entrepreneurial action and the role of uncertainty …€¦ · like before, entrepreneurial action...

ENTREPRENEURIAL ACTION AND THE ROLEOF UNCERTAINTY IN THE THEORY OF THE

ENTREPRENEUR

JEFFERY S. MCMULLENBaylor University

DEAN A. SHEPHERDIndiana University

By considering the amount of uncertainty perceived and the willingness to bearuncertainty concomitantly, we provide a more complete conceptual model of entre-preneurial action that allows for examination of entrepreneurial action at the indi-vidual level of analysis while remaining consistent with a rich legacy of system-leveltheories of the entrepreneur. Our model not only exposes limitations of existingtheories of entrepreneurial action but also contributes to a deeper understanding ofimportant conceptual issues, such as the nature of opportunity and the potential forphilosophical reconciliation among entrepreneurship scholars.

Entrepreneurship requires action. Whetherconceptualized as the creation of new productsor processes (Schumpeter, 1934), entry into newmarkets (Lumpkin & Dess, 1996), or the creationof new ventures (Gartner, 1985), entrepreneur-ship typically involves a mesolevel phenome-non in which personal initiative influencessystem-wide activity and outcomes (Kilby, 1971;Stevenson & Jarillo, 1990). To be an entrepreneur,therefore, is to act on the possibility that one hasidentified an opportunity worth pursuing.

Theories of entrepreneurship that embracethis perspective traditionally have taken one oftwo forms. The first form is devoted to a system-level approach concerned primarily with howthe economic system functions. Proponents ofthese theories argue that the health of the econ-omy depends on the pursuit of opportunities byprospective entrepreneurs (e.g., Kirzner, 1973;Schumpeter, 1934). Who acts is inconsequentialas long as someone does. Thus, the central issueis whether entrepreneurial action occurs. Thesecond form is devoted to an individual-levelapproach concerned primarily with how pro-spective entrepreneurs go about acting. Theseresearchers seek to explain why some individu-als are more likely than others to pursue possi-

ble opportunities for profit (e.g., Begley & Boyd,1987; Sarasvathy, 2001a; Shane, 2000; Shaver &Scott, 1991). Like before, entrepreneurial actiontakes center stage, but this time more in terms ofhow it occurs and who does it than whether itoccurs.

The conceptual overlap of these approachessuggests that they are complementary. In fact, re-searchers of the individual-level approach havefrequently borrowed from theories grounded inthe system-level approach (e.g., Kaish & Gilad,1991). However, this can lead scholars to rely onmodels of entrepreneurial action that are incom-plete when applied at a level of analysis otherthan that intended by the theorist. Accordingly,our purpose in this article is twofold. First, wedemonstrate that economic theories of the entre-preneur are theories of action proposing those el-ements that enhance and hinder individuals fromacting entrepreneurially. Although these modelsmay be sufficient for examining entrepreneurialaction at the system level, they can collapse whenapplied at the individual level, making them sus-ceptible to confounded theorizing and inconclu-sive or misleading empirical findings. This neces-sitates our second purpose: to offer a perspectivethat allows for examination of entrepreneurial ac-tion at the individual level of analysis while re-maining consistent with a rich legacy of system-level theories of the entrepreneur.

Because action takes place over time, and be-cause the future is unknowable, action is inher-

We acknowledge Jeff Covin, Denis Gregoire, Duane Ire-land, P. Devereaux Jennings, and three anonymous review-ers for their valuable comments on an earlier draft of thispaper.

� Academy of Management Review2006, Vol. 31, No. 1, 132–152.

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ently uncertain (Mises, 1949). This uncertainty isfurther enhanced by the novelty intrinsic to en-trepreneurial actions (Amabile, 1997; Smith &DiGregorio, 2002), such as the creation of newproducts, new services, new ventures, and soforth (Gartner, 1990; Schumpeter, 1934). There-fore, it is no surprise that uncertainty constitutesa conceptual cornerstone for most theories of theentrepreneur. However, the role this uncertaintyplays in preventing entrepreneurial action hasremained a matter of debate. As a result, tworesearch streams have emerged, each inspiredby alternative conceptualizations of uncertainty.

The first stream focuses on the amount of un-certainty perceived and frequently discrimi-nates those who decide to act entrepreneuriallyfrom those who do not as a matter of differencesin knowledge (e.g., Busenitz, 1996; Gaglio & Katz,2001; Kaish & Gilad, 1991; Kirzner, 1979). Thus,the amount of uncertainty is considered to bethe barrier between prospective entrepreneursand entrepreneurial action. The second streamhighlights the willingness to bear uncertaintyand typically proposes that those who decide toact entrepreneurially are distinguishable fromthose who do not owing to differences in moti-vation, attitude, or risk propensity (e.g., Douglas& Shepherd, 2000; Knight, 1921; Schumpeter,1934). In this scenario, an unwillingness to bearuncertainty is deemed responsible for prevent-ing prospective entrepreneurs from engaging inentrepreneurial action.

Because an individual must ultimately act tobecome an entrepreneur, and because actioninvolves knowledge and motivation (Higgins &Kruglanski, 2000), we propose that each streammerely emphasizes a different aspect of the un-certainty experienced in the decision to actentrepreneurially. Therefore, each conceptual-ization of uncertainty is representative of a con-struct that is not only reconcilable with its coun-terpart but also necessary for further theorizingabout entrepreneurial action.

By demonstrating that action is central tomost theories of entrepreneurship, we distill thevarious elements of action that must be consid-ered concomitantly when determining whetherone will act entrepreneurially. These includeknowledge (as it relates to the amount of uncer-tainty perceived), motivation (as it relates to thewillingness to bear uncertainty), and, arguably,a stimulus. We propose that each of these ele-ments produces a belief that is qualified by un-

certainty. This uncertainty takes the form ofdoubt, which prevents action by underminingthe prospective actor’s beliefs regarding (1)whether an environmental stimulus presents anopportunity for someone in the marketplace, (2)whether this opportunity could feasibly be en-acted by the actor, and (3) whether successfulexploitation of the opportunity would ade-quately fulfill some personal desire. Drawing onthese elements, we then generate a two-stageconceptual model of entrepreneurial action thatmakes an important distinction between third-person opportunity (an opportunity for someone)and first-person opportunity (an opportunity forthe actor) while explicitly recognizing that bothknowledge and motivation must be consideredconcomitantly when examining entrepreneurialaction in each stage.

This article makes a number of contributionsidentified by Whetten (1989) as important theo-retical insights. First, we use epistemologicalevidence from the philosophy and psychology ofaction literature to demonstrate that the entre-preneurship literature is characterized by one-dimensional conceptualizations of uncertainty’spreventive role in the entrepreneurial actionprocess. Second, we offer a conceptual model ofentrepreneurial action that demonstrates howthe addition of a new construct (in some casesmotivation and in others knowledge) signifi-cantly alters our understanding of the role thatuncertainty plays in preventing entrepreneurialaction. Third, we use the proposed model to re-interpret theories of the entrepreneur, therebyenhancing these highly influential economicmodels’ predictive validity of entrepreneurialaction at the individual level. Fourth, we use themodel to reveal points of empirical tractabilityand philosophical impasse between entrepre-neurship theorists employing different ontolog-ical assumptions regarding opportunity. Fi-nally, we offer a pragmatic and a conceptualapproach to the difficult task of reconciling con-tentious philosophical perspectives.

The article proceeds as follows. First, we ex-plore the notions of the entrepreneur and entre-preneurial action that highlight the importanceof judgment under uncertainty, and then ac-knowledge the role of belief and doubt in entre-preneurial judgment using a discussion involv-ing three types of uncertainty: state, effect, andresponse. Second, we introduce a number of the-ories of the entrepreneur and classify them in

2006 133McMullen and Shepherd

terms of two streams of research on uncertainty:one stream emphasizes the role of perceiveduncertainty and the second gives prominence tothe willingness to bear uncertainty. Third, weoffer a conceptual model of entrepreneurial ac-tion that reconciles aspects of the two streams ofresearch that have previously remained inde-pendent of each other. We describe our concep-tual model of entrepreneurial action as the out-come of the willingness to bear perceiveduncertainty. Fourth, we use our proposed con-ceptual model of entrepreneurial action to rein-terpret three economic theories of the entrepre-neur that are considered to be most influentialto the management literature. Finally, we can-not avoid a discussion of the “thorny” issue ofontology. In this section we discuss a number ofdifferent perspectives about the existence of anobjective opportunity and propose two potentialapproaches for reconciling apparently contrast-ing views.

