The Personality and Geography of the Entrepreneur

May 10, 2013

The Entrepreneurial Personality Profile

Creating new jobs is one of the top priorities for all politicians these days. This issue always ends up being discussed in terms of taxes and spending, sometimes in terms of education, but never ever in terms of people. This is ultimately the old Enlightenment view that human behavior, good or bad, is all about arranging external factors. People are assumed to respond to whatever plans or reforms the political leaders come up with.

And yet, if we look at indicators relevant to job creation it becomes clear that people do what they don’t respond the way they’re supposed to. Take self-employment for example. It has been very stable around 10-15 percent for many years now, seemingly unaffected by shifting policies. Before that it was a bit higher due to more people working in agriculture. A reason for this can be found in entrepreneur research, which shows that certain personality traits make for a good entrepreneur – just like other traits make for a good police, a good nurse etc. These traits are fairly stable over time explaining the relatively constant percentage of entrepreneurs in the American population (and most likely other populations as well).

The psychological research on people with this profession suggests that, in terms of the Big Five model, the entrepreneur profile is high on Extraversion, Openness and Conscientiousness, and low on Agreeableness and Neuroticism. The reasons for this particular mix may seem obvious, except perhaps the low Agreeableness. This is probably because an entrepreneur must be tough and not back down in negotiations. A lot of people complain about how nerve-wrecking it is to negotiate how much you should be paid with your employer, but an entrepreneur has to make similar negotiations on a regular basis, so it makes sense that they need thicker skin than the rest of us.

A Rare Commodity

By all accounts, the traits that make up the entrepreneurial profile are highly inheritable and stable from early adulthood. This means that the number of entrepreneurs (or job creators) will be limited by the amount of people who have the profile and the strength of its relation to entrepreneurial activity. So when politicians say they will create new jobs they appear to indulge in a fantasy. More realistically, they can help entrepreneurs to create jobs. Like a secretary can help an architect or a doctor to do his job more efficient.

I don’t want to sound all Ayn Rand here; I understand that the world would be pretty unpleasant without polices and nurses (and very inefficient without secretaries). We shouldn’t worship these people like some libertarians do, but at the same time we have to accept that a lot of people can be nurses and polices but few can be entrepreneurs – and entrepreneurs are more important. While other research has shown how intelligence affects the economic development, on both an individual and national level, it may be that entrepreneurship is even more important. The intelligent person can maintain the order of things, but entrepreneur is the driving force in technological development. He or she is the reason you’re reading this on a computer (or similar device), why you have fresh food stored in your fridge and why you can travel to the other side of the planet in less than two days.

So while libertarianism may be little more than a personality disorder, Rand still has a point. These individuals have a profound effect on society and to understand the world around us we need to understand them better.

Drawing the Map

One important question regarding entrepreneurship is whether all countries and regions are equally blessed with this commodity or if it’s unevenly distributed. Obviously some countries are more entrepreneurial than others, but that may be for political reasons, because while you can’t create entrepreneurs, you can suppress them. There are probably people in North Korea who have ideas and want to start businesses too.

But if we look at the personality side of this issue, international comparisons suggest that personality traits are unevenly distributed, so if two culturally similar nations had the exact same policies implemented one would still be more innovative than the other for purely genetic reasons. These international studies have been criticized since they sometimes make little sense – Japan scoring lower than Nigeria on Conscientiousness, Italians being introverted and things like that. But even with these clear mistakes, the overall results from the biggest international study of this kind are validated by culture level measures.

But we might get a more reliable test of the importance of the entrepreneurial personality by looking within nations. As I mentioned in my previous post, the data compiled by psychologist Peter Jason Rentfrow, shows an uneven distribution of Big Five factors within the United States. This means that the average levels of some states will be more similar to the entrepreneurial profile than others. But does this also mean that average levels of traits characterizing an entrepreneur on the individual level will translate to more entrepreneurial activity on the regional level?

A case for this is made in a recent study by German psychologists Martin Obschonka and colleagues, published in the Journal of Personality and Social Psychology earlier this year. They used Rentfrow’s data to create a measure of Entrepreneur-prone personality profile for the different states in America. This is what they came up with,

State-level map of the entrepreneur-prone personality

State-level map of the entrepreneur-prone personality, the darker the more entrepreneurial.

As you can see the East-West divide of Neuroticism I discussed in my previous post is present here too, although less pronounced since the other traits weigh in as well. But it’s clear that the distribution is uneven and clustered.

Obschonka then compared this ranking with measures of entrepreneurship, such as the Kauffman Index (measuring business startups) and self-employment rates. They found that even when controlling for state-level measures of prosperity, race, age and gender distribution, they got correlations around 0.35 between the personality profile and the Kauffman Index. Here is the map of entrepreneurial activity for comparison,

State-level map of entrepreneurial activity, the darker, the busier.

