Wednesday, July 27, 2011

Do Friends Encourage or Discourage Us From Becoming Entrepreneurs?

Harvard Business School Professor Josh Lerner and his co-author Ulrike Malmendier have written a fascinating new paper about how our friends may affect our propensity to become entrepreneurs.  They studied a decade worth of students in the first-year curriculum at HBS.  Those students take all their first-year classes in the same section of 80-90 students.  Thus, they spend a great deal of time inside and outside of class with that group, and many of them become quite friendly.   Lerner and Malmendier examined the students' backgrounds prior to HBS as well as what they did after graduation.  Here is the abstract of their paper:

To what extent do peers affect our occupational choices? This question has been of particular interest in the context of entrepreneurship and policies to create a favorable environment for entry. Such influences, however, are hard to identify empirically. We exploit the assignment of students into business school sections that have varying numbers of classmates with prior entrepreneurial experience. We find that the presence of entrepreneurial peers strongly predicts subsequent entrepreneurship rates of students without an entrepreneurial background, but in a more complex way than the literature has previously suggested: A higher share of entrepreneurial peers leads to lower rather than higher subsequent rates of entrepreneurship. However, the decrease in entrepreneurship is entirely driven by a significant reduction in unsuccessful entrepreneurial ventures. The effect on the rate of successful post-MBA entrepreneurs, instead, is insignificantly positive. In addition, sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful entrepreneurs. The results are consistent with intra-section learning, where the close ties between section-mates lead to insights about the merits of business plans.

The finding regarding the "discouragement effect" proves rather surprising and perhaps disappointing to some observers.  However, the finding regarding intra-section learning proves much more encouraging (i.e. the reduction in entrepreneurship is entirely driven by a decrease in unsuccessful start-ups, suggesting that students may learning from peers how to sharpen their business plans). 

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