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Entrepreneurs as parallel processors: an examination of a cognitive model of new venture opportunity evaluation.


One of the central concerns of the entrepreneurship field is new venture opportunity, particularly the related processes of discovery, evaluation, and exploitation (Shane & Venkataraman, 2000). While entrepreneurial opportunities are usually created by external factors, the resulting opportunities can only be transformed into an enterprise through the processes of discovery and exploitation by individuals (Venkararaman, 1997). Furthermore, only some individuals are able to discover and successfully pursue the entrepreneurial opportunities (Baron, 2004; Corbett, 2007). For this reason, the study of the individual-situation nexus is a meaningful endeavor to further understand new venture opportunities (Baron, 2004). In addition, individual mental processes or cognitive properties have been regarded as critical factors in explaining the variability of entrepreneurial behaviors (e.g., Shaver & Scott, 1991; Venkataraman, 1997; Shane & Venkataraman, 2000; Mitchell, et al., 2007; Baron, 2004; Corbett, 2007).

Entrepreneurial cognition has been defined as: "the knowledge structures that people use to make assessments, judgments, or decisions involving opportunity evaluation and venture creation and growth" (Mitchell et al, 2002, p. 91). These same authors more recently noted that the central question for research on entrepreneurial cognition is "How do entrepreneurs think?" (Mitchell et al, 2007) because this would provide much greater understanding of their subsequent decisions and actions. Given there are no optimization processes or simplistic mechanisms in discovering complex entrepreneurial opportunities (see Venkataraman, 1997 and Shane & Venkataraman, 2000 for further review), individuals' different cognitive structures play a critical role in identifying entrepreneurial opportunities. Furthermore, Busenitz et al (2003) posed a question, "... why, faced with an identified opportunity, entrepreneurs will act and non-entrepreneurs will not? (p. 299)" To answer this question, we need to look more closely at the cognitive processes which entrepreneurs and non-entrepreneurs go through in their evaluations of new venture opportunities. While the field of entrepreneurship has made much progress in this cognition-based research, there are still many unanswered 'why' and 'what' questions regarding individual differences, particularly in opportunity discovery, evaluation, and exploitation (Baron, 2004; Shane & Venkataraman, 2000).

The purpose of our study is to contribute to this stream of research by examining types of cognitive properties that foster entrepreneurial thinking; situational factors such as motivation and types of knowledge that are influential; and to test how these individual level differences and situational factors jointly influence the likelihood of entrepreneurial choice. By exploring the key factors and the cognitive processes through which ordinary people or nascent entrepreneurs make decisions when new venture opportunities are present, we hoped to better understand the whole picture of entrepreneurial processes and develop the ways to nurture entrepreneurial initiations among would-be-entrepreneurs. Also, we suggest countermeasures to remove (cognitive) barriers that hamper and inhibit entrepreneurial thinking.

The entrepreneurial process is comprised of a number of phases, and various categories have been developed to characterize them (Baron, 2007; Brockner et al., 2004; Shook et al., 2003). We include existing and widely known concepts, from cognition studies, self-efficacy (Bandura, 1997), risk perception (Simon et al., 2000), and opportunity recognition (Matlin, 2002) in the proposed model (see Figure 1). In addition, we introduce two new concepts to the model that have not been considered in the past research: cognitive multilateralism (i.e., cognitive breadth and tolerance of different ideas in problem solving) and referent criterion (i.e., subjective versus objective criteria activation). These known and new variables are tested in a model that explores the complexity of internally dueling cognitive processes of entrepreneurs, namely a promotion focus versus prevention focus; and decision frames -- gain/non-gain frame versus loss/non-loss frame -- in selecting and interpreting information given in a business opportunity (Higgins, 1997). We renamed these two cognitive processes as entrepreneurial promotion and entrepreneurial prevention and will illustrate the ways they are intertwined and their relative influences in prompting entrepreneurial decisions and actions.

Some literature has adopted Higgins' theory of regulatory focus to advance an "either/or" type explanation of entrepreneurs: i.e., to test whether (would-be) entrepreneurs are either promotion or prevention focus-oriented. However, we suggest that entrepreneurial thinking does not function in an all-or-nothing fashion, but in a more mixed and complicated way. It appears that (would-be) entrepreneurs experience both promotion- and prevention-regulatory focus simultaneously when assessing entrepreneurial opportunities. Specifically, we proposed that the psychological traits of self-efficacy and cognitive multilateralism activate both promotive and preventive types of entrepreneurial cognition and decision frames, and that the activated cognition and frames lead one to experience varying degrees of entrepreneurial optimism or pessimism in assessing entrepreneurial opportunity. Our results generally support, though not completely, that cognitive processes in entrepreneurial decision making are not mutually exclusive but concurrent and parallel motivational forces in analyzing information (Figure 2).




As a first step, we distinguish the two types of entrepreneurial thinking we experience in business decision situations. One is promotive thinking that steers us to see opportunities and encouraging conditions; the other is preventive thinking that makes us more aware of risks and hostile information. Promotive thinking leads us to act on entrepreneurial hunches; whereas preventive thinking leads us to abstain from taking action.

It seems that we experience these two types of thinking simultaneously, although the relative dependence varies among people and situations. That is, entrepreneurs seem to focus more on promotive thinking, while non-entrepreneurs focus more on more preventive thinking.


Higgins (1997) proposed a "theory of regulatory focus" to explain two distinct types of motives - promotion and prevention focus - applicable to many areas of psychological phenomena such as decision making in cognitive and organizational psychology. Higgins pointed out that sole reliance on the "hedonic principles" (seeking pleasure and avoiding pain) constrains theory development and limits research on various psychological phenomena. As an alternative Higgins (1997) proposed promotion and prevention foci which are simultaneously present and jointly regulating human behaviors and underlying psychological process.

