Entrepreneurial Decision-Making: Thinking Under Uncertainty

  • Veronica Gustafsson
Part of the International Studies in Entrepreneurship book series (ISEN, volume 24)

Cognition in Psychology and Entrepreneurship

“Why, you never just stop like this. I mean, if the initial investment hasn’t paid off and more money is required, you keep investing until you pull the project through; especially, if you feel confident about the whole thing.”

The entrepreneur spoke with deep conviction. I ought to have been surprised by the reasoning, but I was not. I was collecting data on a project concerning escalation of commitment and virtually every entrepreneur I had met told me the same thing; money already invested was never regarded as sunk costs. Entrepreneurs were quite prepared to invest additional funds, even if the future of a project was uncertain.

According to the decision theories of rational choice, this was a demonstration of sunk cost fallacy; in other words, an irrational and erratic decision behavior, which subsequently leads to escalation of commitment. Instead of terminating a failing project, decision-makers continue investments, “throwing good...


Decision Task Rational Theory Entrepreneurship Research Entrepreneurship Education Ecological Rationality 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Abelson RP, Levi A (1985) Decision-making and decision theory. In Lindsey G and Aronson E (eds), The handbook of social psychology, vol. 1. New York, Random HouseGoogle Scholar
  2. Anderson JH (1990) Cognitive psychology and its implications. New York, W.H. Freeman and CompanyGoogle Scholar
  3. Ansoff HI (1987) The emerging paradigm of strategic behavior. Strategic Management Journal 8(6): 501–515CrossRefGoogle Scholar
  4. Arkes H, Blumer C (1985) The psychology of sunk cost. Organizational Behavior and Human Decision Process 35: 124–140CrossRefGoogle Scholar
  5. Baron RA (1998) Cognitive mechanisms in entrepreneurship: Why and when entrepreneurs think differently than other people. Journal of Business Venturing 13: 275–294CrossRefGoogle Scholar
  6. Baron RA (2006) Opportunity recognition as pattern recognition: How the entrepreneurs “connect the dots” to identify new business opportunities. The Academy of Management Perspectives 20(1): 104–119CrossRefGoogle Scholar
  7. Baron R, Brush C (1999) The role of social skills in entrepreneurs’ success: Evidence from videotapes of entrepreneurs’ presentations. In: Reynolds RP, Bygrave WD, Carter NM, Manigart S, Manson CM, Meyer GD, Shaver KG (eds), Frontiers of entrepreneurship research. Wellesley, MA, Babson College.Google Scholar
  8. Baron RA, Ward TB (2004) Expanding entrepreneurial cognition’s toolbox: Potential contributions from the field of cognitive science. Entrepreneurship Theory & Practice 28(6): 553–573CrossRefGoogle Scholar
  9. Brockner J (1992) The escalation of commitment to a failing course of action: Toward theoretical progress. Academy of Management Review 17(1): 39–61Google Scholar
  10. Brown RV, Kahr AS, Peterson CR (1974) Decision analysis for the manager. New York, Holt, Rinehart, and WinstonGoogle Scholar
  11. Bröder A, Eichler A (2006) The use of recognition information and additional cues in inferences from memory. Acta Psychologica 121(3): 275–284CrossRefGoogle Scholar
  12. Bukszar E, Connolly T (1988) Hindsight bias and strategic choice. Some problems in learning from experience. Academy of Management Journal 31(3): 628CrossRefGoogle Scholar
  13. Busenitz LW (1992) Cognitive biases in strategic decision-making: Heuristics as a differentiator between managers in large organizations and entrepreneurs. Ph.D. Dissertation, Texas A&M UniversityGoogle Scholar
  14. Busenitz LW, Barney JB (1997) Differences between entrepreneurs and managers in large organisations: Biases and heuristics in strategic decision-making. Journal of Business Venturing 12: 9–30CrossRefGoogle Scholar
  15. Busenitz L, Lau C (1996) A cross-cultural cognitive model of new venture creation. Entrepreneurship Theory and Practice 20(4): 25–39Google Scholar
  16. Chandler G, Lyon D (2001) Methodological issues in entrepreneurship research: The past decade. Entrepreneurship Theory & Practice 25(4): 101Google Scholar
