The Rational Entrepreneur

Four Planning Strategies

2010-01-24T10:08:00.000-08:00

Michael Frese divides real-world small-business planning into four methodologies. As you read, try to think about how you would apply these methodologies to your current projects.

Reactive Strategy. Your actions are not planned in advance, but are instead determined on-the-fly in response to the current situation.

Complete Planning Strategy. Your actions are proactively planned well in advance. You try to have a clear knowledge of what tasks you will need to complete and what scenarios will occur, and you try to anticipate exactly what problems may arise.

Opportunistic Strategy. You begin with a basic plan, but then adjust the plan frequently as new information presents itself.

Critical Point Strategy. "Do the hardest part first," to paraphrase Bloomberg. You start out with a goal and tackle the most important or the riskiest barrier to achievement of your goal. Once you've implemented a solution to that problem, you go on to the next-highest priority issue.

From two related studies of 80 small business owners in the Netherlands:

"Reactive Strategy was negatively related to firm success, while a Critical Point Strategy was positively related. The combination of Critical Point and Opportunistic Strategy was most and the combination of Opportunistic and Reactive was least successful." -How to Plan as a Small Scale Business Owner

The Critical Point and Opportunistic strategy combination was also the most common combination in the sample.

"Business owners that perform poorly employ a Reactive Strategy, with poor performance leading to increased use of reactive behavior. High performing business owners start out focussing on the most crucial issues (Critical Point Strategy), with high performance leading to a more top-down (Complete Planning) approach... Strategy use is dependent upon the type and level of environmental uncertainty. Complete Planning strategy is used less frequently in a fast changing environment and more often in a complex environment." -Strategies, uncertainty and performance of small business startups

Complete Planning can be beneficial if events usually unfold as planned, but most of us in Silicon Valley find such predictability elusive.

Experienced VC's Add Significant Value

2009-12-13T11:14:00.000-08:00

Many experienced venture capitalists claim they add significant values to the ventures they invest in. Many entrepreneurs claim that their experienced venture capitalists are incompetent meddlers who might as well make decisions based on dartboards. (The word 'monkey' or 'vulture' often comes up in such discussions, depending on whether stupidity or evil is invoked as the main causal factor.) What does the scholarly literature claim?

First of all, active VC's tend to do better than passive VC's. According to Who are the Active Investors:

"After controlling for endogeneity, investor activism is shown to be positively related to the success of portfolio companies."

How does VC experience factor in? Let's revisit Skill vs. Luck:

"At the 75th percentile of VC EXPERIENCE and at the means of all the other variables, the predicted success rate is 19.0%, while at the 25th percentile, the predicted success rate is only 13.3%."

Is this solely because experienced VC's snap up the best startups, or are they also adding more value than less-experienced VC's? How Smart is Smart Money? uses a two-sided matching model, similar to Gale and Shapley's College Admissions Model, to compare VC ability to invest in better startups (sorting) with investor influence and concludes:

"If an investor without any experience were to make random investments, the probability of success would be 15.1%. The observed probability of success for an investor with an experience of 225 is 38.9%... The influence of the more experienced investor accounts for 10.0% of this difference... Sorting thus explains 58% and investors’ influence explains 42% of the total increase in the probability of a successful investment for the most experienced investors in the market."

So there appears to be a significant causal benefit of VC experience. Many entrepreneurs do understand the value of a good VC. What do Entrepreneurs Pay for Venture Capital Association:

"Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10–14% discount." (Caveat: For Internet-focused investments, the results are less clear, because finding a good reputation marker is more difficult given the relative youth of the industry.)

Multitasking and Music

2009-11-30T16:44:00.000-08:00

One theory for how human multitasking works:

"It appears that rule activation takes more time for switching from familiar to unfamiliar tasks than for switching in the opposite direction... [T]ask switching may often be mediated by a rule-activation stage of executive control through which the rules for prior tasks are disabled and the rules for current tasks are enabled in distinct operations."

Multitasking is necessary in business to the extent that unexpected higher-priority items need to be able to preempt lower-priority activities. However, frequent gratuitous task-switching is a productivity drain that should obviously be avoided.

On the plus side, engaging in side activities that don't come to the attention of your brain's "executive system" may be relatively harmless. Under many circumstances, listening to music may be one such activity; the data on the topic is mixed. One line of studies claim that music can reduce cognitive performance; for example, lyrical music may harm recall in the short term. Other studies claim listening to enjoyable music over the course of multiple weeks can increase productivity by producing positive affect and lowering stress.

