S T U A R T R E A D

i;; a Professor ot MarketingM IMD, CH-lOd!

.sluart.rea(i@imd.ch

SARAS D . SARASVATHY

IS .in Assoi ijte Professor of

Bnsinoss Administration in

The D.irden Ciraduate

Sihool of Business

Administration,

University' ofVirginia,

C!harlottesvii!e, VA,

sardsvathjs @darden. viipiiia.edu

Knowing What to Doand Doing What You Know:Effectuation as a Form ofEntrepreneurial ExpertiseSTUART READ AND SARAS D. SARASVATHY

when we imagine an expert,glamorous images of a brilliantscientist conducting ground-breaking medical research, a

chess master conquering a computer, or a vir-tuoso flawlessly performing a complex pianosonata are conjured up. Exceptiotially high taskperformance is consistently associated witbexperts as they solve complex problems in theirdomain more quickly, more easily, and moreaccurately than novices (Charness et al. [20(11];Larkin etal. [1980]; Simon and Simon 11978|).The desire to understand expert performancehas inspired research in areas such as psy-cholog\', cognition, and decision-making, andthe difierences between experts and noviceshave been investigated in a variety of empir-ical settings. In the business domain, expertCEOs, marketing managers, and acct)untantscan be found across tirms and industries. Andthe same positive attributions of high per-tormance are associated with experts inmanagement as are linked to experts in otherfields. Yet, management research has barelybegun to leverage advancements made in thepsychology and cognitive science literature toinvestigate e.\pertise in a business setting.

A thorough search of articles publishedin major management and entrepreneurshipjournals revealed one article that seeks tounderstand the nature of entrepreneurialexpertise in management (Mitchell |1997]),one empirical study that shows a strong rela-tionship between entrepreneurial expertiseand firm performance (Rcuber and Fischer[1994]), work investigating venture capitalist

experience (Shepherd and Zacharakis [2(.)(.)3]),and a 1998 dissertation that studied expertentrepreneurs (Sarasvathy |1998|). Althoughthis dissertation used methods from the exper-tise and cognitive science literature, the studymade no attempt to address the contiectionbetween entrepreneurial expertise and exper-tise in general. For example, it does not addressthe tinuiamental question oi whether it isimportant to study entrepreneurship as adomain ot expertise. One explanation couldhe that entrepreneurship has traditionally beenviewed as an individual characteristic.

Besides investigating personality traitsand attributes, studies have examined genderdirterences (Charter et al. [2()()3]), risk aversion(Miner, Smith, and Bracker [1994]) andeven sociopathy as relevant traits that explainentrepreneurial performance (Winslow andSolomon [1987]). A more productive recentapproach involves theories from cognitive psy-chology such as the impact of heuristics andbiases (Busenitz and Barney [1997]). Anotherincreasingly mainstream focus is on the cen-tral role of entrepreneurial opportunity in theentrepreneurial process (Shane and Venkata-raman [2(KH)|; Venkataraman [1997]).

We acknowledge that entrepreneurshipis a complex phenomenon that merits a varietyof approaches to study it. We add to extantapproaches the study of entrepreneurial exper-tise—that is, a set of skills, models, and pro-cesses that can be acquired with time anddeliberate practice. We will not only argue thatexpertise is a significant factor that can explainentrepreneurial pertormance but also show

WiNlIrK 2(105 1'RIVATK liQUIlV 4 5

that it enables us to identify testable elements of entre-preneurship that are teachable. There is much ctirrentinterest in the education of entrepreneurship, and devel-oping a body of information to be shared with aspiringentrepreneurs is a valuable goal tor scholarship and ped-agogy alike, particularly in schools of business manage-ment. Understanding the cognitive processes used byexpert entrepreneurs offers the potential to provide afoundation for that body of knowledge. And as Ericssonet al. fl993| suggests that coaching and instruction canenhance the power of deliberate practice, one goal of oureffort is to identify' the foundation for what instructorsiniglit teach to aspiring expert entrepreneurs.

More broadly, studying entrepreneurship as a formot expertise promises to shed light not only on how newbusinesses and markets are created but also on how tomake existing large enterprises more entrepreneurialas well.

We bring to bear on our endeavor the power ofthree rigorous streams of expertise research from thedisciplines of psychology, cognitive science, and decision-making to describe how experience rooted in deliberatepractice changes the way that experts perceive, process,and use information. We then draw on effectuation theory(Sarasvathy [2001]) and show how results fVom the exper-tise hterature apply to the specifics of effectual entrepre-neurial practice in new venture creation. The results ofour integration of the two lines of thought culminate inExhibits 4 and 5, where we present a precise set of con-structs and hypotheses to focus in on entrepreneurialexpertise in future empirical work, in a nutshell, weattempt to make three contributions to the thrivingliterature on entrepreneurship today:

• First, we introciuce to current discourse in man-agement the body of knowledge from the disciplinesof psychology, cognitive science, and decision-making regarding expertise.

• Second, we develop a set ot observations based ontheoretical parallels between experts in general andexpert entrepreneurs.

• Third, we integrate the expertise literature witheffectuation theory in order to build testable propo-sitions relating the development of entrepreneur-ial expertise to the performance of firms andentrepreneurs.

EXPERTISE LITERATURE

In keeping with traditions from psychology, wedefnie an expert as "someone who has attained a highlevel of performance in the domain as a result of years ofexperience" (Foley and Hart 11992]) and deliberate prac-tice (Ericsson, Krampe, and Tesch-Romer J1993|).Furthermore, we restrict our discussions to "strong-form"expertise, associated with deep personal ability and knowl-edge derived from extensive practice and experience basedon immersion in the relevant domain. We do not seek toinvestigate "weak-form" expertise, associated with fore-casting that can be done through computer models andsimulations or through private information (Mieg |2()()11).

Though experts have interested scholars for cen-turies, investigation of expert performance using modernapproaches began about 30 years ago, focusing on under-standing the nature of chess masters (Chase and Simon[ 1973|; Simon and C .hase [ 1973]).' In their early studiesot expert chess players. Chase and Simon quickly observedthat simple intelligence had no correlation with chessmastery (Ceci and Liker [1986]; Chase and Simon [1973];Doll and Mayr [1987]; Taylor [1975]). There were morecomplex factors at work, revolving around how playersstore information, perceive problems, and generatesolutions. On the foundation of their work, the field beganto expand. Although some of the early empirical hteratureand theory development focused on chess, subsequentwork has validated and expanded the theoretical base tomore dynamic settings, such as taxi driving, medicine.fn etighting, and consumer decision-makitig. It is impor-tant to note that the majority of findings in less dynamicsettings are robust in more dynamic settings as well.

In this section, we focus on three issues germane tothe development of a more precise framework for stxidyingentrepreneurial expertise. First, we briefly outline fourtheoretical drivers of expertise and explain why we chose"deliberate practice" as the lens through which to inves-tigate entrepreneurial expertise. Second, we clarif)' whatconstitutes the domain of entrepreneurial expertise andhow it fits into predominant approaches in current entre-preneurship research. Finally, we list key elements of delib-erate practice within the domain of entrepreneurialexpertise.