  17. Chase WG, Simon HA (1973) The mind’s eye in chess. In: Chase WG (ed), Visual information processing. New York, Academic PressGoogle Scholar
  18. Choo GTG (1976) Training and generalization in assessing probabilities for discrete events. Uxbridge, UK, Brunel Institute for Organisational and Social StudiesGoogle Scholar
  19. Cohen M (1993) Three paradigms for viewing decision biases. In: Klein GA, Orasanu J, Calderwood R, Zsambok C (eds), Decision-making in action: Models and methods. Norwood, NJ, Ablex Publishing CorporationGoogle Scholar
  20. Connolly T (1988) Hedge-clipping, tree-felling and the management of ambiguity. In: McCaskey MB, Pondy LR, Thomas H (eds), Managing the challenge of ambiguity and change. New York, WileyGoogle Scholar
  21. Cooper AC, Folta TB, Woo C (1995) Entrepreneurial information search. Journal of Business Venturing 10(2): 107–120CrossRefGoogle Scholar
  22. Davidsson P (2002) A conceptual framework for the study of entrepreneurship and the competence to practice it. Jönköping, Jönköping International Business SchoolGoogle Scholar
  23. De Finetti B (1964) Foresight: Its logical laws, its subjective sources. English translation. In Kybert Jr RE, Smokler HE (eds), Studies in subjective probability. New York, WileyGoogle Scholar
  24. Dreyfus HL, Dreyfus SE (1989) Mind over machine: The power of human intuition and expertise in the era of computers. Oxford, UK, Basil Blackwell Ltd.Google Scholar
  25. Dunker K (1945) On problem solving. Psychological Monographs 58, whole no. 270Google Scholar
  26. Einhorn HJ, Hogarth RM (1981) Behavioral decision theory: Processes of judgment and choice. Journal of Accounting Research 19(1): 1–31CrossRefGoogle Scholar
  27. Ericsson KA, Smith J (1991) Prospects and limits of the empirical study of expertise: An introduction. In: Ericsson KA, Smith J (eds), Toward a general theory of expertise: Prospects and limits. Cambridge, Cambridge University PressGoogle Scholar
  28. Fischoff B (1983) Predicting frames. Journal of Experimental Psychology: Learning, Memory, and Cognition 9: 103–116CrossRefGoogle Scholar
  29. Fischhoff B, Slovic P, Lichtenstein S (1977) Knowing with certainty: The appropriateness of extreme confidence. Journal of Experimental Psychology: Human Perception and Performance 3: 552–564Google Scholar
  30. Gaglio CM (2004). The role of mental simulations and counterfactual thinking in the opportunity identification Process. Entrepreneurship Theory & Practice 28(6): 533–552CrossRefGoogle Scholar
  31. Gaglio CM, Katz JA (2001) The psychological basis of opportunity identification: Entrepreneurial alertness. Small Business Economics 16: 95CrossRefGoogle Scholar
  32. Gatewood E, Shaver K, Powers J, Gartner W (2002) Entrepreneurial expectancy, task effort, and performance. Entrepreneurship Theory & Practice 27(2): 187CrossRefGoogle Scholar
  33. Gigerenzer G, Murray DJ (1987) Cognition as intuitive statistics. Erlbaum, NJ, HillsdaleGoogle Scholar
  34. Gigerenzer G, Todd PM, the ABC research group (1999) Simple heuristics that make us smart. New York, Oxford University PressGoogle Scholar
  35. Goldstein DG, Gigerenzer G (2002) Models of ecological rationality: The recognition heuristics. Psychological Review 109(1): 75–90CrossRefGoogle Scholar
  36. Gustafsson V (2006) Entrepreneurial decision-making: Individuals, tasks and cognitions. Cheltenham, UK, Edward ElgarGoogle Scholar
  37. Hammond KR (1988) Judgment and decision-making in dynamic tasks. Information and Decision Technologies 14: 3–14Google Scholar
  38. Hammond KR, Hamm RM, Grassia J, Pearson T (1987) Direct comparison of the efficacy of intuitive and analytical cognition in expert judgment. IEEE Transactions on Systems, Man, and Cybernetics 17(5): 753–770Google Scholar
  39. Kahneman D, Tversky A (1982) On the study of statistical intuitions. In: Kahneman D, Slovic P, Tversky A (eds) Judgment under uncertainty: Heuristics and biases, Cambridge University Press, CambridgeGoogle Scholar
  40. Keeney RL, Raiffa H (1976) Decisions with multiple objectives: Preferences and value tradeoffs. New York, Wiley & SonsGoogle Scholar
  41. Keh HT, Foo MD, Lim BC (2002) Opportunity evaluation under risky conditions: The cognitive process of entrepreneurs. Entrepreneurship Theory & Practice 27: 125–148CrossRefGoogle Scholar
