Cognitive mechanisms in entrepreneurship

COGNITIVE MECHANISMS IN ENTREPRENEURSHIP: WHY AND WHEN ENTERPRENEURS THINK DIFFERENTLY THAN OTHER PEOPLE ROBERT A. BARON Rensselaer Polytechnic Institute

Because of their importance in creating wealth—both personal and societal—entrepreneurs have long been the subject of intensive study. Past research has focused on important issues such as: Why do some people, but not others, recognize or create new opportunities? Why do some, but not others, try to convert their ideas and dreams into business ventures? And why, ultimately, are some entrepreneurs successful and others not? Efforts to answer these questions in terms of the personal characteristics of entrepreneurs generally yielded disappointing results: contrary to what informal observation suggests, entrepreneurs do not appear to differ greatly from nonentrepreneurs with respect to various aspects of personality. As a result, a growing number of researchers have recently adopted a different approach—one emphasizing the role of cognitive processes in entrepreneurship. This perspective suggests that valuable insights into the questions posed above may be obtained through careful comparison of the cognitive processes of entrepreneurs and other persons. Whereas informative research has already been conducted within this framework, the present study seeks to expand this developing perspective by building additional conceptual bridges between entrepreneurship research and the large, extant literature on human cognition. Basic research on human cognition suggests that our cognitive processes are far from totally rational; in fact, our thinking is often influenced by a number of sources of potential bias and error. It is suggested here that entrepreneurs often work in situations and under conditions that would be expected to maximize the impact of such factors. Specifically, they face situations that tend to overload their information-processing capacity and are characterized by high levels of uncertainty, novelty, emotion, and time pressure. Together, these factors may increase entrepreneurs’ susceptibility to a number of cognitive biases.

EXECUTIVE SUMMARY

Address correspondence to Robert A. Baron, Lally School of Management and Technology, Rensselaer Polytechnic Institute, Troy, NY 12180-3590. Journal of Business Venturing 13, 275–294  1998 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010

0883-9026/98/$19.00 PII S0883-9026(97)00031-1

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Several cognitive mechanisms that may exert such effects and that have not previously been considered in detail in the literature on entrepreneurship are examined. These include: counterfactual thinking— the effects of imagining what might have been; affect infusion—the influence of current affective states on decisions and judgments; attributional style—tendencies by individuals to attribute various outcomes to either internal or external causes; the planning fallacy—strong tendencies to underestimate the amount of time needed to complete a given project or the amount of work that can be achieved in a given time; and self-justification—the tendency to justify previous decisions even if they result in negative outcomes. Each mechanism is described, and specific hypotheses concerning its potential impact on the thinking of entrepreneurs are proposed. A final section of the article touches briefly on methods for testing hypotheses concerning these mechanisms and explores the implications of this cognitive perspective for future entrepreneurship research. This section emphasizes the fact that a cognitive perspective can provide researchers in the field with several new conceptual tools and may also facilitate the development of practical procedures for assisting entrepreneurs.  1998 Elsevier Science Inc.

INTRODUCTION Much of our American progress has been the product of the individual who had an idea; pursued it; fashioned it; tenaciously clung to it against all odds; and then produced it, sold it, and profited from it.—Hubert H. Humphrey

Few readers of the Journal of Business Venturing would disagree with these sentiments, expressed so forcefully by a politician once known as “The Happy Warrior.” In fact, it is widely recognized that entrepreneurs—people who formulate new ideas, recognize opportunities, and translate these into added value to society by assuming the risk of starting a business—are a major source of economic growth for many economies (Hatten 1997; Holt 1992). Because of their importance in creating wealth—personal and societal—entrepreneurs have long been the subject of intensive study. Such research (Venkataraman, in press) has focused on issues such as these: Why do some people, but not others, recognize or create new opportunities? Why do some decide to “take the plunge” and proceed, exerting vigorous efforts to convert their ideas and dreams into reality? Why are some individuals able to secure the necessary capital and to forge the personal links necessary to create a growing business, whereas others are not—in other words, what are the key differences between successful and unsuccessful entrepreneurs? Initial efforts to answer these questions have focused largely on the personal characteristics of entrepreneurs (cf., Shaver and Scott 1991). The basic premise underlying such research was simple: Entrepreneurs are different from other persons with respect to certain traits, and it is these differences that lead them to recognize opportunities, to pursue them, and so on. At first blush, this assumption seems to be eminently reasonable. Informal observation suggests that entrepreneurs are, indeed, different from other people in terms of their personal traits. For instance, it has been—and still is—widely assumed that entrepreneurs are far above average in their willingness to take risks, their desire to excel, their personal optimism, their tolerance for ambiguity, and in their powerful preference for shaping their own destiny (e.g., Bygrave 1989; Hatten 1997). Surprisingly, however, efforts to uncover differences between entrepreneurs and others with respect to these and other aspects of personality met with only modest success. Try as they might, researchers could not pin down clear-cut differences between entrepreneurs and other people with respect to what seemed to be the most relevant

