Entrepreneurship Theories

Real options theory is concerned with investments in real assets that are similar in structure to financial options like put and call options that allow investors to bet on the upside or downside of stocks without tying up too much capital (Bowman and Hurry, 1993) According to McGrath (1999), real options theory is supposed to be superior to net present value analysis and other time value calculations, especially under conditions of uncertainty. The fundamental idea behind real options theory is that an opportunity that has a way out is worth more that one that does not have a way out. For example, startups can be merged, one startup can be stripped of resources to help another, a team can be moved from one opportunity to another etc... Thus, entrepreneurs and investors in entrepreneurial ventures are apt to view failure as a learning opportunity that contributes to the assessment of future projects. Real options thinking reduces the social cost of failure and thus increases the r

Cognitive evaluation theory is a theory in psychology (part of self-determination theory) where it has been used to explain how external factors affect an individuals intrinsic or internal motivation. Events that increase (decrease) perceived confidence increase (decrease) intrinsic motivation. Keh et al. (2002) borrow the theory to conduct a study of entrepreneurs and find that: "illusion of control and belief in the law of small numbers are related to how entrepreneurs evaluate opportunities." These authors propose that individuals that perceive a lower level of risk associated with an opportunity are more likely to judge it positively. Entrepreneurs exhibiting an illusion of control, will have higher overconfidence and will perceive less risk. This is related to the hubris theory of entrepreneurship . Another finding is that entrepreneurs with stronger beliefs in "the law of small numbers" perceive lower risks. The law of small numbers refers to the fallacy t

Utility theory was developed by moral philosophers in the early 1900s, including John Stuart Mill. The core concept is that individuals make (or should make) decisions that maximize utility. Utility includes value for one's self and for others (society). Mill's book Utilitarianism sets forth several principles and argues that happiness has utility, as does justice. All sentient beings can experience utility, thus maximizing utility can take into account the interests of animals. But it brings forth a debate about how much utility to give to a deer versus a driver in the decision to construct an expensive nature fence and land bridge. Moreover, there might be "more sentient" beings, such as gifted humans, which some might want to give a higher utility in their calculations. Another problem is that we might give little weight to things that affect many people but only a little bit. For example, if one may litter and affect many people (who will see the trash), but

What is the weak ties theory of entrepreneurship? The weak ties theory was put forth by Mark Granovetter in 1969 as a theory that explains why some people seem to access to more and better opportunities than others. He conducted a study of around 200 people who had just gotten new jobs and asked them how they got their jobs and most of them, around 75% had got them from acquaintances. The rate was even higher for the higher income earners in his sample. The core idea is that weak ties are more important than strong ties in terms of providing you with novel and actionable information. Close ties refer to individuals that we interact with on a nearly constant basis, such as roommates, nuclear family members and a few good friends. Close ties provide very little new information because most of the individuals within the clique of a close tie network share many of the same relations. The concept of weak ties is a well-established one in sociology and network theory. It refers to soci

What is the niche theory of entrepreneurship? In ecology, the concept of a niche is crucial to understanding the interactions between species and their environment. Essentially, a niche is a space or role that a particular species occupies within an ecosystem, defined by the specific environmental conditions it needs to survive and thrive. These conditions can include factors like temperature, humidity, available food sources, and predators. One interesting aspect of the niche concept is the phenomenon of convergent evolution. This occurs when two or more species independently evolve similar adaptations or traits because they occupy similar ecological niches. The marsupial wolf and the placental wolf mentioned in the prompt are a great example of this. Despite being separated by millions of years of evolution and located on opposite sides of the world, the marsupial wolf of Australia and the placental wolf of North America share remarkable similarities in their physical appearance an