The Sure Thing: Predatory Entrepenuers
they crunched the numbers, tinkered with logarithms and logistic functions, and ran different scenarios, trying to figure out what would happen if housing prices stopped rising. Their findings seemed surprising: Even if prices just flatlined, homeowners would feel so much financial pressure that it would result in losses of 7 percent of the value of a typical pool of subprime mortgages. And if home prices fell 5 percent, it would lead to losses as high as 17 percent.
This was a crucial finding. Most people at the time believed that widespread defaults on mortgages were a function of some combination of structural economic factors such as unemployment rates, interest rates, and regional economic health. That’s why so many on Wall Street were happy to sell Paulson C.D.S. policies: they thought it would take a perfect storm to bring the market to its knees. But Pellegrini’s data showed that the bubble was being inflated by a single, rickety factor—rising home prices. It wouldn’t take much for the bubble to burst.
What Paulson’s story makes clear is how different the predator is from our conventional notion of the successful businessman. The risk-taking model suggests that the entrepreneur’s chief advantage is one of temperament—he’s braver than the rest of us are. In the predator model, the entrepreneur’s advantage is analytical—he’s better at figuring out a sure thing than the rest of us.
.. At one point, incredibly, Paulson got together with some investment banks to assemble bundles of the most absurdly toxic mortgages—which the banks then sold to some hapless investors and Paulson then promptly bet against. As Zuckerman points out, this is the equivalent of a game of football in which the defense calls the plays for the offense. It’s how a nerd would play football, not a jock.
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“I had no idea how I could afford it,” Turner told one of his biographers, although by this point the reader is wise to his aw-shucks modesty. First, he didn’t pay ten million dollars. He talked the Braves into taking a million down, and the rest over eight or so years. Second, he didn’t end up paying the million down. Somewhat mysteriously, Turner reports that he found a million dollars on the team’s books—money the previous owners somehow didn’t realize they had—and so, he says, “I bought it using its own money, which was quite a trick.” He now owed nine million dollars. But Turner had already been paying the Braves six hundred thousand dollars a year for the rights to broadcast sixty of the team’s games. What the deal consisted of, then, was his paying an additional six hundred thousand dollars or so a year, for eight years: in return, he would get the rights to all a hundred and sixty-two of the team’s games, plus the team itself.
You and I might not have made that deal. But that’s not because Turner is a risk-taker and we are cowards. It’s because Turner is a cold-blooded bargainer who could find a million dollars in someone’s back pocket that the person didn’t know he had.
.. Agency theory, Vermeulen observes, “says that managers are inherently risk-averse; much more risk-averse than shareholders would like them to be. And the theory prescribes that you should give them stock options, rather than stock, to stimulate them to take more risk.” Why do shareholders want managers to take more risks? Because they want stodgy companies to be more entrepreneurial, and taking risks is what everyone says that entrepreneurs do.
.. The failures violate all kinds of established principles of new-business formation. New-business success is clearly correlated with the size of initial capitalization. But failed entrepreneurs tend to be wildly undercapitalized. The data show that organizing as a corporation is best. But failed entrepreneurs tend to organize as sole proprietorships.
.. Ninety per cent of the fastest-growing companies in the country sell to other businesses; failed entrepreneurs usually try selling to consumers, and, rather than serving customers that other businesses have missed, they chase the same people as their competitors do.
.. The children who played the game in the riskiest manner, who stood so far from the pole that success was unlikely, also scored lowest on what he called “achievement motive,” that is, the desire to succeed. (Another group of low scorers were at the other extreme, standing so close to the pole that the game ceased to be a game at all.) Taking excessive risks was, then, a psychologically protective strategy: if you stood far enough back from the pole, no one could possibly blame you if you failed. These children went out of their way to take a “professional” risk in order to avoid a personal risk.
.. When the sociologists Hongwei Xu and Martin Ruef asked a large sample of entrepreneurs and non-entrepreneurs to choose among three alternatives—a business with a potential profit of five million dollars with a twenty-per-cent chance of success, or one with a profit of two million with a fifty-per-cent chance of success, or one with a profit of $1.25 million with an eighty-per-cent chance of success—it was the entrepreneurs who were more likely to go with the third, safe choice. They weren’t dazzled by the chance of making five million dollars. They were drawn to the eighty-per-cent chance of getting to do what they love doing.