* Academy of Management Review

2001. Vol. 26. No. 2, 243-263.

CAUSATION AND EFFECTUATION: TOWARD

A THEORETICAL SHIFT FROM
ECONOMIC INEVITABILITY TO
ENTREPRENEURIAL CONTINGENCY
SARAS D. SARASVATHY
University of Washington

In economics and management theories, scholars have traditionally assumed the

existence of artifacts such as firms/organizations and markets. I argue that an expla-
nation for the creation of such artifacts requires the notion of effectuation. Causation
rests on a logic of prediction, effectuation on the logic of control. I illustrate effectu-
ation through business examples and realistic thought experiments, examine its
connections with existing theories and empirical evidence, and offer a list oi testable
propositions for future empirical work. • ; ; ,

I now am eagerly striving, for example, to get values is the set of values in terms of which he
this truth which J seem half to perceive, into wants to act? (March, 1982: 74).
words which shall make it show more clearly. If
the words come, it will seem as if the striving
itself had drawn or pulled them into actuality out Walk into an MBA classroom anywhere in the
from the state of merely possible being in which world. Chances are the discussion revolves
they were. How is this feat performed? How does around a decision or a set of decisions to be
the pulling pull? How do J get my hold on words made. For example, classes with a more eco-
not yet existent and when they come by what nomic bent (e.g., managerial economics, market-
means have I made them come? Really it is the ing, strategy) might be discussing the pricing
problem of creation; for in the end the question is:
How do J make them be?... decision. The standard formal approach to this
. . . Sustaining, persevering, striving, paying decision involves setting the marginal revenue
with effort as we go, hanging on, and finally equal to the marginal cost; a more adaptive
achieving our intention—this is action, this is approach might involve doing market research
effectuation in the only shape in which, by a pure to discover the shape of the demand function
experience-philosophy, the whereabouts of it and to arrive at a price that the market will bear.
anywhere can be discussed. Here is creation in In another example, classes with a more psycho-
its first intention, here is causality at work
Games, 1912: 181, 183). logical bent (e.g., human resources manage-
ment, organization behavior, leadership) might
We know how to advise a society, an organiza- be discussing personnel decisions, such as hir-
tion, or an individual if we are first given a con- ing the best person for the job or managing
sistent set of preferences. Under some conditions, and/or leading a team. Approaches might range
we can suggest how to make decisions if the
preferences are only consistent up to the point of from psychometric measurements to avoiding
specifying a series of independent constraints on well-understood biases, such as anchoring, es-
the choice. But what about a normative theory of calation, groupthink, and so on.
goal-finding behavior? What do we say when our
client tells us that he is not sure his present set of These decisions in economics and manage-
ment may be discussed at several levels: indi-
vidual, firm, industry/market, and economy. But
underlying almost every one of these decisions
I thank the Ewing Marion Kauffman Foundation for fund- is the assumed existence of the central artifacts
ing the empirical work that led to the development of the and contexts of business within which the deci-
ideas in this article. I also thank Herb Simon, Anil Menon, sions take place. In other words, none of these
and Lester Lave for their invaluable conversation, and the decisions involves the creation of artifacts such
anonymous AMR reviewers, Edward Conlon, Marilyn Gist,
Tom Jones, Tom Lee, Benyamin Lichtenstein, Scott Shane,
as firms, markets, and economies. For example,
S. Venkataraman, and Andy Wicks for commenting on ear- the following are rarely, if at all, addressed in
lier versions of this paper and for helping me improve it. our curricula:
243
244 Academy of Management Review April

