Review of Effectuation

I just finished reading Effectuation by Saras Sarasvathy. It’s a great look at the non-causal (therefore “effectual”) logic used by entrepreneurs (and everyone else) in the face of an unpredictable future.

Here’s some excerpts and thoughts:

Causation v. Effectuation

• Causal logic is based on the premise: “To the extent we can predict the future, we can control it.”
• Effectual logic is based on the premise: “To the extent we can control the future, we do not need to predict it.”
• Causal problems are problems of decision; effectual problems are problems of design. Causal logic helps us choose; effectual logic helps us construct. Causal strategies are useful when the future is predictable, goals are clear, and the environment is independent of our actions; effectual strategies are useful when the future is unpredictable, goals are unclear, and the environment is driven by human action.
• Causal question: What should I do to achieve this effect?
• Effectual question: What can I do with these means?
• Surprises are usually relegated to error terms in formal models. Effectual logic sees them as source of opportunities for value creation.
• Contractual claims are causal claims on the predictable future; equity provides effectual claims on the unpredictable future.
• The paths to entrepreneurial success expand in the future rather than converge (one-to-many, in contrast to causation’s many-to-one approach towards ‘the goal’)

On the Entrepreneur

• Expert entrepreneurs distrust market research; distrust attempt at predicting the future
• “In commercializing new technologies, entrepreneurs often find that formal market research and expert forecasts, however sophisticated in methods and impeccable in their analyses, fail to predict where the markets will turn out to be or what new markets will come into existence.” Christensen (1997) and Mintzberg (1994)
• Expert entrepreneurs start with three categories of means: their identity, their knowledge base, and their social network.
• Theme of converting initial customers to partners
• Entrepreneurs perceive the world around them as human-made
• “Serial entrepreneurship is a temporal portfolio” – diversified over time rather than concurrently like a traditional investment portfolio

Decision Making

• Pragmatism does not assert a singular truth and declare all else false; rather, it compares truths and tests for differences. If no difference in the consequences of the two truths, they are the same pragmatically.
• What does this truth tell us that we don’t already know?
• Risk involves known distribution of options (1 in 5 chance of winning). Uncertainty involves unknown distribution of options
• “Rational choice involves two guesses, a guess about uncertain future consequences, and a guess about uncertain future preferences.” March (1978) in RAND Journal of Economics
• Human rationality is bounded by cognitive limitations such as physiological constraints on computational capacity, and psychological limitations like biases & fallacies

Principles of Entrepreneurial Expertise:

• Bird-in-hand principle: create something with existing means rather than discovering new ways to achieve goals (“What do I have?” vs “What do I need?”)
• Affordable loss principle: Committing what you’re willing to lose rather than investing based on expected returns
• Crazy quilt principle: Negotiate with all stakeholders willing to commit to a project without worrying about the opportunity costs. The venture (or “quilt”) evolves over time based on interactions of all stakeholders (investors, customers, employees, suppliers…).
• Lemonade principle: Leverage surprises rather than avoiding them
• Pilot in the plane principle: Rely on human agency as prime driver of opportunity rather than technical/economic trends. (Comes from SpaceShipOne putting a pilot in charge of the spaceship instead of a computer. The pilot can think on his feet, while a computer would need every possible contingency pre-programmed.)

I’m not sure where I found this book, but it was most likely a blog post or tweet by Ben Casnocha or Paul Kedrosky. Whoever suggested it, thanks.

More information:
Effectuation: How Entrepreneurs Think

Jason Fried @ Big Omaha 2009 from Big Omaha on Vimeo. Many of his thoughts on starting a business are aligned with the idea of Effectuation. “We don’t have a plan.” “We don’t set sales targets. They’re numbers you pick out of the air and make you do things you don’t want to do”

Tagged as: book-review, entrepreneurship, startup

Bill Erickson is a WordPress Consultant who builds custom websites using WordPress as a CMS and Thesis or Genesis as a framework. He’s a cofounder and resident of The Creative Space, and a cofounder of the BIL Conference (the open analog to the TED Conference).