the psychological basis of oportunity identification.pdf

ABSTRACT. Opportunity identification represents a uniqueentrepreneurial behavior yet its processes and dynamicsremain mysterious. Entrepreneurial alertness, a distinctive setof perceptual and information-processing skills, has beenadvanced as the cognitive engine driving the opportunity iden-tification process. To date, empirical support has been equiv-ocal; however, these early studies suffer from fundamentalmistakes in theory and method. These mistakes are examinedand addressed. A research agenda for the systematic and con-ceptually sound study of entrepreneurial alertness and oppor-tunity identification is outlined.

1. Introduction

As the empirical investigation of entrepreneurshipprogresses, an increasing number of scholars areconcluding that opportunity identification repre-sents the most distinctive and fundamental entre-preneurial behavior (Gaglio, 1997a; Kirzner, 1979;Stevenson and Jarillo, 1990; Venkatamen, 1997).

Other market actors do not have the responsi-bility to create innovative market opportunitiesalthough they do have an obligation to considersuch opportunities once they are available inthe marketplace. Consequently, understanding the

opportunity identification process represents oneof the core intellectual questions for the domainof entrepreneurship.

Despite its importance to the theoreticaladvancement of the field, research regardingopportunity identification is in its infancy and isbest characterized as a scattering of descriptivestudies rather than as a systematic researchprogram of theory testing and development. Todate, investigators have examined issues such aswhether entrepreneurial opportunities are theresult of serendipity or deliberate search (Koller,1988; Peterson, 1988). Numerous search behav-iors have been profiled including the source of theidea (Long and Graham, 1988; Peterson, 1988);search strategies; and amount of search effort(Busenitz, 1996; Gilad et al., 1988; Kaish andGilad, 1991). In addition, the influence of theentrepreneur’s social network on search strategiesand boundaries have been explored (Aldrich andZimmer, 1986; Long, 1979; Pekerti, 1985).Evaluation strategies (Crawford, 1980; Long andMcMullan, 1984) have been studied. Finally, somehave tried to map the stages or phases of theopportunity identification process (Herron andSapienza, 1992; Long and McMullan, 1984) anddocument the length of time needed in this processin order to shape successful business opportuni-ties (Singh et al., 1999; Van de Ven, 1980).

The nature of topics studied thus far suggeststhat the discipline implicitly thinks about oppor-tunity identification or creation as a process ofsocial construction (Berger and Luckman, 1967)which is most evident when entrepreneurs offertheir opinions about the meaning of an event, atrend, an invention, or a new technology throughthe creation and introduction of new products,services, or processes. These opinions are then

The Psychological Basis of Opportunity Identification: Entrepreneurial Alertness

Small Business Economics 16: 95–111, 2001. 2001 Kluwer Academic Publishers. Printed in the Netherlands.

Final version accepted on November 1, 2000

Connie Marie GaglioCollege of BusinessSan Francisco State University1600 Holloway Ave.San Francisco, CA 94132, USAE-mail: [email protected]

and

Jerome A. KatzMurray Endowed ProfessorSaint Louis University3674 Lindell Blvd.St. Louis, Missouri 63108 USA E-mail: [email protected]

Connie Marie GaglioJerome A. Katz

legitimated or rejected by the other actors in themarketplace through purchase, consumption andimitation.

The nexus for these reciprocal influences layin an individual entrepreneur’s perceptions anddecision-making. Shaver and Scott (1991) pose thesalient psychological questions: how are marketenvironments represented and interpreted in themind of the entrepreneur such that opportunityidentification occurs? Do these representations andinterpretations differ from those of other marketactors? If so, in what ways?

Kirzner (1979) asserts that the mental repre-sentations and interpretations of entrepreneursdo indeed differ because they are driven byentrepreneurial alertness, a distinctive set ofperceptual and cognitive processing skills thatdirect the opportunity identification process. Todate, empirical support for the construct hasbeen equivocal, leading at least one scholar(Busenitz, 1996) to question its value. However,as will be shown shortly, this may follow in partfrom an unduly narrow approach to the opera-tionalization of theory as well as a potentialproblem in the match of the psychometricmethod to the type of phenomenon being studied.As has been noted by others reviewing entrepre-neurship research (Carsrud, 1988; Shaver andScott, 1991) similar problems in design haveresulted in findings with little or no explanatorypower.

Therefore, the purpose of this paper is toadvance theoretical development in the area ofopportunity identification. It will start by pro-viding a new translation of the concept of entre-preneurial alertness into its appropriate cognitiveand psychological properties. From this new trans-lation a new research agenda will be offered forsystematically testing this more inclusive psycho-logical heuristic of the opportunity identificationprocess.

2. Entrepreneurial alertness

The concept of the skill or ability known as entre-preneurial alertness has its origins in the writingsof economist Israel Kirzner (1973, 1979, 1985)who has defined alertness in two ways: as “theability to notice without search opportunities thathave hitherto been overlooked” (1979, p. 48) or as

“a motivated propensity of man to formulate animage of the future” (1985, p. 56). To date, themajor work on entrepreneurial alertness hasfocused only on the first definition, to an ambiva-lent result.

Almost all of the initial empirical investigationsof alertness have focused on the means by whichan individual might literally “notice withoutsearch.” For example, Kaish and Gilad (1991)interpret this as having an aptitude to positiononeself in the flow of information so that the prob-ability of encountering opportunities without adeliberate search for a specific opportunity is max-imized. Therefore, in their operational measuresof alertness, they asked founders to recall: (a) theamount of time and effort exerted in generating aninformation flow; (b) the selection of informationsources for generating an information flow; and(c) the cues inherent in information that signal thepresence of an opportunity. From this data theauthors deduced: (d) the quantity of informationin the flow and (e) the breadth and diversity ofinformation in the flow.