Expertise and Deliberate Practice

The study of expertise is hardly a united field. Ourreview of the literature identified four theoretical approaches.

46 i WHAT TO D O AND DOINI; WHAT YOU KNOW: Et-i-KCiUAiioN AS A Foio-i or ENTREI'RENEURIAI. EXPERTISE WINTER 2005

each conceptuiilly anchored to a unique view ot whatunderlies the development ot expertise. These approachesare 1) individual differences, 2) knowledge structures,3) experietice, and 4) deliberate practice.

1. Individual differences. Of these, individual differenceswere the very first to be examined in detail, starting withGalton's [1869] work on inherited traits. Work in thisstream seems to have slowed based on notable studiesshowing intelligence, the most promising of individualcharacteristics, to be luirelated to expert performanceamong the most successful and creative artists and scien-tists (Taylor 11^75]) and the best chess players {Doll andMayr |1987]). These findings have been supported andextended such that contemporary literature discounts theimpact of virtually all but physical individual differencesin understanding expert performance. C"!learly, being tallermakes it easier to be a successtul basketball player, whereasbeing smaller makes it easier to be a winning jockey ona racehorse (Ericsson and Lehmann |1996]).

2. Knoti'lcd^^e sirticlnres. As researchers began toquestion the long-held assumption underlying the rela-tionship between individual characteristics and expertisein light of deGroot's [1946/1978] surprising finding thatexpert chess players identify' best moves in their initialperception ot the game, as opposed to through detailedanalysis and thought, new approaches emerged. A vastbody ot empirical work has since accumulated on thegeneral association of the superior knowledge storage andretrieval abilities ot experts with quicker and more accu-rate problem solving in a domain (Anderson 11981];Bedard and Chi [1992|; Chase and Simon []973|; Simonand Simon [1978]; VanLehn [1996]), which is perhapsmanifest in entrepreneurship as "successful intelligence"(Sternberg [2004]).

3. Experience. In parallel to the investigations ofknowledge structure, researchers have also investigatedthe sheer quantity and complexity of knowledge gainedthrough experience (Camerer and Johnson [1991];Shanteau [1992]). When simple expertise is approachedusing the simple construct of experience, however, theconnection with performance weakens. For example,experienced individuals are subject to the pitfall of infer-ring too much trom too little inforination and misreadingevidence that confirms prior beliefs; turthermore, thosewith significant experience are at particular risk becausethey may have become so mechanical that they miss things(Rabin [1998|). This assertion has been empiricalK' testedusing problems involving electronics circuits (Besnard and

IJastien-Toniazzo [1999]). Experience can also cause indi-viduals to inappropriately weight information cues, makeerrors combining them, anci be overcontldent in theirjudgments (Bolger and Wright [1992[; Brailey, Vaster-ling, and Franks [2001]; Camerer andjohnson [1991];Shanteau [1992]).

4. Deliberate practice. A more sophisticated articula-tion ot the experience view suggests that the expertisethat leads to superior performance is developed througha special t\'pe ot experience that involves "deliberate prac-tice." As tireeno and Simon [19HS] put it, experts learnby dt)ing and doing and doing. But that alone is not sut-ticient. Systematic differences between experts and lessproficient individuals within a domain nearly always retiectattributes acc]uired by experts during their lengthy periodot deliberate practice (Ericsson and Lehmann [1996]).According to the deliberate practice view, individuals whoengage in deliberate practice acquire superior knowledgestructures, atid from that, derive superior expert perfor-mance (Ericsson, Kranipe, and Tesch-Ronier [1993]).The growing literature on deliberate practice identitiestive necessary requirements ot deliberate practice thattogether torin the foundation upon which superior expertpertormance is built:

a. Motivation. Ericsson, Krampe, and Tesch-Roiner([1993]) pointed out that a greater objective that moti-vates pertormance improvement is critical because delib-erate practice in itself is not inherently motivating. Assuch, individuals must identify some larger instrumentalobjective tor their practice ii] order to motivate them-selves to engage in it, day in and day out. Not surprisingly,however, additional research showed that deliberate prac-tice can be moderated by inherent enjoyment of theactivity to predict the acquisition ot expertise (Ericsson,Krampe, and Tesch-Romer [1993]; Ericsson and Lehmann[ 1996[; Sloboda et al. [ 1996]). For an entrepreneur, thiskind ot motivation might encompass the satistaction ofbuildmg a new product or process, an etficient company,an enduring organization, or a personal tbrtune.

b. i'ndeiyiaiidijbility. Complex tasks in the domainmust be decomposed into component pieces in order tobe completely understood so that the patterns that enablerapid and accurate recall ot the solution or application otthe solution to a new problem can be properly organizedand stored (Ericsson, Kranipe, and Tesch-Romer [1993]).In the next section we outline several task decomposi-tions in the creation ot new firms and markets that tbrmthe basis tor development ot entrepreneurial expertise. It

WINTER 2IK)5 JOURNAL OI- I'Riv.-Mt: Eguirv 4 7

is on these task compf^nents tliat expert entrepreneursreceive continual feedback as tliey repeat them in deliberatepractice in order to develop expertise.

c. Feedback. Individuals involved in deliberate practiceshould receive immediate feedback on pertormance(Trowbridge and Cason [1932]). Feedback is critical,because people experiment with new metbods and refineexisting methods when presented with negative feedback(Chase and Ericsson |1981]; VanLehn [ 19911), a processthat continuously upgrades die sophisticated pattern recog-nition and matching systems that .ire developed by experts.

d. Rcpciitio)!. The requirement that deliberatepractice involves repeated performance ot the same orsimilar tasks is consistent with the popular notion tbatpractice uiakes perfect. But practice, and especially delib-erate practice, requires time, energy, and tocus. The ded-ication and motivation to repeatedly perform the sametask is one of the key distinctions tbat separates expertsfrom people witb mere experience (Ericsson, Kiampc,and Tesch-Romer 11993]).

e. Fit. The design of the task must account for theknowledge and limitations of the individual. A pitcherwho performs well against right-handed batters but notagainst left-handers must deliberately practice pitching toleft-handed batters in order to advance to an expert levelwhere be can perform well against any comer. Althoughthe design of deliberate practice tasks is ideally facilitatedby an instructor (Baltes and Kliegl |1992|), tbe literatureis quick to point out that the alternative of self-directedlearning activities can be equally powerful for individualswitb tbe creativity to develop new challenges forthemselves and the discipline to overcome tbem (Glaserand Bassok [1989|; Wagner [1991]). As novices navigatetbe trajectory toward expertise, finding existmg chal-lenging lessons or knowledgeable instructors becomesincreasingly difTicult, and Glaser ((1996]) highlights bowtbis transition is often accompanied by an individual'sincreasing control over his or her own learning.

