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A Prescriptive Analysis of Search and Discovery

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DOI: 10.1111/j.1467-6486.2006.00671.x · Source: RePEc

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Journal of Management Studies 44:4 June 2007
doi: 10.1111/j.1467-6486.2006.00671.x

A Prescriptive Analysis of Search and Discovery*

James O. Fiet
University of Louisville

abstract I develop a prescriptive model of entrepreneurial search and discovery, which

operationalizes constrained, systematic search. This approach appears to be superior to the
alertness perspective in both the number and the wealth-creating potential of the opportunities
that it can assist entrepreneurs to discover. Essentially, this research shows how entrepreneurs
can improve their search effectiveness by systematically restricting their searching to known
domains, which I elaborate prescriptively. Finally, I discuss the implications of the approach
for researchers, educators and entrepreneurs.

INTRODUCTION
Consider the careers of two aspiring entrepreneurs, both attempting to discover existing, but
previously unknown information that can be exploited profitably. One of them repeat-
edly profits from novel ideas and creates new wealth. The other earns subsistence wages
trying to imitate what others have done. The difference in their individual financial
success may be due in part to the ideas that each of them chooses to exploit. This helps
to explain why many researchers have focused their attention on the origin of venture
ideas (Archdichvili et al., 2003; Bailey, 1986; Christensen and Peterson, 1990; De Konig,
1999; Gaglio, 1997; Hills, 1995; Kirzner, 1985, 1997; Koller, 1988). The purpose of this
article is to develop a prescriptive model of search and discovery that aspiring entrepre-
neurs can use to increase their odds of success. This is an important contribution because
received theory does not offer guidance to aspiring entrepreneurs in how to search. Nor
does received theory explain how certain entrepreneurs who are repeatedly successful
are able to overcome the odds against them. One way that they could be more successful
would be to launch their ventures with more promising ideas or discoveries. A discovery is
the action or act of revealing something generally unknown about how to create new
wealth.
I proceed by discussing the alertness perspective, which has dominated thinking about
discovery. After addressing its limitations, I propose an alternative analytical model
based on systematic search, which simulates the way in which repeatedly successful
Address for reprints: James O. Fiet, University of Louisville, College of Business, Louisville, Kentucky 40292,
USA (fiet@louisville.edu).

© Blackwell Publishing Ltd 2007. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA.
 Search and Discovery 593
entrepreneurs actually search. There have been various names and definitions applied to
those who have started multiple ventures, including portfolio entrepreneurs (having operated
simultaneous ventures), habitual and serial founders (both meaning having started more
than one venture, whether successful or not) (cf. Ucbasaran et al., 2003; Westhead and
Wright, 1998) and repeat entrepreneurs, which are equivalent to habitual entrepreneurs
(Baron and Ward, 2004). For our purposes, a repeatedly successful entrepreneur is someone
who has founded three or more new ventures without a failure (Baron, 2006). This
definition places more emphasis on successful outcomes than on activity, which limits
its descriptive applicability to those who have demonstrated that their success was less
likely due to luck. For brevity, I will sometimes refer to these entrepreneurs as repeat
entrepreneurs.
The proposed model does not describe how all entrepreneurs search. After all, there
are many failed ventures started by aspiring entrepreneurs, which we probably would not
want to emulate. The next section treats the informational basis of the model, which is
the role of signals and signal processing. I also discuss search choices facing entrepre-
neurs, which leads to a discussion of why the proposed alternative is probably superior to
alertness when one’s purpose is to search and make discoveries. I conclude by discussing
implications of the proposed model for theory, research and pedagogy.

THE ALERTNESS PERSPECTIVE ON IDENTIFYING DISCOVERIES

Some entrepreneurs make discoveries by searching (Bailey, 1986; Koller, 1988);
however, most are identified accidentally by being alert to their possible existence
(Baumol, 1993; Kirzner, 1997). Alertness presupposes that true discoveries leading to the
creation of new wealth cannot be anticipated and therefore must occur accidentally
(Baumol, 1993; Kirzner, 1997). Kirzner (1979, p. 48) defined alertness as to ‘notice
without search[ing]’; however he later expanded this definition to ‘a motivated propen-
sity of man to formulate an image of the future’ (1985, p. 56). Searching is a bounded
attempt to find signals related to a specific set of criteria. A signal is new information that
changes our understanding about the future, particularly as it relates to the creation of
new wealth. As Gaglio and Katz (2001) have noted, nearly all alertness research focuses
on the first definition, which is the one that I will emphasize here. Those who advocate
‘notice without search’ argue that entrepreneurs make discoveries by being alert while
they are otherwise engaged (Archdichvili et al., 2003; Baumol, 1993; Gaglio and Katz,
2001; Kaish and Gilad, 1991; Kirzner, 1997; Shane and Venkataraman, 2000; Venka-
taraman, 1997), which implies that deliberate search is impossible.
The alertness perspective’s primary limitation is that although it may describe how
many entrepreneurs commonly make discoveries, it offers practically no guidance to
aspiring entrepreneurs other than to advise them to stay alert (Baumol, 1993). Demsetz
(1983) argues that ‘if [alertness] is the essence of [entrepreneurial competence], there is a
more familiar name for it – luck’ (Demsetz, 1983, p. 277), which we do not know how to
teach (Fiet, 1997, 2001). I do not think that Demsetz (1983) is attempting to disparage the
alertness perspective or its adherents. His only purpose seems to me to be to suggest that
it really does not provide aspiring entrepreneurs with any guidance in how to find
discoveries, which is actually the purpose of this article.

