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15: Endogenous Uncertainty in Real Options and Entrepreneurial Entry (John Chen)

Updated: Aug 24, 2023

By John Sze-Chi Chen - Florida

Prerecorded session

Live session


Required readings

Bowman, E. H., & Moskowitz, G. T. (2001). Real options analysis and strategic decision making. Organization Science, 12(6), 772–777.

Moore, D. A., & Healy, P. J. (2008). The trouble with overconfidence. Psychological Review, 115(2), 502–517.

Ryan, R., & Lippman, S. A. (2003). Optimal exit from a project with noisy returns. Probability in the Engineering and Informational Sciences, 17(4), 435–458.

Discussion questions

Entrepreneurs and investors I have spoken with have prompted two questions that are highly relevant yet perhaps under-attended in management research on entrepreneurial decision-making under uncertainty, particularly in formal treatments of the topic:

1) Resource-picking versus capability-building (Makadok, 2010). Observationally, both seem to be at work in the entrepreneurial venture world. A recurring theme in the aforementioned discussions is that venture capitalists can be either “resource-pickers” (e.g., placing bets on a skilled founding team) or “capability-builders” (e.g., actively turning around underperforming ventures), depending on the context. Yet some recent entrepreneurial decision-making models largely neglect capability-building and focus more on resource-picking (Chen et al., 2018; Posen et al., 2018 and subsequent research using these models). Is there value to incorporating capability-building in models of entrepreneurial decision-making? What research questions might this spur?

2) Cognitive bias. In the spirit of Moore and Healy (2008) that is in your reading list, entrepreneurship research has placed substantial attention on overconfidence (e.g., Busenitz & Barney, 1997; Camerer & Lovallo, 1999; Chen et al., 2018). Are there other biases worth exploring? For instance, it seems plausible given how certain types of investment become “hot” or “cold” over time that confirmation bias operates in the VC/PE world (another recurring theme in my entrepreneur/VC discussions). What research questions might this spur?

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