Entrepreneurial Cognition

by Dean A Shepherd

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  © The Author(s) 2018

  Dean A. Shepherd and Holger PatzeltEntrepreneurial Cognitionhttps://doi.org/10.1007/978-3-319-71782-1_2

  2. Prior Knowledge and Entrepreneurial Cognition

  Dean A. Shepherd1 and Holger Patzelt2

  (1)University of Notre Dame, South Bend, IN, USA

  (2)Technical University Munich, München, Bayern, Germany

  The ability to identify opportunities is among the most important skills successful entrepreneurs have (Ardichvili et al. 2003), thus making this topic particularly important for entrepreneurship research. For instance, Gaglio and Katz (2001: 95) argued that “understanding the opportunity identification process represents one of the core intellectual questions for the domain of entrepreneurship.” Additionally, research on the resource-based view of the firm has recently begun exploring opportunity identification as a resource that can result in competitive advantage through the process of exploitation (Alvarez and Busenitz 2001). As can be expected, researchers are rather interested in understanding why, when, and how certain individuals are able to recognize opportunities whereas other individuals either cannot or do not (Shane and Venkataraman 2000). In particular, studies have found that knowledge—“a fluid mix of framed experience , important values, contextual information, and expert insight that provides a framework for evaluating and incorporating new experiences and information” (Davenport and Prusak 1998: 4)—plays a crucial role in the entrepreneurial process. How do individuals’ prior knowledge and knowledge acquired through external sources impact the opportunity-recognition process? Which type of knowledge matters for which type of opportunities? And which cognitive processes during opportunity recognition does knowledge trigger? In this chapter, we investigate the relationship between knowledge, cognitive processes, and entrepreneurs’ opportunity recognition.

  Prior Knowledge and Opportunity Recognition

  Thus far, entrepreneurship research has largely taken an Austrian economics perspective centered on the notion of prior knowledge. Austrian economics scholars suggest that differing levels of prior knowledge allow some individuals to identify certain opportunities while others fail to do so (Hayek 1945; Venkataraman 1997). Prior knowledge, which denotes the unique information a person has on a particular topic, enables that person to recognize particular opportunities (Venkataraman 1997; Shane 2000). Individuals obtain prior knowledge, for example, from their education (Gimeno et al. 1997) or experience at work (Evans and Leighton 1989; Cooper et al. 1994). Prior knowledge is often gained through experiential learning, either intentionally or unintentionally, via direct experience, the experiences of others (vicarious learning), and/or second-hand experience (Huber 1991). As an example, Ed Pauls, the inventor of the NordicTrack, is a prime example of how prior knowledge facilitates opportunity recognition. A mechanical engineer passionate about cross-country skiing, Ed was often frustrated when he was not able to go skiing due to severe weather. From this frustration, he identified an opportunity and used his engineering knowledge and skills to develop an indoor cross-country ski machine.

  Previous studies on cognition have argued that increased knowledge within a specific field can lead to important advantages for individuals. For example, individuals become increasingly efficient as they gain more knowledge about a task through experience—namely, they begin to focus their attention on crucial dimensions of the task, generally dimensions that contribute the most variance to decision outcomes (Choo and Trotman 1991). Additionally, those who have more knowledge seem to draw more on intuition and thus make decisions in a more automatic way as opposed to going through more mindful methodical processing (Logan 1990). Automatic processing and the resulting decisions are generally quicker than the more methodical processing.

  Busenitz and Barney (1997) showed that entrepreneurs—compared to managers—tend to depend on heuristics to increase the speed of their decisions. Without these heuristics, entrepreneurs would often miss out on opportunities as the window of time to act on opportunities tends to close quickly. Furthermore, general human capital, which refers to prior knowledge gained through education, helps individuals accumulate and integrate new knowledge, which in turn opens up a wider opportunity set (Gimeno et al. 1997). Indeed, Davidsson and Honig (2003) found that the number of years of education an individual has positively influences that person’s likelihood of identifying new opportunities. Applying the literature on prior knowledge to the recognition of opportunities, those with more prior knowledge (compared to those with less prior knowledge) will pay more attention to the most important aspects of the available information and will then process this information more efficiently, thus facilitating the recognition of more opportunities. Beyond their focus on key information dimensions and enhanced information-processing efficiency, knowledgeable individuals develop stronger, more, and richer connections between mental concepts (Gobbo and Chi 1986), which in turn enhance their capabilities to recognize innovative opportunities.