Their results conform to expectations in someways but also reveal some unexpected patterns.Compared to the sample of corporate executives,the sample of new venture founders do appear tospend more time generating an information flowand do seem more likely to use unconventionalsources of information. Interestingly, the foundersdo seem more attentive to risk cues rather than tomarket potential cues. However, the data alsoreveal that only inexperienced or unsuccessfulfounders engage in such intense informationcollection efforts. Successful founders actuallybehave more like the sample of corporate execu-tives. Cooper et al. (1995) found a similar patternof results in their survey of 1100 firms althoughBusenitz (1996), in an altered replication of Kaishand Gilad’s survey, did not. Indeed Busenitz foundfew significant differences between corporatemanagers and new venture founders. In addition,validity checks of the survey measures yielded lowreliability scores, which led the author to concludethat future research in alertness required improvedtheoretical and operational precision.

This paper contends that, essentially, Busenitzis correct. Advancement in this research arearequires considerable maturation. Most impor-tantly, it requires that investigators shift their focus

96 Connie Marie Gaglio and Jerome A. Katz

from the phrase “without search” in the firstdefinition of alertness to the whole of Kirzner’s(1973, 1979, 1980, 1985) theory regarding entre-preneurial alertness. In particular, investigatorsneed to consider and incorporate the more com-prehensive definition of alertness as motivatedpropensity. Such an approach, if successful, wouldaccount for finding without search but place it ina more powerfully descriptive and predictivecontext.

Supporting this approach is a body of work thatincludes extensive comparisons of how alert andnon-alert people behave in the marketplace. Thesecomparisons suggest a distinctive set of percep-tual and reasoning behaviors that may not neces-sarily depend upon information gathering effortsnor upon cues inherent in the information. Rather,the exercise of these abilities and behaviorsleads to a “shrewd and wise assessment of therealities” (Kirzner, 1980, p. 7) which may lead tothose flashes of insight known as opportunityidentification. Kirzner maintains that the crucialdifference between opportunity finders (aka entre-preneurs) and non-finders can be found in theirrelative assessment of the market event or situa-tion. In other words, compared to other marketactors, entrepreneurs have a better grip on realitybecause they perceive it more accurately and arebetter at inferring the likely implications and con-sequences.

This leads to a new, more mature, operational-ization of entrepreneurial alertness. Logically, thealert individual or entrepreneur must perceive themarket environment correctly (veridical percep-tion); identify the true driving forces and criticalfactors; and infer the real relational dynamicsamong these elements (veridical interpretation).Veridical perception and interpretation enableentrepreneurs to discern when the existing way ofproducing or distributing goods and services orindeed the products and services themselves mayno longer work because of significant market orsocial changes. Furthermore, the alert individualcorrectly infers the commercial potential of thesituation.

Valid tests of the theory of entrepreneurial alert-ness must focus on the core assertions of veridicalperception and veridical interpretation, assumingof course, that these phenomena are defined andmeasured in psychometrically appropriate ways.

The study of entrepreneurial alertness requiresanswers to Shaver and Scott’s original questionsabout opportunity identification. Kirzner’s contri-bution is that his theory predicts how alert andnon-alert market actors will behave. In a disciplineso bereft of theory, this can be a welcome gift.

3. The psychological schema of alertness

Schema are dynamic, evolving mental modelsthat represent an individual’s knowledge andbeliefs about how physical and social worldswork. These mental models help direct attentionand guide information processing and reasoningfor any specific event, real or imagined. If Kirzneris correct, alert individuals have more accuratemental models. Therefore, in order to understandhow the market environment is represented inthe mind of the entrepreneur and whether suchrepresentations differ from non-entrepreneurs,schema content and dynamics must be investi-gated.

Perceptions and interpretations of the market-place or of an industry can vary among individ-uals for many reasons including differences inschema content and complexity. Cognitive psy-chologists (Chase and Simon, 1973, Chi et al.,1982) have demonstrated that the differences inthe decisions and performance of experts andnovices can be traced back to differences inschema content. Specifically, experts have morecomplex schema characterized by extensive cross-links to other schema. These linkages enableexperts to see patterns developing, to detectanomalies more quickly, and so forth. It ispossible, then, that the behavioral differencesKaish and Gilad uncovered simply reflect differ-ences between experts and novices; that is, dif-ferences in schema content and complexity. Theinexperienced or unsuccessful founders were stilldeveloping their industry schema while successfulfounders had achieved or were close to expertstatus.

Chronic schema

Perceptions and interpretations can also varybecause of the particular schema, or part of aschema, that is called upon in response to a realor imagined event or stimulus. Activation can be

Entrepreneurial Alertness 97

influenced by many factors such as informationprimacy, schema accessibility, or personalmotives. In addition, psychologists have observedthat some people habitually activate a particularschema, regardless of its appropriateness to themoment (Fiske and Taylor, 1991; Higgins andKing, 1981). Psychologists refer to that schema asa “chronic” schema. Everyone employs severalchronic schema such as the self or male/female.The influence of these schema is so pervasive andconstant that while the individual can consciouslyactivate and use them, he or she is rarely awareof doing so, which is precisely the point of achronic schema. Some people create additionalchronic schema to guide their perceptions andunderstanding – eternal optimists or pessimists, forexample.

What matters for the theory of entrepreneurialalertness is that habitual or chronic schemaactivators appear to be especially sensitive tokey schema features or attributes such that theycan quickly yet accurately notice these inambiguous situations or regardless of informationload (Bargh, 1989; Fiske and Taylor, 1991).Furthermore, research evidence indicates that thehabitual use of a particular schema “automates”it to the extent that activation occurs without theindividual’s attentional or intentional control(Bargh and Pratto, 1986). Habitual use wouldexplain how alert entrepreneurs may be able to“notice without search.” Thus the early Kirznerdefinition might be reset in a more powerfullydescriptive context, given earlier as a desideratafor a more mature theory of alertness.

So differences in perceptions and interpreta-tions that lead to differing assessments (which mayultimately lead to opportunity identification) willvary among market actors because of differencesin schema activation, schema content, and degreeof schema complexity. Differing not only incontent, these assessments will differ in quality,with actors possessing more realistic (i.e.,veridical) schema doing a better job of projectingthe future and guiding their actions or their firm’sactions towards the future. If the schema, theirunderlying processes, and their applications to thereal world are all potentially accessibly in theoryand operationalization, it seems plausible topropose an investigation of entrepreneurial alert-ness. Such an effort would start with the proposi-

tion there is a chronic schema that heightens theindividual entrepreneur’s awareness to the possi-bility of innovations that have commercial poten-tial – what could be called an alertness schema.

