Entrepreneurship Theories

Biculturalism Theory: The Immigrant Advantage in Entrepreneurship What gives an entrepreneur the ability to spot a gap in the market? According to Biculturalism Theory , the answer may lie in the unique cognitive flexibility developed by immigrants and individuals exposed to two distinct cultures. Biculturalism refers to an individual characteristic that develops as a result of deep exposure to two cultures. The typical case is the immigrant who must learn a host country's local culture while maintaining the elements of their home culture. The Cognitive Advantage The Al-Shammari research team (2018) theorizes that this duality provides a distinct competitive edge. They argue that: "Those who are exposed to different cultures and environments will experience different types of experiences in their social interactions and thus will accumulate rich knowledge that is diverse." This "rich knowledge" allows bicultural entrepreneurs to connect dots th...

Experiential Learning in Entrepreneurship: Kolb & Corbett's Models Experiential Learning Theory (ELT) defines learning as "the process whereby knowledge is created through the transformation of experience" (Kolb, 1984). Unlike rationalist or cognitive theories that emphasize rote memorization and recall, ELT focuses on subjective experience. It is the bridge between reading about business and actually doing business. 1. Knowledge vs. Know-How To understand ELT, one must distinguish between two types of understanding: Explicit Knowledge: Facts learned through language, textbooks, and formal education. Know-How (Tacit Knowledge): Skills acquired through hands-on practice, trial, and error. In entrepreneurship, know-how is often the deciding factor. An entrepreneur may have deep market knowledge (data) but lack the practical know-how to bring a product to market. This gap can only be closed through the risks and mistakes ...

Cognitive Evaluation Theory: Why Entrepreneurs Ignore Risk Why do entrepreneurs often pursue ventures that statistics say are doomed to fail? The answer may lie in Cognitive Evaluation Theory (CET) . A sub-theory of Self-Determination Theory , CET explains how external factors affect an individual's intrinsic motivation. The core premise is simple: Events that increase an individual's perceived competence and autonomy will increase their intrinsic motivation to act. [Image of Self-Determination Theory diagram] Evaluating Opportunity Under Risk Keh et al. (2002) borrowed this psychological framework to study how founders evaluate business opportunities. They found that entrepreneurs do not assess risk objectively. Instead, their cognitive processes alter their perception of reality. The researchers identified two specific cognitive biases that lead entrepreneurs to judge risky opportunities more positively than they should: 1. Illusion of Control Entrepreneurs ...

Israel Kirzner is a British-American economist and emeritus professor at New York University. He is a leading figure in the Austrian School of Economics . Below, we review Kirzner's "Alertness Theory" of entrepreneurship, which argues that entrepreneurs balance supply and demand by detecting market imperfections and exploiting them. The Cause: Market Imperfections Kirzner argues that opportunities exist because markets are not perfect. These imperfections are primarily caused by two factors: Information Asymmetry: Cases where different stakeholders have varying information about a business venture. If one stakeholder uses an information advantage to profit from another, it is considered opportunistic bargaining. Bounded Rationality: The idea that humans are not perfectly rational. While Neo-classical economics models the assumptions of "perfect" economic man, Kirzner acknowledges that real humans have limits on their knowledge and processing power...

Information Processing Theory is explained by Allen Newell and Herbert A. Simon (1972) in their book entitled Human Problem Solving. The book focuses on how humans think and process information. They view the human system as including the sensual, memory and arousal subsystems. Hansen and Allen (1992) borrow the theory of information processing to explain and predict the creation of new ventures. They start with the assumption that business environments produce information in varying quantities and varieties. For instance, a very simple environment might produce a small amount of very similar information, whereas a complex environment produces a large quantity of heterogeneous information. A complex environment might match a fast-paced, ever-changing high-tech industry, whereas a simple environment might match a slow moving traditional industry such as the restaurant industry. A single individual may find it difficult or impossible to cope with the information load that a compl...

Signaling theory has been used to explain how firms communicate their quality and intentions to investors. It addresses a fundamental problem: Information Asymmetry . [Image of signaling theory diagram economics] Entrepreneurs have private (insider) information about their venture's prospects that outsiders do not have. For example, entrepreneurs may know early R&D results, sales data, or human capital details. They may also know about impending lawsuits or union troubles before the public does. Because investors know they lack this information, they look for signals to determine which startups to fund. What Makes a "Good" Signal? The best signals are costly and observable . Observable: The investor must be able to see it easily. Costly: It must be difficult to fake. If a signal is cheap, low-quality firms will mimic it. If it is expensive (like ISO9000 certification or a high degree of founder equity), only high-quality firms can afford to send...

Knight’s Uncertainty-Bearing Theory: Risk vs. True Uncertainty In the Roaring 20s, the world was changing fast. New technologies were booming, and the media idealized business tycoons as daring heroes. Amidst this backdrop of laissez-faire capitalism, **Frank Hyneman Knight**, an economist at the University of Chicago, developed a theory to explain exactly what these entrepreneurs were doing to deserve their wealth. His answer? They were bearing Uncertainty . The "Knightian" Distinction: Risk vs. Uncertainty Knight’s most enduring contribution (1921) is the distinction between two types of unknowns. While often used interchangeably in conversation, in economics, they are opposites: Risk (Insurable): Situations where the outcome is unknown, but the probability distribution is known. Example: Rolling dice or actuarial tables for life insurance. You can model this mathematically and hedge against it. Uncertainty (Uninsurable): Situations where th...