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dimensions of personality (e.g., Shaver and Scott 1991). Thus, as noted recently by Hatten (1997, p. 40): ‘‘The conclusions of 30 years of research indicate that there are no personality characteristics that predict who will be a successful entrepreneur. . . . Successful small business owners and entrepreneurs come in every shape, size, color, and from all backgrounds.’’ Faced with these disappointing results, many researchers interested in studying entrepreneurs neither gave up in despair nor chose to sit idly by awaiting further events. Rather, they turned to a distinctly different approach, which emphasized the potential role of cognitive factors and processes in entrepreneurship. According to this perspective, important insights into such questions as ‘‘Why do some people recognize opportunities whereas others do not?’’ and ‘‘Why do some try to develop such opportunities whereas others do not?’’ may be gained through careful study of the ways in which entrepreneurs and other persons think—how, in the terms of cognitive psychology, they attempt to make sense of the complex world around them. Such a cognitive perspective has recently risen to prominence in psychology and other behavioral sciences and has added greatly to our understanding of many important topics, including how we reason, form judgments, and reach decisions (e.g., Barsalou 1992). Such knowledge, it is suggested here, can prove invaluable in the study of entrepreneurship. But do entrepreneurs really differ from other people with respect to certain aspects of cognition? And if they do, why is this the case? A small but growing body of research has addressed the first of these questions and points to the conclusion that entrepreneurs do indeed differ from other people with respect to some cognitive processes. For instance, a recent study by Palich and Bagby (1995) found that whereas entrepreneurs and nonentrepreneurs did not differ in overall risk-taking propensity, they did differ in terms of how they thought about business situations: entrepreneurs tended to categorize such situations as having more strengths, opportunities, and potential for gain than did nonentrepreneurs. Similarly, in a very thought-provoking article, Kahneman and Lovallo (1994) have argued that one reason business managers generally, and entrepreneurs in particular, make bold or unreasonably ‘‘rosy’’ forecasts about future business results is that they tend to focus on the specific, current situation while largely ignoring the outcomes of previous, related situations that might serve to inform their current judgments. As Kahneman and Lovallo (1994) put it, such persons tend to adopt an ‘‘inside view’’—one that focuses on the current situation and reflects their personal involvement in it rather than an ‘‘outside view’’—one that compares the current situation dispassionately to the results of relevant past ones. Do entrepreneurs and other people also differ with respect to additional aspects of cognition? And do such differences play a role in entrepreneurs’ recognition of opportunities, decision to forge ahead, and ultimate success or failure? These questions will serve as one major focus of the present study, which casts a wide net into the vast literature on human cognition in an effort to identify mechanisms and processes relevant to our understanding of entrepreneurship. In other words, it seeks to provide useful conceptual bridges between research on entrepreneurship and the findings of current research on human cognition. A number of such links are identified, and for each, the process or mechanism in question is first described, followed by an explanation of its potential relevance to entrepreneurship. Before examining possible differences in the thinking of entrepreneurs and other people, however, it seems crucial to address the ‘‘why’’ question posed above: Why

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would such differences be expected to exist in the first place? Why—and when—would the thinking of entrepreneurs be expected to differ from that of other people? To answer this question, it is necessary to take a brief look at some of the basic findings of research on human cognition—findings that appear to be directly relevant to entrepreneurship.

A NOTE ON HUMAN COGNITION: SOME KEY FINDINGS WITH IMPLICATIONS FOR THE STUDY OF ENTREPRENEURSHIP Systematic research on human cognition has continued for more than a century. However, progress has been especially rapid during the past two decades, as the growing power of computers has placed new and highly sophisticated research tools into the hands of cognitive scientists. As a result of this recent work, we now possess a relatively clear picture of many aspects of human cognition—how we think, reason, decide, use language and symbols, store information for future use, and so on (see, e.g., Barsalou 1992). Whereas this scientific literature points to many conclusions, among the ones most relevant to entrepreneurship are these: •

Our capacity to process new information about the world around us is severely limited and can readily be exceeded (an outcome cognitive psychologists describe as overload). Anyone who has been unable to follow the arguments presented by a speaker because they are offered too quickly is quite familiar with these limits.

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As human beings, we seek to minimize cognitive effort, just as we seek to minimize physical effort. As a result, we often use various “short-cuts” in our thinking, techniques that reduce mental effort. Whereas these are often effective in this respect, they have an important downside as well: they sometimes lead to serious errors in our efforts to understand the world around us.

•

Because of our limited information-processing capacity, our tendency to minimize mental effort, and several other factors (e.g., the powerful impact of emotions on thought), we are often less than totally rational in our thinking. In fact, various aspects of human cognition are subject to a wide range of biases and errors.

Although these conclusions apply to all human beings, they seem to have special relevance to entrepreneurs for the following reason: entrepreneurs may regularly find themselves in situations that tend to maximize the potential impact of various biases and errors. Research on this issue (the question of when we are most likely to fall short of the goal of completely rational thought) suggests that cognitive processes are most likely to be influenced by various forms of bias and error when: •

overload occurs—individuals are confronted with more information than they can process at a given time (e.g., Gilbert et al. 1992)

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individuals face situations that are new to them and involve high degrees of uncertainty—situations in which they cannot readily fall back upon existing mental frameworks (known as schemas in cognitive psychology) (Fiske and Taylor 1991)

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emotions run high—there is a complex interplay between feelings and thought, and intense emotions can produce distortions in many aspects of cognition (Oaksford et al. 1996)

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FIGURE 1 Factors influencing differential susceptibility to cognitive errors by entrepreneurs and others. •

individuals face high time pressures and are in a less-than-optimal physical state; time pressures increase the tendency to adopt mental short-cuts, and factors such as physical fatigue or stress exert similar pressures (Wyer and Srull 1994).

