This research uses a controlled experiment to pit the alertness perspective against a new approach to searching for venture ideas to create new wealth. The new approach uses self-selected consideration sets to restrict an entrepreneur’s search domain, which makes an optimal search possible. The restricted domain conforms to the behavior of accomplished entrepreneurs who do not search the whole world for venture ideas. Subjects in the treatment group were successful 37.5 percent of the time compared with a 2.9 percent success rate for the control group. Fourteen percent of the control group emulated the treatment group without receiving instructions to do so.

At the last Babson-Kaufman Entrepreneurship Research Conference, Fiet, Piskounov and Gustavsson (2000) reported on the development and testing of a mathematical model of entrepreneurial discovery. They demonstrated that it was possible to identify an optimal way to search for discoveries. The remaining questions concerned whether aspirants in a treatment group could actually outperform others who attempted only to remain alert for discoveries, as suggested by received theory. It would not be sufficient simply to improve search effectiveness, which could occur due to luck; it was necessary to outperform the most commonly accepted alternative approach. The purpose of this research is to evaluate the training effects of the suggested model on entrepreneurial discovery.

An entrepreneurial discovery is a valuable idea for launching a venture, such as the founding of a new firm, the creation of a new product line, the development of an innovative technology, the satisfaction of an ephemeral market need through arbitrage, or the like. Because individual entrepreneurs may possess idiosyncratic knowledge-based competencies (Shane, 2000), an entrepreneur may or may not possess the requisite prior knowledge for a particular discovery to be exploitable. Thus, an otherwise promising venture idea may not represent a discovery.

Identifying an optimal way to search for discoveries is notable for two reasons. First, many studies of opportunity recognition have concluded that it is impossible to search systematically for unknown discoveries, which leaves alertness as the only alternative for aspiring entrepreneurs (c.f., Kaish & Gilad, 1991; Kirzner, 1997; Shane, 2000; Shane & Venkatraman, 2000, among others). Those who argue against the feasibility of systematic search are correct if we assume that a search domain is unknown, which effectively makes it unbounded. No optimal solution exists for searching an unbounded domain. Second, the research of Fiet and colleagues (2000) was notable because it provides an explanation for the observation that novice entrepreneurs scan widely while trying to make a discovery, whereas accomplished entrepreneurs narrow their search efforts to known domains (Bar-Hillel & Falk, 1982; Baumol, 1993; Gaglio, 1997; Gilad, Kaish & Ronen, 1988). Received theory offers no explanation for their switch in search tactics.

We assert that scholars can resolve questions concerning systematic search, as well as questions about why accomplished entrepreneurs can narrow their search as they gain experience by replacing the scanning for unknown venture ideas (i.e., being alert to them) with the search of known information channels. An information channel is a low-cost source of frequent venture ideas. Examples of possible information channels are an entrepreneur’s inner circle of friends and confidants, business associates, a patent office, trade publications, trade shows, golfing buddies or the like. Information channels provide entrepreneurs with an option to acquire, not a particular message, but a set of messages with some probability distribution.

Entrepreneurs may be able to optimize their searching of information channels by grouping them into consideration sets. A consideration set is a promising set of information channels, which entrepreneurs can select and search based on their prior knowledge (Fiet, 1996; Hirshleifer & Riley, 1979). Not only could the selected channels be sources of discoveries, but they could also be sources of information for updating the selection of the channels themselves within a consideration set. An entrepreneur’s consideration set would probably be unique based on idiosyncratic, prior knowledge and ongoing feedback signals from previously selected channels.

Someone could protest that limiting entrepreneurial search to known channels is too high a price to pay in missed discoveries that could lie outside a consideration set. Such criticism assumes that entrepreneurs are equally qualified to exploit all venture ideas that they encounter when we know that they vary in their competence, depending on their experience-based prior knowledge (Fiet & Samuelsson, forthcoming; Shane, 2000). Entrepreneurs do not forego discoveries that are not a reflection of their prior knowledge because they are not qualified to exploit them. Nor can rapid preparation substitute very often for prior knowledge due to the ephemeral nature of venture ideas, which is what may create windows of opportunity during which exploitable venture ideas are most discoverable.