ENTREPRENEURIAL ACTIONAND UNCERTAINTY

Because we are interested in the entrepreneuras an organizational or economic function thatis filled by an individual, rather than as a per-sonality (i.e., innovative, risk seeking, etc.) orposition (i.e., small business manager, owner,etc.), we seek definitional foundation in econom-ics, where the entrepreneur traditionally hasbeen conceptualized in this manner (Casson,1982: 22). After surveying economic theory de-voted to entrepreneurship, Hebert and Link at-tempt to synthesize several theoretical profilesby defining the entrepreneur as “someone whospecializes in taking responsibility for and mak-ing judgmental decisions that affect the loca-tion, the form, and the use of goods, resources orinstitutions” (1988: 155). They openly admit theirdefinition’s similarity to that proposed by MarkCasson, who defines an entrepreneur as “some-one who specializes in taking judgemental de-cisions about the coordination of scarce re-sources” (1982: 23). Interestingly, both of thesedefinitions are reminiscent of the first theory ofthe entrepreneur put forth by Richard Cantillonin 1755, in which he defined the entrepreneur as“someone who engages in exchanges for profit;specifically, he or she is someone who exercisesbusiness judgment in the face of uncertainty”(quoted in Hebert & Link, 1988: 21).

Each of these definitions suggests that theentrepreneur is an individual who exercisesjudgment, which Hastie defines as “the compo-nents of the larger decision-making process thatare concerned with assessing, estimating, andinferring what events will occur and what thedecision-maker’s evaluative reactions to thoseoutcomes will be” (2001: 657). “Decision making,”he adds, “refers to the entire process of choosinga course of action” (2001: 657). Finally, Hastiesuggests that uncertainty refers to “the decision-maker’s judgments of the propensity for each ofthe conditioning events to occur” (2001: 657).Therefore, judgment is what must be exercisedto make a decision between alternative coursesof action that take place in an uncertain future.

Although many scholars have emphasized theindividual’s exercising of judgment under un-certainty in the form of a decision (e.g., Cantil-lon, Cole, Keynes, Marshall, Menger, Schultz,Shackle, etc.), it is important to note that a deci-sion is a necessary but insufficient condition forthe occurrence of entrepreneurship. We return tothe basic realization that entrepreneurship re-quires one not just to decide but to decide to act.Therefore, we subscribe to Hebert and Link’s(1988) position that entrepreneurs respond to andcreate change through their entrepreneurial ac-tions, where entrepreneurial action refers to be-havior in response to a judgmental decision un-der uncertainty about a possible opportunity forprofit.1 Whether entrepreneurial action occurs,however, depends on how much one must relyon one’s judgment, which, in turn, depends onthe degree of uncertainty experienced in the de-cision of whether to act.

Alternative conceptualizations of uncertaintyexist within the management, economics, andpsychology literature. Particularly noteworthy isMilliken’s (1987) exposure of conceptual incon-sistencies of the term within the organizationalliterature. As a result, he proposes three distincttypes of uncertainty (state, effect, and response)that appear to be as applicable to the individual

1 This conceptualization of entrepreneurial action is pro-cess oriented and transferable across a range of differentdefinitions of entrepreneurship within the management lit-erature (e.g., Gartner, 1990; Shane & Venkataraman, 2000).These scholars identify specific behaviors that are thoughtto be especially “entrepreneurial” in nature, such as newventure creation or Schumpeter’s (1934: 66) five forms of newcombinations.

134 JanuaryAcademy of Management Review

as they are to the organization as a unit of anal-ysis. Milliken suggests that state uncertainty isused to denote when administrators perceivethe environment to be unpredictable (1987: 136).In contrast, effect uncertainty is defined as “aninability to predict what the nature of the impactof a future state of the environment or environ-mental change will be to the organization” (1987:137). Finally, Milliken suggests that response un-certainty is “a lack of knowledge of responseoptions and/or an inability to predict the likelyconsequences of a response choice (Conrath,1967; Duncan, 1972; Taylor, 1984)” (1987: 137), andhe further points out that “response uncertaintyis likely to be salient when there is a perceivedneed to act . . . because a pending event orchange is perceived to pose a threat or to pro-vide some unique opportunity to the organiza-tion” (1987: 137).

Milliken’s framework implies that uncertaintyin the context of action falls within the exclusivedomain of response uncertainty. However, thisperceived need to act frequently is stimulatedby state or effect uncertainty. This would sug-gest that, in the context of action, Milliken’sthree types of uncertainty could be simplifiedinto three questions asked by a prospective ac-tor about his or her relationship to the environ-ment: (1) What’s happening out there? (state un-certainty), (2) How will it impact me? (effectuncertainty), and (3) What am I going to do aboutit? (response uncertainty).

Questions like these require one to form abelief, defined as a “conviction that certainthings are true” (Neufeldt & Sparks, 1995: 55).However, this belief is often qualified by a re-lated sense of doubt, which means “to be uncer-tain or undecided; to tend to disbelieve”(Neufeldt & Sparks, 1995: 180). This process, inwhich a belief and a related sense of doubt areformed, presupposes the existence of a worldthat is malleable and somewhat susceptible tobeneficial actor influence. Therefore, it commu-nicates a world view that is neither fully deter-mined nor fully random (Moya, 1990; Shackle,1966), and, as a consequence, “uncertainty” canbe viewed as a sense of “doubt” that is inextri-cable from the beliefs that produce action.

Therefore, because we are interested in therole that uncertainty plays in preventing peoplefrom acting entrepreneurially, we embrace theproposition made by Lipshitz and Strauss that“uncertainty in the context of action is a sense of

doubt that blocks or delays action” (1997: 150).This conceptualization captures three essentialfeatures of uncertainty integral to our argument.First, the proposition suggests that uncertaintyis subjective in that “different individuals mayexperience different doubts in identical situa-tions” (Lipshitz & Strauss, 1997: 150; see alsoDuncan, 1972). Lipshitz and Strauss (1997) pointout that the conceptualization of uncertainty asa subjective experience has a long traditionwithin psychology (Duncan, 1972; Smithson,1989). Entrepreneurship enthusiasts have con-tributed to this tradition (1) by assuming thatuncertainty prevents action (Shane & Venkat-araman, 2000; Stevenson & Jarillo, 1990) and (2)by attributing variation in its action-obstructivenature to individual differences in needs (Mc-Clelland, 1961), values (Weber, 1930), attitudestoward risk (Khilstrom & Laffont, 1979), confi-dence (Cooper, Woo, & Dunkelberg, 1988), per-ceptions (Palich & Bagby, 1995), and heuristics(Busenitz & Barney, 1997).

The second and third features of Lipshitz andStrauss’s uncertainty proposition are that it isinclusive in that no particular form of doubt isspecified, such as ignorance of future outcomes(Conrath, 1967; Smithson, 1989), and that it isconceptualized in terms of the effect of uncer-tainty on action—that is, hesitancy, indecisive-ness, and procrastination (Dewey, 1933; Gold-man, 1986; March, 1981; Yates & Stone, 1992).These last two features serve to define uncer-tainty more in terms of what it does than what itis. This diminishes the importance of determin-ing which of Milliken’s (1987) three forms of en-vironmental uncertainty is technically beingdiscussed, because each prevents action by con-tributing to doubt. Likewise, whether conceptu-alized as risk (MacCrimmon & Wehrung, 1986),Knightian uncertainty (Knight, 1921), ambiguity(Hogarth, 1987; March & Olsen, 1976), turbulence(Terreberry, 1968), or equivocality (Weick, 1979),uncertainty in the context of action acts as asense of doubt that (1) produces hesitancy byinterrupting routine action (Dewey, 1933), (2) pro-motes indecision by perpetuating continuedcompetition among alternatives (Goldman,1986), and (3) encourages procrastination bymaking prospective options less appealing(Yates & Stone, 1992).

Entrepreneurship theorists have embracedthe position that uncertainty is detrimental toentrepreneurial action because properties such


as hesitancy, indecisiveness, and procrastina-tion are thought to lead to missed opportunities(Casson, 1982). The opportunity for action is of-ten conceptualized as fleeting (James, 2002;Shane & Venkataraman, 2000), owing to the com-petitive nature of the market process (Mises,1949; Schumpeter, 1942). This position isgrounded in an economic assumption that theprocrastination of one actor is typically offset bythe profit-seeking proactiveness of others(Mann, 1996). Thus, economists often consider itinevitable that someone in the marketplace willact, which makes the decision process experi-enced by any one individual seemingly incon-sequential (Stigler, 1963).