It is suggested here that entrepreneurs are exposed to such conditions more frequently, and perhaps more intensely, than other people, because such conditions are part-and-parcel of the entrepreneurial experience. By the very nature of their activities, entrepreneurs often find themselves in situations that are new, unpredictable, complex, and likely to produce information overload in many different ways. Similarly, the length of their work-week is legendary, so they often meet these demands when fatigued or while experiencing high levels of stress. Finally, entrepreneurs’ commitment to their ideas and businesses is often intense, with the result that many opportunities exist for the powerful emotions stemming from such commitment to influence their thinking. Descriptions of entrepreneurship generally seem to paint a picture consistent with these suggestions. For instance, writing more than 60 years ago, Schumpeter (1934, p. 7; italics added) noted that: ‘‘The entrepreneur seeks to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility. . . . Entrepreneurship essentially consists in doing things that are not generally done in the ordinary course of business routine.’’ Similarly, in a more recent description of entrepreneurs, Holt (1992, p. 11; italics added) proposed that ‘‘Entrepreneurs are those who incubate new ideas, start enterprises based on those ideas . . . have vision for growth, commitment to constructive change, persistence to gather necessary resources, and energy to achieve unusual results. . . .’’ Such descriptions suggest that entrepreneurs, more than other people, are exposed regularly to situations that test the limits of their cognitive capacities, and so, it is argued here, increase their susceptibility to various forms of bias or error (see Figure 1 for an overview of this proposed model.) What are these errors? Several will now be described along with their relevance to the thinking of entrepreneurs. For each, specific hypotheses concerning possible differences between entrepreneurs and other people will be proposed. A final section of the article will briefly describe methods for testing these predictions, as well as the implications of this cognitive perspective for future entrepreneurship research.

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COUNTERFACTUAL THINKING: SOME INTRIGUING EFFECTS OF IMAGINING WHAT MIGHT HAVE BEEN From time to time, everyone thinks about ‘‘what might have been,’’ imagining what would have happened in specific situations if they had acted differently. Psychologists refer to this process as counterfactual thinking and suggest that it is far more than an exercise in imagination. In fact, growing evidence suggests that what we think about when we engage in such mental simulations of events that never occurred can have important effects on our emotional states, our conclusions concerning the causes of various events or outcomes, our subsequent decisions, and even our overt behavior (e.g., Mandel and Lehman 1996; Miller, Turnbull, and McFarland 1990). That such effects occur is confirmed by the findings of many different studies (e.g., Gilovich and Medvec 1994; Roese 1997). These investigations indicate, for instance, that when individuals imagine being better off than they currently are, they experience intense dissatisfaction with their current state of affairs. When they imagine being even worse off, however, they feel much more satisfied with the status quo (Medvec, Madey, and Gilovich 1995). Perhaps the aspect of counterfactual thinking most directly relevant to entrepreneurship, however, involves the relationship between counterfactual thinking and the experience of regret. To gain first-hand experience with the nature of this relationship, readers should perform the following simple exercise: 1. Looking back over your entire past life, list the three things you regret most. 2. Next, looking back over the past week, list the three things you regret most. In response to the first question, an overwhelming majority of individuals list things they didn’t do—missed opportunities of one sort or another (e.g., missed educational opportunities, missed romantic encounters, failures to seize the moment; missed career opportunities). Very few persons list things they did—actions that turned out badly. In contrast, in response to the second question, most people list things they did that turned out badly (e.g., unwise actions, poor choices, wasted time, etc.; see Gilovich and Medvec 1994). These findings point to two conclusions: First, the experience of regret is closely linked to counterfactual thinking—imagining how things might have been if we had, or had not, acted in specific ways. Second, the nature of this experience changes over time, so that initially (i.e., with respect to recent events), we tend to regret things we did that yielded disappointing results. Over longer periods of time, however, we come to regret things we didn’t do—missed opportunities. What is the basis for this shifting pattern? Gilovich and Medvec (1994) suggest that it may stem from the fact that people are better at coping psychologically with the effects of actions that turned out badly than they are at coping with missed opportunities or failures to act. When actions we have performed turn out badly, we can sometimes reverse these actions—we can do something else. Failing that, we can convince ourselves that we had strong reasons for acting as we did. In short, we can rationalize these actions away by convincing ourselves that we had little choice: we had to act as we did. The result is that over time, people cope more and more effectively with actions that turned out badly and gradually come to experience less regret about them. In contrast, consider what happens with respect to missed opportunities or failures to act. Over time, the fears and concerns that kept us from taking action tend to fade from view; as a result, it becomes harder for us to understand why we didn’t take action.

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Further, over time, we continue to contemplate—sometimes with growing intensity— the costs of having failed to act or having failed to seize an opportunity. Whereas the negative consequences of actions we took are apparent—they actually happened—the positive consequences of actions we failed to take are uncertain. In fact, in a sense, they are infinite and are bounded only by imagination. Over time, therefore, individuals can embellish the benefits that would have accrued from seizing a missed opportunity— from buying that business, asking that person for a date, and so on. In sum, there are asymmetries in our counterfactual thinking about actions we took and actions we did not take that tend to produce a pattern of decreasing regret for the former but increasing regret for the latter over time. What are the implications of these patterns of thought for comparisons between entrepreneurs and nonentrepreneurs? One intriguing possibility is that entrepreneurs are especially prone to regrets over failures to act or missed opportunities. Recent findings (Roese 1997) suggest that the tendency to engage in counterfactual thinking, and to experience regret, is increased in situations where individuals encounter negative outcomes. In such cases, many people try to imagine what would have happened if they had acted differently, because this helps to reduce the disappointment and other negative feelings they are experiencing. Entrepreneurs, of course, often meet with many setbacks in the early days of their new ventures (e.g., Hatten 1997). Moreover, their commitment to their ideas, businesses, and products is frequently intense, thus magnifying the negative emotions generated by these disappointments. For these reasons, entrepreneurs may be more likely than other persons to engage in counterfactual thinking and, especially, to experience intense regret over past failures to act which they now view as responsible for negative results. Consistent with this reasoning, the following hypotheses are proposed: H1: Entrepreneurs are more likely than other persons to engage in ‘‘if only . . .’’ patterns of thought, especially in situations where they experience negative outcomes. As a result, they are more likely than other persons to experience regret, or to experience more intense regret, over past failures to act that they construe to be missed opportunities. H2: Entrepreneurs’ greater tendency to experience regret over missed opportunities constitutes one reason why they are more likely than others to search for, identify, and act upon perceived opportunities.

