Innovative faculty research: frugality and entrepreneurship

It wouldn’t be entirely inaccurate to say that Tim Michaelis, assistant professor of entreprenuership at NIU Business, can squeeze two dimes out of nickel.

  • An expert on accruing credit-card points, he once paid $11 for a $20,000 first-class, round-trip ticket to New Zealand.
  • In high school, he built a high performance PC, not because he was interested in computers, but so he could spend less money on one.
  • While he and his wife were in graduate school, they had a combined annual income of less than $45,000 but still maxed out their Roth IRA contributions.
  • When he needs to stay on budget, Michaelis turns to meals of rice, beans and frozen vegetables at two bucks per serving.

Instilled in him while growing up in Greensboro, N.C., this penchant for saving money isn’t to be confused with being cheap. “It’s quite the opposite,” says Michaelis, adding that he’s also one to occasionally splurge on a $200 meal.

“Frugality represents one’s personal representation of long-term value,” he explains. “It takes time, planning and a lot of effort. The frugal person critically evaluates the value of new experiences but is grounded in the reality that resources are finite, and choices must be made to maximize one’s happiness.”

This philosophy also has inspired Michaelis’s unique line of business research, which examines the little-studied role of frugality in entrepreneurship.

Frugality has been widely used to study consumer behavior, and research has shown frugal people “follow a different mental process when acquiring resources,” says Michaelis, who holds a master degree in innovation management and a Ph.D. in applied social psychology.

“My research simply suggests that frugality might also be important in the process of entrepreneurship, because building a successful new venture requires one to be savvy with resources. The concept of frugality may provide a powerful explanation for why some entrepreneurs outperform others.”

Anecdotal evidence isn’t difficult to find. Michaelis points to some of history’s most successful entrepreneurs.

“Warren Buffet has lived in the same, modest-sized house for the majority of his career and still orders the senior discount coffee at McDonalds,” Michaelis says. “Similarly, Amazon founder Jeff Bezos still keeps his original make-shift desk, built out of an old wooden door, as a symbol of his own frugality.”

But does an entrepreneur’s frugality predict the success of a new venture? That’s a complicated question, Michaelis says, but one worth investigating. To do so, he and colleagues from Baylor and North Carolina State universities are using a social-cognitive approach, introducing “trait frugality” as a way to explain the resourceful behavior of entrepreneurs.

In a study in press for the Journal of Business Venturing, the researchers developed a measure of frugality, defined as a long-held general preference to conserve resources and apply an economic rationale in resource acquisition, regardless of the situation. (“I always try to get the best price on a gallon of gas.”) They juxtapose that against the trait of self-control, or the tendency to stay committed to achieving an objective in the face of more alluring alternatives. (“I have to get the best price on gas because I need new tires.”)

The researchers then surveyed 178 entrepreneurs whose businesses were less than 5 years old. And they teased out the motivation behind their resourcefulness—hardwired frugality or goal-directed self-control.

Those who were inherently frugal used logic and behaviors that have been shown to be more closely associated with entrepreneurship. The form of logic is known as effectuation, and effectual thinkers commonly limit risk, make do with available resources, demonstrate flexibility in goal development and build off failures.

“These behaviors align with a more veteran approach to venture creation and resource use and help explain why small firms may outperform larger ones that have more resources,” Michaelis says.

In addition to starting the conversation on frugality in entrepreneurship literature, the new study could be useful in other ways. The frugality measure might provide existing entrepreneurs with a way to self-evaluate themselves and their teams. Similarly, investors in these entrepreneurial ventures could potentially gauge the frugality of an entrepreneur.

Michaelis stresses, however, that he cannot say with certainty that frugality predicts entrepreneurial success, although he is collecting data on the topic for a future study. Being frugal could be detrimental, he says, if it keeps entrepreneurs from making decisions quickly or makes them too controlling over an enterprise.

If it’s determined that frugality is indeed an advantageous trait in entrepreneurs, the researchers will examine whether it can be acquired.

“We have yet to test this in our research, but we believe certain mindset interventions may help entrepreneurs become more frugal and thus more resourceful,” Michaelis says. “We know that a growth mindset can be used to increase one’s entrepreneurial self-efficacy, and we think this same outcome may exist with frugality.”

written by Tom Parisi, NIU Institutional Communications; reposted by Michelle De Jean, Director of Marketing, NIU Business

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