© Blackwell Publishing Ltd 2007

594 J. O. Fiet
Alertness is problematic for wealth creation because it can only provide for the
‘discovery’ of ways of diverting resources from one person to another (Ricketts, 1993).
Nor does alertness provide for entrepreneurs being ‘a source of ideas ex nihilo, but . . . as
responding to opportunities rather than creating them’ (Ricketts, 1993, p. 73). Thus, an
economic system depending on alertness alone for its vitality eventually runs down even
though those who discover the opportunities may individually be better off.
Of more interest to scholars should be the fact that the alertness perspective seems not
to incorporate a growing body of findings about how repeatedly successful entrepreneurs
actually search. These findings indicate that repeat entrepreneurs tend to follow a
two-step pattern: (1) they scan the environment widely for information cues, but then (2)
they consciously narrow their search to preferred environmental sectors (Bailey, 1986;
Bar-Hillel and Faulk, 1982; Baumol, 1993; Drucker, 1985; Fiet et al., 2004; Gaglio,
1997; Gilad et al., 1988; Hughes, 1978; Kaish and Gilad, 1991; Keren, 1984; Koller,
1988; Newell and Simon, 1972). In asserting that repeat entrepreneurs search in a
certain fashion, I am not attempting to suggest that the exploitation of a promising idea
does not count or that it counts for less than the idea itself. However, assuming that the
exploitation of two ideas is equivalent, better ideas would yield greater wealth creation.
One way that repeat entrepreneurs could narrow their search by being alert is by using
decision rules and unique cognitive categorization processes or schema (Bailey, 1986;
Bird, 1995; Busenitz, 1995; Busenitz and Barney, 1997; Christensen and Peterson, 1990;
Kaish and Gilad, 1991; Koller, 1988; Palich and Bagby, 1995; Ronstadt, 1988). In
addition, opportunities may come from the imagination and creativity of individuals and
their interaction with others (Daft and Weick, 1984; Dutton, 1993; Dutton and Jackson,
1987; Gioia et al., 2000; Hill and Levenhagen, 1995; Levinthal and March, 1981; Scott
and Lane, 2000; Thomas et al., 1993). Because it is not clear how we could teach aspiring
entrepreneurs either to be more alert or to use cognitive decision rules to heighten their
alertness of finding a discovery, I introduce a new approach.

THE SYSTEMATIC SEARCH FOR DISCOVERIES

I attempt to resolve criticisms of alertness by proposing an alternative, which both
restricts and maximizes search outcomes while emulating how repeatedly successful
entrepreneurs actually search. Table I summarizes the assumptions underlying alertness
and this alternative, which I refer to as constrained, systematic search. The table com-
pares constraints on each of them as they pertain to (1) searching and stopping, (2)
efficiency and equilibrium, (3) individual volition and (4) risk, luck and wealth creation.
Understanding these assumptions is necessary both to appreciate each theory’s boundary
conditions and to appreciate the guidance offered by the proposed alternative, as well as
for seeing how it resolves conflicts in received theory. One could also view Table I as a
key to understanding many of the arguments made in this article.
Constrained, systematic search accommodates concerns of alertness advocates by
replacing the search for unknown venture ideas with the search of known information sources (cf.
Kirzner, 1997; Shane and Venkataraman, 2000). It is based on the observation that
cognitive barriers such as prior knowledge and bounded rationality constrain effective

© Blackwell Publishing Ltd 2007

 Search and Discovery
Table I. The assumptions underlying alertness and constrained, systematic search
Applicable assumptions Alertness
Searching and stopping • Describes how actual
entrepreneurs search.
• Deliberate search is impossible so
alertness is all that is left for
aspiring entrepreneurs to do.
• Offers practically no guidance.
• Search success is determined
stochastically.
• Neglects how repeat
entrepreneurs search.
• Does not explicitly consider a
stopping rule because the process
is not a deliberate effort.
• Entrepreneurs do not consider
the means available to them
while searching because they
cannot search deliberately.
Efficiency and • Is not concerned with the cost of
equilibrium search because opportunities are
recognized while otherwise
engaged. Because it can
encompass the entire world, it is
likely to be ineffective and the
mostly costly in the end.
• Assumes disequilibrium
conditions. Because
entrepreneurs are not required to
search intentionally, this is not a
limitation.
Individual volition • Entrepreneurs make discoveries
by being alert while otherwise
engaged.
595
Constrained, systematic search
• Does not describe how most
entrepreneurs search. However,
it provides a model that they
could employ to improve their
effectiveness.
• Replaces the search for unknown
venture ideas [the effects] with
the search of known information
channels [the means].
• Proposes actionable pedagogical
guidelines based on the searching
of information channels within a
consideration set.
• Entrepreneurs can either search
or exploit. Moreover, the results
of search can be maximized
within a constrained domain.
• Selecting and searching a
consideration set is similar to the
process undertaken by repeat
entrepreneurs.
• Uses prior knowledge to limit the
length of search by directing
efforts to where the odds of
discovery for a particular
entrepreneur are the highest.
• Takes information channels as
given and focuses on selecting
possible effects, the venture idea.
However, does not assume future
can be controlled.
• Is concerned with both economic
cost and search effectiveness.
• Assumes disequilibrium
conditions.
• Entrepreneurs can conduct a
directed search within a
constrained domain.
© Blackwell Publishing Ltd 2007
596 J. O. Fiet
Table I. Continued

