Sunday, January 17, 2016

The Constitutive Role of Risk in Entrepreneurship

In an earlier, somewhat inaccessible essay, we began to explore some of the rough outlines of what constitutes entrepreneurship. In particular we suggested that a novel, instrumental idea, along with the desire and action to see it realized, might be minimum or necessary conditions, though they may not be sufficient. Here we will explore the potential constitutive role of another factor that is often associated with entrepreneurship: risk.

In this piece, our examples will all involve commercial business situations, but that is for the sake of simplicity and clarity, not to limit the discussion or conclusions to entrepreneurship of a commercial nature. Further, for those concerned with rigor, I will point out that in any definitional enterprise there are two value-laden considerations. The first is due to the fact that we have purposes driving the need for a distinct term, and the second that if we are to trouble ourselves with a distinct term, then its meaning should be unique in some way so as to perform some cognitive work. While the latter point is generic, I should clarify for the sake of the former that my purpose is in studying the nature of entrepreneurship, as I believe it has been and will be a major contributor to human civilization.

The popular archetype of an entrepreneur includes “risk-taker” as an attribute, and risk is normally present in entrepreneurship. However, this could be a consequence of another factor, or even just a coincidence resulting from the way entrepreneurship is historically conducted. We would like to determine whether it is among the necessary or sufficient conditions constituting entrepreneurship. We would also like to understand more about the role it plays, given its apparent ubiquity.

To do that, we will need to look more closely at what the term “risk” means in this context. It has several definitions, such as “variability of economic returns” (finance) and “uncertainty of outcome in making a decision” (psychology). In relation to entrepreneurship, we might instead emphasize the possibility of loss of something one currently possesses. What sorts of things might an entrepreneur lose?

Most obvious is the potential for financial loss. Entrepreneurs are usually their own first investors, not only supporting direct outlays but also expending effort and time that could have been directed toward earning money. Bootstrap entrepreneurs sometimes use credit cards, second mortgages, and savings to get the business off the ground. And entrepreneurs - even those with outside financing - rarely draw a full market salary.

Also apparent is the possibility of harming one’s reputation. If the venture fails, one might be viewed as less competent or capable by colleagues, as an embarrassment to one’s family, as an object of pity to one’s friends. Recently, there has been some emphasis on the positive aspects of business failure (for example, learning and experience), and in Silicon Valley some entrepreneurs even tout such failures as a selling point. Nevertheless, loss of reputation remains a real risk.

Less widely understood is the potential for a toll on one’s health, both physical and mental. Entrepreneurship typically involves long working hours, grueling travel, and rushed or indulgent meals. It involves substantial emotional stress, difficult and awkward interactions with a wide variety of people, and extraordinary volatility in the prospects for success. Depression is common and the daily instability may exacerbate any propensity to bipolar disorders.

A few other potential losses, possibly not as consistently present, come to mind. Often an enterprise is founded with trusted and respected colleagues: those relationships could be damaged. The entrepreneur’s adventurous spirit or enthusiasm could be lost. Sometimes the very vision that guides the effort is a longtime dream and an integral part of the entrepreneur’s persona, and failure would do violence to it.

Thus when we speak of risk in entrepreneurship we are typically talking about important values such as these, values that the individual currently possesses and that the venture might directly or indirectly cause to be lost. Further, if the notion of risk is to help us demarcate entrepreneurship from other endeavors, it seems necessary that such risk exceeds that of commonplace activities - whether due to putting larger quantities of the aforementioned values at stake, or from a higher probability of loss.

With that framing of risk in place, let us now consider whether it is a necessary or sufficient condition for entrepreneurship.

We do not normally consider gamblers and thrill-seekers to be entrepreneurs despite their bearing considerable risk. The reason seems to have something to do with the absence of creation: even if the gambler wins, or the thrill-seeker survives and garners an adrenaline boost, nothing new has been produced. This becomes even more clear if we add a creative element to each activity. A “gambler” who develops a team method of counting cards, or a thrill-seeker who devises a new way to plunge toward the earth and decelerate before impact, these activities seem to come closer to our sense of what an entrepreneur does.