• How do we make the pricing decision when to simply pursue an interesting idea that seems
the firm does not yet exist (i.e., no revenue worth pursuing. Similarly, if we clearly knew
functions or cost functions are given) or, which particular market to capture, we could
even more interesting, when the market for
the product/service does not yet exist (i.e., presumably use techniques of market research
there is no demand function)? and formulate strategies to penetrate it. In areas
• How do we hire someone for an organization such as e-commerce, however, most markets are
that does not yet exist? How do we even get nascent or simply nonexistent. Marketing to
able people to apply to a contingent organi- markets that do not yet exist involves under-
zation—an organization whose existence is
contingent upon acquiring employees (e.g., standing how markets come to be. Similarly,
a knowledge-intensive firm, such as a soft- valuing and financing a firm that does not yet
ware company)?! exist involve understanding how firms come to
• How do we value firms in an industry that be. And creating a firm in a market that does not
did not exist five years ago and is barely yet exist involves understanding how to make
forming in the present (e.g., internet compa-
nies)? More interesting, how would we have decisions in the absence of preexistent goals.
valued them five years ago, when internet March sets out three justifications that re-
companies were barely emerging? searchers have used to ignore phenomena in-
• At the macro level, how do we create a cap- volving ambiguous, changing, and constructed
italist economy from a formerly communist goals and values:
one? Or, more interesting, what should a
posfcapifaiisf economy look like?' The first is that goal development and choice are
independent processes, conceptually and behav-
A very large and growing fraction of people in iorally. The second is that the model of choice is
business struggle with such decisions every never satisfied in fact and that deviations from
day. Business all over the world is becoming the model accommodate the problems of intro-
more free-market oriented and more entrepre- ducing change. The third is that the idea of
neurial. Almost half the companies on the For- changing goals is so intractable in a normative
theory of choice that nothing can be said about it.
tune 500 list did not exist fifteen years ago. Since I am unpersuaded on the first and second
Emerging technologies, such as those on the justifications, my optimism with respect to the
internet, are not only creating rapid change but third is somewhat greater than most of my fel-
also fundamentally redefining how we truck lows (March, 1982: 72). •
and trade and how we interact with one another In the past couple of decades, researchers
in every sphere of human action. Therefore, as have been struggling in March's spirit of opti-
March points out in the quote at the beginning of mism to take on these seemingly intractable
this article, questions such as the ones listed questions. I hope to make a contribution here
above ought to be an important part of our re- toward that effort by identifying and developing
search endeavors. a decision model that involves processes of ef-
Each of these questions involves the problem fectuation, rather than causation, and showing
of choosing particular effects that may or may its use in the creation of new firms. Although a
not implement intentional goals. For example, if general theory of effectuation could be devel-
we knew precisely what type of firm we wished oped to address all four types of questions listed
to create, we could use existing theories and above, in this article I develop only a special
principles to create the firm. But usually all the theory to explain the creation of new firms.
entrepreneur knows when he or she starts out is After a brief definition of effectuation as con-
something very general, such as the desire to trasted with causation, I explicate the processes
make lots of money or to create a valuable leg- involved through two thought experiments—
acy like a lasting institution, or, more common. one hypothetical and the other historical—and
then I succinctly review several relevant
' All four questions listed here can be addressed through streams of research in order to delineate the
a general theory of effectual reasoning, the main elements of space for effectuation processes in the literature
which are explicated in this article. However, given the and to develop a rudimentary theory of effectu-
cognitive and spatial limits of a single journal article, I focus ation. Thereafter, I suggest connections to the
on the first question alone. I address this question in con-
siderable detail to illustrate (what is for now) a special seminal works of three eminent researchers in
theory of effectuation in the creation of firms in nonexistent management who have taken the lead toward
or not-yet-existent markets. new horizons in our discipline (March, 1982;
2001 Sarasvathy 245

