In an ever-evolving business landscape, making decisions amidst uncertainty is a daunting challenge. However, Saras Sarasvathy, a renowned professor at the University of Virginia’s Darden School of Business, offers profound insights into navigating this uncertainty. By studying how successful entrepreneurs think and make decisions in the early stages of launching new ventures, Sarasvathy has identified five crucial habits, encapsulated in her theory of effectuation. These habits, or principles, are the Bird in Hand, Affordable Loss, Lemonade, Crazy Quilt, and Pilot in the Plane.
In a compelling conversation on the Hidden Brain podcast, hosted by Shankar Vedantam, Sarasvathy delves into these principles, shedding light on how they can guide entrepreneurs in shaping their futures.
The Logic of Effectual Thinking
Effectuation, as Sarasvathy explains, is the logic of entrepreneurial expertise that prioritizes non-predictive control over prediction. In essence, it’s about minimizing the reliance on predictive information and focusing instead on what can be controlled. This approach is particularly valuable in the chaotic and unpredictable world of startups.
“Effectual thinking,” Sarasvathy states, “is a way to minimize predictive information while making decisions under great uncertainty. And the way you minimize predictive information is you are always dividing the world into things within your control and things outside your control. You ignore things outside your control and continuously use things within your control to shape and co-create the future. And you end up creating new effects in the world.”
1. The Bird in Hand Principle
The first principle, Bird in Hand, emphasizes starting with what you have. Instead of waiting for the perfect idea or the ideal set of circumstances, expert entrepreneurs begin with their existing resources. This could be anything from skills, knowledge, and networks to physical resources.
Take the founders of Airbnb, for instance. They didn’t start with a grand vision of revolutionizing the hospitality industry. Instead, they started with a simple idea: renting out a spare bedroom with an air mattress to make some extra money. This humble beginning eventually evolved into a multi-billion-dollar company. Similarly, the inventors of Post-It Notes at 3M started with a glue that didn’t stick well. They didn’t discard the idea; instead, they transformed it into a highly profitable product line.
This principle teaches that you don’t need a big idea to begin with. Start with your bird in hand – the resources already within your control – and build from there.
2. The Affordable Loss Principle
The Affordable Loss principle revolves around the idea of focusing on what you can afford to lose rather than what you expect to gain. Expert entrepreneurs limit their risks by committing in small, manageable steps and only investing what they can afford to lose at each step.
For example, instead of quitting their jobs and investing all their savings into a new venture, they might start by testing their ideas on a smaller scale, such as through side projects or pilot programs. This approach allows them to learn, adapt, and iterate without the fear of catastrophic failure.
This principle encourages a mindset of experimentation and learning, where the emphasis is on the process and not just the end goal.
3. The Lemonade Principle
The Lemonade principle is about embracing surprises and turning unexpected events into opportunities. Just as the saying goes, “When life gives you lemons, make lemonade,” expert entrepreneurs remain flexible and open to change.
They understand that not everything will go according to plan, and rather than being discouraged by setbacks, they look for ways to turn them to their advantage. This adaptability is crucial in a constantly changing business environment, where unforeseen challenges are the norm.
For instance, many startups pivot their business models in response to market feedback or changing circumstances. By embracing the Lemonade principle, they can find new pathways to success that they might not have considered initially.
4. The Crazy Quilt Principle
The Crazy Quilt principle highlights the importance of partnerships and collaborations. Expert entrepreneurs build networks of self-selected stakeholders who co-create the venture with them. These partners provide valuable resources, knowledge, and support, reducing the uncertainty and risks associated with entrepreneurship.
By working with others who share their vision or bring complementary skills, entrepreneurs can create a more robust and resilient business. This collaborative approach also opens up new opportunities for innovation and growth that might not be possible when working alone.
For example, many successful startups have benefited from strategic partnerships with other companies, investors, or mentors who have helped them scale their operations and reach new markets.
5. The Pilot in the Plane Principle
The final principle, Pilot in the Plane, underscores the idea that the future is not something that happens to us but something we can create. Expert entrepreneurs focus on activities within their control and steer their ventures in the direction they desire.
This principle is about taking proactive steps to shape the future rather than being passively carried along by external forces. By maintaining a clear vision and staying focused on their goals, entrepreneurs can navigate uncertainty and drive their ventures forward.
For instance, Steve Jobs and Steve Wozniak didn’t just predict the future of personal computing; they actively shaped it through their innovative products and relentless pursuit of their vision.
Conclusion
Saras Sarasvathy’s principles of effectuation offer a valuable framework for navigating the uncertainties of entrepreneurship. By focusing on what they can control, leveraging their existing resources, embracing surprises, building partnerships, and proactively shaping their futures, expert entrepreneurs can create new opportunities and drive their ventures to success.
Whether you’re a novice or seasoned entrepreneur, a manager, or someone looking to better handle the growing uncertainty in the world, these principles provide practical guidance for making informed decisions and building a successful venture. To learn more about these principles and hear from Saras Sarasvathy herself, check out the 29 April episode of the Hidden Brain podcast, titled “Innovation 2.0: How Big Ideas Are Born.”
By adopting these five habits, you can cultivate the entrepreneurial mindset necessary to thrive in today’s dynamic business environment, turning challenges into opportunities and creating a future of your own making.
