Where did Effectuation Come From?
As scientists, we seek to push the boundaries of our knowledge about how entrepreneurs make decisions.
As educators, we seek to revolutionize the way entrepreneurship is taught throughout the world. We do that through the study and teaching of effectuation and the “entrepreneurial method.” Effectuation is at its heart a human problem-solving method that was developed through research into the mental processes used by some of the best problem-solvers in the world – expert entrepreneurs.
Why study expert entrepreneurs?
The startup phase of a new company is one of the most “uncertain” and unpredictable situations a business person can be in. It is chaotic, exciting, surprising, and the future is unknown. Expert entrepreneurs figure out ways to navigate these choppy waters – turning big surprises into the utterly mundane. It’s pretty amazing.
The Venturing Experiment
Saras Sarasvathy, under the mentorship of Nobel Laureate Herbert Simon of Carnegie Mellon University, sought to provide “valid microfoundations for an economics in which Schumpeterian perspectives on innovation, competition, and growth are integral, yet consistent with recent evidence from evolutionary economics on the dynamics of markets and industries as well as with recent developments in behavioral economics on human decision-making.” The empirical evidence for the microfoundation came from a cognitive science based study of entrepreneurial expertise using think-aloud protocols. She had two main questions in her research:
“What commonalities and differences exist in the decision-making process of an group of expert entrepreneurs who started with the same idea for a new venture and face exactly the same set of decisions in building it?”
“In the face of non-existent or not-yet-existent markets, what underlying beliefs about the predictability of the future influence the decisions expert entrepreneurs make as they build a new venture?”
To answer those questions, Sarasvathy had 27 expert entrepreneurs (entrepreneurs with over 15 years of experience as such who had founded multiple ventures including both successes and failures and had taken at least one company public [ranging in market capitalization of $250M – $6.5B]) work through a 17-page problem set of 10 typical questions encountered by entrepreneurs as they build a venture. They were asked to think aloud for the entire test period. All of their responses were taped, transcribed, and analyzed by Dr. Sarasvathy and a team of researchers. The responses were coded according to their causal and/or effectual logic (each of the principles above were highlighted). Sarasvathy found that 65% of the respondents used effectual logic 75% of the time when they were solving the problems.
From this empirical basis, she learned that (1) expert entrepreneurs do share a common logic in solving entrepreneurial problems and (2) causal thinking is not bad, but required to form a venture. It was the timing and amount of effectuation reasoning that separated expert entrepreneurs. Especially at the early stages, expert entrepreneurs preferred to use effectual logic in creating new opportunities.
If you’re new to effectuation, you’ll immediately recognize the depth of research that’s being performed by dozens of academics worldwide. You can read some award winning papers on effectuation and see how the research has grown since Saras wrote her first paper in 2001.
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