aspirations, market offerings, and the pursuit of entrepreneurial opportunities

Journal of Business Venturing 21 (2006) 107–123

Aspirations, market offerings, and the pursuit of

entrepreneurial opportunities

Joo-Heon Leea, S. Venkataramanb,*

aYonsei University, Seoul, South KoreabThe Darden School of Business Administration, University of Virginia, P.O. Box 6550, Charlottesville,

VA 22906, United States

Received 1 December 2002; received in revised form 1 January 2004; accepted 1 January 2005

Abstract

In this paper we focus on two core questions: 1) Why do some people seek entrepreneurial

opportunities? 2) Under what conditions is the pursuit of entrepreneurial opportunity most likely?

We attempt to answer these questions by creating a theoretical framework that considers the

interaction between an individual’s level of aspiration and their appraised value in the labor market.

We propose that when there is disequilibrium between the aspiration vector (AV) of an individual

and the perceived valuation of the market offering vector (P-MOV), an individual tends to pursue

entrepreneurial opportunities. In addition, when hiring officers, HR directors, or other relevant

parties involved in the hiring decision are biased or when existing organizations have limitations in

reflecting an individual’s AV, prospective entrepreneurs begin searching for new opportunities in

society. Finally and in our view most crucially, we consider the interaction between an individual’s

subjective consideration and his perceived assessment by the labor market, a novel approach, which

we hope takes into account the complexity and richness of entrepreneurship. We offer seven specific

propositions that derive from the disequilibrium predicted by our framework.

D 2005 Elsevier Inc. All rights reserved.

Keywords: Entrepreneurship; Entrepreneurial opportunity; Opportunity search

0883-9026/$ -

doi:10.1016/j.

* Correspon

E-mail add

see front matter D 2005 Elsevier Inc. All rights reserved.

jbusvent.2005.01.002

ding author. Tel.: +1 434 924 6892; fax: +1 434 243 8945.

ress: [email protected] (S. Venkataraman).

J.-H. Lee, S. Venkataraman / Journal of Business Venturing 21 (2006) 107–123108

1. Executive summary

This paper examines two core questions about entrepreneurship: 1) Why do some

people seek entrepreneurial opportunities while others join or remain in the existing labor

market? 2) Under what conditions is the pursuit of entrepreneurial opportunity most

likely? Scholars in the field of entrepreneurship have long been interested in these

questions and have published a wide variety of answers. These theories range from a

micro-economic explanation, employing the standard utility maximization framework, to

the immutable personal traits explanation. However, there are several limitations to the

answers provided by these theories.

To help us gain further insight into the core questions of entrepreneurship, we develop a

framework consisting of the interaction between two distinct multi-dimensional constructs,

the baspiration vector (AV)Q of an individual and his or her bperceived market offering

vector (P-MOV)Q. The focus of this paper is not the specific content of these constructs butrather their interaction. We claim that the interaction of these constructs determines the set

of opportunities open to an individual and her locus of search among economic

opportunities.

The aspiration vector (AV) of an individual is composed of the combination of

economic, social, and psychological benefits that an individual would like to have or that

she believes she has the means and motivations to achieve for herself. The AV of an

individual tends to be influenced by abilities, values, traits, past achievements, and

environment. In short, AV tends to be formed from the human, intellectual, and social

capital of an individual.

We define the market offering vector (MOV) as the combination of economic, social,

and psychological dimensions that are implicitly or explicitly available to the individual

from the labor market at a given point in time. Every job or potential job offering comes

with an economic package, a perceived social status, and a possible satisfaction that the

individual can derive from performing the job. The MOV for an individual is determined

by a source exogenous to the individual, namely the hiring managers in an existing

organization, labor groups, and trade associations in the community or economy.1 Further,

the factors that go into the calculation of MOV usually go beyond the specific human,

intellectual, and social capital of the individual in question. They take into account social

benchmarks, past experience with similar individuals, reference points, organizational

constraints, labor market demand and supply conditions, and so on.

Unfortunately all this information is not perfectly available to the individual

considering employment options. An individual’s perception of their market offering

vector is what plays a critical role in the entrepreneurial decision.

The entrepreneurial dilemma arises when an individual’s AV does not correspond with

his or her P-MOV. In some cases, a person’s AV may demand a higher quality of life than

their perceived (utilities) available non-entrepreneurial options. In other cases, reasonable

1 Granted there may be a different MOV available to the individual in different contexts. For the purposes of

this paper, we assume the MOV to be the sum of all available market offerings adjusted for any deviation based

on context.

J.-H. Lee, S. Venkataraman / Journal of Business Venturing 21 (2006) 107–123 109

options might not be given to some groups of people (for a variety of reasons — e.g.,

stereotyping or discrimination).

In addition, we view this framework as inherently dynamic. Both the AV and P-MOV

constructs vary across time and space. An individual’s AVand P-MOVare dependent upon

the context in which she views herself. Even if context were to remain the same,

temporality introduces constant change, by introducing or removing knowledge, people,

and perceptions. At a different point in time some entrepreneurs may become paid

employees, and some paid employees may become entrepreneurs.

