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The Real Risk Is Doing Nothing

There is an insurance sales office not far from my home with a letterboard sign out front that proclaims, “The real risk is doing nothing.” Of course, they wanted you to think about the risk of not having insurance. But it got me thinking about entrepreneurship and how entrepreneurs change the world through their actions.

And I’m not talking about changing the world in some pie-in-the-sky, abstract kind of way. Recently I’ve been reading the work of entrepreneurship researcher Dr. Saras Sarasvathy, whose theory of “effectuation” states that entrepreneurs actually create the world around them through their actions.

Sarasvathy has interviewed hundreds of entrepreneurs and one common thread she has observed is that entrepreneurs believe that they are called to act when they see an opportunity to create change; they know that if they do nothing, they will achieve nothing, and things will stay the same.

And so entrepreneurs evaluate their options — what and who they know — to take a calculated risk to move a little closer towards a goal. That action might be as simple as putting together a meeting of stakeholders or researching a topic. And with that very first action, they’ve changed the game.

The entrepreneur has widened the opportunity by involving more people, or by knowing more about the subject, or attracting investment. And so in a very real way, she has changed the world around her to make the world more hospitable to attaining the goal. Her actions do not cause the goal to come true directly; it is the compounded effects of the entrepreneur’s actions that lead to a world where the goal becomes possible.

What Really Motivates Entrepreneurs

A purely rational evaluation of entrepreneurship would suggest that it occurs when someone perceives an unmet market opportunity and then proceeds to allocate resources to address this unmet need. Sarasvathy observes that this is almost never how entrepreneurs really operate.

Indeed, most entrepreneurs are haunted by the risk of doing nothing. They might say, “Well, I’ve always wanted to try this idea and I think it might work. How will I feel if I don’t pursue it?” And then they look to limit risk. Often, if someone can craft a scenario where the downside risk is affordable, they go for it. They ask, “What’s the worst that could happen? I lose a year and have to return to my job.” They are not typically motivated by the lure of the upside, but rather the fear of not acting!

Can Entrepreneurship Be Taught?

Are entrepreneurs born risk-takers, or are they just regular people that are applying a particular kind of logic? Sarasvathy suggests the latter. She says that there is nothing about her study of entrepreneurs that would suggest that there are particular personality traits that distinguish entrepreneurs from others. The only difference is their use of “effectual logic” and the subsequent learning that comes from its use.

Entrepreneurs ask, “What do I know, and what can I do with it?” They then take steps that help to change the game. Then they ask, “What else can I do with it?” Expert entrepreneurs engage in an iterative process of changing the world and then with each round re-evaluate the opportunities that their previous actions have made possible. Surely it’s possible to teach this process to people in the same way that it’s possible to teach a high-schooler how to think scientifically.

The differences come with experience. First-time entrepreneurs are likely to make mistakes around trust and judgment: they tend to trust people too little or too much, misread the character of a partner, or underestimate the importance of foundational elements like operating agreements. And so while many entrepreneurial enterprises fail, each failure causes the long-term success rate for an individual entrepreneur to increase. Failure helps entrepeneurs to know what pitfalls to avoid and it also teaches him fundamental lessons about his own strengths and weaknesses. This is why it’s so essential for entrepreneurs to pick themselves up and try again! Failure is essential to the creation of the expert entrepreneur.

The Role of Entrepreneurial Action in the World

One of the things that puzzles Dr. Sarasvathy is how effectual logic is used routinely in private sector business but is rarely applied to solving the deep social problems that we face in the world. Some beneficial businesses like micro-lending site Kiva.com got started through effectual thinking (you need $27 to break free from debt? Here’s $27), but for the most part we have consigned the world’s most pressing problems to the work of charitable foundations and non-profits. And because of the way these entities are funded (donations and partnerships), effectual logic cannot often be applied.

Sarasvathy suggests that a wave of social innovation might be unleashed if we were to change the funding model of social enterprises to better enable effectual thinking — primarily because effectual thinking is very efficient and good at minimizing risk at each step. And this goes beyond the current trend of “social entrepreneurship” that suggests that there is a class of problems that is suited to entrepreneurial thinking, and class that is not.

Why shouldn’t all entrepreneurship produce social benefit, and why shouldn’t all social problems be soluble through the application of effectual logic? This is an open set of questions, but certainly they represent the challenge of our time.

The Moral Imperative

If we believe that entrepreneurs literally affect the world to alter their own odds of success then we must also believe that there is a legitimate role for human action in the world.

The theory of effectuation additionally suggests that entrepreneurs are designers: at each stage they are using design thinking to imagine a set of possible solutions using available assets.

If entrepreneurs, through their actions, can help design potential solutions to the world’s most pressing problems, then isn’t the real risk doing nothing?

  • http://twitter.com/sengseng Amy

    entrepreneurs see a problem and the solution and ask why not? non-entrepreneurs don't even question why the problem exists, they just accept it.

  • http://www.petersims.com/ Peter Sims

    Dave, These posts are excellent and I'm glad you're as enthused and convinced by Saras' work as me. It deserves broader hearing. Thanks very much and keep it coming!

  • davetroy

    Great clip by Jeff Bezos about his “Regret Minimization Framework,” which is really just Effectuation by another name. http://bit.ly/cBJ8LO