Based on these examples it seems that risk alone is not a sufficient condition to constitute entrepreneurship. More difficult to ascertain is whether it is necessary. Put another way, is it possible for an activity to be entrepreneurship if there is no incremental risk?

Let us assume for a moment that our previously suggested conditions are necessary but perhaps not sufficient. A putative entrepreneur has a novel, instrumental idea along with a desire to see it realized, and takes action on that account. Do we need to add risk to the broth?

Suppose we stipulate further that our subject is financially very sound, physically and emotionally healthy, and has had several large successes as well as some failures, putting her reputation beyond reproach and rendering her ego stable. The amount of time and money she intends to put at risk are proportionately small. The envisioned widget is clearly needed in the market and for whatever reason there are no competitors. Is this activity entrepreneurship?

If we were to claim that it is not, we would be in a somewhat uncomfortable position. An activity that, earlier in our subject’s career, might have been clearly entrepreneurship, is not so designated because the person has managed to be successful and healthy and the project is relatively small. By requiring risk per se, we make the question of whether an activity is entrepreneurship dependent on the financial, health, or reputational status of the subject pursuing the activity. This would be a startling result. We do not ask about a scientist’s prior success to determine whether his latest experiment is science, nor an artist’s mental condition to decide whether her attempts at sculpture constitute art.

Perhaps, though, the necessary conditions we assumed are too strong, and occlude an underlying need for risk in constituting entrepreneurship. Two elements that seem promising in this regard are the novelty of the idea and the need for action. We can consider each in turn.

Imagine an individual investing his entire net worth to purchase a local chain of dry cleaning outlets from the retiring owner. The chain is successful, and no significant changes are planned, so there is no novelty in this endeavor aside from the fact that our subject will be managing the business. Nevertheless, there is considerable risk due to the scale of the investment and the ever-present, uncontrollable macroeconomic factors that affect all businesses. Is this entrepreneurship?

It is a case where opinions might vary. Peter Drucker, in Innovation and Entrepreneurship, excludes situations such as this despite the risk, because there is no innovation involved. Others might hold that in this case the risk substitutes for novelty in constituting entrepreneurship. Still others might claim that the existence of the risk implies at least some hidden novelty - for example, every moment in time has different characteristics - though this sort of claim tends to blur any distinction between entrepreneurship and other activities.

We can more likely agree if we perturb the scenario, so that the subject does not actually operate the business but merely makes the investment. In that case we see the individual as an investor, or perhaps a gambler, but not an entrepreneur. It seems that at a minimum, for risk to act as a substitute for novelty, we also need to see ongoing involvement beyond an initial transaction.

We can take this further, and address the requirement for action, through the following, admittedly recherché, scenario. Here imagine an individual who is a non-operational major shareholder in a company, who has a novel idea and a desire to see it realized. She describes this idea to an operating executive but takes no further action. There is novelty, and there is also risk, but there is no direct action on the part of the shareholder.

Though agreement may not be universal here, most would not call this entrepreneurship. The reason is subtle: the risk does not appreciably arise from the idea or even the fact that it was shared. The risk antedates the sharing of the idea, and exists whether or not the idea is ultimately implemented. WIthout her stake in the company, our subject is merely someone who has an idea and shares it, which is quite outside the realm of entrepreneurship.

From these scenarios we conclude that in constituting entrepreneurship, risk cannot substitute for action, and to the extent that we think that risk can substitute for novelty, it needs to be combined with ongoing action. Consequently, risk is neither a sufficient nor necessary component of entrepreneurship, unless it is substituting for novelty.

We now return to a more realistic scenario to fill out the picture. Suppose an individual seeks a role within a large organization, having distinct novel ideas about how the role could contribute to the firm’s success, and subsequently joins the firm and executes on those ideas. This seems to be entrepreneurial without being entrepreneurship. That is to say, it is similar to entrepreneurship, or has some but not all of the qualities of entrepreneurship. A comprehensive elaboration of this distinction is outside the scope of the present discussion.

