1042-2587

© 2006 by
Baylor University

Social Capital,
E T&P Cognition, and
Entrepreneurial
Opportunities: A
Theoretical Framework
Donna Marie De Carolis
Patrick Saparito

Entrepreneurship—the recognition and exploitation of opportunities—is valuable within

organizations as well as in the establishment of new ventures. Some studies have addressed
the issue why some individuals take advantage of opportunities and some do not. While
some studies find that psychological variables, personality traits and demographic factors
may distinguish entrepreneurial activity, these findings are equivocal. Other research has
looked to the importance of social capital and network ties to new venture creation. Yet,
there is little discussion regarding the possibility that social capital and personal factors
interact and influence entrepreneurial behavior.
Drawing from social cognitive theory (Augoustinos & Walker, 1995; Fiske & Taylor, 1984;
Bandura, 1986; Wood & Bandura, 1989) this paper advances a model suggesting that entre-
preneurial behavior is a result of the interplay of environments (i.e., social networks) and
certain cognitive biases in entrepreneurs. We propose that both individual cognition and
social capital are important in understanding entrepreneurial behavior. If the domain of
entrepreneurship is “. . . the nexus of two phenomena: the presence of lucrative opportuni-
ties and the presence of enterprising individuals” (Shane & Venkataraman, 2000) then our
model suggests an explanation of this nexus through exploring how both external (i.e.,
social capital) and internal factors (i.e., cognition) affect why some people and not others
exploit opportunities.

Introduction

Entrepreneurship is inextricably linked to innovation and competitive advantage.

The importance of entrepreneurship is evidenced not only in public policy initiatives
that encourage new business development but also within established organizations
that actively encourage the development and pursuit of new opportunities. While the
importance of entrepreneurship is obvious, its origins are not. There is a vast theoretical
and empirical literature that poses the question of why some exploit opportunities and

Please send correspondence to: Donna Marie De Carolis at decarold@drexel.edu and to Patrick Saparito at
pas46@drexel.edu.

January, 2006 41
some do not (e.g., Begley & Boyd, 1987; Brockhaus, 1980; Cooper & Dunkleberg, 1987;
Sexton & Bowman, 1984). The majority of this literature proposes that psychological
variables, personality traits and demographic factors may distinguish entrepreneurial
activity. Yet, the results of these findings are equivocal (Brockhaus & Robert Horowitz,
1986; Low & MacMillan, 1988; Shaver & Scott, 1991).
Also, a stream of research emphasizes the importance of networks, and the social
capital inherent in them, for the creation of new ventures (Aldrich & Zimmer, 1986).
Social capital may be described as the “. . . goodwill available to individuals or groups”
(Adler & Kwon, 2002, p. 23) that includes feelings of gratitude, reciprocity, respect, and
friendship. It is an asset that resides in an individual’s relationships and consists of the
goodwill flowing from friends, colleagues, and other general contacts (Burt, 1992). Social
capital as portrayed in previous studies may be an indicator of opportunity, but it is not
a direct predictor. In fact, Burt, 1992 contends that as the presence of entrepreneurial
opportunities in a network increases, the odds of entrepreneurial behavior increase—if
someone is inclined to entrepreneurial behavior. Yet, the literature on social capital and
entrepreneurship is, again, equivocal as to this entrepreneurial inclination.
While it is explicitly acknowledged that social capital enables new venture forma-
tion, there is a gap in the literature regarding how social capital and personal factors such
as cognitive biases interplay and influence entrepreneurial behavior. Drawing from social
cognitive theory (Augoustinos & Walker, 1995; Bandura, 1986; Fiske & Taylor, 1984;
Wood & Bandura, 1989) this article advances a model suggesting that entrepreneurial
behavior is a result of the interplay of environments (i.e., social networks) and certain
cognitive biases in entrepreneurs.
Our contribution is the advancement of both the social capital and entrepreneurship
literature by proposing that the impact of social capital on individual cognition is impor-
tant in understanding entrepreneurial behavior. If the domain of entrepreneurship is
“. . . the nexus of two phenomena: the presence of lucrative opportunities and the pres-
ence of enterprising individuals” (Shane & Venkataraman, 2000), then our model sug-
gests an explanation of this nexus through exploring how both external (i.e., social
capital) and internal factors (i.e., cognition) affect why some people and not others exploit
opportunities.
The article proceeds as follows: We first discuss the multidimensional nature of social
capital particularly as it pertains to new venture creation. The article follows our model
(see Figure 1) from left to right with discussion and associated propositions regarding
cognitive biases, risk perception, and exploitation of entrepreneurial opportunities.
Second, we discuss the model’s implications for future research and practice.

