Title

Market Innovation and Entrepreneurship: A Knightian View

Document Type

Discussion Paper

Publication Date

4-1-1989

CFDP Number

905

CFDP Pages

47

Abstract

Stimulated by Frank Knight’s work, “Risk, Uncertainty and Profit,” I present a theory of innovation based on what I term Knightian decision theory. This theory includes a concept of uncertainty aversion, a behavioral property that makes people reluctant to undertake new unevaluatable risks. This aversion is compounded when individuals are obliged to cooperate in undertaking risks. The theory leads directly to the conclusion that innovation in business is the natural domain of individual investors with unusually low levels of uncertainty aversion. Also, it should be difficult to innovate new markets for insurance of unevaluatable risks, for the success of a new market requires that many people overcome their aversion to uncertainty and enter the market.

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