Mintzberg, 1994; Weick, 1979). Following that, I SO on. These are obviously oversimplified exam-
examine some recent empirical evidence that ples. To bring the definitions closer to reality
does not fit with the traditionally accepted par- through, say, the dinner example, we have to
adigm of causation models and, finally, develop add elements of dynamism and contingencies of
propositions based on effectuation at all four various kinds, including multiple interacting
levels of phenomena: macro, industry/market, chefs and hosts and dinner guests. But the point
firm, and individual. here is that in each example the generaiized
end goal or aspiration remains the same both in
PROCESSES OF CAUSATION AND
causation and effectuation—that is, to cook a
meal, to build some wooden artifact, or to create
/ EFFECTUATION
a painting. In fact, an effect is the operation-
* Definition; Causation^ processes take alization of an abstract human aspiration. The
: a particular effect as given and focus distinguishing characteristic between causa-
:' on selecting between means to create tion and effectuation is in the set of choices:
that effect. Effectuation processes taice choosing between means to create a particular
a set of means as given and focus on effect, versus choosing between many possible
selecting between possible effects effects using a particular set of means. Whereas
that can be created with that set of causation models consist of many-to-one map-
means. pings, effectuation models involve one-to-many
mappings.
A simple example should help clarify and dis-
tinguish between the two types of processes. Both causation and effectuation are integral
Imagine a chef assigned the task of cooking parts of human reasoning that can occur simul-
dinner. There are two ways the task can be or- taneously, overlapping and intertwining over
ganized. In the first, the host or client picks out a different contexts of decisions and actions. Yet
menu in advance. All the chef needs to do is list in this article I deliberately juxtapose them as a
dichotomy to enable clearer theoretical exposi-
the ingredients needed, shop for them, and then
tion. Before embarking on a literature review to
actually cook the meal. This is a process of cau-
delineate the space for effectuation models, I
sation. It begins with a given menu and focuses
present two realistic examples from business to
on selecting between effective ways to prepare illustrate and compare the two types of decision
the meal. processes (i.e., causation and effectuation). The
In the second case, the host asks the chef to first thought experiment is a hypothetical one—
look through the cupboards in the kitchen for that of creating an imaginary restaurant—and
possible ingredients and utensils and then cook the second is historical—the story of U-Haul.
a meal. Here, the chef has to imagine possible
menus based on the given ingredients and uten-
sils, select the menu, and then prepare the meal. Thought Experiment #1: Curry in a Hurry
This is a process of effectuation. It begins with
given ingredients and utensils and focuses on In this example I trace the process for building
preparing one of many possible desirable meals an imaginary Indian restaurant, "Curry in a
Hurry." Two cases, one using causation and the
with them.
other effectuation, are examined. For the pur-
A variety of such simple examples can be
poses of this illustration, the example chosen is
imagined: a carpenter who is asked to build a a typical causation process that underlies many
desk, versus one who is given a toolbox and economic theories today—theories in which it is
some wood and asked to build whatever he or argued that artifacts such as firms are inevita-
she chooses; an artist who is asked to paint a ble outcomes, given the preference orderings of
portrait of a particular person, versus one who is economic actors and certain simple assump-
given a blank canvas and some paints and re- tions of rationality (implying causal reasoning)
quired to paint anything he or she chooses; and in their choice behavior. The causation process
used in the example here is typified by and
embodied in the procedures stated by Philip
^A brief outline of the philosophical underpinnings of
causation is provided in a later section, titled "Future The-
Kotler in his Marketing Management (1991: 63,
oretical Work on Eifectuation." 263), a book that in its many editions is consid-
 Academy of Management Review April
246

