Entrepreneurship and Risk Taking

Augusto Cesar Gomes Lacerda

Arizona State University

Table of contents
Abstract...................................................................................................................... 2
Introduction................................................................................................................ 2
Why companies fail and the idea of
risk..3
Methodology............................................................................................................... 4
Successful entrepreneurs are risk adverse.................................................................4
Conclusion................................................................................................................ 10
About the author(s).................................................................................................. 11
Works cited............................................................................................................... 12

Abstract
This paper discuss the relation of entrepreneurship and risk taking. People normally
believe that to be a successful entrepreneur it is important to be willing to take risk. This paper
will show same case studies showing successful entrepreneurs that are risk adverse and show
how accept risk is one of the reason why companies fail. It also will cover the characteristics of a
successful entrepreneur and how it relate to the Information Measurement Theory. In the
conclusion, it will provide some common characteristics of successful entrepreneurs.
Introduction
Accordingly, to Ajay Bam, entrepreneurship is the journey of opportunity exploration and risk
management to create value for profit and/or social good. Being risk what is not possible to be
controlled.
Those resources that you cant control could be also interpret as what you cant understand. It is
possible to notice that the lack of understanding of the information is what make people believe
in entrepreneurship as a risk, since people fear things that they do not know. The level of
knowledge, education and development of a country maybe be relate to how well they can
innovate and how they do in the business world. The following statistics shows how these things
are related:

The top ten countries in the ranking of the Global Innovation Index (2014) are:
Switzerland, United Kingdom, Sweden, Finland, Netherlands, United States of America,
Singapore, Denmark, Luxembourg and Hong Kong (China).

The 150 best universities in the world, accordingly to Times Higher Education (2014),

are from the top 20 of the Global Innovation Index (2014) Ranking.
The top 10 countries from the Global Innovation Index Ranking are also in the top 25 of

the Human Development Index of 2014.

94 of the Top 100 companies of the Forbes 2015 Ranking of public companies are from
the top 25 countries of the Global Innovation Index 2014 Ranking

People also believe that to be an entrepreneur you should like to take risks. For example, the
definition of the Dictionary.com is that an entrepreneur is the person who organizes and
manages any enterprise, especially a business, usually with considerable initiative and risk and
Merriam Webster definition is that entrepreneur is the one who organizes, manages and assumes
the risks of a business or enterprise.

Why companies fail and the idea of risk

The other reason that people think that entrepreneurship is a risk is because many companies fail.
This high rate of companies failing could be shown on the following statistics:

About 50% of new U.S. companies fail in their first five years (Badal, 2014)
More than half of new businesses dont survive beyond five years on the United

Kingdom (Anderson, 2014)

More than 90% of all tech startups fail (Law, 2013)
Of every one hundred companies open in Brazil, 48 ended its activities in three years.

This paper will discuss the problem that most new companies fail because people believe that
taking risks is acceptable.

Methodology
The methodology of this paper will be to:
1. Show case studies showing that the idea of risk is inaccurate and successful entrepreneurs are
risk adverse.
2. Show characteristics of successful entrepreneurs.
3. Relate with the Best Value concepts.
4. Present conclusions.

Successful entrepreneurs are risk adverse

Most people believe that entrepreneurs are the ones that like risk. The next examples show
examples of successful entrepreneurs and how they avoid risk.
The first example is Warren Buffett, the most successful person in the stock market in the world.
His fortune in the stock market was estimated $104.4B in 2014. His philosophy is based on:
1. He wants business that it is possible to understand.
2. Business with favorable long-term prospects
3. Operated by honest and competent people
4. Available at a very attractive price.
Warren showed his entire life how he risk adverse he is and this could be show on some quotes
that he said:
Theres a whole bunch of things I dont know a thing about. I just stay away from those.

