Jul 192017

Earl R Smith II, PhD


If I am faced with the option of mentoring someone who is too cautious or someone who is too rash, I inevitably choose the former. There are a number of reasons for this but the most important is that progress always comes faster when working with a client who is learning to gradually put more pressure on the accelerator. I know what the ‘common wisdom’ is when it comes to entrepreneurs – that they love risk and are relatively immune to it – but I have found that to be only true for ‘wannabee’ entrepreneurs. The successful ones are risk averse and incredibly good risk calculators.

My work in this area began in the late 60’s at the Sloan School of Management at MIT. I had the great fortune of attending that fine school just when the study of entrepreneurs was kicking into high gear. A number of the faculty – plus several from Harvard – were interested in identifying the key characteristics which made for a good entrepreneur. I got to participate in some of those studies.

Our reference group for the study was a cadre of successful ‘Route 128’ entrepreneurs – mostly engineering MIT graduates who had gone to the high-tech labs then founded companies. Many of them were recidivist entrepreneurs – having founded a company – left it – gone back to the labs – and then founded another.

The research group devised a series of games for the participants to play – games which were designed to measure attitudes towards things like risk and situational awareness. The data which was generated redefined the entire idea of ‘entrepreneur’. I’ll tell you about just two of those games.

Rings and Returns: The first game was a simple ring-toss one. The idea was simple. There was a peg on a base – you started out with a set of rings which you tossed at the peg. Each time you got a ring on the peg you received points. If you missed the peg you got no points. But in this game, distance mattered. The farther you stood away from the peg the more points you received for a successful toss.

I remember our first session vividly. We had assembled a diverse group – about twenty proven entrepreneurs, and the same number each of graduate business students and established middle managers – sixty in all. The patterns of behaviors were astoundingly different for each group. The graduate students – many of whom saw themselves are budding entrepreneurs – approached the game as either a big score or bust – where the most likely outcome was zero. They tended to see each toss as a discrete event and attempted to maximize the points by going all the way across the room and letting the rings fly. The middle managers – virtually none of whom saw themselves as entrepreneurs – stood very close to the peg and dropped the rings on. They tended to see the game as at best riskless where the most desirable outcome was a regular, reliable stream of minimum points.

The proven entrepreneurs were something quite different. They saw the game as one of maximizing returns on risk. Most of them established a range at which they could – most of the time – get the ring on the peg. Then they would gradually back up – extending the distance and increasing the points received. For them the risk/reward calculation was the key to beating the game and most of them were very good at quickly formulating, testing and deploying the optimal strategy. Needless to say the combined score from this group was substantially above that of either of the other two.

Pennies and Nickels: The second game was the nickel bid game. It went like this – I would be an auctioneer with a pile of nickels up for bid. Each bidder was given a stack of pennies. The highest of two bidders won the prize. In this game the graduate students and the middle managers generally followed the same strategy – they bid until the other guy stopped bidding.

But the proven entrepreneurs knew what the game was all about right from the beginning. Whereas the first two groups had seen the other bidder as the enemy, the entrepreneurs quickly realized that it was the auctioneer who was the real enemy – and they conspired to defeat the enemy and maximize their returns at the same time. The pattern quickly became ‘one penny bid and a pass’ – then ‘another penny bid and a pass’. The entrepreneurs ended up literally buying nickels for pennies.

During my time as auctioneer I actually sold one nickel to a graduate student for thirty-five cents to one highly aggressive graduate student!

Mastery: Extending your reach means gaining the ability to deal with more complex situations, making more extended calculations and building an ability to reach a judgment which holds true in complicated times. The higher you rise in any organization, the more complex the environment you are dealing in becomes. People who rush in and thrash about – like the proverbial bull in a china shop – don’t tend to last long or rise very high. But the careful and thoughtful entrepreneur – the one who takes time to learn and master new skills – often does extremely well.

But this is not a tortoise and hare story – at least not in the traditional sense. It is more a story about mastery – and the kind of concentration and practice it takes to develop it. When I work with a client who understands that, the world becomes a truly amazing place. We can chart the advancement – see the results of the work – wonder at new capabilities and opportunities.

I’ll take the careful one who I can help to become adventurous over the reckless one that I have to teach to be careful every time.

© Earl R. Smith II, PhD

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