University of St. Thomas, Minnesota
UST Research Online
Entrepreneurship Faculty Publications
Entrepreneurship
4-1-2010
From Rational to Wise Action: Recasting Our
Theories of Entrepreneurship
Laura C. Dunham
University of St. Thomas, Minnesota, lcdunham@stthomas.edu
Follow this and additional works at: http://ir.stthomas.edu/ocbentrpub
Part of the Entrepreneurial and Small Business Operations Commons
Recommended Citation
Dunham, Laura C., "From Rational to Wise Action: Recasting Our Theories of Entrepreneurship" (2010). Entrepreneurship Faculty
Publications. Paper 27.
http://ir.stthomas.edu/ocbentrpub/27
This Article is brought to you for free and open access by the Entrepreneurship at UST Research Online. It has been accepted for inclusion in
Entrepreneurship Faculty Publications by an authorized administrator of UST Research Online. For more information, please contact
libroadmin@stthomas.edu.
From Rational to Wise Action, Page 1
FROM RATIONAL TO WISE ACTION:
RECASTING OUR THEORIES OF ENTREPRENEURSHIP
Published: Journal of Business Ethics, 2010
From Rational to Wise Action, Page 2
FROM RATIONAL TO WISE ACTION:
RECASTING OUR THEORIES OF ENTREPRENEURSHIP
Abstract
In this paper, I argue that if we challenge some tacit assumptions of narrow rationality
that endure in much of entrepreneurial studies, we can elevate entrepreneurial ethics beyond
mere external constraints on rational action, and move toward fuller integration of ethics as an
intrinsic part of the process of value creation itself. To this end, I propose the concept of
practical wisdom as a framework for exploring entrepreneurial decision-making and action that
can broaden the scope of our research to recognize entrepreneurship as an inherently normative
enterprise. Specifically I suggest that a framework built upon a concept of practical wisdom
enables us to adopt a richer and more complex view of entrepreneurial decision-making that is
well suited to the dynamic and uncertain context of entrepreneurship. Further, this framework
enriches our view of entrepreneurial ethics to include consideration of the personal character,
values and purpose of the entrepreneur. By examining entrepreneurship through a lens of
practical wisdom, we can open up new avenues of fruitful inquiry for scholars of
entrepreneurship.
Category: Small Business, Entrepreneurship and Social Enterprise
Key Words:
o Entrepreneurial decision-making
o Rational choice
o Wisdom
From Rational to Wise Action, Page 3
Introduction
There have been widespread calls within the business ethics literature for a fuller
integration of the ethical and moral aspects of value creation into our conceptualizations and
examinations of that process (for example, Donaldson, 2003; Harris and Freeman, 2008; Wicks
and Freeman, 1998). These calls have been for more than simple recognition of the potential
ethical consequences of creating new value through trade and entrepreneurship. Rather, Freeman
(1994) and others (for example, Wicks, 1996) have proposed that progress in the field of
business ethics depends on a rejection of the “Separation Thesis,” that is, a rejection of the idea
that ethics can be usefully studied separately from the business context and then later applied
externally to business activities. Such theorizing results in “a narrow view that cannot possibly
do justice to the panoply of human activity that is value creation and trade, i.e., business”
(Freeman, Wicks and Parmar, 2004, 364). Thus, real progress can only be made when we
recognize and begin to address the necessary and significant role ethics and values play in
business (Freeman, 1994).
In this paper, I address these issues within the context of entrepreneurship. Others have
noted that entrepreneurship is a particularly rich context in which to examine the role of ethics
(e.g., Dees and Starr, 1992; Hannafey, 2003) given the many ethical tensions that can arise
during the pursuit of entrepreneurial opportunities. I would take this one step farther. Following
Freeman (1994) and others cited above, this paper rejects the Separation Thesis and begins with
the assumption that entrepreneurship is an inherently ethical enterprise, that ethics and values are
necessarily and significantly involved in carrying out the entrepreneurial act, whether the
entrepreneur is fully aware of them or not. While this is, of course, true in all areas of human
action, to greater or lesser degree, the heightened role of ethics in entrepreneurship is rooted in
From Rational to Wise Action, Page 4
the creative nature of entrepreneurial action, as entrepreneurs seek to bring into existence new
products and services for which there has not previously been a market (Venkataraman, 1997).
It is in the pioneering and innovative efforts required to see new possibilities, to build new
organizations for pursuing those possibilities, to form new communities of stakeholders to
sustain these ventures, and to shape new beliefs about value that entrepreneurs find themselves
continually weighing decisions fraught with ethical content and implications ( McVea, 2007).
From this perspective, although there has been a recent growth of interest in
entrepreneurial ethics (see, for instance, special editions of Business Ethics Quarterly, 2002, and
Journal of Business Venturing, 2009), much remains to be done to fully integrate normative
ethics directly into our theories of decision-making within the entrepreneurial context. In this
paper, I argue we have not fully integrated normative ethics because the Separation Thesis
remains rife in the literature. This in turn, I argue, has its roots in assumptions of rational choice
theory that continue to subtly but significantly influence much of the scholarly work in the field
of entrepreneurship.
To suggest that entrepreneurial studies must challenge some traditional assumptions of
neoclassical economics may strike some as odd or misinformed. Indeed entrepreneurship
scholarship has made immense progress over the past few decades precisely by challenging
many of the narrow assumptions of the neoclassical model, building on the criticisms from the
Austrian school (for instance, Hayek, 1948; Kirzner, 1979; Mises, 1949), and as a result fleshing
out more dynamic and realistic theories of value creation and business formation. However,
despite these advances, there are a number of areas where theoretical progress has stalled in the
face of empirical findings. While there might be other explanations, this paper proposes that one
significant barrier to progress is the persistence of neoclassical assumptions of rationality. In
From Rational to Wise Action, Page 5
particular, I argue that the subtle influence of rational choice theory impedes our efforts in
integrating ethics into entrepreneurial theories beyond their role as external constraint on selfinterested rational action. 1 This has effectively cut off scholars from important areas of inquiry
into the positive role of ethics as a driver of entrepreneurial character, purpose, motivations,
processes and stakeholder relationships.
Just as the Impressionists pushed the boundaries of art, so too have entrepreneurship
scholars broken through many of the conventions of neoclassical economics. However, the
Impressionist painters were limited in their ability to explore art as human expression because,
despite their successful revolution over the restrictions of the classical school, they still retained
the assumption that art was a representation of nature. The subsequent generation of Modernists
could only make significant progress in exploring art as human expression when this central
assumption was broken. So too, this paper proposes, we can only overcome the Separation
Thesis and make progress in exploring entrepreneurship as a moral endeavor if we challenge
what remains of rational actor assumptions and replace them with a broader and richer
conception of entrepreneurial decision-making. Specifically I suggest that viewing
entrepreneurial decision-making through the lens of practical wisdom enables us to adopt a
richer and more complex perspective that is well suited to the dynamic and uncertain context of
entrepreneurship and that greatly broadens our conceptions of the role of ethics in the value
creation process. Such a move entails re-orienting our notion of entrepreneurial action away from
one that emphasizes maximizing behavior on a single financial dimension toward one that fully
embraces the complexity of the decision contexts in which entrepreneurs operate, that places
consideration of ethics, human purposes, character and values in a central position, and that
thoroughly integrates rich ethical analysis and reflection into entrepreneurial decision-making.
From Rational to Wise Action, Page 6
While the traditional model of rational action has greatly aided our examination of the ways in
which societies achieve the efficient allocation of scarce resources, it is less well suited to an
examination of the processes through which individuals act both strategically and ethically to
bring new and valuable economic artifacts into existence. By reframing the way we think of
entrepreneurial decision-making, a wisdom-based view of entrepreneurship can help open up
new avenues of fruitful inquiry for scholars of entrepreneurship.
The paper will begin by developing a definition of rational action that will serve as the
basis for discussion in this paper. Second I will try to illustrate that, despite the insights we have
gained by challenging many other aspects of the neoclassical approach, narrow assumptions of
rationality persist. These assumptions, I argue, block our progress, particularly in the area of
ethics. By way of illustration, I will examine the ways in which rational choice theories have
influenced research inquiry and theorizing within a particular stream of research on
entrepreneurial opportunity recognition. The purpose here is to show that, despite many
departures from the neoclassical paradigm, assumptions of rationality continue to remain
embedded within the entrepreneurship literature, and with significant effects. I will then explore
the possibility of viewing entrepreneurial decision-making through the lens of wisdom and close
by addressing the implications for the field, suggesting new avenues of inquiry built on a richer
view of entrepreneurial action with ethics at its core.