Practice under these five characteristics, described as"deliberate practice," results in a performance improvementwithin a domain (Ericsson, Krampe, and Tesch-Romer[1993]; Gibson [1969]). Deliberate practice takes time.Research in the area has converged on the "l(l-year rule"(Chase and Simon [1973[). Although not hard and fast,the "lO-year rule" suggests tbat it takes a minimum of1 (I years of deliberate practice for a novice to ascend to tberank of expert. Before we identify specific elements oi'deliberate practice in entrepreneurship, we examine what

constitutes the domain of entrepreneurial expertise andhow it fits with mainstream research in entrepreneurship.

The Domain of Entrepreneurial Expertise

There is little argument tbat expertise is contextual(Djakow et al. [1927[; Ericsson and Smitb [1991]).Although a neurosurgeon s talents may be unsurpassed inthe operating room, her abilities there predict nothingabout her abilities in tbe grocery store or on tbe computer.As sucb, expertise research examines experts in their owncontext, and likewise we do not expect tbat entrepre-neurial expertise is generalizeable out of context. Pleasenote that for the purposes of this article, we tbink ofL-ntrcpreneurship as the creation of new ventures, newproducts, and new markets, but we hope our ideas willapply to areas that include corporate innovation andentrepreneurship.

So, what is entrepreneurial expertise and how docsit fit with other factors involved in tbe entrepreneurialprocess? Basically, studying entrepreneurship as a form ofexpertise is consistent with process views of entrepreneur-ship (Aldnch [1999|; Brockner, Higgins, and Low [2004];Bygrave and Hofer [1991]; Harvey and Evans [1995]; Lowand Abrahamson [1997]; Stevenson and Jarillo [1990]).Although each of the works cited here bas a different con-ceptual framework and definition of the entrepreneurialprocess, there are several common elements.

Universally, the entrepreneurial process is conceivedas a collection of decision tasks such as selecting an idea oropportunit\' to begin witb, creating a legal entit\', garneringresources, bringing stakebolders on board, managing growthand exit strategies, and so on. Becoming an expert entre-pi'eneur involves mastering these staged elements of theentrepreneurial process, particularly the recurring deci-sions and actions tbat constitute tbose elements. We examinetbese in greater detail in tbe next section on what consti-tutes deliberate practice in entrepreneurship.

Studying entrepreneursbip as a form of expertiseencotirages us to match tbe general elements of expertisewitb heuristics specific to the new venture domain. Effec-tuation theory (Sarasvathy [1998]), as elaborated later inthis article, consists of a set of heuristic principles such asthe affordable loss principle or the logic of control tbatapply specifically to the creation of new organizations andmarkets. Our focus on these particular aspects of entre-preneurial expertise does not negate the importance andvalidity of other factors tbat predict and explain entre-preneurial performance, be it traits or the human and

48 C WllAI U-> D o AND IXi|N(, WilM YoU KN(1W: El I UnUAIlON AS A FORM U\ ENiKtl'RF.NtUKiAL EXl'LkilSt WiNlFR 20115

social capital ot the entrepreneur, environmental con-straints aTid opportunities, or any other random orsystematic etTects impacting the process. Instead, theoriesof entrepreneurial expertise should explicitly take theseimportant internal and external tactors either as constraintsor covariates in analyses of performance.

This brings us to a unique aspect ot entrepreneurialexpertise that makes our investment in this scholarlyendeavor even more worthwhile. Current studies of entre-preneurship focus almost exclusively on the pertbrmanceof the entrepreneurial venture as the primary dependentvariable. Even the literature on traits, knowledge acqui-sition (tacit and otherwise), learning, and the use of gen-eral (non-domain-specitic) heuristics and biases seeksto explain how these factors impact the performance ofthe tirms that entrepreneurs create. The view from entre-preneurial expertise, however, turns the spotlight on theperformance ot the entrepreneur., sometimes juxtaposedwith and at other times even opposed to the performanceof the tirm. Entrepreneurs, in current scholarship, areseen as instruments in the birth and growth ot tirms.Entrepreneurial expertise suggests an instrumental viewof the firm instead.

Analyzing results from labor economics and micro-economics, industrial organization, population ecology,and serial entrepreneurship, Sarasvathy and Menon |2()O2jhave argued in great detail that equating firm success withentrepreneurial success has been one ot the most powertulcontbunds plaguing the development ot our field. Studiesof expertise suggest that although expertise often overlapswith and explains success, expertise is not the same assuccess. The t'act that a chess player wins a tournamentdoes not automatically imply he is a grand master, andsimilarly being an expert chess player does not guaranteea win. This is even truer in the case of entrepreneurialexpertise, where an expert entrepreneur may found oneor more failed firms, and novice entrepreneurs may achievesupranornia! profits in their very tirst ventures. That iswhy studying expertise in complex domains involves inves-tigating consistent commonalties in cognitive processesused by several experts within a given domain, while notdefining experts using criteria in terms ot single-outcomesuccesses.

Teasing out some of the subtleties involved in the rela-tionships between entrepreneurial expertise andthe success of firms and entrepreneurs is an important empir-ical phenomenon, the study of which we hope to engenderand enable through tbe proptisitions we develop later inthis article. One of the most intriguing subtleties is the rela-

tionship between expertise and success in the case of anextraordinarily successful one-time entrepreneur snch asBill Gates or Michael Dell and the more easily under-standable "expertise" of a serial entrepreneur. One of ourpropositions explicitly addresses this issue by examining theinflection point at which the effecttial cognitive processesin successtul founding need to be transtormed into causalprocesses to grow and manage a large corporation. Betbrewe explicate details of a theory of entrepreneurial exper-tise based on effectuation, we need to specify the role ofdeliberate practice in developing expertise within thedomain of entrepreneurship.

Elements of Deliberate Practicein Entrepreneurship

Does an entrepreneurial setting provide tor delib-erate practice? We begin our discourse on this matter witha simple accounting of time available to deliberate prac-tice. According to a survey of 500 small businesses, theaverage small business owner puts in 52 hours of workevery week, 50% more than an average productionemployee in the United States (Willard and Sluillman[2000|). By comparison, Olympic swimmers get rela-tively little practice, putting in a mere 28 hours ofswimming in a training week (Banks [1997]). Given thehigh level of time commitment to a new venture, it seemsreasonable to believe that the entrepreneurial settingenables immersion at a level at least commensurate withother fields where expert performance is attained.