  42. Klayman J, Ha YW (1987) Confirmation, disconfirmation and information in hypothesis testing. Psychological Review 94(2): 211–228CrossRefGoogle Scholar
  43. Knight FH (1921) Risk, uncertainty and profit. New York, Houghton MifflinGoogle Scholar
  44. Krueger N (1993) The impact of prior entrepreneurial exposure on perception of new business feasibility and desirability. Entrepreneurship Theory & Practice 18(1): 5–21Google Scholar
  45. Lipshitz R (1989) Either a medal or a corporal: The effect of success and failure on the evaluation of decision making and decision makers. Organizational Behavior and Human Decision Process 44: 380–395Google Scholar
  46. Lipshitz R (1993) Converging themes on the study of decision-making in realistic settings. In: Klein G, Orasanu J, Calderwood R, Zsambok C (eds), Decision-making in action: models and methods. Norwood, NJ, Ablex Publishing CorporationGoogle Scholar
  47. Lopes LL (1983) Observations: Some thoughts on the psychological concept of risk. Journal of Experimental Psychology: Human Perception and Performance 9(1): 137–144CrossRefGoogle Scholar
  48. McCarthy AM, Schoorman FD, Cooper AC (1993) Reinvestment decisions by entrepreneurs: Rational decision-making or escalation of commitment? Journal of Business Venturing 8: 9–24.CrossRefGoogle Scholar
  49. Mellers BA, Schwartz A, Cooke ADJ (1998) Judgment and decision making. Annual Review of Psychology 49: 447CrossRefGoogle Scholar
  50. Miles R, Snow C (1978) Organization strategy, structure and process. New York, McGraw HillGoogle Scholar
  51. Mintzberg H (1987) Crafting strategy. Harvard Business Review 65(4): 66–75Google Scholar
  52. Mintzberg H, Ahlstrand B, Lampel J (1998) Strategy safari: A guided tour through the wilds of strategic management. New York, Free PressGoogle Scholar
  53. Mitchell RK (1994) The composition, classification and creation of new venture formation expertise. Ph.D. Dissertation, Management Department, University of Utah, Salt Lake City, UTGoogle Scholar
  54. Mitchell RK, Busenitz LW, Bird B, Gaglio CM, Morse EA, Smith JB (2007) The central question in entrepreneurial cognition research. Entrepreneurship Theory & Practice 31(1): 1–27Google Scholar
  55. Mitchell R, Busenitz L, Lant T, McDougall P, Morse E, Smith B, (2002) Toward a theory of entrepreneurial cognition: Rethinking the people side of entrepreneurship research. Entrepreneurship Theory & Practice 27(2): 93CrossRefGoogle Scholar
  56. Mitchell RK, Chesteen SA (1995) Enhancing entrepreneurial expertise: Experiential pedagogy and the new venture expert script. Simulation & Gaming 26(3): 288–306CrossRefGoogle Scholar
  57. Mitchell RK, Morse EA (2002) Developing market economies: The aboriginal case in north-west British Columbia. In: Chrisman JJ, Holbrook JAD, Chua JH (eds), Innovation and entrepreneurship in Western Canada: From family businesses to multinationals. Calgary, AB, University of Calgary PressGoogle Scholar
  58. Mitchell RK, Smith JB, Seawright KW, Morse EA (2000) Cross-cultural cognitions and the venture creation decision. Academy of Management Journal 43(5): 974–993CrossRefGoogle Scholar
  59. Montgomery H (1983) Decision rules and search for dominance structure: Towards a process model of decision-making. In: Humpfreys P, Svenson O, Vari A (eds), Advances in psychology. Amsterdam, North-HollandGoogle Scholar
  60. Neergaard H, Ulhøi JP (eds) (2007) Handbook of qualitative research methods in entrepreneurship. Cheltenham, UK, Edward ElgarGoogle Scholar
  61. Noble D (1989) Application of a theory of cognition to situation assessment. Vienna, VA, Engineering Research AssociatesGoogle Scholar
  62. Patel VL, Kaufman DR (1996) The acquisition of medical expertise in complex dynamic environments. In: Ericson KA (ed), The road to excellence: The acquisition of expert performance in the arts and sciences, sports and games. Mahwah, NJ, ErlbaumGoogle Scholar
  63. Patel VL, Kaufman DR, Magder SA (1996) The acquisition of medical expertise in complex dynamic environments. In: Ericson KA (ed) The Road to Excellence: The Acquisition of Expert Performance in the Arts and Sciences, Sports and Games. Mahwah, NJ, ErlbaumGoogle Scholar
  64. Payne JW, Bettman JR, Johnson EJ (1988) Adaptive strategy selection in decision-making. Journal of Experimental Psychology: Learning, Memory and Cognition 14(3): 534–552CrossRefGoogle Scholar