The interaction between the AV and P-MOV constructs allow us to make several

propositions about the two core questions of entrepreneurship. Asymmetries in

information, motivation, and verification ability lead us to the following propositions:

Proposition 1a: Individuals whose AV exceeds that offered by the available MOV are

more likely to pursue entrepreneurial opportunities.

Proposition 1b: Individuals whose P-MOV exceeds their AV are less likely to pursue

entrepreneurial opportunities. They tend to choose the available non-entrepreneurial

options that most closely resemble their AV.

Proposition 2a: An individual with easily verifiable human and intellectual capital is

more likely to remain in a non-entrepreneurial career.

Proposition 2b: An individual, who believes he has excellent human and intellectual

capital that cannot be easily observed or verified, is more likely to pursue an

entrepreneurial opportunity.

Proposition 3: An individual who has more specialized skills and knowledge is more

likely to remain in a non-entrepreneurial career, while the person who has greater

general skills and knowledge is more likely to pursue an entrepreneurial opportunity.

Proposition 4: An individual who has rich social networks or a high social position is

more likely to pursue an entrepreneurial opportunity.

Proposition 5: An individual who has significant measurable qualities that are not

highly situational and dynamic is more likely to remain in a non-entrepreneurial career,

while an individual who has significant non-measurable qualities that are highly

situational and dynamic is more likely to pursue an entrepreneurial opportunity.

In our view this framework and its propositions side step many of the drawbacks of

previous theoretical models and have promising implications for empirical research.

2. Introduction

This paper features two core questions about entrepreneurship: 1) Why do some people

seek entrepreneurial opportunities while others join or remain in the existing labor market?

2) Under what conditions is the pursuit of entrepreneurial opportunity most likely?

Scholars in the field of entrepreneurship have long been interested in these questions and

have published a wide variety of answers. These theories range from a micro-economic

explanation, employing the standard utility maximization framework (e.g. Kihlstrom and

Laffont, 1979; Gimeno et al., 1997; Douglas and Shepherd, 1999; Minniti and Bygrave,


1999), to the immutable personal attributes explanation (e.g. Brockhaus and Horwitz,

1986; Carland et al., 1988; Churchill and Lewis, 1986). We find that neither group of

theories satisfies all of our concerns, and that the above questions remain largely

unanswered.

In answering the first question, previous scholarship has provided the insight that

complex markets already exist for most professions. These markets regulate the

employment of doctors, lawyers, engineers, managers, and other established career paths.

Knight (1921) has shown that a distinct feature of the entrepreneurial function is the lack

of such a market for the entrepreneur, such that she has to hire her own services to provide

value. The decision to bhire one-self,Q rather than join an existing job market, is interesting

from a job-search point of view and therefore worthy of closer scrutiny.

Traditionally, answers to the first question have only considered either bindividualfactorsQ or bcontextual factorsQ. A few studies have considered both (see Shaver and

Scott, 1991; Shane, 2003 for comprehensive reviews). However these studies consider

the individual and contextual variables independently. We believe our contribution to

this literature is to focus on the interaction between bindividual factorsQ and

bcontextual factorsQ in an entrepreneur’s decision to seek an entrepreneurial oppor-

tunity. We will create a framework that addresses these factors and then highlight the

various outcomes of their interaction. More specifically, this framework will help shed

light on our second question (Under what conditions is the pursuit of entrepreneurial

opportunity most likely?). Our claim is that disequilibrium within the framework has

a tangible affect on an individual’s likelihood of seeking an entrepreneurial

opportunity.

3. Relevant literature

In this section we will first define a few of our key terms that have direct relevance to

our framework. Secondly we will offer a survey of the relevant literature that aims to

answer the questions we find compelling.

For the purposes of this paper, we define entrepreneurs as individuals who hire their

own services in the pursuit of an entrepreneurial opportunity. Similarly, an entrepreneurial

opportunity is the chance for an individual (or a team) to offer some new value to society,

often by introducing innovative and novel products or services by creating a nascent firm.

These opportunities contain the possibility for economic gain as well as the possibility for

financial loss for the entrepreneur(s) pursuing the idea.2 In contrast, non-entrepreneurs are

defined as individuals who join (or continue to remain in) existing businesses or

organizations, which they did not create.

The most common answer to our first question (why do some people seek

entrepreneurial opportunities while others join or remain in the existing labor market)

has been the so-called btraitsQ approach. Using the personal traits of individuals as the key

explanatory variable, this long stream of research has been unable to decisively identify

2 While we recognize that not all self-employed people are entrepreneurs, we wish to point out that at some

point during the pursuit of an entrepreneurial opportunity most pursuers do become self-employed.


any distinctive personal characteristics that may lead an individual to choose

entrepreneurship (Brockhaus and Horwitz, 1986). There are several well known critiques

of the btraitsQ approach (Gartner, 1988; Aldrich, 1989; Shaver and Scott, 1991), which

evaluate the method on a variety of grounds; we will not repeat them here. Suffice it to say

that scholars have recently turned their attention to issues other than personal

characteristics in search of more compelling explanations.

