Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-10T11:34:07.187Z Has data issue: false hasContentIssue false
  • English
  • Français

Bet against yourself: integrating insurance and entrepreneurship

Published online by Cambridge University Press:  25 May 2021

Marian Eabrasu Open the ORCID record for Marian Eabrasu [Opens in a new window]
Marian Eabrasu*
Affiliation:
EM Normandie Business School, Métis Lab, Paris, France
*
Corresponding author. Email: meabrasu@em-normandie.fr
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper revisits and fine-tunes a spin-off from Knight's (1921, Risk, Uncertainty and Profit) influential distinction between risk (‘probability of unknown events’) and uncertainty (‘unquantifiable randomness’): the contrast between actuarial institutions and entrepreneurship. It contends that this opposition is not exclusive and argues that the act of insurance does not automatically reduce entrepreneurial profits. To maintain this claim, the paper emphasizes hedging and, more specifically, draws on an innovative actuarial scheme – parametric (or index-based) insurance – which, unlike indemnity-based insurance, does not rely on a damage assessment but indemnifies the policyholder according to the variation of an index. This argument sheds new light on the function habitually assigned to actuarial institutions, amends the theory of entrepreneurial profits, and integrates hedging within entrepreneurial judgment.

Keywords

Hedgingindex-based insuranceKnightriskuncertaintyB5B53D8G22L26
Type
Research Article
Information
Journal of Institutional Economics , Volume 17 , Special Issue 6: Special Issue on the Centenary of Frank H. Knight's Risk, Uncertainty, and Profit , December 2021 , pp. 959 - 972
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press on behalf of Millennium Economics Ltd.

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aligica, P. D. and Evans, A. J. (2009), ‘Thought Experiments, Counterfactuals and Comparative Analysis’, The Review of Austrian Economics, 22(3): 225–239.CrossRefGoogle Scholar
Arend, R. J. (2020), ‘On the Irony of Being Certain on How to Deal with Uncertainty’, Academy of Management Review, 45(3): 702–707.CrossRefGoogle Scholar
Awudu, I., Asare, A., Asa, E., Osmani, A., Gonela, V. and Afful-Dadzie, A. (2019), ‘Maximizing Profits in an Ethanol Supply Chain with Hedging Strategies’, Journal of Supply Chain and Operations Management, 17(2): 221.Google Scholar
Barnett, B. J., Barrett, C. B. and Skees, J. R. (2008), ‘Poverty Traps and Index-Based Transfer Products’, World Development, 36(10): 1766–1785.CrossRefGoogle Scholar
Baron, R. A. (2000), ‘Counterfactual Thinking and Venture Formation: The Potential Effects of Thinking About “What Might Have Been”’, Journal of Business Venturing, 15(1): 79–91.CrossRefGoogle Scholar
Baumol, W. J. (1968), ‘Entrepreneurship in Economic Theory’, The American Economic Review, 58(2): 64–71.Google Scholar
Bazerman, M. H. and Gillespie, J. J. (1999), ‘Betting on the Future: The Virtues of Contingent Contracts’, Harvard Business Review, 77: 155–162.Google ScholarPubMed
Bertrand, J. L., Hershey, L. and Parnaudeau, M. (2016), Measuring and Managing Weather Variability: Protecting Businesses from Weather Risks, White Paper. Meteo Protect.Google Scholar
Bramoullé, Y. and Kranton, R. (2007), ‘Risk-Sharing Networks’, Journal of Economic Behavior & Organization, 64(3): 275–294.CrossRefGoogle Scholar
Brooke, G. T. F. (2010), ‘Uncertainty, Profit and Entrepreneurial Action: Frank Knight's Contribution Reconsidered’, Journal of the History of Economic Thought, 32(2): 221–235.CrossRefGoogle Scholar
Brück, T., Llussá, F. and Tavares, J. A. (2011), ‘Entrepreneurship: The Role of Extreme Events’, European Journal of Political Economy, 27(Supple 1): S78–S88.CrossRefGoogle Scholar
Bruton, G. D., Ahlstrom, D. and Li, H. L. (2010), ‘Institutional Theory and Entrepreneurship: Where Are We Now and Where Do We Need to Move in the Future?’, Entrepreneurship Theory and Practice, 34(3): 421–440.CrossRefGoogle Scholar
Bylund, P. (2016), The Problem of Production: A New Theory of the Firm, London: Routledge.Google Scholar
Bylund, P. L. and Manish, G. P. (2016), ‘The Mises-Knight Theory of Uncertainty and Its Implications for Entrepreneurship, Equilibrium, and the Theory of the Firm’, in Fiorito, L., Scheall, S. and Suprinyak, C. E. (eds.), Research in the History of Economic Thought and Methodology, Bingley: Emerald Group Publishing Limited, pp. 305–336.CrossRefGoogle Scholar
Demsetz, H. (1983), ‘The Neglect of the Entrepreneur’, in Ronen, J. (ed), Entrepreneurship, Lexington, MA: Lexington Press, pp. 271–280.Google Scholar
de Vries, G., Verhoeven, I. and Boeckhout, M. (2011), ‘Taming Uncertainty: The WRR Approach to Risk Governance’, Journal of Risk Research, 14(4): 485–499.CrossRefGoogle Scholar
Eabrasu, M. (2011), ‘A Praxeological Assessment of Subjective Value’, Quarterly Journal of Austrian Economics, 14(2): 216–241.Google Scholar
Eabrasu, M. (2019), Moral Disagreements in Business. An Exploratory Introduction, Cham: Springer.CrossRefGoogle Scholar
Eabrasu, M. (2021), ‘What If? Fine-Tuning the Expectations of Business Simulation Technology Through the Lens of Philosophical Counterfactual Analysis’, Organization. https://doi.org/10.1177/13505084211015378.CrossRefGoogle Scholar
Ferrari-Filho, F. and Conceição, O. A. C. (2005), ‘The Concept of Uncertainty in Post Keynesian Theory and in Institutional Economics’, Journal of Economic Issues, 39(3): 579–594.CrossRefGoogle Scholar
Foss, N. J. and Klein, P. G. (2012), Organizing Entrepreneurial Judgment: A New Approach to the Firm, Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Foss, N. J. and Klein, P. G. (2015), ‘Introduction to a Forum on the Judgment-Based Approach to Entrepreneurship: Accomplishments, Challenges, New Directions’, Journal of Institutional Economics, 11(3): 585–599.CrossRefGoogle Scholar
Foss, N. J., Klein, P. G., Kor, Y. Y. and Mahoney, J. T. (2008), ‘Entrepreneurship, Subjectivism, and the Resource-Based View: Toward a New Synthesis’, Strategic Entrepreneurship Journal, 2(1): 73–94.CrossRefGoogle Scholar
French, C. C. (2020), ‘COVID-19 Business Interruption Insurance Losses: The Cases for and against Coverage’, Connecticut Insurance Law Journal, 27(1): 1–35.Google Scholar
Gaglio, C. M. (2004), ‘The Role of Mental Simulations and Counterfactual Thinking in the Opportunity Identification Process’, Entrepreneurship Theory and Practice, 28(6): 533–552.CrossRefGoogle Scholar
Godley, A. C. and Casson, M. C. (2015), ‘“Doctor, Doctor…” Entrepreneurial Diagnosis and Market Making’, Journal of Institutional Economics, 11(3): 601–621.CrossRefGoogle Scholar
Goldberg, V. P. (1990), ‘Aversion to Risk Aversion in the New Institutional Economics’, Journal of Institutional and Theoretical Economics, 146(1): 216–222.Google Scholar
Goyder, B. and Smythe, C. (2020), Marsh Offered Clients a Standalone Pandemic Insurance Policy that Would Have Likely Provided Coverage in the Current Coronavirus Crisis, but No One Bought It, According to a Broker at the Intermediary. [Online]. Available at: https://www.slipcase.com/view/inside-in-full-pandemic-product-saw-no-takers-before-coronavirus-marsh-broker (Accessed: 20 December 2020).Google Scholar
Gunning, J. P. (1993), ‘Entrepreneurists and Firmists: Knight vs. the Modern Theory of the Firm’, Journal of the History of Economic Thought, 15(1): 31–53.CrossRefGoogle Scholar
Hallberg, N. L. (2015), ‘Uncertainty, Judgment, and the Theory of the Firm’, Journal of Institutional Economics, 11(3): 623–650.CrossRefGoogle Scholar
Harrison, G. W. and Ng, J. M. (2019), ‘Behavioral Insurance and Economic Theory: A Literature Review’, Risk Management and Insurance Review, 22(2): 133–182.CrossRefGoogle Scholar
Haynie, J. M., Shepherd, D. A. and McMullen, J. S. (2009), ‘An Opportunity for Me? The Role of Resources in Opportunity Evaluation Decisions’, Journal of Management Studies, 46(3): 337–361.CrossRefGoogle Scholar
Hédoin, C. (2019), ‘Institutions, Rule-Following and Conditional Reasoning’, Journal of Institutional Economics, 15(1): 1–25.CrossRefGoogle Scholar
Henrekson, M. and Sanandaji, T. (2011), ‘The Interaction of Entrepreneurship and Institutions’, Journal of Institutional Economics, 7(1): 47–75.CrossRefGoogle Scholar
High, J. C. (1982), ‘Alertness and Judgment: Comment on Kirzner’, in Kirzner, I. (ed), Method, Process, and Austrian Economics: Essays in Honor of Ludwig Von Mises, Lexington, Mass: D. C. Heath, pp. 161–168.Google Scholar
Holcombe, R. G. (2017), ‘Malinvestment’, The Review of Austrian Economics, 30(2): 153–167.CrossRefGoogle Scholar
Huang, L. (2018), ‘The Role of Investor Gut Feel in Managing Complexity and Extreme Risk’, Academy of Management Journal, 61(5): 1821–1847.CrossRefGoogle Scholar
Hubbard, D. W. (2020), The Failure of Risk Management: Why It's Broken and How to Fix It. Hoboken, NJ: John Wiley & Sons.CrossRefGoogle Scholar
Hülsmann, J. G. (2003), ‘Facts and Counterfactuals in Economic Law’, Journal of Libertarian Studies, 17(1): 57–102.Google Scholar
Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, Cambridge: Macmillan and Cambridge University Press.Google Scholar
Kihlstrom, R. E. and Laffont, J.-J. (1979), ‘A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion’, Journal of Political Economy, 87(4): 719–748.CrossRefGoogle Scholar
Klein, P. G. (2010), The Capitalist and the Entrepreneur, Auburn, AL: Ludwig von Mises Institute.Google Scholar
Klein, P. G. and Bylund, P. L. (2014), ‘The Place of Austrian Economics in Contemporary Entrepreneurship Research’, The Review of Austrian Economics, 27(3): 259–279.CrossRefGoogle Scholar
Knight, F. H. (1921), Risk, Uncertainty and Profit. Boston and New York: The University Press Cambridge.Google Scholar
Knight, F. H. (1942), ‘Profit and Entrepreneurial Functions’, The Journal of Economic History, 2(Supplement: The Tasks of Economic History): 126–132.CrossRefGoogle Scholar
Kodaj, D. (2014), ‘Open Future and Modal Anti-Realism’, Philosophical Studies, 168(2): 417–438.CrossRefGoogle Scholar
Kray, L. J., Thompson, L. and Lind, E. A. (2005), ‘It's a Bet! A Problem-Solving Approach Promotes the Construction of Contingent Agreements’, Personality and Social Psychology Bulletin, 31(8): 1039–1051.CrossRefGoogle Scholar
Lachmann, L. M. (1976), ‘From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society’, Journal of Economic literature, 14(1): 54–62.Google Scholar
Lampert, C. M., Kim, M. and Polidoro, F. J. (2020), ‘Branching and Anchoring: Complementary Asset Configurations in Conditions of Knightian Uncertainty’, Academy of Management Review, 45(4): 847–868.CrossRefGoogle Scholar
Langlois, R. N. (1982), Subjective Probability and Subjective Economics, Research Report 82-09, CV Starr Center for Applied Economics, New York University, March 1982.Google Scholar
Langlois, R. N. and Cosgel, M. M. (1993), ‘Frank Knight on Risk, Uncertainty, and the Firm: A New Interpretation’, Economic Inquiry, 31(3): 456–465.CrossRefGoogle Scholar
Leins, S. (2013), ‘Playing the Market’, in Cassidy, R., Pisac, A. and Loussouarn, C. (eds), The Role of Risk, Uncertainty and Authority in the Construction of Stock, New York: Routledge, pp. 218–233.Google Scholar
LeRoy, S. F. and Singell, L. D. (1987), ‘Knight on Risk and Uncertainty’, Journal of Political Economy, 95(2): 394–406.CrossRefGoogle Scholar
Lewis, D. (1979), ‘Counterfactual Dependence and Time's Arrow’, Noûs, 13(4): 455–476.CrossRefGoogle Scholar
Lewis, D. (2013), Counterfactuals, New York, NY: John Wiley & Sons.Google Scholar
Mackay, P. and Moeller, S. B. (2007), ‘The Value of Corporate Risk Management’, The Journal of Finance, 62(3): 1379–1419.CrossRefGoogle Scholar
McGuire, M., Pratt, J. and Zeckhauser, R. (1991), ‘Paying to Improve Your Chances: Gambling or Insurance?’, Journal of Risk and Uncertainty, 4(4): 329–338.CrossRefGoogle Scholar
McMullen, J. S. (2015), ‘Entrepreneurial Judgment as Empathic Accuracy: A Sequential Decision-Making Approach to Entrepreneurial Action’, Journal of Institutional Economics, 11(3): 651–681.CrossRefGoogle Scholar
McMullen, J. S. and Shepherd, D. A. (2006), ‘Entrepreneurial Action and the Role of Uncertainty in the Theory of the Entrepreneur’, Academy of Management Review, 31(1): 132–152.CrossRefGoogle Scholar
Miller, K. D. (2007), ‘Risk and Rationality in Entrepreneurial Processes’, Strategic Entrepreneurship Journal, 1(1–2): 57–74.CrossRefGoogle Scholar
Mullins, J. W. and Forlani, D. (2005), ‘Missing the Boat or Sinking the Boat: A Study of New Venture Decision Making’, Journal of Business Venturing, 20(1): 47–69.CrossRefGoogle Scholar
Munger, M. C. and Villarreal-Diaz, M. (2019), ‘The Road to Crony Capitalism’, The Independent Review, 23(3): 331–344.Google Scholar
Naughton, M. J. and Cornwall, J. R. (2006), ‘The Virtue of Courage in Entrepreneurship: Engaging the Catholic Social Tradition and the Life-Cycle of the Business’, Business Ethics Quarterly, 16(1): 69–93.CrossRefGoogle Scholar
North, D. C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press.CrossRefGoogle Scholar
North, D. C. and Thomas, R. P. (1973), The Rise of the Western World: A New Economic History, Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Nyman, J. A., Welte, J. W. and Dowd, B. E. (2008), ‘Something for Nothing: A Model of Gambling Behavior’, The Journal of Socio-Economics, 37(6): 2492–2504.CrossRefGoogle Scholar
Outreville, J. F. (2013), ‘The Relationship Between Insurance and Economic Development: 85 Empirical Papers for a Review of the Literature’, Risk Management and Insurance Review, 16(1): 71–122.CrossRefGoogle Scholar
Packard, M. D. and Clark, B. B. (2020a), ‘On the Mitigability of Uncertainty and the Choice Between Predictive and Non-Predictive Strategy’, Academy of Management Review, 45(4): 766–786.CrossRefGoogle Scholar
Packard, M. D. and Clark, B. B. (2020b), ‘Probability Logic Fails in Immitigable Uncertainty, but Strategic Logic Does Not’, Academy of Management Review, 45(3): 704–707.CrossRefGoogle Scholar
Packard, M. D., Clark, B. B. and Klein, P. G. (2017), ‘Uncertainty Types and Transitions in the Entrepreneurial Process’, Organization Science, 28(5): 840–856.CrossRefGoogle Scholar
Peterson, J. and Krug, J. (2015), ‘Augur: A Decentralized, Open-Source Platform for Prediction Markets’, arXiv preprint arXiv 1501.01042.Google Scholar
Ramoglou, S. (2021), ‘Knowable Opportunities in an Unknowable Future? On the Epistemological Paradoxes of Entrepreneurship Theory’, Journal of Business Venturing, 36(2): 1–16.CrossRefGoogle Scholar
Rapp, D. J. and Olbrich, M. (2020a), ‘On Entrepreneurial Decision Logics Under Conditions of Uncertainty: An Attempt to Advance the Current Debate’, Journal of Innovation and Entrepreneurship, 9(21): 1–9.CrossRefGoogle Scholar
Rapp, D. J. and Olbrich, M. (2020b), ‘On Predictive Entrepreneurial Action in Uncertain, Ill-Structured Conditions’, Review of Managerial Science, https://doi.org/10.1007/s11846-020-00411-2.Google Scholar
Reinmuth, D. F. and Lewis, D. L. (1970), ‘The Case of the Missing Insurance Entrepreneur’, The Journal of Risk and Insurance, 37(2): 291–300.CrossRefGoogle Scholar
Rindova, V. and Courtney, H. (2020), ‘To Shape or Adapt: Knowledge Problems, Epistemologies and Strategic Postures Under Knightian Uncertainty’, Academy of Management Review, 45(4): 787–807.CrossRefGoogle Scholar
Salvato, C., Sargiacomo, M., Amore, M. D. and Minichilli, A. (2020), ‘Natural Disasters as a Source of Entrepreneurial Opportunity: Family Business Resilience After an Earthquake’, Strategic Entrepreneurship Journal, 14(4): 594–615.CrossRefGoogle Scholar
Searle, J. R. (2005), ‘What is an Institution?’, Journal of Institutional Economics, 1(1): 1–22.CrossRefGoogle Scholar
Simon, H. A. and Newell, A. (1958), ‘Heuristic Problem Solving: The Next Advance in Operations Research’, Operations Research, 6(1): 1–10.CrossRefGoogle Scholar
Sinn, H.-W. (2010), Casino Capitalism: How the Financial Crisis Came About and What Needs to Be Done Now, Oxford: Oxford University Press.Google Scholar
Strange, S. (1997), Casino Capitalism, Manchester: Manchester University Press.Google Scholar
Su, J., Zhai, Q. and Karlsson, T. (2017), ‘Beyond Red Tape and Fools: Institutional Theory in Entrepreneurship Research, 1992–2014’, Entrepreneurship Theory and Practice, 41(4): 505–531.Google Scholar
Swadener, P. (1964), ‘Gambling and Insurance Distinguished’, The Journal of Risk and Insurance, 31(3): 463–468.CrossRefGoogle Scholar
Townsend, D. M., Hunt, R. A., McMullen, J. S. and Sarasvathy, S. D. (2018), ‘Uncertainty, Knowledge Problems, and Entrepreneurial Action’, Academy of Management Annals, 12(2): 659–687.CrossRefGoogle Scholar
von Mises, L. (1998), Human Action, Scholar's ed. Auburn, AL: Ludwig von Mises Institute.Google Scholar