Stumbling on profit opportunities

January 6, 2009

by Sandy Ikeda

I’ve been thinking about the following from Daniel Gilbert’s Stumbling on Happiness:

Experiments have demonstrated that the moment we encounter an object, our brains instantly analyze just a few of its key features and then use the presence or absence of these features to make one very fast and very simple decision:  “Is this object an important thing to which I ought to respond right now? […] As such, our brains are designed to decide first whether objects count and to decide later what those objects are.  This means that when you turn your head to the left, there is a fraction of a second during which your brain does not know that it is seeing a wolverine but does know that it is seeing something scary (Emphasis original, p.62).

This passage came to mind after reading Steve Horwitz’s comment on my coffeehouse post on “optimal distraction.”  Steve had written:

I wonder Sandy whether there’s an evolutionary explanation for the apparent need to be “optimally distracted.” In particular, I wonder whether that tendency to look up every so often, esp. when someone new enters the shop, isn’t a residue of early humanity’s need to be constantly alert to animals in the nearby area. Perhaps our ability to focus was honed in those sorts of environments – we had to learn to screen out the background noise/movement from the real threats. Perhaps that’s why we can work in coffeehouses with the buzz of ambient noise, but the new person entering or walking in front of us becomes that “optimal distraction.”

The ability to take in and quickly evaluate an object is evidently just such an evolutionary adaptation.  And there’s at least a superficial similarity between this phenomenon and what Israel Kirzner means by “entrepreneurial alertness.”  Of course, there are important differences.  Gilbert is talking about wolverines in the wild while Kirzner talks about $20 bills lying on sidewalks:  the one is a threat, the other a potential benefit.

Another apparent difference is that for Gilbert it’s not just becoming aware of something, but being able to unconsciously process certain features of that something that somehow re-focuses one’s attention more directly onto the object itself.  (In Michael Polyani’s terminology, your perception of something is shifting from “subsidiary awareness” to “focal awareness”).  To a layman like me this sounds like a mysterious process, but it also sounds very much like what Kirzner is saying one does when exercising entrepreneurship – being able to pick out from the background that anyone else can see those things that indicate a profit opportunity and (instantly?) evaluate it – and it’s perhaps just as mysterious.  So, I’m curious about whether the psychology literature to which Gilbert refers might shed light on the nature of entrepreneurial alertness in Kirzner’s sense.

Apologies for the vagueness of this post but I’m interested in what, if anything, others might think about this.

14 Responses to “Stumbling on profit opportunities”

  1. koppl Says:

    I think it is possible to link entrepreneurial alertness to psychology. And I think we should. Benny Gilad was a student of Kirzner who linked alertness to “locus of control.” Later David Harper made the same link. (I think David cites Gilad, but I don’t quite remember.) Hayek’s _The Sensory Order_ has a discussion of alertness — under that name — that fits Kirzner’s idea quite nicely.

    I think there is a link to Husserlian phenomenology, too. In “What is Alertness?” (http://alpha.fdu.edu/~koppl/alertness.htm) I say “Alertness problematizes open possibilities.” I still that’s true. I also think that perspective should be integrated with evolutionary and empirical perspectives.

    Overall, I think there is a quite a bit of work to be done on alertness as a universal feature of human psychology.

  2. Sandy Ikeda Says:

    Thanks, Roger. Yes, the authors you cite do show it’s possible to link entrepreneurial alertness to psychology, and like you I believe that psychological research can tell us more. What caught my eye, however, is the particular result that Gilbert cites, regarding our almost pre-cognitive ability to make snap evaluations about what things in our subsidiary awareness matter and what things don’t.

  3. koppl Says:

    I think your issue is addressed both by Schutz’s analysis of problematic and open possibilities and by Hayek’s treatment of alertness. I think cognitive psychology and neuroscience (e.g. Descartes Error) will prove helpful in this connection, though I don’t have further cites at my fingertips.


  4. When I read Gilbert’s wolverine example I knew just what he was talking about. I once ran across a rattlesnake (in a state park in west Texas); I distinctly remember, first, freezing in position, second, realizing that I had stopped frozen but not knowing why, and then third, that maybe 6-8 feet ahead of me the rattlesnake was warning me off.

    Gilbert further explains that the brain’s ability to recognize that something is threatening evolved well before the brain’s ability to recognize just what it is that is causing the feeling. (And I think he suggests or maybe states outright that the first ability is located in the limbic system while the second ability is the later-developed frontal lobe.)

    Entrepreneurial alertness as a psychological phenomenon seems more akin to the second kind of recognition.

    Which, if true, is good news in that it means that entrepreneurial alertness is an ability that can be acquired and improved, rather than being an ability that you are born with or not.

  5. Sandy Ikeda Says:

    Thanks for the story and comment, Michael. I would only add that your final remark — that entrepreneurship can be acquired and improved — does not necessarily mean that such acquisition and improvement need be the result of deliberate action or act of investment.

    What differentiates Kirzner’s concept from others is his claim that the discovery of profit opportunities cannot be explained as the result of a deliberate search, otherwise you get caught in an infinite regress. (I.e., How did you discover that searching for X was a good idea, through a prior search Y? If so, how did you discover that that was a good idea? And so on). If this process has a starting point, and it seems that there indeed needs to be one, it lies in not in (Robbinsian) optimizing, but in a genuinely creative act.