Applicable assumptions Alertness Constrained, systematic search

• Entrepreneurs do not conduct • Utilizes the observation of repeat

constrained searches because
they do not search.
• Describes the actual behaviour of • Given disequilibrium, posits a
many entrepreneurs.
• Alert entrepreneurs constantly
scan the whole world but they
cannot do it systematically.
• The role of prior knowledge is
not relevant because discoveries
still occur accidentally.
Risk, luck and wealth creation • Alert entrepreneurs do not incur
unsystematic risk because they
cannot search systematically.
• Assumes that all entrepreneurs
recognize opportunities by being
lucky.
• Exploitation, which follows
discovery, must be accidental.
• Negative implications for wealth • The interplay between discovery
creation.
entrepreneurs that they narrow
their search to known domains.
way to maximize results by
searching within a constrained
domain that represents the
richest set of opportunities.
• Emulates the two-step approach
of repeat entrepreneurs by using
consideration sets.
• Prior knowledge establishes the fit
with what can be discovered.
• Entrepreneurs can maximize the
trade-off between incurring
unsystematic risk and discovering
ventures ideas.
• Because it emulates how repeat
entrepreneur search, presumably
there is less luck involved.
• Does not preclude the role of
luck but maximizes the available
means for searching.
and exploitation provides
entrepreneurs with choices about
how to invest in the acquisition
of information that can be used
to launch new ventures.
• Discovery and exploitation are
complementary informational
challenges in the creation of new
wealth.

search (Fiet, 1996; Simon, 1979). However, these same cognitive barriers shape a theory
of what can be known and how to search for it.
The basic rationale for this approach is that entrepreneurial discovery depends on a fit
between an entrepreneur’s specific knowledge and a particular venture idea, which may
be discovered through systematic search, and which is illustrated in Figure 1.
The model in Figure 1 may not describe how the average entrepreneur actually
engages in discovery. However, this article is based on the premise that aspiring entre-
preneurs can emulate how repeat entrepreneurs make discoveries if they will follow the
course of action posited by the propositions that flow from the model. The power of these
propositions (found in the Discussion) is to inform aspiring entrepreneurs about where to

© Blackwell Publishing Ltd 2007

 Search and Discovery 597

Prior
Experience

Specific
Select Specify Search for signals Eureka!
Knowledge (1) information a personal from consideration A discovery
channels (2) consideration set set (5) (6)
(4)
General
Knowledge

Interpretation of feedback
based on socio-cognitive
factors (3)

Figure 1. A prescriptive analysis of search and discovery

find the most relevant information to guide them in their searching, all of which should
improve their odds of success. Table I summarizes the implications of these propositions
for searching.
In Figure 1, the relationships in the model generally move from left to right as the
proposed, constrained, systematic search process moves towards possible discovery and wealth
creation. Readers will most readily understand the discussion of the model if they will
consider the relationships among the boxed constructs being discussed. Arrows indicate
the direction of causal relationships among the boxed constructs. The model begins on the
left by specifying the types of specific knowledge that can be identified from prior
experience.

Specific Knowledge as a Subset of Prior Experience

The model considers the role of prior experience, which consists of understandings derived
from a person’s occupation, on-the-job routines, job-related technology, specialized
education, social relations and hobbies (Venkataraman, 1997). Venkataraman (1997)
suggests that these types of prior experience are the sources of most discoveries, probably
because they require minimal acquisition of new knowledge. Thus, prior experience is
important because it circumscribes the domain or boundary conditions within which one
may search and benefit from acquired knowledge. Because knowledge derived from
experience is likely to be idiosyncratic, entrepreneurs are not equally competent to
discover every venture idea with wealth-generating potential.
Some elements of prior experience may consist of specific knowledge, which is the
intellectual perception of people, places, timing, special circumstances and technology
(Fiet and Samuelsson, 2000; Hayek, 1945). All specific knowledge (box 1 in Figure 1) is
a subset of prior experience, but not all prior experience consists of specific knowledge.
Some prior experience may consist of general knowledge, which may be codified into rules
and procedures. General knowledge can be acquired through sources such as books, the
Internet or the popular business press. Once general knowledge has been codified, it can
be transferred to others at a very low cost and thus cannot be either a source of a
sustainable competitive advantage or a source of new wealth.

© Blackwell Publishing Ltd 2007

598 J. O. Fiet
Given that specific knowledge is costly to transfer to others, it may confer a monopoly
capacity to create new wealth upon those who possess it. However, there is an unavoid-
able drawback to specific knowledge – it is co-specialized with regard to particular
venture ideas. The consequences of this co-specialization are that it is relevant to few if
any opportunities for more than one venture idea and poses greater risks in its acquisition
than general knowledge.[1]
Specific knowledge could also play an important role in evaluating any information
found in information channels. Because there would also be some residual uncertainty that
an entrepreneur could find a promising venture idea searching a particular channel, it is
important to evaluate continually the potential of the channels being searched.
The next section discusses information channels as sources of possible discoveries.
Information channels are the basic building blocks of consideration sets, which will be
discussed next, and which appear to be a key to constrained, systematic search.

Information Channels
Entrepreneurs can select information channels for searching, as illustrated by box 2 in
Figure 1 and as further described in Table I. An information channel is a comparatively
low-cost source of new, specific information that is capable of changing our views of the
future, particularly as they relate to the creation of new wealth (Marshak, 1971). Infor-
mation channels are low-cost sources of information compared to random scanning or
the cost of not looking at all. A starting point for individuals to identify their own
information channels is to begin with considering what they already know.
Information channels can exist because of imperfections in the market for discoveries,
which means that venture ideas are probably not equally distributed among aspiring
entrepreneurs. It is possible to enjoy a monopoly in time and space with regard to a
particular information channel or venture idea (Hayek, 1945). During this monopoly
period, they can extract above average economic returns leading to new wealth.
Monopoly profits can accrue to certain entrepreneurs, not because their specific knowl-
edge cannot be transferred to others and appropriated by them, but because the extrac-
tion period for the utility of specific knowledge is ephemeral and only easily exploited by
one already possessing it. The key to creating new wealth is to appropriate the value of
a venture idea, which is easier to do if it is based on specific knowledge, before it becomes
widely known to others who would become competitors.
As entrepreneurs gain experience, they become more knowledgeable about venture
ideas and their sources. Shane (2000) examined the commercialization of a single,
patented idea by different entrepreneurs. He found that they unanimously attributed
their good fortune to being alert to the application of knowledge that they already
possessed. Although they attributed their success to alertness, it is possible that their
success was partially the result of searching an information channel that was already
known to them. That is, they might have increased their odds of success by searching a
promising, restricted domain.
An example of an information channel for a real estate developer could be a familiar
realty office that represents many different properties. The office can serve as a channel
by specializing in the dissemination of information about properties that are for sale.