AFFECT INFUSION: HOW AND WHEN FEELINGS SHAPE THOUGHT That our current moods or feelings influence our thoughts is readily apparent. Nearly everyone has had the experience of “seeing the world through rose-colored glasses” on days when they felt especially happy, with the result that they tended to evaluate everything and everybody around them more favorably than might otherwise have been true. Conversely, most persons can recall occasions on which, because they were feeling unhappy or irritable, they tended to perceive everything and everybody they encountered negatively. A very large body of literature offers support for these informal observations (e.g., Forgas 1995; Isen and Baron 1991). In fact, research findings indicate that even relatively mild shifts in our current moods can influence many aspects of cognition,

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ranging from immediate reactions to stimuli we encounter (e.g., physical objects, specific products), to complex judgments and decisions (e.g., Clore, Schwarz, and Conway 1994). How important are such effects? Existing evidence indicates that they can be quite significant. Indeed, current moods have been found to influence even such important processes as evaluations of applicants during job interviews (e.g., Baron 1993; Robbins and DeNisi 1994), and jurors’ judgments about guilt or innocence (Quigley, Johnson, and Byrne 1995). A key question concerning such effects is this: How do they arise? How, in short, do current moods influence cognitive processes? Whereas many mechanisms have been proposed, by far the most comprehensive theoretical account of such effects—and also the one most relevant to entrepreneurship—is a model proposed by Forgas (1995). This theory is known as the affect infusion model (AIM for short), and, as its title suggests, it focuses especially on the process of affect infusion—ways in which affective states elicited by one source or experience can influence (i.e., infuse) judgments about other, unrelated events. Affect infusion occurs, for instance, when the current mood of a job interviewer influences his or her evaluations of several job applicants, even though these people are in no way responsible for the interviewer’s current mood (e.g., Sinclair and Mark 1992). The AIM model suggests that such infusion of affective states into complex judgments and decisions occurs through two basic mechanisms. In one, known as affect priming, current moods influence judgments or decisions by influencing the ease with which information consistent with these moods can be brought to mind. Positive moods (referred to as positive affect) tend to prime (stimulate) happy thoughts and pleasant memories, whereas negative moods (negative affect) tend to prime unhappy thoughts and unpleasant memories. Thus, one way in which current moods influence thought is by directing it into channels consistent with these moods; and since what individuals think about and remember shapes their judgments, mood—whatever its source—exerts strong effects in this manner. In a second mechanism, known as affect-as-information, affective states influence judgments and decisions by serving as a heuristic—a convenient rule for inferring reactions to a specific person, event, or stimulus. When asked to make a judgment about something in the external world—some topic, some issue, another person—individuals often begin by examining their current feelings. They ask themselves, ‘‘How do I feel about it?’’ If they find that their feelings are positive, they may conclude ‘‘I like it’’ or ‘‘I’m favorable about/toward it.’’ Similarly, if they examine their current feelings and find that these are negative, they may conclude: ‘‘I don’t like it,’’ or ‘‘I’m unfavorable toward/about it.’’ This makes sense in situations where these feelings are, indeed, produced by the object or issue being evaluated. However, affect infusion—and distortion—enters the picture in cases where individuals’ current feelings are not generated by the object, issue, or person in question. In such cases, affective states that are actually irrelevant to the judgments or decisions being made can still influence them. The findings of many different studies lend support to the view that affective states can influence judgments and decisions through both of these mechanisms (e.g., Clore et al. 1994; Forgas 1993). The key remaining question, therefore, is: precisely when do such effects occur? When do our current moods strongly influence our thoughts, judgments, and decisions? The AIM model offers a surprising answer. Briefly, this theory suggests that the likelihood of affect infusion is higher when individuals engage in careful, effortful thought about some issue or topic than when they engage in simpler and relatively ‘‘automatic’’ modes of thought. Relatively simple modes of thought occur, for example, in situations where individuals make judgments or decisions largely by

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recalling previous evaluations (e.g., someone who has already formed the judgment ‘‘I don’t like cheesecake” can quickly eliminate it as a potential choice among an array of desserts simply by bringing this judgment to mind). According to the AIM model, current moods are unlikely to exert strong effects upon these kinds of thinking because they are so rapid and lacking in effort that there is little opportunity for current moods to enter the picture. Careful, reasoned thought, however, presents a markedly different picture. Here, individuals engage in active, effortful processing of information, often with the goal of transforming this information (the raw materials of cognition) into something new (Forgas 1995). According to the AIM model, when individuals engage in such thought, affect infusion has ample opportunity to occur. So, somewhat paradoxically, current moods are more likely to influence judgments and decisions when individuals engage in active, effortful thought about the issues in question than when they do not (e.g., Forgas 1995). A growing body of empirical evidence offers support for this prediction (e.g., Forgas and Fiedler 1996). What is the relevance of this theory to entrepreneurship? Two potential links seem most germane. First, consider the definitions of entrepreneurship offered earlier in this article. These strongly suggest that what entrepreneurs do is often not routine; rather, their behavior is often innovative and involves either creating something entirely new or modifying what exists in unique ways. Such actions, it is argued here, are indicative of, and often require, a high level of careful, constructive thought. Indeed, it is a classic finding of cognitive research that it is precisely in situations where people cannot fall back upon previous experience and operate in automatic ways that they engage in careful, constructive thought (e.g., Bless et al. 1996). It seems reasonable, then, to propose that entrepreneurs, as a group, engage in such thought more frequently than do most other people. To the extent they do, the AIM model suggests that they would be more susceptible to affect infusion than others. Second, for affect infusion to occur, individuals must experience some emotion or mood in a given situation. Because of their deep commitment to their ideas, companies, and vision, entrepreneurs may be more likely than other people to experience intense emotions, more frequently, in relation to their work. For this reason, they may be more susceptible to affect infusion: after all, they have stronger feelings available to infuse (i.e., influence) their thinking and decisions. Together, these considerations point to the following hypotheses: H3: Because of the nature and requirements of their new ventures, entrepreneurs engage in careful, constructive thought more often than do other people. H4: Entrepreneurs also experience stronger levels of emotion or affect (mood) than do other people in relation to their work. H5: As a result of these tendencies, entrepreneurs are more prone to affect infusion than are other individuals—that is, their thinking, judgments, and decisions are influenced to a greater extent by affective states unrelated to these thoughts, judgments, and decisions.