Social Capital

Although there is much interest in and research on the concept of social capital, the
concept is still in an emerging phase, comprising different uses and connotations from
various scholarly perspectives (Adler & Kwon, 2002; Hirsch & Levin, 1999). Conse-
quently, it is important for researchers to clarify their approach to and definition of social
capital. Social scientists have described two forms of social capital: “bonding” and
“bridging.” The bonding social capital perspective explores the impact of a collective’s
internal ties and the substance of the network relationships within that collective (Adler
& Kwon, 2002; Leanna & Van Buaren, 1999). For example, Coleman (1988) suggests
that dense connections between parties within a group facilitate the development of self-

42 ENTREPRENEURSHIP THEORY and PRACTICE

Figure 1

Social Capital, Cognitive Biases, and Exploitation of Entrepreneurial

Opportunities

1a +
Structural holes
1b Overconfidence
+ _
2a 5a
Trust +
Exploitation
2b + 5b 6 of
Illusion of control _ Risk perception
_ entrepreneurial opportunities
Strong ties +3
5c
+ _
4a
+ Representativeness
Shared codes and language 4b

Social capital Cognitive biases

enforcing norms and trust within a collective allowing the group to more easily attain
communal goals.
Alternatively, bridging social capital, sometimes referred to as the private-goods
model of social capital, focuses on individuals and their network relationships (Adler &
Kwon, 2002; Burt, 1992, 1997). Compared with the bonding social capital approach, the
bridging social capital’s focus is on an individual’s external social ties and how the social
capital, as a resource within this network, is used for the individual’s private benefit.
Social capital assists in the explanation of individuals’ success as they can utilize their
contacts and connections and the resources that they bring for personal gain (Adler &
Kwon, 2002; Leanna & Van Buaren, 1999).
For example, Burt (1992) characterizes social capital as a resource that brings a
higher rate of return on investments. He suggests that social capital creates an advantage
in “. . . the way in which social structure renders competition imperfect by creating entre-
preneurial opportunities for certain players and not for others” (1992, p. 57). Indeed, both
the entrepreneurship (Aldrich & Zimmer, 1986; Birley, 1985; Uzzi, 1996; Walker, Kogut,
& Shan, 1997) and social capital literatures (Adler & Kwon, 2002; Burt, 1992; Nahapiet
& Ghoshal, 1998; Tsai & Ghoshal, 1998) have emphasized the importance of connec-
tions and networks to the establishment of new ventures and innovation in general.
Consistent with the literature on how entrepreneurs use network connections for com-
petitive advantage (Aldrich & Zimmer, 1986), this article takes the bridging approach to
social capital, that is, social capital manifested through the individual’s external connec-
tions. In doing so, we suggest that in the context of entrepreneurship, social capital is the
goodwill and resources that emanate from an individual’s network of social relationships,
and its effects flow from the information, influence, and solidarity available to the entre-
preneur (Adler & Kwon, 2002).
Two direct benefits of this type of social capital are relevant to entrepreneurs: infor-
mation and influence. Social capital may facilitate access to information, which is a crit-
ical component of entrepreneurial opportunities (Shane & Venkataraman, 2000). Social

January, 2006 43
capital enhances the timing, relevance, and quality of information (Adler & Kwon, 2002;
Burt, 1992) For example, entrepreneurs with access to university professors either
directly or through associations may find out about an emerging technology before others.
Thus, they may be poised to act upon this before it becomes public knowledge. Another
benefit of social capital consists of influence. Individuals accumulate obligations from
others in the network and leverage these commitments at a later time. Burt (1992) has
discussed the influence and power that entrepreneurs who span disconnected networks
have. These entrepreneurs determine who will gain from the disconnection, locating them
in a favorable position during negotiations.

Three Dimensions of Social Capital

While traditionally, scholars have studied social capital as a unidimensional concept
(e.g., Burt, 1992; Coleman, 1988; Walker et al., 1997), increasingly, researchers are
adopting a multidimensional perspective of social capital (e.g., Lesser, 2000; Nahapiet
& Ghoshal, 1998). In this article, we adopt Nahapiet and Ghoshal’s (1998) three
dimensions of social capital: structural dimension, relational dimension, and cognitive
dimension.