Following Higgins' (1997) theory of regulatory focus, we break down the entrepreneurial thinking process into promotive thinking and preventive thinking, two distinct yet concurrent processes one experiences in business problem solving. As individuals engage in entrepreneurial decision making, they experience both thinking processes simultaneously but to varying degrees. Promotive and preventive thinking hinge on two types of underlying regulatory motivations, promotion and prevention foci (Higgins, 1997), and the two influence one's situation evaluation such as opportunity recognition or risk perception in both quantitatively and qualitatively different ways. We theorize that each regulatory focus is induced by two types of referent criterion. A referent criterion is a "gross criterion" or "general guide" in which other more specific criteria will be required to fit (e.g., maximum profits, maximum sales, and survival of the organization) (Grunig, 1966). In the present study, we use the term to refer to subjective and objective types of knowledge and decision frames which a person "activates" from memory in a given business decision situation ("knowledge activation," Higgins, 1996). The promotion focus is related with the absence or presence of positive outcomes. Individuals with a promotion focus have "an inclination to approach matches to desired end-states" and are more sensitive to "aspirations and accomplishments'" (italics added, Higgins, 1997, p. 1282). In addition, promotion-focused individuals tend to use "approach as strategic means" and "insure hits and insure against errors of omission" (p. 1283). In contrast, the prevention focus is related with the absence or presence of negative outcomes; individuals with a prevention focus have "an inclination to avoid mismatches to desired end-states" and are more sensitive to "responsibilities and safety" (italics added, Higgins, 1997, p. 1282). In addition, prevention-focused individuals are more likely to use "avoidance as strategic means" and "insure correct rejections and insure against errors of commission" (Higgins, 1997, p. 1283). Shah, Higgins, and Friedman (1998) found each type of strategic inclination associated with success in different types of tasks. We extend this examination to the relative contributions of the two cognitive approaches to entrepreneurial opportunity evaluation.

We note here that each motivational or regulation focus prompts different decision frames and thus generates different strategic inclinations in entrepreneurial decision making. We refer to (cognitive) strategy as "a pattern of decisions in the acquisition, retention, and utilization of information that serves to meet certain objectives, i.e., to insure certain forms of outcome and to insure against certain others" (Bruner, Goodnow, & Austin, 1956, p. 54). Specifically, the promotion regulatory focus triggers a gain/non-gain frame (cf. "aspirations and accomplishments"). This frame then leads one to attend to more positive aspects (promotion-oriented gain/non-gain information) in a business situation - this results in an optimistic strategic inclination. In contrast, the prevention regulatory focus prompts loss/non-loss frame (cf. "responsibility and safety"). This frame then leads one to attend to negative aspects (prevention-oriented loss/non-loss information) in the business situation which results in a pessimistic strategic inclination. Each strategic inclination induces one's situation assessment differently, whether seeing more opportunities or more risks in the given business proposal. In this vein, it is worthy to understand how and why one adopts a certain strategic inclination and how this inclination influences one's situational assessment of a business opportunity.

As we will see next, the knowledge (entrepreneurial cognition) we would activate in a business decision situation (Higgins, 1996) steers us to a different decision frame (gain/non-gain or loss/non-loss frame) and strategic inclination (approach versus avoidance strategy). Specifically, the type of knowledge will induce different assessments of the business opportunities - optimistic versus pessimistic evaluation.


The presence of certain knowledge structures (or cognitive structures) accessible in decision situations importantly affects the way we interact with our social and physical environment (Kruglanski, 1989). Research on social cognition suggests persons' subscriptions to some knowledge structures influence the way they interpret the present conditions, recall the past experience, and forecast the future state (Fiske & Taylor, 1991; Higgins, 1996). Subscription to a certain knowledge structure, for example, will favor information consistent with the cognitive structure or lead to consistent interpretation with accessible cognitive structures (Kruglanski, 1989). In this vein, the extent and the way we act in a given decision situation is influenced by the types of accessible cognitive structures. Our first conceptual base is, thus, the cognitive structures - "schemata" (Fiske & Taylor, 1984; Gaglio & Katz, 2001) or "knowledge" (Kruglanski, 1989; Shane, 2000; Sigrist, 1999) that influence on individual assessment about entrepreneurial opportunities. We are interested in the functions of accessible knowledge type in entrepreneurial thinking -- specifically, the relationships between types of entrepreneurial cognitive structures and situational assessments of the given entrepreneurial decision situation. We identify two types of entrepreneurial cognitive structure are likely to be "activated" in business decision situations (Higgins, 1996). They are objective referent criterion from education and past experience (cf., "scientific" knowledge structure, Kruglanski, 1989) and subjective referent criterion from one's strength of motivation related to outcomes (cf., "lay" knowledge structure, Kruglanski, 1989). Both types of knowledge structures are functionally identical for making a decision and solving a problem (Kruglanski, 1989). In an entrepreneurial decision situation, however, the former is responsible for increasing both promotive thinking and preventive thinking while the latter is responsible for increasing promotive thinking but decreasing preventive thinking.

One key assumption in this study is that entrepreneurial decisions require more promotive thinking and the gain/non-gain frame. To start a business venture one needs to foresee positive potential outcomes during the opportunity evaluation phase. The gain/non-gain frame fosters one to seek and process information about possible gains and prompts one to seize the chance and to take the risks. However, entrepreneurs also get benefits from preventive thinking and the loss/non-loss frame. In the loss/non-loss decision frame, one is more likely to monitor and detect possible threats and control the negative factors. As a result, entrepreneurs who also use this frame can better foster the opportunity's potential.


The two thinking processes are induced by the motives for desired outcomes, past experience, and information and decision rules (entrepreneurial cognition) recalled and activated in a given decision situation ("knowledge activation," Higgins, 1996). People approach their problems by recalling relevant experiences of success similar to a current problem - a referent criterion (Carter, 1965; Higgins, 1996). Simon (1957) explained a need for such a general guide or criterion -- "referent" -- when people encounter similar or a repetitive problem. This leads one to speculate a generalized query of the following kind: "what criteria can I discover which can be used whenever a problem of this kind arises?"