A second approach has been the utility maximization approach. Since J. S. Mill (1848)

isolated risk-bearing as crucial to the entrepreneurial function, numerous scholars in a

variety of fields have recognized that entrepreneurs tend to bear high risk in creating new

organizations because they need to invest a lot of their time and capital (Brockhaus, 1980;

Cooper et al., 1988). Using utility theory, Kihlstrom and Laffont (1979) demonstrate that

individuals with high risk aversion become workers, while individuals with lower risk

aversion become entrepreneurs.

A third strategy to answer our primary question is the career choice approach.

Researchers (e.g. Eisenhauser, 1995; Douglas and Shepherd, 1999) claim that the

entrepreneurial choice should be seen as ban occupational choiceQ or bcareer choice.Q Thislanguage shift does not add much that is new to the discussion and only serves to pass on

the ambiguities in the entrepreneurial choice problem to the more general occupational

choice problem. The implicit assumptions of this model are: 1) that the decision-maker

tends to think there is no difference between entrepreneurial opportunities and non-

entrepreneurial opportunities; (2) that the decision-maker can rationally assess the utilities

of two choices when she makes her decision. However, different occupational choices

generally involve different degrees of risk and reward just as different entrepreneurial

opportunities involve different degrees of risk and reward (Friedman and Savage, 1948).

Thus the occupational decision becomes just as complex and elusive as the entrepreneur-

ial. From the observation that an individual both gambles and insures himself, Friedman

and Savage (1948) take a step in the right direction by deriving different heuristics for

decision-making under uncertainty. This view was crystallized in Schumpeter’s (1942)

remark, which used relative social standing as one such reference point: bIt is non-

controversial that the class situation in which each individual finds himself represents a

limitation on his scope, tends to keep him within his classQ (p. 163).A fourth approach extends Friedman and Savage’s intuitions. Kahneman and Tversky

(1979) develop the framework of bprospect theoryQ which has become one of the most

popular models in recent management and economics research on individual decision-

making under uncertainty. In their model, uncertain choices are evaluated not in relation to

an absolute utility but in relation to subjective reference point (Fiegenbaum et al., 1995).

Many earlier studies ignore the concept of reference points altogether, thus raising

questions about their validity. We credit bprospect theory,Q with providing us with the

critical insight that choices depend fundamentally on reference points. Our frame will

build on their work.

Finally and most recently, Shane and Venkataraman (2000) have argued that

entrepreneurship is an activity that involves the nexus of two phenomena: the presence

of lucrative opportunities and the presence of enterprising individuals. A myopic focus on

either the individual or the opportunity alone, without regard to the other, involves an

incomplete analysis. Further, they add that the traditional definition of an entrepreneur as


an individual who creates any new business or organization, misses some compelling

evidence that is central to the diversity inherent in entrepreneurship, mainly variations in

the qualities of new organizations or the differences in the quality of the entrepreneurs

(Shane and Venkataraman, 2000). For example an entrepreneur who creates one specific

type of business opportunity might not even grasp the significance of other types of

business opportunities. To do so would require a different set of aspirations, personalities,

intentions, knowledge, and skills. Neglecting these variations has surely affected the

sensitivity of past empirical research and made our questions harder to answer. Another

more serious problem in the existing literature is the implicit assumption that either the

characteristics of individuals or the opportunities they pursue are permanent and

unchanging. Even if the relevant characteristics and opportunities for entrepreneurship

are present in all people (albeit in varying degrees), but are expressed in very particular

contexts, the pursuit of permanent and unchanging btraitsQ would be unsuccessful.

We would like to highlight the work of Amit et al. (1993) as an example of a successful

attempt to bring the individual and the notion of opportunity together. These authors claim

that an individual’s opportunity cost is an important reference point in the decision to

become an entrepreneur. They argue that individuals with low opportunity costs to market

entry are more likely to become entrepreneurs than those who incur higher opportunity

costs are. However, their study was static (they used only one time point) and did not

account for variations in the macroeconomic conditions or the quality of opportunities

pursued. Similarly, Gimeno et al. (1997) argue that in order to understand entrepreneurial

exit decisions, researchers should not only consider the utilities of employees but also their

alternative opportunities. We will extend these arguments by proposing a more general

theory of composed of the interaction between two different conceptual vectors, rather

than one narrowly based on solely on opportunity costs or individual traits.

4. Differences between entrepreneurial opportunities and non-entrepreneurial

opportunities

Before we flesh out our framework, we want to argue that every individual in society

who seeks financial remuneration has two different sets of options (in theory), one

entrepreneurial (which we define as involving more risk) and one non-entrepreneurial

(which we define as involving less risk). Second, we argue contra Knight (1921) that there

is a market for entrepreneurs which are directly tied to the existing market. Further the

market for non-entrepreneurial options generally operates more efficiently, exogenously,

and decisively than the market for entrepreneurial opportunities.