Structural Dimension. The structural dimension refers to the network structure’s overall
pattern of connections between actors (Nahapiet & Ghoshal, 1998). Most notably,
network structure includes such factors as the existence or absence of direct connections
between a focal actor and others, and the pattern and number of indirect ties between a
focal actor and others (Burt, 1992; Nahapiet & Ghoshal, 1998).
Positioning within a network is important because it can confer differential access
to information (Burt, 1992). For instance, Burt, 1992 suggests that a structural hole is
said to exist when different clusters of interconnected actors are only sparsely connected
to one another. Consequently, any individual who holds the only or one of the few con-
necting position(s) between the two clusters is able to capitalize on information that exists
in one cluster but not in another by acting as a broker for nonredundant information. Burt
(1992, 1997) suggests that entrepreneurs will act as tertius gaudens—the third who
benefits (Burt, 1992, 1997) through leveraging the nonredundant information for profit.

Relational Dimension. While the structural dimension refers to the overall pattern of
network connections, the relational dimension refers to the nature of the personal rela-
tionship that develops between specific people (Nahapiet & Ghoshal, 1998) as manifested
in “strong” versus “weak” ties. The “strength” of a tie is a reflection of the combination
of the amount of time, emotional intensity, intimacy, and reciprocal services that char-
acterize that tie (Granovetter, 1985). Strong ties are typically associated with trust
and facilitate the flow of fine-grained information (Gulati, 1998; Rowley, Behrens, &
Krackhardt, 2000) and the transfer of tacit knowledge (Uzzi, 1996).
While many factors make a tie weak or strong, trust plays a pivotal role (Granovet-
ter, 1985; Uzzi, 1999). Trust has been conceptualized as a willingness to be vulnerable—
placing one’s welfare in the hands of others—and a feeling of positive expectations—an
individual’s confident beliefs that another will behave in a beneficial manner (Rousseau,
Sitkin, Burt, & Camerer, 1998). Being embedded in a network gives rise to a form of
trust known as relational trust (Nahapiet & Ghoshal, 1998). Relational trust refers to a
trustor’s confident beliefs that a trustee will act beneficially because the trustee cares
about the trustor’s welfare (Rousseau et al., 1998) which emerges from repeated
interactions between individuals over time that yield feelings of reliability and positive

44 ENTREPRENEURSHIP THEORY and PRACTICE

expectations. Relational trust is based on continual reciprocity—the notion that “I’ll do
this for you now, but you will do something for me later” (Adler & Kwon, 2002; Lesser,
2000).

Cognitive Dimension. The cognitive dimension of social capital refers to “shared rep-
resentations, interpretations, and systems of meaning among parties” (Nahapiet &
Ghoshal, 1998, p. 244) that enable individuals within a network to make sense of infor-
mation and to classify it into perceptual categories (Augoustinos & Walker, 1995). Shared
systems of meanings and language facilitate the exchange of information, learning and
knowledge creation that allows individuals to share each other’s thinking processes.
These common ways of looking at the world help individuals to make sense of new infor-
mation and knowledge (Grant, 1996; Nonaka, 1994).

Cognitive Biases and Entrepreneurial Opportunities

Prior research on personal attributes distinguishing entrepreneurs from others has