  65. Pennington N, Hastie R (1988) Explanation-based decision-making: Effects of memory structure on judgment. Journal of Experimental Psychology: Learning, Memory and Cognition 14(3): 521–533CrossRefGoogle Scholar
  66. Piatelli-Palmerini M (1994) Inevitable illusions: How mistakes of reason rule our minds. New York, WileyGoogle Scholar
  67. Read S, Wiltbank R, Sarasvathy S (2003) What do entrepreneurs really learn from experience? The difference between expert and novice entrepreneurs. Frontiers of entrepreneurship researchGoogle Scholar
  68. Rieskamp J, Hoffrage U (2008) Inferences under time pressure: How opportunity costs affect strategy selection. Acta Psychologica 127(2): 258–276CrossRefGoogle Scholar
  69. Roese NJ (1997) Counterfactual thinking. Psychological Bulletin 121(1): 133–148CrossRefGoogle Scholar
  70. Sanna LJ (2000) Mental simulations, affect and personality: A conceptual framework. Current Decisions in Psychological Science 9(5): 168–173CrossRefGoogle Scholar
  71. Sarasvathy S (1999) Decision-making in the absence of markets: An empirically grounded model of entrepreneurial expertise. Ph.D. Dissertation, School of Business, University of WashingtonGoogle Scholar
  72. Sarasvathy S (2001) Causation and effectuation: Towards a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management Review 26(2): 243–263Google Scholar
  73. Sarasvathy S (2008) Effectuation: Elements of entrepreneurial expertise. Cheltenham, UK, Edward ElgarGoogle Scholar
  74. Sarasvathy S, Dew N, Velamuri SR, Venkataraman S (2003) Three views of entrepreneurial opportunity. In: Acs ZJ, Audretsch DB (eds), Handbook of entrepreneurship research. The Netherlands, Kluwer Academic PublishersGoogle Scholar
  75. Sarasvathy DK, Simon HA, Lave L (1998) Perceiving and managing business risks: Difference between entrepreneurs and bankers. Journal of Economic Behavior & Organization 33: 207–225CrossRefGoogle Scholar
  76. Savage LJ (1972) The foundations of statistics. New York, DoverGoogle Scholar
  77. Shanteau J (1989) Cognitive heuristics and biases in behavioural audition: Review, comments and observations. Accounting Organizations and Society 14: 165–177CrossRefGoogle Scholar
  78. Simon HA (1955) A behavioral model of rational choice. Quarterly Journal of Economics 69: 99–118CrossRefGoogle Scholar
  79. Simon HA (1979) Information processing models of cognition. Annual Review of Psychology 30: 363CrossRefGoogle Scholar
  80. Simon M, Houghton SM, Aquino K (2000) Cognitive biases, risk perception and venture formation: How individuals decide to start companies. Journal of Business Venturing 15(2): 113–134CrossRefGoogle Scholar
  81. Staw BM (1981) The escalation of commitment to a course of action. Academy of Management Review 6(4): 577–587Google Scholar
  82. Staw BM, Ross J (1978) Commitment to a policy decision: a multi-theoretical perspective. Administration Science Quarterly 23(1): 40–64.CrossRefGoogle Scholar
  83. Sweller J, Cooper GA (1985) The use of worked examples as a substitute for problem solving in learning algebra. Cognition and Instruction 2(1): 59–89CrossRefGoogle Scholar
  84. Todd PM (2007) How much information do we need? European Journal of Operational Research 177(3): 1317–1332CrossRefGoogle Scholar
  85. Todd PM, Gigerenzer G (2003) Bounding rationality to the world. Journal of Economic Psychology 24(2): 143–165CrossRefGoogle Scholar
  86. Tversky A, Kahneman D (1971) Belief in the law of small numbers. Psychological Bulletin 76: 105–110.Google Scholar
  87. Ulvila JW, Brown RV (1982) Decision analysis comes of age. Harvard Business Review 60(5): 130–141Google Scholar
  88. Palich LE and Bagby DR (1995) Using cognitive theory to explain entrepreneurial risk-taking: Challenging conventional wisdom. Journal of Business Venturing 10(6): 425–438CrossRefGoogle Scholar
  89. Wallsten, TS (1983) The theoretical status of judgmental heuristics. In RW Scholz (Ed) Decision making under uncertainty. Elsevier, Amsterdam, North-HollandGoogle Scholar
  90. Zakay D, Wooler S (1984) Time pressure, training and decision effectiveness. Ergonomics 27(3): 273–284CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Jönköping International Business SchoolSweden

Personalised recommendations