How do entrepreneurs make decisions? Saras Sarasvathy considered this question. She wondered what differences existed in the decision-making process among expert entrepreneurs who find themselves in a situation of uncertainty.

The Basics

Saras Sarasvathy’s research on decision making concluded that most of them use effectual instead of causal reasoning. Using causal reasoning means having a specific outcome in mind and trying to reach this goal with a set of given recourses. These people believe that they can control the future because they can predict it. The majority of entrepreneurs, however, start the other way around by using effectuation. They look at the means they already have and by trying to deploy them, possible goals emerge. They believe that if they can control the future, there is no need to predict it. Saravathy shows that entrepreneurs make things up as they go instead of following a path to an already determined goal. Therefore, effectuation is best described as applying a problem-solving logic with the following five principles.

1. The Bird–in-Hand Principle: Start with your means! Most businesses do not start with divine inspiration but instead with what they have at hand at a given moment. Who they are, what they know, whom they know and what they have. Considering these factors together eventually leads to many possibilities. The bird in hand principle essentially encourages you to just do it with whatever you have and see where the process takes you.
2. The Affordable Loss Principle: Set affordable loss! Starting a new venture is considered risky business. But it does not need to be this way. At each step, try to understand the risk of what you might lose. Then choose a comfortable risk and afterwards try to push creatively to increase the return. Over time the risk one might be willing to take changes, yet remains affordable throughout.
3. The Lemonade Principle: Leverage contingencies! Use problems or surprises to create new ideas and turn your “failures” into new opportunities. Instead of being disappointed or angry about unexpected occurrences, take the knowledge of how this could have happened and use it as potential clue for new innovations. Simply put, the lemonade principle is an incarnation of the common proverb: “If life deals you lemons, make lemonade!”
4. The Crazy Quilt Principle: Form partnerships! This principle acknowledges the simple factor of networking. By communicating with customers, clients, potential stakeholders and industries, you build partnerships and therefore increase your means and eventually also your outcomes. And by increasing these you also get more opportunities to succeed.
5. Pilot-in-the-Plane Principle: Control v. predict: The future is not determined but rather made and as an entrepreneur you are in the right position to shape the future and therefore also predict it.