Perceptions of Opportunities – Part 1 | Organizations and Markets

Perceptions of Opportunities – Part 1

23 January 2012 at 3:38 pm Peter Lewin 18 comments

| Peter Lewin |

The January 2012 issue of the AMR (available here for subscribers or those with academic access) features two review articles assessing the progress of the “Promise” examined in the well-known article by Scott Shane and Sankaran Venkataraman (AMR 2000: The Promise of Entrepreneurship as a Field of Research) — one from each of the original co-authors. The first is an interesting, if somewhat pedestrian, article by Scott Shane. The second is a much more profound and ambitious contribution by Venkataraman together with Saras Sarasvathy, Nicholas Dew, and William Forster.

In the decade since that article there has, indeed, been a significant shift in the focus of research in entrepreneurship. Most notable, perhaps, is the focus on entrepreneurial “opportunities” — familiar to Austrian economists from the work of Israel Kirzner, but by now a standard element in the story. Each of the articles spends considerable time revisiting questions about the nature of entrepreneurial opportunities and provides its own resolutions. Here I will provide just a quick overview of this part of Shane’s article. (I intend to provide one for the second article soon).

In considering the “nexus of opportunities and individuals” offered originally in “Promise” as a reason to shift attention from the person to the function, Shane addresses the question of whether entrepreneurial opportunities should be considered “objective” or “subjective” — a question that has proliferated in this research stream, albeit with varying focus and terminology. The problem is, it seems to me, that the notion of “opportunity” is one that depends on the formation of a mental image by some individual or individuals. Opportunity implies plan — a plan of action to use, transform, combine, existing resources in a profitable way. Without the plan there is just the world. So how can “opportunity” be objective? This is related to the question: are opportunities “discovered” (Alvarez and Barney: Organizaҫões em Contexto, 2007) or are they created; or in the words of Venkataraman, et. al. are they made or found?

Shane thinks now that the whole debate was probably unnecessary and that opportunities must be objective. If not, then there is no way to talk about unsuccessful entrepreneurial action. If, as asserted by our esteemed host Professor Peter Klein (Strategic Entrepreneurship Journal, 2008), opportunities are “imagined” and “are inherently subjective — they do not exist until profits are realized” (180) — “then unsuccessful entrepreneurship is a logical impossibility. No entrepreneur can fail to generate an entrepreneurial profit” (Shane, 16). No profit, no opportunity really existed.

Shane resolves this by making a distinction between entrepreneurial opportunities and business ideas. The latter are subjective. Juxtaposing the two rescues the notion of failed entrepreneurship.

This strikes me as unacceptably ad hoc, to say the least. I think Shane does not really understand what “subjectivism” is all about and, as a result, his treatment is rather superficial. Nevertheless, he may be incidentally right in suggesting that aspects of the debate are unnecessary. I refer to the ontological status of “opportunity.” Subjectivism in economics and related fields is an epistemological issue, not an ontological one. Accordingly, I would say as follows: Opportunities originate as perceptions — perceptions of what can be done to earn a profit. (Klein says “imagined” which I think is essentially the same as perceived.) Perceptions are both real and subjective. These perceptions may turn out to be right or wrong. The “discovery” of an opportunity is, strictly speaking, the formation of a perception, a plan involving real (objective) resources. So, action in pursuit of a perceived (discovered, created) opportunity is entrepreneurial action and may be successful or unsuccessful.

Alvarez and Barney — Academy of Management Annals, 2010 — blurring epistemology and ontology, want to make a distinction between exogenously and endogenously generated opportunities. I am not sure this is a viable or profitable distinction. To repeat, all opportunities are about perceptions that can be right or wrong.

TBC: Part 2.

Entry filed under: Austrian Economics, Entrepreneurship, Former Guest Bloggers, Papers.

Charles Dickens, Capitalist Life in the Echo Chamber

18 Comments Add your own

1. Peter Klein | 24 January 2012 at 12:56 am

Great post, Peter. I agree that Scott’s distinction between (subjective) business ideas and (objective) “opportunities” is unsatisfactory. By the latter he seems to mean simply objective conditions of the market — resource constraints, realized prices, etc. No one denies that these are important but, without some subjective interpretation on the part of the entrepreneur, they’re like the tree falling in the forest with no one around. What Scott calls opportunities (in this new definition) are preconditions of action, but not action per se.

I also note that he quotes me out of context in the passage you note above. He writes:

If, as Klein explains, “opportunities for entrepreneurial gain are . . . inherently subjective—they do not exist until profits are realized” (2008: 180)—then unsuccessful entrepreneurship is a logical impossibility.