A referent criterion, thus, could be a solution carried from past situations to repeated problems (Simon, 1957), a cognitive "schema" (Fiske & Linville, 1980), "categories" (Carlston & Smith, 1996), it can be a cognitive "schema" and "cross-situational attitude" to those bits of cognitive and attitudinal knowledge that guide problem solving and decision making (Grunig, 1997). Development of such a heuristic rule generally reduces the need for costly information search by the problem solver. In this study, we define referent criterion as any knowledge or cognitive structures either from education and past experience or subjective judgmental system such as motives for desired-end states one activates or improvises in problematic life situations. Entrepreneurship researchers noted that the process of entrepreneurial discovery is often driven by knowledge one acquired from previous experiences rather than by new search for knowledge in the decision situations (Kirzner 1997; Shane, 2000). In other words, one's types of referent criteria exert specific influence on the way one approaches problem solving because it provides cognitive guidelines or decision frames to evaluate and select information during a problem-solving process (Shane, 2000; Venkataraman, 1997).


We distinguish entrepreneurial cognitive structures as objective or subjective referent criterion in assessing and making a decision about a business opportunity. Objective referent criterion or objective knowledge structure is a decisional guideline one searches and activates in a decision situation (Higgins, 1996). It is called "objective" in that its utilities as a decision rule or a decision frame have been tested already by oneself or by others who experienced similar problems in the past. An objective referent criterion is activated as one enters into a problematic situation and searches for knowledge internally and externally. The sources of objective referent criteria are one's previous education or achieved experience as one experimented and refined a solution or decision rules in previous problem solving (Shane, 2000; Ucbasaran, Westhead, & Wright 2009).

In contrast, subjective referent criterion or subjective cognitive schema is also a decisional guideline but is comprised of any knowledge one improvises or creates as one enters into problematic situations such as identified situational goals or desired outcomes ("goals as knowledge structures," Gollwitzer & Moskowtiz, 1996 ). This type of decision frame is functionally equivalent in problem solving in that it guides selection or interpretation of information and helps to make a decision. Its utilities, however, were never contested in similar types of problematic situations in the past. Quite often, it is a kind of "directional motivation" toward the end-state (Kruglanski, 1996). The most common type of a subjective referent criterion is subjective goals such as wishful thinking or willful thinking about the desired-end state one brings up in the given situation (Gollwitzer & Moskowtiz, 1996). It is often improvised when one encounters a problem and works as a heuristic tool for filtering and selecting information one takes and gives in the problem-solving process. Despite its functional equivalence in problem solving it may not be equivalent in terms of problem-solving efficacy to achieve desired outcomes.

Based on recent research findings (Higgins & Kruglanski, 1996), motivation, cognitive structures, and cognitive processing are intertwined in persons' problem solving or decision situations. We posit, specifically, that whereas education or experience (objective referent criterion) provides entrepreneurs both preventive thinking and promotive thinking, our motive or determination about the successful business (subjective referent criterion) provides mainly promotive thinking. In other words, the objective type of referent criterion is a form of competence and the subjective referent criterion is a form of confidence in problem solving.

Generally speaking, objective referent criteria lead problem solvers to suffer less from individual biases in problem solving because they have been tested to some degree in previous situations. In contrast, subjective referent criteria are more likely to be self-perpetuating decisional referents (e.g., wishful thinking) and lower one's problem-solving effectiveness because of their reduced effectiveness in diagnosing problem characteristics and employing self-complacent solution building and evaluation. Once a problem solver retrieves such a self-fulfilling referent (e.g., a goal, a desire, or a preference), this will strongly influence the interpretations and selection of the data one encounters during problem solving. The stronger presence of such self-perpetuating referents will result in more selective information processing and lead to less than ideal problem solving (Kim & Grunig, forthcoming).


Activation of subjective referent criterion from memory will primarily induce a "gain and non-gain" decision frame, whereas activation of objective referent criterion will induce both a "gain and non-gain" decision frame and a "loss and non-loss" decision frame. If one relies on the gain and non-gain decision frame, he or she will attend to success potential in the given opportunity evaluation. In contrast, if one relies on the loss and non-loss decision frame, he or she will attend to extent of risks embedded in the opportunity evaluation.

During the same opportunity evaluation, it is likely that objective referent criterion consisted of both positive types (e.g., successful business cases or opportunities) and negative types of cognitive structures (e.g., conditions likely to fail a business cases or risk factors). For example, much of business-management curricula adopt case studies in which a substantial portion of the cases are oriented to lessons learned from negative experiences. In contrast, subjective referent criterion involves mainly positive or successful business outcomes because people's desired end-states are almost always positive ones. Baron (2000a, b) noted that entrepreneurs are often susceptible to some "heuristics" and cognitive "biases in thinking" such as overgeneralization or optimistic tendencies. He (1998, 2000a, Baron & Markman, 2000) also found that pre-nascent entrepreneurs are less likely to think counterfactually and therefore could be less attentive to unforeseeable consequences of their decisions. Such observations and empirical findings explain why would-be entrepreneurs are likely to activate or be influenced by subjective referent criterion. So the decision frame induced from subjective referent criterion (i.e., "gain- and non-gain frame") will lead the frame holder to attend more to positive information and less to negative information in the business situation. In contrast, the decision frame triggered from objective referent criterion (i.e., "loss- and non-loss frame") will lead one to attend more to negative information and less to positive information. In this vein, we posit:

H1 Greater use of objective referent criterion will result in more optimistic opportunity evaluation (H1a) and more perceived risk in opportunity evaluation (H1b).

H2 Greater use of subjective referent criterion will result in more optimistic opportunity evaluation (H2a) and less perceived risk in opportunity evaluation (H2b).

With the H1 and H2 hypotheses, we can test if knowledge from business-management courses would increase optimistic opportunity evaluation or opportunity recognition. Objective referent criterion mainly comes from education, experiences, and learning from other successful business problem solving in the past - i.e., related with competence in business problem solving. The activation of such types of knowledge is likely to increase opportunity recognition. However, reliance on the objective referent criterion type could lower entrepreneurial potential. Specifically, one's business knowledge about managerial process would steer one to recognize potential risks embedded in the business opportunity. A good business opportunity cannot be risk-free in most cases. Therefore, use of an objective referent criterion would increase both optimistic opportunity evaluation and perceived risks in business opportunity at the same time (cf. double-edged sword).