Defining the rational actor
Before proceeding, it is important to begin with the definition of rational action which
will guide this discussion. As a construct of human behavior and decision-making, rational
choice theory has been subject to many interpretations and much debate. It would be easy
enough in this paper to draw up a straw man model of rational choice as a convenient target for
From Rational to Wise Action, Page 7
criticism. The purpose here, however, is to take into account those criticisms of the model
already received and focus instead on those elements of rational choice that are widely accepted
among all the competing camps of rational choice theorists.
In his review of the controversies surrounding rational choice theory, Opp (1999) has
found it useful to divide the competing camps of rational choice theorists into those that advocate
what he calls a “narrow version” and those that argue for the superiority of a “wide version” of
rational choice theory. The narrow version, although still in common usage in mainstream
economics, has been the source of the greatest controversy. According to Opp, advocates of the
narrow version have argued that the kinds of preferences and constraints incorporated into the
model should be strictly limited (and these limitations are discussed in greater detail in
subsequent passages of this section). Advocates of the wide version, on the other hand, have
sought to expand the kind of assumptions underlying rational choice models, including beliefs,
altruism, norms and social sanctions in explaining behavior. For instance, proponents of the wide
version have sought to incorporate a range of motivations and preferences that go beyond
assumptions of purely egoistic preferences central to the narrow version: “A proponent of the
wide version does not deny that the assumption of egoistic preferences is useful for various
explanatory problems, but claims that it should not be assumed a priori that altruistic preferences
are entirely irrelevant” (Opp, 1999, 172).
Despite these kinds of differences between the various camps, Opp has identified what he
terms the “core assumptions” (Ibid, 173) of rational choice theory, shared by all its theorists, and
these will serve as the reference points for the model of rational action which will drive the
discussion in this paper. According to Opp, there are three universally accepted components of
rational choice theory. They are:
From Rational to Wise Action, Page 8
“Preference proposition: individual preferences (or goals) are
conditions of behaviors which are instrumental in satisfying the respective
preferences.
Constraints proposition: Anything that increases or decreases the
possibilities of an individual to be able to satisfy her or his preferences by
performing certain actions (i.e., opportunities or constraints) is a condition
for performing these actions.
Utility maximization proposition: Individuals choose those actions
that satisfy their preferences to the greatest extent, taking into account the
constraints.”
I shall take each of these in turn.
The preference proposition
Rational choice theorists universally agree that the rational actor is a goal-oriented
creature. Further, they depict the actor as guided by a well-ordered, stable set of preferences that
enables him or her to compare alternative choices and select the alternatives that best help
achieve those goals. Where the two camps depart is in their characterization of those preferences.
“The narrow version holds that individuals have egoistic preferences: they are selfish in the sense
of being interested only in their own welfare… However, advocates of the wide version
recognize a diversity of human preferences in different societies and at different historical
periods, which govern human behavior” (Opp, 1999, 173-4).
This is an important source of contention and one that must be resolved adequately in
order to justify the choice of the components which will go into the model used as the basis of
discussion in this paper. The debate between the two camps has been primarily focused on two
From Rational to Wise Action, Page 9
questions: whether models of rational choice can incorporate the actor’s interest in others’
welfare, and whether these models can incorporate other norm-guided preferences, i.e. whether
rational actors can act altruistically or otherwise morally. Proponents of the wide version have
argued that the narrow version’s conception of man runs counter to the basic facts about human
behavior, that humans do in fact make decisions through which they seek to benefit others and to
abide by a set of moral and other norms. The critics of the wide version, however, have attacked
this argument by pointing out the essentially tautological nature of the wide version. In moving
from a conception of action that draws upon a limited and clear-cut set of explanatory factors
(e.g., egoistic motivations), as is the case in the narrow version, to one that accommodates the
full range of human motivations, these critics charge the wide version with becoming empty. As
Etzioni (1988) puts it, “From a methodological viewpoint, the all-inclusive expansion of the
concept of utility violates the rules of sound conceptualization. Once a concept is defined so that
it encompasses all the incidents that are members of a given category (in the case at hand, the
motives for all human activities), it ceases to enhance one’s ability to explain” (p. 27).
While the debate on this topic has been extensive (see Green and Shapiro, 1994, for a
review) and is yet far from settled in the literature, we can resolve it for the purposes of this
paper by settling on the one point of agreement between theorists. Whether a proponent of the
narrow or wide version, rational choice theorists universally depict the actor as ultimately selfinterested in the narrow sense, albeit not necessarily selfish. This means that the self-interested,
rational actor is governed by a utilitarian 2 compass wherein even altruistic or other norm-guided
behavior is pursued for the actor’s pleasure (Etzioni, 1988; Opp, 1999). In other words, even “a
monk who lives in order to help people may not be selfish, i.e., egoistic, but self-interested,
because increasing the welfare of others maximizes his utility” (Opp, 1999, 173). Thus in
From Rational to Wise Action, Page 10
specifying the preference proposition that will serve as the basis of discussion in this paper, I will
draw upon the points of agreement between rational choice theorists and incorporate the
following elements:
− Rational actors are goal-oriented, focused on objectives that are selfinterested in nature
− They are guided by stable and well-ordered sets of preferences
− They are driven by utilitarian calculations
The constraints proposition
In the narrow version, rational choice theorists limit the consideration of constraints to
such “tangible” factors (Opp, 1999) as income, prices and legal and economic incentives.
Further, they assume all agents have access to perfect information and, relatedly, that the
constraints placed upon the individual actor are “objective” (Opp, 1999) in nature, accurately
perceived and deliberated upon by the actor.
Proponents of the wide version take issue with each of these assumptions. Of particular
note is the work that has been done by various theorists to critique and modify the second two of
the above-stated assumptions. Perhaps the best known work done in that area has been that of
Herbert Simon, who coined the term “bounded rationality” to describe the various cognitive
limitations at work in human agents during the decision-making process. Simon never doubted
that human decision-making--certainly within organizations, his area of focus--was intendedly
rational (Augier, 2001). However, he helped move the fields of economics and other behavioral
sciences away from a model of rational action rooted in a notion of “substantive rationality” (or
the concept of objective rationality that had been the mainstream approach in economics) to one
based on a notion of “procedural rationality,” that is, intendedly rational but marked by the need
From Rational to Wise Action, Page 11
for humans to accommodate the cognitive limitations by which they are constrained (Simon,
1976). Hence, in the model of rational action that will drive the argument in this paper, I will
draw upon the following assumption:
− Rational actors are intendedly rational, pursuing a procedurally
rational decision-making process
Utility maximization proposition
There is little or no debate over this assumption among rational choice theorists. By
equating rationality with maximizing behavior, both narrow and wide theories assume that actors
enter situations with a firm goal to optimize their own position. Whether the utility they seek to
maximize is characterized as pleasure, happiness or some other measure for overall well-being, a
central premise of the theory is that rational actors seek to maximize one stable, overarching
utility or “mono-utility” (Etzioni, 1988; see also Lindenberg, 1983; Margolis, 1982). This
position implies that all choices they face can be characterized by some uniform, quantifiable
value that allows the actor to reliably rank order the options and select among them.
Hence in the model put forward in this paper, I will assume:
− Rational actors are utility maximizers, focused on a single, overarching utility
Table 1 – A Summary of the Rational Actor Model
Qualities of Rational Actors
−
Goal oriented
−
Self-interested and utilitarian
From Rational to Wise Action, Page 12
−
Guided by stable, well-ordered
preferences
−
Utility maximizing
−
Procedurally rational
Having defined the model of rational action which will be the focus of this paper, I will
now turn to an examination of the ways in which the model continues to exert an influence on
the study of entrepreneurship.
Rational action and research on opportunity recognition
In this section, I will argue that assumptions of rationality remain influential in the field
of entrepreneurship. Such a statement is clearly one that invites controversy. As pointed out
earlier, the field of entrepreneurship has risen up, in part, as a corrective to the inadequacies of
neoclassical treatment of entrepreneurial action. My point is that, although our approaches to
entrepreneurship are indeed much richer than the neoclassical approach, assumptions of
neoclassical rationality remain tacitly embedded within much of the work being done in the field.
And those tacit assumptions have played a powerful role in defining the important research
questions to be studied within the entrepreneurial process, in bounding the range of possible
hypotheses to be tested, and in determining the methods deployed to study the phenomenon. The
result has been that in a number of important areas of the entrepreneurial process, theoretical
progress has stalled in the face of empirical findings. This is particularly true in the area of
entrepreneurial ethics, where models of rational action provide inadequate foundations for
meaningful inquiry, often limiting the normative aspects of the process to mere ethical
constraints on entrepreneurial action. This means important and interesting research questions
From Rational to Wise Action, Page 13
about the positive role of ethics have been neglected, such as the role of virtues in the formation
of professional character, the role of values in defining entrepreneurial purpose and motivation,
the role of moral identity in influencing the entrepreneurial mission, and the role of shared values
in stakeholder network formation.