I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner
or later, one will.
Its far better to buy a wonderful company at a fair price than a fair company at a wonderful
price.
I dont look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
Decide early in life to make your money by selling things that you really believe are good for
the customers.
You cant make a good deal with a bad person.
There are also other examples of successful entrepreneurs, Gladwell (2010) show some of them:

Giovanni Agnelli, the founder of Fiat, financed his young company with the money of
investorswho were subsequently excluded from the company by a maneuver by

Agnelli, the authors point out.

Bernard Arnault took over the Boussac group at a personal cost of forty million francs,

which was a fraction of the immediate resale value of the assets.

The French industrialist Vincent Bollor took charge of the failing family company for

almost nothing with other peoples money.

George Eastman, the founder of Kodak, shifted the financial risk of his new enterprise to

his family and to his wealthy friend Henry Strong.

IKEAs founder, Ingvar Kamprad, arranged to get his furniture made in Communist

Poland for half of what it would cost him in Sweden.

Marcel Dassault, the French aviation pioneer, did a study for the French Army that
pointed out the value of propellers, and then took over a propeller manufacturer. When he
started making planes for the military, he made sure he was paid in advance.

Sam Walton financed his first retailing venture, in Newport, Arkansas, with money from
his wealthy in-laws. That approach was safer than turning to a bank, especially since
Walton was forced out of Newport and had to go back to his wifes family for another
round.

Moreover, accordingly to Das & Teng (1996), the risk behavior has been examined in the
literature by two approaches: personality trait approach and the cognitive approach.
However, neither approach could convince that the risk behavior is a trait for entrepreneur
and this could not prove the difference between entrepreneurs and non-entrepreneurs in terms
of risk behavior.
Nevertheless, there are some common characteristics for successful entrepreneurs and these
characteristics could be related to the Information Measurement Theory (IMT) concepts from
Kashiwagi (2015).
Accordingly to Hornady (1982), the traits and characteristics that are common in successful
entrepreneurs and help them in many situations.
It is possible to see them in the table 1 below the relation of these traits and characteristics
and IMT:

Trait/Characterist
ic

Self-confident
and optimistic

Able to take
calculated risk

Respond
positively to
challenges

Flexible and able

to adapt

Knowledgeable
of the markets

IMT concept related

Theorem 18: A persons ability to
predict is relative to their
understanding of the event.
Theorem 21: The more information
perceived by an individual, the shorter
and simpler an event seems.
Theorem 51: Risk is caused by an
inaccurate perception and concepts of
the initial conditions.
Theorem 52: Risk is the difference
between what one perceives and
expects and what is actually
happening due to the initial
conditions.
Theorem 4: Information is defined as:
the natural laws and conditions that
describe the event at a point in time.
Information can predict the future
outcome of an event.
Theorem 13: All components of an
event are required for the event to
transpire
Theorem 34: A persons rate of
change correlates to his or her ability
to perceive, process, and apply new
information. The "more intelligent"
person changes at a faster rate and is
able to more consistently predict the
outcome of events. The "less
intelligent" person changes at a
slower rate.
Theorem 35: Individuals who change
at a very slow rate are "less
perceptive", have more difficulty
identifying differences, and feel very
uncomfortable with a changing
environment
Theorem 18: A persons ability to
predict is relative to their
understanding of the event
Theorem 21: The more information
perceived by an individual, the shorter
and simpler an event seems.

Explanation
If the person is a truly expert,
he could see the event from
beginning to end and will be
more confident. Have less fear
and worry. That is why they
will be more confident and
optimistic.
There is no such thing as a
calculated risk, because you
can measure something that is
uncertain. The key point here
is because an expert could
perceive more about the event
and that is why they will know
which action they should take.
Understanding the event, you
will understand the challenge
and know that it is just part of
the event. And if you really
could see the future you will
not be concerned about that.
The quicker the person can
change, he will be more
flexible and able to adapt.
Intelligent person change
more and are more able to
admit their mistakes.

How much more the person

could perceive about their
business, it just increase the
probability of the company be
a success.