ered a classic and is widely used as a textbook eat out at least twice a week. That would help
in MBA programs around the world. her determine her menu choices, decor, hours,
Kotler defines a market as follows: "A market and other operational details. She could then
consists of all the potential customers sharing a design marketing and sales campaigns to in-
particular need or want who might be willing duce her target segment to try her restaurant.
and able to engage in exchange to satisfy that She could also visit other Indian and fast food
need or want" (1991: 63). Given a product or a restaurants and find some method of surveying
service, Kotler suggests the following procedure them and then develop plausible demand fore-
for bringing the product/service to market (note casts for her planned restaurant.
that Kotler assumes the market exists): In any case, the process would involve consid-
erable amounts of time and analytical effort. It
1. Analyze long-run opportunities in the would also recjuire resources both for research
market. and, thereafter, for implementing the marketing
2. Research and select target markets. strategies. In summary, the current paradigm
• Identify segmentation variables and seg- suggests that we proceed inward to specifics
ment the market.
• Develop profiles of resulting segments. from a larger, general universe—that is, to an
• Evaluate the attractiveness of each seg- optimal target segment from a predetermined
ment. market. In terms of Curry in a Hurry, this could
• Select the target segment(s). mean something like a progression from the en-
• Identify possible positioning concepts for tire city of Pittsburgh to Fox Chapel (an affluent
each target segment.
• Select, develop, and communicate the residential neighborhood) to the Joneses (specif-
chosen positioning concept. ic customer profile of a wealthy family), as it
3. Design marketing strategies. were.
4. Plan marketing programs. , , Instead, if our imaginary entrepreneur were to
5. Organize, implement, and control market- use processes of effectuation to build her restau-
ing effort.
rant, she would have to proceed in the opposite
This process is commonly known in marketing direction (note that effectuation is suggested
as the STP—segmentation, targeting, and posi- here as a viable and descriptively valid alterna-
tioning—process. tive to the STP process—not as a normatively
Curry in a Hurry is a restaurant with a new superior one). For example, instead of starting
twist—say, an Indian restaurant with a fast food with the assumption of an existing market and
section. The current paradigm using causation investing money and other resources to design
processes indicates that, to implement this idea, the best possible restaurant for the given mar-
the entrepreneur should start with a universe of ket, she would begin by examining the particu-
all potential customers. Let us imagine that she lar set of means or causes available to her. As-
wants to build her restaurant in Pittsburgh, suming she has extremely limited monetary
Pennsylvania, USA, which will then become the resources—say $20,000—she should think cre-
initial universe or market ior Curry in a Hurry. atively to bring the idea to market with as close
Assuming that the percentage of the population to zero resources as possible. She could do this
of Pittsburgh that totally abhors Indian food is by convincing an established restaurateur to be-
negligible, the entrepreneur can start the STP come a strategic partner or by doing just enough
process. market research to convince a financier to invest
Several relevant segmentation variables, the money needed to start the restaurant. An-
such as demographics, residential neighbor- other method of effectuation would be to con-
hoods, ethnic origin, marital status, income vince a local Indian restaurant or a local fast
level, and patterns of eating out, could be used. food restaurant to allow her to put up a counter
Based on these, the entrepreneur could send out where she would actually sell a selection of
questionnaires to selected neighborhoods and Indian fast food. Selecting a menu and honing
organize focus groups at, say, the two major other such details would be seat-of-the-pants
universities in Pittsburgh. Analyzing responses and tentative, perhaps a process of satisficing
to the questionnaires and focus groups, she (Simon, 1959).
could arrive at a target segment—for example, Several other courses of effectuation can be
wealthy families, both Indian and others, who imagined. Perhaps the course the entrepreneur
2001 Sarasvathy 247

actually pursues is to contact one or two of her ing on to cultural aspects, including concerts
friends or relatives who work downtown and and ancient history and philosophy, and the pro-
bring them and their office colleagues some of found idea that food is a vehicle of cultural
her food to taste. If the people in the office like exploration—"School of Curry"? Or maybe what
her food, she might get a lunch delivery service really interests them is theme tours and other
going. Over time, she might develop enough of a travel options to India and the Far East—
customer base to start a restaurant or else, after "Curryland Travels"?
a few weeks of trying to build the lunch busi- In a nutshell, in using effectuation processes
ness, she might discover that the people who to build her firm, the entrepreneur can build
said they enjoyed her food did not really enjoy it several different types of firms in completely
so much as they did her quirky personality and disparate industries. This means that the origi-
conversation, particularly her rather unusual nal idea (or set of causes) does not imply any
life perceptions. Our imaginary entrepreneur one single strategic universe for the firm (or
might now decide to give up the lunch business effect). Instead, the process of effectuation al-
and start writing a book, going on the lecture lows the entrepreneur to create one or more sev-
circuit and eventually building a business in the eral possible effects irrespective of the general-
motivational consulting industry! ized end goal with which she started. The
Given the exact same starting point—but with process not only enables the realization of sev-
a different set of contingencies—the entrepre- eral possible effects (although generally one or
neur might end up building one of a variety of only a few are actually realized in the imple-
businesses. To take a quick tour of some possi- mentation) but it also allows a decision maker to
bilities, consider the following: Whoever first change his or her goals and even to shape and
buys the food from our imaginary Curry in a construct them over time, making use of contin-
Hurry entrepreneur becomes, by definition, the gencies as they arise.
first target customer. By continually listening to Furthermore, even the generalized aspiration
the customer and building an ever-increasing of starting a business is not a necessary starting
network of customers and strategic partners, the point for effectuation processes. Several suc-
entrepreneur can then identify a workable seg- cessful businesses and even great companies
ment profile. For example, if the first customers have begun without any conscious initial inten-
who actually buy the food and come back for tion on the part of the founders. To cite but one
more are working women of varied ethnic origin, example, the waste management giant Brown-
this becomes her target segment. Depending on ing Ferris Industries (BFI) began as the result of
what the first customer really wants, she can contingent problem solving. In 1967, while pre-
start defining her market. If the customer is re- siding over a community association meeting,
ally interested in the food, the entrepreneur can Tom Fatjo, a respected professional in Houston,
start targeting all working women in the geo- Texas, listened to members whine about the
graphic location, or she can think in terms of garbage problem in their subdivision. Exasper-
locating more outlets in areas with working ated, he suggested that maybe the community
women of similar profiles—a "Women in a should haul its own garbage. The community
Hurry" franchise? turned to him and dared him to do it himself.
Or, if the customer is interested primarily in After physically hauling garbage while continu-
the idea of ethnic or exotic entertainment, rather ing his professional career for over a year, he
than merely in food, the entrepreneur might de- realized the potential in garbage and went on to
velop other products, such as catering services, build BFI.
party planning, and so on—"Curry Favors"?^ In a similar vein, the Curry in a Hurry entre-
Perhaps, if the customers buy food from her be- preneur's journey of effectuation might also be
cause they actually enjoy learning about new the result of any one of a wide variety of seren-
cultures, she might offer lectures and classes, dipitous events. For example, a chance sugges-
maybe beginning with Indian cooking and mov- tion made by a friend after tasting her food on a
social occasion might have started the process
or, as happens in the case of many entrepre-
^ I apologize for the cheesy names, but, hopefully, they get neurs today, an unexpected misfortune might
the message across. have forced her to earn a living on her own.
248 Academy of Management Review April

