A Dynamic Entrepreneurial Decision Model

Edison Tse
Department of Engineering Economic Systems, Stanford University
EdTse@expertedge.com

Abstract

All classical dynamic decision models are based on three basic assumptions. First, one can articulate the set of options one can select from over a period of time. Second, one can reasonably comprehend the complexity of the world events, and therefore can ``project quantitatively", at least in probabilistic sence, the distribution of outcome events if one follows a certain decision rule in selecting the options over the future time period. Third, one can associate utility value to the possible outcomes caused by the actual options selection. With these basic assumptions, the dynamic decision model is a hedging model: select the decision rule that will yield the highest expected utility value.

Simon challenged these assumptions. In particular, he argued that decision maker cannot fully comprehend the complexity of the world event and therefore can not model the uncertainties in quantitative terms within a reasonable period of time to apply the ``rational decision analysis". Instead, he introduced the notion of bounded rationality and developed a satisfying model for administrative decision behavior. Simon acknowledged the difficulty in dealing with unquantifiable uncertainties, but his satisfising model did not provide a normative framework for decisionmaking under unquantifiable uncertainties.

An entrepreneur sees the world bery differently from a rational maker and a satisfying decision maker. Let us introduce the ``status of the uncertainty" as a state variable representing ``our knowledge of the world", with two extremes: quantifiable uncertainty and unquantifiable uncertainties. Classical decision model assumes one extreme (quantifiable uncertainties) whereas Simmon's bounded rationality assumes the other extreme (unquantifiable uncertainties). We define an entrepreneurial decision process as a normative process of bringing the status of uncertainty from unquantifiable uncertainties to quantifiable uncertainties, and though the process, discovering new ways to exploit the hidden opportunities imbedded in the world of unquantifiable uncertainties. Therefore, an entrepreneurial decision process is inherently a learning process. However, the issue is, in the state of unquantifiable uncertainties, what guides an entrepreneur's learning activities. Moreover, what is the normative way that the entrepreneur can discover and exploit hidden opportunities to extract economic gains.

In this paper, we developed a dynamic entrepreneurial decision process based on three basic assumptions which represents how an entrepreneur sees the world. These assumptions are not related to value and choices, but related to dynamic changes and surprises. The focus of an entrepreneurial decision process is not what action to take, but rather what role he or she should play in participating the, and what core competence the entrepreneur should build in order to ride on the dynamioc wave movement successfully. We also discuss how the model explains the successes and failures of many entrepreneurial activities.