Advantages of listening to music include:

Positive affect
Reduction in mental fatigue
Reduced stress
Screening out other environmental distractions

The emotional benefits can often increase productivity. The main disadvantage is a risk that the music itself can become a distraction, especially for more complicated tasks. Some factors that may affect the cost/benefit ratio (again, the data is mixed, and many of these points have been unevenly replicated, so take with even more of a grain of salt than usual):

In terms of productivity benefits for simple tasks, the genre of music may be less relevant than whether you find the music enjoyable.
In terms of distraction, certain genres (such as lyrical and pop instrumental) may be more distracting than others.
The simpler your tasks are, the greater the productivity boost; conversely, the more complicated the tasks, the more distraction can harm you. However, even the tasks involved in a typical software development workflow may be simple enough to gain some productivity benefits.
Extroverts might gain a greater productivity boost than introverts do.

Metapost: Posting Schedule and Python

2009-11-30T15:42:00.000-08:00

1. As the prophecy foretold, we've had one post per day in November, and starting tomorrow will scale back the attack on your poor RSS reader.

2. This month I'm looking for fellow Python developers in the Silicon Valley area to collaborate with on some small Google Wave and CRM projects. If you know anyone who might be interested, have them drop me an email.

The Mental Athlete

2009-11-29T10:53:00.000-08:00

As with a physical athlete, the mental athlete (or, as we call him nowadays, "knowledge worker") should pay attention to what he puts into his body.

Nutrition

Besides adopting good overall nutrition, remain aware that the brain runs on glucose, and is quite a pig. Familiarize yourself with the concept of glycemic load. Don't skip breakfast; your blood glucose levels are low when you wake up. Based on basic biochemistry, vitamin or protein deficiencies are presumably harmful as well to cognition.

Caffeine

Caffeine raises alertness and (at larger doses) increases mental performance. Habituation poses a significant problem, especially at 900 mg/day or more. Happily, lower doses appear not to cause complete habituation, even in the long run. The half-life of caffeine is about five hours, with some caveats. So, if you drink two cups of coffee with dinner, you might have as much trouble sleeping as if you drank a single cup at midnight.

Prescription Nootropics

Modafinil improves working memory and may be neuroprotective. Ritalin (Methylphenidate) focuses attention (which can be a good thing or a bad thing) but carries a risk of habituation. The long-term effects of most nootropics are unknown.

Other

Stress tends to increase mental fatigue, as does a lack of sleep.

See also:

Bostrom and Sandberg on cognitive enhancement
Nature on Cognitive-Enhancing Drugs

Time is Money (a quick and free guide)

2009-11-28T11:15:00.000-08:00

Putting an explicit monetary value on your time has the advantage of ironing out certain irrational habits. (Of course, if taken too far it could be a source of stress, for example if you were to constantly interrupt your leisure time with thoughts of how much it's costing you.) Here's some advice for putting a ballpark dollar value on your time.

Your time value should be your marginal salary increase if you consistently were to try to work an extra hour, not your average hourly wage. Your marginal wages may be above or below your average wages, depending on your circumstances. (If you're unlikely to follow through on efficiently working the full extra hour, you would want to factor that in.)
Factor in expected marginal taxes, both personal and (for some entrepreneurs) corporate taxes.
Factor in a discount rate if returns are far in the future or if you're currently short on cash.
For entrepreneurs or anyone else exposed to high levels of risk, figure out an expectation value and adjust for your personal level of risk aversion.

Setting a time value doesn't magically instantly increase or decrease your cash flow. However, it does help you decide whether you should:

spend more (less) money on leisure activities and personal expenditures, and indulge in less (more) leisure time
invest more (less) money in business automation and hired help

Not all hours are equal; the monetary value can be adjusted by situation based on many criteria, such as:

How pleasant or unpleasant is the given activity?
Does the activity provide a learning opportunity?
How much does the activity affect your level of mental fatigue?

Cheat sheet: Success Factors in New Technology Ventures

2009-11-27T11:58:00.000-08:00

Some sobering statistics remind that, even after gaining initial funding, your high-tech startup still isn't out of the woods. From Success Factors in New Ventures: A Meta-analysis:

...after four years only 36 percent... of (U.S. New Technology Venture) companies with more than five full-time employees had survived.

If you want a handy reference to which factors consistently were correlated with survival for U.S. NTV's, here's your cheat-sheet (in order of decreasing importance):

Supply chain integration: "A firm’s cooperation across different levels of the value-added chain (e.g., suppliers, distribution channel agents, or customers)"
Market scope: "Variety in customers and customer segments, their geographic range, and the number of products"
Firm age
Size of founding team
Financial resources
Founders’ marketing experience
Founders’ industry experience
Existence of patent protection

Interestingly, the "market scope" factor contrasts with Scott Shane's advice that "new businesses that focus their activities (on one market or product) perform better than those that do not," which cites (for example) "Survival chances of newly founded business organizations."

