Who becomes an entrepreneur – and when?

At the risk of sounding like a cliché, I think entrepreneurs are the lifeblood of our economies. They are the ones that innovate and create jobs and even though their firms tend to be smaller, there are more of them and that means that put together their influence on the economy is comparable, if not bigger than that of large corporations. But who starts a business and when do they do it? Besides obvious drivers like the personality of an entrepreneur and her knowledge, etc. a new study from Harvard, Yale, and Norges Bank found an additional – somewhat surprising – factor: Stock market wealth.

The study looked at Norwegian individuals, their stock market wealth and stock market returns, and their propensity to start a business. The chart below shows the relative likelihood of starting a business based on the financial wealth (excluding real estate, other businesses, etc.) of the entrepreneur and the returns experienced in the previous year.

Relative likelihood of starting a business in Norway

Source: Chodorow-Reich et al. (2024)

Two things stand out.

First, people with larger financial wealth tend to be more likely to start a business than people with less wealth. This confirms what we know from studies on Universal Basic Income and other interventions where people get a certain amount of money with no strings attached. If people feel financially secure, they are willing to take risks. And one such risk is that they start a business. Many of these businesses fail, but some are going to be the next Apple, Meta, etc. In Norway, there is no Universal Basic Income, but people who have more money in a portfolio can use some of that money to start a business and still have a safety net in place in case the business idea doesn’t work out. Now think of all the entrepreneurs we lost just because they are poor and can’t afford to start a business. Think of the jobs lost by these people never starting a business.

Second, people tend to start a business when stock market returns have been high. It seems that high stock market returns do two things. They lift the mood and make people more optimistic and they provide a sudden increase in financial wealth that feels like a windfall and thus is mentally easier to put at risk than money that has been accumulated in a long slog over many years. It’s the house money effect.

But whether it is good timing to start a business when the stock market is booming, I am not so sure. If the stock market boom continues for several years, starting a business after strong returns is a good idea because one can ride the wave of capital flowing easily. But what if the strong returns in the stock market were just temporary and returns turned negative quickly again?