ATTRIBUTIONAL STYLE AND THE ROLE OF AUGMENTING A key question people ask themselves over and over again during the course of daily life is, very simply, “Why?” Most human beings are not content merely to react to the events that befall them; rather, they want to understand why these events occurred, why

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other people have behaved in various ways, why a particular product or business strategy failed (or succeeded), and so on. Efforts to answer the question “Why” are described in the field of social psychology by the term attribution, the processes through which an individual seeks to identify the causes of events, others’ behavior, or practically anything that is encompassed by their experience (e.g., Pittman 1993). Existing evidence suggests that virtually all human beings engage in attribution on a regular basis and that, to an impressive degree, it is an orderly and rational process: individuals attempt to determine the cause or causes for any event of interest to them through the careful observation of information that might shed light on this issue. For instance, efforts to identify the causes behind others’ actions often involve observations of information relating to: (1) consensus—the extent to which other people aside from the individual who is the focus of attention also act in the same manner; (2) consistency—the extent to which the person in question acts in the same manner in this situation at other times; and (3) distinctiveness—the extent to which this person acts in the same manner in other, related situations (distinctiveness is high if the person acts differently in other situations, thus making his or her behavior in this situation distinctive). Information on these issues is useful in determining whether another person’s behavior derived primarily from internal factors (e.g., her or his personality, current moods, motives, etc.), or because of external factors (e.g., some event in the external world that impelled the person to act in this manner). Research findings indicate that we tend to attribute some event or action by another person to external causes (i.e., ones outside the person) when consistency, consensus, and distinctiveness are all high, but tend to attribute events or actions to internal causes (something about this person) when consensus and distinctiveness are low, but consistency is high (e.g., Kenny 1994). As noted above, attribution does often appear to be a reasonable and orderly process. However, it is important to note that it is also subject to important sources of bias or error. Many of these exist, but this discussion will focus on one that seems especially relevant to entrepreneurship, an error known as the self-serving bias (e.g., Miller and Ross 1975; Brown and Rogers 1991). This bias actually consists of two distinct but related parts: (1) a strong tendency on the part of most persons to attribute positive outcomes to internal causes—for instance, their own skill, talent, good judgment, or hard work, and (2) a corresponding tendency to attribute negative outcomes to external causes—factors beyond their control, including the actions of other persons, faulty equipment, a lack of needed resources, and so on. Most persons show the self-serving bias, at least to a degree; indeed, growing evidence suggests that the only important exception to this general rule is people suffering from depression—they tend to show the opposite pattern, blaming themselves for negative outcomes while attributing positive ones to external causes such as good luck or the efforts of others (Watkins et al. 1996). Many researchers refer to these contrasting patterns of attribution (the typical “self-serving” pattern shown by most people and its opposite), as discrete attributional styles. What is the relationship of attribution, and especially attributional style, to entrepreneurship? Close examination of these cognitive processes points to the existence of important links—ones that may help to increase our understanding of why entrepreneurs recognize opportunities and decide to pursue them, and may also have relevance to the question “Why are some entrepreneurs more successful than others?” First, it has often been suggested that entrepreneurs show an usually strong preference for exerting personal control over their outcomes (e.g., Shaver and Scott 1991).

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In other words, they want to shape their own destinies or, at least, to believe that they can do so, even more strongly than do other people. Second, it has also frequently been noted that entrepreneurs tend to perceive their own abilities, dedication, and effort as crucial to success: this is one reason why, when asked to estimate the likelihood that their business will succeed, entrepreneurs vastly overestimate the odds (e.g., Cooper, Dunkelberg, and Woo 1988; Kahneman and Lovallo 1994). When these tendencies are combined, the following hypothesis is suggested: H6: Entrepreneurs are more susceptible to the self-serving bias than other persons. Specifically, they are more likely than others to attribute positive outcomes to internal causes but negative outcomes to external causes.

Although the self-serving bias may be beneficial from the point of view of bolstering one’s self-esteem, it has a downside as well. An extensive body of literature indicates that the self-serving bias can be an important source of interpersonal friction (e.g., Baron 1990). The reason why is straightforward: when individuals work together, each tends to take credit for positive outcomes, while assigning blame or responsibility for negative results to the other person. This can result in interpersonal friction whenever these contrasting views become apparent. The existence of such patterns—and of the self-serving bias—may be relevant to differences between successful and unsuccessful entrepreneurs. As noted recently by Venkataraman (in press), successful entrepreneurs are more adept than unsuccessful ones at forging relationships with others that are necessary to the survival and growth of their business. They generate trust among potential investors and commitment from the persons with whom they work. It is suggested here that one factor in such success is reduced susceptibility to the self-serving bias and the more effective interpersonal relations this often produces. More specifically: H7: The thinking of successful entrepreneurs is influenced to a smaller degree by the self-serving bias than is the thinking of less successful entrepreneurs—that is, successful entrepreneurs show less tendency to overestimate their own responsibility for positive outcomes and to underestimate their own responsibility for negative outcomes.