The positive correlation of patent protection contrasts with Guy Kawasaki's disdain for patent protection, although Guy may be speaking towards new software startups specifically rather than to NTV's as a whole.

These factors consistently failed to be correlated with survival for NTV's:

R&D experience
Prior start-up experience (a recurring puzzle)
Environmental dynamism: "High pace of changes in the firm’s external environment"
Environmental heterogeneity: "Perceived diversity and complexity of the firm’s external environment"
Competition intensity

The non-correlation of competition intensity suggests that entrepreneurs as a group are well-calibrated, neither shying away from competition to an irrational degree, nor irrationally ignoring the existence of competition.

Roundup of Business and Rationality Links

2009-11-26T10:51:00.000-08:00

Some useful links:

Less Wrong:

Scott Shane:

Prediction Apps:

Other:

Fighting the Sunk Cost Fallacy

2009-11-25T12:20:00.000-08:00

One person's innovative way of fighting the sunk cost fallacy:

All you have to do is to periodically pretend that you were magically teleported into your current situation.

Puzzle: Failing as a Founder Seems to Teach Surprisingly Little

2009-11-24T16:53:00.000-08:00

"...a programmer deciding between a regular job at a big company and their own startup is probably going to learn more doing the startup." -Paul Graham

Paul Graham's sentiment, that the best way to gain the skills, experience, and knowledge necessary to succeed at a startup is to launch a startup, is common, logical, and reasonable, but (surprisingly) might be wrong. Some claim your odds of success are maximized if you have experience as an employee rather than a founder:

"...good preparation, having a business partner, and some years in salaried employment also enhance firm growth." -Determinants of new firm success

"...people who have worked (and indeed were employed before start-up) in the industry where they are founding the new firm, and who have had at least some managerial experience, embody the entrepreneurial human capital features which are more likely to contribute to the early success of new businesses... Entrepreneurial experience in itself does not seem to play a significant role in enhancing survival probability..." -Entrepreneurial Backgrounds, Human Capital and Start-Up Success

The data is mixed on the final point above, whether entrepreneurial experience might be useful if added to experience as an employee. Part of the difficulty in analyzing the data is that first-time success (or near-success) can cause someone to become a serial entrepreneur, and the traits of successful entrepreneurs differ from the traits of failed entrepreneurs. Failed serial entrepreneurs do have a decent second-time success rate, but this could be an artifact of the fact that serial entrepreneurs' first-time failures are more likely to be of the 'almost made it' variety. People who completely crash and burn are less likely to continue to want to be entrepreneurs! Such people tend to withdraw themselves from the entrepreneur pool, leaving behind a more competent set of serial entrepreneurs; this confounds the data analysis.

Anyway, here is one set of numbers:

In one population, the overall success rate of first-time ventures is 25.3%.
Subsequent ventures in the same population have a success rate of 29.0%.

This all seems fairly mysterious; "practice makes perfect" is the rule in most other domains, and failed entrepreneurs seem to strongly believe they learned a lot from their experiences. Still, until more data is available, I would argue you should only start a venture because you think it might succeed, not because you think failing at it will provide you with priceless and invaluable experience.

Overconfidence and Reference Group Neglect

2009-11-23T17:31:00.000-08:00

While overconfidence is a complicated phenomenon, it does seem clear that in contests of skill (such as entrepreneurship), we tend to be overly optimistic:

"The large majority of subjects in the self-selection sessions seem to be saying, 'I expect the average entrant to lose money, but not me!'... When subjects’ post-entry payoffs are based on their own abilities, individuals tend to overestimate their chances of relative success and enter more frequently (compared to a condition in which payoffs do not depend on skill). The more surprising finding is that overconfidence is even stronger when subjects self-select into the experimental sessions, knowing their success will depend partly on their skill (and that others have self-selected too). In these sessions, there is so much entry that the average subject loses money in 34 out of 48 periods, and earns money in only four periods. This result suggests a new phenomenon specific to competition, 'reference group neglect'- the tendency to underadjust to changes in the reference group one competes with." -Overconfidence and Excess Entry

Overconfidence can have some advantages; for example, confident people can seem more competent to observers (occasionally to absurd degrees). On the balance, though, overconfidence may be harmful to entrepreneurs:

"...the average survival chances of nascent entrepreneurs are actually lower in countries that exhibit high prevalence rates of entrepreneurial self-confidence." -"I think I can, I think I can": Overconfidence and entrepreneurial behavior

"...both overconfidence and under-confidence have a negative effect on sales growth." -What Makes a Successful Entrepreneur? Evidence from Brazil

"...optimism is on average bad for performance... (however) optimism is much less harmful to performance when loans have a shorter maturity." -Financial Contracting with Optimistic Entrepreneurs

The point about loans is interesting: it appears that being under short-term debt "keeps optimists honest," to coin a phrase, and helps mitigate the negative effects of overconfidence about long-term growth prospects.

