Effectuation
Encyclopedia
Effectuation is a set of decision-making principles expert entrepreneurs are observed to employ in situations of uncertainty
. The alternative to effectuation is causality
, which describes decision-making heuristics rooted in prediction
.
General Overview
Effectuation is an idea with a sense of purpose - a desire to improve the state of the world and the lives of individuals by enabling the creation of firms, products, markets, services, and ideas.
Effectual reasoning is a type of human problem solving developed from a cognitive science based study of 27 founders of companies ranging in size from $200M to $6.5B. Effectuation articulates a dynamic and iterative process of creating new artifacts in the world. Effectual reasoning is a type of human problem solving that takes the future as fundamentally unpredictable, yet controllable through human action; the environment as constructible through choice; and goal as negotiated residuals of stakeholder commitments rather than as pre-existent preference orderings.
Effectuation is a logic of entrepreneurial expertise. What makes great entrepreneurs isn’t genetic or personality traits, risk-seeking behavior, money, or unique vision. Effectuation research has found that there is a science to entrepreneurship and that great entrepreneurs across industries, geographies, and time use a common logic, or thinking process, to solve entrepreneurial problems. Effectuation is a logic of entrepreneurial expertise that both novice and experienced entrepreneurs can use in the highly unpredictable start-up phase of a venture to reduce failure costs for the entrepreneur.
Effectuation vs. Causation
Aspiring entrepreneurs in MBA classrooms have long been taught the principles and tools of causal reasoning—the exact inverse of the effectual reasoning that drives entrepreneurial success. Using causal reasoning, one begins with a specific goal and a given set of means for reaching it. Using effectual reasoning, one starts with only a set of means; in the process of deploying them, goals gradually emerge.
Causation
The focus is on achieving a desired goal through a specific set of given means. Causation invokes search and select tactics and under-lies most good management theories. Causal thinkers believe that “If I can predict the future, I can control it.”
Effectuation
The focus is on using a set of evolving means to achieve new and different goals. Effectuation evokes creative and transformative tactics. Effectual logic is the name given to heuristics used by expert entrepreneurs in new venture creation. Effectual thinkers believe that “If I can control the future, I do not need to predict it.”
Effectuation consists of a unique world view and 4 principles. These 5 elements are core to using the “effectual cycle” as a venture develops.
The Principles
Bird in Hand Principle – Start with your means. Don’t wait for the perfect opportunity. Start taking action, based on what you have readily available: who you are, what you know, and who you know.
Affordable Loss Principle – Set affordable loss Evaluate opportunities based on whether the downside is acceptable, rather than on the attractiveness of the predicted upside.
Lemonade Principle – Leverage contingencies Embrace surprises that arise from uncertain situations, remaining flexible rather than tethered to existing goals.
Crazy-Quilt Principle – Form partnerships Form partnerships with people and organizations willing to make a real commitment to jointly creating the future—product, firm, market—with you. Don’t worry so much about competitive analysesand strategic planning.
What is the effectual cycle?
Effectuation isn’t a static, one-time exercise. It is a logic and process that can be used as the firm develops in the “0-60mph” (early startup) phase of growth. Expert entrepreneurs follow the process to gain early customers and committed partners who then create new means and new goals as resources and viewpoints are added to the mix. Thus, instead of having a stated goal and finding means to reach it, expert entrepreneurs use the new means and new goals to drive the creation of the venture in ways they hadn’t expected, leveraging surprises as they present themselves. Effectuators use the process to lower the risk of the venture (by getting customers and income early, setting affordable loss, and spreading risk to others) and finding truly new and useful market opportunities by leveraging constraints and new information.
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...
. The alternative to effectuation is causality
Causality
Causality is the relationship between an event and a second event , where the second event is understood as a consequence of the first....
, which describes decision-making heuristics rooted in prediction
Prediction
A prediction or forecast is a statement about the way things will happen in the future, often but not always based on experience or knowledge...
.
General Overview
Effectuation is an idea with a sense of purpose - a desire to improve the state of the world and the lives of individuals by enabling the creation of firms, products, markets, services, and ideas.
Effectual reasoning is a type of human problem solving developed from a cognitive science based study of 27 founders of companies ranging in size from $200M to $6.5B. Effectuation articulates a dynamic and iterative process of creating new artifacts in the world. Effectual reasoning is a type of human problem solving that takes the future as fundamentally unpredictable, yet controllable through human action; the environment as constructible through choice; and goal as negotiated residuals of stakeholder commitments rather than as pre-existent preference orderings.
Effectuation is a logic of entrepreneurial expertise. What makes great entrepreneurs isn’t genetic or personality traits, risk-seeking behavior, money, or unique vision. Effectuation research has found that there is a science to entrepreneurship and that great entrepreneurs across industries, geographies, and time use a common logic, or thinking process, to solve entrepreneurial problems. Effectuation is a logic of entrepreneurial expertise that both novice and experienced entrepreneurs can use in the highly unpredictable start-up phase of a venture to reduce failure costs for the entrepreneur.
Effectuation vs. Causation
Aspiring entrepreneurs in MBA classrooms have long been taught the principles and tools of causal reasoning—the exact inverse of the effectual reasoning that drives entrepreneurial success. Using causal reasoning, one begins with a specific goal and a given set of means for reaching it. Using effectual reasoning, one starts with only a set of means; in the process of deploying them, goals gradually emerge.
Causation
The focus is on achieving a desired goal through a specific set of given means. Causation invokes search and select tactics and under-lies most good management theories. Causal thinkers believe that “If I can predict the future, I can control it.”
Effectuation
The focus is on using a set of evolving means to achieve new and different goals. Effectuation evokes creative and transformative tactics. Effectual logic is the name given to heuristics used by expert entrepreneurs in new venture creation. Effectual thinkers believe that “If I can control the future, I do not need to predict it.”
Effectuation consists of a unique world view and 4 principles. These 5 elements are core to using the “effectual cycle” as a venture develops.
The Principles
Bird in Hand Principle – Start with your means. Don’t wait for the perfect opportunity. Start taking action, based on what you have readily available: who you are, what you know, and who you know.
Affordable Loss Principle – Set affordable loss Evaluate opportunities based on whether the downside is acceptable, rather than on the attractiveness of the predicted upside.
Lemonade Principle – Leverage contingencies Embrace surprises that arise from uncertain situations, remaining flexible rather than tethered to existing goals.
Crazy-Quilt Principle – Form partnerships Form partnerships with people and organizations willing to make a real commitment to jointly creating the future—product, firm, market—with you. Don’t worry so much about competitive analysesand strategic planning.
What is the effectual cycle?
Effectuation isn’t a static, one-time exercise. It is a logic and process that can be used as the firm develops in the “0-60mph” (early startup) phase of growth. Expert entrepreneurs follow the process to gain early customers and committed partners who then create new means and new goals as resources and viewpoints are added to the mix. Thus, instead of having a stated goal and finding means to reach it, expert entrepreneurs use the new means and new goals to drive the creation of the venture in ways they hadn’t expected, leveraging surprises as they present themselves. Effectuators use the process to lower the risk of the venture (by getting customers and income early, setting affordable loss, and spreading risk to others) and finding truly new and useful market opportunities by leveraging constraints and new information.