For illustrating the limitations to an approach built on assumptions of neoclassical
rationality, there is perhaps no better area to explore than the recent stream of research being
conducted on entrepreneurial “opportunity recognition.” The ability to identify or develop new
value-creating opportunities in the market has been widely recognized as a central aspect of the
entrepreneurial process (e.g., Kirzner, 1979, 1985, 1997; Schumpeter, 1934; Stevenson et al.
1985; Venkataraman, 1997). It is also a stage of the process in which significant ethical concerns
can arise (Dees and Starr, 1992; XXXX, 2008 3), as entrepreneurs navigate the complexities and
uncertainties of bringing “new-to-the-world” products and services into fruition. Thus, it would
seem an important area of focus as well as one that requires an underlying model of human
behavior capable of accommodating the ethical aspects of entrepreneurial behavior.
Kirzner and early research on opportunity recognition
I argue here that opportunity recognition is a stream of research that has been strongly
influenced by theories of rational choice since its inception. Kirzner (1979, 1985, 1997) was one
of the first to articulate the role of opportunity in the entrepreneurial process. For him, the
discovery of opportunity represents the core act of entrepreneurship. In developing his theory of
entrepreneurial “alertness” and opportunity “discovery,” Kirzner builds directly upon the
foundations of rational choice. His entrepreneur is a goal-oriented utility maximizer, motivated
by promises of financial gain. Driven by this goal, Kirzner’s entrepreneur is quick to recognize
inefficiencies in the market, to discover “unexploited opportunities offered by existing conditions
but also, and especially so, by those to be created by future conditions” (1985, p. 7). Kirzner’s
From Rational to Wise Action, Page 14
entrepreneur is no innovator, creating radically new products, services or markets; rather he is an
arbitrageur, scanning for the errors of others, for new information that he can deploy to his own
advantage (1979, 149). He casts no moral judgment on these errors/potential opportunities;
rather, he is merely a reader of his environment, focused on the task of finding information about
existing, but as yet undiscovered, profit opportunities. Thus the environment and the
opportunities embedded within it are givens – objective phenomena--which cannot be created
and need not be ethically evaluated by the entrepreneur, only discovered and exploited. Ethical
concerns that arise due to the processes, stakeholder relationships and consequences involved in
discerning and exploiting these opportunities are outside the theory.
Given Kirzner’s influence, it is unsurprising that the subsequent research is strongly
rooted in the rational actor tradition. Even as research in the area has expanded to incorporate
aspects of social context, relationships and cognitive approaches not addressed by Kirzner, the
grounding in assumptions of rationality remain clear. In the remainder of this section, I will look
at three particular areas in which assumptions of rationality have influenced the study of
entrepreneurial opportunity recognition and have led to less than satisfying theoretical results,
thus seeming to suggest opportunities for exploration using alternative theoretical lenses. These
three areas include the motivators, cognitive processes and social relationships involved in
opportunity recognition.
Rational action and entrepreneurial motivations
In each of these areas, the individual as autonomous, goal-driven decision-maker remains
the unit of analysis. Another requirement of rational actor is met in the implicit reference to
utility maximization, focused on a single, over-arching utility, as driving motivator behind
opportunity recognition. The research regularly characterizes opportunities as those vehicles
promising economic return to entrepreneurs. While this might seem an uncontroversial choice, it
From Rational to Wise Action, Page 15
assumes the primacy of financial gain over all other motivators and excludes from consideration
those ventures pursued for other normative reasons. For instance, while research in
entrepreneurial motivations remains fairly undeveloped (Shane, Locke and Collins, 2003),
studies have indicated that entrepreneurs often pursue their opportunities for multiple and
sometimes conflicting reasons, such as desire for achievement, need for independence, and
passion for a particular idea While it seems logical to assume that even these ventures are only
pursued if the entrepreneur believes they are economically viable, they are clearly not always
pursued primarily for that reason. An interesting example from the research helps clarify the
point. In seeking to explore the role of social networks on opportunity recognition, Singh et al.
(1999) discarded responses from 16% of their sample of entrepreneurs (47 out of 308 returned
surveys) because they failed to agree with the model of opportunity recognition presented at the
start of the survey. That model sought to distinguish between entrepreneurial ideas and
opportunities, the latter being distinguished by their ability to generate economic return. In
discarding those responses that failed to concur with that distinction, the authors could be seen as
biasing the responses toward a focus on utility maximization. It is not surprising then that the
field has only recently begun to turn theoretical attention to the increasing occurrence of social
entrepreneurship, that entrepreneurial activity focused on creating social value, rather than
founder or shareholder wealth (e.g., Dees and Anderson, 2003; Austin, Stevenson & WeiSkillern, 2006).
Rational action and entrepreneurial cognitions
Assumptions of dominant rationality also pervade an emerging body of work on the
cognitive processes through which entrepreneurs are able to identify new opportunities (see
Mitchell et al. 2004, or Forbes, 1999, for an overview of this literature). To be sure, these studies
have typically found that entrepreneurs deviate significantly from purely rational models of
From Rational to Wise Action, Page 16
decision-making when assessing the opportunities they have identified, due to the cognitive
limitations inherent to bounded rationality. Much of this work has, in fact, set out to explore the
variety of cognitive biases and heuristics that mark the entrepreneurial thinking process.
Nonetheless, in their depiction of a goal oriented, utility maximizing individual, that literature
characterizes the entrepreneur as following an ostensibly, if boundedly, rational path.
While an extensive review of the empirical findings is beyond the scope of this paper,
some examples can help illuminate the point. One particular stream regards the role of risk
perception and risk-taking on the part of entrepreneurs. Assessing the risks associated with new
venture launch is an important aspect of opportunity recognition and evaluation (e.g.,
Venkataraman, 1997). It has been noted often that pursuing new opportunities is highly uncertain
and risky, and yet entrepreneurs regularly act despite those risks. Assumptions of bounded
rationality have led theorists to two possible explanations of entrepreneurial behavior in the face
of such risks. One explanation is as follows: entrepreneurs do indeed perceive the high risks
involved in starting new ventures around the opportunities they have identified. However, they
have a higher propensity for taking risks--what looks risky to us does not look so risky to them.
In other words, they are less risk averse than the rest of us and hence it does not violate the
dictates of bounded rationality to continue to pursue new opportunities. Unfortunately, this
explanation does not hold up in the face of empirical evidence. Research has fairly consistently
shown that entrepreneurs do not differ significantly from other members of the population in
terms of their propensity to take risks (Low and MacMillan, 1988).
So where does that lead researchers? To explanation number two. That explanation states
that entrepreneurs do not perceive the risks associated with their ventures due to their cognitive
approach. Theorists have argued that entrepreneurs tend to rely upon various biases and
From Rational to Wise Action, Page 17
heuristics that cause them to underestimate the risk when evaluating a new opportunity. Busenitz
and Barney (1997), for instance, found that entrepreneurs were more likely to engage in
overconfidence or representativeness errors than managers in established businesses. Similarly,
Palich and Bagby (1995) found that entrepreneurs tend to view their situations more positively
and to underestimate the risks involved. In another study, Simon and his colleagues (1999) found
support for the previous studies and also found an increased susceptibility to “illusions of
control,” a bias that causes entrepreneurs to believe they can master situations over which, in
actuality, it is likely they have little or no control. Hence, due to cognitive limitations, it remains
within the realm of bounded rationality to view new opportunities more positively.
Such approaches fail to consider a third perspective--that entrepreneurs see and fully
understand the risks involved with the opportunities they have identified, but decide to proceed
anyway. While such a perspective is not consistent with assumptions of rationality, a theory of
human behavior that encompasses normative considerations could provide important insights.
We need only look at some other empirical work focused on high-risk behavior. For instance, in
a variety of studies seeking to explain rescue activities to save Jews from Nazi persecution,
normative, personal values-based considerations, unsurprisingly, figured strongly. Rescuers felt
so strongly that it was the right thing to do, that issues of risk became dwarfed (see review of
studies in Opp, 1999). Within the context of entrepreneurial start-up, normative considerations-e.g., a strong belief in the goodness of the venture’s purpose, a desire to solve a pressing
problem, an interest in pursuing activities that reflect the entrepreneur’s search for the good life,
a vehicle through which the entrepreneur can “be the person that they want to be,” etc.-- might
make considerations of risk less important to the decision. However, these alternative hypotheses
can only be fully explored by challenging the “dominant rationality” model. 4
From Rational to Wise Action, Page 18
Rational action and entrepreneurial social networks
Finally, work on entrepreneurs’ social relationships has run into similar difficulties in
terms of empirical findings that fail to square with received theory. Much of that work builds
upon social exchange theory, a sociological theory with roots in rational choice. Social exchange
theory reveals its rational choice roots in its central premise that individuals engage in social
exchanges, conferring benefits upon others, in hopes of future benefits and rewards. This social
exchange differs from the economic exchange that is the usual subject of rational choice in
several ways (Blau, 1964). For instance, although social exchanges may include benefits of
extrinsic economic value, such as information, they generally focus on benefits carrying a more
intrinsic value, such as social support or status. Also, unlike economic exchanges, social
exchanges are rarely if ever contracted for explicitly, although they do generally leave
participants with an implicit sense of obligation. Despite these differences, however, social
exchange theory is clearly recognizable as a theory of rational choice in its assumptions of selfinterest, goal orientation, utility maximization and bounded rationality. As Homans (1958) puts
it: “For a person engaged in exchange, what he gives may be a cost to him, just as what he gets
may be a reward, and his behavior changes less as profit, that is, reward less cost, tends to a
maximum. Not only does he seek a maximum for himself, but he tries to see to it that no one in
his group makes more profit than he does” (p. 606).
