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Summary Entrepreneurial Strategic Decision-Making: A Coginitive Perspective
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Summary of 16 pages for the course Strategic Decision Making at UVT
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Entrepreneurial Strategic Decision-Making: A Coginitive PerspectiveVermeulen & Curșeu
Course: Strategic Decision-Making (2013-2014)
Content: Chapter 1,2,3,4,5,6,7,8,11,9 & 10 (based on Bird’s eye view slides)
1. Entrepreneurs and strategic decisions
• Introduction
- Decision-making is a cognitive process that involves the selection (there are alternative choices) of a
specific course of action that is supposed to bring us to a certain result.
- Reduce uncertainty:
1. Gather relevant information before we make a decision.
2. Apply pre-existing heuristics = cognitive short cuts developed through experience.
Entrepreneurs = those individuals who start and run their own business and are often believed to have
specific characteristics that influence the decision-making process. It is an individual who establishes and
manages a (small) business for the purpose of profit and growth.
Strategic decisions = decisions with major consequences for the small and medium-sized enterprises.
Cognitive complexity = the richness of entrepreneurial cognitive representations to explain
entrepreneurial strategic decision-making.
• Four fundemental characteristics of SDM
1. Complexity = the amount of differentiation in the knowledge domain of the decision. Complex: large
number of facts, variables and contingencies.
2. Uncertainty = make decision without knowing all possible alternatives and outcomes associated with
these alternatives.
3. Rationality = the cognitive process involved in SDM is rational because the decision-maker is trying to
reach a specific goal by making the decision.
4. Control = the intentional character of the strategic choice.
Cognition = the way in which decision-related information is represented in the human cognitive system
and to the way in which these representations are transformed.
• Reasons why individual cognition is more decisive for small firms than for large firms
Several factors impact on SD in large firms (monitor their environment), while is SMEs it is often the
entrepreneur alone who makes the decision.
Entrepreneurs are a particular group of SDM that are especially important, why?
1. Entrepreneurial ventures have a large part of the employment.
2. Entrepreneurship has evolved into a broad field of research.
3. Need for explaining entrepreneurship from a theoretical and practical point of view.
Combined SMEs play a key role in the modern market economy: high employment rates, regional cohesion
and sustainable development, diversification, social inclusion, new technologies, innovative
1. They face a hostile and uncertain environment is SDM: do not have access to extensive information
sources.
2. The environment of small firms is dynamic and complex: simplify and make decision with cognitive
heuristics, and lower rationality.
• Reasons why individual cognition needs to be studied in ESDM
The environment in which a small firm operates might affect the propensity to exhibit certain cognitive
biases.
There are many different types of entrepreneurs and we should further explore the cognitive differences
among them.
2. The decision-making entrepreneur: A literature review
• Types of rationality and premises of rationality
,- Rational behaviour is that type of behaviour which is sensible or logical in pursuing goals.
Types of rationality
1. Substantive rationality: the objectively best alternative is chosen, no imperfections or logical errors are
assumed
2. Instrumental rationality: the right means are chosen in relation to an end, given the decision-maker’s
belief system (not objective reality). Logical errors not assumed.
3. Procedural rationality: on the basis of available information, reasonable decisions are made.
1. Classical rationality: people are driven in their economic actions by pure rationality, hence are able in
every given situation to rank their preferences with almost mathematical precision and to pursue the
optimal outcome.
2. Bounded rationality: the rationality that decision-makers with limited abilities demonstrate, due to
incompleteness and uncertainty of information.
- Looks for satisfactory of choices, not for optimal ones.
- Simplify complex, uncertain situation into smaller easily observable and controllable outcomes.
- Delegate and distribute the decision tasks between several specialists who are able to grasp all the
aspects of the issue.
3. Neoclassical rationality
- Prospect theory: a model of decision-making under risk that explicitly incorporates the cognitive errors
that have been found to systematically occur in decision contexts.
- DM first form mental models of a certain situation in which they code outcomes in terms of gains and
losses.
- Regret theory: assumes comparison between choices and captures anticipated regret and triumph when
one learns that a different choice would have produced a better or worse outcome.
- Two constraints: time and memory
- Other theories: cost-benefit analysis, SWOT analysis, net present value technique.
• Analytical framework of EDM & types of entrepreneurs
- we need to understand the context in DM to fully understand rationality in DM.
- DM model with three components (constant in interaction): environment, specific characteristics of the
decision, the entrepreneur
- Factors influencing the strategic process: manager’s individual characteristics, internal organizational
context and environmental factors.
- Levels of analysis: the individual, the environment, and the strategic decision process itself.
The entrepreneur:
- Doesn’t have perfect knowledge about all critical factors thus he/she have to bear certain risks.
- Types of entrepreneurs:
Dimensions:
* frequency of decision-making
* dependence on others
* confidence
* innovativeness
* perceived risk
* extent of information search
* consideration of alternatives
* problematic decision-making process
* economic situation
* amount of investment
* type of decision
* degree of radicalness of their innovations
* cooperation with third parties
1. Daredevils
- risk seekers
- above-average number of strategic decisions
- above-average in innovativeness, information search and consideration of alternatives
- aware of problems and bottlenecks
- engage in cooperation
2. Lone Rangers
, - sure about decision
- dislike asking for advice
- do not see many problems and bottlenecks
- don’t find it important to search for information or consider alternatives
- do not engage in cooperation
3. Doubtful minds
- not sure about decision
- ascribe much importance to the economic situation
- see problems and bottlenecks
- consider many alternatives
4. Informer’s friends
- does not make many decisions
- does not need to consider alternatives of introduce radical innovation
- advice of others make them confident to make the decision
- do not perceive risks
5. Busy bees
- above-average number of strategic decisions
- always juggling many ideas for future strategic changes
- share ideas with others
- do radical innovations and large investments
• Psychologogical traits of entrepreneurs & findings on entrepreneurial personality
1. The need for achievement: negative and positive factors to start a business.
2. Desire to be independent and to have control over situations
3. Individualism: entrepreneurs need autonomy and dominance and are not strongly influenced by needs
for support from others or conformity to the norms of others.
4. Locus of control: belief that a person can or cannot control his own destiny.
- internals: those who ascribe control of events to themselves.
- externals: those who attribute control to outside forces.
5. Ability to focus and pursue a goal
- the environmental stimuli and the level of attention deficit hyperactivity disorder lead some individuals
to react and to become entrepreneurs, motivating them for higher performance.
6. Optimism
Typical entrepreneurial features that negatively affect SDM:
- impulsive character
- inability to change problem-solving strategies
- inability to learn from mistakes
Important mistakes by money decisions:
1. Overconfident
2. Unprepared
3. Ignorant
4. Exclusive
5. Competitive
6. Focused on the short term
7. Focused upon immediate reference points
8. Recursive
9. Ignorant of alternatives
10. Easily influenced
• Section on environment
- Successful DM requires an accurate understanding of the environment in which that decision will be
played out.
- Decision environment = the collection of information, alternatives, values and preferences available at
the time of the decision.
- Time constraints: decisions must be made at a certain time or the opportunity may have expired.
- Effort constraints: the limits of manpower, money and priorities.
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