But what if we now substitute risk for novelty, as we did before? For example, the subject leaves a stable job and moves her family to a new city to join a company in a particular role, but has no particular novel ideas about that role. Here the similarity seems to fail. The subject is merely making a risky job move; not only is it not entrepreneurship per se, it does not even seem particularly entrepreneurial. This outcome suggests that, even if we do consider risk to be a potential substitute for novelty, its constitutive role is considerably weaker.

If risk is only a necessary condition for entrepreneurship in limited circumstances, and even there its constitutive role is weak, why does it seem to be present virtually all of the time? There are two straightforward reasons.

First, action in the face of novelty always carries incremental risk, above and beyond that of prosaic activities, even if such risk seems immaterial to a particular subject. Not only is there some probability of failure; that probability can be quite difficult to estimate, because there are no genuine comparables to rely on.

Second, the relatively strong requirement of action means that there is an opportunity cost risk for the entrepreneur. Typically, an entrepreneur makes a deep commitment to a single venture rather than engaging in a portfolio as an investor would; thus there is significant unique risk (as the term is used in portfolio theory) relating to the time, money, and effort expended. Even in cases where the entrepreneur is involved in multiple activities simultaneously, each one limits the time available for the others. This commitment implies a concomitant risk, again even if it is not material for the individual.

Given these straightforward causal relationships, it is no wonder that we often conflate risk with entrepreneurship. More accurately, we might consider certain forms of risk to be entrepreneurial, even if the activity as a whole is not genuinely entrepreneurship. As a similarity relation, the term entrepreneurial admits of degrees. For example, in a scenario where an individual takes a job with a startup at half-pay in exchange for a significant equity stake: that is surely entrepreneurial in some degree, simply because bearing risk of this particular kind is common among entrepreneurs.

Finally, risk is often present in entrepreneurship because investors and other parties see it as a motivational tool. The upside is a carrot; the risk is a stick. An entrepreneur who takes little risk is seen as lacking commitment. When difficult situations arise, so this view goes, the entrepreneur with “skin in the game” will be more likely to persevere in the effort and do whatever is needed to succeed. Whatever the merits of this view, risk incurred for this reason is clearly not constitutive of the activity of entrepreneurship, but simply represents a common business practice.

As the practice of entrepreneurship continues to become more professionalized and systematized, it is important to recognize that the presence of risk is a common but not inevitable artifact of other, essential characteristics, or of particular business methods.

Saturday, January 2, 2016

Deconstructing Atheism

Though probably too much has been written on atheism and its various strains, I will nevertheless contribute to the fray, as a result of some recent concerns and insights I have had on the topic. Though I have long been a committed atheist, I have never been completely satisfied with the standard depictions of what that means. I am also concerned not to overreach in my own beliefs, as I described in detail in Doxastic Promiscuity Considered Harmful.

In the following I make numerous claims about rationality and what qualifies as rational. Arguing those claims is well outside the scope of this article, but in any case I do not think any of the claims is outrageous, even if debatable.

The usual organization of atheism divides the field with two oppositions: implicit vs. explicit, and weak vs. strong. An implicit atheist merely has not thought, or thought much, about the subject, while an explicit atheist has made a conscious decision. A weak atheist does not hold a belief in a deity, whereas a strong atheist denies the existence of deities. This results in three actual categories (implicit weak, explicit weak, explicit strong) since it makes no sense to hold strong atheism implicitly. Somewhere in all this are agnostics, which I will not address here because agnosticism is really about knowledge claims rather than belief.