This theoretical perspective has informed important work within entrepreneurship on the
role of social relationships in the pursuit of entrepreneurial opportunities. For instance, in their
seminal article on the role of social relationships in the earliest stages of entrepreneurial
opportunity pursuit, Starr and MacMillan (1990) explicitly draw upon social exchange theory in
order to explain the way venture managers set about to “exploit certain ‘social assets’ they
From Rational to Wise Action, Page 19
possess” (p. 85) in order to secure the resources needed to get their ventures off the ground. As
they describe it:
“In such social contracts the goods and services the venture
manager needs are implicitly ‘traded’ for social commitments;
favors are extracted or obligations built (Homans, 1958, 1961;
Blau, 1964). While the mental records may be ambiguous, each
party knows that at some time in the future, on a completely
different and totally unspecified transaction, the initial provider of
the resource may ask a favor, recalling his ‘loan’ or ‘cashing in’
the obligation” (p. 85).
The article proceeds to develop a loose taxonomy of the kinds of social assets subject to
entrepreneurial exploitation. The authors characterize these assets along two dimensions--the
degree of formality behind the recognition of social “debt” being incurred and the cost of
“maintaining” the asset (p. 85). Further, the authors then define some “strategies” through which
entrepreneurs can “build an inventory” (p. 86) of such assets. The social nature of
entrepreneurship becomes distilled, in classic rational choice fashion, down to transactions
between individualistic, self-interested and utility maximizing players, each viewing the other
instrumentally and as subordinate to their individual goals but willing to engage in reciprocal
favors in order to achieve those goals.
In a similar manner, this perspective has influenced the social network literature focused
on entrepreneurial relationships. A prominent example includes the work of Burt (1992), who
stressed the importance of social networks in exposing individuals to information that is new to
them. Building upon Granovetter’s work on “the strength of weak ties ” (1973), Burt depicts
From Rational to Wise Action, Page 20
personal networks as purely instrumental to the furthering of the goals of rationally calculative
agents. The ideal network configuration that he prescribes is one in which a minimum
investment of time and energy results in a parsimonious network where the agent finds him or
herself centrally positioned between otherwise unconnected groups of people. This puts the agent
in the advantageous position of tertius gaudens, “the third who benefits” (Simmel, 1923, 154 as
cited by Burt, 1992). This position allows the enterprising individual to become the link between
two otherwise separated groups and to reap the rewards of access to fresh information and the
ability to control the flow of communication between the two groups. That individual becomes a
broker of sorts who then “plays conflicting demands and preferences against one another and
builds value from their disunion” (Burt 1992, 34).
The social network literature in entrepreneurship has sought to validate these theories by
demonstrating the links between certain attributes of entrepreneurs’ networks and venture
performance. For instance, based on the insights provided in Burt’s work, most social network
theorists in entrepreneurship have sought to test hypotheses linking network size, diversity and
number of weak ties to superior performance. However, based on a review of a number of
network studies, conducted in both U.S. and international markets, de Koning (1999) concludes
that “a large, diverse network did not seem linked to performance--on the contrary, the more
profitable entrepreneurs had denser and smaller networks…” In other words, successful
entrepreneurs relied most heavily upon strong ties. These findings were supported in a
longitudinal study conducted by Johannisson (1996), which found that entrepreneurs whose top
five venture-related contacts were based on long-term, personal ties led more successful
ventures, in terms of financial performance.
From Rational to Wise Action, Page 21
Theorists have expressed some puzzlement at these findings since they clearly do not
square with the theory motivating the studies. In order to make sense of these results, social
network theorists have again turned to arguments built upon assumptions of rationality. Given
the regular interaction and accumulation of trust between network members linked by strong ties,
they conclude, such networks must lead to efficiency of information distribution and speedier
decision-making. In other words, access to information becomes replaced by efficiency of
information communication in terms of the benefits derived from entrepreneurial networks. But
the network remains “ego” centered on the entrepreneur and network members remain primarily
instrumental to the goals of the entrepreneur, a theoretical posture consistent with underlying
assumptions of rationally driven behavior. Furthermore, most theorists conducting these studies
cannot refrain from speculating that, in the long run, such dependence upon close ties is bound to
dampen the venture’s growth prospects, leading these theorists to suggest the need for
entrepreneurs to become more proactive at adding diverse and distant ties. Such purely
instrumental ties are assumed to bring with them greater information access and to be free of the
kinds of social/moral/emotional obligations that can “encumber” the entrepreneur too closely
involved with close ties.
What these theories fail to examine, of course, are the moral imperatives, values, beliefs
and norms that shape the collaborations between entrepreneurs and their network ties and how
these normative elements drive venture performance. Larson (1997) has argued that “…the
embeddedness of entrepreneurial firms in supporting network structures explains a great deal
about their formation, growth and innovative capabilities, and this framing of the issues in
network relationship has ethical dimensions as its core (trust, relationship, etc.). By logical
extension then, ethical issues are not just part of the entrepreneurial story, but in fact, to a
From Rational to Wise Action, Page 22
significant degree, explain the economic phenomenon of dynamic entrepreneurial innovation”
(251-252). It would seem difficult to make progress in this area without a view of entrepreneurial
action that moves beyond the strictures of neoclassical rationality.
Summary
In the preceding section, I have attempted to show how assumptions of rationality have
impeded theoretical progress in understanding some of the core processes involved in pursuit of
new entrepreneurial opportunities, particularly in understanding the role of ethics in shaping
these processes. Given these limitations, a new perspective is proposed here. This approach,
based on a conception of practical wisdom, offers some important benefits. Specifically I argue
that by applying practical wisdom as a framework for entrepreneurship, we can offer insight into
the skills and processes needed to address both the strategic and the ethical dimensions of
entrepreneurial decision-making and action.
It is important here to take a brief aside and note what the paper is not saying. To say
that entrepreneurship has ethical dimensions is not to say that entrepreneurship is an inherently
“good” process or that entrepreneurs are all inherently good moral agents. Nor is it trying to say
that entrepreneurship is unique in having inherent ethical aspects. Obviously most complex
human activities have ethical dimensions of varying degrees. What the paper proposes is that the
ethical implications of entrepreneurial action are so significant, as well as rich, complex and
unique, that they require a decision-making approach capable of addressing them. The approach
proposed here is explicitly normative in nature, meant to reflect the kinds of decision-making
processes that I argue are necessary for good entrepreneurial action – “good” action being
defined here as that which is both strategically and ethically sound. However, I believe it can
also motivate analytical studies of a descriptive nature in its ability to explain entrepreneurial
behaviors and outcomes that have eluded explanation in current theory (some of which have
From Rational to Wise Action, Page 23
been highlighted in the previous section). In the remainder of the paper, I shall describe how
viewing entrepreneurial decision-making through a lens of practical wisdom can provide these
new insights on entrepreneurial action and help us overcome the Separation Thesis in
entrepreneurial studies.
Practical Wisdom
The ancient and venerable topic of wisdom has a long and distinguished history as a
subject of concern among philosophers and theologians--including the likes of Plato, Aristotle,
and Thomas Aquinas, to name a few--who saw it as exemplifying the highest level of human
achievement and whose purpose was to provide concrete guidance on its development and
cultivation. More recently, a growing number of behavioral scientists have sought to understand
and study wisdom as a behavior (see for instance, Baltes and Smith, 1990; Csikszentmihalyi and
Rathunde, 1990; Sternberg, 1998). These scholars have taken a variety of approaches to defining
the concept, including through the review of ancient philosophical tracts (e.g., Robinson, 1990),
by exploring implicit, “folk” theories of wisdom (e.g., Sternberg, 1998) and through the
development of theoretical constructs drawn from human developmental psychology (e.g., Baltes
and Smith, 1990). While the ensuing definitions differ in some regards, almost all theorists agree
that wisdom entails judging well in the face of complex problems and pursuing courses of action
that seek consciously to contribute to both individual and collective well-being. However, most
of these models limit attention to ethics and focus on a conception of wisdom more akin to
prudential intelligence.
