Estimating entrepreneurial risks

Don’t Quit Your Job Until You’ve Talked to a Small Business Failure

Over the last week I’ve done several posts on different surveys showing how small business owners view risk. A quick summary is most small business owners think working for someone else is more risky than owning a small business and they are very good at minimizing business risk.

Several people have asked me does this data mean that small business ownership is less risky than traditional employment? The quick answer is yes, but only if your small businesses is successful.

The reason is the referenced surveys onlysurveyed existing small business owners. This is almost always the case with small business surveys because most research is focused on what is going on at existing small businesses.

But if your goal is to find out how all small businesses owners think about risk, this approach is flawed. This is because former small business owners – the folks that went bankrupt, lost their companies or were removed from their jobs – are no longer small business owners so theyaren’t included in these surveys. Because business failures are excluded, the survey resultsare biased towards successful small businesses.

It’s possible (probably likely)that failed small business owners consider small business ownership riskier than those still in business.Andincluding them might change the survey results.

This is called survivor bias and it is a common research problem.

My favorite example of survivor bias is surveyingexisting customers to develop satisfaction ratings. I was once asked to figure out why a company was losing so many customers despite having stellar customer satisfaction ratings.

It turned out they didn’t include customers that left prior to the annual customer satisfaction survey. After all, they explained, they weren’t customers anymore.

Not surprisingly, when surveyed this group rated the company very low in several important areas. But because of stellar ratings fromthe shrinking number of customers that stayed with them, the company was unaware of these problems.

So if you are considering small business ownership, entrepreneurship or self-employment keep survivor bias in mind as you read surveys and talk to people. Also, make sure to talk to folks that have failed. They will give you important and likely different perspectives than people thathave succeeded.

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