Some economists have been puzzled that although entrepreneurs take on the risk of losing money by starting new businesses, on average their incomes are lower than those of people with similar characteristics who go to work at large firms. Economist William Baumol believes part of the explanation for this puzzle may be that entrepreneurs are like people who buy lottery tickets. On average, people who don't buy lottery tickets are left with more money than people who buy tickets because lotteries take in more money than they give out. Baumol argues that "the masses of purchasers who grab up the [lottery] tickets are not irrational if they receive an adequate payment in another currency: psychic rewards."
a. What are "psychic rewards?
b. What psychic rewards might an entrepreneur receive?
c. Do you agree with Baumol that an entrepreneur is like someone buying a lottery ticket? Briefly explain.

Find explanations below.

Explanation:

Psychic connotes the idea of unusual mindset or disposition to things. Psychic rewards are benefits or payments which are psychological or intangible rather than monetary.

When an employer chooses this as a means to reward employees, he does not give them money. Rather, the reward could be in form of;

1. An appreciation note.

2. Presentation of an award for service excellence.

3. Commendation of the employee amongst his colleagues.

I agree with Baumol in his view of entrepreneurs like someone buying lottery tickets because business is a risk just as Lottery is a risk.

An entrepreneur stakes his money in an investment hoping for huge benefits in the form of profit, just as a person playing lotteries who buys tickets for a small amount of money, hopes to win a huge amount of money or reward.

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