In contrast, reliance on the subjective referent criterion type is related more with confidence in problem solving. Subjective refers to one's state of determination to solve a problem in a preferred direction. Such preferences can manifest themselves in various ways mostly in the form of complacent wishful thinking and/or self-fulfilling willful thinking. Here, we expect that subjective confidence will increase the desire to seize a business opportunity because of a heightened, self-fulfilling optimism. In contrast, subjective confidence or one's desire toward an outcome can make one less conscious about the potential pitfalls associated with the opportunity evaluation. We predict that unlike objective referent criterion, subjective referent criterion will not only increase optimistic opportunity evaluation but also decrease perceived risks in the business opportunity.


We now turn to what individual characteristics would influence the two types of referent criterion. We identified two individual characteristics: The first, self-efficacy, has an established role in models of entrepreneurial orientation and opportunity evaluation, and the second, cognitive multilateralism, is a newly introduced concept with particular relevance to the examination of cognitive processing during opportunity evaluation.

Potential entrepreneurs develop more numerous and higher quality cognitive structures usable in new venture opportunity evaluation when they exhibit enduring personal characteristics that foster self-competence and confidence (self-efficacy) and as they explore and experiment with different ideas (cognitive multilateralism). Thus, we hypothesize and test whether these two factors would affect activation of distinct knowledge structures applied to a given entrepreneurial decision task. We next review and introduce each concept in detail.


The concept of self-efficacy is an element of social cognitive theory which assumes that people "enact" or actively shape the situations and contexts within which they operate rather than just reacting to external stimuli or factors (Bandura, 1997). As such, one's perceptions of personal competence are socially embedded and evolve through ongoing person-environment interaction. The most powerful contributor to self-efficacy perceptions are the result of one's own attempts at performance in a certain arena (Maddux & Gosselin, 2003). Bandura (1997) thus defined self-efficacy as the beliefs by an individual about their ability "to organize and execute courses of action required to produce given attainments" (p. 3). Although there are measures of general self-efficacy (e.g., Scherer et al, 1982), self-efficacy beliefs are usually viewed as perceptions that are cross- situational, not an inherent personality trait such as optimism.

Self-efficacy is particularly relevant to the context of entrepreneurial decisions and actions because of its effect on how an individual regulates their level of effort in an activity, choice of goal difficulty, and problem solving (Chen, Greene, & Crick, 1998). High self-efficacy engenders higher motivation and perseverance in overcoming obstacles even to the point of overestimating personal capabilities (Bandura & Locke, 2003). Taylor and Brown (1988) referred to this overestimation potential as "positive illusions" and Hmieleski and Baron (2008) found that high entrepreneurial self-efficacy combined with high dispositional optimism among lead founder-managers operating in highly dynamic environments produced negative effects on firm performance. This was likely due to unfavorable biases in judgment.

Exploring this potential bias in judgment as it relates to the particular entrepreneurial activity of opportunity evaluation and subsequent judgment on action with regards to a business opportunity is a key focus of this study. Specifically, do self-efficacy perceptions regarding one's ability to recognize business opportunities influence the choice of a subjective or objective referent criterion used to judge and make an actionable decision about a business opportunity? It is generally accepted that the higher an entrepreneur's self-efficacy the greater his/her proactivity, risk taking, and likelihood of attempting to create a new venture (Cools & Van den Broeck, 2007; Crant, 2000; Hmieleski & Baron, 2008). Hence, we predict that self-efficacy will increase the use of both subjective and objective referent criterion.

H3 The higher the self efficacy, the greater the use of subjective referent criterion (H3a) and objective referent criterion (H3b).


As one recognizes a problematic state - a perceived discrepancy between experienced state and expected state in a life situation, he or she initiates cognitive activity and information search efforts for problem solving to reduce the discrepancy (Higgins, 1996; Kruglanski, 1996). As a narrowing mechanism or problem-solving effort, one starts an internal search whether there is an applicable solution available ("knowledge activation," Higgins, 1996). If this search does not lead to a relevant solution, one then starts an external search for solutions - information seeking ("knowledge action," Kim & Grunig, in press, forthcoming). Through information-seeking efforts, problem solvers increase their cognitive inventory of candidate solutions to facilitate problem solving. The identified pieces of candidate solutions consist of past experiences, decision rules, or pieces of information usable in building a new solution (Higgins, 1996). And the inventory of such candidate solutions could vary across problem solvers. Kim and Grunig (in press, forthcoming) conceptualize this varying extent or cognitive breadth one develops in problem-solving process as cognitive multilateralism.

Cognitive multilateralism is the extent of a problem solver's "cognitive breadth" he or she adopts during the problem-solving process, and cognitive breath refers to one's level of tolerance to competing or contradictory ideas or proposals about a problem (i.e., prefactual thinking). It can be measured by the number of alternatives one generates and the granted tolerance of rival information and alternative solutions during problem-solving process. Cognitive multilateralism has conceptually related with cognitive tolerance to ambiguous situations (Bunder, 1962; Begley & Boyd, 1987) and cognitive flexibility (Spiro, Feltovich, Jacobson. & Coulson, 1995) to structure and restructure knowledge in various ways matching the changing situational demands. Ambiguity is associated with novelty, complexity, and insolubility from a situation, and one's tendency of tolerating ambiguity increases creative behaviors (Budner, 1962). Begley and Boyd (1987) found that business founders are more likely to tolerate ambiguity than nonfounders. Overall, cognitive multilateralism is associated with one's cognitive flexibility to modify one's preference in thinking about solutions (Kim & Grunig, forthcoming). This tolerance to rivalrous or incompatible ideas from a fluid environment could foster various opportunities (Timmons, Smollen, & Dingee, 1985). Thus, as one is more cognitively multilateral, one tends to recognize more possibilities for action and solutions within given problem-solving situations.