Further reading:

Persevere, But Avoid the Sunk Cost Fallacy

2009-11-22T10:08:00.000-08:00

The Sunk Cost Fallacy is the tendency to "throw good money after bad", especially when the alternative is to admit that you made a mistake. In one experiment, subjects were asked to role-play managers who either were or were not responsible for initial funding:

"Under high personal responsibility conditions, subjects allocated an average of 11.08 million dollars to the corporate divisions they had earlier chosen for extra R & D funding. Under low personal responsibility conditions, subjects allocated an additional 8.89 million dollars to the corporate divisions previously chosen by another financial officer." -Knee-Deep in the Big Muddy

The great thing about this experiment is that the high-responsibility subjects were only role-playing managers who had made a set of initial investments (which were actually determined by the researchers), and yet still felt the need to save face and defend their fictitious past investments.

The main effect of the sunk cost fallacy is to encourage further investment in projects, especially ones you feel personal responsibility for. A side-effect is to raise your probability estimate that the project will succeed (which can result in a state of denial over a failing project).

On the one hand, you want to avoid the sunk cost fallacy. On the other hand, you do want to exhibit the minor personality trait of grit (perseverance):

"Grit did not relate positively to IQ but was highly correlated with Big Five Conscientiousness. Grit nonetheless demonstrated incremental predictive validity of success measures over and beyond IQ and conscientiousness. Collectively, these findings suggest that the achievement of difficult goals entails not only talent but also the sustained and focused application of talent over time." -Grit: Perseverance and Passion for Long-Term Goals

Perseverance seems helpful in the technical arena:

"..the higher the overall perseverance scores of patent inventors, the higher their annual earnings." -Are perseverance and self-efficacy costless?

My advice is to persevere, but to focus your perseverance especially powerfully on the projects that have the greatest possibility of success. For example, you should (within reason) persevere on a promising company you own based on the amount of future profits you expect, regardless of whether you founded or bought the company, and regardless of how much or how little you've invested in it so far.

Your Market is Smaller Than You Think: The Law of Small Numbers

2009-11-21T14:35:00.000-08:00

"The Law of Small Numbers" is our intuition that we can pick a small sample and confidently extrapolate from it. You and your best friend like paintball and chihuahuas, yet the paintball/chihuahua crossover demographic is completely ignored by big business. Surely you two can't be the only ones who would enjoy combining the experiences; you can extrapolate that there must be many others who would pay for the ability to roam about in camo as you deploy an army of small dogs to hunt down and sink their teeth into the enemy's padded ankles. So you open the world's first Chihuahuaball franchise, and are puzzled when the throngs fail to materialize.

The problem here (besides your lack of advertising; you really should have bought that Animal Planet spot) is that we tend to believe too strongly in an intuitive "Law of Small Numbers" that turns out to be false. (This error may be an overuse of the Representativeness heuristic.) In other words:

We tend to overestimate how much we can generalize from a small sample more often than we tend to underestimate.

This "hasty generalization" problem can vex any company, but is especially nasty for startups because they are less likely than large companies to have the resources to perform market research and confirm whether the hypothesized demand for their new service is real or illusory.

Two related problems can help calibrate your intuitions:

1. The birthday paradox. Suppose there are 23 people in the room. What is the likelihood that two of them have the same birthday? The answer, surprisingly, is about 50%.

Now suppose you survey 23 people in the room about what iPhone app they would most like to see. Only two of the people in the room give the same answer. What conclusions do you draw?

2. A research institute tests 20 hypotheses, all of which are incorrect. You still expect one of them to be confirmed at a 95% confidence interval, due to the laws of chance.

Now suppose you have 20 great Chihuahuaball-level ideas. 19 of them generate no interest in the people you survey, but for one of them, you find a certain level of interest. How suspicious should you be of that level of interest?

Answers: 1. If the two people agree on iChihuahuaball, go ahead and launch. The other 21 people are clearly unrepresentative freaks. 2. You should be suspicious of anyone who would discount even one of your 20 fantastic ideas. They are probably spies for a rival company, eliminate them.