Entrepreneurs need to discover bnew means–ends relationshipsQ within their respective

opportunities (Shane and Venkataraman, 2000, p. 220), which involves a search for

opportunities, definition of the process, assembly of resources, successful execution,

accumulation of positive cash flows, and many other such steps (Kaish and Gilad, 1991, p.

48). A lot of information and action is required to understand and estimate the expected

returns and risks of entrepreneurial opportunities. Thus, we can say that entrepreneurial

opportunities generally involve higher levels of uncertainty even after entrepreneurs have

spent a lot of time acquiring basic required information. Because of this high uncertainty,


the mere act of searching for new entrepreneurial opportunities might take more than a few

years (Reynolds and Miller, 1992).

By contrast, because the hiring practices of existing firms usually provide detailed

information, individuals can reliably and fairly estimate, their utilities (for example,

expected returns in monetary terms) of non-entrepreneurial options. An individual can

have a relatively good idea about her non-entrepreneurial options after short search

process. If an individual is already employed, computing the prospects of continued

employment is easier and more certain than computing the prospects of an entrepreneurial

opportunity. Thus, after a limited search of the labor market, each individual forms a

judgment about his or her dvalueT in the market place. The crux of our argument is that the

market for non-entrepreneurial options operates more efficiently than the market for

entrepreneurial opportunities. Because of this asymmetry, individuals are more likely to

first search existing markets and decide whether to join (or continue in) an existing

organization or pursue more costly information searches regarding possible entrepreneurial

opportunities.3

To clarify, we do not mean to say that all entrepreneurial opportunities are riskier than

all non-entrepreneurial opportunities. Some entrepreneurial opportunities may be less risky

than some non-entrepreneurial opportunities. For example, a newly employed investment

banker may shoulder a much higher rate of risk than an owner of new local retail store. In a

competitive market, opportunities that can provide higher utilities (expected returns in

monetary terms) tend to involve higher risks and uncertainties. The individuals who aspire

to higher levels of utility tend to pursue only riskier entrepreneurial opportunities.4

In the following section we will construct our framework, compare and contrast its two

concepts, and derive some basic intuitions from it.

5. Aspiration vector and market offering vector

Our framework consists of the interaction between two distinct multi-dimensional

constructs, the baspiration vector (AV)Q of an individual and the bmarket offering vector

(MOV)Q. The focus of this paper is not the specific content of these constructs but rather

their interaction. We claim that the interaction of these constructs determines the set of

opportunities open to an individual and her locus of search among these opportunities.

3 Of course, sometimes opportunities may fall bin the lapQ of an individual and then they may decide to pursue

this serendipitous opportunity. However, even here we believe our argument that entrepreneurial markets are less

efficient holds for several reasons. First, such serendipitous opportunities essentially influence an individual’s

aspiration and create a dis-equilibrium that did not exist. Second, opportunities rarely come in completely pre-

packaged forms (Venkataraman, 1997). People almost always have to create specific opportunities from general

trends and forces. Third, even if the search process is short-circuited individuals have to decide to invest time,

energy, and money in the execution and creation of products and firms to exploit the opportunity. So, our

observation is still valid under conditions of serendipitous events. And, finally, we believe such serendipitous

discoveries are very rare in the lives of individuals.4 We recognize that people make occupational choices for more than purely financial interests. Occupational

decisions may involve economic, social, and psychological value. For the clarity of argument, we address only the

financial in this example. However our framework takes into account social, psychological, and economic value.


The aspiration vector (AV) of an individual is composed of the combination of

economic, social, and psychological benefits that an individual would like to have or that

she believes she has the means and motivations to achieve for herself. Thus AV is similar

to the individual’s operational goal at that specific time (March, 1994). For example, an

individual might need a job that can be finished by three o’clock in the afternoon because

he needs to be home with his children. In addition, he may want to earn more than $50,000

per year to support his family. Then, his simplified AV consists of two variables, a time

constraint (3:00 PM) and a compensation requirement (N$50,000). Thus, the individual

prefers entrepreneurial or non-entrepreneurial opportunities constrained by these two

criteria.

The AV of an individual tends to be influenced by abilities (Hollenbeck and

Whitener, 1988), values and traits (Hollenbeck and Whitener, 1988), past achievements

(Bandura, 1982), and environment (March and Simon, 1958; Herron and Sapienza,

1992). In short, AV tends to be formed from the human, intellectual, and social capital

of an individual. Recently, Fiegenbaum et al. (1995) have argued that individuals or

firms usually use SRP (strategic reference points) to decide their strategies and they

proposed a three-dimensional SRP matrix (time, internal, external) to develop a

comprehensive theory. Fiegenbaum et al. (1995) point out that various theories in

economics, psychology, organization, and strategic management focus on different

dimensions of strategic reference points. For example, a resource-based view in strategic

management emphasizes the importance of unique capabilities of internal organization

while stakeholder theory in strategic management emphasizes the importance of

compatibility with external community and society. Thus, different managers in a firm

may use different strategic reference points depending on their positions, perceptions,

focuses, and styles (Shoham and Fiegenbaum, 1999). Similarly, although individuals

have a variety of aspirations in their lives, they tend to set a diverse aspiration vector

based on the human, intellectual, and social capital dimensions pertinent to them at a

point of time.

