Entrepreneurship and human action: Why the award received by Darden’s Saras Sarasvathy is important

Saras Sarasvathy, the originator of the entrepreneurial theory of effectuation, has just received the prestigious Swedish Global Award for Entrepreneurship Research. Organized since 1996 by the Swedish Foundation for Small Business Research (FSF) and the Swedish Agency for Economic and Regional Growth, the award recognizes researchers who made major contributions to entrepreneurship research. She joins such great researchers as Sidney Winter, Shaker Zahra, Kathleen Eisenhardt, Scott Shane, Israel Kirzner, William Gartner, William Beaumol or Zoltan Acs and David Audretsch. The prize is the recognition of more than twenty years of efforts to promote a radically different approach to entrepreneurship. But its significance goes far beyond that, as effectuation is above all a vision of human action and freedom.

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Frank Knight’s century-old wisdom on risk, uncertainty, and profit

What can we learn from a little-known economist’s book published exactly a century ago? Quite a lot. Is it useful for us today? Yes, very. It turns out that Risk, Uncertainty and Profit, published by Frank Knight in 1921, is an essential book, even if it is difficult to read. It is the first book to really define uncertainty and show what it means in decision making and how it explains profit.

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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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Stop Bothering your Employees with Entrepreneurship

It is decided, the theme of your next company convention will be “All entrepreneurs!” You’ll talk about Google, Tesla, Facebook, plus a Chinese champion for good measure. The manager of your Lab in San Francisco will come to talk about the latest local innovations. You will show a film that will explain “the six qualities of a good entrepreneur” with rock opera music. After a closing speech by the leader who, in essence, will say that it is only a matter of courage, the roadmap will be clear.

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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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Getting to plan B

Getting to plan B, by John Mullins and Randy Komisar, is an important book. In short, the thesis of the book is that successful startups very often had to change their initial business plan. To quote Mullins and Komisar: "If the founders of Google, Paypal or Starbucks had stuck to their original business plans, we'd likely never had heard of them." The startup process, largely driven by poorly conceived business plans based on untested assumptions, is seriously flawed. And the authors to give a few interesting examples of business plans changes that were successful. If only for this, the book is important because, despite many criticisms, business planning remains the cornerstone of entrepreneurship courses at business school, and well honed business plans are a must-have to pitch venture capital. The fact that no business plan survives the first encounter with reality seems to bother no one in industry. Importantly, the flaw does not lie in some limitations of the planners. In other words, it is not because of poor planners that business plans are useless, or even harmful. It is the very process of planning that is problematic. Behind the notion of planning lie the idea that to control the future, we need to predict it. However, recent research on entrepreneurship by Sarasvathy (see the concept of effectuation) showed that in uncertain environments, it is simply not possible to predict the future. Hence prediction is really a gamble.

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