Modeling a schema of entrepreneurial alertness

At this stage of the research process, the goal isto demonstrate the existence of a schema of entre-preneurial alertness. This will be done by devel-oping a series of hypotheses describing theoperation of the proposed schema. In futureresearch, if the hypotheses can be supported, theunderlying model of entrepreneurial alertnesswould be shown to exist as described. The generalflow of this section will follow the sequencedepicted in Figure 1, starting with instances of dis-equilibrium in the market, and moving through thestages of schema application by alert and non-alertindividuals.

The process of entrepreneurial alertness. In itsessential form, the theory of alertness (Kirzner,1979, 1985, 1992) asserts that the differencebetween alert and non-alert individuals lay inthe different decisions they make about theircurrent circumstances. Non-alert individuals failto identify or create entrepreneurial opportunitiesbecause they misjudge their market environmentand the kind of behavior demanded by themoment. These different types of non-alert indi-viduals will be profiled later. For the moment, itis important to note that non-alert individualseither do not detect, or they ignore, or theydiscount informational cues indicating that currentway of “doing business” (that is, producing ormarketing) may no longer be as efficient or aseffective or both. Consequently, non-alert indi-viduals believe that their behavioral requirementsconsist of allocating their existing resources inways that historically have had the highest prob-ability of maximized returns or have been con-gruent with previous institutional responses.

Alert individuals, prompted by a schemaemphasizing objective accuracy, apprehend thechanging environmental cues and realize that theappropriate behavior at that moment requiresreassessment of the situation and the environment,in other words, figuring out what is really goingon.


Figure 1 depicts the hypothesized cognitiveunderpinnings of the opportunity identificationprocess if driven by entrepreneurial alertness. Likeall schema, alertness directs attention (in thiscase towards the novel, unusual or contrary) andguides information processing (towards the inte-gration of the unusual event even if it means re-thinking the existing means-ends framework or theway things are done). Specifically, the theory ofalertness proposed that unlike most market actors,who accept information as given, alert individualsmay simply have a habit of being contrary and/orlooking for change. Periodically, the results of thishabit may challenge the entrepreneur’s currentunderstanding and the entrepreneur is confrontedwith the option of ignoring or discounting the newpossibilities or with assessing their impact on theexisting relevant schema. Counterfactual thinkingand mental simulations facilitate the reassessmentprocess and may (but not always) indicate that itis necessary to radically alter the contents or therelational dynamics of schema and the existingmeans-ends framework. Occasionally, (but notalways) this alteration process affords an insightabout the commercial value of the newly foundor reconfigured information, in which case amarket opportunity has been identified or created.Whether the opportunity should be pursued is aseparate question.

Recognizing events of disequilibrium. What wouldan alertness schema contain and how would itwork if it were to lead to a more accurate orsuperior assessment of a market situation? Kirzner(1979, 1985) posits that the alert individual isespecially sensitive to signals of market disequi-librium, which can occur at the macroeconomicand microeconomic levels.

Macroeconomic disequilibrium is the mostcommon form at the moment and in Kirzner’stheory, the less considered form. In this situation,market disequilibrium arises from disruptivechanges brought about because of new technology,knowledge, demographics, or social values that,as Drucker (1985) observed, force industries to re-invent themselves through radical innovation.Therefore, it seems logical to expect an alertnessschema to include mental models of these kindsof changes and specifically extensive representa-tions of the kinds of signals or cues that wouldindicate not just the presence of these disruptionsbut more importantly, to their potential presence.Indeed, it is probable that an alertness schemadirects attention and focus to search for anomalies,the unexpected or anything remotely new or dif-ferent.

Non-alert individuals are not necessarily obliv-ious to major disruptions in the marketplace.When anyone encounters something different orunexpected that is signaled in a clear, unam-


Figure 1. Alertness and the opportunity identification process.

biguous, strong and persistent way, he or she willattempt to accommodate the new information(Fiske, 1993). Weick (1995) notes that these kindsof disruptions trigger extensive “sensemaking”efforts within organizations; research suggests thatthe context or framework used for sensemakingmay lead non-alert actors away from the conclu-sion that an entirely new assessment is needed.

Kiesler and Sproull (1982) contend thatmanagers activate their organizational culture asthe schema to guide assessment of a situation andthat the historical perspective inherent in thatschema tends to bias managers against noticing theless forceful or more subtle signals of marketchange. However, Cowan (1986) found thatmanagers do notice signals of change but use theorganization schema to discount the meaning ofthese signals. In perhaps the most interestingline of research, Johnson et al. (1991) found thatthere are a group of people who do appear to bemore attuned to cues of anomalies and inconsis-tencies. However, like Cowan, Johnson et al.,found that the mere notice of cues did not lead toany special insight. Some people explained ordiscounted each anomaly when encountered andthis interpretive behavior allowed them toconclude that nothing had or would change; thatis, they could maintain the status quo. Onlythose who attempted to integrate the perceivedanomalies or inconsistencies into a pattern thenformed hypotheses that the status quo may not bethe most accurate description of that particularsituation.

While disruptive macroeconomic marketchanges are forceful and generally more easy todiscern, they are only one source of market dise-quilibrium. The other source is microeconomic –a less dramatic form but one that has the advan-tage of being ever present because it is inherentin the marketplace. Ongoing microeconomicmarket disequilibrium arises from the everydaymistakes market actors make in their investment,production, and distribution decisions and actions.These mistakes create pockets of disequilibrium,which become evident as underpriced products,unused capacity, unmet needs, and so on. In morepopular terms, these pockets represent marketniches, the favored spawning ground of newbusiness opportunities.

