CHAPTER THREE

COGNITIVE FOUNDATIONS OF ENTREPRENEURSHIP:

CREATIVITY AND OPPORTUNITY RECOGNITION

LECTURE NOTES
THE RAW MATERIAL FOR CREATIVITY AND OPPORTUNITY RECOGNITION:
MENTAL WSSTRUCTURES THAT ALLOW US TO STORE – AND USE – INFORMATION

Learning Objective:
Explain why cognitive processes provide an important foundation for understanding
creativity and opportunity recognition.

Ideas occur when individuals use existing knowledge they have gained and retained from
their experience to generate something new.

Ideas are generated with our cognitive processes.

Cognitive Systems for Storing – and Using – Information: Memory, Schemas, and Prototypes.

Learning Objective:
Describe working memory, long-term memory, and procedural memory, and explain the
role they play in creativity and opportunity recognition.

Experience provides useful information people can store and later use to create or
recognize something new.

Memory, the most basic cognitive system for storing information, consists of:

1. A “working memory” which holds limited amount of information for brief

periods of time.
2. “Long-term memory” which allows us to retain vast amounts of information
for long periods of time.

Information is in the form of factual information (dates, events, etc.) and procedural
information (an almost subconscious ability to remember data used in processing
information).

Using and Transforming Information: Schemas and Prototypes.

Learning Objective:
Explain why we tend to use heruristics and other mental shortcuts, and how these
shortcuts can influence entrepreneurs.

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 We retain information from our experiences by creating mental frameworks which help
us

1. understand new information and

2. integrate the new information with information already present in our memory.

Schemas – cognitive frameworks representing our knowledge and assumptions about

specific aspects of the world. For example, we know how to walk into a restaurant, order
a meal and eat it.

Heuristics – simple rules for making complex decisions or drawing inferences in a rapid
and seemingly effortless manner.

Availability heuristics – the easier it is to bring information to mind, the more

important or accurate we perceive it to be, and the more it will influence our
future judgments.

Tilts or potential errors that can enter into our thinking:

Optimistic bias – we tend to expect things to turn out well even when there is no
reasonable basis for that to happen.

Planning fallacy – we believe we can complete more in a given period of time

than we truly can.

Confirmation bias - our tendency to notice, process, and remember information

that confirms our current beliefs more readily than information that is contrary to
our current beliefs.

Illusion of control – we tend to assume that our fate is under our control to a
greater extent than it really is.

CREATIVITY: ESCAPING FROM MENTAL RUTS

Creativity is the generation of ideas which are both new and useful.

DANGER! PITFALL AHEAD!

In many situations, people who have made a bad decision tend to stick to it even as evidence for
its failure mounts.

Sunk costs or escalation of commitment – the tendency to stay with a bad decision.

Collective entrapment – a group becomes trapped in a bad decision. This happens in

decision-making groups also. They cling to decisions that generate increasingly negative
results. The harder the group had to work to reach the initial decision, the more likely
they are to stay with that decision even when it is a bad decision. Those who made the
initial decision want to justify their actions. The best way to do this, they feel, is to stay

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 on the current course and somehow make it turn out okay In any decision made by a
group, some members of the group will feel more responsible for the choice than will
other members. Those members who back away from the decision and claim to have
been against it all along, are likely to come into conflict with those who feel closer to the
decision.

Steps the entrepreneur can take to minimize the risk of this kind of error include:

1. Deciding in advance that if losses reach a certain limit, or negative

results continue for a specific period of time, no further resources
will be invested and the decision will be changed.
2. charging persons other than those who made the bad decision with
the task of deciding whether to continue.
3. Creating a culture in which people do not feel that they will lose face
if they reverse earlier decisions now found to be poor ones.

Escalation of commitment and collective entrapment in bad decisions represent serious

threats to the success of new ventures. New ventures have limited resources and cannot
absorb mounting losses. .

Creativity: Generating the Extraordinary

Learning Objective:
Define creativity and explain the role that concepts play in it.

Creativity provides new knowledge, products, and other advances that can
improve the quality of human life.

Concepts: Building Blocks of Creativity

“Concepts” are categories for objects or events that are similar in some way to each other.

Concepts act as a filing system for our mind to put information away and then
find it more easily.

This storing of information in an organized manner is both good and bad.

Good – it enhances our ability to retrieve the vast amount of knowledge included
in our long-term memory.

Bad – that it is organized can restrict our thinking into mental ruts. We can be so
used to doing something in a certain way we cannot recognize that there is a
better way.

Concepts can be stretched or expanded in the following ways:

1. They can be combined so that something very new is generated.

2. They can be expanded

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 3. They can be changed through analogies, which perceive similarities between
objects or events that are otherwise dissimilar.