These descriptions of atheism have numerous difficulties on their face, and consequently it is common for theists to debate the logical consistency of these positions using this casual presentation as a straw man. So, let us attempt to improve on it. Here is an informal statement of the two forms of explicit atheism:

Weak: I do not believe that God exists.
Strong: I deny that God exists; or, I believe that God does not exist.
In the event you are unclear on the distinction here, the weak atheist has some set of beliefs, but the belief in God is not among them. He is mostly epistemically passive with respect to the beliefs of others. The strong atheist, in contrast says that a belief in God is incorrect, and not only does he not include it among his beliefs, but would also say that you are wrong if you do so.

There are three obvious difficulties here:

  • What do we mean by “exists”?
  • As to the Strong claim, is a statement of non-existence logically coherent?
  • What do we mean by “God”?
As to what we mean by existence, we need to assume agreement on some sort of ontic postulate, i.e., that there is a world of real things that exists independently of our consciousness and of which our own existence is a part. The primary alternative to this is radical phenomenology, a vaguely Berkelian universe of phenomena presented by God, roughly akin to The Matrix but without even the bodies. It can be argued that an ontic postulate is a metaphysical article of faith, but since virtually all theists and atheists alike accept some version of this, we will proceed in that context. With an ontic postulate, the notion of existence is largely our common sense view of it - something that is part of that external world.

Even with this clarification, the logical coherence of existential statements about particulars is suspect. We do not need to get involved in that debate, as these statements are straightforward to repair using the notion of reference. Reference just means that there is an actual thing in the world to which a concept or name refers beyond its representation in someone’s mind. Not surprisingly there is also debate about reference of proper names, but here we can rely on the weakest form of reference, that there is something in the world that at least epistemically justifies the use of the term. Using the language of reference, we can restate the two explicit forms of atheism as follows:

Weak: I do not believe that “God” refers.
Strong: I deny that “God” refers; or I believe that “God” does not refer.
As to what we mean by “God,” we can agree with theists that a variety of concepts of God or gods are held or have been described by different believers now and through history. Further, these concepts often contain certain attributes that are shared among many or most of these concepts (e.g., immortality). Capitalized it is a proper name, implying monotheism, but it is nevertheless defined by a set of conceptual attributes, some of which a believer may claim to have experienced but others not. We could also consider a broader class of concepts that have never yet been expressed but that are somehow of a kind. We will need to look at all this more closely.

We now introduce further terminology, a distinction between de dicto and de re statements. Suppose we take the statement:

Something is rotten in the state of Denmark.
This can be interpreted in two different ways. It might mean that one believes there is a particular, known thing in Denmark that is rotten (de re); or it might mean that one believes that there is some unidentified but apparently rotten thing in Denmark (de dicto).

Using this distinction, we can further adjust our statements to clarify which meaning we intend:

Weak de re: I do not believe that that particular concept of God refers.
Weak de dicto: I do not believe that any concept of God refers.
Strong de re: I deny that that particular concept of God refers.
Strong de dicto: I deny that any concept of God refers.
Note that nearly everyone is at least a weak de re atheist about some concepts of God; for example, a Christian does not (usually) believe that Zeus exists. And weak de re atheism is clearly within the bounds of rationality, as we can simply claim that we do not find convincing the level of evidence in favor of a particular concept of God. But what about strong de re atheism?

Demonstrating that a concept or name does not refer is of a different order than demonstrating that it does. In the latter case, we simply show that the various attributes match actual evidence. This sort of demonstration is subject to all sorts of justificatory disputes, but at least we are dealing with substance. In the former case, it seems as though we must claim that there cannot be a thing to which it refers, or that we have looked everywhere. Nevertheless, rationality cannot require that our standard of belief is apodeictic knowledge - otherwise we can only believe logic, and perhaps not even that.

Further, we generally consider it within the bounds of rationality to deny the reference of fictional characters. Thus we can say that neither unicorns (which are a good example, because they present no logical difficulties) nor Mickey Mouse refer (except to those fictional characters in stories and screen), because we know (at some level) the provenance of their authorship.

There may be additional rational bases on which to deny reference, but I am not aware of them.