We define the market offering vector (MOV) as the combination of economic, social,

and psychological dimensions that are implicitly or explicitly available to the individual

from the labor market at a given point in time. Every job or potential job offering comes

with an economic package, a perceived social status, and a possible satisfaction that the

individual can derive from performing the job. All this information is not perfectly

available to the individual making the decision. Therefore an individual’s employment

decisions are based on his perception of his MOV.

The MOV for an individual is determined by a source exogenous to the individual,

namely the hiring managers in an existing organization, labor groups, and trade

associations in the community or economy.5 Further, the factors that go into the

calculation of MOV usually go beyond the specific human, intellectual, and social capital

of the individual in question. They take into account social benchmarks, past experience

5 Granted there may be a different MOV available to the individual in different contexts. For the purposes of

this paper, we assume the MOV to be the sum of all available market offerings adjusted for any deviation based

on context.


with similar individuals, reference points, organizational constraints, labor market demand

and supply conditions, and so on. While such factors may also go into the formation of the

AV, the crucial difference is that AV is formed by one individual with a limited set of

information, while MOV is determined by taking into account the information of a much

larger pool of people. Thus, an individual’s AV might be rationally or non-rationally

different from the MOV for the individual. However, the individual does not have the

perfect information necessary to fully gauge their MOV. It is their perceived market

offering vector (P-MOV) that they construct. By examining the interaction between an

individual’s AV and their P-MOV, we can identify what kinds of people tend to pursue

entrepreneurial opportunities and subsequently become entrepreneurs.

Both the AV and the P-MOV are not a simple re-packaging of bindividual factorsQ andbcontextual factorsQ respectively, but contain a combination and interaction of these

factors. Despite a composition of similar elements AV is distinct from P-MOV. Although

each category contains uncertainty and imperfect knowledge about the future (Knight,

1921). The distinguishing features revolve around where the uncertainty comes from.

Knight argues, bThe best example of uncertainty is in connection with the exercise of

judgment or the formation of opinions as to the future course of events, which opinions

(and not scientific knowledge) actually guide most of our conductQ (p. 233). Thus an

individual’s assessment of the future may be very different from their perception of the

assessments of others. It is not that one is more accurate than the other, rather that there are

good reasons for being different. This difference matters when individuals make choices.

Because of uncertainty and information asymmetry expectations about the future are

different for different individuals. Thus disequilibrium in an individual’s AV, MOV, and

thus P-MOV is highly probable.

Despite their differences, our two constructs contain some similar facets. Just as

individual opinions (or judgments) guide individual behaviors, we argue that social

opinions about individuals determine that individual’s employment opportunities. Our

position is that, similar to individual opinions, social opinions can be biased and stereo-

typical; the social judgment and stereo-typing matters in understanding how and why

specific individuals make specific choices. AV and MOV both contain imperfect

knowledge and biases. We claim that the interaction, specifically the disequilibrium

between these two categories, has a significant impact on an individual’s consideration of

entrepreneurial options.

In addition, we view this framework as inherently dynamic. Both the AV and P-MOV

constructs vary across time and space. An individual’s AVand P-MOVare dependent upon

the context in which she views herself. Even if context were to remain the same,

temporality introduces constant change, by introducing or removing knowledge, people,

and perceptions. At a different point in time some entrepreneurs may become paid

employees, and some paid employees may become entrepreneurs.

The entrepreneurial dilemma arises when an individual’s AV does not correspond with

his or her P-MOV. In some cases, a person’s AV may demand higher remuneration, quality

of life, and benefits than their perceived (utilities) available non-entrepreneurial options. In

other cases, reasonable options might not be given to some groups of people (for a variety

of reasons — e.g., stereotyping or discrimination). Thus, in order to understand an

individual’s decision-making, we need to understand the following questions: (1) How do


individuals shape their AV? (2) When, how, and why do some people’s AV and P-MOV

tend toward disequilibrium? (3) When, how, and why are reasonable non-entrepreneurial

options not offered to some groups of people? We will discuss these questions in further

detail below as we derive a set of propositions that will be useful in predicting why and

under what conditions individual’s will pursue entrepreneurial opportunities.

6. Sources of disequilibrium in AV and P-MOV and the decision to pursue

entrepreneurial opportunities

As we have seen the non-entrepreneurial options an individual has may not always

match his AV because the supply of non-entrepreneurial options is determined

exogenously to the individual. Although the factors forming an individual’s AV and the

factors determining the non-entrepreneurial options might arise from some of the same

underlying elements, namely human, intellectual, and social capital, the way the

information on these elements is obtained, processed, interpreted, and combined are

different in each case. The primary underlying reasons for these differences can be traced

to asymmetries in motivation, information, verifiability, and the problem of predicting the

future from the past. We examine each of these in turn and derive useful propositions from

them.