Creativity and Human Intelligence

Learning Objective:
Distinguish between analytical, creative, and practical intelligence, and explain how all
three are combined in successful intelligence.

Intelligence – is an individual’s abilities to

1. understand complex ideas,
2. adapt effectively to the world around him,
3. learn from experience,
4. engage in various forms of reasoning, and
5. overcome a wide range of obstacles.

There are different kinds of human intelligence.

--Analytic intelligence – the abilities to think critically and analytically

--Creative intelligence – the ability to formulate new ideas and gain insights into
a wide range of problems.
--Practical intelligence – being intelligent in a practical sense
--Social intelligence – the ability to understand others and get along well with
them.

Entrepreneurs need

--creative intelligence to come up with new ideas,

--practical intelligence to identify ways to develop those ideas, and --
analytic intelligence to evaluate the ideas and determine whether they are
worth pursuing.

Encouraging Creativity: The Confluence Approach

Learning Objective:
List several factors that influence creativity, as described by the confluence approach.

Confluence approach says that creativity emerges out of the confluence of the following:

1. Intellectual abilities – the ability to see problems in new ways.

2. A broad and rich knowledge base – large store of information in our memory
3. An appropriate style of thinking – thinking in novel ways.
4. Personality attributes – willingness to take risks, etc.
5. Intrinsic, task-focused motivation – creative people usually love what they are
doing.
6. An environment that supports creative ideas – an environment that does not
impose uniformity of thought, but that encourages change.

Techniques to increase your own creativity:

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 1. Have a great deal of information at your disposal. New ideas do not come
from a vacuum.

--Have varied work experience

--Live in many different places
--Have a broad network of friends who can share their experiences with
you.

2. Cultivate a style of thinking that helps you break out of mental ruts.

--Spend time with people who have different backgrounds than you
-- Talk with people who challenge your beliefs.
--Be flexible and open in your thinking

3. Work in environments that encourage rather than discourage creativity.

OPPORTUNITY RECOGNITION: A KEY STEP IN THE ENTREPRENEURIAL PROCESS

Identifying potentially valuable opportunities is a key initial step.

Ask: --How does this process occur?

--Why are some people better at identifying opportunities than others?
--Do opportunities exist in the external world or are they created by human
minds?

Access to Information and Its Effective Use: The Core of Opportunity Recognition.

Learning Objective:
Explain the role of access to information and utilization of information in opportunity
recognition.

Greater access to information

--Jobs in research and development or marketing are good for this.

--Have varied work experiences and life experiences.
--Search for opportunities.
--Have a schema of entrepreneurial alertness – an internal mental framework that
helps one search for and notice changes that might yield valuable opportunities.

Superior Utilization of Information

Entrepreneurs have greater access to information, and thus have richer and better
integrated stores of knowledge than do other people.

This enhances their ability to interpret and use new information because
(a) they have more information at their disposal and
(b) it is better organized.

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 Entrepreneurs have a better ability to process information quickly as they go along.

Entrepreneurs generally have higher intelligence than other people.

Entrepreneurs generally have higher practical intelligence than others (the ability to solve
varied problems in everyday life).

Entrepreneurs are higher in creativity than other persons.

Opportunity Recognition: Additional Insights from Cognitive Science

Learning Objective:
Describe signal detection theory and distinguish between hits, false alarms, and misses.

Opportunities emerge from a complex pattern of changing conditions.

Opportunities come into existence at a given point in time because of a combination of

conditions that did not exist previously, but is now present.

Opportunities are only potential until someone sees them as opportunities.

Signal Detection Theory – states that opportunities are often hard to discern.

When looking for a stimulus, there are four possibilities:

1. The stimulus does indeed exist and the entrepreneur concludes

correctly that it is present.
2. The stimulus does exist but the entrepreneur fails to recognize it.
3. The stimulus does not exist and the entrepreneur concludes wrongly
that it is present
4. The stimulus does not exist and the entrepreneur correctly concludes
that it is not present.

In looking for the existence of an opportunity, the state of mind of the

entrepreneur is of critical importance.

Entrepreneurs are strongly motivated to:

1. obtain hits
2. avoid false alarms, and
3. avoid misses.

Learning Objective:
Explain the difference between a promotion focus and a prevention focus, and describe
the effects these contrasting perspectives may have on entrepreneurs’ efforts to discover
valuable opportunities.

Regulatory focus theory – states that in regulating their own behavior to achieve desired
ends, individuals adopt one of two contracting perspectives:

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 Promotion focus – their primary goal is attaining positive outcomes, or
Prevention focus – their primary focus is to avoid negative outcomes.