As stated earlier, tbe literature on deliberate practicespecifies five criteria tor a domain to quality- tor the devel-opment of expertise: motivation, undLTstandabilm; feed-back, repetition, and fit. It is easy to see tliat motivation andfit are satisfied in an entrepreneurial setting. Entrepreneurialmotivation ranges from making personal fortunes to cre-ating an enduring organization ot great value to society.Passion, commitment, workaholism, perseverance, and ahost of other attributes of the setting, both in the popularpress and in academic research, point to motivations thatgo beyond what the mere practice of entrepreneurshipprovides. Similarly, the sheer variety^ of possible firms andmarkets allows entrepreneurs to select ventures that they arebetter suited tbr and set in motion a chain ot tasks for self-directed learning and deliberate practice. In tact, the theoryof etfectuation, as elaborated in this article, points to anexplanation as to why previous research has not uneartheda compelling set of tactors that predict the success ot entre-preneurial firms. As Sarasvathy [2001] puts it,

2005 JOURNAL of- I'kiVAiL EQUITY 4 9

The theory of cfFectuation brings another per-spective to the table. It suggests we need to give upideas such as the successful pcrsoiKiIit -. or clearlysuperior characteristics of the successful tlrTii ororganization. . . .The focus in our journals andcla.ssroonis for example, v 'ould shift from "How tobuild a successful firm?" or "How to become asuccessful entrepreneur?" to "What types of ideasand opportunities should VOL' pursue?" and"Given who you are, what you know, and whomyou know, what types of economic and/or socialartifacts can you. would you want to. and sliouldyou create?"' The old ad.ige about iiivention cap-tures this shift rather pithily: Both the optimist andthe pessiuiist contribute to successful inventions. The opti-

mist inrents the airplane; the pessimist, the parachute.

The remaining three requirements for deliberatepractice, namely, the decomposability of entrepreneurialtasks into siibtasks that provide feedback and are alsorepeatable, may be a little more difficult to see because ofthe perception that entrepreneurial ventures are ratheridiosyncratic m nature. But the typical daily routines ofentrepreneurs, however unique their circumstances andhowever quirky their venture, do consist of a variety oftasks that fit the bill for deliberate practice. In fact, thesetasks form the building blocks of the various phasesidentified by the well-received process views of entre-preneurship that dominate our research today.

Exhibit 1 lists a variety of exemplar tasks that everyentrepreneur has to perform and shows hovi each fulfillsthe three deliberate practice criteria of understandability.feedback, and repetition. It also relates each task to spe-cihc principles ot effectuation used by expert entrepre-neurs in performing it. We turn to explicating thoseprinciples next.

EFFECTUATION: A THEORY OFENTREPRENEURIAL EXPERTISE

Effectuation theory (Sarasvathy [2001]) has been thefirst attempt to develop a baseline of entrepreneurial exper-tise. Although the theory was indticed from an investiga-tion ot actual expert entrepreneurs using the classic methodof protocol analysis from cognitive science (Sarasvathy[2001]), exact ditTerences between expert and noviceentrepreneurs have yet to be worked out. even in theory.We begin this task witb a concise summary of etlectua-tion theory, including six key constructs that we then use

to differentiate it from the many versions of rational choicethat dominate extant theories: 1) prediction. 2) commit-ment, 3) action. 4) planning, 5) risk, and 6) attitude towardoutside firms, as described in Exhibit 2.

Effectuation and Rational Choice

EtTectuation is a straight inversion of rational choicetheory (also referred to as causal or predictive rationality).Ratiotial choice theory has been questioned in a varietyof ways, particularly in the second half of the twentieth cen-tury. Simons |1991] assaults on its empirical validity basedon cognitive bounds of the human mind inspired a slewot research results on heuristics and biases that deviate tromrationality in a variety of ways e.g., Kahneman and Tversky[]979|). Effectuation theory too was inspired by Simon'swork and was in fact developed in close collaboration withbim (Sarasvathy [2002]; Sarasvathy and Simon [2000|).Although bounded rationality has been construed by someas a subset ot rational choice, and the vast literature onheuristics and biases is considered a set of deuiarioiis fromrationality, effectuation is a complete inversion of rationalchoice. In other words, as Sarasvathy and Simon [2000] putit. ettectiiatioii answers the question:

Where do we find rationality when the environ-ment docs not independently influence outcomesor even rules of the ganic (Weick f 1979]). the tuturcis truly unprcdictahle (Knight [1921]). and thedecision maker is unsure of his/her own preferences(March [1982])?

Effectuation: inverse of causation. Effectuationinverts every aspect of causal rationality, including itsproblem space, solution process, fundamental principles,and overall logic. Causal rationahty is goal driven; effec-tuation is means driven. Rational choice rests on a logicof prediction—that is. 'To the extent we can predict thefuture, we can control it." EtTectuation rests on a logic ofnon-predictive control^tliat is. "To the extent we cancontrol the tuture. we do not need to predict it." Causalrationahty takes the environment as largely outside thecontrol ot the decision-maker and therefore seeks topredict it and adapt to changes in it. Effectuation con-siders the environment endogenous to the actions ofeffectuators and therefore seeks to tabricate it throughprecomimtments trom stakeholders. Effectuation isenactive and exaptive where causation is reactive andadaptive.

5 0 K N I W I N I . WHAT R I I")O AND I^OINC. W H A I Y O U KNOW: ErFECJUAiiON AS A Ft)kM oh ENiKti'KHiMEUKiAi EXPERTISE WiNtnii. 21105

E X H I B I T 1Deliberate Practice in the Entrepreneurial Process

Entrepren-eurialTask

Bringingpeople onboard

Generatinggoals anddevelopinga vision

NewVentureManage-ment

Understand-able,repetitiveSub-Task

Cold callingpeople

Taking andgiving advice

Negotiatingstakeholdercommitments

Transformingstakeholdercommitmentsinto executablegoals

Business Flandevelopment

Resourceacquisition

CashManagement

Timemanagement

Peoplemanagement

Feedback from Sub-Task shows you

How to:

• Open conversations with strangers;• Generate new leads;• Take rejection.

• Get people lo pay attention and care;• Extract useful and candid feedback;• Decide which information to ignore and which

to heed.

• Understand what matters toothers;• Creatively fmd overlaps;• Structure contractual relationships.

• Close the deal with customers and investors;• Creatively assess what each new stakeholder

enables;• Re-assess venture strategies as resources

become availahle.

• Develop compelling, yet flexible businessmodel;

• Revise and re-write myriad versions tor avariety of resource-providers;

• Re-write plan as means and goals change.• Negotiate supplier partnerships;• Craft compelling stories - test them in market;• Creatively differentiate cheap money from the

expensive, and smart money from the dumh.

• Understand the difference hetween profitmargins and cash flow;

• Manage time lags in resource flows;• Create stakeholder demand for sudden cash

need.

• Decide what not to do - i.e. which promisingopportunities to give up;

• Delegate responsibilities;• Meet payroll every single time period.• Raise employee commitment through stock

options and other tools;• Hire and fire people;• Balance decisiveness needed to turn on a dime

when goals change, with culture of consensus

Effectual Principles

Means (Whom youknow). Leveragingcontingencies

Means (Who you are.What you know.Whom you know).Non-predictivecontrol

Pre-Commitments

Focus on "Can".