Able to get along

well with others

Independent
minded

Versatile
knowledge

Energetic and
diligent

Theorem 47: If performance is

predictable, the environment is the
person, and performance is the
persons capability to apply
information, then every individual is
"doing what he or she can" or is
"doing the best that he or she can".
Therefore, every person is constrained
by his or her capability to perceive.

People that believe in these

concepts understand that
everyone are doing the best
that they can and could get
along better with people.

Theorem 39: An individual is fully

responsible and has full control over
his or her own actions, decisions, and
future environment.
Theorem 26: Since each finite element
has only one input and one output,
each event, which is comprised of
many finite elements, has only one
input and one output. Holding dt
constant, each event has only one
input and one output. If an event has
a different output, then it must have a
different input. Therefore, given "all"
information about the input, each
event becomes predictable: one
output for one input.
Theorem 20: The intensity of emotion,
or the degree to which an individual
becomes disoriented with an accurate
and full integration with an event
environment, is an indicator of their
lack of understanding of some part of
the event environment.

People that believe in no

influence and no control
understand that the change
just depends on himself.
Even if the person has
difficulties to understand the
event by himself, utilizing
expertise will allow the person
to understand more about the
event and the event will
become more predictable.

If you have clearly understand

from what you are doing, they
will be more energetic and
diligent about it, because they
know what value they are
adding.

Dynamic Leader

Responsive to
suggestions

Responsive to
criticism

Receptive with
foresight

Resourceful and
persevering

Theorem 18: A persons ability to

predict is relative to their
understanding of the event.
Theorem 21: The more information
perceived by an individual, the shorter
and simpler an event seems.
Theorem 39: An individual is fully
responsible and has full control over
his or her own actions, decisions, and
future environment.
Theorem 47: If performance is
predictable, the environment is the
person, and performance is the
persons capability to apply
information, then every individual is
"doing what he or she can" or is
"doing the best that he or she can".
Therefore, every person is constrained
by his or her capability to perceive.
Theorem 34: A persons rate of
change correlates to his or her ability
to perceive, process, and apply new
information. The "more intelligent"
person changes at a faster rate and is
able to more consistently predict the
outcome of events. The "less
intelligent" person changes at a
slower rate.
Theorem 35: Individuals who change
at a very slow rate are "less
perceptive", have more difficulty
identifying differences, and feel very
uncomfortable with a changing
environment
Theorem 18: A persons ability to
predict is relative to their
understanding of the event.
Theorem 21: The more information
perceived by an individual, the shorter
and simpler an event seems.
Theorem 47: If performance is
predictable, the environment is the
person, and performance is the
persons capability to apply
information, then every individual is
"doing what he or she can" or is
"doing the best that he or she can".
Therefore, every person is constrained
by his or her capability to perceive.

A leader should be the one

that understand the entire
event and can predict what
will happen. He also should
understand that he control his
own environment, making him
not making just decisions but
the right decisions. He also
should understand the person
that he is working with in order
to maximize their potential.

The person understands that

he does not have to be right
and if the other person makes
sense and has a better
answer, he changes his
opinion easily if it makes
sense.

The person is more receptive

to people that could see the
future and he will persevere
since he could see the future
and understands what will
happen. He also will be a good
align person for things that he
are not good at.

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Take initiative

Theorem 39: An individual is fully

responsible and has full control over
his or her own actions, decisions, and
future environment.

Take initiative because this

person understands that he is
responsible for his own
environment.

Conclusion
The idea that taking risks is what make entrepreneurs successful is not accurate as
it was showed in the case studies. Even for countries, the level of development and
knowledge is what make them more innovative and better companies.
In addition, it is possible to see that the complexity of the business dictates the rate
of the success. Because more complex an industry is more likely people will not
perceive the information and they will just make wrong decisions. For example, the
rate of failure of start-ups is higher than every kind of company, because their level
of innovation. Start-ups innovate in areas that are not fully developed and that is
why they have a lack of understanding of information, make more mistakes and are
more likely to fail.
For successful entrepreneurs, it is possible to perceive some common
characteristics that made them successful. They are:

Risk adverse, for example, Warren Buffett hates markets that he could not
understand and risk is caused by an inaccurate perception and concepts of
the initial conditions. Successful entrepreneurs do not be comfortable if they

could not understand what is really happening.

