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The Shkreli Effect: Cavalier Attitude Toward Rules Helps Entrepreneurs Rise, Then Fall

By:
Chris Gaetano
Published Date:
Sep 18, 2017
Broken Rule

The business world is full of both meteoric rises and spectacular falls, often by the same person. Why this is the case could be linked to findings that people who eventually become entrepreneurs seem to respect rules less: in their pre-business days they are more likely to have regularly done things like skipping school, taking drugs and committing petty theft.

"People who become incorporated business owners tend to be more educated and—as teenagers—score higher on learning aptitude tests, exhibit greater self-esteem, and engage in more illicit activities than others. The combination of “smart” and “illicit” tendencies as youths accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. Individuals tend to experience a material increase in earnings when becoming entrepreneurs, and this increase occurs at each decile of the distribution," said the study abstract. 

An article in the New York Times posits that such behavior may drive early success, and, as time goes on, dramatic collapse. The general idea is that industries tend to have unwritten, but very powerful, rules of the road that establish norms of how businesses in that sector operate. Markets will tend to reward those who can upend these established norms and find new ways of doing things. The Times suggests that those with a more cavalier attitude towards rules and restrictions are more likely to come up with the innovations that can rapidly grow their companies. At the same time, this same cavalier attitude can also lead them to flout actual rules and regulations, such as sexual harassment policies and securities law, eventually leading to a hard fall. 

This suggests that there could be some sort of golden mean between "disruptive rule-breaker" and "industry pariah" or "convicted felon." Where exactly that mean lies, then, is the real question. 

It also brings to mind other research that estimates the financial industry has a higher proportion of psychopathic personalities than the general population: 1 in 10 on Wall Street, versus 1 in 25 in general. While the exact figure has been disputed (one researcher on the phenomena says it likely overestimates "true" psychopaths while underestimating borderline cases), arguments exist that psychopathy and other "Dark Triad" personality traits like Machiavellianism and narcissism may actually lend a similar kind of competitive advantage in the industry. Sridhar Ramamoorti and Barry Epstein argue in the CPA Journal that leadership positions in the corporate world may even advantage such traits, though noted that this also comes at a cost. 

"In certain settings, having a dark triad personality is actually a helpful, even desirable, characteristic of aspiring CEOs. Leaders need to be able to make difficult decisions that more prudent people may actually shy away from. There is something about dark triad personalities that allows them to make those big bets. When those big bets succeed, that’s a wonderful outcome inviting the highest plaudits, and everybody wins. Unfortunately, when those bets go sour, they go sour very badly, and everyone loses," said Ramamoorti and Barry.