Cognitive multilateralism can be conceptualized not only as a within-an-individual trait (an intrapersonal variable), varying across different problems, but also as a personal trait varying across individuals (an interpersonal variable). In problem solving some people have a tendency to obtain more cognitive breadth and tolerance about rival or alternative solutions than others as an enduring personal trait. A more multilateral person will be more likely to increase their cognitive inventory of approaches to a problem and grant more tolerance among competing or even conflicting candidate solutions. As a result, multilaterally-thinking people will be more likely to include both subjective and objective referent criterion in their opportunity evaluation decision process.

H4 The higher the cognitive multilateralism, the greater the use of subjective referent criterion (H4a) and objective referent criterion (H4b).



Entrepreneurial opportunities have been defined as "situations in which new goods, services, raw materials, markets, and organizing methods can be introduced through the formation of new means, ends, or means-ends relationships" (Eckhardt & Shane, 2003: p. 336). The issue for the market in coordinating such economic activity is that information about these opportunities is asymmetrically distributed across individuals and organizations and the price mechanism is an insufficient guide. As Eckhardt and Shane (2003) have further elucidated, price doesn't help explain how to serve new markets, exploit new technologies, or pursue new ways of organizing. This requires human agency and the entrepreneur "can develop hunches (italics added) about how a new variable such as a technological breakthrough or an environmental change will impact a specific project long before it can be methodically and rationally explained" (Busenitz et al., 2003, p. 299).

Characterizing entrepreneurial opportunity evaluation as "hunches" has been formalized by Kor, Mahoney, and Michael (2007) as the entrepreneur's subjective productive opportunity set. They cite the classic work of Penrose (1959) who stated: "the decision to search for opportunities is an enterprising decision requiring entrepreneurial intuition and imagination and must precede the 'economic' decision to go ahead with the examination of opportunities for expansion" (p. 34). The market is then the arbiter of which new business models are viable, but the initial opportunity evaluation by the entrepreneur is based on his/her unique ability to create new business solutions. Doing so entails a combination of opportunity recognition and evaluation as well as personal motivation regarding one's own ability and desire to serve as the human entrepreneurial agent. It is this combination which our model addresses through two paths; the first examines subjective proclivities that may contribute to optimistic opportunity evaluation and the second addresses the knowledge referent applied to opportunity evaluation.


One factor commonly identified in the opportunity evaluation phase is the entrepreneur's perception and preferences of risk (Grichnik, 2006 Norton & Moore, 2006; Wu & Knott, 2006). Entrepreneurial risk can be explained as the 'likelihood and magnitude of below target outcomes which may follow from a given behavior or set of behaviors' (Mullins& Forlani, 2005: 51). Thus it is easy to infer the greater risk taking propensity of entrepreneurs, at least from empirical observations (e.g., the high failure rate of new ventures). However, some studies have shown that there is no significant difference of risk taking propensity between entrepreneurs and others (Brockhaus, 1980). This counterintuitive finding can be further explained by the 'perceived risk' of entrepreneurs, instead of their 'risk propensity' per se. Entrepreneurs make risky decisions (e.g., new venture formation with uncertainty) because they perceive less actual risk from their decisions than others typically do (Baron, 2004); they are not simply risk takers by nature (Palich & Bagby, 1995; Kahneman & Lovallo, 1993).

As noted by Busenitz and Barney (1997), opportunity evaluation involves judgments usually in situations that are ill-defined, complex, and full of uncertainty. In addition to this uncertainty, the entrepreneur faces potential losses as a result of venture failure and potential benefits as a result of venture success. A significant cognitive element of perceived risk is the individual's conceptualization of subjective values of loss and/or gain (Baron, 2004; Plous, 1993), and others include, but not limited to, confirmation bias (Johnson-Laird & Bara, 1984), optimistic bias (Shepperd, et al., 1996), affect infusion (Forgas, 1995), illusion of control (i.e., overestimation of entrepreneur's role in success) and belief in the law of small numbers (i.e., accuracy/generalizability of small samples of information; Simon, Houghton, & Aquino, 2000). Consequently, entrepreneurs tend to take risky actions (e.g., new venture creation) if they perceive less than the actual risk embedded in the decision

The focus of this study is on opportunity evaluation. As such, we are most interested in examining how perceived risk is evaluated by entrepreneurs when presented with the need to make an actionable decision about a new venture opportunity. Thus, while others hesitate to move on to the next level because of a higher level of perceived risk regarding the existing opportunity, entrepreneurs tend to make a 'go' decision. This lower degree of perceived risk enables them be more optimistic about outcomes from the given set of behaviors, ceteris paribus. Therefore, we hypothesize the following,

H5 The more the optimistic the opportunity evaluation, the more likely a choice will be made to pursue the opportunity.

As we illustrated in preceding sections, we draw another cognitive aspect in entrepreneurial decision making from the 'regulatory focus theory' (Baron, 2004: Higgins, 1997). An entrepreneur who is primarily subscribing to a 'promotive thinking' approach as his/her regulatory focus, tends to pursue positive outcomes (e.g., unique opportunity and future success) and tries to test lots of means, alternatives, hypotheses to reach to the desired goal. This promotive thinking parallels the concept of entrepreneurial orientation which is most commonly thought of as a combination of innovativeness in creativity and experimentation, risk taking in terms of committing resources in the face of uncertainty, and proactiveness in opportunity-seeking and a forward-looking perspective (Runyan, Droge, & Swinney, 2008). Furthermore, it appears that pre-nascent and nascent entrepreneurs are more likely to engage in promotive thinking relative to those with prior experience. For example, in a survey study of college students, Hmieleski and Corbett (2006) found that inexperienced, nascent entrepreneurs were more likely to engage in improvisation (i.e., extending or reconfiguring a course of action based on the perceived low likelihood of success with current course of action/referents) than follow a planning or trial-and-error approach. In other words, they were more likely to extend their promotive thinking in creative ways to pursue their entrepreneurial objectives than more experienced entrepreneurs. Their research extended the work by Baker, Miner, and Eesley (2003) who found through interviewing employees at 68 start-up companies that very few had engaged in rational planning. Such entrepreneurs are likely to see the brighter side of decisions (e.g., opportunity) and, consequently, the odds of exploiting existing true opportunities is high although there is also a greater chance of choosing a false opportunity (Baron, 2004).