Non-predictivecontrol

Focus on "Can",LeveragingContingencies

Pre-commitments,Non-predictivecontrol,Affordahle Loss

Affordable Loss,Pre-commitments

Affordahle Loss,Pre-commitments

Pre-commitments,LeveragingContingencies.Non predictivecontrol

WINTER 2(105 Jl>UKNAL or I'RIVAIf, 51

E X H I B I T 2

Basic Differences between Causal and Effectual Thought

Issue

View oftheFuture

Basis forCommitment

Basis forTaking ActionAnd AcquiringStakeholders

Planning

PredispositionToward Risk

AttitudeTowardOutside Firms

Causal or Predictive Position

Prediction. The causal appnntchviews the future as a continuation ofthe past that can be acceptably andusefully predicted.

Should. Commit as a course ofmaximizing, analysis, and whatshould he done.

Goals. The causal approach is to letgoals determine sub-goals.Commitment to particular sub-goalsdetermined by larger goal constrainedby means. Goals determine actions,including individuals brought onboard.

Commitment. Path selection islimited to those that support acommitment to an existing goal.

Expected Return. The causalapproach is to pursue the (riskadjusted) maximum opportunity, hutnot focus on downside risk.

Competition. The causal approach isto be concerned with competition andconstrain task relationships withcustomers and suppliers to just whatis necessary.

Effectual Position

Creation. The effectual approach views thefuture as contingent on actions by willfulagents, largely nonexistent and a residual ofactions taken. Prediction is unimportant us aresult.

Can. The effectual approach is to do what youcan (what you are able to do) rather than whatyour prediction says you should.

Means. Actions emerge from means andimagination. Stakeholder commitments andactions lead to specific sub-goals. Feedbackfrom achievement/non-aehievement of sub-goals lead to design of major goals.

Contingency. Paths are chosen that allowmore possible options later in the process,enabling strategy shift as necessary.

Affordable Loss. The effectual approach isto not risk more than can afford to be lost.Here, the calculation is focused on thedownside potential.

Partnership. The effectual approach is tocreate a market jointly, building YOURmarket together with customers, suppliers andeven prospective competitors.

Source: Sarasvathv |2001 ].

The overall inversion ofthe problem space and solu-tion logic ot rational choice is implemented through aseries of effectual heuristic principles, each of which invertscausal heuristics. In entrepreneurial settings in particular,1) whereas causal rationality' suggests using expected returnas a decision criterion, effectuation prescribes the afford-able loss principle; 2) instead of competitive analyses,effectuation involves building partnerships throughprecommitments trom stakeholders; and 3) in contrast torational choice that seeks to avoid unexpected contin-gencies in order to efficiently achieve predetermined goals,effectuation seeks tbem out and leverages them to createnovelty.

Causation and effectuation: empirical examples. InExhibit 2. we have laid out a series of individual con-

structs from rational choice that are inverted in effectua-tion. But to get an integrated picture of effectuation, itmay be more useful to cite a concrete example. At leastone major thread of research in entrepreneurship sets outa causal process that begins with the identification, recog-nition, or discovery of an opportunitv; followed by a seriesot tasks that include I) developing a business plan basedon 2) extensive market research and 3) detailed compet-itive analyses, followed by 4) the acquisition of resourcesand stakeholders for implementing the plan, and then 5)adapting to the environment as it changes over time witha view to 6) creating and sustaining a competitive advan-tage. In this view, if an entrepreneur wanted to start ,irestaurant, he or she would start by identifying a high-potential location, analyzing the competition in the area.

5 2 KN()WIN(; WHAr lo Do AND DOINC WHAT YOU KNOW: EFFECTUATION AS A FOI'.M OF ENIREPRKNEURIAL Exi'tki ISE WiNTLR 2IK6

identifying particular target segments, developing mar-keting strategies to fit the targets, obtaining necessaryfunding, hiring the appropriate chef to develop the rightmenu, and then opening the doors to the restaurant.

As Exhibit 3 shows, etfectuators, in contrast, wouldstart witb the means available. Based on who they are,what they know, and whom they know, they would startwith a list of things they can afford to do. Most impor-tant in this list would be to call pet>ple they know andplunge straight into negotiating a series ot precommit-ments. Depending on who comes on board tbe ventureand other contingencies along the way, they would set inmotion two contrasting cycles. The first would be anexpanding cycle that increases the resources available tothe venture; the second would accrete constraints on theventure that converge into specific goals over time. In therestaurant example above, the effectual entrepreneur mayor may not start with a location. Instead it would alldepend on who the effectuator is. If the effectuator is acook, he might start a catering service, or a lunch ser-vice, or even just hire himself out as a clief wbo doeshouse calls— it depends on what he can afford to investin terms of money, time, and emotion. An expert entre-preneur would not even jump into one of these projects.She would start by calling people she knows and puttingtogether partnerships and precommitments. For example.

E X H I B I T 3The Effectual Process

Expanding cycle of resources

Who I amWhat I knowWhom I know

What canrdo?

Interact withpeople I know

or meet

Obtainstakeholder

commitments

Converging cycle of constraints on goals

NEW FIRMSAND

MARICET5

if she knew someone who owned a grocery store, shemight start making dishes for his deH. Or if she knewsomeone in the popular media, she might start producingcooking videos. And so on.

In causation, the end product is determined by theinitial "opportunity"" identified by the entrepreneur andthe adaptive changes over time to fit the preselected"market" and/or "vision." The end product in effectua-tion is fundamentally unpredictable at the beginning oftheprocess. In tact, the opportunity and even the market ltseltget created through the very process of effectuation. Inother words, both market and opportunity are contingenton who comes on board and the actions and goals theyenable and constrain; goals and visions of an opportunityseldom determine who comes on board or what resourcesare gathered.

It IS important to note that the extreme dichotomydescribed above is meant to create a powerful theoreticalseparation between effectuation and rational choice.Empirically speaking, of course, both causal and effectualprocesses would be at work. We would expect, therefore,that the data entrepreneurship scholars gather would con-tain decisions and actions tbat confound tbe two. Yet,preliminary investigations into expert entrepreneurialdecision-making (Sarasvathy J2(){)1]) and the histories ofearly-stage firms (Sarasvathy and Kotha [20011; Dew and

Sarasvathy [20(121) indicate that strongpatterns of one or the other can be isolatedand evidenced. Our contribution in thisarticle consists in developing a more preciseset of tools to empirically tease out these pat-terns and relate them to performance vari-ables within the life cycles ot both entrepre-neurial firms and entrepreneurial careers. Andit is in this connection tbat the literatLire onexpertise is pertinent to entrepreneurship asa field of research.

Effectuation Theory and Theoriesof Expertise in General

At a gross level, effectuation theory andexpert theory wt)rk to understand similarquestions of how experience changes the waypeople think. Perhaps it is not surprising,then, that effectuation theory utilizes manyof the same axes that the scholarship onexpertise has focused on in determining thecharacteristics of expertise. Sarasvathy [2001]

WlNTi:R2lKl5 JOUKNAI or I'KlVAlb EQUJIY 53

provides several clues as to how we might proceed in thetask of describing the strategies of expert entrepreneurs.For example, when we examine how expert entrepre-neurs perceive, process, and use market research infor-mation, or information relating to the creation of markets,we find striking parallels to the expertise literature wereviewed above.

