Lecture # 2

HOW DO ENTREPRENEURS
THINK AND MAKE
DECISIONS?

„If I may control the future, I do not have to

predict it”
Different approaches to venture creation

or

Entrepreneurship as making
 How to build a new venture?
• Make a market analysis
• Think about strategy to conquer the market
• Write a business plan
 How to build a new venture?
• Make a market analysis

• Think about strategy to conquer the market

• Write a business plan

EFFECTUATION
VERSUS

CAUSATION
 Introduction
• In dynamic thus uncertain environment
entrepreneurs take actions in different ways.

• What is distinctive for successful entrepreneur

(especially expert one) is specific logic of thinking
and in consequence making decisions.

• The logic might be analyses in CONTROL-

PREDICTION fra e.
READ THE RECIPE GO TO SHOP TO BUY INGREDIENTS COOK

SET THE GOALS OBTAIN THE RESOURCES ACHIEVE THE

GOAL
SEE WHAT YOU PREPARE THE MEAL
HAVE

MOBILIZE YOUR CLARIFY YOUR IDEA

RESOURCES
 Effectuation vs causation
• There are different approaches to taking actions, solving
problems and decision making of entrepreneurs, especially in
uncertain environment.

• Effectuation - the future is unpredictable yet controllable,

entrepreneurs create opportunities, effectual models begin
with given means and seek to create new ends, based on the
premise „To the extent we can control the future, we do not
need to predict it”

• Causation – rooted in prediction, causal models begin with an

effect to be created, based on the premise „To the extent we
can predict the future, we can control it”

Sarasvathy 2008
 CAUSUAL REASONING
• predictive

• very functional area in business

• begins with a pre-determined goal and a given set of means

and seeks to identify the optimal – fastest, cheapest, most
efficient, etc. – alternative to achieve the given goal.

• involves the creation of additional alternatives to achieve

the given goal.

• causal reasoning may or may not involve creative thinking.

The form of creative causal reasoning is often used in
strategic thinking.
 CAUSAL REASONING
• based on the rational reasoning found in neo-
classical micro-economics

• Based on intensive search process and the

alternative with highest rate of return is
chosen

• Planning and analysis are required

 EFFECTUAL REASONING
• does not begin with a specific goal. Instead, it
begins with a given set of means and allows
goals to emerge contingently over time from
the imagination and aspirations of the
founders and the people they interact with.

• effectual reasoning is inherently creative

 EFFECTUAL REASONING
• entrepreneur selects alternatives based on the
affordability of experimentation and hedges
experiments by making alliances with and getting
pre-commitments from potential suppliers,
competitors, and customers

• decision criteria are the affordability of

experimentation and the degree to which an
uncertain outcome can be controlled through
alliances and pre-commitments

Chandler et al. (2007)

 Effectual logic
• Unlike causal reasoning that comes to life
through careful planning and subsequent
execution, effectual reasoning lives and
breathes execution.

• Plans are made and unmade and revised and

recast through action and interaction with
others on a daily basis.
 PRINCIPLE CAUSATION EFFECTUATION

STARTING POINT GOAL ORIENTATION MEANS ORIENTATION

Goals define the resources Resources define goals

RISK PERCEPTION FOCUS ON EXPECTED FOCUS ON AFFORDABLE

RETURNS SOURCE

ATTITUDE TOWARDS POTENTIAL COMPETITORS POTENTIAL PARTNERS

OUTSIDERS

ATTITUDES TOWARDS AVOIDANCE LEVERAGE

CONTINGENCY

VIEW OF THE FUTURE FORECAST CREATE

Future environment is Environment depends on
externally given future action
 How effectual entrepreneurs start?
with three categories of means:

(1) Who they are – their traits, tastes and abilities;

(2) What they know – their education, training, expertise,

and experience;

(3) Whom they know – their social and professional

networks.

Using these means, the entrepreneurs begin to imagine an

implement possible effects that can be created with them.
 5 principles of Effectuation
• Bird-in-hand principle → Start with Who you are, What you know and
Whom you know

• Affordable loss principle → Invest what you can afford to lose

• Crazy Quilt principle → Build a network of self-selected stakeholders

• Lemonade principle → Embrace and leverage surprises (every day)

• Pilot-in-the-plane principle → The future comes from what people do

 Some remarks
• It is important to point out that the same person can
use both causal and effectual reasoning at different
times depending on what the circumstances are.

• The best entrepreneurs are capable of both and do use

both modes well. But they prefer effectual reasoning
over causal reasoning in the early stages of a new
venture.

• Most entrepreneurs do not transition well into latter

stages requiring more causal reasoning.
SOCIETY FOR EFFECTUAL ACTION

www.effectuation.org
 Who is more entrepreneurial?

• Shane

Shane 2003
 Who is more entrepreneurial?

Shane 2003