Thought Experiment #2: U-Haul If we examine each of these entrepreneurial

decisions using only causation processes, the
The following example also consists of a best current theory and practice within each
thought experiment to trace the processes used functional domain will fail to lead us to a good
in the creation of U-Haul. Although there is no decision. For instance, if we examine the mar-
detailed history of U-Haul in which the actual keting decisions using current theories and
processes used by its founder are traced, the practice in marketing, we have to figure out the
thought experiment uses extracts from the com- potential universe of customers for U-Haul and
pany's history posted on its website, combined develop a marketing plan that targets the seg-
with Silver's study: ment with the highest potential for return on
Like many other successful ventures, the con- investment. Even if Shoen could somehow find a
cept for U-Haul® was provoked by need. After way to figure all this out in 1945 without ex-
World War II the population of the United States hausting his initial capital of $5,000, there was
became more mobile and migratory. There ex- presumably no way he would be able to realis-
isted an obvious widespread need for do-it-
yourself moving equipment on a one-way, nation- tically convince any potential investor to put up
wide basis. It was the visionary approach of the enormous outlay called for in such a market-
U-Haul that recognized this need, acted upon it ing plan.
and literally created an industry.
This has been tested through class discus-
With $5,000, L. S. Shoen, his wife Anna Mary
Carty Shoen and their young child moved to the sions using the creation of U-Haul as a case
Carty ranch in Ridgefield, Washington. There, study. Students typically come to one of two
with the help of the Carty family, the Shoens built conclusions: ;...; '•:•• '•.- ; •••-?' S * s ?•-. 4 ' ; : • ; - • , ,
the first U-Haul trailers in the iall of 1945, using
the ranch's automobile garage (and milk house) 1. This project is not financially viable—the
as the first manufacturing plant for the budding resource requirements are very large (esti-
U-Haul Co. mates range between $20 million and $50
By the end of 1949, it was possible to rent a million in current dollars) and overwhelm
trailer one-way Irom city-to-city throughout most any attempt to price the service viably: OR
of the United States (Silver, 1985: 387-390). 2. This project is not viable psychologically—
even if it were financially viable and poten-
The historical facts are that in four years tially profitable, the initial resources re-
Shoen transformed his perception of an obvious quired would be so large as to raise the
question of why anybody with control over
widespread need, $5,000, and access to an auto- $20 to $50 million would want to invest it in
mobile garage into a nationwide firm with a ,.,,, this relatively mundane but risky project
complicated production function, thousands of consisting of buying trucks and renting lo-
stakeholders, and what was essentially 100 per- cations across the country.
cent market share in the newiy created do-it- Yet U-Haul was created with an almost instan-
yourself moving industry. In our thought exper- taneous national presence for a very small fi-
iment we can now examine the minimal set of nancial outlay!
decisions that he had to make in effecting this Shoen used processes of effectuation that in-
transformation: volved his seizing and exploiting contingencies
through an expanding network of human alli-
1. How many moving vans/trucks should he ances. Instead of trying to raise the money to
buy or make?
2. How many locations would he need to buy a large number of trucks or trying to start
open? the company with very few locations, he did the
3. How many employees should he hire? (One following:*
per location or more?)
4. From whom should he raise the capital? • He began by establishing an identity. The
5. Should he open a few locations regionally trailers were painted bright orange. The
or go national at once? name "U-Haul Co." was established. Trail-
6. How should he establish his market pres- ers were imaged on the sides and back with
ence—advertise? If so, how? a sales message: "U-Haul Co., Rental Trail-
7. Putting it all together, how should he price
the product?
8. Given the fact that all he had was $5,000 to
begin with, should he move to Ridgefield * The sources used were the compxiny's own historical
and begin building the trucks? records and Silver (1985).
2001 Sarasvathy 249