On the other hand, an entrepreneur who is primarily subscribing to a 'preventive thinking focus' usually looks for a safe solution (not having negative outcomes) over achieving positive accomplishments. Therefore, these entrepreneurs typically tend not to learn much about the potential of existing opportunities and are very passive and conservative in espousing uncertain opportunities. Indeed, in a survey study of 517 nascent entrepreneurs in the pre-startup phase, Gelderen, Thurik, and Bosma (2005) found that perceived market risk was the only significant predictor of success probability for those with considerable work experience. Therefore, regardless of the quality of opportunities, an entrepreneur subscribing more to a promotive thinking focus is more proactive and optimistic about the existence of opportunity while an entrepreneur subscribing more to a preventive thinking focus is more doubtful and pessimistic about the existence of opportunity. This logic is represented in the following hypothesis:

H6 The greater the perceived risk in the opportunity evaluation, the more likely a choice will be made not to pursue the opportunity.



Ideally, primary data collection in entrepreneurship research should be conducted with samples of individuals or teams engaged in the creation of new ventures. The key issue, as with top executives, is access due to time constraints and a reluctance to divulge proprietary information. While not a substitute for such data collection, Shook et al. (2003) have suggested that the use of simulations, scenarios, and laboratory experiments are a viable complement to gathering information related to the new venture creation decision making process. This study intended to further understanding of the "go/no-go" decisions related to evaluating a new venture opportunity and we included such a scenario in our survey data collection for measurement of our dependent variable. In addition, we had access to a diverse population of business and non-business students at three universities in different geographic areas of the U.S.: Eastern, Midwestern, and Western regions. Thus, to test our hypotheses we administered a role-playing scenario embedded in a survey that asked questions prior to and after the respondents read the scenario. A total of two-hundred-and-seventy-nine undergraduate business and communication students served as participants in exchange for extra credit. To compare the model findings between business and non-business majors, we divided our sample in two groups: a business student group (n = 206) and a communication student group (n = 73).


The researchers complied with the American Psychological Association's ethical standards in the treat of our participants by obtaining review and approval of the stimuli and procedures by Institutional Review Board offices of all three universities.

In data collection, the researchers visited the capstone strategy classes for senior business undergraduates and the mass media and public relations classes for junior and senior communication majors. Assembled in small groups, participants were instructed about the purpose and steps in the study. Participants were given a survey booklet that contained the general instructions of the study, questions and scales measuring sociodemographics, psychological traits, entrepreneurial cognition, a scenario of a potential startup business opportunity adapted from Keh, Foo, and Lim (2002; see Appendix I), and evaluation and decision questions of the new business proposal.



Four items measured the objective referent criterion on a seven-point scale ranging from 1 (not at all) to 7 (extremely): (a) "I am very knowledgeable in management principles," (b) "I got A's in most business management courses," (c) "I am confident about my knowledge in dealing with problems in the above case," and (d) amount of time worked for a small and/or family businesses (years). The reliability of the four items was at a = .75.


Three items measured the subjective referent criterion on a seven-point scale ranging from 1 (not at all) to 7 (extremely): (a) "I strongly support a certain way of approaching the problems in the above case," (b) "I have a strong preference for how the problems in the above case should be settled," and (c) "No matter what happens I will pursue this venture." The reliability was at [alpha] = .79.


As noted by Maddux and Gosselin (2003) in their review of self-efficacy research, the measurement of self-efficacy beliefs must be specific to the domain(s) of interest. This study was most interested in individual beliefs about one's ability to recognize new business opportunities. While a comprehensive scale of overall entrepreneurial self-efficacy has been developed (De Noble et al., 1999), for reasons of survey length and the narrower scope of opportunity evaluation, we adapted Tierney and Farmer's (2002) scale for creative self-efficacy.

We used their eight items with a business opportunity recognition referent rather than a creativity referent to measure the self efficacy. Sample items were: "I am confident about my ability to recognize new business opportunities," "I have the ability to recognize previously unnoticed new business opportunities," "I have the ability to recognize new business opportunities before most of my peers" (strongly disagree = 1 - strongly agree = 7)." The Cronbach's alpha was .92.


We used four items to measure the cognitive multilateralism on a seven-point scale ranging from 1 (not at all) to 7 (extremely): Sample items were: "I love to know many solutions to one problem," "I often consider contradictory suggestions at the same time," and "I always look to alternative solutions to solve a problem." The Cronbach's alpha was .82.


Three items measured the extent of optimistic opportunity evaluation on a seven-point scale ranging from 1 (not at all) to 7 (extremely): (a) "I would consider this business an opportunity," (b) "This business is worth considering," and (c) "This business is feasible in this situation." The reliability of the three items was at [alpha] = .88.


We used four items to measure the extent of perceived risk in the business opportunity on a seven-point scale ranging from 1 (not at all) to 7 (extremely): (a) "The overall risk of the business is high," (b) "The probability of failure is high," (c) "The founder stands to lose a lot financially," and (d) "There is a lot of uncertainty when predicting how well the business will do." The reliability of the four items was at [alpha] = .74.


Participants' opportunity evaluation judgment about the new venture scenario was measured ("I want to make this business venture happen") on a seven-point scale ranging from 1 (not at all) to 7 (extremely). Responses were then median-splitted and recorded into likely to invest (= 1) versus not-likely to invest (= 0).


We conducted structural equation model (SEM) analysis using the EQS 6.1 to test hypotheses. We summarized all hypotheses in Figure 1. In Figure 2 we summarized the outputs of tested model and parameter estimates. As presented in Figure 2, the structural models tested reached adequate model fits (RMSEA = .052 and SRMR = .089) based on Hu and Bentler's (1999) joint criteria (i.e., CFI [greater than or equal to] .96 and SRMR [less than or equal to] .10, or RMSEA [less than or equal to] .06 and SRMR [less than or equal to] .10). To examine non-significant paths we conducted two separate model tests for Business-management student group (n = 206) and Communication student group (n = 73). We summarized the model fit information and parameter estimates in Figure 3. As shown, the Business student model reached an acceptable model fit (RMSEA = .050 and SRMR = .095) but the Communication student model did not (RMSEA = .092 and SRMR = .122) - although it approached the acceptable joint-criteria.