Despite economists’ system-level, probabilis-tic perspective of entrepreneurial action, how-ever, we wish to point out that there is no marketindependent of the actors who create it. There-fore, ultimately, someone somewhere mustundergo a decision process in which action ischosen if any market “process” is to occur. Over-looking this fact has arguably contributed to thegeneration of alternative theories of the entre-preneur characterized by examination of onlyone dimension of uncertainty’s effect on action.

ALTERNATIVE THEORIES OFTHE ENTREPRENEUR

Traditionally, the label theory of the entrepre-neur has been used within the economics liter-ature to denote the study of the relationshipbetween entrepreneurship and economic activ-ity. These theories (e.g., Kirzner, 1973; Knight,1921; Schumpeter, 1934) frequently attribute themovement of the economy to a catalystic func-tion fulfilled by the entrepreneur. Accordingly,the entrepreneur is conceptualized in terms ofwhat he or she does—that is, innovates, coordi-nates, etc. This behavior is then thought to in-fluence the system by moving it toward, or awayfrom, some ideal state, such as equilibrium orefficiency.

Two assumptions are characteristic of mosttheories of the entrepreneur: (1) entrepreneur-ship is a “good” thing, with beneficial outcomesthat accrue to the system in which it occurs(Kilby, 1971; Stevenson & Jarillo, 1990),2 and (2)

entrepreneurship is observable as a behaviorthat can be attributed to some definitive theo-retical attribute capable of differentiating entre-preneur (actor) from nonentrepreneur (nonactor).Although the first assumption is important forunderstanding why scholars have devoted somuch energy to the subject and why the study ofentrepreneurial behavior at the individual levelis of value to organizational studies, it is not thefocal point of this article. The second assump-tion, however, is highly significant to our argu-ment in that it helps to expose the manner inwhich uncertainty is conceptualized withinthese theories.

We suggest that many theoretical explana-tions of why prospective entrepreneurs chooseto pursue a possible opportunity can be classi-fied into two simple conceptualizations of therole that uncertainty plays in preventing action:(1) the amount of uncertainty perceived and (2)the willingness to bear uncertainty. We turnnow to a deeper examination of each.

Entrepreneurial Action As the Outcome ofLess Perceived Uncertainty

While neoclassical economists were abolish-ing the need to consider individual differencesby constructing theories with assumptions suchas perfect information, “Austrian” economistswere building their economic theories on suchpremises as the subjectivity of value (Menger,1950), imperfect knowledge (Hayek, 1945), asym-metric beliefs (Mises, 1949), and differences inentrepreneurial alertness (Kirzner, 1973, 1985).Austrian economists typically have consideredthe entrepreneur to be the engine of the econ-omy (Kirzner, 1989; Mises, 1949; Pasour, 1989) andhave attributed the stagnation of the economy toa lack of entrepreneurial action. This lack ofentrepreneurial action, they believe, is often theconsequence of unperceived opportunities (Kirz-ner, 1979), which arise from the various explana-tions mentioned above.

Although Austrians are labeled subjectivists,this subjectivism traditionally has referred tothe epistemological limitations suffered, to agreater or lesser extent, by the subjects of their

2 Baumol (1996) questions this assumption by suggestingthat entrepreneurs pursue profit. If this profit is achieved via

innovation, then the system benefits as a by-product. How-ever, if innovation is difficult or unnecessary for profit, thenentrepreneurial energy is likely to take unproductive or evendestructive forms.


theories. Thus, people who have acted entrepre-neurially are seen to possess a more accuratepicture of reality than those individuals whohave not acted. Moreover, an objective reality isthought to exist in which a market opportunity isthere for the taking, but only for those who pos-sess the qualities necessary both to discoverand exploit it (see Addleson, 1995, for an elo-quent articulation of this point). Thus, entrepre-neurial action is seen as something all wouldengage in if they knew what to do, but, owing toepistemological differences, only some people(the entrepreneurs) “know” what to do. Accord-ingly, entrepreneurs are thought to have takenaction because they somehow escaped the igno-rance and paralysis produced by uncertainty,whereas those who have not acted entrepre-neurially are believed either to have fallen vic-tim to doubt or to have been blinded to the needfor forming a belief at all.

Graphically, this can be depicted as in Figure1. This figure shows two hypothetical internalresponse curves centered around two means.3

The left mean represents the noisy status quo,

and the right mean represents third-person op-portunity, which we define as a potential oppor-tunity for someone in the marketplace. Thus,third-person opportunity may not reflect an op-portunity for everyone, but, for those individualswith the right qualities, market potential exists.The distance between the means signifies theability to discern the market potential of thisthird-person opportunity. For example, onewould expect the market potential of a tele-porter to be more easily discerned than, say, themarket potential of the internet prior to webbrowsers.

The distance between the means and the dis-tribution of the curves contribute to the amountof uncertainty perceived in the decision to act.Although the Austrian presumption of an objec-tive reality suggests that the distance betweenthe means is the same for any prospective actor,the distribution of the curves surrounding thesemeans frequently is discussed as a function of atheoretically determined individual difference.For example, according to Hayek’s (1945) argu-ment, considerable overlap between the twocurves would represent an individual with little“local” knowledge of time and place, whereaslittle overlap would reflect an individual with aknowledge base that is highly applicable to therecognition and exploitation of this particularthird-person opportunity. Thus, the discriminat-ing feature between these two individuals is thepossession of applicable knowledge. Thisknowledge reduces perceived uncertainty to apoint that not only enables prospective entre-preneurs to form a belief that they have recog-

3 The curves centered around the two means are repre-sentative of hypothetical responses to the question ofwhether the individual believes that a third-person oppor-tunity exists. If the answer is no, then the decision wouldreflect a point on the left curve, whereas if the answer is yes,then the decision would reflect a point on the right curve.Under a repeated decision scenario, such as those con-ducted in experimental settings, this process would producea response curve around each mean composed of pointsrepresenting actual decisions. However, we qualify thecurves as “hypothetical” because, in a natural context, onlyone point of an individual’s response curve is observable.

FIGURE 1Hypothetical Internal Response Curves Regarding Third-Person Opportunity


nized a third-person opportunity but also allowsthem to overcome the belief-related doubt thatwould otherwise prevent action.

Therefore, according to many theories of en-trepreneurial action, uncertainty has been con-ceptualized in terms of quantity. Owing to thedistance between the means and the distribu-tion around the means, the prospective entrepre-neur is thought to face more or less uncertainty,which prevents action either by obfuscating theexistence of the third-person opportunity or bycontributing to the doubt people experience intheir belief that a third-person opportunity ex-ists. Thus, the uncertainty perceived by a pro-spective actor forms a continuum, with completeignorance on one end (denoted graphically asflat response curves) to near certainty on theother end (denoted graphically as responsecurves that nearly form a perfectly straight per-pendicular line at the mean, with no overlapbetween these narrow curves). Although the rolethat perceived uncertainty plays in obstructingentrepreneurial action is important, we arguethat it is insufficiently explanatory, because itsays nothing about the willingness to bear theuncertainty that is perceived.

Entrepreneurial Action As the Outcome ofMore Willingness to Bear Uncertainty

The theory of the entrepreneur is not the ex-clusive domain of the Austrian economist. Prom-inent non-Austrians, from Knight (1921) toSchumpeter (1934), also have recognized the rolethat uncertainty plays in preventing entrepre-neurial action. However, these economic theo-rists conceptualize uncertainty’s action prohibi-tive role in a slightly different way. They seeentrepreneurial action not as the outcome ofless perceived uncertainty but as more willing-ness to bear the uncertainty faced by all pro-spective actors. For instance, Knight addressesuncertainty explicitly. He posits that profit is thereward for those willing to bear uncertainty be-cause, unlike risk, uncertainty is inestimableand therefore uninsurable. Thus, entrepreneursare distinguishable from nonentrepreneurs intheir willingness to bear the uncertainty intrin-sic to a possibly profitable course of action.