ers, $2.00 Per Day"—always advertising actualization. Sufficiency is provided by active

them, whether on the road or on display.
• He convinced friends, family members, and implementations of imagined solutions that
customers (who then convinced others close seize and build on several types of contingen-
to them, and so on) to individually make cies that ultimately carve out the structure and
down payments on trucks and then lend him shape of the market. Currently, markets on the
the use of the trucks. internet are being created in this manner,
• He contracted with service station outlets through contingent interactions between the
(including national chains) to merchandise
trailer rentals, eliminating the need for buy- imaginations of effectuators and the aspirations
'•• ing space in cities across the country and for of their partners in the process, whether the
•"• recruiting employees to man the spaces. partners consist of customers, investors, and/or
,.: "He offered early customers a discount on various types of alliances.
their trailer rental for establishing a U-Haul
. rental agent at their destination and estab-
lished a commission structure for dealers. A RUDIMENTARY THEORY OF EFFECTUATION
PROCESSES IN BUSINESS
Thus, with hardly any employees and a ridicu-
lously small outlay of funds, U-Haul came into Before developing a theory for decisions in-
being. Furthermore, in the case of U-Haul, in the volving effectuation and delineating its space
initial stages of implementing processes of ef- within the literature, it is necessary to empha-
fectuation, the firm appears almost to have been size that effectuation processes are not posited
in the business of selling livelihoods to poten- here as "better" or "more efficient" than causa-
tial U-Haul franchisees (before the idea of fran- tion processes in creating artifacts such as
chising was developed), rather than in the one- firms, markets, and economies. Under what cir-
way rental business. cumstances which types of processes provide
This case study particularly highlights the particular advantages and disadvantages is an
unique role of the decision maker in solving the issue to be resolved through future empirical
existence problem through effectuation. Charac- studies. For example, in the thought experiment
teristics of decision makers, such as who they of Curry in a Hurry, presented above, if the en-
are, what they know, and whom they know, form trepreneur clearly wants to build an up-scale
the primary set of means that combine with con- Indian restaurant, she presumably will be better
tingencies to create an effect that is not prese- off using causation processes than effectuation.
lected but that gets consfrucfed as an integral But if she has only the generalized aspiration of
part of the effectuation process. The effectuator building a successful business of her own with
merely pursues an aspiration and visualizes a relatively limited access to resources, she
set of actions for transforming the original idea should consider effectuation processes.
into a firm—not into the particular predeter- Summarizing from the literature on decision
mined or optimal firm, but a very generalized making, the anatomy of a decision involves
aspiration of a firm. The commitment to such a • a given goal to be achieved or a decision to
tentative set of actions includes proceeding with be made (usually well structured and spe-
no a priori guarantees or even strong potential- cific),
ities for success. The effectuator more often than • a set of alternative means or causes (that
not proceeds without any certainties about the can be generated through the decision pro-
cess),
existence of a market or a demand curve, let • constraints on possible means (usually im-
alone a market for his or her product, or a poten- posed by the environment), and
tial revenue curve. • criteria for selecting between the means
In cases involving spectacular successes (Sil- (usually maximization of expected return in
ver, 1985), the effectuating entrepreneurs' vision terms of the predetermined goal).
appears to involve more than the identification Clearly, this structure assumes a decision pro-
and pursuit of an opportunity; it seems to in- cess involving causation.
clude the very creafion of the opportunity as part A decision involving effectuation, however,
of the implementation of the entrepreneurial consists of
process. The latent market for U-Haul, consist- • a given set of means (that usually consists
ing of the obvious widespread need for one-way of relatively unalterable characteristics/
rentals, was only a necessary condition for its circumstances of the decision maker).
250 Academy of Management Review April