© Blackwell Publishing Ltd 2007

 Search and Discovery 599
Other possible examples could be an entrepreneur’s inner circle of friends and confi-
dants, business associates, the US Patent Office, weekly trade publications, trade shows,
golfing buddies at the country club, and the like. Information channels provide entre-
preneurs with an option to acquire, not a particular message, but a set of messages with
some probability distribution (cf. Lilien et al., 1992; Marshak, 1971; McGrath and
MacMillan, 2000).
An advantage of analysing how entrepreneurs could search information channels,
rather than studying how entrepreneurs may be alert to particular venture ideas, is that
it becomes mathematically possible to maximize the search of a finite number of chan-
nels. In contrast, it is not possible to maximize the search of an unbounded domain (Fiet
et al., 2005; Talmain, 1992). Some have criticized systematic search as being reductionist
(DeTienne and Chandler, 2004), but this concern does not seem very important in the
face of bounded rationality and the challenge to match search objectives with prior
specific knowledge. Repeat entrepreneurs manage their search for discoveries by utiliz-
ing a constrained, systematic approach. How else could they do it that would not be
based on guessing? The selection of information channels presupposes where future
discoveries will lie. It does not specify precisely what they will be.
Restricting entrepreneurial search to information channels is also consistent with the
expectation that entrepreneurs would update their ongoing search patterns as they
interpret environmental signals. Thus, Figure 1 contains a feedback loop from box 5 to
box 2, which may be used to reconstitute the set of information channels to be searched.
Figure 1 specifies socio-cognitive factors as moderators of the feedback loop used for
signal evaluation. Refer to box 3. These moderators may include motivation, goal
setting, expectations, personal relations, individual differences, creativity, decision-
making style, absorptive capacity, sensemaking or personality (cf. Cohen and Levinthal,
1990; de Konig, 1999). Clearly, they can play an important role in the tendencies and
preferences of individual entrepreneurs. An individual entrepreneur’s evaluation of
signals is likely to be influenced by them. A thorough treatment of each of them is beyond
the scope of this article. Instead, I offer a testable model to indicate how entrepreneurs
ought to search, given rational behaviour, if their purpose is to maximize returns from
discovery.

Consideration Sets
A new feature of this research is the suggestion that entrepreneurs can maximize their
results of searching information channels by grouping them into consideration sets. Box
4 in Figure 1 illustrates the central role of specifying a personal consideration set. A
consideration set is a promising group of information channels, which entrepreneurs can
select and search based on specific knowledge from prior experience (Fiet, 1996; Hir-
schleifer and Riley, 1979; Johnston and Dark, 1986; Keren, 1984). Because we cannot
assume that prior experience consists of all relevant experience to discover a particular
venture idea (Simon, 1979), the search of consideration sets may only maximize, not
optimize, the results from searching for discoveries. Still, this is a notable improvement
over random scanning or not-looking-at-all.

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600 J. O. Fiet
Specifying and Searching a Consideration Set
Entrepreneurs can specify and search a consideration set for wealth-creating ideas, as
illustrated by boxes 4 and 5 in Figure 1[2] and as further described in Table I. In box 4,
an entrepreneur would specify his or her personal consideration set. This specification is
not intended to be final but can be used as a basis for Bayesian updating. After specifying
the channels to be searched within a particular consideration set, an entrepreneur would
then search for signals from the information channels in his or her consideration set, as
indicated in box 5.
Not only could preferred signals in box 5 lead to wealth-creating discoveries (refer to
box 6 in Figure 1), but they could also be sources of information for updating the
selection of the channels themselves within a consideration set, as indicated by the
feedback loop going back to box 2 in Figure 1. Furthermore, the discoveries in box 6
could also provide feedback about channel effectiveness as indicated by the double-
headed arrow back to box 5. An entrepreneur’s consideration set would probably be
unique, based on specific knowledge from prior experience combined with ongoing
feedback signals from previously selected channels. Thus, the use of consideration sets is
a way to implement constrained, systematic search.

The Promise of Constrained, Systematic Search

One could protest that limiting search to known channels is too high a price to pay in that
missed discoveries could lie outside a consideration set. Such criticism assumes that
entrepreneurs are equally qualified to discover all venture ideas when we actually
suppose that they vary in their competence, depending on their experience-based specific
knowledge (Hayek, 1945; Shane, 2000). They also vary in their absorptive capacity to
assimilate new knowledge once it is acquired (Cohen and Levinthal, 1990), which would
further differentiate their competence to launch a new venture. Entrepreneurs do not
actually forego discoveries that are unrelated to their absorbed, specific knowledge.
Specific knowledge is a prerequisite for their discovery. Nor can rapid preparation
substitute very often for prior knowledge due to the ephemeral nature of many venture
ideas, which is what creates windows of opportunity for discovery.
An incentive for entrepreneurs to work in teams is that a diverse team membership can
expand the number of accessible information channels composing the consideration set
to which an entrepreneur has access. By combining the individual consideration sets of
team members, a team could access a larger joint consideration set than could a single
entrepreneur working alone. Having access to more information channels may be one of
the reasons that teams launch new ventures more often than do solo entrepreneurs.
These arguments for using a team-based consideration set highlight the importance of
formulating a diverse, rather than a homophilous team if an entrepreneur is to maximize
his access to previously unknown information (Ruef et al., 2003). Granovetter (1973)
makes a similar, seminal argument when he describes the informational advantages of
the ‘strength of weak ties’.
The preceding discussion of information channels and consideration sets posits that it
can be more efficient for entrepreneurs to conduct a constrained, systematic search using