  Researchers have also shown that prior knowledge is an important element of creativity. According to Amabile (1997: 42), relevant knowledge or expertise “can be viewed as the set of cognitive pathways that may be followed for solving a given problem or doing a given task—the problem solver’s network of possible wanderings.” Further, in their study on absorptive capacity, Cohen and Levinthal (1990: 130) highlighted why pertinent prior knowledge can increase the number of innovative ideas: “the prior possession of relevant knowledge and skill is what gives rise to creativity, permitting the sorts of associations and linkages that may have never been considered before.” Thus, prior knowledge seems to increase individuals’ ability not only to produce more opportunities but also to enhance those opportunities’ level of innovativeness. For example, in one study, my (Dean) colleague and I (Shepherd and DeTienne 2005) found that more prior knowledge about customer problems leads to the recognition of a greater number of opportunities. In addition, the opportunities higher-knowledge individuals identify tend to have high levels of innovativeness. These results are in line with the arguments presented by researchers who study entrepreneurship through the lens of Austrian economics as well as with the literature on cognition. However, these results may not be applicable to other types of prior knowledge, and they may not represent a clear-cut blessing.

  Studies in the expertise literature (e.g., Fiske and Taylor 1991) have shown that as individuals gain experience, their thoughts can start to become channeled in such a way that they fall into mental ruts. For instance, when an individual has prior
knowledge of ways to serve the market, his or her thoughts may be channeled along known pathways. In turn, creative thought becomes more difficult and unlikely, thus making the recognition of innovative opportunities more challenging. Such mental ruts also tend to make it increasingly difficult for seasoned decision makers to identify new variables or recognize environmental change (Tversky and Kahneman 1974), and they limit individuals’ ability to think “outside the box,” which can make recognizing more innovative opportunities difficult. Whether this limited creativity and constrained ability to identify opportunities help or hurt firm performance seems to be determined by the task at hand in relation to the knowledge comprising the particular individual’s expertise (Shanteau 1992). As such, entrepreneurship scholars who explore the connection between prior knowledge and opportunity identification must carefully differentiate between types of prior knowledge.

  Both of these perspectives could be possible—namely, that prior knowledge leads people to recognize more opportunities that display themselves higher in innovativeness but that some individuals may become entrenched in mental ruts as they gain more experience. Indeed, this relationship could be curvilinear such that there is an early increase in the number and innovativeness of opportunities until a plateau is reached, which is then followed by a decline. These are just expectations, however; additional research is needed to fully understand these relationships.

  Moreover, it is likely that prior knowledge and opportunity identification are related in a more complicated way than a clear-cut main-effect-only explanation. Through our more in-depth analysis, we found that the relationship between individuals’ prior knowledge of customer problems and their ability to recognize an opportunity varies depending on—at least to some extent—differences in the financial reward they receive for completing the task (Shepherd and DeTienne 2005; see also Csikszentmihalyi 1975, 2000; Maheswaran and Sternthal 1990). While it is valuable to explain why certain individuals (and not others) recognize opportunities based on the prior knowledge they have, the mechanisms underlying how prior knowledge facilitates opportunity recognition remain largely unclear to date. Interestingly, a better understanding of the relationship between prior knowledge and opportunity recognition may come from focusing on specific potential opportunities, namely, those that enhance the natural and communal environments, to which we now turn.

  Prior Knowledge and Opportunities That Support and Enhance Natural and Communal Environments

  Known as “a source of resources and services for the utilitarian life support of humankind” (Costanza et al. 1997; Daily 1997), the natural environment includes the earth, biodiversity, and ecosystems and the phenomena that constitute the physical world (Parris and Kates 2003). Numerous individuals and groups have noted the importance of protecting the natural environment for fear of threats to the existence of many species, including humans, if the natural world is damaged. The Global Scenario Group, for example, encouraged the world’s population to protect the “beauties of the earth,” while others have emphasized how important it is to safeguard open green spaces and natural resources (Boston Indicators Project 2007).

  Referring to the communities in which people live, the communal environment consists of a complex network of relationships between people with common history, norms, meanings, values, and identity (Etzioni 1996). Unique to communities are their specific culture, groups, and places. In case these distinguishing elements are threatened, the community faces decline and even collapse. Culture, in particular, plays a central role in the communal environment as “human beings have a right to culture—not just any culture, but to their own” (Margalit and Halbertal 2004: 529). Thus, the ability to conserve a culture as an element of the larger society enables community members to develop and secure their personal identity.

