Mitigating preference uncertainty: Prediction- and control-oriented strategies

Abstract

Entrepreneurs cope with uncertainty in different ways, from predictive approaches, based on the statistical assessment of contingencies, to non-predictive approaches based on judgment and oriented towards action. In this paper we develop a simple mathematical framework of the process by which entrepreneurs collect information about customers’ preferences under predictive and non-predictive strategies to assess the conditions under which they reduce uncertainty. Whereas predictive approaches may reach a large and representative base, non-predictive approaches are prone to biases may deliver a more effective reduction in uncertainty. An entrepreneur who manages to establish a fruitful exchange with relevant customers, may obtain a more reliable assessment if, by revealing information about the product, she facilitates the elicitation of preferences. These positive effects are constrained by the nature of the product, the entrepreneur’s social capital and the degree of heterogeneity in customer preferences.