think that reckless risk taking is to be admired. However, if you are confident about some aspects of your life, it is exhilarating (and potentially rewarding) to take risks in others. However you have to consider what you hope to gain, what you stand to lose, and the likelihood of success.

  6. November 23, 2011 at 4:44 pm

    If you are craving risk for its own sake, perhaps you should examine your personal situation a bit. What exactly do you want to risk, and why? What is it you are itching to give up? Your money? Your job? Your family? Your property?

    Being risk-averse doesn’t mean you don’t take risks. It’s impossible not to take risks. Life is full of them. Being risk-averse means you want to manage your risk, and find the path with the most potential reward for the least possible risk.

    Even skydivers use a parachute. Imagine how much riskier it would be to just jump out of a plane, without a parachute! If risk was what skydiving was all about, obviously that’s what they would do.

    In fact, skydivers are being risk-averse, too. The thrill the skydiver gets is from maximizing the reward (adrenaline) in relation to the actual risk of death. If the total amount of risk was what it was all about, then obviously jumping without a parachute would be the thrill-seeker’s choice.

    In business as well, nobody goes into business in search of risk. If you want risk, just go buy lottery tickets. Business is about the reward (profit). Risk is the enemy you are constantly trying to avoid/minimize. .

  7. Alex
    November 24, 2011 at 4:05 pm

    It seems like you have defined risk-taking in this post to be entrepreneurial risk-taking (that’s fine, but maybe we should explicitly say that this is what we’re talking about). I think another factor here is that it takes a tremendous amount of energy and perseverance to start a company. It takes someone very ambitious to do this. In my experience, people in the U.S. are not very ambitious, although I don’t have a good sense of how this compares to the rest of the world. I think it’s also interesting to ask what societal factors influence the average “ambition level.”

  8. Jon Peterson
    November 28, 2011 at 8:54 am

    Understand risk is an essential skill in life. People tend to ignore or not understand risks as they become more asymmetrical. Everyone knows about 50% probabilities – coin tosses, that kind of thing.

    But it becomes very hard for someone to really know what to do when probability changes from 0.01% to 0.001%. People tend to just treat both of those as ‘very unlikely’ or ‘not going to happen to me’. There’s an order of magnitude difference there that would never be ignored if it were 50% as opposed to 5%

    In many risk situations, the up side is a certainty (you will get 40k more working for this company) but the downside is not (you may not like their big corporate culture – but maybe you won’t mind too much- or you’ll get used to it?).

    Starting your own company is different. While the probabilities are unknown, the downside, if it occurs, is predictable – you lose your entire investment. The upside is not – it might be 5 years of just staying in the black, it might be a soaraway success, it might be you love being your own boss even if the money is always a struggle etc. etc.

  1. November 23, 2011 at 4:49 am
  2. November 24, 2011 at 2:10 pm
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