• a set of effects or possible operation- dynamic process involving other decision mak-
alizations of generalized aspirations (most- ers interacting with one another.
ly generated through the decision process), Table 1 presents a list of the distinguishing
• constraints on (and opportunities for) possi-
ble effects (usually imposed by the limited characteristics of the two types of processes.
means as well as by the environment and its Causation processes are effect dependent. Ef-
contingencies), and fectuation processes are actor dependent. Cau-
• criteria for selecting between the effects sation processes are excellent at exploiting
(usually a predetermined level of affordable knowledge. Effectuation processes are excellent
loss or acceptable risk related to the given at exploiting contingencies. Nature abounds in
means).
particular events with regular causes that can
be analyzed and understood, and, therefore,
Entrepreneurs begin with three categories of
causation processes are excellent when dealing
"means": they know who they are, what they
with natural phenomena. Human life abounds
know, and whom they know—their own traits,
in contingencies that cannot easily be analyzed
tastes, and abilities; the knowledge corridors
and predicted but can only be seized and ex-
they are in; and the social networks they are a
ploited, and, therefore, effectuation processes
part of. At the level of the firm, the correspond-
are far more frequent and very much more use-
ing means are its physical resources, human
ful in understanding and dealing with spheres
resources, and organizational resources, a la the
of human action. This is especially true when
resource-based theory of the firm (Barney, 1991).
dealing with the uncertainties of future phenom-
At the level of the economy, these means be-
ena and problems of existence.
come demographics, current technology re-
gimes, and sociopolitical institutions (such as An examination of existing research on deci-
property rights). sions dealing with uncertainties pertaining to
the future (even if the research predominantly
One could speculate that effectuation pro- involves causation processes) should be useful
cesses are more general and more ubiquitous in delineating the space for processes of effec-
than causation processes in human decisions. tuation. Researchers in areas ranging from
For example, on most nights most people cook mathematics, statistics, and economics to psy-
dinner using an effectuation process—that is, chology, sociology, and business have grappled
they look around in their kitchen cupboards for with decisions involving future phenomena. His-
what's available and fix themselves something. torically, the research on decision making under
Only rarely do they decide to throw a dinner uncertainty can be divided into (1) the develop-
party and carefully develop a causation process ment of normative, rational decision models
for accomplishing it (i.e., choose a menu, shop (e.g., Focardi & Jonas, 1998; MacCrimmon,
for specific ingredients, and follow precise rec- Wehrung, & Stanbury, 1986; Shapira, 1997) and
ipes). It stands to reason, then, that effectuation (2) empirical investigations into bounds on that
processes may not be very helpful for throwing a rationality in actual decision makers (e.g., Ein-
great dinner party. But human life usually horn & Hogarth, 1981; Kahneman & Tversky,
comes stocked with cupboards that open and 1990; Taylor 1984; Zey, 1998).
close at unexpected moments, often containing
The normative development is rooted in the
unspecified ingredients that the decision maker
conceptual distinction between "risk" and "un-
has little choice over; grocery shops are typi-
certainty" (Knight, 1921). The commonly used
cally too far away or closed; and cookware often
statistical metaphor of the urn containing differ-
has to be borrowed from neighbors. To put it
ent colored balls serves to illustrate the differ-
more mundanely, in cases in which a particular
ence between the two (Kamien, 1994). Problems
effect has been preselected by the decision
involving risk are akin to a speculative game
maker, causation processes can be applied to
involving an urn containing five green balls and
choose the best, the fastest, the most efficient, or
five red balls. Whoever draws a red ball is
the most economical method to achieve the cho-
awarded a prize of $50. For any given draw, we
sen effect; imagining possible effects and choos-
can precisely calculate the probability of get-
ing among them, however, involve characteris-
ting a red ball, because we know the underlying
tics of the decision maker(s) and his or her (their)
distribution of balls inside the urn from which
ability to identify and use contingencies over a
we are making the draw. Problems involving
2001 Sarasvathy 251