Have more information, the person who knows about their market, clients
requirements, competitors and could see the big picture are more likely to be
successful in entrepreneurship.

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Utilize expertise, entrepreneurs that know strengths and weaknesses of

themselves are more likely to utilize better expertise and more likely to be
successful about it. There are more flexible and able to adapt so they will

recognize easily their weaknesses and will utilize expertise to mitigate them.
Proactive because entrepreneurs are the ones that take initiative because
they believe in what they are pursuing and they understand that an individual
is fully responsible and has full control over his own actions, decisions, and
future environment.
This figure 1 below summarizes the characteristics of a successful
entrepreneur:

Risk
Adverse

Have more
information

Successful
Entreprene
urs

Utilize
Expertise

Proactive

Figure 1 Characteristics of a successful entrepreneur

About the author(s)

Augusto Cesar Gomes Lacerda is a Brazilian from Belo Horizonte, Minas Gerais that has
the following achievements:

Raised R$12K to implement solar energy for an orphanage through crowd funding.
Strategic consultant for the business incubator of UFMG, supporting 5 new ventures with
business model development.

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Champion of Minas Gerais for the State Stage of Enterprising University Challenge
2013 (5th place in the National Stage of the same competition).
Participation in events such as Startup Weekend 2013 and the Global Entrepreneurship Week
and Impacte.
Studied at 5 different universities 2 in Brazil (Cefet-MG and UFMG) and 3 in the U.S.
(University of Nebraska, University of Arkansas and Arizona State University)

Works cited
Ajay Bam. What is Entrepreneurship? Source: http://www.businessnewsdaily.com/2642entrepreneurship.html
Allmand Law (2013) Mapping Tech Startups. Source:
http://www.allmandlaw.com/Blog/2013/January/Mapping-Tech-Startups.aspx
Anderson,E. (2014). Source: http://www.telegraph.co.uk/finance/businessclub/11174584/Half-ofUK-start-ups-fail-within-five-years.html
Bam, A.. What is Entrepreneurship? Source: http://www.businessnewsdaily.com/2642entrepreneurship.html
Badal, Sangeeta (2014). Source: http://www.gallup.com/businessjournal/178787/why-newcompanies-fail-during-first-five-years.aspx
Cornell University, INSEAD, and WIPO (2014): The Global Innovation Index 2014: The Human
Factor In innovation, Fontainebleau, Ithaca, and Geneva
Das, T. K. & Teng, B.. (1996) Time and Entrepreneurial Risk Behavior
Entrepreneur [Definition]. (n.d.). In Merriam Webster Online.
Entrepreneur [Definition]. In Dictionary.com
Forbes 2015 Ranking of Public Companies. Source: http://www.forbes.com/global2000/
Hornaday, J.A. (1982). Research about Living Entrepreneurs.
Human Development Index. Source: https://en.wikipedia.org/wiki/Human_Development_Index
Kashiwagi, D. T. (2015). Information Measurement Theory. Arizona, Kashiwagi Solution Model
Inc. ISBN 9 78-0- 9850496-6-9
Malcolm Gladwell (2010) The Sure Thing. The New Yorker.
Times Higher Education (2014). Source: https://www.timeshighereducation.co.uk/worlduniversity-rankings/2015/world-ranking/#/
Warren Buffet information source:
http://www.gurufocus.com/holdings.php?GuruName=Warren+Buffett
http://www.gurufocus.com/news/250105/warren-buffetts-simple-formula-for-picking-stocks