In contrast, the willingness to bear uncer-tainty is implicit in Schumpeter’s theory, wherehe argues that the entrepreneur’s function liesin the innovative act of creating new combina-

tions. Believing that the potential for new com-binations is abundant and at times obvious,Schumpeter delineates entrepreneurs from non-entrepreneurs not by differences in knowledgeor perception but by the performance of the in-novative act itself (1934: 88). This elimination ofperceptual differences forces Schumpeter tospeculate reluctantly about motivational differ-ences in an attempt to explain why some indi-viduals and not others engage in entrepreneur-ial action (1934: 90).

Schumpeter’s (1934) behavioral bent attractedpsychologists, such as McClelland (1961), Hagen(1962), and Kunkel (1965), who exchanged theeconomic theorists’ descriptive orientation for amore prescriptive theoretical viewpoint. Where-as economic theories of the entrepreneur fo-cused on explaining what must occur (e.g., un-certainty bearing) for the economy to function,psychological theories sought to explain whyentrepreneurs are more willing than their coun-terparts to bear this uncertainty. Because thesepsychologists shared the economists’ belief thatentrepreneurship produced economic growth,they tried to identify the motives underlying en-trepreneurial activity in an effort to developthese motives in their subjects. Unfortunately,this was thought to produce explanations thatrelied too heavily on unchangeable needs andvalues developed in childhood.4

Graphically, this can be depicted as in Figure2. Figure 2 builds on the graph shown in Figure1. However, in this case, the distance betweenthe means and the distribution of the curvesremain constant. The vertical line in Figure 2indicates the criterion, used to designate thepoint at which the prospective entrepreneur iswilling to act. It is at this point that the prospec-tive entrepreneur decides that a possible third-person opportunity is an opportunity for him orher—that is, a first-person opportunity. The cri-terion, therefore, conveys the individual’s will-ingness to bear the uncertainty intrinsic to en-trepreneurial action.

A criterion that splits the uncertainty (denotedby the area of the overlapping response curves)

4 It should be noted that, unlike critics, these theorists didnot see these motives as unchangeable elements of person-ality. For instance, much of McClelland’s empirical workwas devoted to establishing that the need for achievementcould be learned. We wish to thank Jerry Katz for this in-sightful observation.


in half means that a prospective actor will be aslikely to act as not. In contrast, if an individualchooses a lax criterion (denoted by moving thecriterion to the left), he or she will pursue almostevery possibility that comes along. Such a loca-tion of the criterion is representative of the pro-file of the Schumpeterian entrepreneur who isfrequently conceptualized as an innovator,leader, and/or adventurer. It is also reflective ofthe Knightian entrepreneur who is explicitlyconceptualized as a “bearer of uncertainty.” Psy-chologists like McClelland sought to explain the“laxity” of the criterion (e.g., as the need forachievement) and promote it in an effort to en-courage entrepreneurial activity.

If the individual chooses a strict criterion (de-noted by moving the criterion to the right), he orshe will choose to pursue very few possibilities.Given the uncertainty surrounding the decision,there is always overlap between the noise andthird-person opportunity curves. Thus, individu-als are forced to expose themselves to the pos-sibility of either committing an error of commis-sion (taking action only to find their belief wasunfounded) or committing an error of omission(not taking action only to regret it when timeproves that their passed-over hunch was cor-rect). Although only time proves prophecy, con-sideration of the possible payoffs associatedwith these various decisional outcomes shapesprospective actors’ decisions as they contem-plate whether to commit to a particular course ofaction.

A simple amalgamation of the above argu-ments suggests that uncertainty prevents actionby obfuscating (1) the need or possibility for

action, (2) the knowledge of what to do,5 and (3)whether the potential reward of action is worththe potential cost. In the next section we presenta conceptual model (illustrated in Figure 3) thatrelates perceived uncertainty and motivation toentrepreneurial action.

A PROPOSED SYNTHESIS: ENTREPRENEURIALACTION AS THE OUTCOME OF THEWILLINGNESS TO BEAR PERCEIVED

UNCERTAINTY

Environmental change is usually thought tobe a source of business opportunities. For exam-ple, Shane (2000) investigated a technologicalchange in printing (a patented three-dimen-sional printing process) and eight teams of en-trepreneurs, each of whom pursued a differentopportunity arising from the technology. Simi-larly, we use technological change as a startingpoint to summarize our conceptualization of thetwo stages of entrepreneurial action.

Stage I: Attention and Third-PersonOpportunity

Stage I addresses first-person attention. Eitherpeople acknowledge a third-person opportunityarising from a technological change or they donot. Of course, those individuals who are un-aware of the technological change are likely to

5 We use “what to do” inclusively. That is, “what to do”does not refer merely to the “end” but also to the “means” of“how,” “when,” and “where” that end is to be achieved.

FIGURE 2The Criterion As the Individual’s Willingness to Bear Uncertainty Intrinsic

to Entrepreneurial Action


fall into the latter category. For example, with-out a certain degree of domain-specific knowl-edge, one may not even recognize the possibilityfor action (by oneself or others). In other words,there may be so much uncertainty that the indi-vidual is too ignorant to ask, “What’s happeningout there?” Thus, whether individuals perceiveMilliken’s state and effect uncertainty dependson whether they know enough about a techno-logical change to perceive it, even if only faintly.This suggests that a general form of domain-specific knowledge is necessary to trigger theexperiencing of response uncertainty.

However, knowledge need not predicate moti-vation in this process. Before the criterion be-comes attached to the evaluation of a particularthird-person opportunity, its location dependson an individual’s strategy. “A strategy refers toa pattern of decisions in the acquisition, reten-tion, and utilization of information that serves tomeet certain objectives, i.e., to insure certainforms of outcome and to insure against certainothers” (Bruner, Goodnow, & Austin, 1956: 54).Thus, the position of the criterion prior to theexistence of a stimulus represents the individu-al’s strategy.

For example, when a person becomes dissat-isfied with his or her current athletic shoes, theindividual may begin to consider switching

brands when buying a new pair. As a conse-quence, the individual will likely become moresensitive to what others are wearing than beforeand will increasingly allocate attention to theissue. This relaxes the criterion, making the in-dividual more sensitive to his or her environ-ment. This can produce deliberate search, suchas exploring various stores in the hopes of find-ing the qualities the person is looking for in anathletic shoe (e.g., improved performance andcomfort, through reduction of the accumulationof sweat in the shoe), or it can take form as adiscovery heuristic (Gigerenzer, 1991), such as asudden increase in awareness of ventilationtechnology used in other products (e.g., bellows,fans, suction devices) that one (and others) hadpreviously ignored. Either way, the desire for anew, improved athletic shoe has spurred theacquisition of knowledge likely to prompt therecognition of recent technological advances infan miniaturization (for use in computers) andthe determination that to insert miniaturizedfans in athletic shoes represents a third-personopportunity, one that reduces the temperature ofthe foot and thus reduces sweating, odor, andsuch fungal infections as athlete’s foot. Oncethat opportunity is noticed, however, the crite-rion becomes attached to the specific action nec-

FIGURE 3A Conceptual Model Relating Perceived Uncertainty and Motivation to Entrepreneurial Action


essary to assess whether third-person opportu-nity represents first-person opportunity.

Therefore, the acknowledgment of a third-person opportunity arising from a technologicalchange is configural in the sense that peoplewho have the necessary knowledge and motiva-tion will believe that there is third-person oppor-tunity arising from a technological change, butthose who do not have the necessary knowledgeand motivation will not believe that the techno-logical change represents an opportunity forsomeone and will no longer attend to it. Stage IIapplies only to those individuals who believethat a third-person opportunity exists.