There isn't any easy solution. Even if you can't afford to conduct full-scale market research, try to attack subparts of the question from different angles and see if the estimates converge. And, as always, try to have a way to "fail fast" if your basic assumptions fail to pan out.

Predictors of Startup Success

2009-11-20T10:37:00.000-08:00

Here's a roundup of some predictors of startup success.
Determinants of new firm success:

"In addition to a large firm size right from the start, good preparation, having a business partner, and some years in salaried employment also enhance firm growth."

Intellectual capital and business start-up success:

"...the human capital of the entrepreneur (i.e. education, business experience and level of motivation), organizational capital (i.e. firm capacity to adapt quickly to changes and the ability to implement successful strategies), and relational capital (i.e. development of productive business networks and an immediate access to critical stakeholders)... seem to be related positively to venture performance."

Social interaction: A determinant of entrepreneurial team venture success:

"The quality of the social interaction within entrepreneurial teams is crucial for the new venture success."

Predicting new venture survival:

"New ventures that survived were more likely to have: (1) entrepreneurs who gained knowledge and ability during the founding process; who devoted greater efforts to (2) dealing with suppliers; (3) analyzing potential new entrants and who (4) devoted less time to determining the identity of the business; businesses that had (5) 'fundable' resource requirements (6) focused on products or services that were designed or produced to order; and (7) were in high growth industries."

Intelligence, Education, and Startup Success

2009-11-19T09:52:00.000-08:00

From van der Sluis's "Successful entrepreneurship and human capital" (2007):

"We find that an individual's level of general intelligence increases both entrepreneurs' and employees' incomes to the same extent. But entrepreneurs and employees benefit differently from specific areas of intelligence. The earning power of both groups is affected positively by social and technical intelligence. Both types of intelligence render stronger returns for entrepreneurs than for employees. Mathematical intelligence is also beneficial for both groups, though only for the upper end of the mathematical intelligence distribution. Only employees benefit from clerical intelligence. Verbal intelligence does not have a strongly significant effect on earnings for either group."

The biggest surprises for me here are:

No statistically significant benefit from verbal intelligence, and
No statistically significant benefit to entrepreneurs from clerical intelligence, which includes the ability to accomplish simple tasks quickly.

Formal education seems to aid entrepreneurs even more than employees; in "Why are the returns to education higher for entrepreneurs than for employees?", van der Sluis advances a hypothesis:

"We find (indirect) support for the argument that the higher RTE for entrepreneurs is due to fewer (organizational) constraints faced by entrepreneurs when optimizing the profitable employment of their education."

The fox, the hedgehog, and the entrepreneur

2009-11-18T16:30:00.000-08:00

"Generalists Succeed as Entrepreneurs," proclaims a 2005 press release from the Stanford School of Business. It is robustly true that entrepreneurs tend to be generalist "foxes" rather than "hedgehogs" who specialize. However, among inventor-entrepreneurs, it turns out that the more varied their experience, the lower their household income. The current likelihood is that Stanford got the arrow of causation wrong: variety-seekers tend to gravitate toward both generalism and entrepreneurship, but a lack of specialist skills is more likely to make a startup fail rather than succeed. While foxes may be better at predicting the future, they may be worse at succeeding in a startup.

Many people have read the earlier studies showing the tendencies of entrepreneurs as a whole, but fewer have read the later study characterizing successful entrepreneurs. It would be nice if there were a service that keeps track of what claims you've read and then alerts you if later evidence comes up that invalidates those claims! In any case, press releases are generally set in stone, so it's unlikely the press release will ever be updated to "Generalists Try to be Successful Entrepreneurs, but Usually Fail."

Request for Feedback: scaling up to a larger founder team

2009-11-17T17:06:00.000-08:00

I'd like to request comments on the following concrete proposal for how a Silicon Valley founder team might be productively scaled up to four, five, or even six founders.

Management. The founders periodically elect a manager from amongst themselves. The manager is expected to act in an authoritarian manner and pursue aggressive schedules. Where possible, the manager delegates responsibilities to other founders, who are also expected to act in an authoritarian fashion within their area of responsibility. This allows the startup to make decisions quickly despite its larger size, and also fights over-engineering: software can still ship even if there's no consensus that all issues have been solved to everyone's satisfaction.

