The "idea" of being an entrepreneur

Evidence that this idea spreads best from people in a similar social position, and that you can only get the idea once

  
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What kinds of things make someone decide to try and solve some problem, instead of accepting it? Economists tends to think in terms of broad costs and benefits: if the expected benefits from innovating exceed the expected costs, then a person decides to innovate. But an alternative perspective is well articulated by the economic historian Anton Howes:

The more I study the lives of British innovators, the more convinced I am that innovation is not in human nature, but is instead received. People innovate because they are inspired to do so — it is an idea that is transmitted. And when people do not innovate, it is often simply because it never occurs to them to do so. Incentives matter too, of course. But a person needs to at least have the idea of innovation — an improving mentality — before they can choose to innovate, before they can even take the costs and benefits of innovation into account.

If this is right, where does this “improving mentality” come from? People are social creatures, and often take their cues from the people around them. So one way people could obtain this “improving mentality” is if they see it modeled in other people.

I reviewed some evidence for this notion in last week’s post, “Entrepreneurship is contagious.” That article tried to show two things. First, entrepreneurs are often found in social clusters - if people have worked with entrepreneurs or lived near them, they are more likely to go on to become entrepreneurs. Second, this effect is causal, in the sense that if you expose a random person to entrepreneurs you can “infect” them with entrepreneurship.

In this piece, I want to present two more complementary strands of evidence in favor of the notion that entrepreneurs transmit to their peers the idea that “yes, even someone like you can become an entrepreneur.” Those two strands of evidence are:

  1. Entrepreneurship transmits from peer to peer more readily when peers are similar.

  2. The positive impact of being around entrepreneurs falls off quickly, once that idea has been planted.

Let’s start with the similarity of peers.

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Entrepreneurs Just Like Me

In “Entrepreneurship is contagious” I reviewed a 2015 paper by Lindquist, Sol, and Van Praag that showed Swedish adoptees were more likely to become entrepreneurs if either their biological or adoptive parents were entrepreneurs. Moreover, the link between entrepreneurial parents and children was twice as strong for adoptive parents as it was for the biological parents of adopted children, and there was little evidence this was due to factors like inheriting the family business or access to wealth. Instead it seems to have been something the children learned from their parents.

Could it have been the idea that entrepreneurship is the kind of thing “people like us do?” One piece of evidence in favor of that interpretation is the differential effect of parental gender on their children. Adopted sons are more likely to become entrepreneurs if either parent is an entrepreneur, but the effect of fathers on sons is generally more than twice as strong as the effect of mothers. For daughters, the effect is even stronger. It turns out adopted daughters are more likely to become entrepreneurs only if their mother is an entrepreneur - adopted daughters raised by entrepreneurial fathers are no more likely to become entrepreneurs than those raised by non-entrepreneurial fathers.

This gender asymmetry has been seen in other papers as well. Rocha and Van Praag (2020) looks at people who work with an entrepreneur: the employees of startups, this time in Denmark. Everyone who joins one of these startups has some degree of exposure to the founder and therefore everyone is exposed to the “idea” of entrepreneurship. But Rocha and Van Praag focus on how similar the founder is to the employee.

As shown in the table below, as with mothers and fathers, Rocha and van Praag find female employees are more likely to subsequently go on and found a business of their own if the founder is also a woman. While the table is just the raw correlations in the data, this is one of those findings that sticks around when you use more and more sophisticated methods that control for more and more possible confounders.

Moreover, Rocha and Van Praag find the more similar the founder is, the more they seem to influence the decisions of their employees. The effect is stronger if the employee and founder are both women, and they are both mothers (or both not mothers). It’s stronger if they’re both women, and have similar ages; or if they’re both women with similar educational background; or both women from the same place of birth.

Kacperczyk (2013) finds a similar effect. She studies mutual fund managers and their decision to strike out on their own and found a hedge fund, and looks to see if this decision is influenced by exposure to other hedge fund managers who do the same. Similar to a 2010 study by Nanda and Sørensen (discussed in this post), she finds hedge fund managers are more likely to strike out on their own if they have more coworkers who have done the same.

But she also finds the same effect if more university alumni (who also work as fund managers) struck out to found their own funds in the preceding year. One reason this is notable is that, whereas it might be that fund managers interested in striking out on their own gravitate to the same work places (which would lead to a spurious correlation between coworkers starting funds), that’s less likely to be true of alumni. It would mean, for example, that people interested in starting their own hedge fund some day choose to go to the similar universities and then wait until their peers start forming funds to do the same.

For our purposes though, alumni is interesting as another example of indicating the importance of “people like me” doing entrepreneurial things. Kacperczyk also establishes the effect is much stronger for alumni of the same gender, and for alumni who went to school around the same time period.