6.1. Motivations asymmetry

When given the choice between relatively uncertain opportunities and relatively certain

options what factors influence and individual’s decision? There is a long list of scholars

who have theorized this choice among other risk alternatives. Again, maximization of

utility has proved to be a very successful model in theorizing choices among riskless

alternatives, but over the years, many scholars have pointed out numerous problems of

using this framework to theorize about choices among risky options. von Neuman and

Morgenstern (1944) developed the indifference curve analysis and made it possible to

analyze choices among risky alternatives using the maximization of utility framework.

According to this framework, high-risk options are chosen only when they can provide

high yield utilities (returns) to investors because the investors are usually assumed to be

risk-averse. However, as Friedman and Savage (1948) first argued, this framework cannot

explain the phenomena that the same person might simultaneously gamble and purchase

insurance. They proposed an alternative utility function with an inverted bSQ shape. Thisutility function was interpreted in connection with varying socio-economic status. For

example, bincreases in income that raise the relative position of the consumer unit in its

own class but do not shift the unit out of its class yield diminishing marginal utility, while

increases that shift it into a new class, that give it a new social and economic status, yield

increasing marginal utilityQ (Friedman and Savage, 1948, pp. 298–299). From the

perspective of the modern bstrategic reference point theoryQ (Fiegenbaum et al., 1995), the

main concern was past social positions or the social class of people. This interpretation

was further developed by Brenner (1985) to explain general social phenomena such as

gambling, war, and starting new businesses.


Kahneman and Tversky (1979) also criticize the expected utility theory and propose an

alternative framework, bprospect theory.Q Prospect theory argues that risky options are

evaluated not relative to absolute scale of wealth or welfare but relative to reference points

of decision-makers. Kahneman and Tversky (1979) explain these behaviors as follows:

bOur perceptual apparatus is attuned to the evaluation of changes or differences rather thanto the evaluation of absolute magnitudes. . . the past and present context of experience

defines an adaptation level, or reference point, and stimuli are perceived in relation to this

reference pointQ (p. 277). In addition, the risk propensity of an individual (or organization)

is dependent on the reference point of an individual and the current situation (Fiegenbaum

et al., 1995). For example, if individuals think their current positions are below their

reference points, they tend to show risk-seeking behaviors. If individuals think their

current positions are above their reference points, they tend to behave in risk-averse ways.

Following the logic of prospect theory, we can further explain an individual’s choice

between entrepreneurial and non-entrepreneurial options. After a short search, individuals

tend to formulate good ideas about what kinds of non-entrepreneurial options they can

have. However, at this point, individuals may not know what they can finally get when

they choose to pursue more entrepreneurial opportunities by sacrificing their temporal

incomes.6 This decision to explore entrepreneurial opportunities should be dependent on

the AV (reference point) of an individual and the individual’s non-entrepreneurial options.

As prospect theory claims, if the non-entrepreneurial options can satisfy the decision-

maker’s aspiration, he tends to become more risk-averse. Thus, he will not choose to

pursue entrepreneurial opportunities and tends to accept one of the best non-

entrepreneurial options available. If the non-entrepreneurial opportunities cannot satisfy

the decision-maker’s aspiration vector, the decision-maker tends to look for ways he can

achieve his purpose. Thus, decision-makers tend to pursue uncertain entrepreneurial

opportunities because the choice gives higher probabilities for satisfaction of their

aspiration vector.

Proposition 1a. Individuals whose AV exceeds P-MOV are more likely to pursue entre-

preneurial opportunities.

6 Could it be that certain types of entrepreneurial opportunities are less risky than some non-entrepreneurial

opportunities for individuals with the same aspiration levels, because the potential entrepreneurs have more

information or because they have superior abilities? While this is certainly possible, this is obvious only ex-post,

after the entrepreneurs actually take steps to exploit the opportunity. Recall, the choice for the individual is

between becoming a salary-worker (non-entrepreneur) and pursuing an entrepreneurial opportunity. Since the

market for non-entrepreneurial opportunities is more efficient than the market for entrepreneurial opportunities,

individuals can find and investigate non-entrepreneurial opportunities in a relatively short time. However, if the

individual chooses to pursue entrepreneurial opportunities rather than become a salary-worker, ex-post, the search

may yet prove unsuccessful — that is, no worthwhile entrepreneurial opportunity may transpire even after much

investment in search and effort. Thus, the potential entrepreneurial opportunities still tend to involve higher

uncertainties. Second, if the relevant information for an entrepreneurial opportunity is readily available, many

people may simultaneously discover this information and may be strongly attracted to such opportunities. The

ensuing severe competition among many potential entrepreneurs will only increase the uncertainty of the

opportunity.


Proposition 1b. Individuals whose P-MOV exceeds their AV are less likely to pursue

entrepreneurial opportunities. They tend to choose the available non-entrepreneurial

options that most closely resemble their AV.

