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Entrepreneurial individualLecture 1 – Introduction
The enemy of an entrepreneur is confirmation bias and escalation of commitment bias
- We all have these beliefs about the future, but it is important we do not become ideological and fixed
about them
- Confirmation bias > the tendency to search for and interpret information in a way that confirms one’s
own existing preconceptions, beliefs, and opinions
o Leads to an escalation of commitment (tendency to remain committed to our past
behaviours, particularly those exhibited publicly, even if they do not have desirable
outcomes)
McGrath (1999) - Falling forward, real options reasoning and entrepreneurial failure
Solving/reducing the confirmation bias problem by > real options reasoning
- View your venture as an option
o An option is the exclusive right but not obligation to continue invest time/money/effort
- If investments are staged so that expenditures end under poor conditions, losses can be contained
o The cost of failure is limited to the costs of creation
o Investing in stages means that you can learn and adapt to signals, saving yourself from
confirmation bias
- When conditions prove favourable, further investments may be made
o Exercising the option
- Can also pursue multiple paths to organizing in the beginning, not being committed to any one in
particular
o These should not be too related to each other
- As a result
o If you set it up smart, what makes a good entrepreneur is not avoiding failure, but managing
the cost of failure by limiting exposure to the downside risks while preserving access to
attractive opportunities and maximizing gains
o Think of success/failure in terms of testing different condition assumptions (not venture as a
whole), then you will better redirect efforts or terminate without too many costs
Key issue is not avoiding failure but managing the costs of failure (real options reasoning theory)
- However, people seek success and avoid failure > results in errors in the interpretation process
o As a result, failures are more likely/expensive than in need have been
- Three types of errors
o Errors caused by extrapolating to the future from past success
Economic systems oversample success and under sample failure > generalizing from
observation can therefore be a poor guide for future action
Routinization > practices perceived to be associated with adequate performance are
retained and repeated, whereas practices perceived to be associated with
inadequate performance (failure) are avoided > responses to the environment are
selected from a narrow range of path-dependently acquired routines, not from all
possible choices
o Errors owing to cognitive bias
Confirmation bias leads people to reject information that might indicate that their
current assumptions are incorrect > available information is misinterpreted
Negative perceptions of events associated with failure, whether or not they were
actually related to the failure and whether or not they would lead to the same
results under other circumstances
o Errors caused through failure avoidance
Direct manipulation > metrics can be manipulated
, Resources are diverted to support initiatives that might otherwise be cancelled,
because stakeholders may value the survival of the firm more than economic
returns to shareholders
Conclusion
- Fundamental idea > an opportunity that has a way out is worth more than one that does not
o Start-ups can be merged, or a team can be moved from one opportunity to another
Entrepreneurs and investors are apt to view failure as a learning opportunity
Real options thinking
Reduces the social cost of failure
Increases the risk tolerance that potential entrepreneurs and investors will
be willing to take in the future
Wang and Chung (2014) - Entrepreneurial learning, past research and future challenges
Entrepreneurship is about action first, and learning second > not planning > build-measure-learn
- Smart entrepreneurship is about trying to organize others and things around beliefs, looking to see if
beliefs is justified, and using that information to adapt or quit
Entrepreneurial learning
- EL research studies what people should learn and how and when they should learn it
o However, ‘what’ is very contextual beyond basic business skills
- Research shows that entrepreneurship can be learned, and thus not only up to genes and traits
- Learning what? > learning propositional knowledge and practical knowledge
Entrepreneurial learning types
- Individual and collective > key challenge > how to integrate individual opportunity-seeking behaviour
with organisational advantage-seeking behaviour
o Individual learning
Individuals acquire data, information, or knowledge
o Collective learning
A social process of cumulative knowledge, based on a set of shared rules and
procedures > individuals coordinate their actions in search for problem solutions
Team, organizational, or regional level
o Integrating individual learning with collective learning in entrepreneurial firms is a challenge,
given the individualistic nature of entrepreneurs
- Exploratory and exploitative > key challenge > how to develop skills and resources required for
opportunity exploration and exploitation (why and how entrepreneurs learn)
o Exploratory learning
Emphasizes learning through enactment and interpretation to generate enough
variations that some will prove ex post to yield desirable results
Variance-seeking > increases performance variance
High level of creativity
o Exploitative learning
, Directed information search that is amenable to ex ante planning and control to
limit variety achieved by honing in on and deepening initial ideas
Mean-seeking > improves mean performance and decreases variance
Marketing survey, focus group
- Sensing and intuitive learning > key challenge > how opportunities are discovered or created
o Sensing learning
Learning by knowing facts or details based on external contacts through sights,
sounds, and physical sensations
Concrete and practical thinkers
o Intuitive learning
Learning by knowing relationships of facts and possibilities
Abstract thinkers
o Opportunities are discovered or created
Creation approach > as a result of the entrepreneur’s perception, interpretation,
and understanding of the environment opportunities emerge
Discovery approach > what differentiates entrepreneurs from non-entrepreneurs is
entrepreneurial alertness
Solution >
Opportunities may exist as objective realities even though their discovery
may require a creative act by the entrepreneur
Effectual entrepreneurs can use their expertise to recognise, discover or
create opportunities dependent on market conditions
This suggests that opportunity exploration may involve both intuitive and
sensing learning
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