Category: Entrepreneurship

The Entrepreneurial Resilience of a Business School Dean

ZupanMarkRochesterDean2012-10-11.jpg

“Mark Zupan is the dean of the Simon School of Business at the University of Rochester. Baggage carts once were his salvation.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B4) Once I landed in Boston without my wallet or any money, I was able to put into practice what I learned from watching the wonderful movie “The Terminal” featuring Tom Hanks.

Like the character he portrayed, Viktor Navorski, I wandered through the airport and rounded up and returned six baggage carts. I was refunded enough change to be able to afford the subway fare to get to my first meeting. Then, I was able to borrow enough cash from the amused alum I was meeting with to get through the rest of the day and back home to Rochester that night after my assistant faxed a copy of my driver’s license and passport to me.
I have to admit I felt a little idiotic rounding up the carts, but it was one of my finest entrepreneurial ventures.

For the full story, see:
MARK ZUPAN. “FREQUENT FLIER; How to Cope at the Airport Without a Wallet.” The New York Times (Tues., September 4, 2012): B4.
(Note: the online version of the article is dated September 3, 2012.)

Romney Praises Dan Senor Book on Israeli Entrepreneurship

SenorDanRomneyAdviserBriefing2012-09-03.jpg “Dan Senor, left, a leading campaign adviser, at a briefing on Saturday for the Romney campaign on the plane en route to Israel.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A10) WASHINGTON — Moments after making remarks in Jerusalem about Middle East culture that enraged Palestinians and undermined the public relations value of his trip to Israel, Mitt Romney looked around the room for Dan Senor, one of his campaign’s top foreign policy advisers.

It was Mr. Senor’s book about entrepreneurs in Israel that informed his comments, Mr. Romney explained to the group of Jewish-American donors he had assembled at the King David hotel. The book, “Start-up Nation,” is among Mr. Senor’s writings that Mr. Romney frequently cites in public.

For the full story, see:
MICHAEL D. SHEAR. “Adviser Draws Attention to Romney Mideast Policy.” The New York Times (Thurs., August 2, 2012): A10.
(Note: the online version of the article is dated August 1, 2012.)

The Senor book is:
Senor, Dan, and Saul Singer. Start-up Nation: The Story of Israel’s Economic Miracle. hb ed. New York: Twelve, 2009.

BremerSenor2012-09-03.jpg

“L. Paul Bremer III, left, in 2004 when he was the top United States envoy in Iraq, with Mr. Senor, who was his spokesman.” Source of caption and photo: online version of the NYT article quoted and cited above.

A Marshmallow Now or an Elegant French Pastry Four Years Later

HowChildrenSucceedBK2012-08-31.jpg

Source of book image: http://images.amazon.com/images/G/01/richmedia/images/cover.gif

(p. 19) Growing up in the erratic care of a feckless single mother, “Kewauna seemed able to ignore the day-to-day indignities of life in poverty on the South Side and instead stay focused on her vision of a more successful future.” Kewauna tells Tough, “I always wanted to be one of those business ladies walking downtown with my briefcase, everybody saying, ‘Hi, Miss Lerma!’ “

Here, as throughout the book, Tough nimbly combines his own reporting with the findings of scientists. He describes, for example, the famous “marshmallow experiment” of the psychologist Walter Mischel, whose studies, starting in the late 1960s, found that children who mustered the self-control to resist eating a marshmallow right away in return for two marshmallows later on did better in school and were more successful as adults.
“What was most remarkable to me about Kewauna was that she was able to marshal her prodigious noncognitive capacity — call it grit, conscientiousness, resilience or the ability to delay gratification — all for a distant prize that was, for her, almost entirely theoretical,” Tough observes of his young subject, who gets into college and works hard once she’s there. “She didn’t actually know any business ladies with briefcases downtown; she didn’t even know any college graduates except her teachers. It was as if Kewauna were taking part in an extended, high-stakes version of Walter Mischel’s marshmallow experiment, except in this case, the choice on offer was that she could have one marshmallow now or she could work really hard for four years, constantly scrimping and saving, staying up all night, struggling, sacrificing — and then get, not two marshmallows, but some kind of elegant French pastry she’d only vaguely heard of, like a napoleon. And Kewauna, miraculously, opted for the napoleon, even though she’d never tasted one before and didn’t know anyone who had. She just had faith that it was going to be delicious.”

For the full review, see:
ANNIE MURPHY PAUL. “School of Hard Knocks.” The New York Times Book Review (Sun., August 26, 2012): 19.
(Note: the online version of the article is dated August 23, 2012.)

The full reference for the book under review, is:
Tough, Paul. How Children Succeed: Grit, Curiosity, and the Hidden Power of Character. Boston, MA: Houghton Mifflin Harcourt, 2012.

