Entrepreneurial Beliefs and Agency under Knightian Uncertainty

Abstract

At the centenary of Frank H. Knight’s Risk, Uncertainty, and Profit (1921), we explore the continuing relevance of Knightian uncertainty to the theory and practice of entrepreneurship. There are three challenges facing such assessment. First, RUP is complex and difficult to interpret. The key but neglected element of RUP is that Knight’s account is not solely about risk and uncertainty as states of nature, but about how an agent’s beliefs about uncertain outcomes and confidence in those beliefs guide their choices. Second, RUP is Knight’s only effort in this area. His subsequent career led elsewhere, so he did not engage with subsequent interpretations of this work. Third, much of the current literature emphasizes that decisions must be different under the two states of nature with a consequent misunderstanding of entrepreneurial agency. This paper addresses each challenge in sequence. First, we explicate Knight’s (1921) approach and explain why that approach is murky. Second, as a complement to Knight’s interpretation, we examine Frank P. Ramsey’s approach to subjective probabilities to help clarify Knight’s murky approach. What links Knight and Ramsey is a shared pragmatism about entrepreneurial agency under uncertainty that depends upon the beliefs about, and confidence in, their judgments of possible outcomes. This Knight-Ramsey approach does not require actor’s behaviors to be determined by the class of uncertain environment (whether risk, uncertainty, or ambiguity) they face. We focus on the response by the entrepreneur to the existence of uncertainty in all its forms. We argue that this reductive account provides a foundation to examine common problems in management, including managerial hubris, the interaction between entrepreneurs and venture capitalists, and the need for experimentation (such as prototyping and market research) in advance of new product and venture launches. Third, we critique current literature that favors epistemic purism about the ontology of risk and uncertainty and ignores Knight-Ramsey pragmatism in meeting uncertainty, such as using formal and informal institutions for uncertainty mitigation. Our account locates Frank Knight’s subtleties in entrepreneurial behavior firmly in the literature on entrepreneurial agency a century later.

Pivoting in startups: a judgment based approach

“…Therefore, under these conditions, individuals 'subjectively' interpret the context and make judgments based on these interpretations (Packard et al, 2017). Although these interpretations or beliefs cannot be considered "good" or "bad" ex-ante, individuals grade their beliefs, and when they deem them to be sufficiently reliable, individuals proceed to take action (Ramsey, 2001;Westgren & Holmes, 2021). However, like all cognitive processes, judgments are subject to bounded rationality (Simon, 1955) and, consequently, susceptible to errors or biases (Bazerman & Moore, 2008;Fodor, Curşeu, & Fleştea, 2016).…”

“…Thus, although necessary, abandoning previous beliefs during pivots is not easy and requires conscious processing. This process, for instance, requires realizing that the initial course of action was not entirely correct; thus, it also requires accepting that the initial judgment was not entirely reliable, a situation that can lead to conflicts with the beliefs about the self (Westgren & Holmes, 2021). In other words, this can undermine the self-confidence of the entrepreneurs' judgmental capacity (Khanin et al, 2021).…”