Entrepreneurship, opportunity and human cognition

1. What is an Entrepreneurial Opportunity?
Pontus Engström, PhD, MSc
Session 1

2. What is Entrepreneurship?
From the French words entre (between) prendre (to take).
Cantillion (1680-1734) described as the crucial agent in
economic activity
Four schools
1. Joseph Schumpeter - primus motor, creative destruction, an
innovator
2. Israel Kirzner – entrepreneur as arbitrageur
3. Frank Knight – entrepreneurs takes on uncertainty, not risk
4. Jean Baptise Say – entrepreneur as the coordinator
Recent research combines or further elaborates on the four schools.
- An entrepreneur is someone who creates or discovers an
entrepreneurial opportunity
- Someone who imagines an opportunity no one else can see or is
willing to finance. Moves the economy to or from equilibrium.
2

3. Schumpeter (1934)
The Theory of Economic Development
• At the center is the entrepreneur who seeks for changes to reach
an improved economic state, the primus motor.
• Through innovation, the entrepreneur mixes the available
resources, such as markets, products, production methods,
etc., into new combinations.
• Calls the creative process for “Creative descruction”
• “entrepreneurs are a special type” (p. 84) which may explain why
much research is concerned with the description of who the
entrepreneur is.
3

4. Who is the entrepreneur?
Source: Timmons, 1999
Inventor Entrepreneur
Manager
Administrator
Promoter
High
Low High
General management skills, business know-how & networks
Creativity
&
Innovation

5. Kirzner
• Opportunities exist because of imbalances in the
market or in efficient use of existing resources
• Entrepreneurs are creators of equilibrium
5

6. The process of entrepreneurship
Shane & Venkataraman (2000)
The Promise of Entrepreneurship as a Field of Research
Source: The Academy of Management Review
Seeking answer to why, when and how entrepreneurial opportunities come to
exist, are discovered, and are exploited.
Sequential conditions:
6
Existence of
Entrepreneurial
Opportunities
Discovery of
Entrepreneurial
Opportunities
Decision to Exploit
Entrepreneurial
Opportunities
Entrepreneurship

7. Entrepreneurial Opportunity
Opportunity is actually a word we use when talking about a
situation in which we can do something that we want to do.
Possibility is when we talk about something that may happen or
be true
Economic definition: Any idea for a new product, service, raw
material, market, or production process that can be successfully
exploited so as to generate economic benefits for stakeholders.
7

8. How do entrepreneurs recognize ideas?
“By noticing a need that is not now being met and filling it –
preferably in a way no one else is currently doing.” (Baron and
Shane, 2008)
8
Why do some see these needs, and what does it take
to act on seeing these needs?
IndividualsOpportunities

9. Right Person, Right Place, Right Time
• Better access to crucial information—information helpful
in recognizing opportunities or formulating new ideas
• Better able to utilize information—to combine it or
interpret in ways that reveal the opportunities overlooked
by others

10. Human cognition and opportunities – three key
processes
1. Idea generation – the production of ideas for something new
2. Creativity – the generation of ideas that are both new and
potentially useful
3. Opportunity recognition – the process through which
individuals conclude that they have identified something new
that has the potential to generate economic value.
10

11. Global Innovation Index 2016
11
https://www.globalinnovationindex.org/analysis-indicator

12. A Cognitive Perspective
Human cognition—the mental processes through which we
• Acquire information
• Enter it into storage
• Transform it
• Use it to accomplish a wide range of tasks

13. Cognitive processes are the basis for generating new
ideas, for creativity and for opportunity recognition
Learning and life experience is key.
Two questions:
1) What are these cognitive systems for retaining and processing
information like?
2) Can they be stretched or improved in ways that enhance
creativity and the ability to recognize opportunities?
13

14. Our cognitive system for retaining and processing
information
Memory
The more experience the more likely to identify opportunities
Includes:
Working memory – limited information for brief period
Long-term memory – retain information long term (unlimited
space)
Various forms:
Factual knowledge – facts and figures
Personal knowledge – your first love, your first trip to dentist
Procedural memory – why athletes perform well, or how a
musician remembers an entire song. Information that cannot be
readily expressed in words.
14

15. The role of cognitive mental frameworks
- Interpreting and integrating information are
essential for creativity and for recognizing opportunities
- Prototypes: idealized representations of the most typical
member of a category, for instance “house” or “car”
- A business opportunity is a form of “prototype”
- Ability to add information is unlimited, but ability to process
information is not à leads to us adopting mental shortcuts or
tactics for stretching our limited capacity as far as possible.
- Leads to errors, often due to our tendency to rely on heuristics
– simple rules for making complex decisions.
15