Combining the signal detection theory and the regulatory focus theory leads us to the
idea that:

Entrepreneurs who adopt a promotion focus (emphasizing accomplishment) will

be more concerned with attaining hits (recognizing opportunities that actually
exist) and with avoiding misses (failing to recognize opportunities that do exist).

Entrepreneurs who adopt a prevention focus will concentrate on avoiding errors

(pursuing opportunities that do not really exist) and on correct rejections
(correctly recognizing when opportunities do not exist).

Entrepreneurs who recognize opportunities most often are those who have a more
realistic view of the risks involved and their chances of obtaining success.

Entrepreneurs who recognize opportunities are strongly motivated to maximize

hits and to avoid false alarms.

Practical Techniques for Increasing Opportunity Recognition

Learning Objectives:
List several steps you can take as an individual to increase your skill at recognizing
potentially valuable opportunities.

Build a broad and rich knowledge base

Organize your knowledge
Increase your access to information
Create connections between the knowledge you have.
Build your practical intelligence
Temper eagerness for hits with wariness of false alarms.

THE VOICE OF EXPERIENCE

Chet Opalka, cofounder of Albany Molecular Research, Inc. gave his thoughts on how to avoid
false alarms. False alarms are those seemingly good ideas which take much time, effort and
money only to prove to be of no value.

Opalka urged entrepreneurs to develop a good network of people whose experience base and
knowledge base can be trusted. This would be a group of advisors off of whom you could bounce
ideas. He said people tend to put blinders on and see only what they want or expect to see. He
also recommended belonging to an angel network. This would be a board or group of investors
with varied backgrounds who would look at problems from different angles. Their advice and
counsel could prove invaluable. The authors encourage entrepreneurs to surround themselves
with intelligent, experienced people and then listen to their advice.

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ANSWERS TO END OF CHAPTER DISCUSSION QUESTIONS

1. People are not very good at describing information stored in procedural memory (the
kind of memory that allows you to perform skilled tasks such as playing a musical
instrument). Why do you think this is so?

Answer: Guide the students into a more in-depth understanding of how memory works. The
procedural memory is that depository of information that is done over and over, but, once
understood, seems to require little thought to be utilized. The entrepreneur may have
accumulated knowledge over many years demonstrating how to recognize opportunities. He or
she has done this so much and so often that it is basically second nature. The analysis process has
been used so much by the entrepreneur that it is automatic. It is so much this way that trying to
explain how it is done can cause interference with the entrepreneur being able to do it.

2. Many people who are afraid of flying in airplanes are not afraid to drive their own cars.
When asked, they often answer, “Because there is greater danger of being killed in
airplanes.” This is not true - there is actually a greater chance of being killed in an
automobile. Do you think the availability heuristic might play a role in this error?

Answer: Yes. Remind students that the availability heuristic is a mental rule that says the easier
it is to bring a bit of information to mind, the greater the importance we assign to it. Since
dramatic or unusual information is easier to recall than more mundane information, the
availability heuristic does play a role in this error. The person will more likely remember news
reports of an airplane crash in which 100 people were killed than 100 news reports where only
one person was killed in an automobile. The airplane crash is a dramatic event because of the
number of people killed. Car crashes happen every day and become mundane in our memory.

3. Repeat entrepreneurs – people who start one successful venture after another – seem to
have a knack for recognizing good opportunities. Do you think they may have better
prototypes for opportunities than other people? If so, how did they acquire them?

Answer: Yes. Prototypes are abstract, idealized mental representations that capture the essence
of a category of objects. Those who start and complete a successful venture know what a
successful venture should look like, how it should be run, and how it will be. With that mental
picture or mold, the entrepreneur can start a new business, fit it to the mold that he or she knows
to be successful and then have another successful business. Such successful entrepreneurs might
have better prototypes for opportunities to others because of greater access to information, more
creative and/or organized utilization of information, or better signal detection (i.e. ability to
distinguish a viable opportunity from background “noise”).

4. Can you think of people you have known who were high in analytic intelligence (the kind
measured by IQ tests) but low in practical intelligence? What about the opposite pattern
– have you known people high in practical intelligence but low in analytic intelligence?
Which would make better entrepreneurs? Why?

Answer: Ensure that students understand how the brain works as it affects being an entrepreneur.
There are actually four types of intelligence that are involved in entrepreneurship: creative
intelligence, practical intelligence, analytic intelligence and social intelligence. Creative
intelligence involves the ability to formulate new ideas and gain insights into a wide range of
problems. Practical intelligence involves being intelligent in a practical sense – solving problems

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of everyday life and having ”street smarts.” Analytic intelligence involves the abilities to think
critically and analytically. Social intelligence involves the ability to understand others and get
along well with them.