Kirzner appears more interested in market dis-

equilbrium on the microeconomic level; indeed,his comparisons of alert and non-alert individualsare primarily embedded in this context. Onceagain, the key question is what would an alert-ness schema contain such that it facilitates theanticipation or detection of these mundane pocketsof disequilibrium? It is entirely possible thatalert entrepreneurs simply recognize the factthat misapprehension and bad judgment occur andthey try to capitalize on it. If so, an alertnessschema would probably include mental modelsfor detecting the “herd mentality” of other marketactors and for developing contrarian positions asthe initial reference point for a shrewd assessmentof a particular market situation. Again, this doesnot guarantee that the contrarian niches or pocketsof opportunity will be successful.

The discussion regarding the alternative sourcesof market disequilibrium is important becauseinvestigators will have to examine both in theiroperationalizations of market environments whentesting for the existence of entrepreneurial alert-ness. Regardless of the source or kind, the theoryof entrepreneurial alertness predicts that alert indi-viduals will be more sensitive to early indicatorsof disequilibrium. This leads to Hypothesis 1:

H1: In any given market situation, alert indi-viduals are more sensitive to signals of market disequilibrium than non-alert individuals.

Changing schema vs. information. Schema theoryassumes that people engage in a kind of patternmatching between environmental stimuli and theinformation stored in the activated schema (Fiskeand Taylor, 1991; Mitchell and Beach, 1990). Ifthe pattern match is good enough, attention turnsto action and developing a response. If the patternmatch is not good enough – that is, when the indi-vidual detects something unusual or unexpected,then additional cognitive processing is required.When actors are motivated to be accurate, theyusually try to integrate the new information withintheir existing schema by creating new subcate-gories or new causal links that increase the dif-ferentiation and complexity of their schema (Fiskeand Taylor, 1991; Sherman et al., 1989). If theactor places a higher value on quick action or ifhe or she feels it is socially desirable to adhere toa schema, then the actor will either discount the


new information or engage in elaborate re-inter-pretations that maintain the structure and dynamicsof the existing schema (Fiske, 1993; Kiesler andSproull, 1982). Given the nature of this cognitivedynamic, the theory of alertness would predict:

H2: Alert individuals will change their schemato accommodate non-matching informa-tion; non-alert individuals will change theinformation.

Cognitive error control. The failure to recognizeand integrate information regarding marketdisequilibrium are not the only kinds of cognitivemistakes non-alert actors can make. Kirzner(1985) identified several other assessmentmistakes non-alert individuals may make: (a)failure to recognize that assumptions were neveror no longer are appropriate; (b) ignorance of newresource availability; (c) excessive optimism orpessimism about resource availability; (d) exces-sive optimism or pessimism regarding probableresults of actions or decisions. The common threadin all these mistakes appears to be inaccuracy. Thechain of inaccurate processing may begin with thenon-alert individual simply following the humantendency to uncritically accept and use informa-tion only in its original form (the “concretenessprinciple,” Slovic, 1972) or to unquestioninglyaccept the initial frame of reference (the “framingeffect,” Kahneman and Tversky, 1986).

If alert individuals are not making these kindsof cognitive processing mistakes, then it seemslogical to conclude than an alertness schemaincludes a dynamic that induces skepticism aboutinformation perceived and that questions, if notchallenges, the initial frame of reference. In fact,Gunderson (1990) maintains that veridical per-ception simply means a willingness to challengeassumptions and perceptions, much like a goodscientist. Alert individuals then, take to heartand have integrated into their schema thegraduate student mantra: “what are the three otherways to think about this?” – another form of con-trarian perception and reasoning! This leads tohypothesis 3:

H3: In any given market situation, alert indi-viduals will be impervious to framingeffects will non-alert individuals willsuccumb.

Accuracy vs. timeliness. Kirzner examines atconsiderable length the theoretical propositionthat alert individuals have veridical (accurate) per-ception and interpretation. For example, the fourforms of inaccuracy discussed above represent onetype of threat to veridical perception. Therefore,it would seem logical to conclude that accuracyis a major component of an alertness schema,perhaps even the driving force of the schema.

From a psychological perspective, the issue ofaccuracy is somewhat problematic becauseaccuracy can also be considered part of an indi-vidual’s motivation that triggers the activation ofa particular schema. A central tenet of cognitivepsychology is that people employ information pro-cessing tactics that best facilitate their goals(Fiske, 1993; Showers and Cantor, 1985) and thatone of the first decisions people must make,implicitly or explicitly, in any information pro-cessing episode is whether their goal is to be com-pletely accurate or to act quickly.

This stark choice minimizes a crucial and dis-tinctive element of opportunity identification, thatis its time-limitedness. Pockets of microeconomicdisequilibrium can quickly change, be filled, orbecome exhausted. The window of opportunitywhen viewing macroeconomic changes is alsolimited and shrinks substantially as other actorssee the opportunity and visibly exploit it. Thusthere is a need to balance perceptual accuracywith time-to-action or timeliness. Even managersembedded in a corporate context recognize thetime-limitedness of opportunities.

Weick (1979) argues that managers need toprocess information in ways that are just goodenough to determine the course of action. Hesuggests that most managers stop their sense-making activities when they have found the firstplausible explanation or framework regardlessof its accuracy (Weick, 1995). Isenberg’s (1986)detailed analysis of managerial decision-makingappears to confirm Weick’s supposition thatmanagers feel more pressure to act than to beabsolutely accurate in their analysis. In otherwords, what is proposed and observed in man-agerial decision-making is a simple application ofMarch and Simon’s (1958) satisficing conceptwhere enough analysis is done to satisfy personaland peer expectations of adequate considerationand therefore, adequate accuracy.


When alertness is conceptualized as a chronicschema, the tradeoff between timeliness andaccuracy is blurred because one advantage ofa chronic schema is that information aboutkey schema attributes can be processed quicklywithout sacrificing accuracy. Therefore, we wouldpredict that alert individuals will not accept a sat-isficing goal as they balance their information-pro-cessing strategies with the demands of timeliness.

H4: Non-alert individuals will satisfice; alertindividuals will seek objective accuracy.