hypothesized a positive relationship between venture creation and variables such as inter-
nal locus of control, need for achievement, personal optimism, preference for shaping
one’s own destiny, and tolerance for ambiguity (Baron, 1998; Bygrave, 1989; Hatten,
1997; McClelland, 1961). The assumption behind this literature stream is that increased
manifestation of certain personal attributes facilitates new venture creation. However, this
research has produced inconsistent results (Shaver & Scott, 1991). The field has since
moved to an investigation of the impact of variations in cognition and decision processes
to explain entrepreneurial behavior (Bird, 1992; Busenitz & Barney, 1997; Krueger &
Brazeal, 1994; Shaver & Scott, 1991).
Consistent with this and with the psychology literature, we employ the term cognitive
bias. However, we do not intend to use the term “bias” as either a negative or positive
state of affairs. Instead, we intend to use the term objectively to identify an entrepreneur’s
cognition and decision processes that lead to alternative perceptions of entrepreneurial
opportunities. In fact, we embrace the possibility that cognitive biases could lead to
either successful or unsuccessful exploitations of entrepreneurial opportunities.
Recent research suggests that some entrepreneurs perceive situations differently than
others (Baron, 1999; Busenitz & Barney, 1997; Gatewood, Shaver, & Gartner, 1995;
Palich & Bagby, 1995; Shaver & Scott, 1991; Simon, Houghton, & Aquino, 1999).
Although there are many cognitive biases that affect our thinking and, in particular, our
perception of risk, recent research in the field of entrepreneurship suggests several spe-
cific cognitive biases that influence risk perception as they relate to entrepreneurs: over-
confidence, illusion of control, and representativeness (Busenitz & Barney, 1997; Palich
& Bagby, 1995; Simon et al., 1999). The failure to know the limits of one’s knowledge
results in a cognitive bias known as overconfidence (Bazerman, 1990; Lichtenstein &
Fischoff, 1977; Oskamp, 1965). When individuals are overconfident, they overestimate
the probability of being right. The psychological basis for this bias appears to be people’s
refusal to examine any unsubstantiated assumptions they might hold. Overconfidence
occurs because individuals may ignore new information they receive after an initial deci-
sion has been made, or they do not realize the extent to which their plans or estimates
are inaccurate. Individuals who are overconfident treat their assumptions as fact and may
believe that certain actions are less risky than they really are.
Illusion of control is individuals’ overestimation of the extent to which they can affect
the outcome of particular situations (Duhaime & Schwenk, 1985). Illusion of control

January, 2006 45
affects peoples’ assessments of their chance of success at a venture. It differs from over-
confidence in that the former is an overestimation of skills, whereas the latter is an inac-
curate estimation of the facts of a particular situation and one’s ability to cope with and
to predict future events (Langer, 1975; Simon et al., 1999) found that people expressed
an expectancy of personal success much higher than objective probability would predict.
This overestimation stems from the fact that people will seek out information that sup-
ports their opinions while ignoring contradictory information.
Representativeness (i.e., belief in the law of small numbers) arises when individuals
use only a limited number of information sources to make a decision (Tversky &
Kahneman, 1971). While the law of large numbers advocates that large random samples
should be used to make inferences about population statistics, decision makers have
bounds to the amount of information they can practically gather and process (March &
Simon, 1958). Consequently, to economize on information processing, decision makers
are willing to rely on small samples (March & Simon, 1958), which may not represent
an accurate picture of a situation (Payne, Bettman, & Johnson, 1992; Tversky &
Kahneman, 1974). Additionally, individuals who discuss business ideas with a limited
number of advisors or colleagues are more likely to receive overly positive feedback
(Kahneman & Lovallo, 1993). Finally, research suggests that people are likely to remem-
ber successes more than failures (Golder & Tellis, 1993) which can create overly posi-
tive estimations of a situation. Therefore, while reliance on small samples may economize
on information processing, it can potentially introduce serious biases in the information
received (Kahneman & Lovallo, 1993; Payne et al., 1992; Tversky & Kahneman, 1974).
There is sufficient reason to believe that representativeness is prevalent among entre-
preneurs. Entrepreneurs live and breathe uncertainty in new markets and technologies,
unknown demand, and unpredictable operating costs. Moreover, entrepreneurs would not
likely even have the resources to collect all the needed information. In these situations,
entrepreneurs might rely on small, nonrandom samples and personal experiences to guide
their decision making (Busenitz & Barney, 1997).

Model Development

Our model examines how social capital and cognition interact and influence the
exploitation of opportunities. In so doing, we rely on the ideas behind social cognitive
theory (Wood & Bandura, 1989) to explain how behavior (exploitation of opportunities)
is the result of the interplay between the environment (a network’s social capital) and
personal factors (cognitive biases and risk perception). Social cognitive theory (Bandura,
1986; Wood & Bandura, 1989) suggests that social environments play a pivotal role in
shaping individuals’ cognition and, ultimately, behavior. That is, individual cognition
originates in social life, human interaction, and communication (Augoustinos & Walker,
1995). We suggest that social capital derived from being embedded in a network shapes
entrepreneurs’ cognitive processes and ultimately their behavior. Simultaneously exam-
ining both social capital and cognition should provide a fuller understanding of an entre-
preneur’s exploitation of an opportunity than simply examining either alone.