Entrepreneurs need creative intelligence to come up with new ideas, practical intelligence to
identify ways to develop these ideas, analytic intelligence to evaluate the ideas and determine
whether they are worth pursuing, and social intelligence to select and successfully interact and
manage employees. All types of intelligence are needed. However, entrepreneurs are likely to be
higher than normal in practical intelligence and creative intelligence.

5. In your opinion, do opportunities exist “out there” in the external world? Or are they
purely a construction of human thought? Why?

Answer: Answers will vary on this, according to the student’s opinion. Each student should
understand that opportunities exist “out there” as potential. They come into existence at a given
point in time because of a combination of conditions that did not exist previously, but are present
now. The challenge is recognizing those opportunities. Opportunities can exit “out there” in the
external world, but are not realized into successful ventures until someone recognizes the
opportunity in a thought process. The entrepreneur is able to recognize the situation as an
opportunity because the entrepreneur generally has greater access to information than others, and
the entrepreneur is better at formulating plans and strategies.

6. Have you ever been trapped in mental ruts – forced by your own experience and training
to view a situation or problem in a way that blocked you creativity? If so, what should
you have done to escape from this kind of cognitive trap?

Answer: Students should think of their own situations. We all become trapped in mental ruts,
but there are indeed ways out. We store information in our memory in an organized manner.
This enhances our ability to retrieve the information. However, the internal structures we have
created in our minds for this storage can make it difficult for us to access that information in any
way other than the way we have always done it. We can expand these concepts in three major
ways. First, we can combine the concepts. Concepts that appear to be quite opposite can be
combined into novel things. Secondly, concepts can be expanded. Thirdly, concepts can be
changed through analogy, by involving perceived similarities between objects or events that are
otherwise dissimilar. In this way, we can find new ways of thinking and get out of the mental
ruts we had gotten into.

ANSWERS TO INFOTRAC EXERCISES

1. "The rusty ribbon": John Herbert Orr and the making of the magnetic recording
industry, 1945-1960. David L. Morton.

SOLUTIONS

1. Successful intelligence is the balances mixture of three components: creative intelligence,

practical intelligence, and analytic intelligence.

2. Orr reflected analytic intelligence in his decision to pursue the commercialization of magnetic
tape. He reflected practical intelligence as he adjusted his products quickly to new markets for

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instrumentation or video tape. And he reflected creative intelligence through innovative
marketing practices and experimentation.

3. Yes, according to the article, “He had a knack for gaining the friendship and trust of those he
met. His business associates in later years recalled that his intelligence and enthusiasm
contributed to his special talent for influencing people: he was a "’natural salesman.’"

2. Opportunity Recognition: An Exploratory Investigation of a Component of the

Entrepreneurial Process in the Context of the Health Care Industry. Richard L. McCline;
Subodh Bhat; Pam Baj.

SOLUTIONS

1. Build a broad knowledge base, organize your knowledge, increase your access to
information, create connections between the knowledge you have, build your practical
intelligence, temper eagerness for hits with wariness of false alarms
2. (1) a behavioral component that captures how the individual behaves toward a particular
environmental stimulus; (2) a belief component that captures what the individual thinks
about this same environmental stimulus; and (3) an emotional component that captures
how the individual feels about the specific environmental stimulus.
3. (a) attitude toward risk, because this concept is included in almost all current definitions
of the entrepreneurial process (Brockhaus, 1980; Kirzner, 1979; Knight, 1921; Stevenson,
1983; Timmons, 1999); and (b) an attitude of looking for unmet needs in the health care
environment or "opportunity recognition," because this concept has generated
considerable interest in the literature (Allen, 1999; Covin & Slevin, 1990; Gartner, 1988;
Timmons, 1999).

ANSWERS TO SMALL BUSINESS SCHOOL VIDEO DISCUSSION

TOPICS
Ziba Design with Sohrab Vossoughi
This episode of Small Business School visits the Ziba design firm in Portland, Oregon, to try to
uncover how this top industrial design firm has created surpassingly successful designs for
products as diverse as shower squeegees and smoke detectors. Relevant to this chapter in the
text, students might consider the following questions. What evidence is there of creativity at
work at Ziba Design? What kinds of intelligence do Sohrab and his employees demonstrate
through their interactions and final products? How do Ziba’s designs illustrate successful
creativity that matches the criteria of being both novel and appropriate?