One observation is that the articulation of forwardthinking employed by experts and backward thinkingemployed by novices (Larkin et al. [1^80]) has some sim-ilarities with effectual and causal reasoning. In forwardthinking, experts use information cues to take action. Oneof the most important inputs available to entrepreneursconsists in stakeholder commitments, and, as such, theseand other means can substitute for information cues. Inthe case of effectual reasoners, these cues can provide abasis for action. Similarly, backward-reasoning noviceswho use information cues to validate their actions can belikened to causal thinkers basing action on goals. Yet,effectuation is different from forward thinking in thateffectuators iu[i^otiatc stakeholder commitments and donot take them as passive cues from the task environment.The implications of this endogeneity are particularlyimportant in an entrepreneurial setting.

Anderson |1993|. Larkin et al. [1980] and Newelland Simon [ 1972] highlight another important analog)' ofeffectuation to expertise in general, namely, the meansorientation of experts and the goals orientation of novices.In contrast to the way in which stakeholders shape com-mitment to particular goals in the effectual example, thecausal or goal-orieuted novice seeks stakeholders onlyafter first committing to a vision specified through par-ticular goals. Further investigation into the similaritiesof expert entrepreneurs and experts in general brings tolight several intriguing parallels between observationsregarding expertise in general and effectuation as a formof entrepreneurial expertise in partictilar.

Observation 1 from the expertise literature:Experts eschew prediction. Parallel in effectuation: Expert

entrepreneurs reject the use of predictive information.

The literature on expert decision-making shows usthat experts amass and organize the knowledge necessaryto make good decisions without placing great reliance onexternal inputs, particularly predictive inputs {Rikers et al.[2002]). Instead, experts have learned to filter infbruiationfrom external sources (Leifer [19911), likely validating itagainst stored patterns from previous experiences (Chaseand Simon [1973]). Similarly, expert entrepreneurs arelikely to ignore predictive information as it is based on

the existing environment and does not account for theimpact of actions that the entrepreneur will take (Saras-vathy [2001]). Empirical research into the creation ofmedia software giant Real Networks showed that notonly did the founder act without predictive tools, but heconsciously acted counter to predictions made by marketanalysts at the time (Sarasvathy and Kotha [20(H|).

Observation 2 from the expertise literature:Experts focus on "Can." Parallel in effectuation: Expert

entrepreneurs prefer to do the thin^i;s they can to control those

parts of the ein>ironnient they deem controllable.

Experts automatically store information accordingto outcomes (Ericsson and Kintsch |1995]), so that as theymatch and recognize stored patterns against existingsituations (Reingold et al. [2()()! j), they are likely to retrievestrategies they already know they can implement (Kalakoskiand Saariluoma [20011). Expert entrepreneurs do the samething, matching current actions with past experiences sothat they can come up with creative courses of action thatare realistically executable, rather than elaborate plans con-tingent upon things outside their control (Sarasvathy[2001]). Instead of wondering what she should do,1. M. Isidro, founder of GeniusBabies.coin, says, "We haveLOW budget. We try to think of different marketing thingsthat we can do" (Isidro [2002]). She goes on to describefairs assembled by groups of like entrepreneurs, networking,and interactions with e-colleagues as strong enablers ofwhat can be done in her setting (Isidro [2002]).

Observation 3 from the expertise literature:Experts employ means-based action. Parallel in efTectu-ation: Expert entrepreneurs are tethered to their means andflexihic oii^i^onls. From experience, experts have more exten-sive knowledge assets, or means, to apply to a problem thannovices (Gobet and Simon [1996]). Through superiormemory, utilization of "Broken Leg" clues (Shanteau[]992[), and sophisticated search (Seines [1989]), expertscan draw on processes and results of previous experiencesas they make decisions (Shiffrin and Schneider [1977]).The volume of knowledge is only one of the means thatexperts have developed. As part of assembling a base ofexperience, experts also learn how to integrate and syn-thesize that knowledge (Boshuizen and Schmidt [1992])and use it to model solutions to new problems (Adelson11984]). Whereas novices are likely to use goals as thebasis tor taking action, expert knowledge means providealternative rationales for taking action that simply are notavailable to novices (Larkin et al. [198O[). Likewise, expertentrepreneurs facing decision ambiguity and environ-mental uncertainty fall back on the means of who they

54 KNOWING WHAT iv Do AND DOING WHA"I YOU UNOW. ErrEiiTUATioN AS A ui ENInhi'kLNLURiAi. EXPEKTISE WINTER 21 IDS

are, what they know, and whom tlicy know (Sarasvathy[2001 ]). All that the two founders of Ben and Jerry's had,for example, was the flict that Ben knew how to make icecream, their unwavering faith in the (hippie?) values ofthe Sixties, and the liberal folks in Vermont who enjoyedboth. They combined who they were, what they knew.and whom they knew to create the foundation for aunique offering within an existing industry that succeededagainst the most powertul precepts of received wisdomon building and managing an ice-cream company(Sarasvathy and Wicks [2003]).

Observation 4 from the expertise literature:Experts leverage contingencies. Parallel in effectuation:

Contin^iiency, as opposed to plnnniiiiy. provides expert entrepre-

neurs with il wider ran^^e of viable stmte<,^y choices.

Thus far, we have explained why experts may makebetter decisions than novices. But we also know thatexperts are human and thus fallible. Experts intuitivelyrealize from past experiences where failure is possible(Schenk, Vitalari, and Davis [1998]) and work to frameproblems in such a way that they build contingency intotheir strategies (Gkiser [1996[). Deferring the eliminationof options and selecting paths that may have many posi-tive outcomes enables experts to recover from mistakes(Shanteau [1992[) more quickly than novices (Presley andMcCormick f 1995]). E.xpert entrepreneurs frame decisionsin the same way, replacing elaborate planning toward asingle outcome with strategies that enable maiiy differentpaths that are contingent on intermediate outcomes(Sarasvathy [2001]). Some form of informal real options(McGrath [1999]), for example, is more hkcly to be auseful tool to entrepreneurs than standard financialplanning techniques. Interviews with executives at 10technology start-ups in the Ottawa area about what makesa new venture succeed revealed only a single commonresponse, that "all goals are contingent on what comesnext " (Hammond [2002]).

These parallels are detailed in Exhibit 4 and relatedto the constructs in Exhibits 1 and 2.

In the exposition above, we have highlighted theconunonalities between elements of effectual thought andof experts in general that are already m evidence in empir-ical work. There are, however, several open issues initi-ated by theory on both sides that suggest truitful avenuesfor tuture research. For example, expertise theory pro-vides significant explanations as to why expert task per-tbrmance is much more rapid than that of novices. Theattributes of automatic pattern coding and matching,information organization, combining steps, advanced

search, and superior memory all predict that experts willanalyze problems and arrive at solutions more quicklythan novices. Yet effectuation theory provides nohypotheses about the generation of speedier analyses thanthose of causal reasoning. We anticipate future extensionsof research around effectuation will address this issue assolution speed seems important in the entrepreneurialenvironment and in other environments where peopleare likely to employ etTectual thought.