THE PLANNING FALLACY: WHY PEOPLE OFTEN THINK THEY CAN DO MORE, SOONER, THAN THEY REALLY CAN That entrepreneurs often underestimate risks and overestimate the likelihood of success are well-established facts. Why these tendencies occur, however, remains uncertain; indeed, a major focus of this article is identifying cognitive mechanisms that may play a role in generating such tendencies. One possible explanation for the over-optimism shown by many entrepreneurs has been suggested by Kahneman and Lovallo (1994). They propose that entrepreneurs and others often take actions or adopt strategies involving very high levels of risk because, in reality, they don’t truly recognize or accept these risks. The reason for this “cognitive blind spot,” according to Kahneman and Lovallo (1994), is that they tend to treat the current situation or decision as unique, thus isolating it from past experience. Their forecasts of future results are often anchored not on the lessons of the past, but on plans and glowing images of the future. One result is the overly bold forecasts that often get entrepreneurs, and other decision-makers, into serious trouble.

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Another cognitive mechanism that may enter into the picture is one that will be quite familiar to most readers: the general tendency of all persons, not simply entrepreneurs, to overestimate how much they can accomplish in a given period of time or, turning the question around, to underestimate how long it will take them to complete a specific project. Examples of this effect, which is known as the planning fallacy, abound (Kahneman and Lovallo 1994). Large-scale public projects generally take much longer to complete, and cost far more, than originally projected. Similarly, when asked to estimate how long it will take to complete a given endeavor, most people are overly optimistic. This fact is clearly illustrated by research conducted by Buehler, Griffin, and Ross (1994). These researchers asked college students to indicate how long it would take them to complete a current term project. The same individuals were then contacted 1 week after the completion dates they had specified and asked whether they had actually finished the projects. Results were clear: almost half had failed to meet the deadlines they had previously predicted. Readers who have any doubts about these data should pause, at this point, and consider a recent project of their own: Was it completed within the time frame they originally envisioned? It seems safe to predict that many readers will notice a sizable gap between their initial predictions and the actual completion date. Why is the planning fallacy so common? Buehler, Griffin, and Ross (1994) suggest that it occurs largely because of two factors. First, when formulating an estimate about how long it will take to complete a given task, most individuals enter what they term a planning mode of thought in which they focus primarily on the future: how they will perform the task, what steps they will take, and so on. They do not consider their past experiences in similar situations because there are important cognitive obstacles to doing so: predictions, by their very nature, induce a “future orientation;” it is difficult to determine just what previous situations qualify as being “similar” to the present situation; and even if these are identified and considered, attributional processes may interfere with using such information in an accurate manner. Specifically, even if individuals do consider past experiences in which tasks took longer than anticipated, they tend, because of the self-serving bias discussed in the preceding section, to attribute such delays to external factors beyond their control. As a result of these obstacles, individuals tend to ignore past situations and experiences when making predictions about future outcomes. That this is actually the case is suggested by the results of a study conducted by Buehler, Griffin, and Ross (1994). They asked participants in their research to explain why they did not get a particular task done on schedule. Results indicated that fully 71% of the comments made were related to future plans; fewer than 1% referred to problems in completing projects in the past. Thus, as expected, individuals did focus on the present situation and on the future in making their estimates, while largely ignoring past experience. Further, in the few cases where they did mention past experiences, they attributed failures to meet previous deadlines as due to external, transitory, and unique causes—factors largely beyond their control. What is the relationship of these findings to entrepreneurship? First, entrepreneurs tend to focus primarily on the future—perhaps to a greater extent than do other people. After all, they are enthusiastic about their ideas and are, as Holt (1992, p. 11) put it, focused on a “vision for growth.” Moreover, as noted earlier, they may be even more susceptible to the self-serving bias (i.e., the tendency to attribute past failures to external causes) than are other people.

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Second, the planning fallacy, like other cognitive biases, would tend to operate more strongly in the kind of situations entrepreneurs generally face—especially ones that are filled with uncertainties and that are novel and unique. In making predictions about how long various tasks will take or how much can be accomplished in a given period of time, entrepreneurs have little relevant experience to draw upon: they are, in a sense, “making it up as they go along.” Thus, the tendency to view the present situation as isolated or separate from past experiences may be increased. Together, these considerations point to the following hypothesis: H8: Entrepreneurs are more susceptible to the planning fallacy than are other people; this, in turn, contributes to the overly confident predictions they make about future outcomes, and to their beliefs that they can do more, in less time, than is actually feasible.

SELF-JUSTIFICATION AND THE ESCALATION OF COMMITMENT: “TOO MUCH INVESTED TO QUIT TOO SOON IN THE PROCESS” Almost everyone has had the experience of finding themselves in a situation where they felt that they had “too much invested to quit.” Such reactions can occur in a wide range of contexts, from holding onto a stock that has few prospects of rising simply because it was purchased in the past, through remaining in intimate personal relationships that yield little but pain and suffering (e.g., Brockner 1992). Many readers will be familiar with another instance of such effects: continuing to spend money on repairs for an aging automobile because “they have put too much into to it to give up on it now.” In all such situations, the individuals involved feel a strong pressure to continue investing time, effort, or money in what they gradually come to realize is a losing proposition. Such situations—which are described as involving an escalation of commitment— present a puzzling picture. Why, after all, should individuals continue to sink resources into a project, an object, an idea, a stock, or a relationship that has little prospect of yielding anything but ever-mounting costs? From a rational perspective, it would be best to “cut one’s losses” and retreat. Yet, as most readers know from their own experience, escape from such situations is anything but easy. What accounts for this seemingly irrational tendency to stick to a bad decision or a losing course of action? Research on the escalation of commitment (e.g., Staw and Ross 1987; Bobocel and Meyer 1994) indicates that although several factors are involved, the most important are these: (1) feelings of responsibility for the initial decision—once individuals make a decision, they feel responsible for it, and view reversing the decision as backing away from such responsibility; (2) the effort involved in making a decision—decisions require hard cognitive work, and most people are reluctant to begin the process all over again; (3) concerns about the loss of face and image that may result from admitting that one made a mistake; and (4) strong desires to justify one’s initial choice to oneself—to convince oneself that the reasons for making this decision in the first place were good. Together, these factors make it very difficult for individuals who have made a decision, and an initial commitment to it, to reverse this choice. Are these factors also relevant to decision-making by entrepreneurs? It seems reasonable to suggest that they are. In fact, it seems possible that these factors operate more strongly among entrepreneurs