Failed Entrepreneurial Firms that Signal New Markets Are “Optimistic Martyrs”

(p. 260) Colin Camerer and Dan Lovallo, who coined the concept of competition neglect, illustrated it with a quote from the then chairman of Disney Studios. Asked why so many expensive big-budget movies are released on the same days (such as Memorial Day and Independence Day), he replied: Hubris. Hubris. If you only think about your own business, you think, “I’ve got a good story department, I’ve got a good marketing department, we’re (p. 261) going to go out and do this.” And you don’t think that everybody else is thinking the same way. In a given weekend in a year you’ll have five movies open, and there’s certainly not enough people to go around.
The candid answer refers to hubris, but it displays no arrogance, no conceit of superiority to competing studios. The competition is simply not part of the decision, in which a difficult question has again been replaced by an easier one. The question that needs an answer is this: Considering what others will do, how many people will see our film? The question the studio executives considered is simpler and refers to knowledge that is most easily available to them: Do we have a good film and a good organization to market it? The familiar System 1 processes of WYSIATI and substitution produce both competition neglect and the above-average effect. The consequence of competition neglect is excess entry: more competitors enter the market than the market can profitably sustain, so their average outcome is a loss. The outcome is disappointing for the typical entrant in the market, but the effect on the economy as a whole could well be positive. In fact, Giovanni Dosi and Dan Lovallo call entrepreneurial firms that fail but signal new markets to more qualified competitors “optimistic martyrs”– good for the economy but bad for their investors.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Resilience

(p. 183) In 1832, a young man was fired from his job and lost his bid for election to the state legislature. The next year his new business failed. Three years later he suffered a nervous breakdown. After recovering, he was defeated as speaker in the state legislature. He was defeated in his efforts to win his party’s nomination to Congress in 1843. He was rejected as land officer in 1849. In 1854, he was defeated in the U.S. Senate election and, in 1856, his efforts to win the nomination as his party’s vice president failed. The string of failures continued. He was again defeated in the Senate election in 1858. Finally, in 1860, Abraham Lincoln was elected as the sixteenth president of the United States.

Source:
Audretsch, David. “Review of: Adapt: Why Success Always Starts with Failure.” Journal of Economic Literature 50, no. 1 (March 2012): 183.

Entrepreneurs Thrive in a Culture of “Chutzpah”

VanceCyrus2012-08-22.jpg “Manhattan District Attorney Cyrus Vance, Jr.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. C13) Before a recent business trip to Israel, someone handed me a copy of “Start-Up Nation: The Story of Israel’s Economic Miracle,” a book by Dan Senor and Saul Singer about Israel’s culture of innovation and entrepreneurialism. I had finished the book on the overnight flight to Tel Aviv. When I returned home a week later, based on what I had seen in Israel, I purchased multiple copies and handed them out to senior staff who work with me.

“Start-Up Nation” recounts and dissects how Israel, in just 60 years, has thrived as an economy, creating an environment where talent and technology have attracted more venture-capital dollars per person than any other country in the world.
In a nutshell, and admittedly oversimplifying, the authors boil Israel’s success down to a few, core themes. First, Israel was born into and exists in an adverse political environment. Surrounded by hostile neighbors, Israelis survived–and thrived–by adapting quickly, making the most out of limited resources and taking on outsize challenges without fear or undue regard for authority. The latter quality might be called chutzpah. Second, Israelis all participate in military service, before university. The skills they learn in the military, and the maturity they gain from military service, make their work force better skilled and more capable of better teamwork at the entry level on up.
If my recent visit provides any evidence of national characteristics, Israelis question authority, openly and all the time. At any given meal, whether it included ordinary citizens, generals, government officials or business executives, deference was in short supply. No quarter is given. But debate and disagreement create a climate of self-awareness. That in turns helps to create a culture of achievement.
So why did I give copies of the book to my senior staff? I believe in a bottom-up organizational culture, where problems are identified, raised and solved by the line employees who make the enterprise run. Our American system–and especially our legal and government cultures–frequently operates with a top-down style, which can discourage creativity and individualism.
The one thing that I am not planning to do is give copies of “Start-Up Nation” to my children until they graduate from college and have left the house. They have questioned my authority enough already.

For the full book discussion, see:
Cyrus Vance. “Twelve Months of Reading: Cyrus Vance.” The Wall Street Journal (Sat., December 17, 2011): C13.
(Note: the broad multi-page article was sub-divided into sections headed by the name of the person who was writing the book advice in that section. Internally the broad article seemed to be entitled “Books of the Year.”)

The first book Vance recommends is:
Senor, Dan, and Saul Singer. Start-up Nation: The Story of Israel’s Economic Miracle. hb ed. New York: Twelve, 2009.

Overly Optimistic Entrepreneurs Seek Government Support for Projects that Will Usually Fail

People have a right to be overly-optimistic when they invest their own money in entrepreneurial projects. But governments should be prudent caretakers of the money they have taken from taxpayers. The overly-optimistic bias of subsidy-seeking entrepreneurs weakens the case for government support of entrepreneurial projects.

