Risk-Return and Entrepreneurship
 

In the world of finance, people often talk of the relationship between anticipated risk and expected returns.

It's a very well known relationship that most people would know without ever taking a finance class -- that is, for taking on higher risk, you generally will expect higher returns, and vice versa.

That's why if you buy government bonds that return 5% interest per year (next to zero risk), the return you get from bank bonds will be slightly higher, as they are slightly riskier.

Every person has a different tolerance for risk-return. So while someone might choose to invest in safe government bonds, another might prefer to invest in tech stocks that might be more risky.

And when people talk of risk-return, they're generally talking about monetary investments. About finance, where to put your money, and so forth.

So what does this have to do with entrepreneurship?

It is my belief that people don't just invest money.

No, in everyday life, every person in effect invests their time.

You invest it by choosing what you choose to do with your time. And there are many, many choices to choose from.

If you decide to become a receptionist, for example, then in effect you are investing your time to get the relatively stable income you will receive.

If you are an entrepreneur, your income stream might be a lot more unknown.

What I am trying to get to is, the choice of whether to be an entrepreneur or not, I believe, is simply one that comes down to how you like to invest your time, and what your risk-return preferences are.

If you work for a company all your life and don't do much entrepreneurial, chances are your income will be relatively steady and known (low risk), but perhaps they won't reach substantial heights either.

If you choose to be an entrepreneur, start your own company, expand your own business, then your income can be a lot more volatile -- you can even lose money. Or you can make some. Or more. But the expectation is, with this increased risk compared to normal employment, there is an expectation of higher returns.

And this risk-return tolerance that everybody has may be a decisive factor in determining the future course people take with their lives.

Anyhow, just thought I'd share my thoughts that were racing through my mind.

Thanks for listening... or reading. :)

- Thomas.

Tom...
 

that post, your post, was very insightful.

Have you heard of 'The Disciplined Trader', by Mark Douglas...I think he is the author?

He touches on this same point.

Traders of commodities are constantly struggling with their management systems and their view of themselves.

Whether or not their personalities can weather the risk-to-reward ratios inherent in trading commodities is a vital factor in their success as a trader.

There is also the element of the economic costs of entreprenuership as opposed to employment as you have spoken of employment.

Overall, I have to say I am in agreement with your thoughts and I can see how it can have an adverse effect on the spirit of an aspiring entreprenuer who has been conditioned to take the less risky road to a comfortable lifestyle even though they dream of more.

Taylor

> In the world of finance, people often talk
> of the relationship between anticipated risk
> and expected returns.

> It's a very well known relationship that
> most people would know without ever taking a
> finance class -- that is, for taking on
> higher risk, you generally will expect
> higher returns, and vice versa.

> That's why if you buy government bonds that
> return 5% interest per year (next to zero
> risk), the return you get from bank bonds
> will be slightly higher, as they are
> slightly riskier.

> Every person has a different tolerance for
> risk-return. So while someone might choose
> to invest in safe government bonds, another
> might prefer to invest in tech stocks that
> might be more risky.

> And when people talk of risk-return, they're
> generally talking about monetary
> investments. About finance, where to put
> your money, and so forth.

> So what does this have to do with
> entrepreneurship?

> It is my belief that people don't just
> invest money.

> No, in everyday life, every person in effect
> invests their time.

> You invest it by choosing what you choose to
> do with your time. And there are many, many
> choices to choose from.

> If you decide to become a receptionist, for
> example, then in effect you are investing
> your time to get the relatively stable
> income you will receive.

> If you are an entrepreneur, your income
> stream might be a lot more unknown.

> What I am trying to get to is, the choice of
> whether to be an entrepreneur or not, I
> believe, is simply one that comes down to
> how you like to invest your time, and what
> your risk-return preferences are.

> If you work for a company all your life and
> don't do much entrepreneurial, chances are
> your income will be relatively steady and
> known (low risk), but perhaps they won't
> reach substantial heights either.

> If you choose to be an entrepreneur, start
> your own company, expand your own business,
> then your income can be a lot more volatile
> -- you can even lose money. Or you can make
> some. Or more. But the expectation is, with
> this increased risk compared to normal
> employment, there is an expectation of
> higher returns.

> And this risk-return tolerance that
> everybody has may be a decisive factor in
> determining the future course people take
> with their lives.

> Anyhow, just thought I'd share my thoughts
> that were racing through my mind.

> Thanks for listening... or reading. :)

> - Thomas.

Tom, Taylor and Other SowPub visitors....
 

As Taylor said....

> that post, your post, was very insightful.

****Both of them were! Thank you!

As a former Government employee (THANK GOODNESS FOR FORMER!) I look from a slighty different slant.

> Overall, I have to say I am in agreement
> with your thoughts and I can see how it can
> have an adverse effect on the spirit of an
> aspiring entreprenuer who has been
> conditioned to take the less risky road to a
> comfortable lifestyle even though they dream
> of more.

****And to add to Taylor's thoughts, there have been incredible changes in the workplace
even in the last couple of decades. No longer is the social contract of agreeing to commit an entire lifetime to one company who promises secure employment for that lifetime. With the continued "Gulp and Devour" that is happening in the Corporate World, people are downsized, outsourced etc. as a fact of life much more so than the 20 year, 30 year and 40 year careers at a single company we used to hear about from our parents or their parents.

It has left workers with a shadow of fear and apprehension rather than the comfort of stability.

For me, being an employee squelched my spirit in many, many ways.

When are the most heart attacks? On Monday mornings, when people go back to workplaces where their hearts do NOT want to be.

I am reminded of the old joke: "What is the difference between a corporation and a chain gang?

Answer: On a chain gang, you get to work outside."

Looking towards the New Year as a somewhat fledgling entrepreneur, I am looking how I can create services and products which will have the most powerfully inspirational impact on the lives of my clients and guests. It is truly exciting.

There are workplaces which create environments for their employees that have bridged the gulf from institutional thinking to inspirational thinking. I am a big fan of Lance Secretan, who writes, speaks, teaches and guides along these lines.

Below is a link to the Secretan Center, where you can learn more about Inspirational Leadership...

With Purpose and Passion,

JULIE JORDAN SCOTT




The Secretan Center