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 Search and Discovery 601
consideration sets than it would be for them to conduct an unbounded search based on
scanning. Also because aspirants can probably learn to identify personal consideration
sets, they may also provide a basis for improving search effectiveness. Although some
may argue that entrepreneurs do not conduct unbounded searches, this is not the
contention of Kirzner (1997) and those who support his view of alertness-based oppor-
tunity recognition. According to Kirzner (1997), ‘Without knowing what to look for,
without deploying any deliberate search technique, the entrepreneur is at all
times scanning the horizon, as it were, ready to make discoveries’. Advocates of his
approach to alertness, of which there are many, argue that it is impossible to search
systematically for an object that cannot be known in advance (Archdichvili et al., 2003;
Kirzner, 1997).

The Actual Use of Consideration Sets

The preceding sections have discussed the relationships among specific knowledge and
venture ideas, as well as how the discovery of these ideas can be facilitated using consid-
eration sets. Clearly, we would not expect many entrepreneurs to process information in
this way because the use of consideration sets is based on economic principles of
efficiency, of which it is conceivable that they would have little knowledge. (Refer to
Table I under efficiency and equilibrium.) However, we do know that repeat entrepre-
neurs employ constrained, systematic search. Nonetheless, if aspiring entrepreneurs
could learn to use consideration sets, they could reduce their costs of searching for
discoveries. The following sections examine how signals could be processed. An under-
standing of signal processing is important to provide guidance to aspiring entrepreneurs,
which is further described in Table I under individual volition.

SIGNALS AND SIGNAL PROCESSING

One key to discovering venture opportunities is to respond quickly to signals about
imminent environmental changes. As mentioned previously, a signal is new information
that changes our understanding about the future, particularly as it relates to the creation
of new wealth. Information consists of facts communicated about a particular person, place
or thing, which may or may not lead to the creation of new wealth. The recognition of
a signal could constitute a discovery, which would enable entrepreneurs to act quickly to
equilibrate changes in the market (Kirzner, 1997). Entrepreneurs perform their equili-
brating function by arbitraging the cost and value of goods and services, which become
known to them as they receive and process signals. Alternatively, entrepreneurs them-
selves could be instigators of change and create disequilibria conditions that make
discoveries possible (Schumpeter, 1947). Without the signals created from disequilibria
conditions, there would be no discoveries to be made and information would not have a
role to play.
I now detail three roles performed by explicit signals, which would take place in box
3 in Figure 1. Role 1 discusses signals as venture-specific information. Role 2 discusses
signals as triggers for assessment. Role 3 discusses signals as cues for resource allocation.

© Blackwell Publishing Ltd 2007

602 J. O. Fiet
Role 1: Signals as Venture-Specific Information
The type of information with the greatest wealth-creating potential is an explicit signal
related to a specific venture opportunity. This sort of information has greater potential
because a single entrepreneur can take possession of it and appropriate its value (Hayek,
1945; Rumelt, 1988). A venture-specific opportunity deals with particular people, places,
timing, special circumstances and technology (Fiet, 1996; Hayek, 1945). For a real estate
developer, a sale sign could signal the discovery that the asking price of a property was
half its feasible value after development, which may indicate an opportunity to create
new wealth. In this case, the sign is a venture-specific signal because it relates to a
particular place, time and seller.
It is interesting to remember that signals do not convey equal potential advantage to
all recipients. For instance, the sale sign would not signal a development opportunity
unless its observer already possessed specific knowledge related to the local real estate
market. Someone who did not know about real estate development in the local market
could receive the same signal and fail to notice the same opportunity. Thus, the value of
signals can be most effectively realized when they are related to what a recipient already
knows.
Signals can consist of either specific or general information. In contrast to the limited
applicability of specific information, general information consists of facts that can be reduced
to rules that can be applied widely and disseminated inexpensively, typically by print or
electronic media ( Jensen and Meckling, 1992). Despite the wide applicability of general
information, it has very little utility in creating a competitive advantage, which could lead
to new wealth creation. For example, a student could take courses to qualify for a real
estate licence, and in the process, learn the same printed lessons as anyone else who was
similarly licensed. Because the same opportunity to study for a real estate licence is
available to others, each of them could acquire similar general knowledge, none of
whom, however, would gain a competitive advantage from this action alone. For clarity,
general knowledge is the intellectual perception of information that is already widely dis-
seminated. General knowledge, which is an existing perception of information, could not
constitute a signal because it is not new. However, general knowledge can sensitize
someone to the possibility that a specific opportunity could exist but by itself it cannot be
used to identify it. Someone who knew (that is, possessed specific knowledge of) the
property values in a particular neighbourhood could discover an under-valued property
in relation to other values in the same neighbourhood, which could signal the opportu-
nity to create new wealth.
Consideration sets are useful in creating new wealth precisely because they direct an
entrepreneur’s searching and attention to signals with the promise of wealth creation.
This promise exists because these signals consist of specific information.

Role 2: Signals as Triggers for Assessment

Entrepreneurs can access signals either though alertness-based not-looking-at-all or by
conducting a targeted, systematic search of information channels, which reflect their
specific knowledge. These approaches differ in both their potential effectiveness for
wealth creation and in their costs.