In order to develop a conception of wisdom with a more robust role for ethics, this paper
draws upon one of the earliest and most enduring accounts of wisdom--Aristotle’s
conceptualization of the virtue of phronesis, or practical wisdom (Aristotle, 1984)--but updated
From Rational to Wise Action, Page 24
by viewing it through a pragmatist lens and considering entrepreneurial wisdom as it might have
been interpreted by such thinkers as Dewey, Putnam, and Nussbaum. Aristotle’s ethics have
proven a rich source of insight into contemporary problems of business ethics (e.g., Duska, 1993;
Hartman, 1996; Solomon, 1992). Most recently, Aristotle’s conceptualization of practical
wisdom has begun to motivate increased interest among management scholars (e.g., Moberg,
2008; Roca, 2007). Elsewhere, this author and colleagues have begun the task of describing and
defining practical wisdom as it might be deployed in the entrepreneurial context (****) 5. Hence,
I will keep the conceptual definition fairly brief as my central purpose here will be to show how
this model of entrepreneurial decision-making contrasts with rational action models and could
drive fruitful new areas of inquiry within entrepreneurial research. Table 2 summarizes key
elements of the model.
Table 2 – A wisdom-based view of entrepreneurial decision-making
Qualities of Wise Entrepreneurs
−
Focused on achieving good ends
that support both individual and
collective well-being within the
context of creating new products,
services, and markets
−
Seek to act in conformance with
virtue
−
Draws upon analytical, emotional,
imaginative and moral capacities
From Rational to Wise Action, Page 25
to determine right goals and
means when pursuing
entrepreneurial opportunities
−
Rejects maximization of monoutility/acknowledges and acts on
plurality of values embedded in
options
−
Engages in a process that
emphasizes perception,
deliberation, experimental action,
reflection
Aristotle’s ethics are famously focused on answering the question, “How should we
live?” His short answer to this complex query is that all humans should strive to achieve
eudaimonia (variously interpreted as “flourishing” and “happiness” and “wellbeing”).
Eudaimonia can be seen as the highest human good and achieving it requires cultivation of
personal character rooted in those virtues consonant with human flourishing – virtues like
courage, honesty, friendliness, generosity, justice, to name a few. Our virtues shape our action,
but are also, in turn, shaped by the actions we take everyday – we are what we act. Thus the
rational human agent (as construed by Aristotle) will seek to consistently act in such a way as to
cultivate good character and virtue as well as to bring about the larger good for both himself and
others. Of course, determining the right course of action in individual situations is a complex
task and this is where practical wisdom plays its indispensable part in the path toward
From Rational to Wise Action, Page 26
eudaimonia. It is practical wisdom (phronesis) that enables us to determine in particular
situations which actions are most suitable for achieving this larger goal.
Hence, practical wisdom can be defined as the capacity to understand and act upon what
is both good and feasible for oneself and others in particular situations. The practically wise
individual is predisposed to “to identify the right aims or objectives to seek in a specific situation
and to enact the right actions to bring about or accomplish these aims” (Moberg, 2008, 835).
For the entrepreneur, then, practical wisdom entails, first, understanding the shared sense
of value that binds them to their stakeholders--i.e., the good they seek to achieve together.
Wisdom then requires the desire and ability to discern the most appropriate action for achieving
that joint value in a multiplicity of complex and uncertain situations. John Mackey, founder and
CEO of Whole Foods, captures the idea nicely:
“At Whole Foods, we measure our success by how much
value we can create for all six of our most important stakeholders:
customers, team members (employees), investors, vendors,
communities, and the environment. … There is, of course, no
magical formula to calculate how much value each stakeholder
should receive from the company. It is a dynamic process that
evolves with the competitive marketplace. No stakeholder remains
satisfied for long. It is the function of company leadership to
develop solutions that continually work for the common good”
(Mackey, 2005).
From Rational to Wise Action, Page 27
Comparing rational action and practical wisdom
A theoretical examination of entrepreneurial decision-making based on practical wisdom
departs in notable ways from models of rational action. As stated earlier, rational choice theory
paints a picture of a goal oriented individual, guided by stable and well-ordered sets of
preferences, and driven by self interest and a utilitarian compass. The purpose of the rational
decision-making process is to maximize one stable, overarching utility.
In contrast, the practically wise entrepreneur does not seek to maximize one utility
(typically characterized as economic return in entrepreneurial theory). Rather, the practically
wise entrepreneur seeks to construct the good life for herself and her stakeholders, pursuing
opportunities and building ventures whose purpose, guiding values, and relational interactions
support the collective good. To be sure, the wise entrepreneur recognizes that economic viability
is necessary and that profit supports the venture, thus economic factors play an important role in
her deliberations. However, for the wise entrepreneur, economic return is only one of many
factors she weighs when deciding her course of action.
In this way, a wisdom-based account of entrepreneurial decision-making places ethics at
the center of entrepreneurial deliberation. In contrast to rational choice, which places ethics
outside the perceived bounds of business decision-making in the role of annoying or even
confounding constraints on business action, a wisdom-based account makes ethics fully
constitutive of managerial decision-making. Rather than constraining action through the add-on
application of a set of external rules or principles, entrepreneurial decision-making as practical
wisdom is inherently ethical as wise entrepreneurs seek to judge “rightly” in the face of complex
problems, in order to choose a course of action that will support the achievement of good for all
stakeholders. Intelligent or “clever” decisions as interpreted within rational choice models –
those decisions that demonstrate expertise in the application of means towards ends – are sharply
From Rational to Wise Action, Page 28
distinguished here from wise decisions, which only obtain when that expertise has been used
toward ascertaining what is good for the collective and applying the correct and virtuous means
towards achieving that good. Thus, decision-making, action and a commitment to the collective
good are fully intertwined. And the inherent ethicality of the many decisions facing the
entrepreneur becomes more readily apparent.
In seeking to construct this good, the wise entrepreneur is guided by a desire to act in
conformance with virtue, rather than in conformance with self-interest, another notable departure
from rational choice. Aristotle characterizes practical wisdom as an intellectual virtue. As such, it
requires both virtuous character, that is, a predisposition to act virtuously, as well as the
intellectual capacity, built on knowledge and experience, to discern what is virtuous action in any
given circumstance. What is particularly relevant for this paper is that this concept of practical
wisdom involves the normative striving for the good through the practical development of habits
that are inseparable from the practice of whatever aspect of human endeavor the actor is trying to
excel within--in this case, entrepreneurial practice. Good character arises from good practices,
and good practices emerge from good character. Cornwall and Naughton (2008) have argued that
entrepreneurial practice shapes the entrepreneur’s character as much as the entrepreneur’s
character shapes the emerging enterprise. Thus in making decisions about the kind of product to
develop, the kind of organization to build, the kind values that will guide stakeholder
interactions, the wise entrepreneur continually reflects on the sort of person she is becoming, the
kind of personal character that is in the making through her actions.
Finally, a wisdom-based account of entrepreneurial decision-making differs markedly
from rational choice in its depiction of the actual decision process itself. Practical wisdom is
rooted in the recognition that the act of choosing rightly requires a close and careful
From Rational to Wise Action, Page 29
consideration of the particular, concrete attributes of problem situations. Wisdom in action can
never be reduced to general rules that apply smoothly across circumstances because of the
uncertain and idiosyncratic nature of human action. “…Matters concerned with conduct and
questions of what is good for us have no fixity … The agents themselves must in each case
consider what is appropriate to the occasion.” Such a characterization rings particularly true for
the highly uncertain entrepreneurial context. Hence, wisdom requires an acute sensitivity to the
features of the particular situation and an ability to choose a course of action that is most fitting
to that situation and most likely to achieve or further the collective good.
To carry out this task, wise decision-makers must go far beyond the dispassionate, coolly
calculative deliberation highlighted in rational choice models. Rather, wise decision-making
requires the full engagement of one’s emotional, imaginative and moral capacities in order to
closely attend to a wide and complex array of details: to the particular persons and relationships
involved in the situation (McVea and Freeman, 2005); to those stakeholders’ wants, needs,
values, and aspirations; to the potential good which can be constructed for all stakeholders in this
setting and to the qualitative differences among the multiple values embedded within the means
at her disposal. Wisdom requires both a fine discernment of the immediate details as well as the
ability to connect those details to larger meanings--to identify what is both new and different
about this situation as well as to link it with others one has experienced. Most importantly,
practical wisdom requires a moral compass, as one sizes up the situation with which one is faced
and sets out to seek the means and ends most conducive to human good in that situation.