Social Capital and Cognitive Biases

Structural holes provide a rich social context that influences cognition. Individuals
involved in a web of diverse relationships can have early access and timing to a diverse
set of information (Burt, 1992, 1997). These connections and access to various

46 ENTREPRENEURSHIP THEORY and PRACTICE

information sources can increase information absorption and individuals’ beliefs about
their level of knowledge in a given area (Cohen & Levinthal, 1990). Thus, this broad set
of information may cause entrepreneurs to overestimate their knowledge base.
Additionally, the exploitation of new opportunities is fraught with uncertainty. As the
tertius gaudens an entrepreneur has control and can benefit from playing one group
against the other. Structural holes facilitate access to information; they impact the timing
of when that information is employed, and they provide a sense of control. Thus, struc-
tural holes may heighten the occurrence of overconfidence because they bring with them
information access and timing (Burt, 1992, 1997). Additionally, to lessen the uncertainty,
individuals may rely on this network of resources as a “cushion.” In other words, pur-
suing a new opportunity becomes more appealing since individuals believe they can
control the unknown through continued reliance on their network position and the infor-
mation benefits they may obtain. Therefore we more formally propose:
Proposition 1a: The number of structural holes in an entrepreneur’s social network
will be positively related to their overconfidence.
Proposition 1b: The number of structural holes in an entrepreneur’s social network
will be positively related to their illusion of control.
Trust is one element that comprises the relational dimension of social capital, and it
is a concept that is consistently discussed in the context of networks (Granovetter, 1985;
Nahapiet & Ghoshal, 1998; Uzzi, 1999). Recognizing and pursuing a new idea is risky
and involves substantial investment in terms of time, money and other resources. Start-
ing a new venture also involves reliance on others for various resources ranging from
social and emotional support to concrete assets. Trust is an “expectational asset” (Knez
& Camerer, 1994) that by definition creates confident expectations about the future
(Rousseau et al., 1998). Additionally, trust within networks can cause a party to focus on
a tight circle of existing relationships (Coleman, 1988). Therefore, we suggest that trust
developed in network relationships can contribute to both an entrepreneur’s overconfi-
dence and representativeness.
Trust is a double-edged sword. While trust creates confident expectations, it also
makes the trusting party more comfortable about entering vulnerable situations (Rousseau
et al., 1998). By relying on previous interactions directly with others and indirectly
through associations, entrepreneurs may be more willing to take risks in an exchange.
Trusting that others will behave or perform or deliver can motivate individuals to seek
opportunities and act on them. Believing that one could start a new venture is bolstered
by the expectation that they can depend on resources, both emotional and concrete, of a
network of others.
Further, information received from a trusted partner is more likely to be perceived
as accurate and relevant (McEvily, Perrone, & Zaheer, 2003). This has two potential
effects: First, when information is received from a trusted party, an entrepreneur may be
less likely to verify the information’s accuracy (McEvily et al., 2003) and may overesti-
mate the information’s probability of being right. Second, by not verifying the informa-
tion’s accuracy, the entrepreneur is relying on smaller numbers of information sources.
Networks serve the important function of directing information flows (Walker et al.,
1997). Trust within dense networks can cause an entrepreneur to focus on a tight set of
established relationships (Coleman, 1988). However, by focusing on this dense network,
information flows can become constricted (Walker et al.). This, combined with the
proclivity to not verify the information’s accuracy from a trusted source, can lead
an entrepreneur to focus on a limited number of information sources, thus increasing
representativeness.