Given the ethereal nature of most concepts of God, there is probably not a rational notion of having looked everywhere pertinent in an attempt to find something to which the concept refers. Therefore the strong de re atheist must rely on one or both of the following claims in order to conform to some standard of rationality:

  1. The applicable concept of God cannot refer, most likely because it contains an inherent contradiction. Recalling that our standard of belief is less than apodeictic knowledge, along with accepting an ontic postulate, it is rational to insist that a proposed entity not imply a contradiction.
  2. The applicable concept of God is fictional, i.e., it was authored by individuals who either fabricated the concept in its entirety (e.g., the “flying spaghetti monster”) or who one believes grossly misinterpreted the evidence available to them.
A special case applies when the attributes of a particular concept of God is entirely metaphysical, i.e., it has no nexus with the known world, and nothing at all about it is verifiable or refers in any way to any known element of reality. In this case, one might be able to make a fiction argument, but the impossibility of referral is not available because the concept does not make reference to anything that could be contradicted.

Having examined de re atheism in both strong and weak forms, we can proceed to de dicto. We see immediately that the nature of this question depends on the set of concepts of God over which the claim would apply, what we might call the range. In the easiest case, the range is merely a finite, defined collection of de re claims (e.g., “I do not believe that any of the concepts of God with which I am familiar refers.”) For this narrow range, weak de dicto atheism seems safely rational, since we are in essence listing a set of potential beliefs that we do not hold. Strong de dicto atheism is more challenging, for we need to have some level of justification for either (1) or (2) in each case, but there is no fundamental impediment to such justification. Such a range, whether it is circumscribed by familiarity or by historical access, represents a simple aggregate of claims which can in the worst case be addressed individually.

We might also consider a broader, non-finite range based on attributes. For example, suppose that we include in the range any concept of God that ascribes omnipotence. We would then say:

Weak: I do not believe that any concept of God that ascribes omnipotence refers.
Strong: I deny that any concept of God that ascribes omnipotence refers.
The weak de dicto atheist here simply does not believe in omnipotence. The strong de dicto atheist must make the claim that omnipotence itself is self-contradictory. When our range is based on attributes and therefore includes not-yet-created notions of God, we cannot claim that all those notions are specifically fictional; and to claim that they are necessarily fictional is to assume the self-contradiction. Consequently argument (2) is not available.

Caution is advisable if the attribute is entirely metaphysical. Above we noted that argument (1) is not available to us in these cases de re, but argument (2) is not available in ranges of concepts described by an attribute. Consequently, while weak atheism remains safely rational, a claim of strong de dicto atheism on a range based on a metaphysical attribute risks making unjustifiable assertions.

The range can be expanded further to include disjunctions and conjunctions of attributes, with the weak de dicto atheist not believing in entities with those combinations of attributes, and the strong de dicto atheist believing that those combinations of attributes are contradictory. We could perform a union of this range with all known historical concepts of God to establish a comprehensive notion of what we mean by God, with both weak and strong versions as potentially rational.

There may be other ways to expand the range. The broadest range at first seems to be all possible concepts of God. But without any attributes, this is not a meaningful notion, and God could be anything. What if by “God” one means “cats”? We would not want to claim that “cats” does not refer. Neither weak nor strong atheism will do here: there is no rational claim of this sort to make. As the foregoing discussion has illustrated, when taking an atheist position we must circumscribe the range, and if we are to take a strong de dicto position, we must make a set of arguments applicable to either attributes or particular concepts.

I’m sure the reader is wondering where the author comes out on all this. In general I hold weak atheism with respect to any of the concepts of God with which I am familiar, or that have the typical “omni-” attributes. In particular cases of note, I am willing to step up to a position of strong de re atheism. For example, I would deny that the various Christian concepts of God refer, based on both fiction and contradiction arguments. However, I am not willing to put forth the effort to pursue strong atheism against a broader range. Actively denying the reference of a concept assumes an argument with someone who holds or might hold it; belief in God is invariably based on faith, thus such a person’s beliefs will be impervious to my rational claims. I see it then as a waste of time, and rationality requires that we ration our time.