H1a-b and H2a-b were to examine the relationships between types of referent criterion employed, optimism about the new venture, and perceived risk of the new venture. In H1a and H1b we posited subjective referent criterion fosters more optimistic evaluation (H1a), while suppressing risk perception (H1b). We found support for both hypotheses: .74, p < .001 for H1a and -.36, p < .01 for H1b. In H2a and H2b we predicted a positive influence of objective referent criterion on optimistic evaluation (H2a) and to risk perception (H2b). We found support for H2b (.28,p < .01) but not for H2a (.05, n. s.).

H3a-b and H4a-b tested two personal characteristics, self efficacy and cognitive multilateralism, favorable personal traits in entrepreneurial thinking process. We hypothesized that these factors would influence opportunity evaluation as they trigger search for "available" and "applicable" cognitive structures -- types of activated "knowledge" (Higgins, 1996) -- one utilizes in a given entrepreneurial decision situation. In H3a-b, we predicted that higher self-efficacy in business problem solving would induce both subjective (H3a) and objective (H3b) types of referent criterion. We found support for both predictions: .41, p < .001 for H3a and .52, p < .05 for H3b. In H4a-b, we again postulated that one's cognitive breadth and tolerance for competing or conflicting ideas will increase use of both subjective (H4a) and objective types (H4b) of referent criterion. The findings support these two predictions as well: .15, p < .05 for H4a and .16,p < .05 for H4b.


H5 posited a positive relationship between optimistic opportunity evaluation and a positive opportunity evaluation. H5 was supported. H6 predicted a negative relationship between perceived risk in the new venture opportunity and a positive opportunity evaluation. H6 was not supported.

Overall, our hypotheses tests were all supported except for H2a and H6. Two situationally based cognitive paths represented in the conceptual model, promotive thinking and preventive thinking, were expected to jointly influence the likelihood of pursuing the new venture opportunity. We based these two distinct yet concurrent paths on Higgins' (1997) theory of regulation focus, wherein human behaviors or decisions are explained as the products of two motivational forces (promotion focus and prevention focus). This theoretical approach received strong support for our test of the dual path model and points to a promising way to understanding how entrepreneurs think and make decisions about opportunity evaluation.

Regarding H2a, another unsupported hypothesis, our model comparisons between business-management student and non-business-management student groups introduced some insights. Originally, we posited a positive influence from objective referent criterion such as education and past working experience to optimistic opportunity evaluation. In the business-management student model, the path was found still non-significant. Interesting in the communication student model, however, the path was positive and significant (.25, p < .05) despite the lack of power related to small sample size. With some caution, we interpret this as an educational effect for opportunity recognition. In the business student sample, the education about business principles and knowledge might not vary as much within the sample as it would in the non-business sample, who took fewer business courses and a wider range of other courses. The positive and significant path seems to suggest that business experience and education would improve opportunity recognition for non-business majors wishing to start new businesses.

Finally, regarding the unsupported hypothesis H6, the path from risk perception to opportunity evaluation decision, it seems that risk perception is a relatively less important factor in entrepreneurial decision making than optimistic opportunity evaluation, particularly for pre-nascent entrepreneurs. Optimistic thinking in business decision situations is more important in understanding who becomes an entrepreneur.


In this study, we identified and tested the influence of person and situation variables on an inexperienced, pre-nascent entrepreneur's likelihood of deciding to pursue an entrepreneurial opportunity. We identified self-efficacy and cognitive multilateralism as antecedent individual variables that we hypothesized to activate distinct types of entrepreneurial cognitions as well as subjective and objective referent criteria. Each type of entrepreneurial cognition then exerts influences on one's situational assessment in two ways: optimistic opportunity evaluation vs. perceived risk in the business.

Specifically, we hypothesized that the subjective referent criteria are likely to foster an optimistic opportunity evaluation while they are likely to suppress risk perception embedded in the entrepreneurial situation. In contrast, we posited that the objective referent criteria are likely to foster both risk perception in the situation and optimistic opportunity evaluation. For example, education and past working experience in a small/family business (objective referent criterion) are likely to trigger both promotive thinking and preventive thinking in the given business decision situation; whereas willful or wishful thinking about the desired outcomes (subjective referent criteria) trigger more promotive thinking and suppress preventive thinking. Our predictions are also supported by the types of decision frames (gain/non-gain as well as loss/non-loss frame) that will steer one in different directions in the recognition of opportunities and risks.


In this paper we introduced the concepts of cognitive multilateralism and two different types of referent criteria--subjective and objective--to the study of entrepreneurial cognition research. These individual and situational concepts illustrate the parallel thinking processes adopted by entrepreneurs during the opportunity evaluation phase of the new venture creation process. This study thus makes several significant contributions to theory building for entrepreneurial cognition research.

First, as we applied the new conceptual variables within the theory of regulation focus (Baron, 2004; Higgins, 1997), we created a comprehensive model that describes how the dual-motivational forces - promotion focus and prevention focus - are produced in the entrepreneurial opportunity evaluation. We explained how the two motivational forces are activated and influence an entrepreneur's thinking when situational activation of two types of cognitive structures occurs. We further accounted for how the two types of cognitive structures are likely to be activated from two enduring individual factors. Our review of extant early literature suggests that most of it assumed people experience entrepreneurial optimism (promotive thinking) and entrepreneurial pessimism (preventive thinking) in a mutually exclusive way - one is only present at the expense of the other's absence. However, as we have shown, it seems entrepreneurial thinking on business venturing is more intertwined with conflicting or at least competing motives and decision frames in practice. The two frames of gain/non-gain and loss/non-loss are the yin and yang of entrepreneurial thinking we would adopt in reality. In this sense, our conceptual model is a viable description of the phenomenon -- how the entrepreneur's mind is working during opportunity evaluation situations.

