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The Review of Austrian Economics

, Volume 26, Issue 3, pp 329–345 | Cite as

Can probability theory deal with entrepreneurship?

Article

Abstract

The Austrian theory of entrepreneurship emphasizes the importance of epistemic heterogeneity and the unlistability of the set of all possibilities. A similar concern with what has been called “the art of choosing the space of possibilities” is an important part of Bayesian model selection. Both Austrian and Bayesian authors view the common knowledge assumption as an unrealistic and unnecessary restriction. This coincidence of concerns leads to a joint theory of entrepreneurship. Three important benefits result from this merger: (1) the ability to use Itti & Baldi’s Bayesian theory of surprise to empirically measure radical surprise and improve the Betrand competition model as a consequence, (2) dealing with the unlistability problem, and (3) better understanding why the emergence of common knowledge is always the outcome of a social process rather than an inherent consequence of “rationality”.

Keywords

Kiznerian entrepreneurship Bayesian surprise Unknown unknowns Radical uncertainty Bertrand competition 

JEL Classification

D01 D83 D84 C11 

Notes

Acknowledgments

I have received very useful feedback on earlier versions of the paper from Dragos Paul Aligica, Simon Bilo, Peter Boettke, Bryan Caplan, Robert Cavender, Chris Coyne, Thomas Duncan, Jesse Gastelle, Laura Grube, Dave Hebert, Ryan Langrill, Peter Leeson, Jayme Lemke, William Luther, Lotta Moberg, Kyle O’Donnell, Shruti Rajagopalan, Alexander Salter, Solomon Stein, Virgill Storr, Jessi Troyan, and an anonymous reviewer.

Supplementary material

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Economics Department, Mercatus CenterGeorge Mason UniversityFairfaxUSA

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