Can Probability Theory Deal with Entrepreneurship?

29 Pages Posted: 18 Oct 2012 Last revised: 9 Apr 2017

See all articles by Vlad Tarko

Vlad Tarko

Dickinson College - Department of Economics

Date Written: October 16, 2012


The Austrian theory of entrepreneurship emphasizes the importance of epistemic heterogeneity and the unlistability of the set of all possibilities. A similar concern with what has been called “the art of choosing the space of possibilities” is an important part of Bayesian model selection. Both Austrian and Bayesian authors view the common knowledge assumption as an unrealistic and unnecessary restriction. This coincidence of concerns leads to a joint theory of entrepreneurship. Three important benefits result from this merger: (1) the ability to use Itti & Baldi’s Bayesian theory of surprise to empirically measure radical surprise and improve the Betrand competition model as a consequence, (2) dealing with the unlistability problem, and (3) better understanding why the emergence of common knowledge is always the outcome of a social process rather than an inherent consequence of “rationality”.

Keywords: Kiznerian entrepreneurship, Bayesian surprise, unknown unknowns, radical uncertainty, Bertrand competition

JEL Classification: D01, D83, D84, C11

Suggested Citation

Tarko, Vlad, Can Probability Theory Deal with Entrepreneurship? (October 16, 2012). Review of Austrian Economics (2013), Vol. 26, No. 3, pp. 329-345, DOI: 10.1007/s11138-012-0193-5. Available at SSRN:

Vlad Tarko (Contact Author)

Dickinson College - Department of Economics ( email )

Room 120, Althouse Hall
Carlisle, PA 17013
United States

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