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This chapter is from the book

Why It's Difficult for People to Quit Their Jobs and Start Their Own Businesses

Risk is a concept that signifies a potential negative impact or outcome that results from a process or future event.3 In everyday language, we use the term "risk" to indicate the probability of a loss. Two terms that are associated with the study of risk are the endowment effect and loss aversion. An understanding of both these terms and the concepts behind them provide insight into why it's difficult for people to quit their jobs and start their own businesses.

The endowment effect refers to the fact that people value a good, service, or anything of value more once they posses it.4 In other words, people place a higher value on things they own opposed to equivalent or even superior items they don't own. In one famous study depicting this effect, college students placed a high value on a coffee mug that had been given to them but put a lower price on a near equivalent mug they did not yet own. There is a very powerful urge among people to protect what they already own or possess, even though something of greater value may be within their reach. It's easy to see how this applies to people and their jobs. When an individual already has a job, his tendency is to protect it, imperfect as it might be, rather than quit that job to start a business. The problem with this tendency is that people often exaggerate the desirability and future potential of a job simply because they have it.

The second dimension of risk that helps explain why it's hard for people to quit their jobs to pursue self-employment is loss aversion, which refers to the tendency for people to strongly prefer avoiding losses rather than acquiring gains.5 In fact, some studies have shown that losses are as much as twice as psychologically powerful as gains. The way this applies to people and their jobs is similar to the endowment effect. People are reluctant to lose or give up something, like their jobs, even if the possibility exists that they could exchange them for something much better, like different jobs or starting their own businesses. Ironically, what this means is that people often achieve the worst of both worlds without even realizing it. They'll fight hard to keep jobs that are mediocre or poor, simply to avoid losing them, while they are psychologically less inclined to fight hard to gain something that might improve their situations, like different jobs or starting their own businesses.

In our experience, there are three activities in which people engage to overcome the natural tendency to succumb to the endowment effect and loss aversion and objectively assess whether starting a business is right for them. As you read through and think about these activities, pay particular attention to how each activity can bring clarity and a sense of purposefulness to your life. The problem with succumbing to natural tendencies, like loss aversion and the endowment effect, is that they in effect place a person on autopilot rather than equip them to make more personal and deliberate choices. This outcome can be a good thing when someone reflexively withdraws his or her hand from a hot stove. But it can be a bad thing if it keeps a person in an unsatisfying job when other alternatives, like starting a business, are readily available.

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