In addition, the newly introduced concept, cognitive multilateralism, is worthy of further application in entrepreneurship research. Prior theory development suggests that entrepreneurs are better able to discover or create something unusual that others cannot identify, often ignore as trivial, or dismiss as not worthy of additional information search or learning costs (e.g., Zahra, 2008). Such a distinct tendency is conceptually captured and predicted by cognitive multilateralism - as one possesses a cognitive breadth and tolerance for inconsistent or rivalrous ideas, she or he is more likely to find some "unthinkable" solutions. We thus have another way to distinguish entrepreneurs' unique cognitive style in addition to the extant psychological concepts such as self-efficacy.

In addition to differing referent criteria, there are the cognitive structures we may retrieve from memory or improvise spontaneously in a given decision situation. While the conceptual ideas might lack novelty, the distinctions between subjective and objective referents allow us to make additional predictions on two competing situational assessments during opportunity evaluation. The utility of the different types of referent criteria seems promising in that they are new concepts that help to explain entrepreneurial cognition linkages between individual factors and situational judgment.

Finally, we introduced and tested two cognitive processing paths, promotive and preventive thinking, to capture the general parallel flow of entrepreneurial opportunity evaluation. These concepts present a useful and intuitive conceptual frame to illustrate the notion of dual-motives and dual-thinking paths toward entrepreneurial decisions and actions. This is a significant contribution to the entrepreneurial cognition literature because we can develop normative or prescriptive research to devise measures to foster more effective entrepreneurial opportunity evaluation in future research.

Methodologically, the use of inexperienced pre-nascent entrepreneurs is a limitation to the study in terms of generalizability, but also has its strengths as pointed out by Bishop and Dixon (2006). The use of such a sample reduces prior learning effects related to our dependent variable--judgment of action on a new venture opportunity. In addition, examining such a sample provides base rate data and findings for comparison to studies of similar cognitive models with samples of more experienced entrepreneurs.


Experienced entrepreneurs consider awareness of danger as well as opportunity, whereas novice entrepreneurs are more focused on newness, novelty, the perceived superiority of their ideas, and intuition (Baron & Ensley, 2006). These researchers suggest that novice entrepreneurs might be 'cognitively dazzled' by novelty and the perceived potential of the unique business ideas they generate such that they may fail to devote sufficient attention to financial and business factors. The Catch-22, of course, is that premature application of preventive reasoning will result in fewer and less frequent new business ideas. This seeming trade-off between promotive and preventive thinking may help to explain two observed phenomena: founding rates of new ventures and failure rates for new ventures.

As reported in the GEM Global Report (GEM Consortium, 2005) opportunity-driven entrepreneurs have lower failure rates among early-stage businesses and all early stage entrepreneurs perceive less market competition (i.e., risk) than established business owners. In examining closure rates of small businesses, Headd (2003) found that a substantial minority of firms that closed their doors were not failures in that they were planned exits either through selling a viable business or retiring from the workforce. Firms considered successful at closure tended to have young owners and no debt. While this is at a late stage in the new venture process, it suggests that pre-nascent and nascent entrepreneurs may view the motivation to create a new venture or the goals for their new ventures quite differently from experienced entrepreneurs.

Perhaps these young and/or inexperienced entrepreneurs are often less motivated by personal wealth creation, more interested in creating a unique solution to a perceived or imagined future need, and are less vested in controlling the eventual success of the new venture than experienced entrepreneurs--recognizing and creating a new venture is much more of a 'grand life experiment'. This would support a greater balance and presence of parallel cognitive processing in pre-nascent and nascent entrepreneurs. This would also help to explain differential founding and failure rates between pre-nascent/nascent entrepreneurs and experienced entrepreneurs (GEM Consortium, 2005). The former group would be more likely to found a new venture due to greater "over-optimism" from employment of subjective referent criteria and lower perceptions of risk. Experienced entrepreneurs meanwhile would likely to be more pessimistic, employ objective referent criteria, perceive greater risk, and less likely to found a new venture. Both cognitive paths are employed but differentially by pre-nascent/nascent versus experienced entrepreneurs. This also helps to explain differential closure rates and potentially, failure rates, in that pre-nascent/nascent entrepreneurs would have started more new ventures, but of lower success potential, on average than those founded by experienced entrepreneurs. So, "liability of newness" may be less of a concern for young entrepreneurs because closure may not be perceived as, or actually, a failure. The first new venture opportunity is, rather, a life experiment whose learning outcomes are more valued than financial success.


Business Opportunity Scenario (Adapted from Keh, Foo, & Lim, 2002)

Instructions: Please answer the questions below after you read this brief case study.

Jimmy Parker has been a successful manager for a medium-sized local company for five years. The idea of being his own boss, taking calculated risks, and making a fortune all appeal to him. He has an idea for his first new business and decides to ask around to see if it is a good idea. He has some very positive feedback from some potential customers and some associates who know the industry well. Jimmy does not have the resources to do in-depth market research to find out whether the business is going to work and published data are too general to be useful. However, he feels that there is money to be made based on the positive feedback from potential customers and his associates. He is enthusiastic about starting the business even though he has no experience in the particular industry in which his start-up would compete.

There are a few, large companies in the same industry but they have not targeted the market segment Jimmy is aiming for. He feels that these large companies are likely to move into the market segment if his new business proves successful and he will not be able to prevent this major threat. He is unsure whether the market is still growing or has matured. If the market reaches maturity, it is likely a new business will be squeezed out. If the market is still growing, the new business will be able to survive the entry of large companies into this market segment. Jimmy finds out that there are only a few, small businesses that are still surviving in the industry.

Jimmy estimates he will need at least $150,000 to finance the new business. As he only has $40,000 in savings, he has to borrow from the bank or find partners to get the rest of the investment funds needed.


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Jeong-Nam Kim, Purdue University

Iain Clelland, Radford University

Seung Bach, California State University--Sacramento
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Date:Jul 1, 2010
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