16. Examples of thinking “tilts” in human cognition
• Optimistic bias refers to the tendency to expect things to turn
out well. One example is the planning fallacy.
§ Confirmation bias refers to the tendency to notice, process,
and remember information that confirms our current beliefs.
§ Illusion of control refers to the tendency to assume that our
fate is under our control to a great extent that it is…
§ Escalation of commitment refers to the tendency to stick with
decisions that yield negative results even as the negative results
continue to mount.
16
See Table 3.1 in “Cognitive Foundations of Entre-
preneurship” for more examples of sources of errors

17. Drivers of creativity?
Creativity – items or ideas that both novel and useful
Emerges from a small set of basic cognitive processes:
1. How we internally organize the information
2. Human intelligence
17

18. Creativity and Organizing the information
Stretching or expanding the internal cognitive frameworks/concepts
we construct, e.g.:
a. Vehicle -- bicycle, airplane, automobile and elevator
b. Clothing -- shoes, shirts, jeans and jacket
+ Internal structure enhances our ability to retrieve information
- Internal processes are so strong that we find it very difficult to
escape them (e.g. Sony and the CD or the Incas and wheels)
Combining concepts – “Luxury SUVs” or “nonalcoholic beer”
Expanding concepts – Horse-drawn carriages and railroad
carriages or early TV looking like a furniture.
Analogy – Perceiving similarities between objects that are
otherwise dissimilar. “My love is like a red rose”. A Red Santa?
18

19. Is Flying Lawnmovers perhaps an opportunity?
19
https://www.youtube.com/watch?v=9Yrt9qkBQ2Q

20. “An old thing becomes new if you detach it from what usually
surrounds it.”
--Robert Bresson

21. Creativity and Human Intelligence
Intelligence – individual´s abilities to understand complex ideas, to
adapt effectively to the world around them, to learn from
experience, to engage in various forms of reasoning, and to
overcome a wide range of obstacles (i.e. not just IQ).
a. Analytical intelligence – abilities to thin critically and
analytically
b. Creative intelligence – ability to formulate new ideas
c. Practical intelligence – being adept at solving problems of
everyday life
d. (Social intelligence) – the ability to understand others and
get along well with them
Combining all into successful intelligence (Sternberg)
21

22. Successful Intelligence
Practical
Intelligence
Creative
Intelligence
Analytic
Intelligence SuccessSuccessful
Intelligence

23. What can be done to enhance creativity?
Creativity emerges from the operation of several kinds of memory,
the expansion or merging of concepts, and related processes – the
confluence approach
23

24. Broad, Rich Knowledge Base
• Having varied work experience
• Having lived in many different
places
• Having a broad social network

25. Opportunity Recognition – why are some better than
others at discovering opportunities?
(1) Better access
(2) Able to utilitze
---
i. Active Search
ii. Alertness
iii. Prior Knowledge
iv. Social Networks
25
Opportunities sometimes go unrecognized for decades

26. Opportunity recognition as pattern recognition
Noticing meaningful patterns in complex events, trends, or changes
1) Recognizing links between trends, changes, and events that
seem at first glance to be unconnected
2) Noticing that these connections form an identifiable pattern
Influenced by cognitive frameworks within individuals, developed
on the basis of past experience
26

27. Experienced entrepreneurs focus more on factors likely
to influence business success, whereas novice
entrepreneurs focus on novelty and intuition
27

28. Can individuals be trained to be more successful at
recognizing opportunities?
Individuals can learn to be more proficient at recognizing patterns
and thus opportunities – pattern recognition perspective.
Steps to recognize more valuable opportunities:
• build a broad, rich and organized knowledge base
• Increased access to information
• Actively searching for opportunities
• Increasing practical intelligence
28

29. Signal Detection Theory
HIT
Opportunity
present and
recognized
FALSE ALARM
Opportunity not
present, but
judged to be
present
MISS
Opportunity is
present, but not
judged to be present
CORRECT
REJECTION
Opportunity not
present and
judged to be
absent
Yes No
Actual Presence of
Opportunity
Yes
No
Judgment
About
Presence

30. The Seven Domains Framework
“An opportunity: why will or won’t this work?”
The New Business Road Test The New Business Road Test

31. Designed to help entrepreneurs:
• Assess opportunities (our focus today)
• Shape opportunities
The New Business Road Test
Order it online:

32. Opportunity Analysis
Involves assessment of the:
(1-2) Market
(3-4) Industry
(5-7) Team dimensions
The New Business Road Test

33. The Seven Domains of Attractive
Opportunities
Macro
Level
Micro
Level
Industry
Domains
Mission, Ability to
Aspirations, Execute
Propensity on CSFs
for Risk
Connectedness up
and down Value Chain
Team
Domains
Market
Attractiveness
Target Segment
Benefits and
Attractiveness
Industry
Attractiveness
Sustainable
Advantage
The New Business Road Test
Market
Domains

34. Thank you for the attention!
Pontus Engström, PhD, MSc.
Stockholm School of Economics
E-mail: pontus.engstrom@hhs.se