Stage II: Evaluation and First-PersonOpportunity

Stage II addresses first-person evaluation.The belief that a technological change repre-sents a third-person opportunity triggers a deci-sion-making process in which the prospectiveentrepreneur must evaluate whether this third-person opportunity constitutes a first-person op-portunity. The individual forms beliefs regard-ing what to do and why to do it—that is, whetherthe potential reward for this particular action isworth the potential cost specific to oneself. How-ever, both of these beliefs are undermined to agreater or lesser extent by doubt. Therefore, re-gardless of whether the construct of knowledgeor motivation is discussed, the process remainsthe same: a belief is formed regarding a desiredend state, but doubt exists regarding whetherthat desired end state is feasible (can beachieved in the manner envisioned) and desir-able (whether its attainment will fulfill the mo-tive for which it is being sought).6

This evaluation stage is rooted in Aristotle’s“practical syllogism,” which forms the founda-tion of most expectancy-value theories (e.g.,Ajzen, 1996a,b; Gatewood, Shaver, Powers, &Gartner, 2002). According to Aristotle (1987), thepremises of this syllogism are the actor’s desires(“A wants to achieve X”) and beliefs (“A believesthat if B is performed X will occur”), and theconclusion is not another belief but the actionitself. Thus, the realization that individual ac-

tion is not solely a function of knowledge ormotivation but, rather, a composite of belief anddesire regarding a particular form of behavior isnot new, nor is it limited to expectancy-valuetheory (Greve, 2001). In fact, Hastie suggests thatthe field of judgment and decision making isabout “how people . . . combine desires (utilities,personal values, goals, ends, etc.) and beliefs(expectations, knowledge, means, etc.) to choosea course of action” (2001: 655–656). He goes on topoint out that the conceptual and perhaps defin-ing template for a decision comprises three com-ponents:

(a) courses of action (choice, options, and alterna-tives); (b) beliefs about objective states, pro-cesses, and events in the world (including out-come states and means to achieve them); and (c)desires, values, or utilities that describe the con-sequences associated with the outcomes of eachaction-event combination (2001: 656).

Believing that one has recognized a third-person opportunity does not necessarily meanone believes one possesses the knowledge andmotivation necessary to exploit it. However,through learning efforts and/or the encourage-ment of others, one may be able to overcomedoubt and act. Therefore, the question of thesecond stage is similar to a classic “risk/return”dilemma in which a prospective actor must askhim/herself whether he or she believes that thepayoff of the third-person opportunity justifiesbearing the perceived uncertainty necessary toattain it. If the answer is yes, then a first-personopportunity is believed to exist, and entrepre-neurial action takes place. The “risk” of thisrisk/return dilemma, however, is subjectivelydetermined by the prospective actor. Thus, itseems that, to act entrepreneurially, peopleneed not have a high tolerance for uncertainty ifthey believe that they know what they are doing.

Therefore, whether one will engage in a par-ticular action is a decision that depends onwhether the individual is motivated enough toact, given the uncertainty he or she expects toencounter in pursuit of a third-person opportu-nity. The next section applies our model to anumber of influential economic theories of theentrepreneur (conveyed in Table 1) not only as ameans of revealing problems that managementscholars face when trying to apply these theo-ries of the entrepreneur to the individual ratherthan system level, but also as a means of glean-

6 See Barnard (1968) for an analogous argument in whichthe terms effectiveness and efficiency are used, respectively,to delineate goal attainment from motive satisfaction.


ing theoretical insights that are not ontologi-cally constrained.

REINTERPRETATION OF INFLUENTIALTHEORIES OF THE ENTREPRENEUR

Failure to address entrepreneurial action interms of both knowledge and motivation hasproduced a number of theories of the entrepre-neur that are incomplete when used at the indi-vidual level of analysis. In this section we useour conceptual model of entrepreneurial actionto address possible limitations of the three the-ories of the entrepreneur that are consideredmost influential in the management literature:Schumpeter (1934), Kirzner (1973), and Knight(1921).7

Schumpeter’s Innovator: Epistemological andOntological Issues

Schumpeter’s theory introduces two major as-sumptions. The first is that perceived uncer-tainty does not play a role in entrepreneurial

action. This assumption is derived from a beliefthat opportunity is abundant and readily iden-tifiable. For example, Schumpeter discusses theeconomy as if it were a relatively closed systemthat merely interfaces with science, literature,politics, and so forth via the entrepreneur.8 Indoing so, Schumpeter suggests that opportuni-ties originate elsewhere for all prospective en-trepreneurs to see. Because all of the prospec-tive entrepreneurs are equally capable ofseeing the development, it is only the adventur-ous who make the leap—that is, entrepreneurscan be discriminated from others only in termsof the location of their criterion. Schumpeter isthen forced to speculate about individual differ-ences in the motivation to act entrepreneurially,and he identifies a number of “traits,” includinggreater self-centeredness (1934: 91–92), “thedream and the will to found a private kingdom”

7 We have chosen to emphasize these three theorists overothers for the following reasons. First, as Stevenson and Jarillo(1990) point out, Schumpeter’s conceptualization of the entre-preneur has provided one of the primary theoretical founda-tions on which entrepreneurial management research hasbeen built. Second, Kirzner’s conceptualization of the entrepre-neur is the most influential in the opportunity paradigm pro-posed by Shane and Venkataraman (2000) in their recent butalready highly influential piece. Finally, Knight was chosen toround off our examples because his theory is typically recog-nized as the third primary and distinctly original theory of theentrepreneur (Barreto, 1989; Hebert & Link, 1988).

8 For example, Schumpeter notes:

It is no part of [the entrepreneur’s] function to “find” orto “create” new possibilities. These are alwayspresent, abundantly accumulated by all sorts of peo-ple. Often they are also generally known and beingdiscussed by scientific or literary writers. In othercases, there is nothing to discover about them, be-cause they are quite obvious. To take an example frompolitical life, it was not at all difficult to see how thesocial and political conditions of France at the time ofLouis XVI could have been improved so as to avoid abreakdown of the ancient regime. Plenty of people asa matter of fact did see it. But nobody was in a positionto do it. Now, it is this “doing the thing,” without whichpossibilities are dead, of which the [entrepreneur’s]function consists (1934: 88).

TABLE 1Limitations and Assumptions of Three Influential Theories of the Entrepreneur

Theorist

Knowledge:PerceivedUncertainty

Motivation:Willingness toBear Uncertainty

PhilosophicalStance Importance of Configural Argument

Schumpeter Relatively ignored Addressed—primarilyin terms of theevaluationstage

Naive realism Moderate—third-person opportunityis considered to be readilyidentifiable

Kirzner Addressed—primarilyin terms of theattention stage

Relatively ignored Critical realism High—third-person opportunity isthought to be obscured by marketignorance

Knight Addressed—primarilyin terms of theevaluationstage

Addressed—primarilyin terms of theevaluationstage

Critical realism Low—awareness of third-personopportunity is taken for granted


(1934: 93), “the will to conquer” (1934: 93), and the“joy of creating” (1934: 93–94).

Schumpeter’s second major assumption isthat opportunities have an objective existence—an argument that communicates a social realistontology. Ontological assumptions are assump-tions concerning the nature of social reality. “[A]social realist ontology presumes that actors arereal—natural persons having innate capacitiesto act so as to secure and protect their interests.. . . The environment too is regarded as real: it isout there as a part of the natural world” (Scott,1995: 50). In contrast, a social constructionist on-tology suggests that “individuals do not dis-cover the world and its ways, but collectivelyinvent them. Such invention is not random andarbitrary, but itself arises out of and is informedand constrained by existing social arrange-ments and beliefs” (Scott, 1995: 50). BecauseSchumpeter’s theory conceptualizes possibili-ties as existing objectively (i.e., in the form ofnew technologies observable by all), it not onlyrecognizes the existence of a third-person oppor-tunity but it also equates this third-person op-portunity with first-person opportunity in everyway except one: the amount of desire peopleexhibit in deciding whether to exploit it.

Subscription to this social realist ontology, incombination with the elimination of epistemo-logical differences, puts Schumpeter into a bit ofa straitjacket. Because everyone in his economyshares the same perceptual acumen, opportuni-ties must be new to everyone, not merely theactor, or else they would already have beenexploited. This limits Schumpeter’s “true” entre-preneur to the domain of radical innovation.9

However, the radicalness of the innovation andeven the innovation itself become third-partyassessments subject to post hoc analysis. Thatis, the degree of innovativeness exhibited ismore dependent on a subjective evaluationmade by a number of observers after the factthan it is on some objectively definable criteria.Consequently, a priori classification of “radical

innovation” is exceptionally difficult and empir-ically problematic.

One potential explanation for this difficulty isthat action is an individual phenomenon affect-ing system-level outcomes. Traditionally, theo-retical focus has started with the system-leveloutcome (i.e. radical innovation), and the theo-rist then looked to the actor(s) to determine thecause. This approach unwittingly imposes theontological assumptions common to economic,system-level theories on to the process experi-enced by the individual actor (i.e., entrepreneur).Unlike these system-level theories, which relyon an observer’s assessment of whether an actoris engaging in radical innovation or bearinguncertainty, a theory of individual action fre-quently defines novelty through the eyes of theactor (see Weber 1947, 1968) and argues that it isthis actor’s assessment of the situation that ul-timately determines whether entrepreneurialaction will occur. Thus, the individual actionthat impacts the system depends on whether anactivity is radical, uncertain, novel, and so forthin the mind of the prospective actor. If this actionoccurs on a scientific knowledge frontier, then itwill likely appear radical to observers, but if thisaction occurs on a personal knowledge frontier(e.g., franchising), then it may appear to observ-ers to be nothing more than imitation. To theparticular actor, however, it may be novel eitherway. An embrace of this first-person approach ischaracteristic of the Austrian school and of Kirz-ner’s theory, to which we now turn our attention.

