Do You Think Like An Entrepreneur? – If Not, Maybe That’s What’s Holding You Back

There has always been a consensus that entrepreneurs think differently than the average Joe; however, it was not until fairly recently that the root of this “entrepreneurial thinking” was identified.

Saras D. Sarasvathy, in her study, “What Makes Entrepreneurs Entrepreneurial?” examined the reasoning of 30 founders of companies, ranging in size from $200 MM to $6.5 B. What Sarasvathy found was that these founders shared a distinct form of rationality that we have always intuitively recognized as “entrepreneurial”. She termed this type of rationality “effectual reasoning”.

Effectual vs. Causal Reasoning

The word “effectual” is the inverse of “causal” and It is causal reasoning that most of use throughout our professional lives. What is causal reasoning? Causal reasoning involves making the optimal choice, given a set of means and a pre-determined goal. An example of a causal reasoning decision would be the “build vs. buy” choice in production.

Sometimes causal reasoning does involve the creation of additional alternatives to reach a given goal. This form of creative causal reasoning is sometimes referred to as strategic thinking.


Effectual reasoning, however, is quite different, as Sarasvathy explains:

“Effectual reasoning… does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with. While causal thinkers are like great generals seeking to conquer fertile lands (Genghis Khan conquering two thirds of the known world), effectual thinkers are like explorers setting out on voyages into uncharted waters (Columbus discovering the new world).” – Saras D. Sarasvathy

Sarasvathy postulates that “while both causal and effectual reasoning call for domain-specific skills and training, effectual reasoning demands something more –imagination, spontaneity, risk-taking, and salesmanship.

Why Should You Care?

If you are interested in entrepreneurship or in working with an entrepreneur, understanding how you approach problems is vital. While I believe some elements of effectual reasoning can be learned, entrepreneurship may not be the best path for you if you find you naturally think causally or strategically.

Instead, you might be perfectly matched to work with an entrepreneur. Furthermore, if you are an effectual reasoner and have your own business, it is important to know when to step aside or ask for assistance. Entrepreneurs are often poor at managing their businesses after they mature.

We use our decision-making skills every day but we rarely examine how our minds frame the situation. If you are thinking of starting your own business, taking the time to understand how you reason may be the best choice you’ll ever make.

If you would like to read more from Saras D. Sarasvathy’s article or see some of her other work, please visit her SSRN page or her home page at Effectuation.org.


Goldy

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If you like Goldy, go ahead and check out his personal blog, GoldyWorld, where he talks about absolutely nothing important and has fun doing it.

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Comments

  1. says

    Really smart post Goldy!

    Effectual reasoning is basically looking at “what you got” and working with it instead of looking at what you want.

    The biggest problems I’ve seen with businesses are:

    1) Not selling (what they already have)

    2) Building and buying stuff they don’t need (’cause they don’t know how to sell what they already have)

    So it makes a lot of sense to look at what you have and work with that. Because if you can’t sell what you’ve already got, then you probably won’t sell whatever you buy next.

  2. says

    Great article Goldy! This is a good discussion to invite Ellen Weber and Robyn McMaster to participate in!

    While both causal and effectual reasoning require a further step, being action, that action is certainly approached from vastly differing angles dependent upon the reasing behind it..

    I think one of the key factors defining entrepreneurs is their willingness to severely stretch the confines of their comfort zone.

  3. says

    Goldy, that’s a great post! (keep ‘em coming! hehe)

    I agree with Shane’s points there, it’s pretty easy to keep buying and not selling stuff and end up with over stock. You kinda have to be able to profit from what you already have.

    Daniel, expanding the comfort zone, I exercise that everyday hehe not always easy, but definitely worth the efforts.

  4. says

    Great advice about entreprenuership and websites. Buying AND selling are important to the business.

    I agree with the ‘building’ versus ‘managing’ concept too…. many entreprenuers are ineffective at running a business, and many business people are ineffective at entreprenuership. That is when you get so big that you leverage the management to someone else, and keep entreprenuering =D

  5. says

    Very insightful post Goldy.