© Blackwell Publishing Ltd 2007

 Search and Discovery 603
Alertness advocates argue that it is impossible to conduct an optimal search if a search
domain is unknown (cf. Baumol, 1993; Kaish and Gilad, 1991; Kirzner, 1997; Shane
and Venkataraman, 2000). According to Kirzner:

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. 71–2)
The alternative to performing a systematic search is to stay alert, which Demsetz (1983)
has equated with luck. The advantage of relying solely on luck is that it requires the lowest
cost for signal acquisition. Refer to Table I under ‘Risk, Luck and Wealth Creation’.

Role 3: Signals as Cues for Resource Allocation

The systematic search of a consideration set incorporates the evaluation of signals to
update the selection of channels, as indicated by box 3 in Figure 1. Signals can both
impede and facilitate resource allocation (Tsoukas, 1996). The impediment for entre-
preneurs is that the information needed to make informed allocations of resources does
not exist, according to Hayek,

. . . in a concentrated or integrated form, but solely as dispersed bits of incomplete and

frequently contradictory knowledge. . . . The economic problem . . . is [one] of the
utilization of knowledge not given to anyone in its totality. (Hayek, 1945, pp. 316–17)

This dispersion of signals prevents entrepreneurs from taking advantage of all the
possibilities to search that exist at a given moment. Thus, entrepreneurs tend to pursue
self-interests differently in response to their unique information about the world. The
natural dispersion of signals reduces the chances of entrepreneurs finding discoveries.

DISCUSSION
There is no other known work that attempts to model the success of repeat entrepreneurs
using constrained, systematic search. Other approaches appear to depend on luck,
intuition or creativity and it is not clear how these could be taught. Nor are there any
known attempts in the literature to compare the dominant alertness paradigm with how
repeat entrepreneurs actually search. For these reasons, it will not be surprising if
entrepreneurship scholars find the ideas in this article to be unusual.
This section summarizes this study’s scope limitations and theory development. It then
discusses its particular implications for research and pedagogy. It concludes by discussing
its relevance for researchers, educators and entrepreneurs.

Scope Limitations
This article did not examine in detail socio-cognitive factors, such as motivation, goal
setting, expectations, personal relations, individual differences, creativity, decision-

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604 J. O. Fiet
making style, absorptive capacity, sensemaking or personality (cf. Cohen and Levinthal,
1990; de Konig, 1999). Clearly, they moderate rational decision making and represent
future research opportunities for interested scholars. Although they certainly affect how
entrepreneurs make choices, they may not have as much pedagogical promise for
suggesting to aspirants how they should search most effectively. In addition, I do not
examine in detail the many derivatives of Kirzner’s original ideas. Instead, I emphasize
Kirzner’s ‘notice without search’ as their fountainhead.
Another limitation of this research is that I have focused solely on search leading to
discovery and excluded the role of exploitation in the creation of new wealth. One
cannot be carried on successfully without the other.

Summary of Theory Development

I have proposed a prescriptive model of search and discovery and compared it favour-
ably in its effectiveness to that obtained using an alertness-based scanning approach. The
model is based on a new construct – the consideration set, which may be conceptualized
first by entrepreneurs and then used by them to discover venture ideas. The model was
used to operationalize constrained, systematic search (or more simply, systematic search)
within a set of known information channels collectively labelled as a consideration set.
The advantage of this approach is that it not only extends informational economics
(Arrow, 1974, 1989; Fiet, 1996; Fiet et al., 2004; Hayek, 1945; Hirschleifer and Riley,
1979; Jensen and Meckling, 1992; Stigler, 1961), which makes it theoretically interesting,
but it also has very practical implications for wealth creation (Fiet, 2001).
Because alertness research has attracted the attention of many scholars, their positions
have tended to evolve and vary greatly. However, what each of these researchers shares
is a common intellectual heritage that can be traced back to Kirzner’s work. Thus, it is
appropriate to compare this new approach using consideration sets with Kirzner’s view
of ‘notice without search’ alertness, or continual scanning, which is based on surprise. In
contrast, a consideration set-based approach presupposes constrained, systematic search
within a known domain, where fewer surprises would be expected. Entrepreneurs
can search most effectively within a consideration set because their specific knowledge
prequalifies them to discover familiar or similar ideas, which they could not recognize if
they were scanning outside of the domain where they are most knowledgeable. Scanning
more effectively means that they will find more venture ideas with wealth-creating
potential.[3] This inference from the model in Figure 1 leads to the first proposition:

Proposition 1: Aspiring entrepreneurs can identify more discoveries with wealth-creating

potential while searching consideration sets than is possible using only alertness.

The implications of this proposition are far-reaching because alertness advocates are
reluctant to concede that any discoveries can be found using systematic search.
As mentioned earlier, many studies indicate that repeat entrepreneurs narrow their
search to preferred information channels in anticipation of making discoveries (cf. Fiet
et al., 2004). It is important to recognize that as they do this, they are not searching for
a particular idea. They are searching among known channels (ones with a familiar and

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favourable probability distribution) for a signal that could provide a clue about how to
launch a new venture. Any discovery may actually include some element of surprise, as
noted by Kirzner (1997). The key difference between alertness (‘notice without search’ or
not-looking-at-all) and searching information channels is that the economic cost[4] of a
constrained, systematic search based on specific knowledge is probably less than the cost
of luck-based alertness, which by definition has a much lower probability of leading to
wealth creation.
It is important to recall that discoveries are only those that reveal something new about
how to create new wealth. Some opportunities thought to have wealth-creating potential
may in fact only lead to the destruction of wealth. The destruction of wealth could occur
for some entrepreneurs because they are not prepared with prior specific knowledge that
fits the criteria for a potential discovery. Alertness requires no search criteria, whereas
systematic search relies on search criteria rooted in specific knowledge. Alertness-based
not-looking-at-all appears to be the economically more costly, less effective way of
making discoveries. The costs of not-looking-at-all are primarily opportunity costs that
entrepreneurs must incur while they forgo having an opportunity to exploit. Also,
not-looking-at-all is costly because entrepreneurs who employ this approach may be on
duty but they are not sure to what they ought to be alert. In a very real sense, systematic
search is typically superior to alertness when it comes to finding wealth-generating ideas
because entrepreneurs might as well do something (searching systematically) while they
are doing nothing (not-looking-at-all).