Occupational Experience

The primary benefit to aspiring entrepreneurs of a consideration set-based approach is that it offers them a choice—they can either exploit a venture idea with their knowledge from previous experience or they can continue searching for more related, informative signals (Fiet, 1996; Hayek, 1945; Hirschleifer, 1970). Because searching for information within a consideration set surely would be less costly (due to economies of scope) and risky than actually launching a venture, this recognition offers them a chance to leverage their resources even if they are minimal. Using this approach, entrepreneurs with fewer resources may be able to compete with those who are more richly endowed.

To evaluate searching with consideration sets, it is necessary that we compare subjects using a consideration set-based approach to subjects using entrepreneurial alertness. It is possible that a subject using either approach could be lucky. Thus, we must control for luck by establishing that not only does a particular approach work but that it also outperforms approaches suggested by received theory, which may depend on luck (Demsetz, 1983). Thus, our approach is to pit systematic search using consideration sets against the alertness perspective.

Entrepreneurial discovery depends on a fit between an entrepreneur’s prior knowledge often influenced by occupational experience, and a particular venture idea (Venkatraman, 1997; Shane, 2000). Knowledge is information that can be stored and recalled (Dreyfus & Dreyfus, 1986; Palich & Bagby, 1995). Search can pay off with a discovery because not all knowledge is equally valuable or accessible. Whether prior knowledge can lead to discoveries is a testable hypothesis. We focus specifically on their use of prior knowledge obtained through occupational experience. We would expect a more random scanning process from the alertness group, which could occur, as suggested by Kirzner (1997) while they were engaged in something other than a deliberate search. In contrast, we would expect that the treatment group could use its occupational experience to guide its searching.

Hypothesis 1: The consideration set-based group will focus more on situations identified through the use of occupational experience than will the alertness group.

Specific Information and Knowledge

The most valuable knowledge for making a discovery consists of specific information, which is not readily available to potential competitors. It consists of information about people, places, timing, special circumstances, relationships and technology (Hayek, 1945). In contrast, general information, which is more widely available, can be codified into rules and procedures, which have little value for creating new wealth (Jensen & Meckling, 1992). Typical sources of general information are the Internet, textbooks and newspapers.

We expect that subjects trained in the use of consideration sets will search more using the higher-cost, but more informative, specific knowledge than would subjects in the alertness group. Subjects in the alertness-based control group should tend to discover ideas based more on lower-cost, general information than specific information. Thus, we expect that subjects in the alertness group will identify more ideas than the treatment group because they would not distinguish between their informative content. Without making such a distinction, cost would lead the treatment group to search for more ideas, regardless of their lower value.

Hypothesis 2: The consideration set-based group will utilize specific knowledge more in making discoveries than will the alertness group.

Hypothesis 3: The alertness group will submit more venture ideas than will the discovery group.

Wealth-Creating Ideas

Consider the wealth created by two entrepreneurs. Even if we assume that each of them faces similar environmental opportunities and threats, one of them is still likely to create more wealth than the other. In this research, we assume that the ideas exploited by the entrepreneurs play an important role in determining their differential success. Two of the most important attributes of a venture idea are whether it can be efficiently imitated by others or transferred to them. Both of these attributes refer to its inalienability (Jensen & Meckling, 1992). These attributes largely determine whether competitors can appropriate the value of an idea without having to invest in the cost of its discovery. To protect themselves against competitive appropriation, entrepreneurs who succeed in creating new wealth probably base their strategies on ideas with inalienable attributes.

In addition, creating substantial wealth depends on a venture enjoying a sustainable competitive advantage. Wealth creation also depends on an entrepreneur’s competencies being suitable to exploit an idea’s potential. We draw on the resource-based literature (c.f., Barney, 2001. chapter 5), as well as literature on entrepreneurial competence (Fiet, 2001), to elaborate on some of the special attributes of venture ideas that could lead to the sustainability of a competitive advantage.

