"Uncertainty and Enterprise
By Amar Bhide
Oxford, 440 pages, $34.95
Microeconomists have been trying to make sense of entrepreneurship as a distinctive category of activity for more than a century. During my graduate-school days at Stanford, a classmate asked Kenneth Arrow, the economist and Nobel laureate, to comment on the Austrian School of economics' emphasis on entrepreneurship as essential to economic progress. Arrow expressed skepticism that entrepreneurship was different from the other kinds of business management and did not seem to believe that it required special analysis.
In "Uncertainty and Enterprise: Venturing Beyond the Known," Amar Bhide takes up the challenge of formalizing what makes managing new businesses different. Mr. Bhide, a professor of health policy at Columbia University, focuses on the central role of Knightian uncertainty in shaping the way businesses behave and structure their activities, governance and funding.
Named for Frank Knight, the University of Chicago economist, Knightian uncertainty refers to situations in which the probability of success is unknowable due to the novelty of an enterprise's product, service or strategy for producing and distributing it.
Mr. Bhide shows that uncertainty in the Knightian sense elicits unique human capacities. Most importantly, it provokes imaginative responses rather than simply calculations.
Framing the issue this way has a major advantage: It shows the practical importance of the distinction between uncertainty and risk. If dealing with uncertainty elicits fundamentally different kinds of human behavior than dealing with risk, then uncertainty clearly is different from risk in an important way.
Imagination is uniquely useful for navigating business decisions. It is provoked, Mr. Bhide tells us, by doubts. "Doubts can be about anything that we . . . have not seen or cannot logically prove." When we confront our doubts, we try to find ways to resolve or limit them. That is the process that gives rise to imaginative thinking. This formulation reminds me of the evolutionary biologist Stuart Kauffman's conception of innovation as a capacity beyond deduction, induction or abduction [1].
Mr. Bhide's thorough knowledge of case studies in entrepreneurship gives flesh and blood to that insight. He draws from many examples to show how imagination overcomes doubt, specifically the usefulness of "context-specific, nonstatistical facts" that can be used "to make and justify choices about imagined possibilities," which is necessary for the practically important "justifications" one often constructs to explain to others how to respond to "situationally unique one-offs."
Doubting, imagining and justifying can be embodied in routines that structure deliberation and aim to achieve consensus. A primary function of entrepreneurs is to take "responsibility for uncertainty" by establishing means to identify and respond to it with a variety of specialized skills, which produce "groundedly imaginative" justifications capable of persuading financiers, customers and employees that an enterprise's strategy makes sense.
Mr. Bhide shares with Herbert Simon, the economist who brought practical psychology into economic analysis, a respect for the processes and routines that experience has taught us to employ when addressing challenging problems. Like Simon's concepts of "bounded rationality" and "satisficing," Mr. Bhide's "functional reasonableness" admires the application of reasonable (as opposed to optimal) processes for reaching practical answers with "relative confidence." Mr. Bhide teaches us not to expect the most interesting problems to be resolved by precise calculations or optimization algorithms.
What is especially appealing about this formulation is that it is not a one-size-fits-all view of managing uncertainty. It implies that different degrees of uncertainty should give rise to enterprises that differ in size, governance structure, funding sources and decision-making processes. Uncertainty is a guiding light for understanding what is essentially different about firms along these dimensions.
Mr. Bhide believes that theories of firm structure and organization based on degrees of uncertainty deliver predictions that are different from, and more powerful than, those that flow from models of contracting costs and control rights. Firms operating at the high-uncertainty end of the spectrum don't simply pioneer new products or services or rely on new patents. Their central commonality is operating in "unsettled markets." Such enterprises can often trace their higher growth and profitability to an ability to adapt to changes, and not to any preparatory research about opportunities.
This insight does more than illuminate the shortcomings of microeconomics. It allows us to see why and how enterprises structure themselves to foster imaginative learning and justification, and how they are able to communicate this learning and justification to prospective funding sources.
This conception also highlights the roles of venture capitalists (VCs) and angel investors as distinctly structured funding sources. Academic research, including my own, has shown that early-stage VCs do much more than provide funding; they recycle their networks of experienced early-stage company managers. It's not that experienced managers have seen the particular problems that new businesses are facing; rather, it's that they are familiar with the necessary processes of what Mr. Bhide calls doubting, imagining and justifying.
An uncertainty-based framework allows one to think in new ways about the tradeoffs that firms confront when choosing between VCs and other investors. In particular, VCs are less forgiving of basic doubts; they operate with stricter routines that govern investment choices in uncertain circumstances. In some cases, this can create problems for early-stage entrepreneurs. Hence the need for angel investors in some circumstances.
"Uncertainty and Enterprise" shows how the need to manage uncertainty shapes the functions and structures of enterprises, the process of innovation and the skill sets of entrepreneurs. At a time when artificial intelligence and computational power are reshaping the world, it also points reassuringly to the importance of the uniquely human imaginative faculty." [2]
1. "Abduction" in thinking refers to a type of reasoning called "abductive reasoning," where you form a conclusion or hypothesis based on incomplete information, essentially making the "best guess" explanation for a set of observations, often by considering the most likely scenario given your knowledge and context; it's also known as "inference to the best explanation."
2. Known Unknowns. Calomiris, Charles W. Wall Street Journal, Eastern edition; New York, N.Y.. 25 Feb 2025: A15.
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