Schema complexity. As noted earlier, an observ-able difference between experts and novices orbetween creative and non-creative individuals isthe degree of schema elaboration, content com-plexity, and cross linkages with other schema.Research into expert performance suggests that,beyond a certain level of preparation (which willvary by domain), experience and education do notinevitably lead to more elaborate and complexschema (Bonner and Pennington, 1991; Camererand Johnson, 1991). What does lead to theincrease in complexity necessary to achieve expertstatus are increasingly complex and henceveridical or realistic mental representations ofcausal patterns and interacting factors. The avail-ability of these complex patterns as a single unitof information is the mechanism that producescomparatively more accurate, albeit very fastopportunity identification and problem solving inexperts than in the novices (Chase and Simon,1973; Chi et al., 1982).

An important caveat from research about expertperformance is that it is domain specific and doesnot extend to all areas of life. For purposes of ourdiscussion, we define the domain of interest as themarket environment or what might be called the“business world.” Given the kind of informationprocessing and schema revisions we predict alertindividuals to make, we would expect an alertnessschema to contain elaborate mental models aboutthe cues indicating market disequilibrium as wellas elaborate and complex models about the processof disequilibrium and its range of outcomes.Therefore, we predict:

H5: Alert individuals will have more complexschema about change in the market envi-ronment than the non-alert.

Schema cross-linkages. In addition to elaborateand complex representations, we would expect tosee numerous cross linkages with other schema.For example, an alert individual would not onlyhave anticipated when the Baby Boomers wouldhit middle age but his/her alertness schema wouldcontinue to direct attention towards the ways inwhich demographics have typically caused changeand go looking for relevant preliminary evidence.This near-expert status (perhaps brought on byhabitual use) enables the alert individual to detecta pattern in the midst of the level of noise changenormally generates. Furthermore, we would expectto see extensive cross-linkages to industry schemaand socio-political schema such that alert indi-viduals automatically consider the implications ofthese changes for the relevant industry. This leadsto hypothesis six:

H6: Alert individiuals will have more complexschema about their industry or social envi-ronment or market process or any combi-nation thereof.

Figure 2 diagrams what an alertness schemaand its cross-linkages might look like.

Schema change – counterfactual thinking:Counterfactual thinking (e.g., what if; if only, etc.)is a fairly normal response to unexpected events(Roese and Olsen, 1995). However, we wouldexpect alert and non-alert people to use counter-factual thinking in different ways. Non-alertindividuals most likely use the typical strategyfor dealing with the unexpected which is tomentally undo the unusual circumstance thatcaused the unexpected outcome. Mentally undoingthe unusual highlights its abnormal quality butalso shifts focus back to the usual, that is, towardsnormalcy. This kind of counterfactual thinkingmay be one of the cognitive mechanisms fordiscounting. On the other hand, if alert individualsincrease the complexity of their schema andchange their schema to accommodate novelevents, we would expect alert individuals tomentally maintain the unusual circumstance anduse counterfactual thinking to undo other elementsin the causal sequence as he or she imagines howthe unusual information will affect other elementsor other schema. Furthermore, it is possible thatalert individuals undo several causal links, which


would lead them to break the existing means-endframework. Therefore, we would predict:

H7: Alert people engage in counterfactualthinking that undoes causal sequences;non-alert people engage in counterfactualthinking that undoes the unusual causeonly.

Schema change – frame-breaking. The alert indi-vidual’s extraordinary abilities in discernment thatlead to a conclusion about changing times andevents, while necessary, do not inevitably lead tothe identification or creation of entrepreneurialopportunities. Opportunity identification at thislevel (that is, breakthrough or innovative) dependson the alert individual using his or her insightsabout disequilibrium to recognize when it becomesnecessary to radically reconfigure his or her under-standing of the industry, or society, or the mar-ketplace, or more probably, all three.

Kirzner (1985) refers to this as breaking theexisting means-ends framework. He considers thisstep to represent the heart and soul of entrepre-

neurial alertness and to be the strongest point ofdifference between entrepreneurs and other marketactors. Non-entrepreneurial decision-makers focuson how to work effectively within the existingframework; that is, they attempt to make gooddecisions about how to allocate their scarceresources in order to maximize return. Thispresumes that the development of the means andends occurred earlier and by someone else. Thatsomeone else was an alert entrepreneur from anearlier time who identified new ends to strive forand made new means available.

The belief that breaking the existing mean-ends framework is a necessary step for genuineinnovation can also be found throughout thecreativity empirical literature (Amabile, 1983;Csikszentmihalyi, 1996). It has also beenaddressed in the management literature throughArgyris’ Type II thinking (Argyris and Schon,1978) and in the distinction of effectiveness-baseddecisions (vs. efficiency-based) in Katz andKahn’s (1978) model of organizational effective-ness. Translated to cognitive terms, this step can


Figure 2. Alertness schema and hypothesized cross-linkages.

be viewed as either a case of breaking the pre-sented frame or as an extreme instance of schemachange.

Given the central importance of frame-breakingto the theory of entrepreneurial alertness, wewould predict that alert individuals would be morelikely to break the existing means-ends frameworkand indeed, there is some preliminary evidencethat this is a crucial step in the identification ofentrepreneurial opportunities (Gaglio, 1997b).

H8: Alert individuals are more likely to breakthe existing means-ends framework thannon-alert individuals.

Psychologists have identified several cognitiveheuristics for breaking the existing or presentedframework: changing category labels (therebyactivating different schema); using analogies(thereby making connections between schema);looking for the counterintuitive (another contrarianstrategy); and, of course, engaging in counterfac-tual thinking (thereby undoing outcomes, causes,cause-effect links), or running mental simulations(thereby creating alternatives). We would expectalert individuals to use any or all of these heuris-tics. Future research may want to examine whetherone or more of these heuristics are more likelyto facilitate frame-breaking than the others but atthis stage of theory development, it is more impor-tant to test the hypothesized causal betweenbreaking the existing mean-ends framework andthe identification or creation of entrepreneurialopportunities.

