Draft:Effectuation

Effectuation is a theory of entrepreneurial action which emphasizes the importance of control-based versus prediction-driven decision making in the creation of a new venture. The theory was developed in the late 1990s by Professor Saras D. Sarasvathy based on her study of expert entrepreneurs which was conducted under the supervision of Nobel Laureate Herbert Simon. The theory suggests that since entrepreneurs face extreme uncertainty they should start creating companies based on their available means versus pre-determined goals and embrace collaboration.

Sarasvathy identified five principles of Effectuation, each of which emphasizes control over prediction. Effectuation has been the subject of over 250 peer-review journal articles.University of Albany journal article search.

Background
The theory of Effectuation was initially formulated by Saras D. Sarasvathy while at Carnegie Mellon University and studying under Herbert A. Simon, a Nobel Laureate and a cognitive scientist known for his work on expert decision behaviors. Her research, particularly with Simon, revolved around the decision-making patterns of expert entrepreneurs, notably those with a history of serial entrepreneurial successes.

Contrary to Sarasvathy's initial hypothesis of a unique planning capability among these entrepreneurs, her findings revealed a general skepticism towards predictive strategies in expert entrepreneurs' decision-making processes. Sarasvathy delineated five core principles of decision-making which collectively form the logic of effectuation. Since its inception, effectuation has evolved into a significant and influential stream within entrepreneurship research attracting both supporters and detractors. The topic has garnered extensive academic attention, evidenced by the publication of over 250 peer-reviewed journal articles on the subject of Effectuation. Sarasvathy was awarded the Global Award for Entrepreneurship Research in 2022 for her work on effectuation.

Concept & Principles
Effectuation has been summarized as including five principles that expert entrepreneurs employ to overcome uncertainty.

Means-driven action (Bird-in-hand): Individual means (who you are, what you know, and whom you know) determine what options for action are possible and what results may be achieved. Instead of asking "What should one do?", expert entrepreneurs start with "What can I do?".

Affordable loss thinking: The affordable loss principle suggests that entrepreneurs take action based not on expected return but rather on risking only the resources they can afford to lose.

Embracing Partnerships (Crazy quilt): Expert entrepreneurs start partnerships with self-selected stakeholders who agree to commit means to a venture under conditions of uncertainty. The principle asserts that with every new partnership, new potentials emerge and the available means and resources expand.

Leveraging contingencies (Lemonade): The lemonade principle refers to the idea of leveraging contingency by embracing and adapting to unexpected events or challenges. Rather than viewing surprises as setbacks, entrepreneurs using Effectual logic see them as opportunities to create new possibilities and markets, much like turning lemons into lemonade.

Practicing Non-predictive control (Pilot-in-the-plane): Expert entrepreneurs use a logic of non-predictive control by which they create new things with means and resources at their disposal. The principle suggests the future can be created through commitments from autonomous actors.

Measurement
Survey instruments for measuring Effectuation have been created by researchers including Wiltbank, Chandler and Mauer. The reseach and validation work by Gaylen Chandler resulted in an instrument to measure Effectual behavior. The article entitled "Causation and Effectuation Processes: A Validation Study," focuses on developing and validating measures for causation and effectuation approaches in new venture creation.

Critical and Popular Response
Effectuation was the cover story in Inc. in February 2011 in an article entitled, "How Great Entrepreneurs Think".

Richard J. Arend, Hessamoddin Sarooghi, and Andrew Burkemper published an article critical of the effectuation theory in entrepreneurship in 2015. The authors argued that the theory lacked sufficient empirical testing and critical analysis. In their assessment, they drew on a comprehensive set of theory-building criteria to evaluate effectuation.

Venture Capitalist Vinod Khosla reviewed a copy of, "What Makes Entrepreneurs Entrepreneurial?" an explanation of Effectuation by Saras Sarasvathy and described it as, "The First Good Paper I've Seen".

On April 29th, 2024 Sarasvathy and her Effectuation Research were the subject of the social science podcast Hidden Brain in an episode entitled "Innovation 2.0 - How Big Ideas are Born".

The Government and NGO Policy Application
The United States Government and Several NGO's have studied or evaluated the use of Effectuation in entrepreneurship education including USAID, The Danish Entrepreneurship Foundation and Youth Business International.