    I am still in the Entrepreneur wannabe stage as I work an”old fashoined” job & but have a LLC in my name that I am attempting to grow.

    Thinking like an entrepreneur is not as easy as I percived it to be. I hope to glean some valuable info from this blog.

  6. says

    WOW! This is was EXCELLENT. You dont have to “hope you provided good information”… you succeeded in providing EXCELLENT information.

    Great Job. I am looking forward to more of this from you.

  7. says

    What a great post, Goldy. I wish I had had access to a site like this when I was a real estate broker. Your post really clarified some things for me about the way I approached my business that would have been great to “realize” at the time.

  8. says

    Goldy, I’m not entirely certain that I understand. Is this about being able to adapt and see the opportunities, even when the original “goal” is not achieved, or is it something different?

    It seems to me that there would always be a goal, but what would differ is how much risk is acceptable, and how failure to achieve a goal is dealt with.

    Even in the Columbus example. He wanted to do something entirely different than he did. There was a goal that was not attained, but the new opportunity was recognized.

  9. says

    Hi Fiar,

    Someone wishing to do business will always have an overarching goal (e.g. I want to start a profitable web 2.0 travel site) but the difference is in how a causal thinker will approach that goal vs. an effectual thinker.

    Using the above example, a causal thinker would break up the overarching goal into smaller goals that followed a specific plan of action:

    1) Research market
    2) Segment the market
    3) Design site for aforementioned market
    4) Partner with existing sites
    5) Etc.

    An effectual thinker would start by examining his means:

    1) Who they are
    2) What they know
    3) Who they know
    4) Etc.

    They would then immediately start thinking about what effects their means could have and start executing, changing their plans along the way.

    In essence, an entrepreneur uses his means to execute quickly and adapts his plans and goals along the way.

    There is obviously more to this and I urge you to read Sarasvathy’s article but I hope this helps a little.

  10. says

    Goldy, Thanks for the clarification. Now, if I’m understanding correctly, here’s an analogy.

    Let’s say I wanted to start a business doing computer tech support.

    Effectual thinking would be to say, “I need a computer science degree, an office space, startup money for advertising, etc. Then I can start my business.”

    Causal thinking would be to say, “I have more knowledge about computers than the average person, a phone line, and an internet connection. Let’s see where I can get with that.”

    Am I on the right track?

  11. says

    You did switch the terms but are very much on the right track… the rest has to do with how the entrepreneur would execute. He would jump into action quickly with what the means he had and adjust his goals fluidly… even completely changing them along the way based on feedback, etc.

  12. says

    Thanks Goldy. I see the difference in the ways of thinking, and why the entrepreneurial way of thinking is an advantage.

    Also, thanks for visiting and commenting at my blog. It went down for half a day just minutes after you left your comment, but it’s back up now.

    :)

  13. says

    I think you are right, if you have an entrepreneurial spirit, things just come naturally, I remember making a fortune when I was living in Berlin selling small slithers of the wall for a kings ransom

  14. says

    phenomenal & inspiring.

    And i can clearly see the effect’s of this at play here ;) LOL

    However granted, it is so spot-on the money, it’s hard to deny genius.

    genius i believe, is that person who relises a inkling that you’ve felt.

    and you go “WELL SHIT! lol, they did it”. It is alway the one that feels tantalisingly close

    to home, yet someone has managed realise it, make it into reality, better then yourself.

    I believe firmly in a unified consiousness, and i believe it to be a large pool of abstractions

    and idea’s, i believe genius tap into spiritual energy, and PLUCK one of these more popular

    idea’s from this field, and then go about defining it and manifesting it under the dymanic’s

    and laws of our reality and everyday society.

    I also believe people come together for a reason, and i believe each of as are playing a part

    in our own success.

  15. says

    This article made me understand a lot about myself. My goal this year is to start my own business and I’m really trying to get into a business person’s way of thinking. I realized through this post that I’m actually a causal reasoner. But I know I can still train my mind to be an effectual reasoner. Thanks again. More power to your blog.

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