Sensitivity to profit potential. Finally, there is onemore perceptual and cognitive component to analertness schema based on Kirzner’s theory ofentrepreneurial alertness: the individual’s sensi-tivity to profit potential. This sensitivity can bereflected in the schema in at least two ways. First,the individual may direct his or her attention tofind under-priced products, services, processes,and so on. Secondly, the individual may includethe question “how can I make money at this” aspart of the assessment process itself. This situa-tion is analogous to the differentiation in the inno-vation literature between invention and innovation.Invention may involve the identification of a newidea or opportunity but it only becomes an inno-vation when the invention or idea is translated into

a form that demonstrates its economic potential(Kirzner, 1979; Schumpeter, 1971; Timmons,1999).

Kaish and Gilad (1991) tried to test thisproposition in their early study of alertness andfound quite the contrary: founding entrepreneursappeared to be more sensitive to downside riskwhile corporate managers were more attracted tothe market potential. However, the data collectionmethod used in their study (survey of past behav-iors) relies on retrospection; this technique con-founds the processes of opportunity identificationand opportunity evaluation so, in fact, the questionof sensitivity to profit potential still requires adefinitive empirical test. It is entirely possible thatalert individuals are more sensitive to commer-cial value of ideas and are able to quickly identifyor create entrepreneurial opportunities but as theymove on to implementation, they become moresensitive to the downside risks as it becomes moreapparent that their careers are on the line with eachnew venture launch (Ronen, 1983).

Mindful that theory development requiresmaking important analytical distinctions such asthat between opportunity identification and eval-uation, we predict that at the identification state,alert individuals will be more sensitive to thecommercial value or profit potential of facts andideas.

H9: Alert individuals are more sensitive to theprofit potential of ideas and events thannon-alert individuals.

The continuum of entrepreneurial alertness

The prior hypotheses advance a cognitive modelof entrepreneurial alertness that reflects thescope of Kirzner’s original theoretical formulation.Accounting for the intuitively appealing “noticewithout search” while shifting focus to the moreessential issue of breaking the means-ends frame-work represents a substantial step forward in thestudy of entrepreneurial alertness and opportunityidentification. However, Kirzner’s theory doeslittle beyond differentiating alert individuals fromother non-market actors. While this distinction isa beginning and there is much to be learned bycontrasting ideal types, such a dichotomy is insuf-ficient and indeed inappropriate for a psycholog-


ical explanation. Psychologists presume that allskills and abilities, including alertness and oppor-tunity identification, fall along continua and arebest conceptualized and measured in these terms(Gehiselliee et al., 1981).

Clearly, Kirzner’s theory anchors one end of thealertness continuum; he defines the alert individual(the “10” on a 1 to 10 scale). Such a personrecognizes disequilibria and is willing to makechanges in the schema, frame, or evaluationprocess to accurately accommodate, predict, andprofit from the new information. Their goal is tocorrectly assess the new information and its impli-cations. At the other end of the continuum wouldbe truly non-alert people whose perceptual andprocessing behaviors stand in marked oppositionto alert behaviors. Non-alert individuals arenot even aware of market situations or eventsleading to disequilibrium. They are not awarethere is data on potential new opportunities forprofit. Their goal is the continuation of the statusquo.

How can we characterize the kinds of behav-iors that lay in between these two anchors? Logicand experience suggest at least two other recog-nizable points. As noted earlier, there are individ-uals who are able to detect signals and cues ofmarket disequilibrium or potential disequilibriumbut for a number of reasons choose to interpretthese cues in ways that discount their impact. Themotivations for discounting are numerous. Perhapsthe political pressure overwhelms the need foraccuracy. Weick (1995) suggests that most actorsstop their sensemaking activity when they uncoverthe first plausible account for the unusual, regard-less of its accuracy; such a cognitive strategy maybe at work here. It is important to note that thisgroup of actors do not summarily dismiss the newinformation. Rather their interpretations attemptto make the data fit into existing frameworks orcognitive structures. This group can be calledthe discounters or marginally alert. When theytake action in the marketplace, they may discoverbusiness opportunities but they would identify andpursue business opportunities that either representincremental improvements over existing goods,services, and processes or represent imitations ofexisting opportunities (recognizing the need for aBlockbuster video store in the neighborhood, forexample).

The fourth group consists of individuals whoalso recognize the signals or cues but elect toignore them. Such individuals continue to use theirstanding cognitive structures and dismiss theevidence of disequilibrium. As a result, theyachieve their goal which is to continue as before,without any change. This group can be called dis-missives or uselessly alert individuals. These con-siderations lead to hypothesis seven:

H10: Individuals can be categorized as demon-strating one of four outlooks: assessing(the fully alert individual), discounting(the marginally alert individual), dis-missing (the uselessly alert individual) oruninterested (the non-alert individual).

Non-alert schema

It is proposed that alert individuals activate aschema that guides their perception and informa-tion processing in ways that tunes them in to thesubtle market cues and propels them to fully andaccurately account for the cues regardless ofwhere it ultimately leads. This may mean that alertindividuals develop several alternative frameworksto be tested against reality.

However, not all non-alert individuals mind-lessly ignore the world around them. They aremaking decisions about the allocation of theirpersonal and positional resources and these deci-sions are based on their understanding of how theworld works. What schema are the non-alert acti-vating that interferes with or prohibits an accurateassessment of the situation?

As agents of the firm, it may be expectedthat managers will activate their organization’sschema. Managers may compare current situationswith expectations based on the organization’shistory (Keisler and Sproull, 1982); the organiza-tion’s past performance; a forecast or plan; theexpectations of important stakeholders (Pounds,1969); the desired strategic direction (Peters,1979); or the expectations derived from one’sposition within the organizational structure (Marchand Simon, 1958; Spencer, 1990). It is possiblethat because these schema are not chronic, theiractivation imposes on the non-alert individual’sinformation processing capacity which may thenconstrain what is noticed and processed. It is also


conceivable that the activation of these kinds ofschema impose real or imagined social or politicalconstraints which again limits what is noticed andprocessed.