January, 2006 47
 Proposition 2a: The trust entrepreneurs have in their network contacts will be
positively related to their overconfidence.
Proposition 2b: The trust entrepreneurs have in their network contacts will be
positively related to an their representativeness.
In addition to trust, the strength of the ties within a network structure is an impor-
tant element within the relational dimension (Nahapiet & Ghoshal, 1998) that may
directly impact representativeness. Strong network relationships require more effort and
intimacy. Thus, strong ties are relatively difficult to create and to maintain which
decreases their occurrence (Granovetter, 1985; Uzzi, 1996). While there may be a small
number of strong ties within a network, strong tie connections enhance the transfer of
tacit knowledge—knowledge that is not easily codified. Therefore, individuals embed-
ded in strong ties may be exposed to richer but less diverse information. By relying on
fewer sources of information and contact, the chances for optimism based on a small
sample is increased. Research has shown that individuals who discuss business decisions
with a limited number of colleagues are more likely to receive an inflated degree of pos-
itive feedback (Kahneman & Lovallo, 1993). Relying on the opinions of small samples
may or may not be detrimental to decision making. We are proposing that the chances
that an entrepreneur who is embedded in network of strong ties will have an increased
probability of the cognitive bias of representativeness.
Proposition 3: Strong network ties in entrepreneurs’ network is positively related to
their representativeness.
Membership in a network or group can shape an individual’s consciousness
(Moscovici, 1984). Individual resources and opinions correlate with the resources and
opinions of their close contacts because people develop relationships with others like
themselves (Burt, 1992). Social information processing theory (Salancik & Pfefer, 1978)
discusses the role of social influence in the development of individual attitudes and behav-
iors. The theory suggests that within organizations, coworkers influence an individual’s
attitude and behaviors by providing credible and relevant information about an object or
situation. This theory addresses the effects that individuals have on others who come in
contact with them. Interpersonal attraction theory (Byrne, 1971) posits that individuals
with similar beliefs are attracted to each other, thus reinforcing a shared set of attitudes
and behaviors. Both these theories predict that individuals will have attitudes and behav-
iors similar to those with whom they interact. Applying the implications of these theo-
ries to social networks, arguably, shared codes and languages will foster similar world
views, opinions, and attitudes within an entrepreneur’s network.
Information and knowledge sharing is facilitated by the shared meaning among
network members (Inkpen & Tsang, 2005). Shared meanings and understandings can act
as a bonding mechanism between network members. These bonding mechanisms allow
members within a network to feel comfortable sharing resources and knowledge (Inkpen
& Tsang, 2005). Additionally, knowledge creation rests on the ability to combine and
exchange various pieces of information (Boland & Tenkasi, 1995; Nahapiet & Ghoshal,
1998) show the importance of a shared vocabulary on the ability of individuals to
combine information.
However, common vocabularies also leave open the possibility for individuals to
filter out dissenting opinions or attitudes. Selectively focusing on information that falls
into common perceptual categories may distort the reality of that information. Vital infor-
mation that could challenge an entrepreneur’s view of “how the world works” may be
filtered out causing the entrepreneur to overestimate their understanding of the situation.

48 ENTREPRENEURSHIP THEORY and PRACTICE

 Similarly, relying on shared meanings developed in network relationships can
enhance the illusion of control, that is, individuals’ belief that their skills can impact the
outcome of a decision. Again, being immersed in a network drawing with the same mental
models of the world may lead individuals to overstate their abilities concerning specific
undertakings. By relying on the shared meanings in a network, individuals may feel their
decisions can have greater influence over future events. Indeed, prior research has shown
that managers with an illusion of control bias make overly optimistic performance esti-
mates (Duhaime & Schwenk, 1985; Schwenk, 1984).
Proposition 4a: Shared codes and languages will be positively associated with an
entrepreneur’s overconfidence.
Proposition 4b: Shared codes and languages will be positively associated with an
entrepreneur’s illusion of control.

Cognitive Biases and Risk Perception

In classical decision theory, risk is conceptualized as the total variance of potential
outcomes (March & Shapira, 1987). In business, however, potential upside outcomes are
thought of as opportunities, and only downside variance (i.e., financial loss) surrounding
business outcomes is considered risk (March & Shapira, 1987). Further, in assessing risk,
business people tend to focus on the total amount of a potential loss as opposed to simply
the dispersion of downside outcomes (March & Shapira, 1987). Consistent with this,
we conceptualize risk perception as the beliefs about the magnitude of potential losses
associated with a particular business situation.
Because cognitive biases influence the information that individuals notice and
how they interpret that information, biases may affect risk perception (Barnes, 1984;
Busenitz & Barney, 1997; Schwenk, 1984; Simon et al., 1999). Certain cognitive
biases may cause individuals to discount negative outcomes and uncertainties associated
with decisions, thus leading to underestimation of risk (Cooper, Woo, & Dunkelberg,
1988; Shaver & Scott, 1991).
Previous empirical studies in the entrepreneurship literature have suggested that over-
confidence and illusion of control are related to risk perception (Simon et al., 1999).
Recent research has shown that entrepreneurs may be more susceptible to overconfidence
than other individuals (Busenitz & Barney, 1997) and may often be more optimistic in
their assessments of business situations (Cooper et al., 1988). When an entrepreneur is
overconfident, these initial optimistic assessments may not be further tested. Further,
overconfident entrepreneurs would overestimate the probability of being right in their
optimistic assessments of business situations (Bazerman, 1990; Lichtenstein & Fischoff,
1977; Oskamp, 1965). Consequently, entrepreneurs who are overconfident are more likely
to treat their assumptions as fact and may perceive less risk associated with particular
actions than may actually exist (Bazerman, 1990; Lichtenstein & Fischoff, 1977;
Oskamp, 1965).
Entrepreneurs may be more prone to illusion of control than other individuals
(Duhaime & Schwenk, 1985; Hogarth, 1980; Schwenk, 1984; Simon et al., 1999). By
feeling that they can control and predict outcomes, individuals will evaluate the hazards
inherent in situations in a more favorable light. A recent empirical finding has also sup-
ported the effect of illusion of control on risk perception (Simon et al.). Thus, illusion of
control contributes to lower levels of risk perception in entrepreneurs.
Finally, entrepreneurs have a tendency to use limited information in decision making
(Baron, 1998; Busenitz & Barney, 1997). Entrepreneurs typically find themselves in

