Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Anthony Stevens
In a recent New Yorker, JamesSurowiecki (author of The Wisdom of Crowds) wrotean article about health-care reform in which he brought upwhat’s known as the EndowmentEffect. The Endowment Effect (EE) essentially says thatpeople overvalue what they already have. There’s debate amongbehavioral economists about the existence or importance of thisimpulse, but it’s supported by asmall body of empirical evidence.
My thoughts, when I first read the article and then did alittle research into this hypothesis, turned to entrepreneurism, andwhether or not the EE can help explain why or why not certain peoplecan make the leap from the comfort of a full-time job working forsomeone else to the risks and potential rewards of starting a newbusiness. Do people overvalue the safety of working for someone else? Perhaps classic risk-aversion theory be supplemented with the EE toexplain why potential entrepreneurs struggle with the decision tostrike out on their own.
What factors come into play here? In terms of the EndowmentEffect, what might you be overvaluing or undervaluing as you ponder anentrepreneurial life?
| Overvalue? | Undervalue? |
| Current salary | Owning significant equity in your own business |
| Job safety | Self-determination |
| Predictability | Opportunity |
| Conformity | Independence |
A lot of these things are non-economic and have to do withbehavioral psychology. What’s interesting, and valuable, about the EEhypothesis is that it can be used to explain both hard-economic as wellas soft-psychological value. Although explained experimentally interms of financial value, the EE is not strictly an economic hypothesis– the concept of value can take on forms. We don’t need to be able toexperimentally assign a hard-dollar value to the notion of“predictability”, for example, to know that predictability is valuableto many people. And when you debate whether to launch your startup,how can you know for sure – and thus, fairly evaluate – the financialrewards? Even more problematic is trying to assign a value to thingslike job safety. For example, at some level, weall know that the value of job safety is not the same as in ourparent’s’ day. The socialcontract has changed; economic cycles are swifter and morevolatile; the certainty of lifetime employment is an ephemera. But theEE suggests that, for those of us who are employed, we still overvalueour jobs, merely because we have them. The flip side of the argument,then, is that we systematically undervalue entrepreneurism, merelybecause we haven’t yet done it.
I’m curious to hear from the entrepreneurs who have made theleap – what, in hindsight, did you overvalue before you started yourbusiness, and what about the entrepreneurial life did you come tounderstand to be much more valuable than you originally thought? Letus know in the comments!