(p. 259) The optimistic risk taking of entrepreneurs surely contributes to the economic dynamism of a capitalistic society, even if most risk takers end up disappointed. However, Marta Coelho of the London School of Economics has pointed out the difficult policy issues that arise when founders of small businesses ask the government to support them in decisions that are most likely to end badly. Should the government provide loans to would-be entrepreneurs who probably will bankrupt themselves in a few years? Many behavioral economists are comfortable with the “libertarian paternalistic” procedures that help people increase their savings rate beyond what they would do on their own. The question of whether and how government should support small business does not have an equally satisfying answer.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

For Inventors “Optimism Is Widespread, Stubborn, and Costly”

(p. 257) One of the benefits of an optimistic temperament is that it encourages persistence in the face of obstacles. But persistence can be costly. An impressive series of studies by Thomas Åstebro sheds light on what happens when optimists receive bad news. He drew his data from a Canadian organization–the Inventors Assistance Program–which collects a small fee to provide inventors with an objective assessment of the commercial prospects of their idea. The evaluations rely on careful ratings of each invention on 37 criteria, including need for the product, cost of production, and estimated trend of demand. The analysts summarize their ratings by a letter grade, where D and E predict failure–a prediction made for over 70% of the inventions they review. The forecasts of failure are remarkably accurate: only 5 of 411 projects that were given the lowest grade reached commercialization, and none was successful.
Discouraging news led about half of the inventors to quit after receiving a grade that unequivocally predicted failure. However, 47% of them continued development efforts even after being told that their project was hopeless, and on average these persistent (or obstinate) individuals doubled their initial losses before giving up. Significantly, persistence after discouraging advice was relatively common among inventors who had a high score on a personality measure of optimism–on which inventors generally scored higher than the general population. Overall, the return on private invention was small, “lower than the return on private equity and on high-risk securities.” More generally, the financial benefits of self-employment are mediocre: given the same qualifications, people achieve higher average returns by selling their skills to employers than by setting out on their own. The evidence suggests that optimism is widespread, stubborn, and costly.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Entrepreneurs Are Optimistic About the Odds of Success

(p. 256) The chances that a small business will survive for five years in the United States are about 35%. But the individuals who open such businesses do not believe that the statistics apply to them. A survey found that American entrepreneurs tend to believe they are in a promising line of business: their (p. 257) average estimate of the chances of success for “any business like yours” was 60%–almost double the true value. The bias was more glaring when people assessed the odds of their own venture. Fully 81% of the entrepreneurs put their personal odds of success at 7 out of 10 or higher, and 33% said their chance of failing was zero.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

“If Apple Is a Fruit on a Tree, Its Branches Are the Freedom to Think and Create”

(p. B3) Millions of Chinese flooded the popular micro blogging site Sina Weibo to tweet their condolences on the death of Steve Jobs over the past two days. They also raised the question: Why isn’t there a Steve Jobs in China?
. . .
One of the most popular postings on Mr. Jobs’ legacy came from scholar Wu Jiaxiang. “If Apple is a fruit on a tree, its branches are the freedom to think and create, and its root is constitutional democracy,” he wrote. “An authoritarian nation may be able to build huge projects collectively but will never be able to produce science and technology giants.” On that, Wang Ran, founder of a boutique investment bank China eCapital Corp., added, “And its trunk is a society whose legal system acknowledges the value of intellectual property.”

For the full story, see:
Li Yuan. “China Frets: Innovators Stymied Here.” The Wall Street Journal (Sat., October 8, 2011): B3.
(Note: ellipsis added.)

“Planning Fallacy”: Overly Optimistic Forecasting of Project Outcomes

(p. 250) This should not come as a surprise: overly optimistic forecasts of the outcome of projects are found everywhere. Amos and I coined the term planning fallacy to describe plans and forecasts that

  • are unrealistically close to best-case scenarios
  • could be improved by consulting the statistics of similar cases

. . .
The optimism of planners and decision makers is not the only cause of overruns. Contractors of kitchen renovations and of weapon systems readily admit (though not to their clients) that they routinely make most of their profit on additions to the original plan. The failures of forecasting in these cases reflect the customers’ inability to imagine how much their wishes will escalate over time. They end up paying much more than they would if they had made a realistic plan and stuck to it.
Errors in the initial budget are not always innocent. The authors of unrealistic plans are often driven by the desire to get the plan approved–(p. 251)whether by their superiors or by a client–supported by the knowledge that projects are rarely abandoned unfinished merely because of overruns in costs or completion times. In such cases, the greatest responsibility for avoiding the planning fallacy lies with the decision makers who approve the plan. If they do not recognize the need for an outside view, they commit a planning fallacy.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.
(Note: ellipsis added; italics in original.)