January, 2006 49
circumstances of information overload, high uncertainty, novel situations, strong emo-
tions, time pressure, and fatigue (Baron, 1998). In dealing with these tense circumstances,
entrepreneurs may focus (1) on limited amounts of information to gain support for risky
actions and (2) on recent success stories or positive outcomes that relate to the situation
at hand. Generalizing from a small sample can effectively reduce the perception of risk
for a particular opportunity. Therefore. we suggest:
Proposition 5a: Entrepreneurs’ overconfidence will be negatively associated to their
risk perception for a given situation.
Proposition 5b: Entrepreneurs’ illusion of control will be negatively associated to
their risk perception for a given situation.
Proposition 5c: Entrepreneurs’ representativeness will be negatively associated to
their risk perception for a given situation.

Risk Perception and Exploitation of Opportunities

A vast amount of research in the entrepreneurship literature addresses the issue
of why entrepreneurs start new ventures in spite of the risk level of those ventures.
Evidence suggests that not only are entrepreneurs dissatisfied with their new venture’s
performance (Cooper & Artz, 1995) but also that over half of all ventures fail within 5
years (Cooper et al., 1988). Paradoxically, past research findings have also suggested that
entrepreneurs are notably more optimistic in their assessment of business situations
(Cooper et al., 1988).
This has led to an assumption that entrepreneurs have a propensity for risk taking.
However, the proposition that entrepreneurs have greater levels of risk propensity than
others has not been supported by empirical evidence (Brockhaus, 1980; Busenitz &
Barney, 1997; Palich & Bagby, 1995; Shaver & Scott, 1991). An alternative view is that
entrepreneurs perceive less risk than others. Essentially, it is risk perception and not risk
propensity that explains the exploitation of entrepreneurial opportunities (Palich &
Bagby, 1995).
Entrepreneurs who perceive lower risk by definition envision that a smaller chance
and level of financial loss is associated with a given situation. When business decision
makers perceive lower probabilities and smaller levels of potential financial loss associ-
ated with a particular business situation, they are more likely to enter it (McNamara &
Bromiley, 1997; Palich & Bagby, 1995; Simon et al., 1999). Indeed, Simon and col-
leagues (1999) found that individuals given the exact same information could perceive
different levels of risk. Further, using a case analysis, these authors demonstrated that
lower levels of perceived risk was associated with a stronger likelihood of starting a new
business venture. More, formally we propose:
Proposition 6: Decreased risk perception leads to the exploitation of entrepreneur-
ial opportunities.

Discussion and Implications

Understanding why some people pursue entrepreneurial opportunities while others

do not is a major focus in the study of entrepreneurship (Shane & Venkataraman, 2000).
Our model contributes to this field by proposing that social capital and cognition are
important in understanding the exploitation of entrepreneurial opportunities. This argu-
ment is consistent with a growing body of research suggesting that cognition plays a vital

