Effectuation Theory.

Original source: http://www.effectuation.org/FAQ.htm#Process

What is effectuation?

Effectuation is a type of human problem solving that takes the future as fundamentally unpredictable, yet controllable through human action; the environment as constructible through choice; and goals as negotiated residuals of stakeholder commitments rather than as pre-existent preference orderings.  Back to top

 

What are the key elements of effectuation?

• A focus on non-predictive control of the future

• Being tethered to means and being flexible with regard to goals

• Who comes on board determines what gets done and is in turn determined by what they commit to getting it done.

 

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What is the logic underlying effectuation?

To the extent we can control the future, we do not need to predict it.  Back to top

 

What is the fundamental behavioral assumption underlying effectuation?

Not opportunism and not altruism/trust – but docility (See Simon’s 1993 AER paper titled Altruism and Economics for details).  Docility is the idea that all human beings (leader and member alike) are persuasive and persuadable to varying degrees along a variety of dimensions.  Back to top

 

How is the use of effectuation related to performance?

At the micro-level (Level of individuals and firms)

1. First, effectuation separates the performance of a firm from that of the entrepreneur.

2. Even if superior firm performance is assumed exogenous, effectuation reduces the costs of failure – i.e. in the effectual firm, when failures occur, they occur earlier and at lower levels of investment.

3. Effectuation also increases the probability of entrepreneurial success, irrespective of the probability of firm success – it allows the entrepreneur to create a larger temporal portfolio.  Because the effectual entrepreneur is able to create more number of firms over his or her lifetime, it increases his or her chances of hitting a home run, ceteris paribus. 

At the macro-level (Level of the economy)

1. A larger proportion of the population become entrepreneurs

2. More firms get founded

3. Failing firms fail at a lower level of investment            Back to top

 

What are the boundaries and limitations of effectuation?

Effectuation is most effective in a problem space where the future is highly unpredictable, the decision maker’s goals are ambiguous, and the environment is not independent of the actors involved.  It follows then that it is not effective in exogenous environments that are predictable and where goals are specified ex-ante.

The following diagrams illustrate two ways of organizing the boundaries for effectuation:

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What is NOT effectuation?  Comparisons with related extant theories

Effectuation is not Bayesianism

While Bayesianism uses its probability estimates as proxy for the truth and focuses on updating our beliefs about the future based on those estimates, effectuation seeks to falsify the conditioning assumptions of the estimate so the prediction does not come true – i.e., the Bayesian takes the distribution as independent of the decision maker; but the effectuator partitions the event space into controllable and uncontrollable events and takes the distribution as largely endogenous to his or her own actions.  Back to top

Effectuation is not improvisation

While the improviser is creative in the use of his or her means, effectual creativity has more to do with the generation of novel goals.  Moreover, effectuation spells out specific strategies for goal creation with stakeholders taking center-stage rather than available resources.  Effectuation emphasizes a logic that is an inversion of traditional goal driven maximization, rather than a time compressed or even simultaneous execution of traditional notions of rationality.  Back to top

Effectuation is not unconstrained social construction. 

In fact, effectuation is highly constrained by actual means available and negotiations with particular stakeholders on particular commitments.  However, entrepreneurs act on the belief that their actions have a large impact on what will happen in their future.  Additionally, to varying degrees in different settings, these actions can contribute to the creation of their future.  Effectuation spells out a path to transform a wide variety of stakeholders with pluralistic and even conflicting aspirations into a meaningful hierarchy of constraints that converge into valuable pragmatic goals – for the individual, the organization and society.  Back to top

 

Graphical representation of Effectuation as a Process

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