When the future is uncertain, you decide better from what you do control than from a forecast. Start from your own resources, look for partners who truly commit, and test your assumptions in small steps before you spend a lot of money. Research shows that experienced entrepreneurs work this way. An experiment with 116 Italian start-ups shows that entrepreneurs who test their assumptions like a scientist perform better.
In short
- Your feeling of certainty says little about whether you are right. Intuition is only reliable in a predictable environment where you learn quickly from your mistakes.
- Experienced entrepreneurs start from their resources and partners, not from a forecast. In research, this approach is associated with better performance.
- Test assumptions as hypotheses. In an experiment, entrepreneurs who did so performed better, and switched to a different idea more often.
In this article
- Can you trust your instinct with an uncertain decision?
- What do experienced entrepreneurs do differently under uncertainty?
- Does that approach also deliver better results?
- How do you test an idea before you spend a lot of money?
- How much risk can you take with an uncertain decision?
- How do you tackle an uncertain decision in practice?
Can you trust your instinct with an uncertain decision?
Only under two conditions. Your environment must be predictable enough, and you must have had the chance to learn its patterns. How sure you feel says nothing about whether you are right.
Psychologists Daniel Kahneman and Gary Klein came from different schools, but agreed on this. The intuition of professionals is sometimes impressive and sometimes seriously wrong. Whether an intuitive judgement is sound depends on how predictable the environment is and whether someone could learn its regularities. One's own feeling of certainty is not a reliable measure (Kahneman & Klein, 2009).
For a business owner, this means: trust your experience with decisions you make often and whose outcome you see quickly, such as a quote for a regular customer. Be careful with a new market, a large new product or an investment you make only once. There you lack that learning experience.
What do experienced entrepreneurs do differently under uncertainty?
They try less to predict the future and more to make it. They start from what they have, invest no more than they can afford to lose and look for partners who join in. This way of thinking is called effectuation.
Saras Sarasvathy contrasted two ways of deciding. With causation, the classic approach, you first choose a goal and then look for the means, based on a forecast. With effectuation, you start from your means and see what you can make with them. Causation rests on prediction, effectuation on control over what you have in hand (Sarasvathy, 2001).
One study had 27 experienced entrepreneurs and 37 MBA students think aloud while they made typical decisions involved in starting a business. The experienced entrepreneurs thought more often in terms of effectuation. They considered more possible markets, paid less attention to predictive information, invested only what they could afford to lose and built a network of partners. The students mainly followed the predictive textbook (Dew, Read, Sarasvathy & Wiltbank, 2009).
Does that approach also deliver better results?
There is a link, but it is modest. A meta-analysis found that most principles of effectuation are associated with better performance of young companies. One principle, not putting in more than you can afford to lose, was not associated with better performance.
The meta-analysis, a study that combines the results of many earlier studies, brought together 48 studies covering 9,897 young companies in total. What the entrepreneur knows, who they are and whom they know were all three positively associated with performance. The same applied to partnerships in which both parties share the risk, and to making use of surprises. The principle of affordable loss was not (Read, Song & Smit, 2009).
Read these figures with the right expectations. Correlations between 0.07 and 0.23 are weak to modest links. It is about association, not proof that the approach causes success. When the researchers included only strictly financial performance measures, the three principles about means held up, but partnerships and making use of surprises were no longer significant (Read, Song & Smit, 2009).
How do you test an idea before you spend a lot of money?
Treat your assumptions as hypotheses you can test, like a scientist. This evidence carries extra weight, because it comes from a controlled experiment with random assignment. Entrepreneurs who worked this way performed better.
Researchers followed 116 Italian start-ups for about a year. All the entrepreneurs received ten training sessions on how to get feedback from the market. By lottery, some of them were also taught to work like a scientist: setting up a theory about why the idea would work, and testing it with rigorous tests. The other group followed its own intuition (Camuffo, Cordova, Gambardella & Spina, 2020).
The entrepreneurs who worked as scientists performed better. They switched to a different idea more often, and they did not drop out more often than the other group. According to the researchers, the approach makes decisions more precise: you are less likely to continue with an idea that only looks good, and more likely not to drop a good idea too early (Camuffo, Cordova, Gambardella & Spina, 2020).
This fits what Kahneman and Klein say about intuition. With a new idea, you have no predictable environment to learn from. A small, well-designed test does give you that learning experience, before the large investment is made.
How much risk can you take with an uncertain decision?
Do not put in more than you can afford to lose. This principle is called affordable loss. It is a sensible limit, but no guarantee of success: in the meta-analysis it was not associated with better performance.
With affordable loss, you do not look at the expected return, but at the most you are willing to lose. Experienced entrepreneurs in the research thought this way (Dew, Read, Sarasvathy & Wiltbank, 2009). However, the four studies in the meta-analysis that measured this principle, covering 783 companies in total, found no link with performance (Read, Song & Smit, 2009).
So see affordable loss as protection, not as an engine. It ensures that one failed bet does not bring down your company. Whether the idea succeeds depends on your resources, your partners and how well you test.
How do you tackle an uncertain decision in practice?
Combine the lessons from the research into five questions. They fit every big choice whose outcome you cannot predict, such as a new market, a new product or a large investment.
Is this a decision my experience says something about?
Only in a predictable environment with quick feedback is your instinct a good guide.
What can I do with what I know, who I am and whom I know?
These three resources were most clearly associated with performance in the meta-analysis.
Which partner wants to join in and bear part of the risk?
A partner who truly joins in shares risk and reward.
Which assumption must be right, and how do I test it on a small scale?
Formulate the assumption as a hypothesis and agree in advance when you continue, adjust or stop.
How much can I lose without putting the company at risk?
That amount is your limit, not your goal.
Uncertainty does not disappear by thinking about it longer. It shrinks by acting in steps you can afford, and by learning at every step. That is what the research, from entrepreneurs thinking aloud to a controlled experiment, keeps showing.
Sources
- Kahneman, D. & Klein, G. (2009). Conditions for intuitive expertise: A failure to disagree. American Psychologist, 64(6), 515-526. doi.org/10.1037/a0016755
- Sarasvathy, S.D. (2001). Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management Review, 26(2), 243-263. doi.org/10.5465/amr.2001.4378020
- Dew, N., Read, S., Sarasvathy, S.D. & Wiltbank, R. (2009). Effectual versus predictive logics in entrepreneurial decision-making: Differences between experts and novices. Journal of Business Venturing, 24(4), 287-309. doi.org/10.1016/j.jbusvent.2008.02.002
- Read, S., Song, M. & Smit, W. (2009). A meta-analytic review of effectuation and venture performance. Journal of Business Venturing, 24(6), 573-587. doi.org/10.1016/j.jbusvent.2008.02.005
- Camuffo, A., Cordova, A., Gambardella, A. & Spina, C. (2020). A scientific approach to entrepreneurial decision making: Evidence from a randomized control trial. Management Science, 66(2), 564-586. doi.org/10.1287/mnsc.2018.3249