How do entrepreneurs know how to evaluate something that is fundamentally new? Novelty plays an essential role in breakthrough innovations, entrepreneurship and economic change Yet novelty is difficult to recognize, hard to assess and associated with high levels of failure. This “inaccessibility and indeterminacy of novelty” (Schumpeter, 2005) has made the assessment of novelty a challenge in both the economics of change and understanding the process of innovation.

Novelty is classically viewed as hard to assess because of problems of bounded rationality arising from individual, environmental, and ecological sources of novelty. Individual sources of novelty are assessed by means that are bounded by the capacity of the individual to process information, such as differences in cognition and prior knowledge. Environmental sources of novelty are assessed by means that are bounded by the costs of searching for information, such as differences in information channels. An emerging view is that novelty could be assessed using ‘ecological rationality’, where the limitations of the individual rationality are reduced by knowledge about the information environment (Todd and Gigerenzer, 2003).

Ecologically rational strategies are useful under conditions of incomplete information when search and stopping rules are well defined. However simple defined rules do not seem to perform well under the ambiguous, dynamic and contextual conditions associated with entrepreneurial settings. I argue that entrepreneurs use strategies that simultaneously recognize individual and environmental sources of novelty by engaging in selective learning. In selective learning, entrepreneurs learn about failure criteria rather than assessing factors of success.