Taken together, it’s all consistent with the idea that people take their cues about what kinds of options are available to them from people who occupy a similar social position. When people like you are entrepreneurs, it seems to be especially impactful on your future probability of becoming one yourself.

You only need an idea once

A second piece of evidence that peers activate the idea to be an entrepreneur comes from the fact that we see little evidence these peer effects work well when people probably already have the idea of being entrepreneurs. You can only get an idea once after all.

As we’ve seen, the children of entrepreneurs are themselves more likely to become entrepreneurs. Let’s suppose this is because the children of entrepreneurs are much more likely to have the idea of being an entrepreneur in their heads; that would imply further exposure to entrepreneurs doesn’t add that idea to their choice set - it’s already there. It turns out a general finding is that all of these social exposure to entrepreneurship effects are a lot weaker for the children of entrepreneurs.

  • In Rocha and Van Praag’s study of the impact of working with a female founder on the probability of women going on to start businesses, the effect is only statistically significant for those without an entrepreneurial mother. The daughters of entrepreneurial mothers were more likely to become entrepreneurs, but they weren’t “even more” likely to do so if they also worked for a startup headed by a female founder.

  • In Nanda and Sørensen’s study showing people are more likely to become entrepreneurs if they work with coworkers who have previously been entrepreneurs, the effect is half as strong for children with an entrepreneurial parent. Moreover, they also find a weaker effect for those who reside in a region where there are more entrepreneurs. In general, those with exposure to entrepreneurship outside work are much less affected by the presence or absence of entrepreneurial coworkers.

  • In Eesley and Wang (2017), students in a 10-week innovation and entrepreneurship class worked on a startup project with a mentor (the paper was reviewed in more detail here). Students were randomly assigned mentors who were entrepreneurs or not, and those assigned entrepreneur mentors were more likely to join startups in the two years after graduation. But only if they did not have a parent who was an entrepreneur. For the children of entrepreneurs, there was no additional impact from having an entrepreneurial mentor.

Note this is not because the children of entrepreneurs are always entrepreneurs, and therefore there is no way to further increase their chances of being entrepreneurs. Entrepreneurship remains uncommon in all cases, even for the children of entrepreneurs.

I think this idea is also consistent with one of the few studies that finds exposure to entrepreneurial peers does not increase the probability people become entrepreneurs. In a 2013 study by Lerner and Malmendier (reviewed last week) MBA students at Harvard Business School who were randomly assigned to class sections with more classmates who had previously been entrepreneurs were actually less likely to express an intention to become entrepreneurs when they graduated. This might well be because people getting an MBA at Harvard Business School do not lack the confidence and idea of becoming an entrepreneur. They are already weighing the costs and benefits of entrepreneurship, and meeting an entrepreneur classmate doesn’t add anything “new” to their choice set (instead, Lerner and Malmendier suggest it helps them avoid starting businesses that are unlikely to succeed).

The importance of ideas

To sum up, I agree with Anton Howes that innovation may not come naturally to most people (why that might be will have to be a topic for another day). As humans, we have an enormous range of courses of action we can take as we try to live our lives; too many possibilities to consider them all in fact. So, as a shortcut, we use the choices of people in similar situations as ourselves to build a circumscribed choice set. These are the possibilities whose costs and benefits we weigh when deciding how to act.

Now, we actually don’t have much evidence about this as it relates to innovation (with one exception - see postscript below). But we do have a lot of evidence related to a close cousin of innovation: entrepreneurship. Across this article and “entrepreneurship is contagious” I’ve tried to pull together four strands of evidence about this notion that entrepreneurship isn’t normally a default choice that people consider, but they instead have to learn it’s an option from their social context:

  1. Entrepreneurs are often found in social clusters (workplaces, neighborhoods)

  2. Quasi-random exposure to entrepreneurs increases the probability of becoming an entrepreneur

  3. Entrepreneurial influence seems stronger when entrepreneurial peers occupy a more similar social position

  4. The effect of exposure to entrepreneurs is much weaker for the people most likely to already be considering a career in entrepreneurship

Taken together, I think it’s pretty compelling. In addition to the usual things that drive economic growth - institutions, macroeconomic policy, technological opportunities - we should also think about something intangible like what people regard as possibilities for their lives.

Postscript

There is a famous 2018 study by Bell and coauthors with the seemingly very relevant title “Who becomes an inventor in America: the importance of social exposure to innovation.” Despite the subtitle, I don’t think it actually sheds much light on the topic at hand. As the authors state: “the data point to mechanisms such as … access to networks that help children pursue a certain subfield, acquisition of information about certain careers, or role model effects.” My read of their paper is that their evidence is certainly consistent with peers transmitting the “idea” of innovation, but it’s hard to disentangle the importance of this channel from others. I think their best evidence is on things like the importance of networks, advice about how to succeed in a specific industry, and influencing people’s decisions about which industry to work for.