A few weeks ago I included an article in my #PickOfTheWeek by Steve Blank that looked at a research paper Asymmetric Information and Entrepreneurship. The premise of the article started an avalanche of related ideas that I have had a hard time getting out of my head as it connects to so many opinions about entrepreneurship that I also hold and personal experiences I have had. Today I’d like to discuss how understanding Information Asymmetry will make your hire better employees.
The report postulates that the primary reason most entrepreneurs start businesses is that most employers award jobs to candidates based on observable signals such as those found on someone’s resume. However, in the case of many entrepreneurs, their observable signals are not very reflective of their true abilities. In technical terms, this is known as information asymmetry.
Asymmetric information, also known as “information failure,” occurs when one party to an economic transaction possesses greater material knowledge than the other party.
Due to information asymmetry, many highly qualified people are hired for jobs below their level of expertise or are not hired altogether. So instead of working for someone, they chose entrepreneurship where they can earn an income based on their true abilities.
Upon reflection, I found the basis of the argument to be very applicable in my own personal situation.
Being generally a poor student academically in high school, I never went to college. Instead, I chose to join the United States Coast Guard after High School. I was offered a guaranteed “A” school after boot camp based on my high Armed Services Vocational Aptitude Battery (ASVAB) scores. My high ASVAB scores were a bit of a revelation for me since I never considered myself to be very smart. Even though I was never into academics, I was encouraged to become a Fire Control Technician where very few candidates qualified for the rating.
After the Coast Guard, I got a job with Digital Equipment Corporation (DEC). I was always way below the salary curve because I was hired into the position based on my lack of a formal education shared by many of my peers.
During my career at DEC, I was often ignored when it came to promotion for jobs that I felt I was more than qualified for. Instead, these jobs went to my colleagues who had better qualifications on paper. Many of them went on to fail at these jobs based on the Peter Principle. I later crushed these jobs when DEC ran out of other candidates and promoted me to these positions.
Feeling perpetually underemployed, I became an Invisible Fencing dealer that I operated as a side-hustle while I continued working for DEC.
When I finally became a manager at DEC they fell on hard times. Rather than continuing to climb the corporate ladder, I became more of a hatchet man as I was forced to lay off half my workforce over the course of the next several years.
The thought of being tasked with shutting off the lights and closing down my department was always looming large for me. I knew if that time came, the qualifications on my resume would not allow me to compete in the job market. This was especially so since I would be flooding the market with my remaining employees who were the crème de la crème in their respective areas.
While I still maintained ownership of my Invisible Fencing franchise as a potential life-saver in the event I got laid off at DEC, I was eventually forced to make a decision to go full-time with invisible Fencing or relinquish it altogether. While the prospects of long-term employment at DEC were continuing to diminish, the potential income from my Invisible Fencing business could not replace my DEC income so I chose to give up on the franchise. However, I learned some valuable business lessons having operated my Invisible Fencing business. Unfortunately, these lessons didn’t add to my observable signals caused by information asymmetry.
I knew that my best shot at earning the kind of income I had grown accustomed too was to quit my DEC job, start my own business, hire my quality former employees that were left, and contract them back to my former employer. After much discussion, DEC agreed that this was a viable option for all parties involved and we put the plan into motion. This also allowed me the bridge to find other customers, that were not suffering the same fate as DEC allowing me to diversify my revenue sources.
When asked why I chose to become an entrepreneur, I have always said that it was not my desire to do something great but rather was due to my lack of viable employment options. As an employee, I knew I could do the job, however, my employers were not convinced based on my lack of observable signals. caused by information asymmetry.
Moreover, there is a great paper by Sally Shaywitz that I wrote about in Dyslexia and the Entrepreneur. The article postulates that dyslexics have a much greater propensity to be entrepreneurial because of information asymmetry.
Being a flaming dyslexic myself, I also find this to be congruent with the report. Formal education is majorly based on reading textbooks. Being a poor reader, I was always a poor student academically resulting in a rather poor GPA. Having no formal education beyond High School and less than stellar grades equals fewer job opportunities and lower pay when and if you get hired.
As I discussed in Is Your Business Focused on the Right Things business is facing their money-ball moment. They have an imperfect understanding of what kinds of attributes are needed to grow a successful business. So, when it comes to hiring employees I believe that businesses have a proclivity to measure the wrong things. Prospective employers limit their screening and hiring process to easily observable signals and rely too heavily on education and job history or on their own cognitive biases when making hiring decisions.
As I discussed in How To Hire An Employee The Right Way using a test to determine a candidates fitness similar to the ASVAB the armed forces uses can uncover a person’s additional talents and remove any biases.
In my case, my ASVAB score was the first indicator that I was not as dumb as my high school experience had led me to believe. In fact, a study showed that the Armed Forces Qualification Test (AFQT), a subset of the ASVAB that measures arithmetic reasoning and knowledge as well as paragraph comprehension and word knowledge was significantly higher among the self-employed as compared to salary employees.
Furthermore, since most businesses rely on observable signals when hiring or making promotions, many employees rise beyond their level of incompetence based on the Peter Principle. Lacking options, many remain in their positions as the business descends into mediocrity.
By contrast, underemployed and underappreciated employees seek to leave the company and follow an entrepreneurial path to capitalize on what they know is their greater abilities than their employers give them credit for based on information asymmetry.
So, in the end, these businesses are left with the less productive employees while the most productive ones choose entrepreneurship.
Like in money-ball, the implication is that most businesses embrace prospects more qualified on paper and see prospects with limited observable signals as lemons who don’t fit in. They fail to recognize or factor in less observable attributes like curiosity, resourcefulness, tenacity, and passion that are the hallmarks of entrepreneurs.
So, what are businesses to do?
- Widen the aperture of what you should look for when hiring an employee to include attributes common among entrepreneurs and give them proper weight to make better hires.
- Seek out and recognize the less observable attributes common to entrepreneurs in your current employees or risk losing them.
- Develop a culture that embraces attributes of entrepreneurship by rewarding intrapreneurs in your business.
- If you can’t find them or grow them, consider buying existing businesses even if for no other reason other than to obtain access to the entrepreneurs that founded the business.
Are you guilty of relying entirely on observable signals when looking for employees and failing to recognize when an individual has the attributes of an entrepreneur due to information asymmentry?