Communication. Rather than write down brief status reports, random screenshots are automatically taken during the day. At periodic intervals, each founder then walks the rest of the founder team through his screenshots, using them as visual aids to explain what he's been working on. This allows the other team-members to understand his activities and make suggestions. This also provides more opportunities for team-members' work to be recognized. Watching and listening to occasional visual status reports is probably not a mentally taxing activity, and so should enhance communication and coordination without greatly increasing mental fatigue.

Equity. Founder equity vests gradually over the course of three years, vesting at a reduced rate throughout the first six months. Any founder can be dismissed at any time by a majority of the other founders, if they are not a good fit for the organization. Founders are required to verifiably work for at least seventy hours per week, not including breaks and meals. Founders are expected to get proper sleep, nutrition, and exercise. Founders are required to abstain from recreational drugs; if enforceable, I would even favor a clause that founders forfeit equity if they fail to abstain. The goal of this equity strategy is to encourage good work habits and to reduce tensions and conflicts over perceptions of unfair workload distribution.

Many aspects of the proposal are expected to be tweaked or replaced as one gathers evidence of what works and what doesn't. Any comments are welcome on specifics or the overall approach, either by posting comments below or by sending me email, but I'm especially interesting in hearing:

Have similar approaches been tried before, and what lessons were learned?
If you're a software developer, would you tilt towards being interested in participating as a co-founder in such a startup?
If you're in a position to hire consultants, would you tilt towards hiring such an organization to provide consulting services to you if it provided appropriate consulting services?
If you're a VC, would you tilt towards funding such a startup?

70 hours times 6 founders

2009-11-16T16:22:00.000-08:00

Currently a typical high-tech startup has up to three founders and, I would estimate, up to 50 hours of actual productive work per founder per week. (I would claim that most founders tend to overestimate their productive hours per week.)

One can have one of four strategies for scaling up the number of founders or increasing the work schedule to increase the number of productive man-hours:

1. Increase the number of founders, or the number of hours worked, without paying attention to the many difficulties that can ensue. Not too bright.

2. Don't bother increasing the number of founders or the number of hours worked, because it seems doomed to failure.

3. Increase the number of founders, and the number of hours worked, but understand the difficulties involved and take action to mitigate the risks and disadvantages.

The goal of option (3) is to go from the smaller to the larger rectangle, without suffering too great a loss in per-hour productivity:

A Small Graphic on Procrastination

2009-11-15T09:19:00.000-08:00

On the mental front (as on the physical front), we are too lazy and procrastinate too much. Just as most developed-world citizens engage in too little physical activity, most people would agree that we put off and avoid mental labor to an irrational degree. Research tends to back up this intuition: for example, driven people tend to earn more (even controlling for hours worked) and students who are given the opportunity to commit themselves to not procrastinate end up doing better.

Habits that suited our ancestors well are sometimes poor fits for modern society. For example, we are not particularly calorie-limited in physical nor in mental effort.

To help visualize the situation:

Predictors of Career Success

2009-11-14T13:46:00.000-08:00

An Empirical Investigation of the Predictors of Executive Career Success is a great working paper on what sort of things can affect overall pay as well as subjective career satisfaction. One of its findings also provides further backing that, unfortunately, the college you go to matters.

To zero on personality: the research on the effects on your career of the Big 5 Personality Traits is all over the place, but in general if you're in doubt, you could do worse than ask yourself, "what would I do in this situation if I were a little more conscientious, agreeable, mentally stable, and open to new experiences?"

Some of the varied findings on the Big 5 and Achievement: here, here, here, and here.

Introducing the 70-hour Work Week

2009-11-13T08:38:00.000-08:00

Let's consider the consequences, good and bad, of voluntarily increasing to a 70-hour work week as a white-collar worker in a job that you often need to immerse yourself in. The 70 hours does not include time spent on commutes, meals, or breaks. This is outside the range of most current research; most populations studied have an insignificant number of 70-hour white-collar workers as defined, even in Japan and South Korea. In the absence of good studies, I will render my own judgments here on what I expect the likely consequences to be for the average person.

1. Decreased per-hour productivity

Mental fatigue, short-term ego depletion, stress, and flagging motivation can reduce hourly productivity. Sunk costs for training and knowledge-acquisition can increase it, as can medium-term willpower building. Overall, I judge that per-hour productivity is probably diminished.

How to mitigate: Aggressively vary tasks and take breaks during work. Try to reduce stress during work. Relax outside of work. Reduce commute time if possible, otherwise use unavoidable commute time to unwind. Do not allow the long work hours to interfere with sleep and exercise. Adopt good sleep hygiene.

2. Increased total productivity

I will judge that per-week productivity goes up with a 70-hour work week, if managed correctly; the extra hours available, rather than the reduced per-hour productivity, should be the dominating factor.