There are four attributes to consider, which we assert, collectively determine the quality of venture ideas and their potential for being exploited for competitive advantage and wealth creation. The first is the value of an idea. If appropriately exploited, does it have the potential to create or increase a venture’s revenues or decrease its costs? The second is rareness. Are there so many current or potential competitors threatening the market for an idea that there is little chance that it could be exploited for an economic profit? The third attribute is costliness-to-imitate. Would potential competitors be at a cost disadvantage if they attempted to use it to pursue a similar strategy? The fourth attribute, and perhaps the most critical to consider, is entrepreneurial fitness. Does an entrepreneur already possess the requisite prior knowledge to exploit an idea? Because entrepreneurs vary in their knowledge-based competence, they are not equally competent to exploit all ideas, which may be the reason that venture capitalists pay so much attention to the experience of an entrepreneurial team when evaluating a business plan. An idea that can score well on each of these attributes has the potential to be used for the creation of a sustainable competitive advantage, leading to the creation of substantial new wealth, particularly if the potential market is quite large.

In our view, it would be quite unlikely that an entrepreneur could stumble very often across an idea that possessed these four attributes. Very few ideas would possess these attributes, and if they did, someone else may have already exploited them. Yet, it is unlikely that an entrepreneur will be able to exploit any idea to create new wealth that does not possess these four attributes.

Based on the informational arguments underlying a consideration set-based approach, we would expect that aspiring entrepreneurs could discover more ideas that qualified as wealth-creators using a consideration set-based approach than when using an alertness approach.

Hypothesis 4: The group using consideration sets will identify more venture ideas that can lead to the creation of new wealth and a sustainable competitive advantage than will the alertness group.

We randomly assigned 52 graduate students in entrepreneurship to two treatment groups, one intended to instruct subjects to search systematically using consideration sets, the other intended to acquaint subjects with the literature on entrepreneurial alertness.

We met weekly for eight weeks with each of the separate teams to ensure that they understood their task, which was to discover venture ideas that they could exploit to create new wealth. For each session, we prepared a treatment regimen for each group, which reinforced particular aspects of the underlying theory for the treatment and control groups.

One of the challenges of the treatment regimens was to insure that they accurately reflected both the most recent findings and the overall sense of the literature from each approach. We list below some of the excerpts from the literature that we discussed separately with each treatment group.

Excerpts in Support of Entrepreneurial Alertness

It must be remembered that the theory of entrepreneurial alertness does not operate by having the entrepreneur ponder the comparative merits of a list of alternative future scenarios. Instead the theory posits that, based on the entrepreneur’s ‘alertness’, his sense of the future, his attention will tend to be grasped by the relevant profit future scenario. Our point is that all relevant future alternative realities have equal potential for grasping entrepreneurial attention. The greater the degree of his alertness, the greater the likelihood that the ‘future reality’ which will in fact grab his attention will be that which will in fact turn out to be the case. (Kirzner, 1992, p. 228)

An opportunity for pure profit cannot, by its nature, be the subject of systematic search. Systematic search can be undertaken for a piece of missing information but only because the searcher is aware of what he does not know. . . . What distinguishes discovery . . . from successful search . . . is that the former involves . . . surprise. (Kirzner, 1997, pp. 71, 72)

The truth surely is that, of the mass of knowledge, beliefs, opinions, expectations, and guesses that one holds at a given moment and that inspire and shape action, only a fraction can be described as being the result of deliberate search or learning activity. Surely a great volume of one’s awareness of one’s environment, and of one’s expectations concerning the future, is the result of learning experiences that occurred entirely without having been planned. (Kirzner, 1979, pp. 142–143)

