Thanks! Can you say more about why comparisons to leveraged index funds are useful?
It’s not obvious to me that discount rates for capital and labor should be the same; I included the S&P 500 since it was simple, but I don’t think there are many people who are going to decide whether or not to start a company based on S&P 500 returns.
Can you say more about why comparisons to leveraged index funds are useful?
It’s convenient because it lets you ignore your risk preferences. Making up some numbers, if entrepreneurship has a 20% return, and a leveraged index fund has a 25% return at the same level of risk*, then the leveraged index fund is better no matter how risk averse you are. It doesn’t matter how much you care about risk because the two investments are equally risky.
(It’s less helpful if the comparison comes out the other way. If a leveraged index fund has only a 15% return, then sufficiently risk-accepting investors prefer the 20% return of entrepreneurship, but risk-averse investors might still prefer an index fund with less leverage.)
*And we assume the returns follow the same distribution and there’s no non-financial reason to prefer one over the other.
Sure, my question was more about using the returns to capital as a way to estimate the returns to labor. I see no particular reason why these should be the same (though I understand that if you do make this assumption, leveraged index funds are a reasonable thing to use.)
I’m not entirely sure I understand what you’re saying but this is how I think about it:
You have two options (really more, but just two that are relevant): you can start a startup or you can earn to give at a salaried job. If you start a startup, you expect to get paid $X in N years, and you get nothing (or not much) until then. If you work a salaried job, you get paid $Y per year. You can invest that money in public equities. To compare entrepreneurship vs. salaried job, you can look at the expected payoff from entrepreneurship vs. how much money you’d have if you took your salary at the salaried job and invested it in a leveraged index fund, where you add enough leverage to match the risk level of entrepreneurship. These two choices are equally risky, so you can compare them directly in terms of which one has better expected return.
I don’t know what you mean about return on capital vs. labor but I hope that makes sense.
Sure, but the salaried job has the added confusion that you get paid annually. It’s not the same as investing $X for N years (or (1−d)NX dollars for N years).
Thanks! Can you say more about why comparisons to leveraged index funds are useful?
It’s not obvious to me that discount rates for capital and labor should be the same; I included the S&P 500 since it was simple, but I don’t think there are many people who are going to decide whether or not to start a company based on S&P 500 returns.
It’s convenient because it lets you ignore your risk preferences. Making up some numbers, if entrepreneurship has a 20% return, and a leveraged index fund has a 25% return at the same level of risk*, then the leveraged index fund is better no matter how risk averse you are. It doesn’t matter how much you care about risk because the two investments are equally risky.
(It’s less helpful if the comparison comes out the other way. If a leveraged index fund has only a 15% return, then sufficiently risk-accepting investors prefer the 20% return of entrepreneurship, but risk-averse investors might still prefer an index fund with less leverage.)
*And we assume the returns follow the same distribution and there’s no non-financial reason to prefer one over the other.
Sure, my question was more about using the returns to capital as a way to estimate the returns to labor. I see no particular reason why these should be the same (though I understand that if you do make this assumption, leveraged index funds are a reasonable thing to use.)
I’m not entirely sure I understand what you’re saying but this is how I think about it:
You have two options (really more, but just two that are relevant): you can start a startup or you can earn to give at a salaried job. If you start a startup, you expect to get paid $X in N years, and you get nothing (or not much) until then. If you work a salaried job, you get paid $Y per year. You can invest that money in public equities. To compare entrepreneurship vs. salaried job, you can look at the expected payoff from entrepreneurship vs. how much money you’d have if you took your salary at the salaried job and invested it in a leveraged index fund, where you add enough leverage to match the risk level of entrepreneurship. These two choices are equally risky, so you can compare them directly in terms of which one has better expected return.
I don’t know what you mean about return on capital vs. labor but I hope that makes sense.
Sure, but the salaried job has the added confusion that you get paid annually. It’s not the same as investing $X for N years (or (1−d)NX dollars for N years).