How to capitalize: Leverage your competitive advantage by seeking out fields where "time is of the essence," for example where there is a race to exploit a market window before it closes.

3. Mildly decreased health

Research is mixed, but overall it seems long hours can have a negative impact on health, possibly due to decreased exercise and sleep, and increased stress. Some of the negative impact may be permanent.

How to mitigate: As above, prioritize exercise, sleep, and stress reduction.

4. Decreased happiness

If you significantly value happiness, and are rational, you should familiarize yourself with the literature of hedonic psychology. Unfortunately, some of the advice from the literature will be difficult to fully implement given the reduction in your free time. It's extremely unlikely that the set of activities that are optimized for your long-term happiness are the exact same set of activities that are optimized for your career success. Mapping out your schedule should confirm for you that adopting a 70-hour work week, and following the productivity mitigation advice above, will leave you with extremely little free time.

How to mitigate: Pick a career you find meaningful.

I would conclude the 70-hour work week as described is not for everyone. If you're prone to stress (for example, if you tend to score high on the Maslach Burnout Inventory), or if you value happiness more than your career goals, you should pursue a more conventional work schedule.

Further reading:

Social Loafing, meet Peer Pressure

2009-11-12T07:29:00.000-08:00

Founder team size has two contradictory effects on effort:

The larger a team is, the more social loafing occurs: each founder has a greater incentive to "free ride" on a larger team and withhold effort. This causes each founder to put in less effort in a larger team.
The larger a team is, the more peer pressure there is to contribute effort. As the extreme low end, in the case of a sole founder, there is no co-founder peer pressure at all.

By crunching data from the Cologne Founder Study and correcting for confounding variables, Backes-Gellner et al claim that, in terms of causation, social loafing and peer pressure combine in their population to make three-founder companies the size that makes founders work the longest hours. In other words, if you're at three founders, removing a founder makes the founders work fewer hours because of the removed peer pressure, and adding a founder makes the founders work fewer hours because of social loafing.

Having the hours worked peak at three founders can be unfortunate in that larger teams require spending more time on communication and coordination activities. In my opinion, larger teams should consider making an explicit effort to work more, rather than fewer, hours than three-founder teams, for example by agreeing from the outset on aggressive work-schedule expectations. This would compensate for the additional coordination overhead. This assumes that the coordination activities can be managed in a way that doesn't greatly increase mental fatigue, which I believe is a reasonable assumption.

See Also:

Transparency, Inequity Aversion, and the Dynamics of Peer Pressure in Teams: Theory and Evidence

A Quick Guide to Mental Fatigue

2009-11-11T09:07:00.000-08:00

A natural consequence of being engaged in your work, or of working longer hours, is a risk of mental fatigue. Mental fatigue is a very broad phenomenon: the brain is a very complicated organ, with many different working parts! Mental fatigue appears to be a warning sign that mental reserves are starting to become depleted. Its symptoms include increased task aversion and difficulty focusing attention on the task at hand.
Two contrasting examples:

During the course of two hours of repetitive boring mental tasks, false-alarm error rates doubled from 5% to 10% and reaction time increased from 675 to 700 ms. Subjects became increasingly averse to continuing, and their tension level dropped. (Mental fatigue and task control: Planning and preparation)
Subjects took part in a simulated workday. Reaction times decreased (got better!) during the morning and stabilized during the afternoon. For most people, error rates did not significantly increase throughout the day. However, subjects showed signs of subjective mental fatigue as the day progressed, especially if they had started with a high score on the Maslach Burnout Inventory. (The influence of mental fatigue on facial EMG activity during a simulated workday)

For a Swedish population:

"Fatigue was predicted by high work demands, low social support, not being a supervisor, female gender, lower age, lack of exercise, inability to stop thinking about work during leisure time (high immersion), snoring and disturbed sleep. The latter became the major predictor." (Mental fatigue, work and sleep)

People working 55+ hours per week do not in general seem to accumulate more mental fatigue due to their longer hours, unless they have high work demands and/or high immersion, in which case the combination seems to be quite nasty, and paying attention to mental fatigue issues becomes extremely important.

Obvious ways to combat mental fatigue include proper sleep (which also gives a boost to long-term happiness), physical exercise, work breaks, and task variation. Stress reduction is another obvious win, but how to best accomplish it is not well-understood; perhaps any activity that makes you feel more relaxed will do. The Mayo Clinic's list of suggestions is probably as good a starting point as any.