State-level map of entrepreneurial activity, the darker, the busier.

As expected from the correlations you can see a resemblance in that there is a cluster in the West. There are some states that break the pattern in a conspicuous way: Mississippi and Maine have the wrong profile but perform well while Nevada and Washington are the other way around. This may be due to the fact that both these measures used are fairly crude. As far as I can tell, The Kauffman Index counts all business startups – hotdog stands and high tech ventures alike. And the personality profile is built on the assumption that all traits are equally important which, if true, seems like a happy accident. (Rentfrow was kind enough to send me his data in an Excel file so when I have the time, I’ll be looking to see if a weighted measure could give a better picture of the entrepreneurial personality as well as comparing it to lots of other interesting variables).

Obschonka and his colleagues then went on the make regional-level studies of American Metropolitan areas, the UK and Germany. They got the same result with similar sized correlations but couldn’t reach statistical significance due to the small number of regions. So while preliminary, these findings suggest that their results hold not just for America but within other countries too, and most likely between countries as well.

Implications

This study is the first of its kind and the positive result no doubt means it will be followed by others. The results, should they hold up, can explain things like why people leave California for Utah or why Japan leveled out, and maybe why China isn’t the future either, but perhaps why Chile might be. It’s also interesting to note that entrepreneurial hotspots are not clearly linked to the large metropolitan areas, that are often hyped as being at the forefront of just about everything. Judging by both personality and activity it seems like states like Colorado and New Mexico show more promise than states containing larger cities, like California and New York. Then we have the fact that these clusters were most likely in part created by migrations and can be changed by future migrations.

It’s a whole new field of research opening up here – doesn’t even have a name yet but I’m sure it will soon enough – and it will be highly interesting to see what comes out of it in the future.


Don’t Judge a Nation by the Size of Its Government

February 21, 2013

A recurring issue in the political debate is that of big or small government. From the political right, big government is invariably seen as an objectively bad thing. It breeds corruption and it lulls hard working citizens, and especially minorities, into a false sense of entitlement. It leads to public overspending and fiscal disaster. The left are not crazy about framing the debate in the big versus small dichotomy. They could say that big government means social security, public schools, infrastructure and so on. But since most people are naturally suspicious of the government, the term “big government” will never have a good ring to it. It just sounds too much like Big Brother (and sometimes it is). Recently president Obama even went as far as to say the following in his State of the Union speech,

It is not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.

And he is a big government guy!

This got me thinking. Is the size of the government really objectively good or bad? There are no official measures the government size (that I know of at least) but I think total tax revenues as a percentage of the GDP could be a reasonable proxy.  I selected 38 countries that are comparable in terms of development, that is most countries in Europe and USA, Canada, Australia, and the richer countries in East Asia. I omitted really small countries since they would affect the result disproportionally. That gave me a list of 38 countries listed below, in order of size (biggest first),

  1. Denmark 49.0
  2. Sweden 47.9
  3. Belgium 46.8
  4. France 44.6
  5. Finland 43.6
  6. Norway 43.6
  7. Austria 43.4
  8. Italy 42.6
  9. Germany 40.6
  10. Netherlands 39.8
  11. Slovenia 39.3
  12. Hungary 39.1
  13. United Kingdom 39.0
  14. Spain 37.3
  15. Argentina 37.2
  16. Portugal 37.0
  17. Russia 36.9
  18. Israel 36.8
  19. Czech Republic 36.3
  20. New Zealand 34.5
  21. Poland 33.8
  22. Estonia 32.3
  23. Canada 32.2
  24. Australia 30.8
  25. Ireland 30.8
  26. Latvia 30.4
  27. Greece 30.0
  28. Slovakia 29.5
  29. Switzerland 29.4
  30. Japan 28.3
  31. United States 26.9
  32. Korea, South 26.8
  33. Croatia 26.6
  34. Belarus 24.2
  35. Lithuania 20.9
  36. Chile 18.6
  37. Singapore 14.2
  38. Hong Kong 13.0

Next, I looked up some key indicators of how well a country is doing:

1. GDP (PPP) per capita (IMF 2010-11)

2. Gross government debt as a percentage of GDP (IMF 2011)

3. Corruption Perceptions Index (CPI) from Transparency International (2012).

4. Murder rate by country according to UNODC, most recent year.

I chose murder rather than crime in general since it’s a more robust measure than lesser crimes that will be reported in varying degrees in different countries.

