Entrepreneurs Gene or Rich Kids with Money

August 4, 2016 Abdallah Alaili

Recent research from the National Bureau of Economic Research studied risk-taking in the stock market and found that environmental factors (not genetic) most influenced behavior.

The study appear to answer the question “Are Entrepreneurs Born or Made“, but it doesn’t really. Furthermore many interpreted the results as: Entrepreneurship is for rich kids (or upper middle class), which again is a wrong interpretation.

First, let’s examine the Abstract of the research, before jumping to conclusions, (full article linked above).

Risk-taking behavior is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use data on stock market participation of Swedish adoptees and relate this to the investment behavior of both their biological and adoptive parents. We find that stock market participation of parents increases that of children by about 34% and that both pre-birth and post-birth factors are important. However, once we condition on having positive financial wealth, we find that nurture has a much stronger influence on risk-taking by children, and the evidence of a relationship between stock-holding of biological parents and their adoptive children becomes very weak. We find similar results when we study the share of financial wealth that is invested in stocks. This suggests that a substantial proportion of risk-attitudes and behavior is environmentally determined.

To explain it in simple English, the study finds that both genetic and environmental factors influence the risk taking behavior, but once the financial factor kicks in (rich kids), the genetics have almost no influence. While i would not contest the data and results of the study, i would like to object to the interpretation of these results by many.

Here’s the basis to my objection:

1- The study focused on risk taking linked to stock investing not risk taking link to entrepreneurship;
Meaning, there is a difference between someone putting his money on random companies with no emotional connections to, and someone putting his money on an idea that he has been day dreaming about for several months.

2- The role model or mentor effect; In the assumption that financially security is the driving force behind risk taking and investing in stocks, or even in entrepreneurship, they forget to factor the role model and mentor effect. It is only normal, that when you see your father or someone in your family investing, you too might want to invest, furthermore you get a mentor without even seeking one, the experiences and know hows are transmitted to you with often a hands on approach.

3-It true that it is very hard to take risks when you are not financially secure; But entrepreneurship wise many businesses can be started with little money, unless you are planning to launch a tech startup, chances are you don’t need huge amounts of money to start.

4- It is true, that when you are rich, you have more possibility to test and fail, you can test 100 business idea for all you care, when you are not rich, you do not have this freedom, but that doesn’t mean you can’t test a couple ideas, especially if they do not require too much cash. So yes, maybe rich kids can be serial entrepreneurs while others can’t.

5- What about many developing and poor countries where entrepreneurship is booming ? Entrepreneurship doesn’t have to be opening a chain restaurant, setting a lemonade stand is also entrepreneurship!

6- Self-made billionaires who rose from nothing (extremely poor), and overcame various tough obstacles, represent 8.5% of the Forbes top 400 billionaires, those with 100% inherited fortunes represent 7%. So if even those who went from nothing were able to get 8.5% of word wealth, there’s no doubt those raised in middle class could have fared as good.

7- My last point, crowdfunding, is now letting wannabe entrepreneurs raise funds without taking any risks, sure they crowdfund their project with wealthy investors money, but still it shows that the character makes the entrepreneur not the money makes the entrepreneur .

Another article covering this subject can be found: Are Entrepreneurs Rich Kids From Wealthy Families ?

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Abdallah Alaili

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