Effectuation: How Experienced Entrepreneurs Act Under Uncertainty

What do you do when the future cannot be predicted?

A business wants to offer a new service, open up a new group of customers, or build a line of business that does not yet exist in that form. The usual advice is: analyze the market, set a goal, write a plan, raise the means. That assumes demand, prices, and competition can be predicted reasonably well. For truly new ventures that is rarely the case.

That raises one question: How do experienced entrepreneurs act when the future cannot be predicted, and what of this can be transferred to a small business? To answer it, I first clarify the terms, then present the effectuation model with its five principles, check what studies say about it, and finally derive how you can use it in your own business.

Causal and effectual logic: two ways of deciding

The Indian-born management researcher Saras Sarasvathy introduced the term in the Academy of Management Review in 2001 (Sarasvathy 2001). She distinguishes two logics. Causal logic starts with a given goal and looks for the best means to reach it. It works with forecasts: whoever can foresee the future can control it. Effectual logic starts with the available means and asks which goals they can achieve. It works with shaping: to the extent that someone can influence the future, they do not need to predict it.

The background is a distinction the economist Frank Knight made in 1921. With risk, the possible outcomes and their probabilities are known; with uncertainty, they are not. The article Deciding under uncertainty explains this distinction in detail. Read and colleagues (2009) take it up and name three cases: known, unknown, and unknowable distributions. The first two can be handled with forecasts; effectual logic is meant for the third.

An everyday analogy makes the difference tangible. If you cook causally, you choose a recipe, buy the ingredients, and follow the instructions. If you cook effectually, you open the fridge, see what is there, and think about what you can make from it. Both ways can produce a good meal. Which one is better depends on whether you know what your guests want.

The five principles of effectuation

Sarasvathy sums up effectual logic in five principles. In their tribute to the researcher, Foss and colleagues (2023) describe them like this: entrepreneurs work with available resources, think in terms of affordable loss rather than maximum profit, rely on trustworthy partners, and see unexpected events as opportunities rather than problems. The original English names of the principles are pictorial; here I paraphrase them.

1. Start with what you have

   The starting question is: Who am I, what do I know, whom do I know? The first possibilities arise from these three means, not from a market analysis.

2. Set the affordable loss

   Instead of asking what a venture could bring in, you ask how much money and time you can lose without endangering the business. No more than that is committed.

3. Commitments instead of forecasts

   Partners, customers, and suppliers who commit bindingly bring in resources and help determine the goal. A commitment is worth more than an estimate.

4. Use surprises

   An unexpected call, a customer who drops out, a new inquiry: such events are examined for whether they point to a better direction instead of being fended off as a disruption of the plan.

5. Shape instead of predict

   What you can influence yourself, you do not need to predict. Attention goes to the levers that are in your own hands.

If you cannot predict the future, you should not pretend that you can. You should shape the part that is in your hands.

Where the model comes from: think-aloud protocols of experienced founders

The model was not created at a desk. In her doctoral work, written in close collaboration with the Nobel laureate Herbert Simon, Sarasvathy had experienced founders think aloud while they solved an invented start-up problem. This method is called protocol analysis: the statements are recorded and then analyzed for the thinking patterns that occur.

Read, Dew, Sarasvathy, Song, and Wiltbank (2009) applied the method to marketing decisions. They gave 27 experienced entrepreneurs and 37 managers with little entrepreneurial experience the same unpredictable task: for a new product, they were to determine target customers, sales channels, and prices while thinking aloud. The managers relied mainly on forecasting techniques of the kind found in textbooks. The experienced entrepreneurs often inverted these techniques. They asked less what the market wants and more with whom they could build the market together.

The authors themselves name the limits: it is a staged task and a small sample. The study shows how experienced entrepreneurs think, but not whether they are more successful with this way of thinking.

What studies show about success: two readings

Research on effectuation has grown strongly since 2001. Whether effectual logic leads to better results is answered differently. There are two readings.