Making the “right” decision, therefore calls for far more than the correct mathematical calculation; it calls for a shrewd and wise assessment of the realities (both present and future) within the context of which the decision must be taken. (Kirzner, 1985, p. 17)

Excerpts in Support of Searching with Consideration Sets

There is a state of the world, which if we only knew it, would tell us what the consequences of every action are. But since we don’t know it we speak of uncertainty as being an uncertainty about the state of the world. Whereas what will actually happen will depend not only on the action we take but also on factors, which we don’t know. (Arrow, 1989. p. 41)

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information. (Hayek, 1945, p. 321, 322)

The information needed to make informed allocations of resources [discoveries] does not exist . . . “in a concentrated or integrated form, but solely as dispersed bits of incomplete and frequently contradictory knowledge. . . . The economic problem . . . is [one] of utilization of knowledge not given to anyone in its totality.” (Hayek, 1945, p. 320)

A consideration set-based approach models how entrepreneurs can select and search information channels to find exploitable venture ideas (Fiet, 2001). We instructed the treatment group in the use of this approach. After 6 training sessions, each of the subjects could use the model to select information channels that fit their competencies. They also knew how to update and search their consideration sets.

Instructions for the Treatment Group Using Consideration Sets

We provided detailed instructions on how to use consideration sets to discover venture ideas, which we partially reproduce below:

1. Identify and categorize a subject’s prior knowledge. We used a series of activities over a three-week period to uncover knowledge areas.

2. Select information channels to search, based on a subject’s prior knowledge.

3. Determine an order for searching these channels, which depends on their search costs and prospects for discovering an idea in each of them.

4. Update the composition of a subject’s consideration set in response to learning while searching.

5. Record journal entries to explain search experiences.

Instructions for the Control Group Using Entrepreneurial Alertness

The control group received a comparable amount of training in staying alert over the same eight-week period. The alertness perspective argues that it is impossible to conduct an optimal search because the object of search would be unknown. Accordingly, there is little, if anything, that an entrepreneur can do to increase his or her odds of success. This raised concerns for us that the subjects would begin to realize that they were in the control group, which might have lessened their motivation to stay alert.¹ Therefore, we developed a cover story.

The cover story acknowledged that most discoveries are accidental. We shared findings that supported this view. Nevertheless, we argued that it could be devastating to entrepreneurship education, if alertness advocates were correct that it is impossible to teach the discovery process. We explained that in order to prove that alertness could be taught that we had to collect a real-time sample of alertness-based discoveries from which we could induce a theory with more promising pedagogical implications. Their task was to provide us with that sample of discoveries while they recorded their efforts several times a week in a journal, which they turned in at the end of the experiment. In addition, we cited those who convincingly argue that we cannot teach entrepreneurs either to be lucky or to search systematically. Still, one of entrepreneurship education’s basic assumptions is that we can improve student performance, and if we cannot actually do it, the intellectual foundation of what we espouse to be able to teach suddenly becomes less stable.

During the course of the eight-week experiment, all subjects recorded their efforts in journals. Their journals contained information about their successes, their frustrations, as well as descriptions of their venture ideas. Three raters independently classified venture ideas, together with journal entries, survey responses, and explanations of accomplishments as indicators of prior knowledge. There were no disagreements among raters. We used crosstabs and univariate analysis of variance to analyze the results. (Refer to Table 1, Table 2, Table 3, and Table 4.)

We analyzed journal entries and concluded that we had 59 useable venture ideas, which were generated by 31 subjects who completed the experiment. There were no statistically significant differences between groups on average in their age (31 years), gender (2/3 of whom were male), income ($41,216), or the income of their immediate family ($64,730). Nor were there any differences between groups in their educational or occupational backgrounds. Most of the randomly assigned subjects (93%) had no previous start-up experience, however 14% of the subjects in the control group did have previous start-up experience compared with 3% of the subjects in the treatment group, which could have assisted the control group. Again, these differences in previous start-up experience were generated by random assignment of subjects.

