Entrepreneurs as Parallel Processors: An Examination of a Cognitive Model of New Venture Opportunity Evaluation

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INTRODUCTION

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).

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HYPOTHESIS DEVELOPMENT

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.

PROMOTIVE THINKING VERSUS 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.

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