  Knowledge of Natural and Communal Environments

  Individuals’ prior knowledge about natural and communal environments is likely to influence their ability to identify possible opportunities to protect and/or maintain those environments. Knowledge of air- and water-pollution sources in developing economies, for instance, facilitated individuals’ recognition of opportunities for ovens that considerably lessen particle pollutants in households as well as opportunities for inexpensive methods to convert polluted water to drinking water (Prahalad 2007). Furthermore, knowledge about specific cultures has uncovered opportunities to sustain those cultures (Foley 2003). For example, Peredo and Chrisman (2006: 322–323) introduced:[community-based enterprise as] an adaptive and socially innovative response to macro-economic social, legal, and political factors with economic, social, environmental, political, and cultural fallout for already impoverished communities. The effectiveness and energy … of community reaction to these factors may be facilitated by local community culture, which taps into ancestral values , practices, and collective learning from previous community mobilizations. The energy of a local response fosters a cycle between culture and action: local culture encourages community action, but, at the same time, community action reinforces local culture and entrepreneurship.

  Indeed, individuals who do not have this type of knowledge about the environment and/or culture may be too uninformed to even question whether any changes take place in these phenomena and whether such changes affect the life of human beings (Patzelt and Shepherd 2011). Thus, it is unlikely that such individuals will identify opportunities to protect natural and communal environments.

  Differences in people’s prior knowledge about natural and communal environments can be explained—at least partially—by variation in their education, life experiences, and cultural and social backgrounds. Individuals specializing in chemistry, for example, have the scientific knowledge needed to understand the chemical processes underlying ozone-layer damage, air pollution, and wastewater treatment. Similarly, individuals with a specialization in biology have the knowledge needed to comprehend pollution’s biological impact on aquatic habitats. Moreover, individuals’ social and cultural backgrounds may affect their prior knowledge and ability to identify opportunities . For instance, opportunities to maintain a threatened culture are often identified by members of that particular culture (Foley 2003).

  Heterogeneity in prior knowledge can also help explain variation in how people direct their attention toward certain characteristics of natural and communal environments and thus their ability to identify opportunities that protect those environments (consistent with Shepherd and Patzelt 2011). In other words, individuals are much more likely to pay attention to sustainability opportunities that relate to their prior knowledge about a particular part of the environment (consistent with Shane 2000). For instance, while reducing greenhouse gas emissions and conserving the rain forest both counter climate change to a degree (Tilman et al. 2002), when beginning to think about opportunities to offset climate change, individuals with a background in chemistry will likely identify different opportunities than individuals with a background in biology. Chemists are more likely to focus on developing new chemicals that can substitute for greenhouse gases, whereas biologists are more likely to focus on protecting the rain forest by developing, for example, alternative materials for producing furniture so as to reduce the use of tropical woods.

  Prior Knowledge of Societal Problems

  Prior knowledge about societal problems often enables individuals to identify opportunities to develop economic and non-economic gains for disadvantaged people (Patzelt and Shepherd 2011). People can acquire this type of prior knowledge from a variety of sources, including education, work experience, personal experience, and social experience. Differences in prior knowledge about societal problems are likely to at least partially explain why some people and organizations pay attention to particular aspects of developing economic and non-economic gains for society, whereas others pay attention to other aspects. Identifying opportunities to assist disadvantaged others by creating economic and non-economic gains is often easier when individuals can take others’ perspective and �
�put themselves in their shoes.” By attempting to take another person’s perspective, the individual tries to understand that person’s thoughts by cognitively positioning him- or herself in the other person’s situation to obtain information about his or her development needs. Depending on their prior knowledge of societal problems, individuals will process and use this information in different ways and will focus on different methods to develop people and society.

  Entrepreneurial Knowledge: Bringing It All Together for Action

  In addition to having knowledge about natural and communal environments and about societal problems, having prior entrepreneurial knowledge is often imperative in identifying possible opportunities. Individuals’ entrepreneurial knowledge likely impacts how much their prior knowledge of natural and communal environments facilitates their identification of opportunities that protect or sustain those environments (Patzelt and Shepherd 2011). For instance, Ibrahim Abouleish—founder of the Egyptian company Sekem—realized that reduced pesticide use and the introduction of organic agricultural methods could help protect the natural environment in this country. Abouleish was able to identify this specific opportunity due to his in-depth knowledge of the pharmaceutical market, which he gained throughout his career in the pharmaceutical industry. Based on this unique knowledge, Abouleish formed the opportunity belief that organic food and herbs can be grown and commercialized in national and international food and pharmaceutical markets. Thus, Abouleish complemented his knowledge about organic agriculture with entrepreneurial knowledge in order to protect the environment, and this complementarity increased the effect of Abouleish’s prior knowledge on his development of a sustainability opportunity belief (Seelos and Mair 2005; as described in Patzelt and Shepherd 2011).