Subjects were employed and/or educated in finance/accounting (15.3%), marketing/sales (18.6%), business-other (28.8%), engineering (22.0%), student only (6.8%), medicine (3.4%)) and information technology (5.1%). We also plotted each of the measures used for hypothesis testing and concluded that they were normally distributed, which enabled us to use parametric statistical techniques. We evaluated these ideas using the four criteria discussed earlier, namely, (1) value, (2) rareness, (3) costliness-to-imitate and (4) entrepreneurial fitness.

Hypothesis 1 was not supported. There was no significant difference between the groups in their reliance on occupational experience to find discoveries. Hypothesis 2 was supported (p<.001). The treatment group used specific knowledge significantly more than did the control group. For hypothesis 3, as predicted, the control group discovered more ideas than did the treatment group (p<.001). However, importantly for hypothesis 4, the treatment group identified significantly more ideas that could lead to the creation of new wealth than did the control group (p<.009), which suggests that the treatment was effective for training aspiring entrepreneurs to search for discoveries.

This research represents a rare attempt to test a theory about how aspiring entrepreneurs may improve their performance. It does not describe the choices or behavior of everyday entrepreneurs, most of whom unexpectedly discontinue their efforts within five years. To its advantage, this study’s findings are not subject to many of the limitations of studies that attempt description, such as being (1) cross-sectional; (2) conducted among convenience samples that do not distinguish between entrepreneurs who create new wealth from their ideas and those who unexpectedly discontinue their efforts; (3) retrospective in that they tend to examine ventures after stochastic effects have already predetermined outcomes and (4) uninterested in the role of luck. On this last point, it is important to realize that we cannot learn much about how to teach aspiring entrepreneurs from studying past successes if we cannot control for the role of luck, which few scholars attempt to do.

The most important finding of this research is that training graduate students in how to use consideration sets can significantly improve the quality of the ideas that they discover. That is, they discovered more ideas that are valuable, rare, costly-to-imitate and that fit their particular entrepreneurial competence. As noted earlier, these four criteria determine whether an idea could be exploited to provide an entrepreneur with a sustainable competitive advantage, as well as an opportunity to create new wealth. Thirty-seven and half percent of the ideas from the treatment group met these criteria compared with the control group that only found qualifying ideas three percent of the time.

One interesting difference that we discovered by comparing the journal entries of the treatment and control group is that the former tended to recognize a problem that existed in the market as a first step in making a discovery. In addition, the treatment group tended to consider ideas that were an extension of an existing product or service. The latter group tended to recognize a problem that they personally encountered as a first step in finding an idea. Although the control group found more ideas based on personal problems, they tended not to be market-driven. Perhaps the reason that the control group found more ideas is that its subjects did not need to be as discriminating. In addition, the control group subjects were motivated by problems in their personal experience.

Another important finding is that knowledge specificity is an important correlate of the quality of ideas, whereas previous occupational experience was a statistically insignificant source of quality venture ideas. This is important because received theory suggests that a person’s occupation is an important source of prior knowledge. Clearly, though, a person’s occupation was not the determining factor in whether he or she discovered a quality idea. Instead, it appears to have been the specificity of prior knowledge. Ninety-two percent of the treatment group used specific knowledge to make a discovery compared with eight percent of the control group.

The study’s most interesting finding is that fourteen percent of the control group narrowed its search to specific domains in accordance with the prescriptions for the treatment group. This narrowing occurred spontaneously and without any encouragement from us as investigators. As expected, none of the subjects in the treatment group resorted to random scanning.

Pedagogical Implications

Entrepreneurs may be heroes in the eyes of many scholars and the popular business press, however most entrepreneurs discontinue their ventures within five years, which suggests that they have quite a bit to learn about how to search for and exploit venture ideas. With these facts in mind, we as educators may want to adopt a cautious approach to suggesting that aspiring entrepreneurs emulate the practices of those who have succeeded because their success might have been due to luck. Nor is it clear yet that we have materially improved our students’ chances of success, which suggests that we also may have quite a bit to learn about how to help our students.