But the second part of the sentence begs the question of what entrepreneurship is. My point in this passage is that opportunities only exist ex post, and therefore unsuccessful opportunity exploitation is a logical impossibility. Unsuccessful entrepreneurship makes sense only if entrepreneurship is something other than opportunity exploitation. Hence the unit of analysis should not be the opportunity, but some action.
2. Peter Lewin | 24 January 2012 at 3:11 am

Peter, I like what you say about the unit of analysis being some action. I wonder why we would want to address the question of the “existence” of opportunity however. When you say “opportunities … do not exist until profits are realized” surely what you really mean is “profits are not shown to have existed until profits are realized.” Profits validate the perception of the opportunity – the opportunity WAS real after all. This suggests a “realist” interpretation of opportunity that has some plausibility. But, on the other hand, imagine a situation in which a perceived opportunity would have been realized but for a last minute extraneous intervention of some kind (maybe a new law or tax). Do we really want to say that that opportunity “did not exist?”

For this type of reason I am inclined to think the ontological status of the opportunity is less important than its entomological nature. Someone perceives an opportunity. For various reasons it may or may not turn out to be validated. What matters is the action taken to validate it – entrepreneurial action.

To expand a bit on what you said about the subjectivism of opportunities – opportunity is a *value-construct.* As Shane correctly argues, entrepreneurial action is about adding value. Value has no meaning without perception, without mental acts of appraisment. So without a human being to interpret and evaluate the concrete circumstances of a situation, opportunity simply has no meaning. Even in retrospect, the third person observer is engaging in an act of interpretation and evaluation (a kind of history really).
3. Peter Klein | 24 January 2012 at 12:56 pm

“For this type of reason I am inclined to think the ontological status of the opportunity is less important than its entomological nature. Someone perceives an opportunity. For various reasons it may or may not turn out to be validated. What matters is the action taken to validate it – entrepreneurial action.”

I agree with this totally. My point is that we can do away with the notion of “opportunity” altogether, and refer simply to what Shane calls business ideas (we Austrians might say something like “the entrepreneur’s subjective production plan”) and the market test of profit and loss. The language of opportunities seems to me to muddy the waters.

So, regarding your first question, I’d just say that the entrepreneur saw a configuration of current, objective market conditions (i.e., the constellation of present prices, engineering knowledge, etc.) and anticipated future conditions (realized consumer demands, future actions of competitors, regulators, etc.) and decided to act, thus bearing Knightian uncertainty. Ex post, we’ll know if the entrepreneur’s idea was a good one. (Was it a good idea ex ante, even if it didn’t work out? I don’t think we can really know this.) Now, we can call this a “real opportunity” that would have materialized except for some unanticipated change, but what does that language really buy us? Kirzner likewise speaks of “mistaken opportunities.” But this seems convoluted to me. Why not just talk about plans, investments, and uncertainty?
4. Peter Lewin | 24 January 2012 at 2:01 pm

Aha! Yes, that is interesting. As a practical matter the players seems to have their teeth into the concept of “opportunity” – they see career opportunities in it (is this a pun, or a self-referential observation?) – and are unlikely to let it go. But what you say makes perfect sense.
5. Mjavad | 24 January 2012 at 8:45 pm

Thank you both Peter Klein & Peter Lewin. As an entrepreneurship student at University of Tehran, I always thought that there is something wrong with the notion of opportunity as being objective. But I couldn’t communicate it satisfactorily and therefore couldn’t convince my professors, obsessed with individual-opportunity nexus and Scott Shane perception of that. I would use some of this materials to prepare for an assault to the castle of I-O nexus in the class!
6. srp | 24 January 2012 at 9:47 pm

There are real oases and there are mirages, but these are hard to distinguish. I perceive what looks like an oasis and travel toward it. If it is a real oasis, I reach it in finite time and get to drink. If the image is a mirage I never reach it and die of thirst.

Business idea = entrepreneurial hypothesis = image of oasis.
Opportunity = oasis.
Unsuccessful entrepreneurship = mirage.
7. Peter Lewin | 24 January 2012 at 11:39 pm

The opportunity was perceived whether it was an oasis or a mirage. If it was a mirage the perception was mistaken. So, in retrospect, it was not a “real” opportunity. No value could be added. What if it were an oasis, but you didn’t see the impenetrable fence around it, that prevents you from reaching it. Was your perception of the opportunity any less real? Maybe some unsuccessful entrepreneurship is also based on “real” opportunities. Or maybe we should not worry about this distinction and just talk about the perception of opportunities and actions based on them.
8. srp | 25 January 2012 at 1:56 am

