Entrepreneurs: Clueless, Biased, Poor Heuristics, or Bayesian Machines?

36 Pages Posted: 21 Aug 2024

See all articles by Thomas B. Astebro

Thomas B. Astebro

HEC Paris - Economics and Decision Sciences

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Cédric Gutierrez

Bocconi University - Department of Management and Technology

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Abstract

Entrepreneurship scholars are interested in understanding and describing how entrepreneurs make decisions under uncertainty, where the probabilities of outcomes are not known but perceived, resulting in ambiguous probabilities. In this context, ambiguity refers to the lack of precise and objective probability assessments and the presence of subjective judgments regarding potential outcomes. In this chapter, we discuss the development of thought on how entrepreneurs perceive and react to uncertainty from Frank Knight (1921) to the present day. Recognizing that entrepreneurs face uncertainty rather than risk and are unlikely to have estimates of all probabilities for all potential outcomes, it becomes difficult to accept Expected Utility Theory (EUT), developed by Savage (1951) and von Neumann and Morgenstern (1953), as a relevant model for entrepreneurial decision-making. We examine a range of decision theories, ranking them in an order starting from EUT and proceeding to the most structure-free models of entrepreneurial choice, allowing for comparisons and contrasts of the main components and underlying concepts as they apply to entrepreneurial decision making.

Keywords: entrepreneurship, uncertainty, ambiguity, decision theory, Bayesian Entrepreneurship

JEL Classification: L26, J24

Suggested Citation

Astebro, Thomas B. and Fossen, Frank M. and Gutierrez, Cédric, Entrepreneurs: Clueless, Biased, Poor Heuristics, or Bayesian Machines?. IZA Discussion Paper No. 17231, HEC Paris Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4932226 or http://dx.doi.org/10.2139/ssrn.4932226

Thomas B. Astebro (Contact Author)

HEC Paris - Economics and Decision Sciences ( email )

Jouy-en-Josas Cedex, 78351
France

HOME PAGE: http://www.hec.edu/Faculty-Research/Faculty-Directory/ASTEBRO-Thomas

Frank M. Fossen

University of Nevada, Reno ( email )

1664 N. Virginia Street
Reno, NV 89557-0030
United States

HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=2906

Cédric Gutierrez

Bocconi University - Department of Management and Technology ( email )

Via Roentgen 1
Milan, MI 20136
Italy

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