Part of our task as educators is to ensure that students are more successful than they would be otherwise without sitting in our classrooms. Because entrepreneurs often do not achieve their objectives, it may be problematic to hold them up as exemplars or to educate aspiring entrepreneurs entirely by exposing them to what entrepreneurs actually do. Although research attempting to describe entrepreneurial behavior has certainly been informative, it may be time to consider other research designs that can control for past limitations.

This study provides some encouragement that we may begin to teach a consideration set-based approach to entrepreneurial discovery as one way to show students how to search more systematically for discoveries. Subjects in the treatment group were twelve times as likely to discover an exploitable venture idea as those in the control group, which mirrors received theory.

Implications for Future Research

Future researchers may want to address some of the following limitations of current research about discovering venture ideas: (1) cross-sectional designs that do not address causality nor control for spurious effects, (2) conducting research among convenience samples that do not distinguish between entrepreneurs who create new wealth from their ideas and those who unexpectedly discontinue their efforts, (3) retrospective studies that tend to examine ventures after stochastic forces may have already determined their outcomes and (4) studies that ignore the role of luck. On this last point, it is important to realize that we cannot learn much about how to teach aspiring entrepreneurs from studying past successes if we cannot control for the role of luck, which few scholars attempt to do.

Randomized experimental designs that control for the above problems offer great promise for adding to our understanding of entrepreneurial discovery. One of their advantages is that they can enable investigators to study discoveries as they occur, which can provide opportunities for subjects to document not only what they do as they search, but what they are thinking. This additional source of data can control for biased findings due to common method variance.

A misunderstanding about randomized designs is that they suffer from lack of realism. Although this initial study chose students as a sample, there is no reason that we had to choose them. We chose students as subjects because we wanted to pretest our treatment exercises to make sure that they effectively conveyed the theoretical assumptions underlying consideration sets and entrepreneurial alertness. .

An area of tremendous promise for future research is the influence of specific information on the systematic search for discoveries. Studying the role of specific information has both public policy and pedagogical implications. For example, can different social groups draw upon private sources of information for making discoveries, which have not been recognized to date? Do economically disadvantaged groups have an unknown informational advantage that they could exploit to create a sustainable competitive advantage? It is not likely that education that provides exposure to general information will make disadvantaged groups extraordinarily successful as entrepreneurs. However, teaching them how to exploit the specific and perhaps private information that they already possess may have a surprisingly beneficial impact.

Research designs that compare the discoveries of different groups are the best way to control for spurious effects, including luck. Studying each of the following groups promises to add to our theoretical understanding of what we can teach students. First, habitual entrepreneurs may already recognize the advantages of searching domains that are an extension of their prior knowledge, in the same way that fourteen percent of the control group narrowed its search. Second, we would expect that technologically trained employees who have already advanced their own fields through their work would be especially effective in discovering ideas that they could readily exploit. Third, economically disadvantaged groups may be able to substitute their presumed lack of formal education for their possession of deal-specific prior knowledge, which could enable them to create new wealth. Fourth, it would be important to compare aspiring entrepreneurs with ten years or more of business experience to determine the differential effect of consideration sets on their performance. Fifth, and finally, we need to do additional research with students who aspire to become entrepreneurs because they are part of our professional mandate. We simply must learn how to teach them more effectively by improving our theoretical understanding of how entrepreneurs can search for quality venture ideas and exploit them more effectively.

1. We also wondered if students in actual classrooms felt as though the discovery of an idea using alertness only was some sort of a game that depended on them being lucky. In fact, during debriefing, we learned that some subjects in the control group, even using the cover story, felt that they were in the control group, which has very important implications for how the traditional teaching of alertness could be reducing the motivation of students to make discoveries.

CONTACT: James O. Fiet, College of Business and Public Administration, University of Louisville, Louisville, KY 40292; (502) 852-4793; fiet@louisville.edu

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