Topic for discussion: Sohrab says, "You know it can be done better." Everything? What makes
better "better"? We grow up learning the basic comparative analysis -- good, better, best -- but
what is the best? Can anything ever be perfect?
Answer: Sohrab would answer, "No." And then, he challenges himself and his team to think
about the next step on the road to reach perfection. The longest-term employee, Henry Chin said,
"Internally, we all strive for perfection."
In all of science there are three conditions that define the continuum of perfection. The
first is to understand what creates order and then discern how. We look for the continuity
conditions. The second is to grasp the real relations and we look at the symmetries. The third is to
grasp what is happening in real time, the dynamics of the moment, and we look at the potential

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for evolving harmonies. Along that continuum, the possibilities approach infinity for higher
perfections and our creative abilities will always be taxed.
 
Topic for discussion: Do you think it is true that those among us who are no longer striving for a
higher perfection have simply lost their vision and hope for the future? Do you think that striving
is at the heart of creativity?
Answer:  Yes.  If we stop trying we stop living fully. 

Topic for discussion: Why would the Museum of Modern Art in New York City make a plastic
squeegee part of its permanent exhibit?
Answer:  It won an award from the Industrial Designers Society of America.  It was one of the
first products Sohrab invented soon after he launched his own business. He became known as
"The Squeegee Guy."   When a rather industrial, mundane product is so good that it gets placed in
museums and people validate it by spending $16 million dollars in one year to buy them,
sometimes out of respect and admiration, sometimes out of jealousy, and sometimes just for
convenience, your colleagues will begin branding you by that product.
 If they do, you have arrived!

Topic for discussion:  Why are some products such an outrageous success?
Answer: Nobody really knows.  If a person said they knew the answer to this question
they would be a billionaire and not want to tell the rest of us the secret.  Everything written on
why products make it can only be case-driven and no two cases are alike.
New product (or service) adoption within the market is the primary challenge of
marketing and sales. But, when every thing is just right, it flows. Sohrab's first product hit big but
many of Ziba's inventions have not made it to the marketplace.  Clients who pay Ziba may
decide, once the product is ready, that they made a mistake even asking for such a product.  They
may decide it will cost too much to convince people to buy it.  Then, like the Microsoft keyboard,
the stars line up and the product sells and sells and sells.
Always, a winning product is a lovely balance between form and function.

Topic for discussion: With so many varying backgrounds assembled in work areas with no
walls, what is the common language?  How does Sohrab orchestrate the achievement of goals?
Answer:  Ziba has an employee manual where the philosophies and work processes are spelled
out in English, which is the language spoken most at the office. Every team takes a project
through these phases:
1) understand the emotional and rational needs of the customer in the context of competitive and
client capabilities.
2) convert theses needs into words, drawings and forms - - this phase is dominated by prototyping
and brainstorming.
3) identify the concepts that have the greatest market potential.
4) develop and engineer the idea without losing focus.
The design philosophy of Ziba is: strive for simplicity, innovation, human-centered
interaction, visual interest and efficiency.

Topic for discussion:  Why is word-of-mouth so efficient?

Answer:  The effort you put forth to please customer X turns into an investment with a high rate
of return. While you might not want to put out the effort to make customer X fully happy, when
you do, that customer brags about you.  The time customer X spends talking positively about you
to others is time you don't have to spend doing it.  Therefore, your phone will ring and it will
seem as if you got lucky. But in reality, it was the excellent work you did for customer X that got
you the next job.

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Topic for discussion:  Why are mentors important?
Answer: Mentors are always people who have already done what you want to do.  They will be
honest and tell you about the mistakes they have made and how they managed to work out of
problems they have faced while building a business. 
  Successful people will be able to tell you about the mentors that have helped them along
the way. The average Joe probably doesn't have a list of mentors; that is why he is average.  It
takes effort and courage to seek out people who are ahead of you in life.  Sohrab and most of the
small business owners I know are not afraid to ask questions and seek help.

Topic for discussion:  What is an Employee Stock Ownership Plan?

Answer: An ESOP is basically a retirement plan.  It is a way for the business to save money for
employees.  In Sohrab's case, he has a hybrid ESOP because only long-term employees who are
hand-chosen can qualify.  With a standard ESOP, all employees are admitted into the program.

Topic for discussion:  How did an Employee Stock Ownership Plan help Sohrab?
Answer:  Sohrab is a big star in his field.  This is good and bad.  He can attract young talent
because they look up to him. But how does he keep those young people happy if they are always
working in his shadow?  By putting an employee ownership plan in place, Sohrab is sharing
ownership in the company with the dedicated employees.  Until he did this, the business was
stuck, and now there is steady growth.

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