Similarly, while effectuation theory provides detailedprinciples such as those relating to partnership and afford-able loss, expert theory references to these are conspicu-ously missing fi-om Exhibit 4. Of course, it is to be expectedthat there exist non-overlapping areas between expertisein any one domain and expertise in general. It might beinteresting, however, to empirically examine whether theaffordable loss principle and partnership precommitmentsfmd parallels in other domains ot expertise—-say, in tunc-tional areas of management. In fact, this suggests yetanother reason for investing in research into managementas a form of expertise.

Given these observations, we develop propositionsthat relate the use of causal and effectual reasoning to per-formance, in the life cycles of both tirms and entrepreneurs.

PROPOSITIONS REGARDING EXPERTENTREPRENEURIAL PERFORMANCE

Although we may be tempted simply to associatecausal thought with novices and effectual thought withexperts, preliminary empirical investigations have shownus that the relationship is more complex. A study of therelationship between expertise and an effectual approachshowed that whereas expert entrepreneurs are more likelyto adopt an etTectual approach, experts and novicescannot be ditferentiated by their use of causal reasoning(Read, Wiltbank, and Sarasvathy [2003]). In light of thesefindings, we integrate our entire theorizing about the roleof causal and etTectual reasoning in the development otentrepreneurial expertise and the creation and growth ottirms into four propositions that culminate in Exhibit 5.-

Eirst, How Is Effectual Action Related to theDevelopment of Entrepreneurial Expertise?

An obvious answer to this question might be thatwhereas expert entrepreneurs are highly effectual, noviceentrepreneurs tend to use more causal modes of reasoning.We believe, however, that we might find more variation

WINTER 21)115 JOURNAL OF PRIVATE EQUIIV 5 5

E X H I B I T 4

Parallels between Expert Entrepreneurs and Experts in General

EffectualPosition(Exhibit 2)

Creation

Can

Means

Contingency

AffordableLoss

Partnership

Experts in General(cites are only examples, eacbtopic has much related work)

Experts have a sense ofinformation relevance (Charnessetal.. |2(X)ll)that they combinewith information filtering{Leifer. [19911) to reducereliance on prediction.

Experts organize infonnation{Ericsson and Lehmann. [ 1996])according to solutions, so thatautomatic pattern coding andmatching (Chase and Simon,[1973]) retums feasible solutionsthat can be implemented.

Through superior memory(Ericsson and Charness. [1994])and advanced search (Simon andSimon, [1978]). experts' greaterknowledge base enables them tointegrate and synthesizeinfonnation (Boshuizen andSchmidt. [1992[), develop aphysical intuition throughmodeling (Simon and Simon,11978]). and benefit fromforward versus backwardreasoning (Chi eta].. [1982]).

Experts use problem abstraction(Fislieelal.. [1983[)anddecision framing (Bettman andSujan. 11987]) to buildcontingent (Glaser. [1996])strategies, enabling quickrecovery from mistakes(Shanteau. [1992]).

Not currently addressed byexpert literature.

Not currently addressed byexpert literature.

Expert Entrepreneurs

Expert entrepreneurs noticepredictive nature of key piecesof market research and rejectthe use of such predictivepieces as irrelevant.

Expert entrepreneurs modelthe new venture creationproblem as a Marchian([I982])-Knightian([l921])-Weickian([ 1979]) space.focusing on problems thatthey are able to solve.

Expert entrepreneurs focus onavailable means of:who they arewhat they knowwhom they knowAnd select solutions based onthose means (as opposed tosetting goals and thenassemb]ing the meansnecessary to accomplish thosegoa]s).

Expert entrepreneurs managerisk through creating oridentifying contingent coursesof action.

Expert entrepreneurs evaluatemaximum downside risk asopposed to upside potential.

Expert entrepreneurs use pre-commitments from partners toshape the environment.

Ohservation

Expert entrepreneursreject the use ofpredictiveinformation.Ex: Real Networks

Expert entrepreneursprefer to do thethings they can tocontrol those parts ofthe environment theydeem controllable.

Ex: Ben & Jerry's

One of the meansthat separates expertentrepreneurs fromnovices is what theyknow.

Contingencyprovides expertentrepreneurs with awider range of viablestrategy choices.

Future researchopportunity.

Euture researchopportunity.

5 6 KNOWINC; W H A T TO D O AND DOING W H A T Y O U KNOW: ErrECTUATiON As A FORM OF ENTKEIHRQNEURIAL

in the behavior ot novices, ranging across the entire spec-trum of causal and effectual action. One reason for sur-mising this consists in the possible existence ot individualvariation in a preexisting propensity for causal or effectualthought and action. Although we aver chat etTectuationis for the most part a learned process consisting of spe-cihc skills, technicjiies. and heuristics, we do not com-pletely rule out the role ot "talent" in developing entre-preneurial expertise. To use an analogy from music,although key aspects of musical expertise might be learnedthrough tormai training and hands-on experience, a cer-tain base level ot preexisting musical talent may ditferen-tiate the performance of novice musicians. Further, asexpertise is developed over time and through experience,individuals will be exposed to strategies that may be anti-thetical to their original starting point. The incorporationot these strategies into the individual's knowledge basewill serve to "soften" any extreme position that individualmay have started with. Theretore, our first propositiongoes as follows:

Proposition la: Ahhouj^li uorices inny vary in their use

of causal and effectual action, their pref-

erences for efjectnatiou in the early staj^es

of new ventures will increase as they

become experts.

Proposition Ib: furthermore, both highly causal and

hi^^hly effectual novices learn to halance

causal and effectual approaches diirinsi

the {growth plhise of neii' ventures, before

derelopin-^ a clear preference for hij^hty

effectual strategies as tlieir expertise j^rows.

Second, What Is the Role of Resourcesin Moderating the Relationship betweenEffectual Action and Entrepreneurial Expertise?

In a predominately resource-poor situation, such asui the case of bootstrapped start-ups, etTectual strategies aremore likely, simply because the resources required for imple-menting causal strategics may not be available. Also, novicesare less likely to change their "vision" when the resourcesto implement it are not scarce. In such cases, they are more

E X H I B I T 5

Type of Reasoning Approach with Respect to Experience and Firm Lifecycle

Causal

REA.S0N1NGSTRATEGY

Hffectiial

L

P2:viodcratingelTeci ofresources

R

c

s

0

11

r

P4; Expcncntrcpri:ncursdo not alwaysbridge this gap

ExpertEnireprencur

Low EXPERIENCE HigliV\A\ Although novices may WATJ in their use of causal and effectual action, their preferences for eftcctuation in tho uariy staj*L's of new ventures will ini-rease as theybecome experts.Fib: Furthermore, both hij hly causal .indhighlyeftectu.il novices learn to balance causal and effectual approaches during the growth phase ot new ventures, beforedeveloping a clear preference for highly effectual strategies as their expertise grows.F2: The more resources available to novices, the more causal their actions art- likely to be. In the case of e>cpert entrepreneurs, availability ot resources will not affecttheir use of highly effectual action.F3: Successful firms are more likely to have begun through effectual action and grown through causal action as they expand and endure over time.F4:C>nly a small subset of expert entrepreneurs will successfully make (he transition from an entrepreneurial firm to a large corporation.