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than among other groups of people, with the result that entrepreneurs are somewhat more susceptible to escalation of commitment than others. Consider, first, the depth of entrepreneurs’ initial commitment to the ideas that they recognized as an opportunity, and to their plans to turn these ideas into viable companies. Few people in any walk of life can match the intensity of this initial commitment. And this, in turn, makes it extremely difficult for entrepreneurs to disown their ideas and the decision to act on them: doing so would almost be akin to disowning one’s children—in this case, intellectual rather than biological offspring. Similarly, it may be even more difficult for entrepreneurs than others to face the ridicule and loss of face that can stem from admitting they were wrong in the first place; this would be especially true with respect to bitter recriminations from friends, family, and early backers— people who bought into the entrepreneurs’ dreams and now find that these have crumbled. Finally, because of their deep commitment to their ideas and to their companies, entrepreneurs may experience truly powerful pressures to justify their initial decisions, and what followed upon these, to themselves. They have a great deal of their self-esteem and self-concept tied to the enterprises they start, so the task of justifying a retreat from these may be personally devastating, to say the least. Together, these considerations point to the following hypothesis: H9: Entrepreneurs are more susceptible to escalation of commitment effects than are other people.

To the extent this prediction is verified in empirical research (see a later discussion of this topic), it may provide a partial explanation for entrepreneurs’ legendary tenacity in the face of adverse results—a definite plus in many situations. But it may also help explain why some entrepreneurs experience total disaster: they simply can’t quit and cut their losses even when doing so is clearly indicated.

IMPLICATIONS OF A COGNITIVE PERSPECTIVE FOR ENTREPRENEURSHIP RESEARCH The major themes of this article can be summarized as follows: (1) entrepreneurs’ thinking may differ, in important ways, from that of other persons; specifically, they may be more susceptible to various kinds of cognitive errors or bias than other persons (see Table 1 for an overview of these biases and errors); (2) such differences in cognition do not stem primarily from differences between entrepreneurs and other people with respect to personal traits (although such differences may well exist), but rather from the fact that entrepreneurs operate in situations and under conditions that would be expected to maximize such errors or biases. These assertions represent logical extensions from the findings of basic research on human cognition, tempered and enriched, insofar as possible, with the findings and insights of research on entrepreneurship (e.g., Venkataraman, in press). But assuming that these assertions are correct, at least to a degree, what are their value to the future study of entrepreneurship? Two potential benefits seem worthy of comment. The first centers around the possibility that drawing on the large body of findings about human cognition may provide entrepreneurship researchers with several new and useful conceptual tools, which they can apply to the unique set of issues and questions addressed by the field. How useful might such a perspective prove? Some hint is provided by the fact that a cognitive perspective has already proven invaluable in psychology and related

Affective states produced by one source influence judgments and decisions about other, unrelated sources (i.e., other objects, issues, or persons)

Most individuals tend to attribute positive outcomes to internal causes (e.g., their own talent or effort), but negative outcomes to external causes (the self-serving bias) The tendency of most people to underestimate the time required to complete various projects, or to overestimate how much they can accomplish in a given period of time

The tendency to continue investing time, ef- Escalation of commitment can lead to a fort, or money in losing courses of action needless waste of precious because of an initial commitment to this resources—something no young comcourse of action pany can afford The desire to justify the initial choice or de- Self-justification is an important factor in cision in an escalation of commitment situescalation of commitment ation

Affect infusion

Attributional styles

Planning fallacy

Escalation of commitment; Self-justification

Predictions

Entrepreneurs may be more prone to the self-serving bias than are other people Successful entrepreneurs are less susceptible to the self-serving bias than are unsuccessful entrepreneurs

Entrepreneurs engage in careful, effortful thought more often than do other people Entrepreneurs typically experience stronger emotions at work than do other people Together, these tendencies make them more susceptible to affect infusion

Entrepreneurs are more susceptible to escalation of commitment effects and tendencies toward self-justification than are other people

These tendencies lead to unrealistic time- Entrepreneurs are more prone to the plantables for the completion of various ning fallacy than are other people; this tasks contributes to their tendency to make overly optimistic predictions about future outcomes

Attributing positive outcomes to internal causes can lead to overconfidence in one’s abilities Blaming others for negative outcomes can lead to interpersonal friction

Affect infusion can lead to serious errors in judgments and decisions, including ones concerning business situations

‘‘If only . . .’’ thoughts cause indivudals to Entrepreneurs are more likely to have ‘‘if feel dissatisfied with current life outonly . . .’’ thoughts than others and to excomes perience regrets over missed opportuniMissed opportunities may lead to intense ties than are other people regrets and magnification of lost poten- This is one reason why they are more tial benefits likely than others to search for, identify, and act upon perceived opportunities