Hyperbolic discounting and self-restraint

2009-11-10T10:15:00.000-08:00

Suppose you're friends with both Alice and Bob. Both of them are great people, but a little self-centered; Alice, in particular, has the bad habit of periodically walking up to Bob and punching him in the face for fun. You ask Alice how she would would like it if Bob punched her in the face. "I would hate that," Alice responds as she pauses from her pugilism. "In fact, I would definitely prefer a world where neither of us punched the other, to a world where we both punched each other. However, I prefer even more the current world, where I can land blow after blow to Bob's head without immediate consequence to myself."
Clearly the amount of harm caused to Bob by these one-sided fights is greater than the benefit accrued to Alice, so despite being friends with both, you owe it to Bob to try to thwart the consistent battery.

This situation is exactly analogous to the situation you find yourself in every day, with respect to your attitude to your future selves. If you're not just concerned with the welfare of you_tomorrow, the person you will be tomorrow, but are also concerned with the welfare of you_{next week}, you should face up to the fact that there's an excellent chance hyperbolic discounting means that you_tomorrowis going to figuratively punch you_{next week} in the face.

Hyperbolic discounting is best described with an example. Suppose that you are trying to quit smoking because you've judged that never smoking cigarettes is better than smoking cigarettes every day. On Monday, hope that you can go without cigarettes on Tuesday. However, when Tuesday arrives, you smoke, hoping that you will quit on Wednesday. On Wednesday you light up again, predictably regretting the decision you made on Tuesday; you_Tuesday has predictably stomped all over the preferences of both you_Wednesday and you_Monday. If you care about you_Wednesday, then you_Monday should consider taking action to dissuade you_Tuesday from making his poor decision, for example by throwing away your cigarettes or enlisting peer pressure to prevent you_Tuesday from smoking.

Hyperbolic discounting is usually irrational. One can make various tortured models where uncertain risks cause us to rationally change our mind; in this scenario, it would correspond to receiving significant new information on Tuesday about the odds of acquiring cigarettes, or contracting cancer, or both, that you infer from the mere fact that you are still alive and capable of smoking on Tuesday. Such odd models with rational hyperbolic preferences are not generally applicable when attempting to attain goals in modern life.

A rational person will seek to normalize their hyperbolic discounting in some way, for example by improving their abilities to commit ahead of time to pursue rational and consistent policies. Failing to consider deploying commitment strategies in the presence of known and predictable temptations is irrational.

More reading:

Life-cycle consumption and hyperbolic discount functions
Uncertainty and Hyperbolic Discounting
Discounting by Intervals: A Generalized Model of Intertemporal Choice, for possible refinements to the hyperbolic model
Less Wrong thread on "Applied Picoeconomics"

You Will Eat That Oreo: The Empathy Gap and Restraint Bias

2009-11-09T13:29:00.000-08:00

An entrepreneur often needs to exercise self-control (for example, in order to engage with boring but necessary tasks.) How good are you at predicting how well your future self will follow through and consistently exercise self-control?

One thing to take into account is the hot-cold empathy gap: we tend to consistently underestimate how much effect emotional state (such as being tempted, or being bored) has on decisions. The restraint bias is a more specific phenomenon where we overestimate how well we will exercise self-control in the future. The restraint bias is a logical consequence of the hot-cold empathy gap: when not tempted, we underestimate how much our future emotional state (such as desire, craving, curiosity, or boredom) will impact our future decisions when a temptation presents itself. The restraint bias may also be further fueled by some of our positive illusions.

Some examples:

People who have not recently experienced pain are more likely to agree to endure future pain in exchange for small sums of money
When in a low-craving state, smokers underestimate how much they will later value cigarettes when in a high-craving state
People overestimate how willing they will be to embarrass themselves in the future by miming or dancing for money
Never go to the grocery store hungry; people order more junk food for future meals when hungry than when satiated, as though either hungry people overestimate how much they will want junk food in the future, or satiated people underestimate

Recent research is starting to confirm that the restraint bias can be harmful:

Recovering smokers with more inflated impulse-control beliefs exposed themselves to more temptation, which led to higher rates of relapse 4 months later. (The Restraint Bias: How the Illusion of Self-Restraint Promotes Impulsive Behavior)

When calibrating how well you will resist future temptations, I advise looking at the following benchmarks:

How well have you resisted similar temptations in the past?
How often do other people resist similar temptations?

If the answer to these questions is 'poorly', consider taking steps to bind your future actions, such as:

remove temptations from your environment
make a public commitment to achieve your goals
make a bet with a friend that you will follow through
install tools on your computer to help reduce time-wasting activities

Tomorrow: a discussion of hyperbolic discounting