No, the point of the analogy is that if it were a mirage, it would not be a real opportunity. It would be a failed hypothesis or a failed business idea. (The weakness of the opportunity perspective lies not in this semantic issue but rather in the precise definition of a business idea and the way in which small changes in its implementation might affect the outcome.)
9. Peter Lewin | 25 January 2012 at 2:33 am

I understand this. My point is, it is not always clear what is a “real” opportunity and what is not. In an important sense no opportunity is “real” until it is actualized – acted on. And even then, just because it failed does not mean it was not “real” – as in the case of the oasis that existed but was not accessible. So, let’s not worry about the “reality” of opportunity – let’s just focus on the perception-action story – it always true. I guess I am asserting that the hope of building a theory-research-program on the distinction between real and imagined opportunities is likely to be disappointed. I will talk more about this in part 2.
10. The Promise of Entrepreneurship « New Combinations | 25 January 2012 at 6:35 pm

[…] tip to the Organizations and Markets blog, where Peter Lewin provides a summary of Shane’s argument. I find it interesting how […]
11. srp | 25 January 2012 at 10:00 pm

Possibly belaboring, but…An oasis with a hidden barrier is just like a mirage–it looks like something is going to work, but it really won’t. If an idea fails, then the opportunity wasn’t real. This doesn’t seem especially tricky, but not much is riding on the terminology in any case.

As I wrote above, the key ambiguity is about what “it” is–how detailed a description do we need? If we had one more or one less purple M&M in the bag, and that determined success vs. failure for the venture of making and selling M&Ms, would those be two different ideas or opportunities? I suspect some of the resistance to admitting the objectivity of market opportunities comes from wanting to say that the opportunity is real even when the wrong number of purple M&Ms is selected and the business fails. That’s a reasonable concern.
12. Peter Lewin | 25 January 2012 at 10:24 pm

Yes, this whole question about what is “real” and what is just imagined – is very problematic. (Some people want to say: it was real, but for this or that reason it failed). Why not just focus on what the entrepreneur thinks he knows and acts on it?
13. Jingjing Wang | 26 January 2012 at 9:31 pm

Subtle distinction makes me feel a little confused, but a consice summary after reading Entrepreneurial Alertness.
14. gregoryjrader | 30 January 2012 at 2:11 am

This debate seems unnecessarily complicated by the hard semantic distinction between “the entrepreneur” and “the opportunity”. (I recognize, Peter and Peter, that you are both trying to do away with this language to some degree.)

Opportunities are neither real nor false in the abstract. They are simply hypothetical…potential. If one entrepreneur fails to exploit “an opportunity”, that does not necessarily imply that the opportunity did not exist. It merely implies that one particular entrepreneur was ill-suited to exploit it.

Asking whether opportunity exists in a given environment is a bit like asking whether energy exists in a physical system. In the abstract, energy exists in any physical system. What you really care about is whether you can extract energy from the system given a specific set of resources. Likewise, opportunity exists in any market that is not perfectly efficient. What you really care about is whether specific people with specific resources can exploit it.
15. Peter Lewin | 30 January 2012 at 2:24 am

Gregory, I agree completely. Thanks for your interesting analogy.
16. Randy | 1 February 2012 at 11:41 am

I look forward to your second sortie into this battleground, Peter L. Your initial statements and the subsequent conversation prove the need to go beyond the glib self appraisal by Shane. His logic that the subjective-objective debate threatens the opportunity– individual nexus and therefore, we must consider opportunities as objective, leaves me cold.

In relation to Gregory’s metaphor, I believe the following. If opportunities exist in an economic system as energy exists in a physical system — that is, objectively — there is still a problem with each side of the metaphor. No single instrument measures all forms of energy that exist in the physical system. No pair of similar instruments will measure any energy level identically. And no measure taken at a point in time will be valid at another point in time. Crossing the metaphorical divide into economic space is easy. Opportunities exist, but no particular opportunity exists in any pure objective sense because of the differences in perception/measurement across time and individuals.
17. Peter Lewin | 1 February 2012 at 12:09 pm

Thanks you Randy. I like your post, as might be expected. I think your extension of analogy is apt.

I am working on Part 2 now. The second article is much more substantial and I think has much more potential to add both clarity and confusion :-).
18. Perceptions of Opportunities – Part 2 « Organizations and Markets | 5 February 2012 at 1:32 am

[…] Sarasvathy, Dew, and Forster (VSDF) is more ambitious than the first by Shane, discussed in Part 1. In fact one might describe the ambition motivating the article as grandiose. VSDF “seek to […]