The tendency to imagine what might have been in a given situation

Counterfactual thinking

Relevance to Entrepreneurship

Description

Overview of Cognitive Mechanisms Potentially Relevant to Entrepreneurship

Mechanism or Process

TABLE 1

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fields. Many readers are probably familiar with the contribution of this approach in efforts to understand such topics as memory, thinking, problem-solving, and decisionmaking. However, it is important to note that a cognitive perspective has also added significantly to our understanding of many other aspects of behavior as well and has been successfully applied to a wide range of topics in such fields as social psychology (e.g., Bargh et al. 1995; Baron and Byrne 1997; Weber and Harvey 1994) and industrialorganizational psychology (Greenberg and Baron 1997). Indeed, to date, a cognitive perspective has added greatly to our understanding of virtually every aspect of human behavior to which it has been applied. Given this fact, it seems reasonable to explore the value of such a perspective in the study of entrepreneurship. Whereas entrepreneurship is certainly a unique field with its own rich set of problems and issues (Venkataraman, in press), there seems no logical reason why it could not benefit from drawing on what has proven to be a very useful perspective on human behavior. Encouraging such exploration is the primary purpose of this paper. A second and more applied benefit relates to the possibility that a cognitive perspective might aid in the development of techniques designed to assist entrepreneurs in various ways—especially, in avoiding the errors and pitfalls described earlier in this article (e.g., the self-serving bias, the planning fallacy, escalation of commitment effects). Whereas personal traits and characteristics can be changed only with considerable difficulty, a large body of research findings suggest that patterns of thought—and errors stemming from them—are often more amenable to change (e.g., O’Donohue and Krasner 1996). Thus, not only does a cognitive perspective offer entrepreneurship the possibility of new conceptual tools useful in basic research; it may also contribute to the development of effective interventions for assisting practicing entrepreneurs. At this point, it is important to note that the goal of such techniques would certainly not be that of making entrepreneurs entirely resistant to all cognitive sources of error—of turning them into totally rational beings like Mr. Spock of “Star Trek” fame. Such a goal is clearly unattainable: decades of research on human cognition suggest that our cognitive systems have too many limitations for this to ever be the case (e.g., Barsalou 1992). But even if it were possible to approach complete rationality, one could argue that this, in itself, might have negative implications. Looking out at the world through completely rational eyes, entrepreneurs might well never get started—the odds would appear, realistically, far too daunting. Such a conclusion on the part of large numbers of potential entrepreneurs would have devastating effects on many economies, since the activities of such people are clearly one of the true engines of economic growth (Timmons 1990). The goal of studying the role of cognitive mechanisms in entrepreneurship, therefore, is primarily that of formulating means for holding errors stemming from the cognitive mechanisms in check, so that the decisions reached by entrepreneurs, and the strategies they adopt, have increased chances of success. In essence, the current situation can be described as follows: Entrepreneurs are creative individuals who generate a tremendous number of potentially valuable ideas; as such, they are a priceless human resource for any society. All too frequently, however, entrepreneurs fail in their efforts to translate their ideas into going business concerns that could provide valuable products and services for large numbers of people and add to the economic growth and well-being of their societies. It is suggested here that these disappointing results stem, at least in part, from the cognitive mechanisms and errors described in this article. Thus, calling

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these to the attention of entrepreneurs, and training them in various techniques for reducing such tendencies, might well yield highly beneficial results. That such training might well be feasible is suggested by the success of efforts to improve the accuracy of performance appraisals by training raters in various error-reducing techniques (e.g., Day and Sulsky 1995). In a similar manner, entrepreneurs could be armed with tactics that would assist them in resisting the impact of counterfactual thinking, affect infusion, the self-serving bias, the planning fallacy, and tendencies toward self-justification. To the extent the impact of such tendencies is moderated, entrepreneurs might then be better able to accurately appraise the potential of specific opportunities, and strategies. One final point: by now, some readers may be wondering whether it will be possible to subject the hypotheses offered here to direct empirical test. Obviously, these hypotheses are of value only to the extent that this is possible. In fact, the methods for accomplishing this goal already exist. Each mechanism considered has already been the subject of extensive research. Thus, adapting the methods used in this previous work to the study of potential differences between entrepreneurs and other people should be readily feasible. Specific suggestions regarding such adaptations are beyond the scope of this study. However, it might be useful to briefly illustrate how this process might proceed with respect to one mechanism examined here—counterfactual thinking. H1 suggests that entrepreneurs are more likely than other people to engage in counterfactual thinking, especially in situations where they have experienced negative outcomes. This possibility can be readily assessed by adapting methods used in previous studies of counterfactual thinking (e.g., Medvec et al. 1994). For instance, entrepreneurs and others could be asked to describe and rate various aspects of their thinking in situations where they have experienced negative outcomes. If the reasoning on which this hypothesis is based is accurate, then entrepreneurs would be more likely than others people to report “if only . . .” thinking and more intense feelings of regret. Corresponding adaptations of existing research methods should be possible for all of the hypotheses proposed and all of the mechanisms considered. Thus, methods for testing these hypotheses already largely exist and can readily be applied to future research on entrepreneurship conducted within a cognitive perspective. In concluding, it seems important to emphasize, again, a point made previously: the goal of a cognitive perspective is certainly not that of creating completely rational entrepreneurs who are totally immune to all cognitive errors. In this respect, the present author agrees with Bernard DeVoto, an historian, who stated (1941, p. 212 ): “The trouble with reason is that it becomes meaningless at the exact point where it refuses to act.” What we want, ultimately, is not entrepreneurs who are paralyzed into inaction by efforts to conduct totally logical assessments of all possible risks and benefits, but rather ones who pause and reflect sufficiently to increase the chances that they—and their societies—will prosper.

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