The discussion about non-alert schema thus farappears plausible when considering how managersin an existing organization may perceive andinterpret but what kind of schema might non-alertindependent businesspeople, the self-employedactivate that interferes with an accurate assessmentof the market situation? Indeed, many in thisgroup would probably report that they believethey are activating an opportunity identificationschema. This may be true in a sense; we believethe way they define opportunity would be sub-stantially different in that they are scanning themarket for proven business opportunities in whichthe opportunity and solution alternatives have beenidentified and the implementation proceduresdemonstrated and documented. While this may beeffective for the goal of starting a new venture orreplacing lost income, this group of non-alert indi-viduals is accepting an external schema (in thiscase one developed and defined by the market-place) that still uses past success (even if it wassomeone else’s) as the reference point for per-ceiving and interpreting information.

The theory of alertness as currently formulatedpredicts that the non-alert individuals will activatesome other schema, most likely a schema mostrelevant to their current market actor role whilethe alert individual will activate the alertnessschema regardless of its appropriateness to his orher current market role (recall that potential inap-propriateness is a hallmark of chronic schema).

H11: Non-alert individuals will activate aschema from the set of schema alreadyexisting and defined by the market.

4. Important considerations and cautions forempirical investigations of alertness

While the discipline would prefer a paper andpencil inventory of attitudes and behaviors indi-cating the presence or absence of entrepreneurialalertness, we simply do not know enough to beable to construct inventories or scales that willhave the necessary internal and external validityas well as reliability. Those claiming an interest in

entrepreneurial alertness must do the necessarygroundwork for the appropriate psychometricoperationalization of the concept. There areseveral crucial theoretical and methodologicalissues that must be carefully considered andaddressed.

Theoretical considerations

Entrepreneurial alertness vs. entrepreneurship.Although this paper proposes a model ofentrepreneurial alertness, not all of those whodemonstrate entrepreneurial alertness will beentrepreneurs. The term entrepreneurial in thispaper refers to the creation of wealth, a definitioncommon in economics, and pioneered in entre-preneurship research at Harvard through the worksof McClelland (1976) and later by other col-leagues (Stevenson et al., 1998). This definitionalapproach contrasts to definitions based on firmcreation (Gartner et al., 1988) or self-employment(Reynolds, 1991). Using the wealth creationapproach means that the person demonstratingentrepreneurial alertness could be self-employedor a manager within in existing firm. Such anapproach permits the accommodation of entre-preneurial alertness wherever it occurs in theeconomy – the identification of potential newgoods or services to exploit opportunities resultingfrom alertness schema.

Once found there is nothing in the proposedmodel of opportunity identification that specifiesthe organizational form used to bring the oppor-tunity to market. Although the popular press dis-cusses creating new firms as an “opportunity,” itis a wholly different matter than what the theoryof entrepreneurial alertness considers an opportu-nity. In fact, the decision to start a firm hasbeen shown to be influenced by other variablesthat have little or nothing to do with the ability tofind market opportunities (Carter et al., 1996;Cooper and Dunkelberg, 1986).

For Kirzner’s theory of entrepreneurial alert-ness, the relevant domain on interest is themarket or industry. In this theory, opportunityidentification refers to the opportunity to offernew products, services, or processes to the marketor industry. The “opportunity” to become self-employed or to create new ventures is irrelevantin this domain; another theory would be needed to


explain the decision to start a business. Therefore,operational definitions of alertness must focus onmarket opportunities and not confound identifi-cation of opportunities for new venture creationwith identification of new goods and services.

Opportunities vs. successful opportunities.Another important theoretical consideration in thedevelopment of operational definitions of alertnessis avoiding the common confound between oppor-tunities and successful opportunities. While it isentirely possible that the difference between alertentrepreneurs and other business people is thattheir accurate assessment helps them triangulateon the successful opportunities, it is unlikely.Ultimately, the success of any opportunity dependson a multitude of factors including the entrepre-neur’s persuasion and communication abilities inorder to procure necessary resources and stimulatebuyer interest. This distinction is implicit in thewealth creation definitions of entrepreneurship,such as that of Stevenson et al., where the entre-preneur’s goal is the exploitation of opportunities,without regard to the personal ownership ofresources.

The journey from idea to feasible opportunityto successful opportunity must be explained in atheory of entrepreneurship. This journey may benon-linear and reiterative (Long and McMullan,1984; Timmons, 1999) but nevertheless it hasidentifiable stages even if the boundaries betweeneach stage are fuzzy. The theory of entrepreneurialalertness applies to the initial stages of the oppor-tunity-shaping journey and research about alert-ness must reflect this theoretical limit. Therefore,the commonly accepted practice of asking suc-cessful entrepreneurs recount how they “found”their opportunities is problematic for alertnessinvestigators because it allows respondents tocollapse all the stages into one moment. This mayexplain why Busenitz could not find convincingevidence of entrepreneurial alertness.

Finally, and most importantly, the phenomenaof interest in this theory are the perceptual andcognitive processes. This also has profound impli-cations for the research methods used to study andtest the theory.

Methodological considerations

Data collection. While surveys and in-depth inter-views that request the recall of pre-launch orstartup activity are convenient and efficient, theseforms of data collection do not and cannot capturethe phenomena of interest. The data collectiontechniques used in most studies of alertness thusfar (Busenitz, 1996; Kaish and Gilad, 1991) havecalled for retrospection and therefore producedimpressions and feelings about cognition, they didnot produce the behavioral processes themselves.

Psychologists (Ericsson and Simon, 1984)recommend the use of concurrent verbalizationsas the most reliable data collection technique.Concurrent verbalization requires the informantto think out loud while engaged in a task designedto demand the specific cognitive processes ofinterest. At first glance, this type of data collec-tion may seem too intrusive and too time con-suming for use with busy professionals. However,it is possible to get business people to engage inthink aloud procedures (Gaglio and Taub, 1992;Isenberg, 1986; Sandberg et al., 1987) with nohigher a refusal rate than currently experiencedas non-returns in mail surveys. Some respondentswill label the various schema they activate, whichmakes an interesting point of comparison for aninvestigator. Furthermore, the logistics and oper-ations necessary to permit valid inferences fromthis technique actually increase the level of controlover some kinds of extraneous variables that mustbe tolerated in survey research.

