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The 5 principles for making decisions like an Expert Entrepreneur

Do successful entrepreneurs make decisions differently than others? Yes they do! This fact seems to be surprisingly unknown to most aspiring entrepreneurs and small business owners. When understood and applied it can have a profound impact on your venture.

The concept is called Effectuation and was developed by Professor Saras Sarasvathy at University of Virgina over 15 years ago. I recently had the good fortune of spending an inspiring week with Sarasvathy studying and discussing the five principles that Effectuation consists of. Don’t make the mistake of dismissing them because they might sound simple at first because these principles are golden.

The 5 principles 

When Sarasvathy started her research she wanted to find out of if there were commonalities in the way highly successful and experience entrepreneurs made decisions. She selected entrepreneurs with at least 10 years of experience and having taken at least one company public or having been awarded the E&Ys prestigious Entrepreneur of the Year. By using such limiting criteria she was assured that the participants had gone through as many all of the critical situations that an entrepreneur faces when building a venture. The participants were presented with a hypothetical scenario in which they were to make a number of tough decisions. As they tried to solve the different problems they were asked to think aloud and in detail describe each step in their thinking and decision process. Sarasvathy recorded everything and in the analysis the following five distinct principles emerged as common denominators among the experts. How many of them do you use?

  1. The bird-in-hand principle
    Your starting point is your means and not your goal. Begin with looking at what resources you have at your disposal right now. This stocktaking can be made by asking yourself the questions: who am I, what do I know and whom do I know? How can you use these resources immediately  to take action and start interacting with people?
  2. The affordable loss principle
    Make a commitment in advance to how much you can afford to loose and stick to it. This principle can be applied in many decision situations to get over inertia. Ask yourself, what can I possibly lose on this decision or by taking this action and is that affordable to me? If it is an affordable loss and the potential gains are large you should go for it. For example initating contacts with other people has a very low cost but high upside. By using this principle you kill failures early and you cumulate success by leveraging on what works.
  3. The crazy-quilt principle
    Your venture is created in cooperation with other people and companies that also make commitments to the project. Together you make it happen and you welcome that the idea and the goal changes in the process bakes you get new means. This is an organic process where you ask for help and cooperation and not by you calculating opportunity costs and making competitive analysis. This might be the most important principle of Effectuation.
  4. The lemonade principle
    Expect surprises and welcome contingencies. It is in the unexpected consequences that opportunities arise. With this mindset you leverage on the surprise situations, you seek for and cherish these moments instead of avoiding or adapting to them.
  5. The pilot-in-the-plane principle
    Effectuators believe that the future is not something you can or even should attempt to predict. The future is instead something you try to control. With this perspective follows that your focus is on activities that is within your control. With this approach the expert entrepreneurs achieve the outcomes they desire.

Do this now
There is a lot of depth contained in these five principles and I urge you to explore them practically. Start for example with these two question: How do these five principles correlate with how I make decisions in my venture today? What would I do differently if I applied the effectuation principles fully and what impact would that? If you have not yet stared your venture you can also use the principles to overcome the the three major obstacles to starting a business, no idea, no money, not enough knowledge. If you lack an idea apply bird-in hand, if you lack financial resources apply affordable loss and if you don,t know how to start apply all five principles.

Want more to read?
“Effectuation – Elements of Entrepreneurial Expertise”, Saras Sarasvathy, Edward Elgar Publishing (2008)

A quote to ponder on:
“Try not to become a person of success but rather a person of value” Albert Einstein