Can Probability Theory Deal with Entrepreneurship?
Dickinson College - Department of Economics
October 16, 2012
Forthcoming, Review of Austrian Economics, DOI: 10.1007/s11138-012-0193-5
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”.
Number of Pages in PDF File: 29
Keywords: Kiznerian entrepreneurship, Bayesian surprise, unknown unknowns, radical uncertainty, Bertrand competition
JEL Classification: D01, D83, D84, C11
Date posted: October 18, 2012 ; Last revised: March 12, 2013