Entrepreneurship and Uncertainty Bearing

4 September 2006 at 8:54 am Peter G. Klein Leave a comment

| Peter Klein |

A further point about entrepreneurial judgment: The claim that the essence of entrepreneurship is uncertainty bearing, that the entrepreneur is the party to whom gains and losses accrue in a dynamic, evolving economy, does not imply any particular view about the psychological characteristics of those individuals who perform this function. The entrepreneurial function is to bear uncertainty, regardless of how entrepreneurs interpret their own behavior.

This issue comes out in “Entrepreneurial Risk and Market Entry” by Brian Wu and Anne Marie Knott, from the September 2006 issue of Management Science (working paper version here). This paper, which has generated a lot of buzz, argues that entrepreneurs (defined here as individuals who start new businesses) are just as risk averse as other agents in the economy, but systematically tend to overestimate their own abilities. In other words, entrepreneurs engage in risky behavior even though they don’t like uncertainty, because they don’t think the results of their own actions are uncertain.

A similar point is made in this paper by Stuart Wood:

The entrepreneur . . . is so supremely confident in the correctness of his forecast of the future, that he cannot believe that it will not occur just as he directs it to. It is not that the entrepreneur does not know that the future is uncertain; rather, it is his confidence in his own ability to forecast correctly, to pick out the actual future state from the wide spectrum of possibilities, that causes him to know that he is correct, despite his knowledge of the uncertainty of the future, while all others in the market are wrong.

Wood concludes that the entrepreneur therefore does not bear risk (or uncertainty). I take Wood’s point to be, rather, that the entrepreneur does not think of his own actions in terms of risk and uncertainty, though as economists, we can continue to define the entrepreneurial function in precisely those terms.