It's a common perception that daring, out-of-the-box risk taking goes hand-in-hand with being a successful entrepreneur in any business—and maybe even more so in real estate.
Renowned economist Malcolm Gladwell, author of recent best-selling books “Blink” and “Outliers,” begs to differ. His recent article in The New Yorker helps to make that point, and he uses the recent bursting of the housing bubble to illustrate it.
Hedge fund manager John Paulson bet against the real estate bubble and made $15 billion in a single year—but not by taking risks. One of Paulson’s mentors, Gladwell mentions, was investor Marty Gruss. In “The Greatest Trade Ever,” Gregory Zuckerman writes: “The ideal Gruss investment had limited risk but held the promise of a potential fortune. Gruss drilled into Paulson the maxim: Watch the downside; the upside will take care of itself. At his firm, he asked his analysts repeatedly, ‘How much can we lose on this trade?’ ”
In “The Illusions of Entrepreneurship,” the economist Scott Shane makes a similar argument. Yes, he says, many entrepreneurs take plenty of risks—but those are generally the failed entrepreneurs, not the success stories.
Gladwell also defines successful entrepreneurs as predators. They feed off opportunities that are obviously risk-free to them, even when they go against consensus, as was the case for investors who were betting against the rise in home values even during times of double-digit growth. Holding contrary beliefs, they were openly ridiculed by some so-called industry experts. “Why are predators willing to endure this kind of personal abuse?” Gladwell asks. Perhaps they are sufficiently secure and confident that they don’t need public approval. Or perhaps they are so caught up in their own calculations that they didn’t notice when critics called them crazy for going against conventional wisdom. The simplest explanation, though, Gladwell suggests, “is that it’s just another manifestation of their relentlessly rational pursuit of the sure thing.”
Entrepreneurs are inclined to think more conservatively and seek independence in their work culture. Gladwell writes, “People who work for themselves are far happier than the rest of us.” And, according to Shane: “The average person would have to earn two and half times as much to be as happy working for someone else as he would be working for himself. And people who like what they do are profoundly conservative.”
Furthermore, according to an oft-cited sociology study, where a large sample of entrepreneurs and non-entrepreneurs were asked to choose among three alternatives—a business with a potential profit of $5 million with a 20 percent risk, one with a profit of $2 million with a 50 percent chance of success, or one with a profit of $1.25 million with an 80 percent chance of success—it was the entrepreneurs who were more likely to go with the third, safer choice. Gladwell writes, “They weren’t dazzled by the chance of making $5 million. They were drawn to the 80 percent chance of getting to do what they loved doing.”
Source: The New Yorker, Jan. 18, 2010, “The Sure Thing”
By Malcolm Gladwell