6.2. Information asymmetry

A second source of difference between AV and P-MOV is the information asymmetry

between the employers and potential employees. Collecting specific information regarding

each potential hire involves significant costs, so employers try to reduce their search cost

by using more easily observable information. A variety of such observable and verifiable

information is used, including degree certificates, resumes, training certificates, references,

and so on. Such certification can endorse the potential employees’ minimum knowledge

and qualifications for specific skills. Most firms tend to hire the employees who have the

required certifications although there is a possibility that someone who does not have those

certifications might have similar or superior knowledge and skills.

Other reasons for bias are the various legitimacy problems in organizations when hiring

managers use their private information in the recruitment process. Even if the hiring

manager knows more about the prospective employee, over and beyond what a certificate

may convey, in order to persuade other members in the organization or people in the

community, hiring managers might want to use more easily verifiable information.

A potential employee almost always has more information about himself and his

environment, but the problem is that the individual tends to judge this information based

on his or her limited knowledge (experience) and perspective. Simon et al. (2000) pointed

out three types of cognitive biases that can affect a person’s judgment: overconfidence, the

illusion of control, and the belief in the law of small numbers. These biases come from

behavior patterns, specifically that individuals tend to neglect the information they do not

know; therefore, they tend to draw conclusions from samples with which they are familiar.

In other words, an individual’s AV tends to be greatly determined by his subjective

information, knowledge, experience, and skills. For example, when an individual has

experienced only easy successes in business, that individual might be overconfident about

his skills and knowledge. Various experiences, analytic thinking, and communications

with other experienced people might help to establish appropriate AV (Wood and Bandura,

1989).

Proposition 2a. An individual with easily verifiable human and intellectual capital is more

likely to remain in a non-entrepreneurial career.

Proposition 2b. An individual, who believes he has excellent human and intellectual

capital that cannot be easily observed or verified, is more likely to pursue an

entrepreneurial opportunity.

6.3. Verifiability asymmetry

Although different organizations have customized their hiring standards depending on

their functions or organizational cultures, Cohen and Pfeffer (1986) argue that there are

still a small set of standards that are common to business organizations. They suggested


that four factors determine hiring practices of existing organizations: (1) a factor related

with employee’s intellectual and technical abilities (Collins, 1979); (2) a factor concerned

with employee’s value, attitude, and loyalty (Collins, 1979); (3) a factor regarding social

conformity or social responsibility (Meyer and Rowan, 1977); and (4) a factor associated

with an organization’s political perspective (Pfeffer and Cohen, 1984). This argument

reveals that employers might recognize the importance of an employee’s abilities and

personal characteristics, but they tend not to evaluate the employee’s full dimensions,

including social capital, family backgrounds, friends, financial standings (wealth), and

community relations. From the perspectives of employers, the main focus would be

whether the potential employee could perform the required jobs in their organizational

environments. Although some of the value offered to the employee might be determined

on the basis of her social and community relations, most of the value offered tends to be

determined on the basis of the employee’s individual ability and capability. Employers or

HR managers tend to only be concerned with how well employees fit into the existing

informal or formal networks, they tend not to be concerned about social networks or

positions of the potential employees.

On the other hand, as March and Simon (1958) pointed out, an individual’s AV seems

to be heavily dependent on extra-organizational groups such as family, culture, and social

memberships separate from formal economic organizations. There might be a variety of

reasons for such dependencies. First, the members in the social networks tend to meet with

other members frequently and share the similar information with each other. Second, there

is pressure in the community to keep up with other members. Thus, an individual’s AV

tends to be heavily dependent on the standards of his extra-organization groups. Similarly,

an individual’s AV seems to be dependent on diverse dimensions of his abilities and

resources although the individual’s job-related specific capabilities tend to be one of the

most important factors determining the individual’s AV. Based on the asymmetry between

what the institution can reliably measure and gauge, and what skills and networks an

individual possesses we derive:

Proposition 3. An individual who has more specialized skills and knowledge is more likely

to remain in a non-entrepreneurial career, while an individual who has greater general

skills and knowledge is more likely to pursue an entrepreneurial opportunity.

Proposition 4. An individual who has rich social networks or a high social position is

more likely to pursue an entrepreneurial opportunity.

6.4. Problem of predicting the future from the past

Employers tend to predict their potential employee’s future performance based on the

employee’s previous career record. Can the past career record of a potential employee be a

good predictor of his future performance? In answering this question, Ajzen (1991) points

out, the argument holds only when ball the factors – whether internal to the individual or

external – that determine a given behavior are knownQ (p. 202). Because of informational

asymmetry problems and political constraints in organizations, employers or HR managers

cannot reflect all the factors that will influence the employees’ future performances and

tend to focus on the easily measurable and easily verifiable variables. In addition, in order


to measure easily and objectively, employers should wait, but the internal variables that

will affect the future performances might change in the meantime.

The most important qualities of future employees are current knowledge, skills,

motivational factors, and loyalty. There are two problems in measuring these variables.

