Thursday, January 30, 2014

Wealth and Entrepreneurship (why the rich get richer and why we should help the poor)

The popular belief is that entrepreneurs are "hungry" because they come from modest backgrounds.

Here in America, we love a great "rags to riches" story.  Of course, it should be noted that America's two richest men, Bill Gates (son of a wealthy attorney) and Warren Buffett (son of a stockbroker/Congressman) don't exactly provide validation for that kind of story.

The fact is that a disproportionate number of Silicon Valley entrepreneurs, like Gates and Buffett, come from privileged backgrounds (there is probably a strong correlation with Ivy League and Ivy-esque schools as well).

This isn't coincidence; it's science.

A recent spate of studies shows that people who experience economic turmoil become more risk-averse:
"Using detailed data on tax, unemployment and military conscription, the authors were able to analyse the investment choices of those affected by Finland’s “Great Depression”. Controlling for age, education, gender and marital status, they found that those in occupations, industries and regions hit harder by unemployment were less likely to own stocks a decade later. Individuals’ personal misfortunes, however, could explain at most half of the variation in stock ownership, the authors reckon. They attribute the remainder to “changes in beliefs and preferences” that are not easily measured."
In yet another example of how life isn't fair, entrepreneurs from wealthy backgrounds have a major psychological, as well as financial advantage.  Shielded from deprivation, they are far more likely to develop the healthy risk tolerance that is a prerequisite of entrepreneurship.

But the answer isn't for investors like me to limit our investments to people who are already millionaires.  Rather, these findings imply that one of the best ways to unlock greater entrepreneurship is to build a stronger societal safety net.

Poverty scars childrens' psychology--who knows how many Gateses and Buffetts, who might have created billions in wealth and millions of jobs, never started the next Microsoft because of the risk-aversion generated by a deprived childhood.

The problem with income inequality isn't that the rich are too rich; it's that the poor are too poor.  If the Gini coefficient remained high, but no child ever had to worry about food, shelter, or education, this country would be massively better off.

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