The complexity of opportunity

Document Type

Article

Publication Date

1-1-2015

Abstract

Entrepreneurship can be usefully conceived as the shifting of bundles of resources from low to high valued uses in the pursuit of profit. While the discovery and creation schools of opportunity both agree that some combinations are more profitable than others they disagree about what can be known about this reality. Discovery theorists believe that opportunities can be perceived, which makes it possible to acquire knowledge about payoffs before a market test. Creation theorists, on the other hand, believe that knowledge can only be gained after a market test. This leads creation theorists to advocate action and discovery theorists to emphasize planning. This paper considers both schools of thought and proposes a third conceptualization based on a model from complexity known as a fitness landscape. A fitness landscape is simply a visual representation of all possible resource combinations, where the height of the landscape corresponds to the value (or fitness) of a particular combination. The landscape will tend to comprise peaks and valleys as not all combinations will yield the same payoff but similar combinations will tend to have similar (or correlated) values. Searching fitness landscapes to discover regions of higher fitness is thus akin to discovering higher valued uses for resources and thus has the potential to shed insights on the process of entrepreneurship. Research on different algorithms to improve fitness has revealed that the choice of search strategy depends on the nature of the landscape and the capabilities of the agent. In some cases, blind search is the most viable strategy, while in others guided search may prove more effective. There is also a curious middle case where an agent does not know the payoff but because the landscape is correlated can determine more efficacious places to search. It is this third type of knowledge, which Ludwig von Mises called praxeological knowledge, which has been overlooked by entrepreneurship theorists. This approach allows us to resolve several tensions in entrepreneurship theory. First, payoffs exist independently of entrepreneurs' beliefs but cannot be measured directly. Thus, the outcome of all entrepreneurial action is uncertain and can only be determined with a market test. Second, this is not a license for 'anything goes'. Successful strategies tend to cluster together, so everything else being equal, future successes will build on past successes. Third, blue ocean strategies are still possible but investors are wise to be wary of them as the risk of failure increases with the complexity, duration, and novelty of an idea.

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