Further, wise decision-making does not assume that we already have a fixed and absolute
set of preferences or values. Instead, one of the purposes of wise decision-making is to discover
what we prefer or what is really of value. For it is only through wise and morally imaginative
From Rational to Wise Action, Page 30
deliberation that we gain clarity about those objects we have previously deemed to be of value; it
is only through envisaging our life as transformed by different possible courses of action meant
to achieve that object that we come to more vividly understand the features and consequences
related to that object. This in turn can either deepen or alter our initial prizing of that object
(Anderson, 2005), thus transforming our system of values in a way that reflects our capacity for
continued growth. In this way, the formation of preferences and values is an integral and
emergent part of the decision-making process. Such a view accords with Sarasvathy’s suggestion
that entrepreneurship is “economics with imagination” and that “the task of entrepreneurship is
to move us from the world we have to live in to the world we want to live in” (Sarasvathy, 2002,
96) 6. Through its introduction of novel economic artifacts, entrepreneurship is a journey through
which entrepreneurs both shape and fulfill our aspirations (105-106), and in doing so, form,
fulfill and challenge our deepest values. A view of entrepreneurial decision-making as
neoclassical rationality has little to say about such a process. In contrast to neoclassical views,
where ethics play no role in the entrepreneurial process save ruling out certain activities, the
approach outlined here emphasizes the ways in which the values and beliefs of the entrepreneur
can have as important an impact on their stakeholders and the larger society as the economic
performance of their ventures. Contrast this with Kirznerian decision-making, in which the
entrepreneur remains agnostic about the ethical value of the means identified through alert
discovery and fixated on a sole, unchanging objective.
Similarly, a process of decision-making based on practical wisdom rejects the notion that
all alternatives can be compared on a single measure of utility. Rather, this process entails an
exploration of the multiplicity of incommensurable values embedded within the options
entrepreneurs face (see Nussbaum, 1990, pp. 56 – 66 for a more thorough elaboration of themes
From Rational to Wise Action, Page 31
which follow and are only briefly highlighted here).The approach here requires wise decisionmakers to address the intrinsic merits and qualitative differences of each of the alternative
actions available to them. Wise deliberation requires the decision-maker to give each option its
due by reflecting fully on its distinctive value, and then, despite the rich array of competing
values, to choose the option that most adequately addresses the situation and then to act in ways
that incorporate recognition of each separate value she has foregone. Maximization is simply not
possible here--in selecting one option, and the value inherent in it, the decision-maker must forgo
the others. And so the practically wise individual fully recognizes the difficulties, and often
tragic dimensions, of the problems she faces. In highlighting these complexities, the approach
advocated here allows us to incorporate a much richer range of variables into a more dynamic
decision-making process.
In sum, entrepreneurial decision-making as seen through a lens of practical wisdom looks
very different from decision-making under assumptions of neoclassical rationality. It is a valuedriven, virtue-based, creative, dynamic process rather than a calculative, self-interested,
maximizing choice. Having examined the construct of practical wisdom within the context of
entrepreneurial decision-making and contrasted it with rational choice models, I close with an
examination of the ways in which this different theoretical lens can enrich our understanding of
entrepreneurship and help us pursue new avenues of scholarly inquiry.
Implications and conclusion
As an underlying construct in most behavioral sciences, rational choice theory has no
doubt influenced the field of entrepreneurship in ways too numerous and subtle to address here.
Most significantly, for our purposes, it has sidelined ethics and left us without a platform for
examining in greater depth the role of ethics as a positive force in driving and shaping the act of
From Rational to Wise Action, Page 32
entrepreneurship. A theoretical examination of entrepreneurial decision-making based on
practical wisdom provides such a perspective. It allows us to rise above the limitations of the
Separation Thesis, to move beyond a view of ethics as extraneous to entrepreneurial action,
limited – if considered at all – to side constraints on action. Viewing entrepreneurial decisionmaking through the lens of practical wisdom enables us to explore a more positive view of ethics
as internal architect, providing the founding purpose and entrepreneurial motivation, building
entrepreneurial character, and inspiring creativity, experimentation and imagination. And it
provides a framework for better examining the skills and processes needed to address both the
strategic uncertainties and the ethical issues embedded in entrepreneurial contexts.
Reconsidering opportunity recognition research through a wisdom-based approach
How might research look different if we take a wisdom-based perspective on
entrepreneurial decision-making? It might be helpful to briefly revisit the topic of opportunity
recognition to see what new insights can be gained and new research questions asked.
For instance, a wisdom-based view offers a new perspective on the linkage between
entrepreneurial motivations and opportunity recognition. As cited earlier, while research in
entrepreneurial motivations has identified a number of different reasons that individuals start
down an entrepreneurial path, none of this work has linked motivation to the actual, core
entrepreneurial task of identifying a new opportunity. Received theory suggests that individuals
decide to become entrepreneurs for whatever reason (i.e., need for achievement) and then must
engage in some other process for identifying a viable opportunity, in a classic separation of
means and ends that is the basis of rational choice approaches. A wisdom-based view allows us
to explore a process in which motivation and opportunity emerge in tandem, when it is the
entrepreneur’s vision of a particular good life that shapes the purpose and thus forms the basis of
the opportunity they pursue. Anita Roddick, founder of the Body Shop, is a case in point. Driven
From Rational to Wise Action, Page 33
by her intense dislike of cosmetic industry practices that to her mind involved outrageous prices,
excessive waste in packaging, and false claims and promises, she launched her first store out of a
desire to provide a different and better experience for women (Roddick, 1991). Her stores
emphasized simple packaging, natural ingredients, an honest, low key sales approach, and an
emphasis on ecological stewardship. Her vision of the good life motivated her as well as shaped
the entrepreneurial venture she founded.
Similarly, the entrepreneur’s pursuit of the good life and desire to live in conformance
with virtue can provide new insight into the cognitive approaches that entrepreneurs use in order
to identify and assess new opportunities. For instance, while the literature on entrepreneurial
cognitions emphasizes the importance of external information (about customers, markets,
competitors, etc.) in the search for entrepreneurial opportunities (e.g. Kaish and Gilad, 1991;
Brush, 1992), a wisdom-based view suggests the importance of looking within, at the values and
beliefs that are most important to the entrepreneur in order to find opportunities that can bring
new and meaningful value to customers. To return to the previous example, Anita Roddick was
far ahead of her time in terms of her emphasis on sustainability and she was entering a mature
and concentrated industry in which external market analysis could only have discouraged most
entrepreneurs. It was only through her pursuit of values and virtues that reflected her vision of
the good life that she was able to create an entrepreneurial venture that went on to become one of
the biggest entrepreneurial success stories of her era. Her distinctive values would ultimately
serve as critical differentiators in a crowded marketplace, but they were initially pursued for
normative reasons and well before their value as strategic assets could be discerned.
Finally, a wisdom-based view provides a very different perspective on the kinds of norms
and behaviors that guide good management of the entrepreneur’s social network in shaping
From Rational to Wise Action, Page 34
opportunity recognition and pursuit. While a rational action model emphasizes the instrumental
value of the network to the entrepreneur, a wisdom-based view suggests an approach in which
network members are viewed as valuable in their own right. From this viewpoint, the
entrepreneur’s efforts become less bent on manipulating the network and more focused on
collaborating with it; the entrepreneur becomes less directed at drawing personal benefits from
the network (in terms of information and other resources) and more targeted at understanding
stakeholder needs and desires in order to craft creative solutions that support the good of all. One
example of this can be seen in the approach taken by Howard Shultz in the founding of
Starbucks. The unique and high quality experience he sought to craft within his stores was
strongly influenced by the collaborative approach he took with his employees, many of whom
were hourly workers used to a more instrumental relationship with their retail employers. Guided
by values of respect and fairness, Schultz departed significantly from retail practices of the time
by offering his shop employees extensive training and education, health benefits and stock
options. Once again, what became critical differentiators began as personal, normative values,
values that in this case were rooted in his own experiences as a young boy watching his ill father
lose his job and health insurance. He took on the expense of providing his employees with those
elements he saw as critical to the good life, long before it became clear that these actions would
pay off strategically.
In sum, the process of entrepreneurial opportunity recognition looks very different when
viewed through the lens of practical wisdom. Viewing entrepreneurship from the perspective of
practical wisdom suggests new explanations of entrepreneurial behaviors and processes and
sparks new research questions. For instance, while the entrepreneurship literature emphasizes the
role of risk and return in the entrepreneur’s identification, evaluation and pursuit of new
From Rational to Wise Action, Page 35
opportunities, the account offered here suggests that entrepreneurs acting in accord with wisdom
will look to a broader range of personal and ethical values when determining their course of
action. Some important questions, then, are: to what criteria, beyond projected profitability/risk
of loss, do entrepreneurs appeal when making their own assessment of the attractiveness of their
ventures? To what sources of information and advice do they turn when developing these
multiple criteria and weighing their plans against them? How do they assess and make trade-offs
among the multiple values embedded in their offerings? For instance, can a commitment to
certain ethical values help explain why entrepreneurs persist despite low returns? To what degree
are they aware of potential conflict between the values embedded in their new offerings and
those held by their prospective stakeholders? How does this affect the way they go about
mobilizing support for their ventures?
