Discussion Paper
Market Innovation and Entrepreneurship: A Knightian View
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.