First reading: effectuation pays off

In a meta-analysis, Read, Song, and Smit (2009) evaluated data on 9,897 young companies from studies in the Journal of Business Venturing. They found a positive relationship with company success for three of the principles. Ruiz-Jiménez, Ruiz-Arroyo, and Fuentes-Fuentes (2021) studied 178 young technology firms and found that effectual logic was related to success among experienced and inexperienced founders alike, whereas causal logic was related to success only among the experienced.

Second reading: planning remains important, and experience does not automatically lead to effectuation

Alsos, Clausen, Mauer, and colleagues (2016) tested the assumption that mainly experienced founders act effectually and found the opposite: experienced founders used causal logic more often, novices effectual logic. Effectuation was linked above all to how uncertain someone perceived the situation to be. Yoon and Cho (2023) found a positive relationship between causal logic and revenue growth and a negative one between effectual logic and profit growth. In a study of 344 small and medium-sized enterprises in China, Yu and colleagues (2024) concluded that neither logic alone was sufficient for good results. Successful were combinations that always included planning.

I consider the second reading the more robust one, without discarding the first. The studies contradict each other less than it seems. Together they show that effectuation helps where uncertainty is actually high and that it complements planning rather than replacing it. For German entrepreneurs there is an additional finding: Kistler and Gillig (2015) found that successful German entrepreneurs proceed less effectually than their US counterparts, but that the logic still plays an important role for them.

How to apply effectuation in your business

For a small business, the value of the model is practical. It answers the question of how to start something new without endangering what already exists. A worked example shows the difference in commitment.

A business is considering offering a maintenance service to a new group of customers. The causal route would be a full build-out with a dedicated position, advertising, and software. The effectual route starts with what is already there: two existing customers who have shown interest and an employee who knows the work. How to set up such a test with pilot customers is described in the guide Testing a new service before it costs a lot.

The Means Check: five questions before every new venture

• Means: Which skills, contacts, and customers do I already have that are useful for the venture?
• Affordable loss: How much money and how many weeks can I lose without the business suffering? This number is fixed before the start.
• Commitments: Who would commit bindingly now, with money, an order, or working time? Without at least one commitment, it remains an idea.
• Surprises: Which feedback would make me change direction rather than give up?
• Transition to the plan: At what point is enough known to plan and calculate as usual?

The fifth question is the most important one for an established business. Effectuation is a logic for the beginning. As soon as an offer has been sold, prices are known, and customers come back, uncertainty has turned into risk. Then planning, contribution margin, and key figures are the better tools. How to review a business model systematically at that point is shown in the article Reviewing the business model on one page.

Limits: where effectuation can mislead

The model has three weaknesses an owner should know. First, focusing on existing means can lead you to do only what you already can. If you only ever look into your own fridge, you keep cooking similar dishes. Second, the logic assumes that partners can be found who commit bindingly. In industries with a few large buyers, that is difficult. Third, using surprises can turn into arbitrariness if every new inquiry counts as an opportunity.

What helps against the third weakness is a clear idea of what the business wants to stand for. The article Sharpening your positioning describes how to draw this line. What helps against the first is an outside view, for example from an advisory board or a mentor. And effectuation does not protect against failure either. What studies show about the reasons is described in the article Why young companies fail.

How to get started

1. Pick a venture you have been putting off for months because you lack the numbers for a plan.
2. Answer the five questions of the Means Check in writing, on one page at most.
3. Set the affordable loss in euros and in weeks.
4. Talk to two customers or partners and ask them not for their opinion but for a commitment.
5. Put a date six weeks from now in your calendar on which you decide: continue, change direction, or stop.

Conclusion: how do experienced entrepreneurs act under uncertainty?

We began by asking
experienced entrepreneurs act when the future cannot be predicted. According to Sarasvathy's model, they start with their means, commit only what they can lose, win partners with commitments, and use surprises. The studies confirm that this logic is widespread under high uncertainty and can be related to success. But they also show that successful entrepreneurs rarely use it on its own.

For a small business, effectuation is therefore not a counter-model to planning but its prelude. It helps you begin something new with a limited commitment. Once uncertainty has turned into knowledge, the plan takes over.