50 ENTREPRENEURSHIP THEORY and PRACTICE

role in the exploitation of entrepreneurial opportunities (Baron, 1998, 1999; Gartner,
1985; Shaver & Scott, 1991; Simon et al., 1999).
While the dependent variable in the model proposed in this study is exploitation of
entrepreneurial opportunities, the model is silent on the success of these exploitation
attempts. Indeed, any of the cognitive biases might cause an entrepreneur to underesti-
mate the amount of risk associated with a particular venture resulting in new venture
failure. Certainly, the possibility that many successful new ventures would not have been
pursued if it were not for cognitive biases also exists. New venture success may also
depend on numerous moderating factors. Future research could further refine this model
by looking at certain sets of the relationships proposed here and by exploring how various
moderating factors might influence new venture success.
Indeed, an extension of this model might examine the moderating influence of various
process factors such as type of information search or business plan development between
risk perception and exploitation of opportunities. Such moderating influences could help
distinguish the accurateness of entrepreneurs’ risk perceptions and the relationship
between these accurate risk perceptions and new venture success. Additionally, psycho-
logical (e.g., personal efficacy, need for achievement, and locus of control) and demo-
graphic factors (e.g., age, entrepreneurial parents, and education) were not incorporated
into this model’s predictions of entrepreneurial behavior. Previous empirical studies
testing the link between these variables and exploitation of opportunities have yielded
inconsistent results. The inclusion of these variables as moderating influences between
social capital and cognitive biases could yield additional insights into entrepreneurial
behavior.
Several opportunities for empirical research are related to the model. Many of the
constructs have already been operationalized in prior research, in particular, cognitive
biases, risk perception and the exploitation of entrepreneurial opportunities. Although the
construct of social capital has also been measured, teasing out the dimensions of struc-
tural holes, weak ties, common language, and trust presents a challenge for future
research, particularly as they relate to their impact on cognition and entrepreneurship.
In developing this model, the analysis concentrated on the facilitation of entrepre-
neurship through social capital and cognition. Recognizably, perhaps social capital and
cognition may deter the pursuit of entrepreneurial opportunities. There are negative con-
sequences of social capital (Adler & Kwon, 2000). For example, networks of structural
holes may provide nonredundant information but may cancel out power benefits. If the
contacts with the actor’s network have numerous other contacts, they become less depen-
dent on the focal actor. Moreover, the shared language within a network could create
tunnel vision and inertia (Powell & Smith-Doerr, 1994). Thus, the “other side” of the
model warrants further elucidation.

Practical Implications
The model has important practical implications for individuals and organizations.
Entrepreneurs need be more aware of the potential for biases and the factors that may
trigger those biases and more attentive to the types and sources of information they are
receiving and how they evaluate this information. From a corporate entrepreneurship
perspective, diverse connections, both inside and outside the organization, enhance an
employee’s chances of discovering new opportunities and capitalizing on them. Policies
attempting to foster corporate entrepreneurship could ensure that employees in organi-
zational units designed to generate new ideas have access and are encouraged to develop
attachments to varied constituencies to maximize diversity of information. This would

January, 2006 51
extend to relationships within and outside the organization. Being acquainted with indi-
viduals from different parts of the organization enhances an environment conducive to
idea generation. Concurrently, organizational members should be exposed to a variety
of external constituencies as well. This could be in the form of industry, professional or
educational associations, civic committees, board positions, and the like. Similarly, the
virtual community—bulletin boards and chat rooms—could generate valuable informa-
tion leading to entrepreneurial opportunities.
For individuals interested in starting a new venture, the implications are similar.
Diversity of ties among networks creates the structural holes for entrepreneurial oppor-
tunities. Cognitive biases might play a powerful role in the interpretation of new oppor-
tunities. Although helpful in evaluating uncertainty and coping with information
overload, entrepreneurs should be aware of the downside of these biases.
The model holds important implications for educational and public policy initiatives
aimed at fostering entrepreneurship. Again, the critical role that networks play in the com-
mencement of new ventures needs to be reexamined, given its potential impact on cog-
nitive biases. Although this model does not address the ultimate success or failure of a
new venture, however that might be measured, surely unrealistic assessments of oppor-
tunities result in wasted time, energy, and resources.

Conclusion

By focusing on the relationships among social capital, cognitive processes, and entre-
preneurial opportunities, this model lays the groundwork for further theory development
and empirical research. The model suggests the importance of network relationships to
the stimulation and advancement of new ideas. No claim is made that this model is a
comprehensive explanation of entrepreneurship. Rather, it is an attempt to explore and
specify the relationships among particular dimensions of social capital and cognition on
entrepreneurial opportunities. Further, the model makes no assumptions that its predic-
tions will lead to successful ventures. Rather, our focus is on the exploitation of oppor-
tunities, which remains the essence of entrepreneurship.

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Donna Marie De Carolis and Patrick Saparito are associate professors at the LeBow College of Business,
Management Department, Drexel University.

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