Summary of all articles covered in Entrepreneurship theory and practice course
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Course
Entrepreneurship theory & practice (6314MA001Y)
Institution
Universiteit Van Amsterdam (UvA)
This is a summary of all the 16 articles covered in the course Entrepreneurship theory and practice, which is part of the master Entrepreneurship (joint degree UVA and VU). It contains all the important information from the articles that you might need for the exam.
Article 1 – Lecture 1: Hayek
Title: The use of knowledge in society
I
Knowledge is never in concentrated or integrated form, it’s dispersed bits of incomplete and
contradicting info held by separate individuals.
à problem of utilization of knowledge not given to anyone in its totality
II
Planning: the complex of interrelated decisions about the allocation of our available
resources à all economic activity
à based on knowledge held by someone else
Three ways to do planning:
- Centrally: by one authority for the whole economic system
- Competition: decentralized planning by many separate persons
- Delegation of planning to organized industries (in between) à monopoly
à the best one is where we expect fuller use of existing knowledge (whether more likely to
succeed in getting info to centralized planner or make plans fit together)
à depends on the kind of knowledge
III
Scientific knowledge à body of suitably chosen experts are best planners
Knowledge of particular circumstances à every individual has some advantage over others
à common idea that this knowledge should be at the command of everybody, but how
IV
Some argue that importance of economic considerations driven into background by growing
importance of technological knowledge
Economic problems always arise from change à no need for planning if everything stays the
same
à there are always small changes, which economist apt to forget about due to
preoccupation with statistical aggregates
Central planning based on statistical information cannot take direct account of
circumstances of time and place, so some planning needs to be left to the ‘man on the spot’
V
We need decentralization, because only then we can make sure circumstances of time and
place are promptly used.
à but ‘man on the spot’ cannot decide solely on the basis of his limited but intimate
knowledge of immediate surroundings
à only relative importance of particular things with which he is concerned (e.g. how
much of something is available) not the reason why. à attaching a numerical index
to each kind of scarce resource (‘values’ or ‘marginal rates of substitution’)
à prices can act to coordinate à if tin become more expansive, decision will change
,VI
Price system is mechanism for communicating information à individual needs to know little
else to take right action, you don’t need to know the reason for price change
Price system is underrated, we’re somewhat blind to the true functions
Civilization advances by extending the number of important operations which we can
perform without thinking about them à price system is just one of those formations
VII
Different opinions of price system are not all political anymore, but also due to intellectual,
and more particularly methodological differences.
It is evident, however, that the values of the factors of production do not depend solely on
the valuation of the consumers' goods but also on the conditions of supply of the various
factors of production
,Article 2 – Lecture 1: McGrath
Title: Falling Forward: Real options reasoning and entrepreneurial
failure
A tendency to view failure negatively introduces a pervasive bias in entrepreneurship theory
and research
Objective: offer ideas that might help redirect the theoretical focus in entrepreneurship
from a preoccupation with achieving success and avoiding failure to a more integrated view
of how the two phenomena are related
A real options perspective on entrepreneurial failure
Entrepreneurial process: the set of activities through which innovations change existing
combinations of factors of production, in both the manufacturing and the service sector
Failure: termination of an initiative that has fallen short of its goals
à involve subjective assessments of alternatives
Entrepreneurial initiatives as real options
Real options theory concerns classes of investments in real assets that are similar to financial
options in structure
Cost of failure is limited to the cost of creating the real option, less any remaining option
value
Higher volatility à higher returns
Real options as bundles
Because of spillover and learning effects, it is often more useful to evaluate the collective
contribution of entrepreneurial initiatives to wealth creation than to assess each initiative on
its own
à maybe first mover has failed, but still had big impact
Entrepreneurial initiatives and wealth creation
Entrepreneurship influences growth of economy and prosperity for individual firm
- Economy level impacts à technical and other advances; government policies
influence entrepreneurship
- Firm-level impacts à propensity of the firm to sponsor initiatives that reconfigure
and renew its re- source base
Implications of using real option reasoning:
- Options are best valued as part of a ‘bundle’
- Uncertainty – and hence potential variance – is key to the value of an option
- Failures can have positive consequences
- Preventing failure can mean sacrificing opportunity
, Addressing anti-failure biases through real option reasoning
Real options reasoning suggests that the key issue is not avoiding failure but managing the
cost of failure by limiting exposure to the downside while preserving access to attractive
opportunities and maximizing gains
à High failure rate can be positive if costs are bounded
Error categories:
- Errors cause by extrapolating to the future from past success
- Errors owing to cognitive bias à systematically lead people to reject information that
might indicate that their current assumptions are incorrect
- Errors introduced through interventions to avoid the occurrence or appearance of
failure
SEE TABLE 1 IN ARTICLE FOR EXAMPLES OF ANTIFAILURE BIAS
More balanced view of relationship between failure and wealth creation through real
options reasoning. Resulting policies should:
- Generate increased variance
- Allow options with poor prospects and little value to be terminated
- Make action more attractive than passivity, despite the possibility of failure
Avoiding unintentional bias by increasing variance
Proposition 1: Other things being equal, at the industry and firm levels, the higher the
motivation for search and the more slack available, the greater the variance in returns that
will be sought and the higher the resulting option value will be. à more experimentation
possible
- Slack: resources not yet committed to other firm effort. Comes from:
o Industry level à when industry is disrupted it gives investors incentive to
increase available slack, because return might become higher
o Firm level à If high-revenue opportunities are sparsely scattered, policies
that encourage search over a wide area will tend to be more likely to discover
them
Proposition 2: Given motivation for search for high-variance opportunities and allocation of
slack at firm level, a portfolio of options structured so that independent decisions can be
made to support or withdraw from individual entrepreneurial initiatives will have greater
upside potential than a portfolio in which one choice affects multiple entrepreneurial
initiatives. à split up company
Parsimony in the pursuit of an options strategy
Proposition 3: At the firm level, planning processes that treat deviations as vehicles for
testing assumptions, rather than as failures, are more likely to permit the early redirection of
resource inflows to or termination of an entrepreneurial initiative, thus containing costs and
increasing the value of the options portfolio.
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