Kirzner’s Alert Arbitrageur: Motivational andConfigural Issues

Whereas Schumpeter’s entrepreneur disruptsequilibrium by introducing radical innovation,Kirzner’s entrepreneur begins in disequilibriumand fulfills the function of an arbitrageur whomoves the economy toward equilibrium by rec-tifying discrepancies in supply and demand.10

Unlike Schumpeter, Kirzner (1973) provides am-ple attention to epistemological differences un-der the guise of entrepreneurial alertness. How-ever, within Kirzner’s (1979) work, there is an9 We use the adjective true because although Schumpeter

often used the term entrepreneur to refer to both the pioneerand the subsequent entrants, he considered the pioneer, or“leader,” to represent the “true” theoretical entrepreneurresponsible for stimulating the system. To avoid the confu-sion associated with introducing a new term, we thought itbest to designate this theoretical profile as the “true” entre-preneur rather than the “leader.”

10 These discrepancies in supply and demand are notlimited to existing products and services. They also includefuture discrepancies that can arise from discoveries of su-perior means-end frameworks of which people were previ-ously unaware.


unwitting dilution of his concept of entrepre-neurial alertness from a description of a behav-ior that is necessary for the economy to functionproperly11 to a description of a psychologicalcharacteristic common to successful entrepre-neurs.12 We say “unwitting” because Kirzner fre-quently acknowledges the importance of astatement made by his mentor, Ludwig vonMises: “The economist must never be a special-ist. In dealing with any problem he must fix hisglance upon the whole system” (Mises, 1949: 69).

As a behavior that is necessary for the econ-omy to function properly, entrepreneurial alert-ness is what happens when the market presentsa profitable situation that is successfully ex-ploited by an individual who “fits” the neces-sary profile (Kirzner, 1973, 1980). In essence, en-trepreneurial alertness is a less mathematicalexposition of probability theory in which themarket presents an objective opportunity forsomeone possessing the necessary knowledge.Entrepreneurial alertness ensures exploitationof this opportunity and consequently perpetu-ates the market system.

To use an analogy, entrepreneurial alertnessis like a radio trivia contest. Although you or Imay not know the answer to the trivia questionasked by the disc jockey, someone inevitably

does. Therefore, an objective opportunity can besaid to exist. The first individual who knows theanswer and calls in to claim the prize is theexhibitor of Kirzner’s (1973) concept of entrepre-neurial alertness. Accordingly, entrepreneurialalertness has no meaning a priori. By definition,it can only be said to exist post hoc. Therefore,alertness can only be said to exist for the suc-cessful radio caller (and possibly to a lesserdegree for those who know the answer, try tocall, but are not as fast as the winner). The callerwho gets through but provides the wrong an-swer cannot be described as exercising entre-preneurial alertness. Thus, entrepreneurialalertness is a configural concept in which anobjective market opportunity is only an opportu-nity for those possessing the necessary at-tributes. Therefore, because this alertness is aproduct of the market, it is problematic for it tobe discussed as a universal attribute of entre-preneurial individuals independent of the sys-tem in which they operate.

However, entrepreneurial alertness is used asa description of a psychological characteristiccommon to successful entrepreneurs in Kirzner’slater works (1982, 1997, 1999; Kirzner & Institute ofEconomic Affairs, 1997) as an effort to soften(1982: 156–157) the more deterministic stancestaken in his earlier work (e.g., 1979: 9). In doingso, he obfuscates the configural nature of the“alertness” concept by discussing it more interms of a quality observable in characteristicssuch as prescience, boldness, self-confidence,creativity, and innovative ability (Kirzner, 1999).This transforms entrepreneurial alertness intonothing more than judgment and leads thereader to believe that the concept is separablefrom the market context. However, we argue thatit is not. This judgment is still discussed in termsof how well the entrepreneur’s envisaged futurecorresponds to the realized future (Kirzner, 1982:156).

The problem that this introduces lies in thefact that Kirzner equates opportunity recogni-tion with entrepreneurial action (e.g., “entrepre-neurial alertness exploits these opportunitieswhen others pass them by”—see footnote 11). Ina subsequent article in which he compares andcontrasts his entrepreneur with Schumpeter’s,Kirzner (1999) comes closer to recognizing theneed for a criterion. However, he still tries toaddress motivation in terms of perception (i.e.,the proposed solution is still the need for a

11 For example, Kirzner notes:

This entrepreneurial alertness is crucial to the mar-ket process. Disequilibrium represents a situationof widespread market ignorance. This ignorance isresponsible for the emergence of profitable oppor-tunities. Entrepreneurial alertness exploits theseopportunities when others pass them by. G.L.S.Shackle and Lachman emphasized the unpredict-ability of human knowledge, and, indeed, we do notclearly understand how entrepreneurs get theirflashes of superior foresight. We cannot explainhow some men discover what is around the cornerbefore others do. . . . As an empirical matter, how-ever, opportunities do tend to be perceived andexploited. And it is on this observed tendency thatour belief in a determinate market process isfounded (1979: 9).

12 For example, within the same book providing the pre-vious comment, Kirzner states:

The truth is that the ability to learn without delib-erate search is a gift individuals enjoy in quitedifferent degrees. It is this gift surely, that we havein mind when we talk of entrepreneurial alertness.Entrepreneurial alertness consists, after all, in theability to notice without search opportunities thathave been hitherto overlooked (1979: 148).


tighter distribution around the mean of thethird-person opportunity). Kirzner explicates:

The seer who can imagine how the world mightbe improved by a radical innovation but wholacks the needed boldness and initiative (toshoulder the risks which he would have to as-sume in order actually to introduce this innova-tion to reality in a world fraught with uncertain-ties)—has in fact not yet really discovered anavailable, attractive opportunity for innovation. Ifhe has not seen that opportunity in so shining alight that it drives him to its implementation inspite of the jeering skepticism of others, and inspite of the possibility of its ultimate failure—then he has not really “seen” that opportunity(1999 13).

In essence, Kirzner’s argumentation collapsesthe attention and the evaluation stages of ourconceptual model of entrepreneurial action intoone simultaneous occurrence in which individ-uals become entrepreneurs if and only if theirprior knowledge enables them to go from igno-rance to near certainty instantaneously. That is,an individual becomes an entrepreneur whenhis or her distribution around the third-personopportunity mean is so tight that uncertainty is,for all material purposes, eliminated from thequestion of whether to act (as was the case inthe aforementioned radio contest analogy). Theprimary problem with this conception lies in therealization that you or I may frequently know theanswer to a radio trivia question without believ-ing that the prize is motivating enough to wastetime on the unlikely prospect of getting throughto the station. Therefore, without motivation, en-trepreneurial alertness cannot be expected toproduce entrepreneurial action, regardless ofhow “clearly” one may have “seen” an opportu-nity.

For the most part, Kirzner’s theory of entrepre-neurial alertness is an elegant explanation ofthe attention stage. Ignorance is addressed interms of perception, and the ability to noticeopportunities without search is highly reminis-cent of personal strategy. However, to be a the-ory of the entrepreneur, both the attention andthe evaluation stages are necessary. After all,entrepreneurial perception can only be consid-ered “entrepreneurial” when it produces action.This cannot be achieved without evaluatingaction-specific uncertainty (even if only briefly,owing to a potentially nominal amount of uncer-tainty). This evaluation, in turn, involves thenecessary motivation in relation to one’s belief

and corresponding doubt that one knows whatto do. Therefore, according to Kirzner, being anentrepreneur logically implies that entrepre-neurial alertness has been exercised. Withoutentrepreneurial alertness, the individual wouldnot have perceived and acted on the opportu-nity, and would not, therefore, be an entrepre-neur.