However, concurrent verbalization is not theonly data collection method available. Pencil andpaper (or computer assisted) techniques arepossible. The fundamental requirement is thatinformants must do the thinking rather than reporttheir perceptions about what they believe abouthow they thought in the past. Carefully con-structed choice scenarios that are the foundationof behavioral decision making research (e.g.,Elliott and Archibald, 1989; Highhouse and Yuce,1996; Kahneman and Tversky, 1979) are examplesof pencil and paper techniques that reliably andvalidly capture cognitive processes. Investigatorswho choose this route have two concerns. First,the investigators must control the environment sothat distractions invoking other schema do notcontaminate data collection. Second, reliability


and validity in this circumstances depend on theinvestigator walking a fine line between con-structing scenarios that rule out alternative expla-nations of the decision but are not so forcefullystructured that they preordain the decision througha demand characteristic.

Sampling. The problem of developing an effectivesampling frame for opportunity identification is aproblem facing all researchers in the area. It is aproblem held in common with entrepreneurshipresearchers (Katz and Gartner, 1988; Aldrich etal., 1989) and with those interested in studyingrare phenomena in any domain (Sudman et al.,1988).

As noted in several contexts above, not allentrepreneurs demonstrate entrepreneurial alert-ness, nor is entrepreneurial alertness impossibleamong managers in large organizations. Severalapproaches to appropriate sampling suggest them-selves. Some have been used while others remainto be tested.

The first approach depends on retrospectiveidentification, that is, sampling those who havedemonstrated entrepreneurial alertness. This is themodel used in most research to date and relies ona post hoc identification of relevant individuals.Gilad et al. (1988) for example, identified twenty-one practicing entrepreneurs who clearly fitKirzner’s ideal type profile in their pilot study ofentrepreneurial alertness. While this approach maymake sense for some research questions (e.g.,trying to map the contents of an alertness schema),it will be important to avoid the discipline’stendency to combine this type of sampling methodwith retrospective data collection techniques. Aslong the research procedures have this groupthinking and doing prospectively, the probabilityof obtaining important insights is very high.

The second approach, prospective identifica-tion, develops a sampling frame based on thoseindividuals whose position should place them inclose proximity to entrepreneurial alertness. BothKaish and Gilad and Busenitz used this procedurefor developing their samples. While this approachseems logical and more likely to produce a largesampling frame, it can be fraught with confounds.For example, using state tax rolls uncovers acomprehensive list of the self-employed. If aninvestigator wants to study the self-employed in

order to uncover some of the differences betweenalert and non-alert individuals (again assumingprospective data collection), the sampling proce-dure would appear valid. If however, one wantedto use the self-employed as a proxy for alertnessand compare cognitive processes with corporatemanagers or investors, then the technique will besuspect because of the confound between self-employed and entrepreneurship discussed earlier.

Another alternative for sampling would be touse a population modeling approach. If the abilityto unearth or create opportunities is not as rare ascurrently believed, then using samples drawn fromthe general population becomes expedient. Forexample, Carter et al. (1996) used this approachto study nascent entrepreneurs in the United Statesand found that the incidence of consideration tobecome self-employed was quite high although theincidence of actually doing activities that led toself-employment was quite low. It is practically atruism among entrepreneurship educators that“ideas are a dime a dozen.” If true, then thissampling method would make sense for use instudies of opportunity identification. It may alsomake sense for those investigators who want todistinguish among imitative opportunities or ideas(which probably are a dime a dozen), incrementalopportunities and truly innovative opportunities(which is the domain of alertness theory).

Finally, the experimental or quasi-experimentalapproach opens up an interesting avenue for futureresearch. For those elements of entrepreneurialalertness that can be modeled in vignettes andsimulations such as sensitivity to signals of dise-quilibria (H1) or framing effects (H3) or counter-factual thinking (H7) or changing schema (H2),future research could even use samples of MBAentrepreneurship students to produce reliableresults about the cognitive processes of this theo-retically narrow topic.

Obviously, the choice of sampling methoddepends on the research question and the natureof the phenomenon under investigation. For futurestudies of entrepreneurial alertness, we hopeauthors discuss their sampling procedures ingreater detail with special attention given to theconcerns outlined above.


5. Conclusion

As noted earlier, Shaver and Scott (1991) assertthat anyone claiming an interest in the opportunityidentification process among entrepreneurs wouldhave to address the essential issues of how marketenvironments are represented in the minds ofentrepreneurs and whether these representationsdiffered from those of other market actors in anysubstantial way. This article has detailed a con-ceptual model and research agenda designed toanswer these questions based on a comprehensiveand cognitive approach to the theory of entrepre-neurial alertness. Specification of behaviorsalong an alert/non-alert continuum has generatedhypotheses whose tests should provide insight intothe core questions.

While the model presented and the discussionof crucial operational considerations represent asubstantial advance in this line of inquiry whichhas been hampered by equivocal results, nonethe-less, it represents only the first step. Ultimately,an explanation of entrepreneurial alertness as achronic schema must address: (a) the content ofthe schema; (b) how it works; (c) whether it istruly chronic; (d) how it is acquired; (e) why it isacquired; (f) whether it facilitates veridical per-ception and interpretation; (g) its role in theopportunity identification process – that is, doesalertness have a direct, mediating or a lack ofeffect on an individual’s ability to identify entre-preneurial opportunities. Logic and expediencydictate that compelling answers to the first andlast issues should be formed before pursuing theremaining questions. Furthermore, the issue ofmotivation for both alert and non-alert actors willrequire more consideration than time and spacepermit here. It is our hope that this article promptsa fruitful line of research and debate that willlead to improvements in theories about alertness,opportunity identification, and entrepreneurship.

Acknowledgements

The authors gratefully acknowledge I. Kirzner,W. Gartner and S. Winter for their insights andcomments of earlier drafts.

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