The option value in Jack‐of‐all‐trades investment

• Date: 01 March 2021
• DOI: http://doi.org/10.1002/sej.1316
• Published date: 01 March 2021

RESEARCH ARTICLE

The option value in Jack-of-all-trades investment

Richard J. Arend

University of Southern Maine, Portland, Maine

Correspondence

RichardJ. Arend, L.L. Bean/Lee Surace Chair in

StrategicManagement, Professor of Business

Administration,School of Business, Collegeof

Management& Human Service, University of

SouthernMaine, PO Box 9300, Portland,ME

04104.

Email: richard.j.arend@buildingbettertheory.net

Research Summary: The Jack-of-all-trades model assumes there is

demand in the economy not only for individuals who are general-

ists but also for those who are specialists, and that organizations

need multiple skills to succeed. Thus, generalists have the option of

acting as self-employed entrepreneurs while specialists must work

for corporations. This model generates empirically testable hypoth-

eses but also holds glaring deficiencies. One deficiency is the exclu-

sion of risk, a deficiency questionable in any model explaining

entrepreneurial activity. Adding risk to the model is straightfor-

ward, but necessitates the analysis of the option value for individ-

ual investments in generalist skills. We discuss how those novel

additions change the predictions and applications of the model, and

what that implies for the relevant literatures in entrepreneurial

human capital, activity and theory assessment.

Managerial Summary: In this conceptual paper, we correct the origi-

nal Jack-of-all-trades model of entrepreneurial activity for risk (and for

uncertainties that can be captured as risk). Decision-makers in human

skills investments can exploit that risk using an options approach. Our

correction affects the original model's predictions in several ways,

including increasing expected entrepreneurial activity in contexts of

high volatility concerning the economic value of such activity. A ne w

set of predictions based on contextual volatility is identified. The new

results have implications for generalist skills investments, for when to

hire specialists, and for the effects of “weakest link”employees. For

potential entrepreneurs, we recommend understanding the value of

options thinking in personal skills investments, as well as the effects

on scale that tightly held generalist skills imply.

KEYWORDS

entrepreneurial activity, Jack-of-all-trades, option value, skills

investment

1|INTRODUCTION

Entrepreneurial activity is one of the most important phenomena underlying economic advancement

(e.g., Audretsch & Keilbach, 2004; Elfenbein, Hamilton, & Zenger, 2010; Strohmeyer, Tonoyan, & Jennings, 2017).

Received: 2 February 2018 Revised: 22 December 2018 Accepted: 28 January 2019 Published on: 27 March 2019

DOI: 10.1002/sej.1316

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2021;15:121–143. wileyonlinelibrary.com/journal/sej 121

Yet, despite that importance, there exist relatively few widely accepted theories addressing the big questions of who

engages in that activity and why they are successful at it. Lazear's (2002, 2004, 2005) relatively recent Jack-of-all-

trades model (denoted JAT henceforth) of entrepreneurial activity stands out as one of those few theories, and we

believe the most straightforward to test. JAT is based on a relatively simple economic system model that comple-

ments the three other widely cited conceptualizations of entrepreneurial activity (Levie & Autio, 2008). It comple-

ments the highly cited individual-opportunity nexus conceptualization (Shane & Venkataraman, 2000) because the

JAT specifies that individual entrepreneurial human capital (e.g., Davidsson & Honig, 2003), in the form of diverse

and balanced business skills, is the primary reason why new venture opportunities are pursued. It complements the

highly cited Austrian (e.g., Kirzner, 1999) conceptualization because the JAT suggests that balanced skills are a pri-

mary reason why entrepreneurs would be more alert to opportunities to combine existing ideas. And, it complements

Schumpeter's (1934) highly cited creative destruction conceptualization because the JAT explains that diverse knowl-

edge is needed not only to invent, but even more so to commercialize, new forms of value.

While the JAT hasgained traction explaining specific patternsof entrepreneurial activity, itis surprising that it has

done so while explicitly excluding adefining characteristic ofsuch activity, that of risk. TheJAT has enjoyed wide empiri-

cal support predicting patternsin who will start up new ventures and succeed (as those individuals with diverse skills),

as evidenced in macro-level studies in the entrepreneurship and economics outlets (e.g., Åstebro, Chen, & Thompson,

2011; Stuetzer, Obschonka, & Schmitt-Rodermund, 2013; Tegtmeier, Kurczewska, & Halberstadt, 2016). However, it

has done so without including the risks involved in entrepreneurial activity, like those arising from: the effects of the

economicchanges that the new product,service, or organizationalform will entail; the questionof whether the underly-

ing technology will work; the effects from regulators and incumbents reactions; the questions of whether consumers

will understand the product and buy it, or whether the supply chain will cooperate in a timely manner; and so on

(e.g., Teplensky, Kimberly, Hillman, & Schwartz, 1993) .We contribute to the literature on entrepreneurial theory, and

specificallyto the JAT stream and its human capital investmentimplications, by addressingthat need to model risk (and

its equivalents

1

) and highlightingthe errors that can occur whenit is not modeled. The JAT stream focuseson the char-

acteristicsof entrepreneurs, identifyingthe skills characteristicsmore likely to result in new ventures and their success,

with a purpose of predicting and verifying the better characteristics. That stream helps address big questions in the

field, like who chooses to become an entrepreneur and whyare some more successful; but, sofar that stream has not

accountedfor the effects of risk and optionalityin the entrepreneur's investmentsin her skills and so part of our contri-

bution is to addressthat gap. We analyze what happens when entrepreneurship-related risk is added to the JATmodel

by not only assessing how the supportfor the original predictions is affected, but also how the contextual risk-related

volatility overthe value of entrepreneurshipaffects skills investment patterns.

2

Note that when such risk is includedin

the JAT model, it is alsonecessary to assess the option valuesof specific human capital investments that areassumed to

undergirdthe choice and success of entrepreneurial activity.

Our analysis is for scholars in entrepreneurship (with interests in the JAT, risk, human capital, options, decision-

making, and theory-improvement), for related policy-makers (with interests in in entrepreneurial activity, skills train-

ing, and labor pool quality), and for business partners interested in new venture assessment and support. The gap we

identify in the JAT is its lack of accounting for risk, risk being a defining characteristic of an entrepreneurial context.

1

Entrepreneurship is concerned with many forms of uncertainty (e.g., Packard, Clark, & Klein, 2017). However, only when the form

can be reduced to an equivalent knowledge state of risk (i.e., where the main distributional characteristics [the mean and variance] of

the decision's possible outcomes are known or assumed) can any rational choices be made (i.e., to a state where one choice can be

calculated with a higher expected value than another, whether that value be objective or subjective). For the purposes of this paper,

we assume that uncertainty can be reduced to such risk, and so calculations, such as those involved option valuation, can proceed.

For instances where this assumption is not valid, or where decision-making is not rational, the analysis here is silent. Given our sub-

ject is the economic paper of Lazear, where that necessary information is available and the decision-making is rational, our assump-

tions are appropriate.

2

Note that our result that contextual volatility affects skills investment patterns can be used to separate out alternative explanations

for observed skills investment patterns (i.e., if the observed pattern varies with volatility then our JAT model is supported while

others may not be).

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