Knight’s Uncertainty Bearer: Attention Issues

Because it emphasizes uncertainty in the ex-planation of profit, Knight’s (1921) theory comesthe closest of the three in recognizing the signif-icance of both knowledge and motivation in en-trepreneurial action. However, because the con-text of the theory is an existing firm, theexistence of a decision scenario is frequentlytaken for granted, and little explanation is givento how the decision maker escapes ignorance.Knight argues that individuals frequently faceuncertainty in the decisions they make regard-ing the normal functioning of the enterprise—that is, forecasting consumer demand, project-ing costs, and so on. Thus, recognizing orcreating opportunities is made insignificant, be-cause profit is believed to come from uncer-tainty, which Knight considers to be rarely inshort supply. Instead, he places emphasis on theresponsibility associated with decision making.

Accordingly, Knight’s theory discusses entre-preneurial action solely in terms of the evalua-tion stage, without adequate concern for the at-tention stage. In other words, there is no need toaddress the kind of radical uncertainty (i.e., flatresponse curves) indicative of market ignoranceif one begins with the assumption that the stim-ulus will be thrust on the individual in the nor-mal course of business activities. This positionmakes Knight’s theory congenial to discussionsof scanning and deliberate search common tostrategy research (Dutton & Jackson, 1987, 1997)but incomplete when addressing discussions ofdiscovery, which are more commonly associatedwith entrepreneurship. Because scanning anddeliberate search are prompted by a consciousawareness of a need for more information, theyaddress uncertainty and known ignorance (i.e.,“I know what it is that I don’t know”). Discovery,however, is based on notions of complete igno-rance (i.e., “I don’t know what it is that I don’tknow”). That is, the individual is not consciouslyinvestigating the phenomenon and may even be


involved in alternative activities that engagehis or her attention, thereby preventing recogni-tion of a third-person opportunity.

Although in some respects Knight’s theory of-fers a less comprehensive explanation of whythe economy functions effectively and why firmsemerge than either Schumpeter’s or Kirzner’s, inother ways Knight may have an advantage overSchumpeter and Kirzner. By not discussing theeconomy explicitly, Knight is able to focus moreclearly on the individual’s decision-making pro-cess. This focus on the individual and relativeneglect of the system may be responsible notonly for preventing oversight of either knowl-edge or motivation but also for keeping Knightfrom becoming too enslaved by his ontologicalassumptions. Although Knight clearly exhibitssocial realist sympathies when he suggests that“a man’s judgment has, in an effective sense, atrue or objective value” (1921: 270–271 footnote),his theory is not constrained by them, as is thecase with Schumpeter and Kirzner, each ofwhom focuses substantially on the concept ofequilibrium and disequilibrium.

As a result, Knight’s theory is less configuralin nature. In fact, the third-person opportunitycould be conceptualized in terms of a sociallyconstructed situation in the future about whichthe entrepreneur must try to accurately predictwhat will take place. For example, the questionis not whether this is or is not an objective op-portunity to seize; rather, it is “How firmly do Ibelieve that I can sell a certain number of mynew product to the market?” In such a scenario,the expectation becomes the third-person oppor-tunity and the actor’s knowledge and motivationcontribute to whether the actor deems the sce-nario action worthy (i.e., “Can I make the futurewhat I want it to be?”). This kind of scenariogeneration and enactment escapes the heavydeterminism implied by the equilibrium para-digm and begins to look a lot like the psycho-logical stances taken by radical, subjectivisteconomists (e.g., Ebeling, 1986; Maki, 2001;Shackle, 1972) and critical psychologists, suchas Weick (1979, 1995). This change in argumen-tation, however, results in a shift in one’s onto-logical assumptions.

Schumpeter and Kirzner embrace social real-ism. In both theories discovery plays a role. Be-cause Kirzner begins with a dynamic and inclu-sive economy, he must address discoverydirectly, which he does through his concept of

market ignorance. Schumpeter also addressesdiscovery, but more indirectly. He simply pushesit back into the realm of science, making thescientists the inventors and the entrepreneursmerely innovators. However, the fact remainsthat “discovery” still occurs somewhere in hisworld view.

In contrast, action theorists of a sociological(DiMaggio & Powell, 1983; Meyer & Rowan, 1977)and critical psychological bent (Burke & Reitzes,1991; Weick, 1993) favor a social constructionistorientation (Scott, 1995), shying away from termssuch as discovery when discussing social con-texts (Scott, 1995). These theorists do not see thesocial environment as something to be discov-ered; instead, they view it as either “wider beliefsystems and cultural frames [that] are imposedon or adopted by individual actors and organi-zations” (Scott, 1995: 44) or as “understandingsand scripts [that] emerge out of actions as wellas guide them” (Scott, 1995: 45), respectively.This subtle but powerful shift of ontology fromsocial realism to social constructionism pre-sents possibilities and problems for entrepre-neurship research.

IMPLICATIONS OF AN ACTION FRAMEWORK

It is not our purpose in this article to act asproponents or critics of social realism or socialconstructionism. Rather, we merely wish to il-lustrate that the many economic theories of theentrepreneur that are so influential to manage-ment theory today are, at their core, theories ofaction that are laden with ontological assump-tions. These assumptions influence not onlywhich components of action are discussed butalso the way that opportunity is conceptualized.Recognition of this fact enables scholars to drawfrom these theories in a more productive man-ner, both theoretically and empirically.

We propose that an action framework canlead to more productive discussions regardingthe important entrepreneurial concept of oppor-tunity (Brown, Davidsson, & Wiklund, 2001;Shane & Venkataraman, 2000; Stevenson &Gumpert, 1985). Shane and Venkataraman (2000)draw from economic theory and present an elo-quent argument for the objective existence ofopportunities. In a highly original study, Shane(2000) pushes this paradigm to the empiricalfront by establishing the mediating role thatprior knowledge has in both the discovery and


exploitation of opportunity. Perhaps what ismost interesting about this study, in relation toour argument, is that the same term opportunityis used to denote both the third-person opportu-nity of the new technology and the first-personopportunity of the various individuals who per-ceive it in different ways. For example, Shanestates, “Potential entrepreneurs should look todiscover opportunities in what they know ratherthan in what is popular with other entrepre-neurs” (2000: 467). Language such as this con-veys a belief in the objectivity of third-personopportunity, even if epistemological differencesproduce different interpretations of it.13

Other entrepreneurship scholars who haveexhibited a qualified subscription to this para-digm have provocatively proposed the use ofsignal detection theory (MacMillan & Creelman,1991; McFall & Treat, 1999; Swets, 1996) for exam-ining opportunity recognition and evaluation(e.g., Baron, 2002; McMullen & Shepherd, 2003).However, the question of whether an error ofcommission is attributable to entrepreneurialerror in terms of misperceived opportunity, poorstrategy formulation, poor strategy implementa-tion, or unfavorable changes in environmentalconditions becomes, at best, difficult to deter-mine using this ontological foundation.

In stark contrast to these social realists areaction enthusiasts who exhibit social construc-tionist sympathies. For example, Gartner,Carter, and Hills (2001) argue that opportunitiesare often enacted phenomena with no existenceindependent of the individuals who envisionand/or exploit them. For these scholars, discus-sion of third-person opportunity underminestheir world view. They fear that the languagethat accompanies this realist ontology reflectsan artificially constructed framework superim-posed on the phenomenon by scholars to helpthem make sense of it. They suggest that theconsequence of such a framework is that it ob-fuscates scholarly understanding of the phe-nomenon as it actually occurs. For example, byusing words in surveys such as “discovery,”which they argue are not used by people whenconfronting the phenomenon in a natural state,

scholars distort findings by introducing theirown conceptions of the phenomenon to be ex-plained. Although the debate regarding whichontology is more suited to entrepreneurship re-search is integral to “good” science (Cannella &Paetzold, 1994), it remains diluted as a discus-sion of the nature of opportunity and unrecog-nized for what it is—a philosophical debateabout the nature of the social world and humanaction (Burrell & Morgan, 1979).

Therefore, the primary difference between en-trepreneurship scholars with social realist sym-pathies and those with social constructionistsympathies concerns the nature of third-personopportunity. Is an “opportunity” conceived to be“out there” awaiting discovery, evaluation, andexploitation? Or does one begin with an individ-ual’s knowledge and motivation and attempt todetermine how that influences his or her mentalrepresentation of the environment? We proposetwo potential approaches for reconciling thesecontrasting views: one pragmatic and the otherconceptual.

