Monday, 6 May 2019

Entrepreneurs and uncertainty

I have written about the work of Sarasvathy before (here), whose research illustrated that entrepreneurs use the means to create the ends. One of the reasons for the different entrepreneurial approach is the uncertain and ambiguous environment which entrepreneurs work within (2008).

Like research, entrepreneurs are making something up as they go along, something that has never existed before, which has no boundaries in three dimensions. There is no handbook, no guide that will work. Every choice has a million - or more - possible answers, with probably half of them viable solutions. There is no time to stop and check each one: we simply weigh up each one as we go, and trust that the boys in the basement (King, 1998) will keep us roughly on track. In such an unstructured environment, it is very hard to know whether an entrepreneur's acts are rational, or not.

in her research, Professor Sarasvathy found that entrepreneurs face many of areas of uncertainty all at once, which more traditional corporates don't encounter. She used three theories to describe these uncertainties: Knightian uncertainty, goal ambiguity and isotropy (2008).

Sarasvathy details these theories as follows (2008):
  • Knightian uncertainty: "the probability distributions and even outcomes are unknown, making it impossible to calculate probabilities or expected consequences" (p. 70). As a result, entrepreneurs tend to look at what they can afford to lose, rather than gain, when evaluating risk and opportunity cost. They also "[mis-]trust predictions. Instead they work to ‘confirm by experience’" (p. 92)
  • Goal ambiguity: "preferences are neither given nor well ordered" (p. 70), and, "although goals at the highest levels might be clear", "their operationalizations at lower levels may be highly ambiguous" (p. 113)
  • Isotropy: there are "elements of the environment" (p. 70), with many "decisions and actions involving uncertain future consequences, [where] it is not always clear ex ante which pieces of information are worth paying attention to and which not" (p. 69)
These uncertainties are very interesting, and feel very applicable. Entrepreneurs operate in a sea of uncertainty, ambiguity and amorphous inputs and outputs.

Amazing that anything ever gets done at all.


Sam

References:
  • King, Stephen (1998). Bag of Bones. USA: Scribner.
  • Sarasvathy, S. D. (2008). Effectuation: Elements of Entrepreneurial Expertise (New Horizons in Entrepreneurship). Cheltenham, UK: Edward Elgar

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