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Professor Israel Kirzner's theory of entrepreneurship uses the methods of Austrian Economics to explain the function of the man who perceives and pursues economic opportunities in the face of uncertainty. The entrepreneur, in seeking his own profit, is essential to correcting mistakes in the structure of prices and remedying the sheer ignorance and error exhibited by some economic actors.

His profits derive from the services he performs in detecting and eliminating arbitrage opportunities, thereby allowing supply and demand for a given good to meet.

Kirzner describes alertness as the fundamental quality of the entrepreneur. Alertness is the entrepreneur's ability to perceive new economic opportunities that no prior economic actor has yet recognized. The entrepreneur might foresee demand for a new product that has not hitherto been manufactured; he might then decide to manufacture that good himself. Alertness may also involve the entrepreneur's detection of arbitrage opportunities on the market: opportunities to sell the same factor of production for a higher price than he bought it. The entrepreneur's alertness detects arbitrage opportunities by recognizing that certain factors of production are underpriced; he then proceeds to act on this knowledge to earn profit.

The entrepreneurial function is possible due to the presence of sheer ignorance on the part of some economic actors. Sheer ignorance, in Kirzner's definition, consists of not only not knowing a given piece of information but also of not knowing that one does not know it: no consideration of the information, positive or negative, even enters the economic actor's mind. Sheer ignorance is the basis for uncertainty; economic actors neither know nor anticipate the future perfectly due to their incapacity to foresee every datum in that future. Future events might occur whose causes are not presently known to the economic actors. Sheer ignorance is the root cause of sheer error: mistakes made by economic actors as a result of not anticipating these future events or knowing their present causes.

The entrepreneur constantly remedies sheer ignorance and corrects sheer error. Through his alertness, the entrepreneur foresees economic developments that other actors have overlooked; he also recognizes where the other actors' lack of information has created mistakes in the price structure and hence arbitrage opportunities for him. The entrepreneur has an incentive to remedy the sheer error in the price structure,

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