In much the same way, the perspective taken here can enrich our understanding of the
relational dynamics between the entrepreneur and those individuals to whom they turn to get
their ventures off the ground. By viewing these interactions through the lens of practical wisdom,
a number of interesting questions are raised. For instance, how do moral concerns, values, and
beliefs shape the collaborations between the entrepreneur and her stakeholders? How does the
entrepreneur perceive the nature of the moral obligation between herself and the community of
stakeholders who make the venture possible? Does it change based on the source of
relationships, i.e., do stakeholders drawn from family and friends have different moral status
from stakeholders attracted through more arms-length, market based transactions? Does that
responsibility change as the venture evolves? Through what processes does the entrepreneur seek
to understand and balance the often conflicting and changing needs of stakeholders? It is
intriguing to speculate whether those entrepreneurs who exhibit higher levels of practical
From Rational to Wise Action, Page 36
wisdom are more likely to recognize and effectively pursue more opportunities, given their acute
sensitivity to the interests and values of their stakeholders. Further, it seems likely that they
would generate higher levels of trust among their stakeholders. If so, what benefits accrue to
them? For instance, do they find it easier to mobilize the necessary resources necessary to launch
their ventures?
Finally, with its emphasis on the virtues and habits of excellent practice, wisdom
encourages us to begin to explore important questions around the role of entrepreneurial
character in the process of entrepreneurship. Cornwall and Naughton (2008) have only recently
begun to open this important area of inquiry with their exploration of the question, “what does it
mean to be a good entrepreneur?” and to understand the virtues necessary to support effective
and morally good entrepreneurship. Examining entrepreneurship through the prism of wisdom
and virtue allows us to consider new issues around entrepreneurial action. A case in point is the
widespread use of bootstrapping strategies by nascent entrepreneurial ventures. Up to 75% of
nascent entrepreneurial firms adopt some form of bootstrapping as part of their operations
(McCune, 1999). In simplest terms, bootstrapping is the strategy of “doing more with less” and
minimizing the use of cash during the initial stages of the business. Within the traditional
entrepreneurship literature, bootstrapping is often studied as an ethically neutral, or even
ethically positive, strategy for entrepreneurial ventures to overcome some of their “unfair”
disadvantages. For instance, it has been observed that “bootstrap financing techniques involving
the delay of payments (to others) are preferred when risk levels appear highest, while owners in
business environments with the most opportunity are more likely to try to minimize accounts
receivable” (emphasis added, Carter and Van Auken, 2005). However, from a wisdom and
virtue-based perspective, bootstrapping necessarily involves a number of important ethical
From Rational to Wise Action, Page 37
questions and research opportunities. For example, how do entrepreneurs differentiate between
ethical and unethical cash-flow management? Do personal ethics constrain the level of
bootstrapping or do other factors play a larger role, i.e., reputational effects? To what extent do
bootstrapping entrepreneurs use outright deception as part of their strategies? How do they draw
the line between what they see as acceptable and unacceptable practice? What impact does the
manipulation of late payments have on the character and values of entrepreneurs themselves?
In closing, it is important to note that by offering practical wisdom as a useful lens for
viewing entrepreneurial decision-making, I do not mean to suggest that all entrepreneurial
decision-making fully conforms to this model, any more than rational choice theorists would
assert that all entrepreneurial decision-making follows the dictates of complete rationality.
However, if we reject the Separation Thesis and believe that entrepreneurship as an act of
creativity, change and progress is inherently ethical, then we must begin developing theoretical
tools and frameworks that allow us to more meaningfully incorporate the ethical dimensions and
implications of entrepreneurial decision-making. And hence I would argue that a model of
entrepreneurial decision-making built on practical wisdom offers great opportunities for
generating rich new insights into the entrepreneurial process beyond those that have historically
been illuminated through an emphasis on rational choice.
Acknowledgements
The author would like to thank the editor and anonymous reviewers, as well as John
McVea, for their helpful comments on this paper.
From Rational to Wise Action, Page 38
References
Anderson, E.: 2005, ‘Dewey's Moral Philosophy,’ The Stanford Encyclopedia of Philosophy
(Spring 2005 Edition), Edward N. Zalta (ed.), URL =
<http://plato.stanford.edu/archives/spr2005/entries/dewey-moral/>.
Aristotle: 1984, Nicomachean Ethics, Trans. David Ross. (New York: Oxford University Press).
Augier, M.: 2001, ‘Sublime Simon: The consistent vision of economic psychology’s Nobel
laureate’, Journal of Economic Psychology, 22: 307-334.
Austin, J. E., Stevenson, H. & Wei-Skillern, J.: 2006, ‘Social and Commercial Entrepreneurship:
Same, Different, or Both?’, Entrepreneurship Theory and Practice 30: 1-22.
Baltes, P. B., & Smith, J.: 1990, ‘The psychology of wisdom and its ontogenesis,’ in R. J.
Sternberg (ed.), Wisdom: Its nature, origins, and development (Cambridge University
Press, New York), pp. 87-120.
Blau, P.: 1964, Exchange and Power in Social Life. (New York: John Wiley).
Brush, C.: 1992, ‘Marketplace information scanning activities of new manufacturing ventures,’
Journal of Small Business Management, Vol, 30, pp. 41-54.
Burt, R. S.: 1992, Structural holes: The social structure of competition. (Cambridge, MA:
Harvard University Press).
Busenitz, L. W., and Barney, J. B.: 1997, ‘Biases and heuristics in strategic decision-making:
Differences between entrepreneurs and managers in large organizations’, Journal of
Business Venturing 12: 9-30.
From Rational to Wise Action, Page 39
Carter, R.B. and Van Auken, H.: 2005, ‘Bootstrap Financing and the Characteristics of Small
Business Owners and Their Business Environment’, Entrepreneurship and Regional
Development 17: 129-144.
Cornwall, J. and Naughton, M.: 2003, ‘Who is the Good Entrepreneur? An Exploration within
the Catholic Social Tradition’, Journal of Business Ethics, 44: 61-75.
Cornwall, J. and Naughton, M.: 2008, Bringing your business to life: The four virtues that will
help you build a better business and a better life (Ventura, CA: Regal).
Csikszentmihalyi, M., & Rathunde, K.: 1990, ‘The psychology of wisdom: An evolutionary
interpretation’, in R.J. Sternberg (ed.), Wisdom: Its nature, origins, and development (pp.
25–51). (Cambridge, UK: Cambridge University Press).
De Koning, A.: 1999, Conceptualizing Opportunity Formation as a Socio-Cognitive Process,
Dissertation manuscript, INSEAD.
Dees, J.G. & Anderson, B.B.: 2003, ‘For-profit social ventures’, International Journal of
Entrepreneurship Education (special issue on social entrepreneurship), 2: 1–26.
Dees, J. and Starr, J.: 1992, ‘Entrepreneurship through an Ethical Lens: Dilemmas and Issues for
Research and Practice’, in D. Sexton and J. Kasarda (eds) The State of the Art of
Entrepreneurship (Boston: PWS-Kent).
Donaldson, T. 2003. ‘Taking Ethics Seriously –A Mission Now More Possible’, Academy of
Management Review, 28: 363-366.
Duska, Ronald F.:1993, ‘Aristotle: A pre-modern post-modern? Implications for business ethics’,
Business Ethics Quarterly, 3: 227-249.
From Rational to Wise Action, Page 40
Etzioni, A.: 1988, The Moral Dimension: Toward a New Economics (New York: The Free
Press).
Freeman, R. E.: 1994, ‘The Politics of Stakeholder Theory: Some Future Directions’, Business
Ethics Quarterly 4: 409-21.
Freeman, R. E., Wicks, A., and Parmar, B.: 2004, ‘Stakeholder theory and "the corporate
objective revisited"’ Organization Science 15: 364-69.
Forbes, D. P.: 1999, ‘Cognitive approaches to new venture creation’, International Journal of
Management Reviews 1: 415 – 439.
Fowers, B. J.: 2003, ‘Reason and human finitude: in praise of practical wisdom’, The American
Behavioral Scientist, 47: 415 – 422.
Granovetter, M.: 1973, ‘The strength of weak ties’, American Journal of Sociology, 6: 13601380.
Green, D.P. and Shapiro, I.: 1994, Pathologies of Rational Choice Theory. A Critique of
Applications in Political Science (New Haven, CT: Yale University Press).
Harris, J.D. and Freeman, R.E.: 2008, ‘The impossibility of the Separation Thesis: A response to
Joakim Sandberg’, Business Ethics Quarterly, 18: 541-548.
Hartman, E. M.: 1996, Organizational Ethics and the Good Life. (New York: Oxford University
Press).