First, accurate measures are extremely costly or rather impossible because there is a great

breadth in these qualities. The importance of certain measures varies depending on time,

situation, and purpose. In other words, they are highly situational and dynamic variables to

measure. Thus, different HR managers tend to have different opinions concerning what or

how people can evaluate the important qualities. Employers tend to rely on other types of

variables, such as education, class performance, career records, certificates, etc. However,

these variables might not capture the current state of the knowledge, skills, and

motivational factors. These evaluation biases might be the reason why some people are

interested in searching for entrepreneurial opportunities.

Proposition 5. An individual who has significant measurable qualities that are not highly

situational and dynamic is more likely to remain in a non-entrepreneurial career, while the

person who has significant non-measurable qualities that are highly situational and

dynamic is more likely to pursue an entrepreneurial opportunity.

7. Conclusion

Why do some people pursue entrepreneurial opportunities? Scholars have answered

this question using various definitions of entrepreneurship and diverse frameworks from

diverse fields. The importance of a definition or a framework has to be judged by its

usefulness in illuminating and explaining some important elements of economic and social

phenomena.

Similar to Eisenhauser (1995) and Douglas and Shepherd (1999), we view the decision

to be an entrepreneur as a career choice. However, we define entrepreneurship as the

search process of alternative or new opportunities instead of just alternative employment

opportunities. Searching and collecting information for new ventures requires a potential

entrepreneur’s energy, time, and money. Even after spending significant resources, a

potential entrepreneur may be unsure of her decision to be self-employed. Thus, pursuing

an entrepreneurial opportunity cannot be seen as only an utility maximization choice.

Instead, in our framework, we view the choice as a function of an individual’s aspiration

vector and the non-entrepreneurial options the individual perceives in the market (P-

MOV). When individuals have an aspiration vector that is quite different from their

perceived market offering vector, they tend to pursue uncertain entrepreneurial

opportunities and become entrepreneurs. However, when individuals have an aspiration

vector that is close to their perceived market offering vector, they tend to be satisfied with

their available non-entrepreneurial options. Thus, they tend to be non-entrepreneurs.

In this article, we also discuss the question bUnder what conditions is the pursuit of

entrepreneurial opportunity most likely? There can be two possible cases. First, people

pursue entrepreneurial opportunities when their aspiration vector is biased and has higher

demands than the subjective valuations of their available non-entrepreneurial options


(MOV). Second, existing organizations might not reflect the bpotential valueQ of certainskill sets, and can not provide reasonable non-entrepreneurial options for them. Thus, in

our theoretical framework, as long as hiring managers are biased or existing organizations

have limitations in reflecting the bpotential valueQ of specific skill sets in society, there willalways be entrepreneurs who pursue entrepreneurial opportunities. These potential

entrepreneurs might be successful only if they have abilities to perceive promising

opportunities and create effective organizations and only if social systems and regulations

are favorable to them. In addition, they will need to be lucky enough to have favorable

environmental factors when they start new businesses.

Also, the more easily biased the people in a society can be or the more limitations the

existing organizations in society have in reflecting the bpotential valuesQ of people, themore potential entrepreneurs there will be. In this article, we claim that if a person has

excellent career records that cannot be easily observed or verified, the person tends to be

an entrepreneur. We also argued that the person who has great immeasurable qualities that

are highly situational and dynamic tends to be an entrepreneur. As the society becomes

more industrialized, as Adam Smith predicted, the more division of labor or the division of

information arises. In addition, new information production and innovation becomes

pervasive and the rate of innovation increases continuously. Thus, as the society becomes

more industrialized and the speed of technological developments increases, our framework

predicts that the more entrepreneurs will be produced.

Our theoretical framework is ultimately aimed at improving the design of empirical

studies. In order to understand why an individual is involved in entrepreneurial search

processes (that is, becoming an entrepreneur), we suggest that understanding the

individual’s aspiration vector and his non-entrepreneurial opportunities in the market is

essential. We believe our approach will lead to empirical studies with improved design for

several reasons. First, in our approach, entrepreneurship is a choice available to all

individuals, while depending on temporal and local contingencies rather than being

restricted to some individuals based on some unobservable, mythical, and unchangeable

personal traits. Second, we take into account the variability in the bqualityQ of both the

opportunities and the individuals pursing entrepreneurial opportunities, which is rare in

previous research. Third, we allow for variations in the bqualityQ of individuals over time.

Most previous researches violated several of the above contingencies, and therefore

proved unsatisfactory as explanations. Finally and in our view most crucially, we consider

the interaction between an individual’s subjective consideration and a labor market’s

assessment of the individual, a novel approach, which we hope takes into account the

complexity and richness of entrepreneurship.

Acknowledgements

We gratefully acknowledge the financial support of the Batten Institute of the Darden

School of Business Administration, University of Virginia, for carrying out this research.

We thank Nicholas Dew, Laura Dunham, Ed Freeman, Mary Hamilton, John McVea, and

Rama Velamuri for their helpful comments on an earlier version of this paper. We are

especially grateful to Bidhan Parmar for editorial help with this paper.


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