Monday, March 9, 2015

What Kinds of People Start Businesses?

I live in Austin, Texas, which prides itself as a center for entrepreneurship.  Entrepreneurs are people who start their own businesses.  In Austin, we have many different kinds of new businesses ranging from high-tech companies that want to be the next Dell or Facebook to food-truck restaurants where someone just wants to follow their dream of cooking for others.

Starting your own business is difficult.  You have to put in long hours.  You have to be prepared to fail.  A high percentage of new ventures do not succeed.  You have to be willing to change course if things are not working out as expected.

Not everyone is cut out to be an entrepreneur.  For decades, psychologists and business researchers have explored whether there is a collection of personality traits that is associated with starting a business.

A fascinating paper by Martin Obschonka, Eva Schmitt-Rodermund, Rainer Silbereisen, Sam Gosling, and Jeff Potter in the July, 2013 issue of the Journal of Personality and Social Psychology explored two related questions.  First, is it reasonable to characterize an entrepreneurial personality?  Second, are there clusters of people with that personality profile within a country?

Based on a lot of previous research, these authors suggested that there is a personality profile for entrepreneurs which is based on the Big Five personality dimensions.  The Big Five dimensions, which reflect the largest differences in behavior across people are Openness to Experience (your willingness to consider new ideas), Extraversion (your desire to be the center of attention), Conscientiousness (your willingness to work hard and follow rules), Agreeableness (your desire to be liked by others), and Neuroticism (your lack of emotional stability).  They suggest that the ideal entrepreneurial profile is someone who is high in openness, extraversion, and conscientiousness and low in agreeableness and neuroticism. 

(As an aside, you might wonder why a good entrepreneur is low in agreeableness.  While it is important to be liked by people who might want to do business with you, it is more important to be critical and demanding when starting a business.  Highly agreeable people do not like to give other people bad news, and so they often temper their criticisms in ways that could hurt a business.)

In the first study in this paper, the researchers analyzed a data set in which over 600,000 people from all over the United States took a 44-question Big Five scale.  The questionnaire also had information about where people lived.  The researchers measured how well each person in the sample compared to the ideal profile for an entrepreneur.

The first interesting result is that the personality profiles were not evenly distributed throughout the US.  There were more people fitting this profile in the western US than in the eastern US, though Georgia and Florida also had a high concentration of people with this profile. 

There are many possible reasons why this personality profile might cluster in particular regions.  For example, people with an entrepreneurial personality profile might move to areas where they think they will meet like-minded folks.  In regions with many people who have this profile, they may act in ways to heighten these behaviors in other people as well.   

The researchers then looked at the relationship between the entrepreneurial profile of people in a region and entrepreneurial activity in that region.  In these analyses, the researchers controlled for many other factors such as the ethnic makeup of those regions, the overall economic climate of the regions, and the age and gender profiles of the regions.  In these analyses, regions with more people who had the entrepreneurial personality profile also had more startups and other entrepreneurial activity.

To follow up on these studies, the researchers did the same analyses in Germany and the United Kingdom using large-scale data sets from those countries.  The same pattern was observed in these studies. People with an entrepreneurial profile were found in clusters in each country.  The regions that had the most people with that entrepreneurial profile also had the most entrepreneurial activity.

This kind of large-scale analysis of the social structure of personality profiles is fascinating, and opens up a number of new avenues for research. Ultimately, it would be interesting to know what factors cause this entrepreneurial personality profile to become clustered in regions.