    So, while entrepreneurship may not be hard-wired and one can become more (as well as less) entrepreneurial over time, how this happens, and why some seem to be better at it than others, has not been fully explained. Although, perhaps Roger is right and it’s in Schutz.

  6. Jake Young Says:

    Hi Ms. Ikeda,

    I am neuroscientist with a strong interest in economics. I found your question intriguing, so I published an answer here:

    http://scienceblogs.com/purepedantry/2009/01/preconscious_processing_and_en.php

    My simple answer is that I don’t think that the system to which Gilbert is referring is being used for entrepreneurial alertness.

  7. Jake Young Says:

    Oops. Sorry Sandy. Didn’t know you were a dude.

    Hi. Mr. Ikeda.

  8. Sandy Ikeda Says:

    Jake, thanks for your informative and extensive response to my query over at your blog, “Pure Pedantry.” I’ve been trying, so far unsuccessfully, to post a comment there — some kind of glitch perhaps. I’ll keep trying. If I’m not able to, however, I’ll post it here.

  9. Jake Young Says:

    Sorry about that Sandy. Our site is down for the next couple days while we upgrade to MT4. The problem isn’t you; commenting is just down at the moment.

  10. Sandy Ikeda Says:

    OK, here’s my reply:

    Jake,

    I learned a great deal from this post and I really appreciate your taking the time to respond to my query. I gather that much of experimental psychology today consists of attempting to trace (reduce?) macro behaviors to neurological processes, which is the approach you took to address my question: “Could the sub-cortical, preconscious processing account for entreperneurial alertness?” It may also have been, although I’m not sure, the basis of the experimental research that Gilbert was referring to.

    I’m revealing my sheer ignorance by asking this, but is it possible that two related macro-phenomena — such as entrepreneurial alertness and danger awareness — can emerge from two different neurological processes? Another way to ask this is: If X and Y are two macro-phenomena, is it the case that experimental psychology will regard them as fundamentally different if they can be shown to emerge via different neurological pathways?

    You’ve persuaded me that entrepreneurial alertness and danger recognition probably run along different neuro pathways, but I’m not yet persuaded that they are not, in some meaningful psychological sense, deeply related phenomena.

  11. Jake Young Says:

    “Is it possible that two related macro-phenomena — such as entrepreneurial alertness and danger awareness — can emerge from two different neurological processes?”

    Absolutely, yes. Scientists — like I imagine economists — spend a lot of our day drawing distinction. In this case, the distinction that I drew was between different neurological implementations of the processes. This is something that neuroscientists tend to obsess over because we focus on how information is represented in the brain.

    But the processes do have very notable similarities. They both are processes by which complex stimuli are assigned motivational significance initiating a response. They both involve pattern recognition. So I don’t think it is odd at all that you would find them similar. When I TA courses in neuroscience, I do comparing and contrasting a lot. One of the principal themes I bring up again and again in different systems is pattern recognition.

    My point with respect to the implementation was merely that the two processes — danger awareness and entrepreneurial alertness — rely on two system that differ in three important respects. First, there is the time scale of reaction. Reactions to danger are very quick; whereas I expect alertness to business prospects are not as quick. Second, there is the sophistication of the stimuli. Danger sense deals with very simple things like loud noises, and EA deals with very complex patterns including a sense of what other people know. Finally, there is the complexity of response. Danger sense results in your jumping backward and that is about it. EA would cause you to initiate a long-term business plan that might last months or years. Each of these systems has evolved to these constraints to deal with different types of situations.

    If I had to speculate on the type of system that would produce EA, I would suspect it is the prefrontal cortical reward system particularly the orbitofrontal cortex (OFC). (This is actually what I study.) Patients with OFC damage look totally normal — memory, perception, motion are intact. But they are utterly incapable of producing anything like a long-term plan. You hear these horrible stories about them getting damage to their brain, and then squandering all their money gambling. The types of patterns recognized in the OFC are the complex multi-relational stimuli that I think Kirzner is referring to, and the types of responses generated can be more long-term. So if I had to speculate the neural system involved in EA, I would say that one.

    But the fact that I am being reductionist with respect to the mechanism does not mean that these two processes are very macro-similar.

  12. Jake Young Says:

    I would add three things.

    1) Multiple parallel implementations of very similar tasks is the rule in the brain. Think of memory. There is short-term memory and long-term memory. These do very similar things, but are implemented through different structures.

    2) The behavioral output is a function of the convergence of many pathways. So there may be fast moving fear process and a slow moving reward evaluation process that both affect the resulting behavioral response.

    3) It takes pretty sophisticated lab equipment to differentiate the action of these separate systems. As a practical matter they are always functioning in parallel.

  13. koppl Says:

    I’ve written an independent post on this which is sitting in the Thinnkmarkets queue. I’d like to hop in now, however, to say that neuroscience and social science are different areas whose categories will not aways line up perfectly. My guess is that more than one brain process corresponds, albeit imperfectly, to Kirznerian alertness. In my (forthcoming?) post I say leaping away from a snake is a good example of Kirznerian entrepreneurship.


  14. […] processing to address the issue of Kirznerian alertness.  He was responding to Sandy’s post, “Stumbling on Profit Opportunities.”  Jake gives a negative reply to Sandy’s conjecture that preconscious processing, whereby we leap […]


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