Entrepreneurial Decision-making
Entrepreneurial decision-making, or entrepreneurial cognition, is a central phenomenon in entrepreneurship. Entrepreneurial decision-making borrows theory from cognitive psychology to understand how entrepreneurs think. Entrepreneurial cognition is central to understand what differentiates entrepreneurs from others, such as managers, in business. Evidence from observational research shows that entrepreneurs do behave differently to managers and one theory suggests that this is because entrepreneurs think (or have learnt to think) differently. One of the main ideas underpinning this is that, when it comes to business, entrepreneurs are less likely than other people to use ‘rational’ approaches of decision-making. For example, instead of carrying out lengthy cost benefit analysis of a situation, entrepreneurs more frequently use what academics call ‘heuristic logic’ or ‘heuristics’, which in simple terms are mental shortcuts, such as rule of thumb. Dean Shepard and Dan Forbes, amongst others, have written about how entrepreneurs use heuristic logic in strategic decision-making to cut through complexity and make decisions quickly. Thus entrepreneurial decisions also exhibit a lot of biases.
Subdomains of entrepreneurial cognition:
- Perception
- Cognitive biases
- Attention
- Risk-taking
- Intelligences
- Heuristics
- Emotion
- Semantic and Symbolic language structure
- Cognitive Development
Entrepreneurial perception[edit]
Entrepreneurship involve the perception of opportunity. Where we begin to understand the role of perceptions can be found in a not inconsiderable amount of research that suggests two critical antecedents of perceived opportunity, both of which themselves are perceptual. Dutton and Jackson (1987) first mapped out an elegant model of opportunity perception that utilized the cognitive phenomenon of categorization. We have significant biases toward simplifying how we represent knowledge; it is much more efficient and convenient to simplify the range of strategic issues that an individual or organization faces by categorizing as many as possible into ‘‘opportunities’’ and ‘‘threats.’’ Dutton and colleagues generated a sizeable number of studies that show how strategic issue categorization plays a central role in strategic decision making (Dutton and Jackson, 1987). The Dutton and Jackson model argues that perception of opportunity is driven by two other key perceptions. First, a situation where the likely outcomes are perceived as positive and that the situation is deemed as within one’s personal control would be categorized as an ‘‘opportunity.’’ Contrariwise, a situation where the likely outcomes are negative and the situation is seen as beyond one’s control would be categorized as a ‘‘threat.’’ This elegant model was then tested successfully (Jackson and Dutton, 1989).
Entrepreneurial bias[edit]
Entrepreneurs who take a tremendous amount of risk often don’t think of themselves as being risk-takers. It’s something that has perplexed researchers for some time and a number of cognition studies cast some light on the issue. They suggest that heuristic strategies create the illusion of control and a tendency to over-generalise with the result that entrepreneurs perceive risks to be lower than non-entrepreneurs do. Understanding the bias in entrepreneurial cognition is imperative to under-standing the essence of entrepreneurship, how it emerges and evolves. What is the nature of entrepreneurial thinking? What cognitive phenomena are associated with seeing and acting on opportunities? Research into entrepreneurial bias offers a way to bring the theory into entrepreneurship. Entrepreneurial bias research offers us multiple mechanisms, both theory-driven and empirically-robust, to build a deeper, richer understanding of how we learn to see opportunities.
Risk-taking[edit]
Theorists Frank Knight[1] and Peter Drucker examined entrepreneurship in terms of risk-taking. The entrepreneur is willing to put his or her career and financial security on the line and take risks in the name of an idea, spending time as well as capital on an uncertain venture. Knight classified three types of uncertainty:
- Risk, which is measurable statistically (such as the probability of drawing a red color ball from a jar containing 5 red balls and 5 white balls).
- Ambiguity, which is hard to measure statistically (such as the probability of drawing a red ball from a jar containing 5 red balls but with an unknown number of white balls).
- True uncertainty or Knightian uncertainty, which is impossible to estimate or predict statistically, such as the probability of drawing a red ball from a jar whose number of red balls is unknown as well as the number of other colored balls.
Entrepreneurship is often associated with true uncertainty, particularly when it involves something truly novel, such as a market that did not previously exist.
Traditional economic theory did not factor in the concept of entrepreneurship, a gap remedied by the work of William Baumol and others.[2]
References[edit]
- ↑ Knight, Frank Hyneman (2005). Risk, Uncertainty and Profit. Cosimo, Inc. ISBN 978-1-59605-242-0. Search this book on
- ↑ "Searching for the invisible man". The Economist. Mar 9, 2006. p. 67. Retrieved 23 December 2012.
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