Proposition 2: Systematic search will identify discoveries with greater wealth-creating poten-
tial than will alertness-based not-looking-at-all.

However, if we do not concern ourselves with the wealth-creating potential of venture

ideas, it is quite possible that an alertness approach will identify more venture ideas with
very little potential.
The propositions argue that the use of systematic search will develop more venture
ideas with greater wealth-creating potential than will alertness-based scanning or not-
looking-at all (Fiet, 2002; Kirzner, 1997). In addition, the ideas that one discovers using
systematic search will have greater wealth-creating potential than those identified using
alertness-based scanning. Systematic search works because it utilizes the fit between one’s
prior, specific knowledge and that needed to identify a potential discovery. Fit circum-
scribes and bounds the domain within which one is likely to be qualified to search.
The basis for these propositions is that entrepreneurs are not equally knowledgeable
about how to discover potential opportunities to create new wealth (Shane, 2000).
Because the market for venture opportunities is not perfectly efficient, potential oppor-
tunities are unevenly distributed, which makes them more difficult to locate (Kirchhoff,
1994). Also, because entrepreneurs may possess idiosyncratic knowledge, if they can find
venture opportunities related to what they already know, they will have a comparative
advantage over other entrepreneurs whose knowledge is not as related to any opportu-
nities that could be discovered. Whether they have a comparative advantage in discov-
ering high-potential venture opportunities depends on their possessing the relevant
specific knowledge (Fiet, 1996; Hayek, 1945).

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606 J. O. Fiet
These propositions are noteworthy in view of the fact that alertness advocates contend
that systematic search cannot discover any venture opportunities (cf. Kirzner, 1997). Not
only have I argued that systematic search will discover more opportunities but that they
will have greater potential to create new wealth.

Implications
This section discusses the implications of this research for research and pedagogy. It
concludes by reviewing its implications for aspiring entrepreneurs.

Research. It is an empirical question as to whether aspiring entrepreneurs can actually use

consideration sets to improve their search effectiveness. Thus, the next steps are to conduct
tests by comparing the performance of randomly selected groups – one that is trained in
the use of consideration sets, based on a careful assessment of their prior knowledge and
a control group that would attempt to be alert to potential discoveries.[5] The performance
of individuals from separate control and treatment groups would be compared based on
how their ideas scored on an index measuring their wealth-creating potential.
There are several clues in the literature about how to create an index to measure a
venture’s wealth-creating potential. The measurement of wealth-creating potential is
essential to testing this research because it is the only way to gauge the dependent
variable without waiting for a venture idea to be exploited. Venture ideas with this
potential would score highly on the following four criteria which become an index as they
are multiplied together: (1) fit; (2) value; (3) rarity; and (4) inimitability (Barney, 2002;
Fiet, 2002; Wernerfelt, 1984).
Fit requires that an entrepreneur already possesses the requisite specific knowledge to
recognize that an opportunity could be a discovery (Shane, 2000; Venkataraman, 1997).
It is the key dimension in assessing the worth of an opportunity because without it, it
would not be possible to assess an idea’s value (Barney, 2002). Fit can be gauged by
whether an entrepreneur’s specific knowledge actually coincides with that required to
discover a potential discovery.
Value assesses the potential of the resource(s) on which an idea is based. Resources can
be heterogeneous and immobile and thus exploited to create new wealth (Barney, 1986).
The difficulty with assessing value is that it relates to future considerations. However,
according to Michael Porter, the future normally evolves from the past and in only rare
cases will the progression of events reach an inflection point leading in an unrelated
direction (Hammonds, 2001). In those cases when the future is unpredictable due to an
inflection point, value will be difficult to determine. Otherwise, the value of a venture’s
resources is inversely related to threats posed by buyers, suppliers, potential entrants,
substitutes and rivals (Bain, 1968; Mason, 1939; Porter, 1980). Because the moderators
of these threats are easier to measure than the threats themselves, the focus should be
more on the moderators than the threats (Chamberlain, 1933). For example, moderators
to the threat of potential entrants could be any one of the following: economies of scale,
product differentiation, and cost advantages independent of scale, contrived deterrence
or government regulation of entry (Barney, 2002, chapter 3). A value index can be
created using these moderators.