And then I did the scatter plots. Starting with GDP (PPP) per capita (IMF 2010-11),

Government size/tax burden on the x-axis and GDP (PPP) per capita on the y-axis.

Government size/tax burden on the x-axis and GDP (PPP) per capita on the y-axis.

As you can see there is practically no correlation at all, a negligible 0.04. Next the public debt, does big government lead to fiscal irresponsibility?

Government size/tax burden on the x-axis and gross government debt as a % of GDP on the y-axis.

Government size/tax burden on the x-axis and gross government debt as a % of GDP on the y-axis.

Again, the correlation is negligible at 0.05. But what about countries that are in real trouble? If we look at the  the ten countries with the largest debts, they have an average size/tax burden of 33.3, which is very close to the overall average of 34.0. Next we look at the Corruption Perceptions Index,

Government size/tax burden on the x-axis and Corruption Perceptions Index on the y-axis.

Government size/tax burden on the x-axis and Corruption Perceptions Index on the y-axis.

As you can see from the regression line, now we have something, a small correlation of 0.16. But note that the CPI measures lack of corruption so a higher score is better. This means that corruption actually decreases as the size of the government increases. This seems counterintuitive since big government should provide more bureaucracy for corruption to thrive on. But it’s a well-known fact that big government countries like those in north western Europe are among those with the least corruption in the world. Finally crime, or murder to be precise,

Government size/tax burden on the x-axis and murder rates per 100K inhabitants on the y-axis.

Government size/tax burden on the x-axis and murder rates per 100K inhabitants on the y-axis.

Here we a have also have a slight but negative correlation, -0.19. This is more what you’d expect since a small government means less social security and less social control, and that should translate to more crime.

So what’s the verdict? With such small correlations it’s hard to say that the data gives much support for big or small government. It may seem to lean towards bigger is better but those correlations are just too low to make much of. The conclusion is rather that government size is a matter of preference. If you value personal freedom and feel that everyone should take more responsibility for themselves, then a small government is the way to go. If you value a society that takes care of all its citizens even if it stands in the way of your personal freedom, then a big government is the answer.


Are Illegal Immigrants Taking Jobs from Americans?

February 18, 2013

Your answer to that question will probably depend on your political views. Illegal immigration is much more of concern for Republicans than Democrats. According to a Gallup 82 percent of Republicans but only 48 percent of Democrats believed that stopping illegal immigration is a top priority. And one of the common arguments for this seems to be the idea that illegals take jobs from Americans. But is there a way to objectively answer the question?

I think there is. If we look at the unemployment numbers from the Bureau of Labor Statistics and the statistics of illegals from Slate/PEW, there is a connection. If we compare these data using a scatter chart this becomes evident,

linear-regression-image.php

The X-axis shows unemployment by state and the Y-axis shows the illegal immigrants as a percentage of the state population.  The steepness of the regression line illustrates the correlation between the two variables, in this case it’s roughly 0.5. That is a clear indication that there is some type of connection.

Still, correlation is not necessarily causation. We could have a reversed causation or third factors affecting both variables. As for reversed causation, that would mean that high unemployment in and of itself would somehow attract illegals, which seems highly unlikely. After all, high unemployment means fewer jobs and that’s what they came for in the first place. As for third factors, this also looks unlikely. The bad economy is of course a global phenomenon which causes hard times both in America and Mexico, thus giving rise to unemployment as well as illegal immigration. But it doesn’t explain why illegals would seek out the states with high unemployment.

The most obvious reasons that those jumping the fence end up in certain states seems to be geographical proximity. If we look at Slate’s map chart it is clear that the border states along with Nevada, the non-border state closest to Mexico, are the most popular.

This does suggest that illegals do take jobs from Americans. And it raises some tough questions regarding the future of the border states. What happens when illegals become citizens? If they do, they will no longer be attractive on the job market. Will new illegals take their place and eventually become citizens creating a never ending influx of Mexicans to America? That, of course, is impossible – the entire population of Mexico can’t live in America.

But even if illegal immigration is stopped today, there are a lot of problems facing the border states.  When illegals become legals they can no longer boost businesses by offering lower than minimum wage pays, so tax revenues from these businesses shrink. At the same time they will become eligible for various entitlements, which will increase public spending in a time when America’s public debt is large and increasing.

It’s hard not think that  in the future this will mean that minimum wages will have to come down to fight unemployment (Californian unemployment is at 10-11 percent as it is). And the quality of healthcare, education, other public services will decrease drastically as all these new citizens will require the services but without creating any tax revenues to pay for it. If this process goes far enough the border states will in most aspects become the northern part of Mexico rather than the south western part of America.

A strategy of dimishing returns?

A strategy of diminishing returns?


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