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.