Salary or startup? How do-gooders can gain more from risky careers

by adamzerner1 min read5th Feb 201411 comments

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See http://80000hours.org/blog/12-salary-or-startup-how-do-gooders-can-gain-more-from-risky-careers.

The expected value of risky careers like startups if often much higher than less risky careers. However, this is more than offset by peoples' risk-aversiveness due to diminishing marginal utility. But... if you're an effective altruist, the money you make doesn't have diminishing marginal value. So... it seems that risky careers like startups are a good choice, if you're trying to maximize your positive impact.

What do you guys think?

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It isn't just that your money doesn't have diminishing marginal utility. EA's should care about total impact over all EA's not just themselves. They should accept higher variance (risk:returns) on an individual level for higher total gains over all EA's.

I think this has come up several times before, and I note that the last link is to a post by you a month ago. What do you think is different now?

Only the second to last link seems to be in the same category of this post (it talks about risk-aversion in investments more generally, while I'm talking more specifically about startups here).

My previous post was about the likelihood of startup success. This post takes chances at success as a given, and asks the question of whether those chances justify an effective altruist starting a startup.

For any of them, if you search the phrase "startup," you will find discussion of this issue either in the post, or in the comments.

Very interesting and logical. The same logic applies to all kinds of other activities. For instance, in the academia there is also often a trade-off between going for "normal science", with a low but relatively risk-free return, and wilder speculations, which are riskier but where the potential upside both for the individual and for the community is far greater. Risk-averse and self-interested people often settle for the former, but if they're rather thinking for the good of the whole research community, they should, in many cases, go for the latter (the "entrerpreneurial" alternative).

While risk-aversion obviously make people take less risky decision, there is one important factor that plays in the other direction, namely wishful thinking. People often overestimate how good their entrepreneurial ideas are, or how good their seemingly revolutionary scientific ideas are. As a result, even risk-averse people often take decisions that are, in fact, quite risky. This might be bad for the individual entrepreneur (since as a result, he will fail to maximize his expected utility), but it is good for society, given that the average entrepreneur creates a lot of value. If I remember correctly, Kahnemann calls wishful thinking for "the engine of capitalism" for precisely this reason.

Now if you, in effect, remove the risk-aversion (by removing the self-interest), then it seems wishful thinking will be even more of a problem. Entrepreneurs or scientists who aren't risk-averse but who remain wishful thinkers will try out ideas which have a very low probability of success. It should be noted that the vast majority of the entrepreneurs that constitute the article's statistics are self-interested, and hence at least somewhat risk-averse. Hence they probably have a higher threshold for trying out an idea than altruists have (ie altruists would try out "worse" ideas). This factor seems to drive altruists' success rate down.

On the other hand, it might of course be that there are some ideas with a very low probability of success but with a huge potential utside that aren't tried out by self-interested people (because of risk-aversion) but which altruists should try out. So the issue is quite complicated.

The big problem to me here is that this was assuming VC money. My impression is that just getting to the point of having VC capital is already a cutoff point.

That caught by eye too, but they address it:

When we further take into account that not all startups reach the point of getting venture capital funding (although Sam’s track record at Google suggests he is relatively apt), the risk-adjusted returns of a startup stake may be in the same ballpark as remaining a salaried employee, despite much higher unadjusted expected returns.

That seems silly to me; it neglects value of information from trying a startup.

You're not deciding between "do a startup for the rest of ever" versus "be an employee for the rest of ever". You could for instance do a startup for two years and then quit if you don't get VC funding.

Well, in any efficient market model, the risk-adjusted returns would have to be the same. And if you don't have an efficient market model, how are you measuring risk-aversion?

The biggest problem I have with this thinking is that it's a false dichotomy - it's not "Salary or startup" at all, and the fact that most young software professionals see those 2 as their only options saddens me.

There are plenty of other routes to go - freelancing, for one, which done well can give both higher earning potential, as well as more flexibility in terms of how much money you can earn. An effective altruist may well decide to work slightly longer hours for more money, something that isn't as possible in a normal salaried position.

Another option is starting a consulting practice (e.g. what I do), again, I'm still early in this game but it may well offer a higher expected value. (Or not - I don't have figures).

Another option is to start a small bootstrapped product company. If your aim is simply to maximise your personal cash in order to donate it, small non-VC product companies have a lot of merit - I think (again, no real proof and totally anecdotally) that their expected value is higher. And if you're into maximising expected value irregardless of how, this may make sense, even if a small product may have less chance of "changing the world" (one of the reasons that it's more likely to succeed).

I'm just saying, there are plenty of options besides being a salaried employee or taking VC money, and money of them seem to be better, on the whole, especially for young software professionals who could use to run a real business and gain valuable information on how running a business looks like.

Startups for effective altruists had been on my mind since seeing Paul Grahm's essays, so I'm glad to see someone writing about it. I don't know for sure that the equation turns out better than salaried work, but an effective altruist would at least get more benefit from taking career risks than most other people.