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1 Lecture 2 - The Entrepreneur Johan Brink Entrepreneurship and New Business Development

2 Origin of Entrepreneurship research Cantillon 1755 Interact with suppliers at known prices in order to produce goods that could later be sold at unknown prices, Risk taker Mill 1848 Risk is asserted as a key in entrepreneurial activities Neoclassical Menger, Jevons, Walras – Price mechanism and allocation Baumol 1968 Critique neoclassical omission of the entrepreneur – models of constrained optimization, exogenous factors Brich 1979) Job creation

3 Who is the entrepreneur?

4 An entrepreneur?

5 An entrepreneur?

6 Individuals - Personal traits How should an Entrepreneur be? – Discuss 2 and 2

7 The myth of the individual Of the 10 years sampled, 480 articles were studied and all portrayed the entrepreneur as an individual. (Nicholson and Anderson,2005) Flamboyant My hero Gentle giant Masters of time and space Likable rogue Polite rebel Ultimate outsider

8 Individuals - Personal traits Need for achievement Locus of control Risk taking Tolerate ambiguity Self efficacy Goal setting Regretful thinking Rely on low representativeness E and High achievers No difference! E! (Weak) E and High achievers E! (Weak)

9 Risk and Uncertainty Risk as: – Variance – Downside loss – Opportunity cost – Near or distant in time

10 Risk and Uncertainty – Assumed that everyone agrees on the level of risk involved, and that some people (entrepreneurs) are constitutionally more willing to take the chance than are other people (non-entrepreneurs). – Research have often failed to find risk-taking propensity associated with success in new venture creation (e.g., Brockhaus, 1980, 1987). – Perhaps those who found businesses do not think about the risks in these statistical terms!!! – Resent research actually points toward Entrepreneurs being more risk averse! - Thus other motivations than profit/pecuniary! Risk as: – Variance – Downside loss – Opportunity cost – Near or distant in time

11 Entrepreneurs and managers How do they think different from managers? Discuss 2 and


13 Modern Entrepreneurship Theories Psychological/managerial How do they think? Opportunity & Alertness (Kirzner, 1979) Sociological & Economics What do they do? Resources & Foundation of organizations (Gartner, 1988) StimulusOrganismResponse

14 Entrepreneurial Alertness Kirzner (1979, 73, 85) entrepreneurial alertness, a distinctive set of perceptual and cognitive processing skills. – “the ability to notice without search opportunities that have hitherto been overlooked” (1979, p. 48) – “a motivated propensity of man to formulate an image of the future” (1985, p. 56). If Kirzner is correct, alert individuals have: – More accurate mental models – A better grip on reality because they perceive it more accurately – Are better at inferring the likely implications and consequences

15 Cognitive Theories Schemata & Heuristics Human beings simply do not have the cognitive capacity to process and remember all information stimuli that arise from complex situations (Komatsu 1992). Effective under uncertainty – bounded rationality Learning knowledge: Unlike personal traits, cognitive processes can be changed! Experts have more complex schema characterized by extensive cross- links to other schema

16 A Simple Cognitive Entrepreneurial model

17 Prior knowledge Source of knowledge Work experience A similar business – stolen with pride! Hobby /Personal interest Cognitive schemata Information Interpretation of opportunity - people recognize those opportunities related to information that they al- ready possess (Venkataraman1997)

18 Cognitive bias - Entrepreneurship Availability bias – Noticeable in the past, spectacular: A person who just read about another restaurant's closing in the morning paper will give a higher estimate of failures than will a person who has not seen such a story in a long time Representativeness bias – Comparative to previous: A person for whom Restaurant X is typical of successful establishments will make a lower guess about failure than will a person for whom the Restaurant X resembles failures Anchoring bias – Relative to given reference point: A perceiver who knows that three local restaurants have failed will make a smaller estimate than a perceiver who has been told that 10,000 restaurants have failed nationally

19 Cognitive bias - Entrepreneurship Confirmation bias – Attach greater weight to information which confirms rather than disconfirming info. A person who just started a restaurant have a higher tendency to pay attention to another restaurant's success than failure Hindsight – Past events as having higher probabilities than actually are, A person who has worked within a successful restaurant will overestimate the success rate of restaurants

20 Entrepreneurial bias Over confident – Availability, anchoring, confirmation, hindsight, confirmation – People do not know what they do, and do not do – the paradox of the uninformed! – Entrepreneurs personal experience - But its rational to collect less information while being over- confident!

21 Entrepreneurial bias Belief in small numbers – Representative, Hindsight – But its rational to do this while entrepreneurs lack resources!

22 Entrepreneurial bias Over optimism – Over positive self evaluations – Over optimism about future plans Failure to break down tasks – Over optimism about control Judge the relative importance of skill and chance Motivated to control their environment

23 Motivation Often Flexibility Income - Necessity Learn and develop as a person Occasionally Wealth Product- to develop a idea Rarely Recognition Admiration Power Family – continuation a tradition

24 What about having fun? Persons experiencing positive affect… Tend to be persistent Tend to perceive objects, other persons, ideas, and almost anything else more positive Productive working relationships Tend to base decision making on satisfying condition rather than maximizing & optimizing Rely on low representativeness Enhance creativity


26 Opportunities: Underlying changes Entrepreneurial opportunities are those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production (Casson, 1982). (1) the creation of new information, as occurs with the invention of new technologies; (2) the exploitation of market inefficiencies that result from information asymmetry, as occurs across time and geography; and (3) the reaction to shifts in the relative costs and benefits of alternative uses for resources, as occurs with political, regulatory, or demographic changes. (Drucker 1985)

27 Opportunities: Entrepreneurial activities Expected demand is large – (Schmookler, 1966; Schumpeter, 1934) Industry profit margins are high – (Dunne, Roberts, & Samuelson, 1988), The technology life cycle is young – (Utterback, 1994), The cost of capital is low – (Shane, 1996) The density of competition in a particular opportunity space is neither too low nor too high – (Hannan & Freeman, 1984) Population-level learning from other entrants is available – (Aldrich &Wiedenmeyer, 1993)

28 Create or discover opportunities? What came first? Idea : Decision to start a business: Simultaneous: (Handbook of entrepreneurial dynamics Gartner et al 2004) % 42% 21%

29 Different opportunities Opportunity recognition involves matching known products with existing demand. The entrepreneur connects dispersed knowledge regarding products and demand to exploit a previously unrecognized market opportunity. Opportunity discovery starts either from a known supply and proceeds in search of an unknown demand, or from a known demand that motivates search for an unknown supply. Once the missing side of the transaction is discovered, the market opportunity can be exploited. Opportunity creation neither the supply nor demand exists prior to entrepreneurial action; instead, the entrepreneur participates in creating both


31 Readings DISCOVERY AND CREATION: ALTERNATIVE THEORIES OF ENTREPRENEURIAL ACTION – SHARON A. ALVAREZ and JAY B. BARNEY – Strategic Entrepreneurship Journal Strat. Entrepreneurship J., 1: 11–26 (2007) Opportunity Recognition as Pattern Recognition: How Entrepreneurs “Connect the Dots” to Identify New Business Opportunities – Robert A. Baron – Academy of Management Perspectives, February 2006 Causation and effectuation: Toward a Theoretical shift from economic inevitability to Entrepreneurial contingency – S Sarasvathy – Academy of Management Review, 26:2,

32 “I was seldom able to see an opportunity until it had ceased to be one.” Mark Twain

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