A Pragmatic Approach

Perhaps the easiest way to address the philo-sophical nature of third-person opportunity is toavoid it. Arguably, this is precisely what manypositivist psychologists, such as Simon, Tverskyand Kahneman, and Giegerenzer, have done.Using experimental methods or controlled tasks,the researcher is able to observe individual be-havior within an “objective,” somewhat micro-cosmic reality. For example, both Simon’s workusing the game of chess or Tversky and Kahne-man’s framing experiments examine judgmentand decision making regarding an “objective”answer (i.e., one that is logically right or wrong).Historically, the quality of the individual’s deci-sion has been determined by equating “good”judgment with “rational” judgment as deter-mined by statistics, or probability theory(Hastie, 2001). Accordingly, these tasks are notsubject to multiple interpretations.

This same approach can be used to analyzethe decision of whether to engage in entrepre-neurial action. Because one can control withinan experiment the amount of information pre-sented to the individual, the researcher can con-trol the distance between the noise and third-person opportunity means in such a way as toensure substantial distance or close proximity.

13 This suggests that Shane subscribes to a social realistontology, but it is a “critical realism,” in which there arelimits on individuals’ epistemological abilities, versus a“naive realism,” in which no such limitations exist (Lincoln& Guba, 2000).


Thus, regardless of whether an “opportunity” inthe real world ever objectively exists, one cancreate an experiment in which an opportunisticsituation does undoubtedly exist (i.e., the poten-tial for arbitrage).

However, such an experiment suffers fromsome of the critiques leveraged against Knight’stheory above (i.e., a decision scenario is forcedon the decision maker, leaving the researcheruninformed about the allocation of entrepre-neurial attention). In addition, whether a situa-tion can be classified as an opportunity if anindividual recognizes it and deems it unworthyof exploitation, and whether an arbitrage oppor-tunity is an “entrepreneurial” opportunity, arequestions that require theoretical answers thatwould most likely go unaddressed under thisapproach.

One final observation regarding this solutionis that it is not so much behavioral as it iscognitive or decisional in nature. Sarasvathy’s(2001a,b) work on effectuation within a slightlymore natural setting epitomizes the promisingpotential of this method. By using “think-aloud”protocols to examine how entrepreneurs thinkabout opportunity, she successfully sidestepsthe configural issues that are often embedded ineconomic theories of the entrepreneur. In fact,the importance of ontological assumptions iseffectively eliminated by focusing only on per-ceived behavioral control and not the actual be-havioral control associated with subsequent ac-tion. This obviates the need to worry aboutwhether it was the opportunity, the execution, orthe environment that prevented successful en-trepreneurial action. This approach works wellif one is interested in the cognitive elements ofopportunity, which is Sarasvathy’s objective.However, its extension to action explanation re-quires one to determine whether the findings onhow entrepreneurs think they would go aboutacting entrepreneurially correspond to how theyactually behave under natural circumstances.14

A Conceptual Approach

Given these various observations, we proposea conditional compromise that is consistent withan action framework and that includes eco-nomic theories of the entrepreneur but is notexclusive to their ontological assumptions. Weargue that the willingness to bear the perceiveduncertainty associated with an entrepreneurialact is representative of a belief-desire configu-ration, in which belief of what to do is a functionof knowledge and desire of why to do it is afunction of motivation. This conceptualization isidentical to an intention as described in the con-text of action theory. For instance, Greve notes:

Actions are distinguished from other kinds of hu-man behavior by the way people usually explainhow they came about: They have reasons for ac-tions. This means that individuals do what theydo because they desire (want) to reach a goal andbelieve (expect) that the action is an appropriateor necessary means of reaching it. The beliefsand desires “rationalize” the action (Davidson,1980a) (Greve, 2001: 437).

Given a specific action, the presence of a specificintention (belief-desire configuration) cannot bedoubted. When an observed behavior is in factthe expression of a certain action, then a corre-sponding intention (constellation of desires andbeliefs) is necessarily implied; the hypothesisthat this action expresses these particular de-sires and beliefs cannot be disproven by empiri-cal means. The assertion that a person, when heor she performs an action, does so due to certainbeliefs (expectations) and desires (values) is triv-ially true, because whatever he or she performswould not, in any other case, be an action (Greve,2001: 439).

Greve suggests that action, by definition, isintentional behavior. Therefore, one cannot startwith the behavioral portion of the action andargue that increases in the intention caused theaction. This would be tautological, given thatthe action partially consists of the intention.However, one could avoid tautology by startingwith the strength of the intention and predictingwhether the intended behavior subsequentlyensues. Such an approach to entrepreneurial ac-tion would equate the concept of opportunitywith that of intention. This action approach (inwhich the researcher examines the compositionof the prospective entrepreneur’s intention as it

14 In the more problematic context of a natural setting,scholars have investigated the role of knowledge in entre-preneurship by using measures of general and specific hu-man capital. General human capital typically is operation-alized by years of schooling (Rauch & Frese, 2000; see, forexample, Bates, 1995; Evans & Leighton, 1989; and Davidsson& Honig, 2003). In the entrepreneurship literature, the mostfrequently investigated aspect of specific human capital isprevious start-up experience (Bates, 1995; Cooper, Folta, &

Woo, 1995; Davidsson & Honig, 2003; Wright, Robbie, & En-new, 1997).


forms and then determines whether subsequentbehavior occurs15) avoids the tautology inherentin some entrepreneurial studies, the erroneousascriptions of risk tolerance or superior innova-tive abilities made by observers, and the posthoc rationalization common to retrospectionbias.

In addition, paradigm wars regarding onto-logical assumptions become less important be-cause, regardless of whether social environ-ments are objective or subjective phenomena,the impact they have on individuals’ intentionsare real just the same. Therefore, it seems thatthe ontological concerns discussed in this arti-cle only come to the forefront when one is inter-ested in what accounts for the origination of theintention or the quality of the outcome producedby the entrepreneurial action. Thus, it appearsthat although the study of entrepreneurial ac-tion consists of an empirically tractable centercapable of paradigmatic reconciliation, entre-preneurial action is “bookended” by two philo-sophically intractable positions grounded inmetaphysical assumption. Whereas for the real-ist these bookends consist of opportunity recog-nition and accuracy, for the constructionist theyrepresent the origination of intention andwhether individuals can realistically imposetheir will on any system.

CONCLUSION

We began this article with an examination ofthe role that uncertainty plays in economic the-ories of the entrepreneur. After establishing theneed to consider knowledge and motivation con-comitantly when examining entrepreneurial ac-tion, we proposed a two-stage conceptual modelof entrepreneurial action, built on these two con-structs and consisting of an attention stage fo-cused on the assessment of third-person oppor-tunity (a possible opportunity for someone) andan evaluation stage focused on the assessmentof first-person opportunity (a possible opportu-nity for the actor). We then used this model toillustrate the conceptual limitations of usingsystem-wide theories of the entrepreneur at theindividual level of analysis by reinterpreting

three economic theories considered highly influ-ential to managerial thought on the subject ofentrepreneurial action. Following this, we dis-cussed how the recognition that these theoriesof the entrepreneur are theories of action, ladenwith ontological assumptions about the socialworld, highlights the need for greater scholarlyattention to both knowledge and motivation infuture theory building and empirical testing. Fi-nally, we offered a pragmatic and a conceptualsolution, inspired by an action framework, as ameans of sidestepping or acknowledging philo-sophically intractable areas associated with theexamination of entrepreneurial action.

Given the renewed interest in the individualwithin entrepreneurship research and the im-portance of the concept of opportunity to theemerging field of entrepreneurship, we believethat scholars who employ these economic theo-ries of the entrepreneur will benefit from adeeper understanding of their predictions, as-sumptions, limitations, and possibilities. Notonly does it appear that an action frameworkprovides this benefit to entrepreneurship, butalso we believe that entrepreneurship providesa promising phenomenon to extend scholarlyunderstanding of the economics, psychology,and sociology of human action.

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Jeffery S. McMullen is an assistant professor of management and entrepreneurship atthe Hankamer School of Business, Baylor University. He received his Ph.D. and M.B.A.from the University of Colorado. His research interests include the contextual deter-minants of entrepreneurial cognition and action, self-regulation, institutional eco-nomics, and opportunity.

Dean A. Shepherd is a dean’s research fellow and associate professor of entrepre-neurship and strategy at the Kelley School of Business, Indiana University. He re-ceived his Ph.D. and M.B.A. from Bond University (Australia). His research interestsinclude the decision making of entrepreneurs and their stakeholders, new venturestrategy/growth, opportunity, and failure.


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