Hayek, F.A.: 1948, Individualism and Economic Order, (Chicago: The University of Chicago
Press).
Homans, G.: 1958, ‘Social behavior as exchange’, American Journal of Sociology, 62: 606-627.
From Rational to Wise Action, Page 41
Johannisson, B.: 1996, ‘The dynamics of entrepreneurial networks’, In: Reynolds, P., et al.
(Eds.), Frontiers of Entrepreneurship Research, pp. 253–267.
Kaish, S., Gilad, B.: 1991, ‘Characteristics of opportunities search of entrepreneurs versus
executives: sources, interest, and general alertness,’ Journal of Business Venturing, Vol.
6, pp. 45–61
Kirzner, I.: 1979, Perception, opportunity and profit (Chicago: University of Chicago Press).
Kirzner, I.: 1985, Discovery and the capitalist process (Chicago: University of Chicago Press).
Kirzner, I.: 1997, ‘Entrepreneurial discovery and the competitive market process: An Austrian
approach’, Journal of Economic Literature, 35: 60 – 85.
Larson, A.: 1997, ‘Ethics and entrepreneurship’, In Werhane, P. and Freeman, R.E. (eds.)
Blackwell Encyclopedic Dictionary of Business Ethics. (Malden, MA: Blackwell
Publishers Inc.).
Larson, A. and Starr, J.: 1993, ‘A network model of organization formation’, Entrepreneurship:
Theory and Practice, 17: 5 –16.
Lindenberg, S.: 1983, ‘Utility and Morality’, Kyklos, 36: 450-68.
Low, M.B. and MacMillan, I.C.: 1988, ‘Entrepreneurship: Past research and future challenges’,
Journal of Management, 14: 139-161.
Mackey, John.: 2005, ‘Rethinking the social responsibility of business,’ Reason Online.
Retrieved November 4 from http://www.reason.com/0510/fe.mf.rethinking.shtml.
Margolis, H.: 1982, Selfishness, Altruism and Rationality: A Theory of Social Choice
(Cambridge: Cambridge University Press).
From Rational to Wise Action, Page 42
McCune, J.C.: 1999, ‘Bootstrapping: Cutting Corners and Pinching Pennies to Finance Your
Business’, Bankrate.com, Retrieved January 10, 2007 from
http://www.bankrate.com/brm/news/biz/Cashflow_banking/19991101.asp.
McVea, J.: 2008, ‘Constructing Good Decisions in Ethically Charged Situations: The Role of
Dramatic Rehearsal, ’ Journal of Business Ethics, 4: 375-390.
McVea, J. F. and Freeman, R. E.: 2005, ‘A Names-and-Faces Approach to Stakeholder
Management: How Focusing on Stakeholders as Individuals Can Bring Ethics and
Entrepreneurial Strategy Together’, Journal of Management Inquiry, 14: 57-69.
Mises, L.V.: 1949 [1966], Human Action: A Treatise on Economics. (Chicago: Henry Regnery).
Mitchell, R. K., Busenitz, L., Lant, T., McDougall, P. P., Morse, E. A., & Smith, B.: 2004, ‘The
distinctive and inclusive domain of entrepreneurial cognition research’, Entrepreneurship
Theory and Practice, 28: 505–518.
Moberg, D.J.: 2008, ‘Mentoring and practical wisdom: Are mentors wiser or just more politically
skilled?’, Journal of Business Ethics, 83: 835-843.
Moberg, D. J. and M. Seabright: 2000, ‘The Development of Moral Imagination’, Business
Ethics Quarterly 10: 845–884.
Nussbaum, Martha C.: 1990, Love's Knowledge: Essays on Philosophy and Literature (Oxford:
Oxford University Press).
Palich, L.E., & Bagby, D.R.: 1995, ‘Using cognitive theory to explain entrepreneurial risk
taking: Challenging conventional wisdom’, Journal of Business Venturing, 10: 425-438.
From Rational to Wise Action, Page 43
O’Donnell, A., Gilmore, A., Cummins, D. and Carson, D.: 2001, ‘The network construct in
entrepreneurship research: A review and critique’, Management Decision, 39: 749-760.
Opp, K.D.: 1999, ‘Contending conceptions of the theory of rational action’, Journal of
Theoretical Politics, 11 : 171-202.
Robinson, D. N.: 1990, ‘Wisdom through the ages’, in R. J. Sternberg (ed.), Wisdom: Its nature,
origins, and development. (Cambridge: Cambridge University Press).
Roca, E.: 2008, ‘Introducing practical wisdom in business schools’, Journal of Business Ethics,
82: 607-620.
Roddick, A.: 1991, Body and Soul (New York: Crown).
Sarasvathy, S. D.: 2001, ‘Causation and effectuation: Toward a theoretical shift from economic
inevitability to entrepreneurial contingency,’ Academy of Management Review, 26: 243263.
Sarasvathy, S. D.: 2002, ‘Entrepreneurship as economics with imagination’, Business Ethics
Quarterly. The Ruffin Series 3: 95-112.
Schumpeter, J.: 1934, Capitalism, socialism and democracy (New York: Harper and Row).
Shane, S., Locke, E. A., and Collins, C. J.: 2003, ‘Entrepreneurial motivation’, Human Resource
Management Review, 13: 257–279.
Simon, H.A.: 1976, ‘From substantive to procedural rationality’, in S.J. Latsis (ed.), Method and
Appraisal in Economics. (Cambridge: Cambridge University Press).
From Rational to Wise Action, Page 44
Simon, M., Houghton, S.M. and Aquino, K.: 1999, ‘Cognitive biases, risk perception and
venture formation: how individuals decide to start companies,’ Journal of Business
Venturing, 15: 113-134.
Singh, R.P., Hills, G.E., Hybels, R.C. and Lumpkin, G.T.: 1999, ‘Opportunity recognition
through social network characteristics of entrepreneurs’, Frontiers of Entrepreneurship
Research (Wellesley, MA: Babson College).
Solomon, R.C.:1992, Ethics and Excellence. (Oxford: Oxford University Press).
Starr, J.E. and MacMillan, I.C.: 1990, ‘Resource cooptation via social contracting: resource
acquisition strategies for new ventures’, Strategic Management Journal, 11: 79–92.
Sternberg, R.J.: 1998, ‘A balance theory of wisdom’, Review of General Psychology, 2: 347–
365.
Stevenson, H.H., Roberts, M.J. and Grousbeck, H.I.: 1985, New Business Ventures and the
Entrepreneur (Homewood, IL: Irwin).
Venkataraman, S.: 1997, ‘The Distinctive Domain of Entrepreneurship Research’, in J. Katz and
R. Brockhouse (eds.), Advances in entrepreneurship, firm emergence and growth, 3
(Greenwich, CT: JAI Press), pp. 119-138.
Werhane, P.: 1999, Moral Imagination and Management Decision Making (Oxford University
Press, New York).
Wicks, A. C.: 1996, ‘Overcoming the Separation Thesis: The Need for a Reconsideration of
Business and Society Research’, Business & Society 35: 89-118.
Wicks, A. and Freeman, R.E. 1998. Organization Studies and the New Pragmatism: Positivism,
Anti-Positivism, and the Search for Ethics. Organization Science, 9, 123-140.
From Rational to Wise Action, Page 45
Wiggins, D.: 1980, ‘Deliberation and Practical Wisdom,’ in A.O. Rorty (ed.) Essays on
Aristotle’s Ethics (pp.221-240). (University of California Press, Berkeley).
1
It is important to note here, that in challenging narrow assumptions of rationality, I am not
challenging the use of rationality at all or encouraging the idea of an “irrational”
entrepreneur. Rather I am challenging the use of rationality as defined in rational choice
theory as the sole driver of entrepreneurial behavior. In the remainder of the paper, use of
the term “rationality” will refer to those assumptions outlined in rational choice.
2
In this discussion, I refer to utilitarianism as the descriptor for utility maximization as
developed in the neoclassical model. From a philosophical standpoint, there are of course
many versions of utilitarianism and these represent only one form of consequentialism.
However, these more subtle aspects of utilitarianism and consequentialism go beyond the
scope of the current discussion. My position is simply that the neoclassical model’s use
of utility places it firmly in the tradition of consequentialism, as distinct from wisdom
which can be seen as a virtue.
3
4
Reference withheld for reviewing purposes
Once again it is worth emphasizing that I am not suggesting that these “moral motivations” are
irrational, but simply that the full richness of their influence is generally not encompassed
by the rational actor view.
5
Reference withheld for reviewing purposes
From Rational to Wise Action, Page 46
6
Sarasvathy cites the example of Josiah Wedgwood, whose revolutionary approach to
manufacturing and selling affordable pottery in the 18th century helped create the notion
of social mobility and, in doing so, played an important role in creating the modern
middle class