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 Search and Discovery 607
Rarity assesses the presence of current or potential competitors threatening the market
for an idea (Chamberlain, 1933). An idea that is fit, valuable and rare may create at least
a temporary competitive advantage leading to the creation of new wealth. Rarity would
be gauged within the market for a particular venture.
Inimitability refers to the cost of imitating a venture’s resources (Barney, 1991). A
resource can be inimitable by being either costly to duplicate or non-substitutable.
Ventures characterized by fit, value, rarity and inimitability can create a sustainable
competitive advantage and new wealth. One way for an entrepreneur to create an
advantage is to focus on ideas within his or her consideration set, which presupposes the
possession of inimitable prior knowledge.
Taken together these four attributes provide standard criteria against which raters
could evaluate a diverse collection of ideas (with their requisite resources) and assign a
joint score or index. This index could be used as measure of wealth-creating potential
based on an assessment of the nature of the competitive advantage that could be
created.
A precursor to controlled tests is to develop assessment techniques to assist aspiring
entrepreneurs to interpret their prior knowledge as possible idiosyncratic competencies.
An underlying premise of this research is that aspiring entrepreneurs are most competent
to discover promising venture ideas that are related to their specific knowledge. In fact,
the selection of information channels that constitute a consideration set depends crucially
on entrepreneurs understanding their own specific knowledge. It is not enough to say
that searching consideration sets leads to the discovery of such venture ideas; it is
important to show that it leads to more discoveries than a ‘luck-based’ alertness approach
(Demsetz, 1983).
Another interesting research question addresses the feasibility of optimal search. Once
an entrepreneur selects a consideration set, the key questions are: (1) Can we determine
a maximal search sequence for the channels within the set? (2) Can we determine a
stopping rule? (refer to Table I). The answer to the first question is a qualified ‘yes’, if we
assume perfect knowledge of the search options. However, as a practical guide, it is more
useful to speak of maximizing the value of channel searching, given the finite nature of
what an entrepreneur knows about a particular consideration set (cf. Simon, 1979, 1981).
Determining a maximal search sequence was derived from a straightforward mathemati-
cal analysis (Bikhchandani and Sharma, 1996; Fiet et al., 2005). Determining a stopping
rule is useful because a search can never completely eliminate all uncertainty, which
leaves an entrepreneur to manage the trade-off between continuing to invest in infor-
mation to reduce what is unknown and the cost of doing so (Fiet, 1996). Fiet et al. (2005)
illustrated mathematically that maximal search is possible, assuming that the search
domain is known and that entrepreneurs can accurately access the costs and risks for
each round of search, which Fiet et al. (2000) assumed could be estimated on the basis of
prior knowledge. Thus using consideration sets, constrained, systematic search is more
focused and less costly than random scanning.

Pedagogy. The teaching of systematic research requires training aspiring entrepreneurs to

develop competence in two areas. First, they must learn how to formulate their own
consideration sets and use them to search for ideas. Second, they must learn to identify

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608 J. O. Fiet
ideas as they search that both fit their prior knowledge and have the potential to create
new wealth.
To help aspirants identify ideas that fit their specific knowledge, they would need to
limit their searching to their consideration sets (Fiet et al., 2005). Otherwise, they would
be extending their search beyond what they already know. As they find ideas, they must
evaluate their potential using the four attributes discussed earlier. Ideas without these
attributes, even if they are based on prior specific knowledge, will not have the potential
to create new wealth.
Aspirants can consider different opportunities found in their consideration sets.
However, their available choices are a reflection of how and where they have positioned
themselves and thus influence their ability to take advantage of relevant signals (Ries and
Trout, 1986). This positioning represents a commitment for which there are additional
costs, benefits and trade-offs. If entrepreneurs do not make such a commitment, they
probably will not have access to useful venture-specific information (Hayek, 1945).
However, if they proceed to acquire specific signals, they may have for at least one brief
moment a monopoly over a particular venture idea.

Conclusion
This research is especially relevant for researchers, educators and entrepreneurs,
whether they are practising or aspiring. First, entrepreneurs have a greater chance of
making discoveries within a consideration set than in the rest of the world. Second,
entrepreneurs select different consideration sets based on their prior knowledge. Third,
entrepreneurs are not equally equipped to discover venture ideas. Fourth, if entrepre-
neurs can evaluate their prior experience, they can use it to select their own (probably
unique) consideration sets, which could endow them with a specific, competitive advan-
tage. Fifth, entrepreneurs can update their consideration sets as they process informa-
tion. Sixth, entrepreneurs always have the option of continuing to search for a more
promising idea or discontinuing a search and exploiting one that is most promising.
Seventh, searching using consideration sets may make it affordable for more people to
make their own discoveries, which posits that more people could be entrepreneurs.
Finally, this research is important because it offers evidence that systematic search is
possible. As Schumpeter expressed it, ‘. . . [as] innovation itself is being reduced to
routine . . . so many more things can be strictly calculated that had of old to be visualized
in a flash of genius’ (1947, p. 132). One way to view the use of consideration sets is as the
routinization of the discovery process, which does not diminish its idiosyncratic nature or
potential for discovering ideas for wealth creation (Baumol, 1993). Although creating
new wealth will never be routine, I look forward to the greater routinization of the
discovery process that Schumpeter (1947) anticipated.

NOTES
*This research has benefited substantially from the insightful comments of the editor, Mike Wright, and the
reviewers.
[1] The risk of co-specialization could be reduced sometimes through savings accrued as a result of
intentional or unintentional economies of scope. That is, in the pursuit of one activity one could acquire
knowledge that could also be used for another purpose.

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 Search and Discovery 609
[2] Proactive searching of a consideration set, guided by specific knowledge, is an alternative to the ‘wait and
see’ approach suggested by real options, which offers another way to reduce uncertainty (McGrath and
MacMillan, 2000).
[3] Later in the discussion section, I examine the contribution of four criteria that determine an idea’s
wealth-creating potential. It is noteworthy that only ideas based on the exploitation of resources that
meet all of these criteria possess the wealth-creating potential mentioned in Proposition 1.
[4] Here, the cost is the economic cost, not the nominal cost, meaning that it considers the return on
invested capital. Although alertness does not require much deliberate effort, its expected return is lower,
which increases its economic cost.
[5] Some of this work has already begun by experimentally testing MBA students, disadvantaged inner-city
residents and technically trained employees. These results provide empirical support for the model
presented. Details are available from the author.

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