A Dynamic Model of Entrepreneurial Learning

1042-2587-01-251$1.50 Copyright 2001 by Baylor University

A Dynamic Model of Entrepreneurial Learning

Maria Minniti William Bygrave

We model entrepreneurial learning as a calibrated algorithm of an iterated choice problem in which entrepreneurs learn by updating a subjective stock of knowledge accumulated on the basis of past experiences. Specifically, we argue that entrepreneurs repeat only those choices that appear most promising and discard the ones that resulted in failure. The contribution of the paper is twofold. First, we provide a structural model of entrepreneurial learning in which failure is as informative—though clearly not as desirable—as success. Second, to complement standard economic models in which agents are rational, we allow our entrepreneurs to have myopic foresight. Our entrepreneurs process information, make mistakes, update their decisional algorithms and, possibly, through this struggle, improve their performance.

"Success is the ability to go from failure to failure without losing your enthusiasm." Winston Churchill

Jvirzner (1973, 1979) describes entrepreneurship as the outcome of superior alertness exhibited by selected individuals in the population. But. once an opportunity is recognized, how do entrepreneurs go about its exploitation? Knight (1921) characterizes the entrepreneur as someone able to cope with uncertainty. But how do entrepreneurs decide what actions are best suited to cope with uncertainty? To address these questions we build a model of the decisional algorithm followed by individuals faced by an array of choices with uncertain outcomes. That is, we build a model in which entrepreneurs. or potential entrepreneurs, have to recognize desirable opportunities and cope with the uncertainty associated with the payoff of these opportunities. We assume entrepreneurial decisions to be the result of an entrepreneur's ability to process information (knowledge), and of random impulses (instinct or luck). In the long run. it...