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The process of identifying, shaping, and pursuing market opportunities is emerging as a focal point in the field of entrepreneurship. Scholarly efforts to date have considered what happens during this process; it is time to turn attention to how and why. This article examines one such “how” question: how do entrepreneurs think and reason such that they identify innovative opportunities? Specifically, the cognitive processes of mental simulation and counterfactual thinking are proposed as mechanisms by which entrepreneurs identify and develop innovative opportunities. Propositions regarding the application of these cognitive processes to opportunity identification are presented and discussed.