Nicolai and I have been writing about entrepreneurial judgment for more than twenty years. Our discussions appear in various articles, chapters, and our 2012 book Organizing Entrepreneurial Judgment. While the idea of entrepreneurship as judgmental decision-making uncertainty is very old—going back to Cantillon in the 18th century and picked up by by von Thünen and von Mangoldt in the 19th, then expressed in canonical form by Knight in 1921, incorporated into a general economic system by Mises in 1949, and elaborated as a theory of entrepreneurship by Casson in 1982—our work has aimed at formalizing, systematizing, and elaborating a distinct, modern approach to entrepreneurial judgment.
The building blocks of our approach are uncertainty and resource heterogeneity. All human decision-making involves uncertainty but resource heterogeneity—the fact that there are typically many ways to accomplish an entrepreneurial objective—makes judgment essential to accomplish business (and other) objectives.
Consider these building blocks separately. Under Knightian uncertainty with perfectly homogeneous resources—identical, fully substitutable, costlessly recombined—there is nothing to arrange. Your view of the future may be idiosyncratic and unformalizable, but it has no lever to act through, and being wrong costs nothing you can’t undo at zero cost. Likewise, heterogeneous resources with a known state space and well-defined probabilities give you a hard allocation problem, but a problem with a solution. That’s optimization.
Put the two together and something different happens. Assets differ in attributes, complementarities, and possible uses, many of which are not specified ex ante and some of which haven’t been discovered. The future is not merely unknown but partly unmade. Someone has to form a subjective interpretation of which combination will create value, commit resources to it, and bear the consequences when the market disagrees. That is the entrepreneurial problem.
A long pedigree and missing document
As noted above, this argument has a respectable lineage. Nicolai’s and my first attempt to articulate a judgment-based approach (JBA) appeared in our 2005 survey of economic approaches to entrepreneurship. My 2008 article critiquing the opportunity-discovery approach featured many of the main elements. We worked out the framework in detail in our 2012 book and have extended it since in various directions, most substantially into ownership competence. Many other scholars have been working in this tradition, adding new insights and applications, articulating alternative foundations, and developing implications for teaching and practice; much of this work is described on the website of the Entrepreneurial Judgment Society, a hub for research, teaching, and practice on entrepreneurial judgment.
What never existed was a single, current, article-length statement of the theory. Our 2015 forum introduction in the Journal of Institutional Economics came closest but it is now a decade old. In the meantime the judgment-based approach has grown and diversified, but without a definitive statement for colleagues, students, and critics to focus on.
So Nicolai and I, with Carmen Elena Dorobat, Matthew McCaffrey, and Mark Packard, wrote such a piece: “The judgment-based approach to entrepreneurship: The uncertainty–heterogeneity nexus,” forthcoming in JBV and open access. It’s a stocktaking, a response to critics, and an agenda. Our recent ETP piece on Knightian uncertainty does the narrower historical work behind it.
The JBA and the theory of the firm
Judgment, as we define it, is the pursuit of imagined, future economic or societal value through the deliberate combination of heterogeneous resources under Knightian uncertainty. Because its content is subjective, tacit, and frequently inarticulate even to the person holding it, it cannot be fully specified in a contract. You can hire consultants, pay for forecasts, and delegate enormous discretion—firms do all this constantly—but you can’t write a contract that transfers ultimate responsibility for a theory of value creation that hasn’t been articulated yet.
That incompleteness is what gives residual control rights their significance. Ownership is not just an incentive device in this account; it is the institutional mechanism through which judgment gets exercised. Hence the the JBA generates a theory of the firm as a byproduct rather than as an application. Firm boundaries, internal authority, and the structure of delegation all fall out of the same nexus: original judgment resides with the owner, derived judgment is delegated to managers and employees whose discretion is real but bounded by someone else’s beliefs about the uncertain future, and the trade-off between the two is what an org chart actually is.
What judgment isn’t
We spend a good deal of the paper on what we are not claiming, because misreadings have been productive but persistent. For example, judgment is not good judgment. The ordinary-language connotation—wisdom, prudence, getting it right—has caused real confusion. Judgment is the act of judging, not the skill with which one judges. Losses also reflect judgment.
Judgment is also not just a reframing of rational-choice economics. Choice among predetermined alternatives with known probabilities is precisely the case where judgment is unnecessary. Nor does judgment require Bayesian updating, which applies when information is added to a given state space is given. Entrepreneurship partly creates the state space, which is not an operation encompassed by Bayes’ rule. And judgment isn’t luck: decision-making without calculable probabilities isn’t random but relies on tacit understanding, intuition, gut feel, or Verstehen.
Importantly, while judgment is sometimes taken as a black-box (an analytical primary), recent work has explored and dimensionalized the foundations and manifestations of judgment. It has been decomposed into matching, governance, and timing competence; into causality, appraisal, goal, and solution judgments; into empathic accuracy and customer need diagnosis. The construct more structure than before.
Not a rival theory
We argue in the paper that that several other leading interpretations of entrepreneurship are better understood as special cases or specific technologies of judgment than as alternatives to it. Bricolage is judgment under severe resource constraint. Effectuation is judgment exercised in small, recursive increments with stakeholder co-creation. The theory-based view is judgment disciplined by explicit causal reasoning. None of them eliminates the need for judgment; they are tools, frameworks, or technologies by which judgment is exercised. The choice to use a particular technique—or, as is becoming increasingly important—to delegate a decision or process to an AI agent—is an act of judgment. As long as there is residual decision authority, i.e., a human actor who bears ultimate responsibility for actions and their consequences, there is human judgment.
What comes next
We are open in the article that the JBA remains long on theory and short on evidence. There is not much large-N JBA research, partly for want of agreed measurement scales. That is changing—ownership competence is now being measured from LinkedIn profiles, IPO prospectuses, and survey instruments—but the empirical agenda is still being formulated. Likewise, there are a few mathematical formalizations of judgment in our sense but most of the theorizing has been verbal, logical, and conceptual (not that this is a bad thing).
The paper is open access, so check it out!
