The Three Principles that Entrepreneurs Use to Control their Risk

How do entrepreneurs deal with risk? A persistent and widely held belief is that entrepreneurs are risk-takers; that they like to take risks. Ask anyone on the street or in a classroom and they will tell you: “An entrepreneur is someone who is bold, who likes to take risks”. But nothing could be further from the truth. Entrepreneurs don’t like risk; no study has ever shown that. What studies do show is that while entrepreneurs are willing to take risks because they recognize that they are necessary, they try to control them. To do this, they use three principles that are at the core of the entrepreneurial theory called effectuation, proposed twenty years ago by Darden professor Saras Sarasvathy.  

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Effectuation: How Entrepreneurs (Really) create new products, new organizations and new markets.

Starting a business may seem straightforward – create a compelling vision based on a groundbreaking concept, write a thorough business plan, secure funding from investors, build the company, assemble a great team, and execute a strategy to achieve global conquest. The prevailing perception of triumphant entrepreneurs often evokes notions of creativity, visionary foresight, resolute ambition, unwavering persistence, dynamism, courage, exemplary leadership, charisma, empathy, and openness to collaboration. This portrayal is akin to portraying them as modern-day superheroes-an appealing but misleading notion. In reality, the process is far less linear and heroic. It’s time to dispel these myths.

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