WiNIKU. 21)115 JOURNAL OF PKIVAIE EQUIIY 5 7

likely to stay tethered to their goals even in the face of tieg-ative feedback, leading to our second proposition:

Proposition 2: Tlic more resources amilable to noi'ices.

the more causal their actions are likely to

be. In the case of expert entrepreneurs,

availability of resources will not affect their

use of hii^hly effectual action.

Third, How Is Effectual Action Related tothe Development and Growth of the Firm?

We now look at the life cycle of a firm as opposed tothe growth ot an individual entrepreneur, who, during thedevelopment of his or her entrepreneurial expertise, may startseveral firms, including ones that fail. In the case of firm devel-opment and growth, there is extant evidence that successtlilfirms, especially highly innovative hrms tliat endure over longperiods of tinic, are more likely to iiave started through effec-tual action (Sarasvathy [2(1(12]; Sarasvathy and Kotha |2()011).Therefore we posit the tollowing relationsliip:

Proposition 3: Successful firms are more lihely to have

bc[iiun through effectual action and (^rown

throiii^h causal action as they expand and

endure over time.

What Are the Interactions between Firm Growthand Effectual Entrepreneurial Expertise?

Our final proposition addresses a fundamental ironyof effectuation. Clearly, an entrepreneur uses cfTectualthought in order to improve the new firm's chances ofsurvival, growth, and success. But as the entrepreneur andthe firm achieve these goals, the relevance of effectualaction is minimized. The very expertise that contributedto fledgling firm survival and growth in the highly uncer-tain and ambiguous start-up setting is not as appropriatefor the more static, causal environniL'iit of a large organi-zation. In other words, the expert entrepreneur who effec-tuates has less and less advantage as the organization thathe created becomes increasingly "corporate." Ironically,therefore, level of entrepreneurial expertise, as measuredby effectuation, predicts the necessary departure of theeffectual eiitrepreneur (through exit, supersession, step-ping aside, or in other ways) once the fu"m has success-

fully expanded to the inflection point at which causal rea-soning becomes necessary for firm survival.

Proposition 4: Only a small subset of expert entrepreneurs

will successfully make the transition from an

entrepreneurial firm to a lari^e corporation.

IMPLICATIONS

In comparing theoretical biology with actual bio-logical evolution, Dennett argued that the latter gets"physics for free"—that is, there is no need for MotherNature to second-guess the laws of physics or even tohave a complete theoretical understanding of physics. Thephysics already exists within the molecular stufT of life.Similarly, implicit in our association of expertise and effec-tuation is that the very process of effectuation providesentrepreneurs with "the market" for free—nemely, imme-diate and tangible feedback on their ideas, strategies, andactions. No effectual manager/entrepreneur need wonderwhether a forecast is accurate or whether the market wassegmented correctly. These facts are simply endogenousto the processes of effectual action, in this light, the devel-opment of entrepreneurial expertise is nurtured througheffectual reasoning, and effectual action becomes a pri-mary tool of expertise. Exactly how various processes ofexpertise development unfold has attracted attention in thefield of psychology, but it merits further exploration, espe-cially in managerial and entrepreneurial business settings.

For example, one of the things that we know is thatan individual's ability to "self-explain" (Chi et al. [1994|)and generate inferences—even if sotne end up beingincorrect—is associated with expertise development. Butwhat does this mean in the management area? Certainlyexperts learn from trial and error (Ohlsson [1996]), butdiscovering the underlying processes, or "self-explanation."promises to help enhance the teachability of expertdevelopment. Our nascent understanding of effectuationinforms this line of inquiry to some degree, as it is alearned process that expert entrepreneurs selectively invokedepending on the situation. But the little we know thusfar opens up a number of interesting questions revolvingaround the boundary conditions for the use of effectualthought, starting perhaps with the question of how expertsinitiate effectual reasoning. This may be best understoodby investigating the transitions that managers and entre-preneurs make at different phases in their career anddifferent points in a firm's life cycle. Another questionwith regard to bounds and initiation may be whether the

58 KNOWINC, WIIM ro Do ANH DOING WHAI YOU KNOW: EFFECTUATION AS A FORM OF ENTRii'RrNr.URiAi EXPFRTISE W;NTf-K 2005

lite cycles oftirnis started by experts versus novices differ.These questions may begin to identify issues in how effec-tuation and expertise interact in the management setting.

On a practical level, this work may help us under-stand the communication gap that has been described asexisting between entrepreneurs and investors. If it istrue that expert entrepreneurs resist predictive tools fordecision-making, then it is easy to imagine how entre-preneurs might share little common ground with investors,who are, by virtue of their task, predominantly causal,predictive thinkers. Understanding this issue raises others,though. For example, might it make sense for early-stageinvestors to adopt a less predictive approach to decision-making? Might successful entrepreneurs be modal in theirthinking, presenting predictive information to investorswhile acting effectually during tbe operation ot tbeirtlrms? And given that a non-predictive approach ispositively related to new venture success, how might aprospective investor look for teams with this expertise?

George Bernard Shaw said, "In literature the ambi-tion of the novice is to acquire the literary language: thestruggle ot tbe adept is to get rid ot it."" Similarly, in entre-preneurship, although we teach novices the tools of marketresearch and business planning, empirical research suggeststhat expert entrepreneurs seek to do without such predic-tive tools. Our primary aim in this article was to initiate adialogue about the nature and role ot entrepreneurial exper-tise in the creation and growth of new firms and markets.We are convinced that such a dialog will provide a rig-orous foundation for making some ot the hard-learnedlessons of expert entrepreneurs teachable to novice entre-preneurs, a task currently based almost entirely on anec-dotal evidence and individual war stories. In the process wehope also to have initiated a dialog between cognitive sci-ence and management on what each can learn from theotber about expertise development and expert pertbnnance.

ENDNOTES

The authors gratetully acknowledge Tom Jones tor hisguiding suggestions and coniments on an early revision ot thismanuscript and Michael Frese for making us work just a littlebit harder on the leterature review.

'de Ciroot |1946/1978] began sporadic work on the topicas early as 1946.

^Exhibit 5 is not intended to be a mathematical modelbur rather a graphical representation of our four propositions.

In "resources" we include tmancial resources as well asprior knowledge and social networks.

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62 KNOWING WHAI in Do AND DOING WHAT YOU KNOW: EPPECTUATION AS A F-OKM or ENTKEI'RENEURIAI. EXPERTISE WINTER 201)5