The Delusions of Entrepreneurs Matter | Virginia Postrel

Not only did I find an incredibly interesting piece by Virginia Postrel, In Praise of Irrational Exuberance, but it turns out that another GMU economist, John V.C. Nye, has some fascinating research and thoughts on how our modern, innovative economy can thrive, or not. (Thanks to Tim Kane at Growthology for the find). From Postrel:

Nye, now at George Mason University, argues that countries become economically stagnant when their business people become too mature and rational.

That’s what happened to Victorian Britain, he suggests, when it was surpassed by the United States and Germany. Britain had capable businessmen and good financial markets to support them. There’s no evidence that Victorian businessmen failed to invest wisely. The problem, argues Nye, is that they didn’t invest unwisely.

The odds of any given venture succeeding are, of course, low. But it’s rational to invest $1 million in a business that will fail nine out of ten times, as long as the tenth time will earn least $10 million. Nye is talking about irrational bets: investing $1 million on a one in 50 shot of $10 million. An entrepreneurial culture encourages those crazy bets as well, and a few startups get lucky. We should, Nye suggests, think of “the entrepreneur as the valiant, but overoptimistic investor rather than the heroic seer.”

Entrepreneurship is not, in this view, a rational risk calculation. It is, as critics of capitalism sometimes charge, a bit like gambling. The few big winners are usually people who shouldn’t have bet their time, money, and ideas. They overestimated their chances of striking it rich. But they beat the odds — to everyone’s benefit. These “lucky fools” create new sources of wealth, new jobs, new industries offering less-risky opportunities, and new technologies that improve life. Society plays the role of the casino, enjoying the spillover benefits from foolish bets.

Good stuff. The entire piece is well worth reading and cites some interesting sounding work from Sociologist Colin Campbell.

via In Praise of Irrational Exuberance | Big Questions Online.


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