Utility theory of entrepreneurship
Utility Theory: Why Entrepreneurs Choose Freedom Over Money
Why do people leave high-paying corporate jobs to start risky ventures that might pay less? According to Utility Theory, the answer is that "value" is measured in more than just dollars.
Developed by moral philosophers in the early 1900s, including John Stuart Mill, the core concept is that individuals make decisions to maximize Utility—a measure of total satisfaction, happiness, and value.
The Entrepreneurial Equation
While traditional economics assumes people want to maximize profit, Utility Theory argues people want to maximize satisfaction. For entrepreneurs, this equation includes intangible assets.
Douglas and Shepherd (2002) conducted a study to see if entrepreneurs truly think in ways compatible with utilitarian thinking. They found that the desire for Independence had massive utility, often outweighing income.
"Significant relationships were found between the utility expected from a job and the independence, risk, and income it offered. Similarly, the strength of intention to become self-employed was significantly related to the respondents' tolerance for risk and their preference for independence."
In short, an entrepreneur might accept 20% less income if it gains them 50% more autonomy, because their Total Utility is higher.
The Complexity of Calculation
While the concept is simple, the calculation is complex. Mill's book, Utilitarianism, argues that utility includes justice and the well-being of others, not just the self.
This brings forth complex ethical debates regarding how we calculate utility for different groups:
- Sentience: How much utility do we give to a deer versus a driver when deciding to construct an expensive nature fence?
- Weighting: How do we weigh a small inconvenience to the many versus a large benefit to the few? For example, a factory might produce useful goods (high utility) but litter the environment, slightly annoying thousands of locals (negative utility).
For the entrepreneur, this means decision-making is rarely a straight line. It is a constant balancing act between financial returns, personal freedom, and social impact.