Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

F rank Knight (1921) proposed that we should not think of entrepreneurship as simply investment under risk, where decisions are made with respect to an objectively known distribution of returns. He argued that entrepreneurship in such a world would not require any particular skill and it would be inconceivable that entrepreneurs could earn rents simply for bearing objective risk as a market should eliminate those rents. Knight therefore put forward the idea that the prerequisites for entrepreneurial activity are a combination of highly uncertain returns that do not have an objectively known distribution, as well as the entrepreneur’s skill in perceiving opportunity more clearly than others. Knight’s (1921) work focused attention on the specific individuals pursuing entrepreneurship and what made them distinct. Subsequent research in this vein has aimed to understand the individual traits, motivations, and preferences that make some individuals more likely to pursue entrepreneurship than others. Ironically, while Knight was interested in justifying why entrepreneurs should earn supernormal returns, much of this subsequent research has found the opposite to be true. That is, there is a growing body of evidence that many entrepreneurs seem Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics