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MANAGERIAL AND DECISION ECONOMICS Manage. Decis. Econ.

(2012)

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/mde.2557

A Theory of Nascent Entrepreneurship and Organization


Teppo Felina,* and Thorbjrn Knudsenb
b

Marriott School, Organizational Leadership and Strategy, Brigham Young University, Provo, UT 84602, USA Strategic Organization Design Unit, Department of Marketing and Management, University of Southern Denmark, Odense, Denmark

In this paper, we develop a theory and model of organizational founding and the emergence of collective beliefs and strategies. We explicate how collective beliefs, resulting in the formation of new organizations, emerge via three social mechanisms: sorting or matching, interaction, and selection. We specically highlight how value homophily, social processes, and threshold effects contribute to the actualization (or not) of entrepreneurial beliefs and ideas. Our theory and model highlight not only the emergence of collective beliefs but also the socially interdependent nature of belief realization, choice, and strategy in nascent organizations. Copyright 2012 John Wiley & Sons, Ltd.

The founding of an organization is a pivotal time. For example, the environment and specic context from which an organization emerges leave a long-lasting imprint on organizations (Stinchcombe, 1965). Furthermore, the founders of the organization make important decisions about the organizations direction and strategy that disproportionally shape and determine the form and future prospects of organizations. In short, the context, processes, and choices associated with the founding of an organization essentially make for a punctuating event, or initial condition, which has far-reaching implications for the survival, path, and future of organizations. The study of nascent organizations and organizational founding, although itself still a nascent area of investigation (Ruef et al., 2003; also Aldrich & Ruef, 2006), has recently begun to receive increased attention. For example, research has shown how the
*Correspondence to: Marriott School, Organizational Leadership and Strategy, Brigham Young University, Provo, UT 84602, USA. E-mail: teppo.felin@byu.edu

demographic characteristics and the associated compositional mix of the founding team play an important role in shaping and imprinting the organization (e.g., Baron et al., 1999). Others have looked at how factors such as experiential background and demographic homophily (Ruef et al., 2003), or the extant social ties and embeddedness of the entrepreneur and the founding team (Hite and Hesterly, 2001; Hite, 2003), play a central role in structuring nascent organizational activity. Yet others have pointed out how founders engage in cultural entrepreneurship by drawing on extant scripts, histories, and environmental resources when founding new organizations (Lounsbury and Glynn, 2001; Johnson, 2007). However, although we know much about the characteristics of the founders of organizations, as well as the environmental context that shapes nascent organizational activity, less is known about the entrepreneurial beliefs, expectations, and ideas that shape organizational founding. In particular, the social mechanisms associated with the emergence of collective beliefs and organizational founding deserve

Copyright 2012 John Wiley & Sons, Ltd.

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further consideration. How do organizational founders with similar beliefs nd each other? How do collective beliefsleading to organizational foundingemerge? Furthermore, although extant theories of organization often take the composition of the organization as a given (March, 1962, p. 672; also Knudsen and Levinthal, 2007), there is an opportunity to explicate how the nascent organization emerges in the rst place and how its initial collective course of action (Simon, 1964, p. 7) emerges. Similarly, in the strategy literature, there is little discussion about where organizational expectations (say, about the value of resourcescf. Barney, 1986) come from or how these might be aggregated. In this paper, we offer a stylized model of organizational founding and the emergence of collective beliefs. Our specic emphasis is on the entrepreneurial beliefs and ideas of individuals and the (potential) realization of these beliefs via collective action. In particular, we highlight how the social context both enables and constrains the set of possible beliefs that can be realized via organizational founding. We argue that collective beliefs and nascent organizations emerge via three generic social mechanisms: sorting or matching, interacting, and selecting. A central contribution of this paper is to highlight both the social aggregation and the interdependence of beliefs during organizational founding and to explicate how coordinated collective action emerges (or not). Our model also includes the set of possible nascent organizations that are not realized, a set of collective processes that arguably, because of left censoring, are important for understanding organizations but have not been understood given that nascent, organizations cannot directly be observed (cf. Aldrich and Ruef, 2006). Overall, the effort in this paper is to develop a theory, a simple model, and a simulation of the emergence of collective beliefs, collective action, and nascent organizations.

FROM IDEALIZED MARKETS TO NASCENT ORGANIZATIONS To develop our theory of the emergence of collective beliefs and nascent organization, we start with the opposite of structure and organization: a set of individuals with heterogeneous beliefs and ideas about the future (for a similar initial condition, see Hayek, 1945, or March, 1962). Imagine, then, a landscape of individuals with differing beliefs, ideas, and Copyright 2012 John Wiley & Sons, Ltd.

expectations about the future: about what actions are desirable, valuable, and lead to desired outcomes. This heterogeneous belief landscape in effect represents a null state, a null state without social order, without equilibrium, without organization. We can imagine that a highly idealized market perhaps represents just such a null state, where individuals have different information, knowledge, and expectations about the future (Hayek, 1945).1 Given this imaginary null state, the market as a whole can be thought about as a heterogeneous conict system (cf. March, 1962). However, for cooperation and production to be realized, this heterogeneous system requires at least some reconciliation, a steady state and order for beliefs and strategies to be actualized (or in effect, for beliefs to be tested) via collective action and nascent organization. Most production in an economy, after all, as powerfully pointed out by Simon (1991, pp. 2529), happens via collective action and organization rather than via markets (cf. Granovetter, 1985). Organizations, however, remain strikingly absent for example from Hayeks (1945) theory of entrepreneurship, economic production, and spontaneous order (given Hayeks focus on the price mechanism). How, then, do nascent organizations emerge? The emergence of organizations, from an economic perspective, has largely focused on the role of an entrepreneur. Coase (1937) specically highlighted how a singular entrepreneur coordinator plays an important role in the direction of resources, hiring, and coordination of production. Although transaction cost economics gives us important intuition related to the emergence of a rm (Coase, 1937, p. 393), nonetheless, the primary focus of transaction cost economics remains quite atomistic and asocial (Granovetter, 1985). The onus of responsibility for the creation of the rm lies with a singular actor, the entrepreneur coordinator. Implicitly, then, the theory focuses on the beliefs and the expectations of the singular entrepreneur. But, as persuasively discussed by Malmgren (1961, pp. 401407), economists have not emphasized the necessarily aggregate and social nature of nascent organizational activity and the specic need to understand the multi-person rm and the convergence of expectations and beliefs that is necessary for the rm to be established with a coherent, unied direction. Organizational founding, then, more often than not, is a collective and social rather than individual activity. Indeed, extant studies highlight how Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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organizations generally begin with a core of three to ve founders. For example, large-scale studies of Silicon Valley rms show that the average founding team size is three individuals (e.g., Burton et al., 2002; Beckman, 2006). Beyond high-tech settings, in the US economy as a whole, organizational activity is a social activity involving a group of founders (Aldrich & Ruef, 2006, p. 102). From the aforementioned studies, we know much about the demographic characteristics of organizational founders. However, our explicit focus is on the beliefs and ideas that nascent founders have. In particular, our emphasis is on the emergence of a collective belief and idea among a set of individuals about what the nascent organization might do. Thus, the sociological literature on opinion formation provides helpful intuition that supports our arguments. For example, Katz and Lazarsfeld (1955, p. 62) argue that uniformity of opinion may be a pre-requisite for group action. . . If individuals cannot agree on what should come next, they cannot take collective action (also Arrow, 1974; Simon, 1952). A central premise of our paper is that this type of agreement on collective action, even if partial, is also fundamental for understanding the founding of organizations. We seek to explain the emergence of this collective agreement via the emergence of collective beliefs and nascent organizations.

Sorting, Matching, and Homophily Given an unstructured landscape of individuals with heterogeneous beliefs, we argue that sorting is a key social mechanism shaping organizational founding and the emergence of collective beliefs. Entrepreneurs and nascent founders of organizations sort or self-select to interact with others with whom they share beliefs. In other words, individuals choose whether or not they will enter into a specic cooperative system (Barnard, 1938, p. 17). Initial social interactions provide an opportunity for nascent founders to see and evaluate anothers beliefs about the future, and collective beliefs emerge as likeminded individuals with the same ex ante beliefs coalesce toward what they jointly see as a feasible, possible, and valuable course of action for a nascent collective. In short, individuals seek to interact with self-similar others (cf. Katz and Lazarsfeld, 1955; Newcomb, 1961). To illustrate this more practically, we can imagine heterogeneous entrepreneurs or nascent founders who have beliefs, ideas, and dreams about a future opportunity to address a new market, to create a new product, or to try a new organizational forma diverse set of agents who envision, assess, and have various beliefs about the opportunity landscape and the environment (cf. Felin and Zenger, 2009). These beliefs are individually held, subjective assessments about the types of entrepreneurial ideas and strategies that might lead to valued outcomes. They could represent ideas about which markets to enter or the types of products that a nascent organization might make. Thus, we take the existence of heterogeneous individual beliefs and ideas for granted or as a given that we do not explain (similar to March, 1962, p. 664; Simon, 1964; also Granovetter, 1978, p. 1421; Macy and Willer, 2002), as we are specically interested in the emergence of collective beliefs that result in the formation of nascent organizations.3 Thus, we argue that social interaction and matching based on similar beliefs provide a central, initial mechanism through which nascent organizations form. Sorting and self-selection allow like-minded individuals to begin interacting with similar others, in hopes of forming an organization with a coherent collective belief about the type of (subjectively promising) large-scale direction that their nascent organization might take. The type of sorting and individual self-selection envisioned here is partially illustrated in Schellings (1971, 1978) powerful neighborhood models, where individuals sort and self-select on the basis of similarity on a certain dimension (i.e., race and a slight Manage. Decis. Econ. (2012) DOI: 10.1002/mde

COLLECTIVE BELIEFS AND NASCENT ORGANIZING: THREE MECHANISMS To highlight the emergence of collective beliefs and organizational founding, we next discuss the role of three idealized social mechanisms. Our effort is to highlight the specic processes that lead to the emergence of observed collective-level outcomes (Hedstrom and Swedberg, 1998). Our theoretical development can be seen as a middle-range attempt to pinpoint and explain the emergence of organization and social order from heterogeneous inputs, without resorting to other forms of structure or order in the explanation itself (Coleman, 1990, pp. 315). In other words, we start from a hypothetical initial condition where individuals have heterogeneous beliefs and opinions and explicate the emergence of collective beliefs and nascent organization via three mechanisms: sorting or matching, interacting, and selecting.2 Copyright 2012 John Wiley & Sons, Ltd.

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preference for self-similar neighbors), which then in turn leads to the observed macro outcomes of homogeneity on that dimension (i.e., segregation). Theoretically, individual similarity, or homophily (Lazarsfeld and Merton, 1954; cf. Huston and Levinger, 1978), on a number of dimensions has provided a powerful social mechanism through which similar individuals sort and self-select to interact and associate with one another (Byrne, 1971; McPherson, 1983; McPherson et al., 2001; cf. Blau, 1977; Friedkin, 1998): examples include friendship (Kandel, 1978; Cohen, 1983) and marriage (Kalmijn, 1998). Our focus here, in the context of organizational founding, is specically on value homophily rather than status homophily (Blau, 1977; Ruef et al., 2003). Value homophily includes beliefs, interests, attitudes, preferences, and aspirationsin short, general values that shape [an individuals] orientation toward future behavior (McPherson et al., 2001, p. 419). Our underlying assumption, then, is that common values precede rather than follow from social interaction (Katz and Lazarsfeld, 1955. pp. 5960; Newcomb, 1961). However, as we will discuss, a measure of tolerance for deviant beliefs may also be required. In all, individuals seek to sort and align themselves with others on the basis of similar value orientations and beliefs about the future. There are powerful examples of value homophily in extant social theory. For example, Tocqueville (1840/2000, pp. 489492) explicated how common individual interests led to the creation of both political and industrial associations (i.e., organizations) early in the history of the USA: As soon as several of the inhabitants of the United States have conceived a sentiment or an idea that they want to produce in the world, they seek each other out; and when they have found each other; they unite (p. 492).4 Similar intuition can also be found in the social movement literature, where similarities in political interest have been shown to lead to collective action (Polletta and Jasper, 2001; Jasper, 2004). More generally, early denitions of organizations capture this homogeneity related to purposes and goals (for an overview, see Scott, 1998, pp. 2425). Etzioni (1964) for example dened organizations [as] social units (or human groupings) deliberately constructed and reconstructed to seek specic goals (p. 3). Or, as succinctly put by political scientist Harold Laski (1939)associations exist to fulll purposes which a group of men have in common (p. 39; also Simon, 1964). This commonality, we argue, then, in part emerges via sorting and matching. Copyright 2012 John Wiley & Sons, Ltd.

Individuals with heterogenous beliefs of course may struggle in nding others who share their beliefs. Thus, the process can be seen as a version of a satisfying search. Individuals keep searching for other persons that are reasonably similar. For example, individuals may have some level of tolerance for divergent beliefs. This tolerance can be seen as either some level of indifference about what the nascent organization does or, more productively, the willingness to be inuenced and learn from others. If the tolerance for diverse beliefs is high, the search concludes quickly. At the extreme of complete intolerance, the search may take far longer: until an identical match in beliefs is found. As the nascent collective formation process produces more or less heterogeneous groups, very intolerant individuals may never nd a home. The process of sorting can be thought about and specied in different ways. For example, on the one extreme, we may consider a perfectly efcient market for the sorting of heterogeneous beliefs, specically where individuals are (somehow) fully aware of others beliefs in a global omniscient sense and thus the market for beliefs clears in frictionless fashion to match and coalesce those who have similar beliefs into collective units. However, a more realistic social conceptualization of how the process of sorting occurs recognizes that interaction happens more locally (rather than globally and omnisciently) or semirandomly, where individuals are only aware of the beliefs of those in their social proximity or neighborhood (cf. Granovetter, 1985), those that they interact with. However, we need to note that a pre-specication of the forms that this sorting (or neighborhood) takes via the imposition of some ex ante structure or social relations is partly antithetical to our effort to explain the emergence of collective beliefs as these very ex ante structures or relations then would in turn strongly drive the outcomes we seek to explain (Coleman, 1990, pp. 36).5 Thus, semi-random, social sorting processes provide an intermediate, stylized solution that presumes neither that individuals are already strongly embedded in social relations (which would then determine social outcomes such as collective belief homogeneity) nor that individuals somehow are omniscient about the beliefs of others (which would reduce our theory and model to a game-theoretic exercise). Overall, local or personal social interaction, however specied, creates boundaries for and structures sorting. The central point here is that collective beliefs emerge as individuals sort and self-select to interact with others who share their beliefs. The end Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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result of sorting is, potentially, a more unitary homogeneous social actor, a nascent organization, with a collective belief about a future possibility and the intention to actualize that belief, to in essence test the expected outcomes associated with this shared belief. Social Interaction and Thresholds Organizational founding requires a form of coherence and agreement among its founders, about what the nascent organization might do. The need for this collective coherence provides a boundary that in essence arbitrates between those beliefs that are actualized or tested and those that are not: a certain threshold of others needs to also share a given belief for nascent organizational activity to be realized. In other words, no social action is possible at all without some element of cooperation and, in particular, agreement (Arrow, 1974, p. 27; also Katz and Lazarsfeld, 1955; Simon, 1964). The need for collective action and some measure of homogeneity in beliefs means that not just any individual belief, expectation, or imagined alternative for the future is actualized or tested. In fact, extreme and socially deviant beliefswhether warranted and correct or notmay rarely be realized. Thus, the actualization of beliefs is not only enabled but also constrained by the need to nd others who may have similar or proximate beliefs. Our focus, then, is on the coalescing of a certain number and threshold of self-similar others to found an organization. Our intuition for thresholds in organizational founding builds on generalized models of collective action and behavior, for example, models of social movements or riots (Granovetter, 1978). However, our notion of a threshold is used differently from these models. Specically, Granovetters model of collective behavior focuses on an individuals threshold and propensity to join extant collective action (as a function of the number of others already engaged in that action)for example, a riotwhereas we focus on the need to meet a threshold number of self-similar others for organizational founding and collective action to be realized. In other words, we focus on the collective aspect of thresholds: if sufcient numbers of others are not in agreement about beliefs, then founding and nascent organizational activity are not realized. We should note that our focus on thresholds of course does not necessarily capture all organizational founding. Some entrepreneurial activity may indeed be driven by a single individual and his or her beliefs. Copyright 2012 John Wiley & Sons, Ltd.

But, as highlighted in extant work, organizational founding in large part is a social activity involving a core group of founders (e.g., Burton et al., 2002; Ruef et al., 2003; Aldrich and Ruef, 2006; Beckman, 2006) and not just driven by a singular entrepreneur coordinator (Coase, 1937). An important layer of complexity that might be added to this nascent organizing process, as it relates to interaction and thresholds, is the fact that not only may beliefs require a set of founders to share beliefs, but external stakeholders, such as venture capital companies or key suppliers (Zott and Amit, 2007), may also need to share beliefs about the direction of a newly founded organization. These external stakeholders then in effect also need to be encompassed within the emerging, collective, and shared circle of belief and threshold. In short, not only may the relevant boundary for the emergence of actualizable collective beliefs by nascent organizations need to include a sufcient threshold set of individuals, rather, the relevant circle of belief may also need to encompass a wider set of external stakeholders, such as those who might provide critical resources for a nascent organization (Pfeffer and Salancik, 1978). Selection and Tolerance Selection provides the third social mechanism in organizational founding and the emergence of collective beliefs. Our selection mechanism focuses on the possibility that individuals may not nd others with whom they share beliefs, and thus, they also have a measure of tolerance for beliefs that deviate from their own. In other words, individuals may sort into a nascent organization even if their beliefs are not the same because of their ability to tolerate others with different beliefs. Another way to think about tolerance is as the underlying strength of belief held by individuals. In other words, the less tolerant an individual is toward deviant beliefs, the more strongly ones beliefs are held. Beyond the individual-level facet of tolerance, our selection mechanism also has both interactional and collective-level components. Although an individual may be tolerant of deviant beliefs, nonetheless, this tolerance also needs to be shared. In other words, if beliefs between individuals do not match up, there is nonetheless a second-order possibility that individuals may form a nascent group if the individuals involved are both tolerant of differences. And, as nascent organizations grow in size, various voting rules for admitting deviant others provide an emergent organization-level component to selection. We might, Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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for example, specify that all individuals need to agree (anyone can veto the entrance of a deviant on the basis of their level of tolerance) or utilize a majority rule. Naturally, as the organization grows in size, various organizational forms essentially also prescribe particular selection rules. The theoretical intuition behind selection and tolerance builds on extant models of organizational behavior related to personorganization t (e.g., Schneider, 1987; Chatman, 1991; also Harrison and Carroll, 2005, p. 21). This literature shows that organizations tend to have certain cultures and climates as a function of both who self-selects and who is selected into an organization. Individuals tend to be attracted to and t the organization when they are self-similar (Schneider, 1987). And, in extant organizations, management sets limits on how culturally tolerant the system will be, and those who deviate culturally beyond the permissible limits will be likely to leave or to experience termination (Harrison and Carroll, 2005, p. 21). Our model specically focuses on the founders of an organization itself, and thus, we do not presume any hierarchy or weighting in terms of whose beliefs and tolerance matters most. Rather, for purposes of simplicity, we assume that the founders are equals and seek to nd others who share their beliefs or who are sufciently tolerant to allow for a nascent organization to be formed. In all, selection and tolerance play an important role in organizational founding and the emergence of collective beliefs. Selection and tolerance are also important as they allow for a measure of heterogeneity in nascent organizational beliefs; and this heterogeneity, as we will highlight, offers some interesting insights into organizational founding. Organizational Founding: Testing Emergent Collective Beliefs A key assumption driving our theory and model is that individual beliefs cannot be realized without some level of collective agreement (Katz and Lazarsfeld, 1955; Simon, 1964; cf. Arrow, 1974). Thus, these beliefs in essence require a threshold level of agreement among a sufciently large set of individuals before they can be realized. Put differently, beliefs require cooperation and coordination among a threshold-size group of individuals (cf. Simmel, 1902): a shared belief must somehow emerge for collective action to be realized and for strategies to be actualized. Thus, individuals are interdependent as nascent belief realization requires collective action. Copyright 2012 John Wiley & Sons, Ltd.

The mechanisms of sorting, interacting, and selecting then can lead to the potential founding of nascent organizations and emergence of collective beliefs. Organizations with sufcient numbers of individuals then are able to test an emergent belief. Once individuals have joined nascent collectives, they then choose a particular belief to be tested. Naturally, not all individuals are able to nd others with whom they share beliefsperhaps because of deviance or intolerance, or bothand thus, an organization may not be founded to test some beliefs. Once beliefs and strategies have been tested, then the mechanisms of sorting, interacting, and selecting continue to shape the nascent organizational landscape (both within and across organizations). Specically, once a nascent organization receives environmental feedback, individuals in nascent organizations may not be happy with the associated organizational payoffs, particularly if they do not reect aspiration levels (for example, payoffs compared with those in the best-performing organization). Thus, individuals may self-select out of or exit the nascent organization if they are not happy with its performance (Hirschman, 1971). Our three mechanisms then continue to play a vital role in the early stages of organizing, and these mechanisms continue to inuence the composition and the stability of the nascent organizations.

MODEL AND SIMULATION We develop and explore our theory of organizational founding and the emergence of collective beliefs via a simple agent-based computer simulation (Macy and Willer, 2002). Agent-based models and simulations have been successfully utilized to understand numerous contexts, including research on organizational culture (Harrison and Carroll, 1991, 2005), organizational learning (March, 1991), and top management team decision making (Rivkin and Siggelkow, 2003). Agent-based computer simulations are also widely utilized across the social sciences more broadly (Miller and Page, 2007), although proportionally, simulations are used signicantly less in organizational and management research despite the potential of simulations to illuminate key organizing processes (Harrison et al., 2007). The advantages of computer simulation as a methodology are many; most important for our purposes are that agent-based simulations allow us to study the underlying theoretical mechanisms, micro-mechanics, and processes of organizing in an Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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analytically focused and tractable fashion. Moreover, agent-based computer simulations allow us to theorize about, study, and replicate emergent organizing processes related to the founding of organizations; these organizational initial conditions are hard, if not impossible, to systematically re-create and study in the eld. Overall, our theory and illustrative simulation directly matches Chang and Harringtons (2006) description of, and reason for, using agent-based models: To take an agent-based approach means not having to assign an objective to an organization [but] instead modeling the agents that comprise it with explicit attention to how decisions are made and how the interaction of these decisions produce organizational output (p. 1276, emphasis added). Model Specication Each of the variables and their associated parameters (and values) for our model and computer simulation are specied in the following (see Table 1 for an overview). Beliefs. Each individual has a set of beliefs that are represented as binary vectors with length N. Each entry in the binary vector represents a belief aspect. Beliefs are assigned randomly to individuals in the simulation. Again, these beliefs represent different ideas about what a nascent organization might do: a market it might enter, a product it might create, or an opportunity that it might exploit. We set N = 10 in all simulations. Tolerance. Each individual has a tolerance, D, with which deviating beliefs can be accepted. The difference between two beliefs is measured as the Hamming distance between two belief vectors, the number of positions for which the entries differ (0 instead of 1 or vice versa). If the agents tolerance of belief diversity D is 0, the agent will only team up with individuals who have identical beliefs. In contrast, maximal belief diversity D = N implies that the agent can team up with any individual. The tolerance measure thus may also be seen as an indirect proxy for how strongly beliefs are held by individuals (as well as an individuals willingness to learn and be inuenced by others). The tolerance (or strength of belief) measure is drawn from a uniform distribution. Sorting. A randomly selected individual takes the initiative and offers other individuals, one at a time, the opportunity to join in a nascent group and organization; this represents an effort for the individuals to come together in hopes of realizing a shared belief Copyright 2012 John Wiley & Sons, Ltd.

and eventual collective action, the founding of a new organization. Individuals sort and interact with others, and when beliefs match or are within each agents tolerance, D, then an offer is made to join the nascent organization. This process of sorting continues until all agents have had a chance to potentially join a nascent collective. Once nascent organizations are formed (see further mechanisms later in the text) and beliefs are tested (if threshold levels of individuals are reached), an individual may also choose to sort or self-select out of the nascent organization if sufcient payoffs and aspiration levels are not met (details later in the text). Threshold for forming a nascent organization. Beliefs are not realized and tested unless the threshold number of G other members also share those beliefs. The tolerance parameter D determines the maximal extent to which beliefs can deviate and still be shared. That is, for particular beliefs to have a chance to be tested, individuals need to be in a threshold G size group (group size must be G or higher). It is further required that G beliefs have a similarity value of D or less, that is, the Hamming distance between the beliefs of any individual and the collective beliefs of the group should not be higher than D. Our choice of threshold G levels is informed by the extant literature on founding team size in entrepreneurship. As discussed previously, large-scale studies of Silicon Valley rms show that the average founding team size is three individuals (e.g., Burton et al., 2002; Beckman, 2006). These founders, then, represent a group of individuals whose choices and associated beliefs represent an important initial condition that impacts the organization far into the future. Beyond high-tech settings, in the US economy as a whole, organizations generally start with ve or less employees (Aldrich and Ruef, 2006, p. 102). Selection. As the nascent organization becomes larger, the decision to join it is also negotiated among its nascent members (if n > 1) according to a simple voting rule. An offer to join the nascent organization will be made only if j out of n members can accept the new candidate (the new candidates beliefs are within j members tolerance, D). Decision rules can vary with j = 0, 2, . . . n. If the decision rule requires j = n, all of the organizations members must agree to accept the candidate, when j = 1, only one of the members are required to accept the candidate, and when j = 0, there is free access to the organization. An individual who receives an offer to join an emerging organization will only do so if each of the organizations beliefs is not too divergent, as measured by the Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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Table 1.
Description

Model Specication
Parameter N D j freq G b A Specication Length of binary belief vector Hamming distance between two belief vectors Inclusion if j out of n group members vote yes (based on D), j/n = 0, . . ., 1 Random draw based on relative frequencies of belief components Groups with <G threshold members receive a payoff of 0 Probability that individual i will leave group k, Pi = 1 1/exp(b (A k)) Fixed or variable performance target Parameter values N = 10 D = 0, . . ., 5 or D = 0, . . ., 10 is the range from which distribution tolerance levels are drawn j/n = 0.00, 0.50, 1.00 Random draw and freeze until group changes G = 2, 3, 4, 5 b = 0.10, 0.50, 1.00 A is variable. All groups set A to performance of the currently bestperforming group

Belief vector Tolerance with which deviating beliefs can be accepted (also a proxy for strength of belief) Selection: group decision rule for inclusion of individuals Collective beliefs Belief test and threshold Disappointment Aspiration level

candidates tolerance, D. If both of these conditions are met, the candidate will accept and join the nascent organization. Given diverse selection rules, some individuals may also remain alone (thus, not realizing any beliefs nor associated payoffs) if the individuals tolerance and the nascent groups selection rules do not allow the individual to nd an appropriate nascent organization to join. Collective beliefs. Each of the nascent organizations negotiates a joint collective belief. The process plays out in the following way. Each entry in the binary string is negotiated. If j out of n members of a nascent organization favor a belief of 1, then the collective, organizational-level belief will be 1 with probability j/n and 0 otherwise. This process of collective choice is based on a random draw from the set of individuals beliefs, although we simply use it as one possible proxy for how the process of aggregation might occur. As an example of how collective beliefs are chosen once the nascent organization has formed, consider a nascent organization of ve members where two of the members favor a belief component of 1 and three favor a belief component of 0. In this case, a random draw resolves whether the organization-level belief will be 1 (with probability of 2/5) or 0 (with probability of 3/5). The collective belief is frozen after it has been settled, that is, unless some members choose to subsequently leave (which is possible at the end of each time step, after belief testing and environmental feedback) or new members join the nascent organization in later time steps. In this case, organizational beliefs are re-negotiated according to the same procedure used to negotiate emergent organizational beliefs. As a Copyright 2012 John Wiley & Sons, Ltd.

consequence, collective beliefs will change as individuals enter or leave the nascent organization (see our discussion on aspirations and disappointment). The greater the diversity and the heterogeneity among the individual beliefs within a nascent organization, the more dramatic is the possible change in a nascent organizations beliefs (given the wider distribution of probable beliefs and negotiated draws). We of course recognize that this process of aggregating beliefs, or choosing a collective one, may occur in various different ways. For example, we might consider weighting the beliefs of particular individuals (those who entered the organization rst, those that are more powerful, etc.), using majority voting, or specifying emergent organizational forms (Knudsen and Levinthal, 2007). But for purposes of simplicity, we simply do a random draw from the set of individual beliefs now within the organization. The process of randomly drawing a collective belief from within the organization (from the set of individual beliefs that constitute the nascent group) does have an interesting background and history as a governance mechanism used by various collectives (see Stone, 2009, for an overview). Belief test. In each time step, subjectively held, collective beliefs are tested against the environment. The environment represents the exogenously given, objective opportunity and payoff structure faced by the individuals and the nascent organizations (cf. Felin and Zenger, 2009). In the belief test, the realized N-bit string that represents the group-level beliefs is valued according to a specic payoff matrix, which represents the environment. Although prior models have often used binary strings to represent a rms policy Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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choices, we use binary strings to represent collective beliefs (as in March, 1991) about actions that are valued by an organizations task environment. More formally, our specication of belief payoffs builds on the NK framework for organizational analysis (although, for simplicity, K in our payoff matrix is set at a value of 0), with beliefs represented by a binary string of length N. A belief about actions that are valued by the organizations task environment comprises N attributes, b1, . . ., bN. Each attribute can take on two states, so there are 2N possible designs. A performance landscape is a mapping of the set of beliefs B = (b1, b2, . . ., bN) onto value V(B). The value V(B) represents the value that external reality (i.e., the groups task environment) assigns to realized grouplevel beliefs. In each time step, the performance of each entrepreneurial group is the value V(B). The values of each of the N attributes of the environment are determined by random draws from a uniform distribution over the unit interval. The performance of a set of (realized) beliefs is the average of the values assigned to each of its N attributes. By construction, K out of the N bits in a design may be interdependent; the value c(bi, bi) of each of the N individual attributes bi is affected by both the state of that attribute itself and the states of K other attributes captured in bi. However, for purposes of simplicity, we set N = 10 and K = 0. That is, we assume that different aspects of collective beliefs are independent. Again, the collective belief test requires that a group comprises at least a minimum threshold of G members. A group that meets the required threshold receives the payoff associated with the bit string that represents its collective belief. Lone individuals or groups with fewer than G members receive a payoff of 0. Aspiration, disappointment, and exit from groups. As beliefs vary with respect to their efcacy in representing the true state of the nascent organizations environment, the groups will receive differential payoffs. Members of low-performing groups will be disappointed and tend to leave their group. The probability with which group member i will leave group k is calculated as: Pi 1 1=ebAk ; where A is the group target, k is the current performance of group k, and b is a positive real number. A higher value of the parameter b makes individual group members more inclined to leave their group when it is trailing behind the aspiration level, A. The target A can be a xed target or a variable target such as the performance achieved by the current best-performing organization. Copyright 2012 John Wiley & Sons, Ltd.

In our model, the aspiration level is dened solely with respect to a single external referent of the best-performing organization in the population. There is no internal/own rm referent as is commonly observed. Further, it is a single universal external referent and not dened with respect to some similarity measure, such as groups of similar size. This is because social comparisons of performance are essential for entrepreneurial start-ups. The simplest way to capture this is to use a single external referent. Naturally, there are different ways of relaxing this assumption. For example, aspirations could be dened with respect to the best-performing group that is similar in size. Because we regulate group size through the threshold effect, this would give a qualitatively similar result at the cost of a more complex model. Model Parameters and Simulation Description We systematically explore the conguration space to establish whether our model generates effects according to our theory and the features of the exogenous environment in understandable and realistic ways. The results reported here are based on averages of 30 samples for each of the 72 (=1 * 1 * 1 * 1 * 2 * 3 * 3 * 4) points in the conguration space as set out in Table 1. We have explored the full parameter space (these results are available upon request), with various levels of selection rules, disappointment, and so on. We report on a more delimited set of parameters, specied in the following under each gure. In each of our samples, a constant population of 100 agents engages in processes of sorting, interaction, and selection over a period of 50 time steps, as described in the preceding section. Each of the 50 time steps represents the playing out of the mechanisms specied in our theory: sorting, interaction, and selection. That is, each individual is given an opportunity to sort and nd an appropriate match in beliefs with other individuals, resulting in the potential formation of nascent groups. As nascent groups and organizations form, they utilize selection rules that delimit entry, and the specic collective beliefs to be tested are drawn from among the nascent group. Finally, each time step ends with the potential exit of individuals from groups; individuals not satised with collective performance (based on aspiration levels) may leave in the hope of nding or forming groups that might better match their own beliefs, in hopes of better performance. Exit represents the nal activity of each period; thereafter, the Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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subsequent period begins again with sorting, interaction, and selection. Results Emergent collective beliefs. As suggested by our theoretical development, groups and nascent organizations with more homogeneous beliefs gradually emerge via sorting, interaction, and selection. Figure 1 represents the full range of results where tolerance is allowed to vary from 0 to N. This allows us to focus on the mechanisms of individual sorting, selection, and interaction and the associated emergence of more homogeneous groups. As shown in Figure 1 and highlighted by our theory, emergent groups (four upper lines in each panel) are more homogeneous in their beliefs than those individuals still seeking belief alignment and realization (four lower, dashed lines in each panel). Thus, group homogeneity is always higher than 0.4, whereas homogeneity of individual beliefs is always less than 0.4 (and in most cases, even lower with typical values in the range of 0.10.2). Thresholds also play an important role. We varied the threshold levels

of individuals needed for belief realization, and larger threshold levels naturally led to more heterogeneity in group beliefs and, as noted earlier, less stability in groups (cf. Carley, 1991). That is, as the threshold is increased from 2 to 5 (parameter G), it becomes harder to form a group without having to accept more deviant beliefs, thus increasing group heterogeneity, although, as expected, even at higher thresholds, group beliefs are much more consistent and homogeneous than individual beliefs. As seen in Figure 1, naturally, there are also differences between loose and strict selection rules (left versus right panels): if an individual is allowed free access into nascent groups, this results in more belief heterogeneity. But if any group member is able to veto entry, this results in increased belief homogeneity. Increasing the threshold for what is a viable group somewhat reduces homogeneity, whereas strict inclusion rules (veto) increase homogeneity. Overall, the dynamics of nascent organizations, beyond homogeneity, are driven by belief heterogeneity and dissatisfaction with group performance. Although the underlying belief structure remains fairly stable (and thus encapsulates beliefs of the founders), realized beliefs will tend to become unstable the more diverse the

Belief homogeneity

T, Free access

Belief homogeneity

T, Veto

Figure 1. Homogeneity and heterogeneity in beliefs. Based on 30 samples (N = 10, K = 0). Tolerance of diversity: D = 0, . . ., 10, disappointment parameter: b = 0.1, threshold values: G = 25 (marked in round circles). The upper set of lines represents within-group beliefs (homogeneity levels 0.4 < H < 0.7). The lower set of lines represents beliefs of individuals outside of group (homogeneity levels 0.1 < H < 0.4). Free access allows individuals to join groups without selection rules. Veto allows any group member to veto someone wanting to join the nascent organization.

Copyright 2012 John Wiley & Sons, Ltd.

Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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collective group beliefs are. Groups with more diverse beliefs are therefore more likely to become unstable, whereas groups with more homogenous beliefs tend to become stable. However, note that group stability is an endogenous feature of the dynamics. This is because tolerance leads to formation of groups with unstable beliefs, which in turn may lead to low performance and subsequent disappointment. The lack of stability in collective beliefs is likely to lead to the disbanding of the groupa negative reinforcement. However, groups may also be successful. In that case, no one wants to leave the groupa positive reinforcement of stability. In other words, we see the classical signature of positive reinforcement of success and negative reinforcement of failure. In our model, positive reinforcement produces group stability, whereas negative reinforcement produces instability in new organizations. Therefore, more belief heterogeneity (driven by higher levels of tolerance) promotes more variance in group stability as well as group performance (high-performing groups become very stable, whereas low-performing groups are unstable). By contrast, increasing belief homogeneity (driven by higher levels of intolerance) promotes less variance in group stability.

Nascent organizing. Figure 2 highlights the number of individuals in groups after each time step. These represent individuals who in each respective time step have found a satisfactory match between their own beliefs and those of a nascent group; thus, Figure 2 also highlights the number of individuals, from a population of 100 agents, that have not found a threshold-size nascent group. Individuals who are not in a group fail to realize payoffs because the threshold levels needed for collective action have not materialized. Smaller thresholds naturally allow for more individuals to nd potential matches in beliefs with the population of 100 individuals. For example, in groups where free access is allowed, some 65 individuals are in a group when the threshold is 5. When the threshold is lowered to 2, over 90 individuals nd themselves in a nascent group. Time, as suggested by the upward slope, plays an important role in that it allows for increasingly better matches between individuals and nascent groups, in essence providing for more efcient sorting and selection, given the chance to interact with more possible and better matches. The number of emergent groups is represented in Figure 3. The increase in groups represents the cycle of continual re-ordering among nascent groups, as

Numder of group members

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Numder of group members

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Figure 2. Number of individuals in groups. Based on 30 samples (N = 10). Tolerance of diversity: D = 0, . . ., 10, disappointment parameter: b = 0.1, threshold values: G = 25 (marked in round circles).

Copyright 2012 John Wiley & Sons, Ltd.

Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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Number of groups

T, Free access

Number of groups

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Figure 3. Number of groups. Based on 30 samples (N = 10). Tolerance of diversity: D = 0, . . ., 10, disappointment parameter: b = 0.1, threshold values: G = 25 (marked in round circles).

groups form, select, and test beliefs, although some individuals are disappointed and seek a better match between their own beliefs and those of others. Furthermore, over time, there increasingly is a better opportunity to nd matches between individual beliefs because each period offers new possibilities of sorting, selection, and interaction. A more ne-grained analysisincluding varied levels of tolerance and disappointmentshows that more tolerance of deviant beliefs increases group size but decreases the number of viable groups. This is because tolerance leads to formation of groups with unstable beliefs, which in turn leads to low performance and subsequent disappointment and disbanding of the group. By contrast, a stricter inclusion rule and a higher propensity to leave a group both decrease group size and the number of groups. It is harder to form groups, but once they are formed, they tend to become very stable. Belief heterogeneity, performance, and cumulative wealth effects. Although we have focused on the need to achieve collective belief homogeneity, via sorting, interaction, and selection, for collective action to be realized, belief homogeneity only represents a means to an end: the desire to meet threshold levels of collective action, which allow for these emergent collective beliefs and strategies to be tested. However, once Copyright 2012 John Wiley & Sons, Ltd.

these strategies are tested, they may also turn out to be wrong. That is, our theory focuses on the emergence of belief homogeneity and collective action, although emergent beliefs still represent subjective assessments about what actions may have the highest payoffs. Because these beliefs, however, may also be wrong (at varying levels), it is interesting to carefully explore the dynamics of within-group homogeneity and heterogeneity and its associated effects on group performance and cumulative wealth. Cumulative wealth effects across thresholds can be found in Figure 4. Interestingly, the cumulative wealth of a population of agents (total payoffs associated with collective belief tests and strategies, across the whole population) increases as threshold size, and thus heterogeneity, increases. This result is somewhat surprising, given our focus on homogeneity and the emergence of collective beliefs. A higher threshold tends to constrain the emergence of groups and therefore narrows down the range of collective beliefs. A higher threshold therefore promotes less variance in performance, but there is little reason to expect differences in average cumulative wealth. Why do we see these effects? This is because larger groups tend to include (more) deviants who become a source of sensible variance in the negotiated collective belief outcomes. Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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Cum. wealth to groups

T, Free access

Cum. wealth to groups

T, Veto

Figure 4. Wealth to groups. Based on 30 samples (N = 10). Tolerance of diversity: D = 0, . . ., 10, disappointment parameter: b = 0.1, threshold values: G = 25 (marked in round circles).

Smaller groups are not able to adjust their beliefs much in the face of adverse circumstance, in this case, poor performance. They vanish instead as individuals choose to exit the group. Larger groups, by contrast, can incrementally adjust their collective beliefs. When groups become too large, however, their collective beliefs become unstable. On the continuum between collective beliefs that cannot be adjusted (very small groups) and highly adjustable but unstable collective beliefs (very large groups) lies an optimal group size or belief range. Put differently, group size translates into a trade-off between adjustment speed and reliability. Larger groups are like supertankers that adjust reliably, at a very slow pace. Smaller groups, by contrast, adjust very quickly but are at risk of losing their course as their beliefs uctuate wildly. The group sizes we are exploring here tend to promote collective beliefs that cannot be adjusted much. Increasing the threshold promotes emergence of larger groups with collective beliefs, representing higher variance in the constituent individual beliefs. And higher variance in individual beliefs is benecial for survival because it allows adjustment of collective beliefs. A comparison of the left and right panels of Figure 4 allows a more detailed assessment. It compares the effect of a stringent veto policy (right panel) with that of a loose free-access policy (left panel). Copyright 2012 John Wiley & Sons, Ltd.

The former naturally stimulates within-group belief homogeneity, and the latter stimulates within-group heterogeneity. Our analysis of the trade-offs between group stability and performance would suggest that a stringent admission policy (veto) decreases cumulative performance. Comparing the right and left panels in Figure 4 conrms this supposition (but the effect is marginal for threshold values less than 5). Our results thus conrm a well-known trade-off of stability versus high performance, albeit within a novel context of organizational founding, which in turn is driven by the social mechanisms of sorting, interacting, and selecting. A veto policy generally increases group homogeneity, and this gives rise to two related effects. One is higher group stability, and the other is less variance in performance. An absence of a veto policy, by contrast, reduces group stability but increases variance in performance. For thresholds lower than 5, a veto policy has little effect on cumulative performance because these dynamics cancel out. That is, a veto policy decreases the variance in performance among groups, but the mean stays the same. For a threshold of 5 (or larger), the variance-reducing effect of a veto policy also reduces cumulative performance. This is surprising because a veto policy promotes group stability. One would therefore expect that a veto policy would increase performance. Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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So, why does a veto policy decrease cumulative performance for thresholds of 5? The reasoning is fairly subtle. An increase in threshold generally reduces the number of groups and thereby also reduces performance variance among groups. This is because continuous improvement is driven by the bestperforming group. And when the dynamics quickly settle down to a stable state, there is less drive to further improve performance. However, when the veto policy is scrapped, the ongoing group formation process is more enduring. This is because the emergence of occasional high-performing groups leads to dissatisfaction in other groups. As a result of the renewed sorting and matching process, new groups form and occasionally settle down at higher levels of performance. More individuals are included in groups (as shown in Figure 2), and their beliefs help form more ambitious ventures in the sense that they aim at a higher performance target set by the best-performing group. A high threshold value (5 or higher) thereby leads to the surprising effect that an absence of veto policy generates a population of entrepreneurial groups that have higher cumulative performance. The boundary condition for this result should also be noted. If the population of entrepreneurial groups were unlimited, a veto policy would always lead to higher performance. This is because there would always be a group with extremely high performance that could fuel ongoing improvement (by disbanding and reformation of groups). It is interesting to note that a high threshold value generates distinct behaviors, as shown in Figures 14. The intuition underlying these results is as follows. A larger organization has a larger set of individuals that are prone to leave. However, as a countervailing force, a new member in a small group will have proportionately greater impact on beliefs. Smaller groups will therefore benet from a strict veto policy because it reduces the risk of admitting members that can disrupt the group. Because a larger group is less likely to be derailed by deviants, it can afford, and even thrive on, a less strict admission policy. Larger groups also tend to be better performing on average, and this greater level of performance will actually reduce the rate at which members exit because the exit process is driven by the degree to which performance falls below the best-performing organization in the population. As previously explained, this dynamic explains the counterintuitive result that a lenient admission policy improves performance for a threshold of 5 but has little effect for lower thresholds. Copyright 2012 John Wiley & Sons, Ltd.

Overall, tolerance and inclusion rules inuence group performance in ways that are highly contingent on the viable group size (thresholds). Our results therefore highlight a number of counterintuitive effects related to performance. Does tolerance increase group performance? Yes, if the threshold of viable groups is high enough; otherwise, tolerance decreases performance. Does a strict inclusion rule increase group performance? Well, if the threshold of viable groups is high enough, a strict inclusion rule has a detrimental effect on performance. By contrast, if the threshold of a viable group is small, a strict inclusion rule increases group performance. Overall, the simulation both illustrates and extends the intuition of our theoretical model of organizational founding and the emergence of collective beliefs. Specically, we show how sorting, interaction, and selection lead to particular collective-level outcomes, thus illustrating the basic mechanisms behind our theoretical development. Model Limitations and Future Directions Our model of organizational founding and the emergence of collective beliefs is highly idealized and simple. It naturally has some limitations and associated opportunities for future extension. First, our simulation is initialized and set in motion without any ex ante social relations, and thus, future work might explore how the incorporation of social space might change the dynamics of organizational founding. We would expect these ex ante social relations, via various forms of embeddedness, to play a central role in how collective beliefs emerge (cf. Hite, 2003). For example, extant relations naturally impact access to information, resources, and knowledge of opportunities (Aldrich and Whetten, 1981). In terms of modeling, it would be fairly easy to include such effects by modeling extant relations, for example, as networks. Second, for purposes of simplicity, we have ignored some social inuence dynamics (cf. Friedkin, 1998; Wood, 2000) associated with social interaction (other than the indirect proxy of tolerance and the possibility of vetoing new membership). But, as extant work shows, socialization dynamics are important in social interaction (and organizations) and might provide an alternative mechanism for the convergence of beliefs (March, 1991; also Chatman, 1991; Harrison and Carroll, 2005). Models that highlight the nexus of sorting and socialization provide a natural opportunity for future work. Furthermore, social interaction (whether within or outside of nascent organizations) naturally Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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also has a certain imprinting on individuals.6 For example, future models might explore how interaction with others leaves an imprint on individuals (in the form of, for example, a memory) and inuences beliefs and subsequent decision making. Furthermore, the beliefs of the organization itself, as a social actor (King et al., 2010), may also inuence individuals within the organization. Third, once nascent organizations are formed, the actual selection of collective-level beliefs might occur in numerous different ways. Although we have largely weighted individual beliefs equally, in essence proxying the founding team (and its sizeBeckman, 2006) of nascent organizations, clearly, even nascent organizations may develop hierarchy and structure and power relations (cf. Martin, 2002), which may have further implications for which beliefs the nascent organization chooses to actualize. For example, future simulations may make distinctions between (and differently weight the beliefs of) founders and mere employees.7 Furthermore, there is also a particular opportunity to explicate how nascent decision-making structures emerge and how they evolve as the organization receives feedback from the environment. We have suggested how the formation of group beliefs, in the abstract, can be analyzed as an emergent process of matching, self-selection, and interaction. But generating and including multiple hierarchical levels of an organization would allow researchers to closely examine the trade-offs between group composition and hierarchya fundamental, yet understudied, problem in organization theory. Fourth and nally, our focus has been on belief heterogeneity and the emergence of homogeneous beliefs and expectations and their potential actualization. Our effort thus can largely be seen as focusing on the exploitation rather than the exploration of opportunities by nascent organizations. Naturally, as our results discussion suggests, additional work is needed on optimal amounts of heterogeneity in organizations (cf. March, 1991); somehow, an organization needs to maintain collective coherence in beliefs yet also introduce variance. Furthermore, our efforts are modeled in a stable environment and thus are conducive for understanding more exploitative strategies, whereas dynamic environments clearly accentuate the need for withinorganizational belief heterogeneity and diversity (Sorenson, 2002). In addition, although we have focused on similarity on the same knowledge dimensions (beliefs about strategy), questions also exist about how disparate information, skills, and knowledge sets are integrated and aggregated by nascent organizations. Copyright 2012 John Wiley & Sons, Ltd.

DISCUSSION AND CONCLUSION The purpose of this paper is to develop and simulate a theory of nascent organizations. We have specically argued that sorting and matching, interacting, and selecting play a central role in structuring organizational founding. We next discuss how our model may contribute to and further enhance our understanding of organizations. First, there has been much discussion about the need to understand the initial conditions and founding of organizations: for example, the composition of nascent organizations (Hannan and Freeman, 1989; Ruef et al., 2003), the choices of founders (Baron et al., 1999), and their knowledge (Huber, 1991). These organizational initial conditions are critical to understand as they impact the path-dependent direction of the organization far into the future (Johnson, 2007; Sydow et al., 2009). Our model explicitly begins with nascent organizational founders, their beliefs and expectations about the future, and highlights the role that sorting, interacting, and selecting play in both enabling and constraining belief realization and associated collective action. We argue that a focus on the value-related dimensions of entrepreneurial activity is just as important as a focus on the demographic characteristics of nascent organizations. Although we know much about the latterfor example, the demographics of founders (Ruef et al., 2003; Aldrich and Ruef, 2007)there is much opportunity to explore the beliefs and ideas themselves that structure and drive nascent organizational activity. Second, although there has been a focus on the beliefs of entrepreneurs, for example, in organizational economics (Coase, 1937), the focus has explicitly been on a singular entrepreneur coordinator rather than a collective set of founders and the social factors that enable and constrain entrepreneurial activity. Organizational economics, particularly the Coasian variant that focuses on the emergence of organizations (vis--vis markets), tends to focus on the judgments and actions of one entrepreneur, rather than the social dynamics associated with founding. However, more consideration needs to be given to the aggregate, social, multi-person nascent organization and the emergence of shared expectations (cf. Malmgren, 1961). Our goal has been to introduce both the individual and social dynamic, to highlight the need for threshold levels of social buy-in and the emergence of shared beliefs in nascent organizations. Furthermore, we might briey note that although transaction cost economics also has much to say about the conditions under which new organizations emerge (Coase, Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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1937; Williamson, 1981), the focus in that literature is explicitly on the emergence of rms due to the exogenously determined (implicitly, objectively known) nature of transactions rather than on the founders subjectively held beliefs and expectations about the nascent organizations environment. Third, beyond our contribution to understanding organizational founding, our model also has implications for organization theory and strategy more broadly. In particular, the effort in this paper is to make explicit links between individuals and organizations. As recently noted by Gavetti et al. (2007), although early organization theories had a direct focus on the role that individuals play in organizational activity (cf. March and Simon, 1958), more recently, there has been considerably less [focus] on linking individuals interests and cognitions to organizations actions and decisions (Gavetti et al., 2007, p. 524). Thus, theories of organization often treat the organization as a unitary actor without consideration of the nested, compositional factors related to organizations (March, 1962). For example, the resource-based view focuses on the rm as a unitary actor in factor markets (Barney, 1986). But, as noted by Simon (1947), administrative activity is group activity (p. 7), and therefore, understanding the negotiated decisions and social dynamics of the nascent organization is of central importance in understanding organizations. In this paper, we have explicitly developed such a model, one that links individual beliefs and self-selection to the social context that both enables and constrains nascent entrepreneurial activity and organizational behavior and performance. Acknowledgements
We would like to thank Markus Becker, Jerker Denrell, John Dickhaut, Jeff Dyer, Mike Findley, Mike Goodrich, Bill Hesterly, Steve Kozlowski, Omar Lizardo, Mike McBride, Janice Molloy, Nils Stieglitz, Wynn Stirling, Todd Zenger, and Ezra Zuckerman for their very helpful feedback and/or conversations related to this paper. Special thanks to Brayden King for helpful feedback on several versions of this paper. We are grateful for the opportunity to present this paper at the following locations: Department of Psychology, Michigan State University; McIntire School of Commerce, University of Virginia; the BYU Department of Computer Science graduate class on multi-agent systems; and the BYU Law School. All errors are our own.

2.

3.

4.

NOTES
1. Taking markets as a given of course is also partly problematic (White, 1981; Granovetter, 1985). However, as noted by Coleman, there are some clear advantages to starting with a hypothetical non-structural world, in

5.

particular, as starting with this type of idealized heterogeneity can help us then explain how structure itself and homogeneity emerge, rather than simply assuming that its a priori existence in some form (e.g., Coleman, 1990, pp. 321, 1991). We might briey interject and note that in choosing our social mechanisms for explaining the emergence of collective beliefs and nascent organizationssorting, interacting, and selectingwe have strived to pick social mechanisms that are in essence generative in nature. By generative social mechanism, we mean that our selection is informed by extant social theory that focuses on abstraction, reduction, and action (Hedstrom and Swedberg, 1998), as well as emergence (Cederman, 2005). Thus, for example, we abstract away from problems related to a priori structures and collective givens and hypothesize an initial condition that helps us build and generate nascent organizations and collective outcomes (cf. Cederman, 2005). Thus, Schellings (1998) denition of a social mechanism perhaps best captures our efforts: A social mechanism is a plausible hypothesis, or set of hypotheses, that could be the explanation of some social phenomenon, the explanation being in terms of the interactions between individuals and other individuals, or between individuals and some social aggregate (pp. 3233). In other words, we not only model the emergence of social structure but also highlight how this emergent structure reciprocally inuences that set of choices and actions that individuals can take. Thus, our model gives due to both the micro and macro, as well as the interactional dynamics of organizing. As discussed, we take the existence of individual beliefs for granted. That said, it is worth noting that we build on a specic strand of psychology that highlights the role that individual beliefs and expectations and interests play in shaping and motivating behavior and associated choices (Fishbein and Ajzen, 1975; Bratman, 1987). Specically, individuals have behavioral beliefs, subjective plans, or anticipations about the potential consequences associated with particular decisions and behaviors. Individuals in essence assign probabilities to the consequences of certain behaviors, assessing the potential benets of various alternatives, and from this analysis, they develop a belief. These beliefs embody a choice and intention and motivation to take certain actions to actualize that belief (cf. Mele, 1992). In other words, what explains [an] action is the persons desires together with his beliefs about opportunities (Elster, 1989, p. 20; cf. Davidson, 1963). Individuals decide and choose to actualize a particular belief, to test whether a particular belief leads to anticipated outcomes (Fishbein and Ajzen, 1975): Bratmans (1987; also Anscombe, 1957; Hedstrom, 2005) beliefdesireintention model in part captures this intuition. In another context, Schneiders (1987) model of organizational behavior, specically his attractionselection attrition model (of organizational culture and climate), highlights how individual values lead similar people to be attracted into organizations, thus creating more homogeneous organizations (cf. Huston and Levinger, 1978). The sociologist James Coleman (1991) indeed emphasized how organizational activity is increasingly

Copyright 2012 John Wiley & Sons, Ltd.

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decoupled from extant social ties and how organizations are purposively constructed (p. 7). 6. We thank an anonymous reviewer for making this point. 7. We thank an anonymous reviewer for raising this point.

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Manage. Decis. Econ. (2012) DOI: 10.1002/mde

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