How Entrepreneurs Reason and Make Decisions




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Paula Kokare
Project Manager, Switzerland

How Entrepreneurs Reason and Make Decisions

Sarasvathy (2001) argues effectual reasoning (effectual logic) guides the understanding of how entrepreneurs process information and carry out decision-making process. Effectuation is typically used in situations of uncertainty while causal reasoning is used when the future is predictable. (Editor: causal reasoning is based on finding relationships between a cause and its effect. The main 3 types of causal reasoning are: Deduction, Induction, and Abduction). Effectuation, as opposed to causal decision-making, is based on on-going strategy development, flexibility and experimentation. Sarasvathy mentions five principles of effectuation:
  • Non-predictive control of the future ("PILOT-IN-THE-PLANE PRINCIPLE"): entrepreneurs are not willing to forecast the future and making decisions based on trend expectations. Rather, they focus on things they can influence directly and intervene to shape the future;
  • Available Means Principle ("BIRD IN HAND PRINCIPLE"): entrepreneurs focus on existing resources and capabilities to generate a set of outcomes, instead of firstly setting a goal and then gathering necessary means to achieve it;
  • "AFFORDABLE LOSS PRINCIPLE": decisions will be made taking into account the maximum loss that can be afforded, instead of choosing investments based on their returns;
  • Contingency Principle ("LEMONADE PRINCIPLE"): recognizing necessities in time to pivot and identify opportunities resulting from negative experiences or arising elsewhere;
  • Partnership mind-set ("CRAZY QUILT PRINCIPLE"): entrepreneurs are seeking for support and resources outside the organization instead of treating outsiders as competitors.
An organisation's ability to apply a comprehensive set of entrepreneurial practices and maintain those along the growth path is a potential source of competitive advantage and helps organisations to remain proactive and anti-fragile during times of continuous change and uncertainties.
Effectuation principles have been applied in practice by organisations to alter the stage-gate, predictive approach and improve new venture management, new product development, R&D or simply decision-making processes.

Source: Sarasvathy, S.D., 2001, 'Effectual Reasoning in Entrepreneurial Decision Making: Existence and Bounds', Academy Of Management Proceedings & Membership Directory, pp. D1-D6.

   

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