TABLE 1
Contrasting Causation and Effectuation
Categories of
Differentiation Causation Processes Effectuation Processes
Givens Effect is given Only some means or tools are given
Decision-making Help choose between means to achieve Help choose between possible effects that
selection criteria the given effect can be created with given means
Selection criteria based on expected Selection criteria based on affordable loss
return or acceptable risk
Effect dependent: Choice of means is Actor dependent: Given specific means,
driven by characteristics of the effect choice of effect is driven by
the decision maker wants to create and characteristics of the actor and his or her
his or her knowledge of possible ability to discover and use contingencies
means
Competencies Excellent at exploiting knowledge Excellent at exploiting contingencies
employed
Context of More ubiquitous in nature More ubiquitous in human action
relevance
More useful in static, linear, and Explicit assumption of dynamic, nonlinear,
independent environments and ecological environments
Nature of Focus on the predictable aspects of an Focus on the controllable aspects of an
unknowns uncertain future unpredictable future
Underlying logic To the extent we can predict future, we To the extent we can control future, we do
can control it not need to predict it
Outcomes Market share in existent markets throui New markets created through alliances and
competitive strategies other cooperative strategies

uncertainty involve the same award of $50 for netic cloning, and commercialization of innova-
the draw of a red ball, except we do not know tions—particularly radical innovations.
how many balls are in the urn, what colors they Experiments by researchers developing nor-
are, or even if there are any red balls at all in the mative models have demonstrated that human
distribution. In statistical terminology, deci- beings in general prefer the "risky or known
sions involving the first type of urn, with the distribution" urn over the "uncertain or un-
known distribution, call for classical analytical known distribution" urn (EUsberg, 1981). But
techniques, and decisions involving the second some researchers, such as those studying cre-
type of urn, with the unknown distribution, call ative problem solving (Getzels & Csikszentmi-
for estimation techniques. Once the underlying halyi, 1976), scientific discovery (Kulkarni & Si-
distribution is discovered through estimation mon, 1986), and entrepreneurship (Dickson &
procedures, the urn with the unknown distribu- Giglierano, 1988; Kamien, 1994), have speculated
tion is transformed, as it were, into the urn with that since creative problem solvers like entre-
the known distribution, and it becomes suscep- preneurs have been shown to have a high toler-
tible to analytical techniques. ance for ambiguity, they will have a preference
Real-life examples of risk include all types of for the urn with the unknown distribution.
insurance, some areas of the stock markets, and Both normative approaches have been quali-
gaming of various types. Forecasting demand fied by other researchers, who have shown that
for very well-established products, such as human beings in general are not strictly ration-
Coca-Cola or personal computers nowadays, al (Simon, 1959). Instead, their rationality is
also falls within this category. Some real-life bounded by cognitive limitations, such as phys-
examples of uncertain fy include dealing with iological constraints on computational capacity
environmental pollution, global warming, ge- (Payne, Bettman, & Johnson, 1993), and psycho-
252 Academy of Management Review April

logical limitations, such as biases and fallacies how much loss is affordable and focuses on ex-
(Bar-Hillel, 1980; Tversky & Kahneman, 1982). Yet perimenting with as many strategies as possi-
this does not imply that decision makers are ble with the given limited means. The effectua-
irrational. Rather, the evidence suggests that tor prefers options that create more options in
within certain bounds, decision makers use heu- the future over those that maximize returns in
ristics and inductive logics that often lead to the present.
very effective decisions (Gigerenzer, Hell, St 2. Strategic alliances rather than competi-
Blank, 1988), tive analyses: Causation models, such as the
The arguments from both perspectives— Porter model in strategy, emphasize detailed
unbounded rationality and bounded ration- competitive analyses (Porter, 1980). Effectua-
ality—can be summarized as follows. If the de- tion emphasizes strategic alliances and pre-
cision makers believe they are dealing with a commitments from stakeholders as a way to
measurable or relatively predictable future, reduce and/or eliminate uncertainty and to
they will tend to do some systematic information erect entry barriers,
gathering and invest some effort on a reason- 3. Exploitation of contingencies rather than
able analysis of that information, within certain exploitation of preexisting knowledge: When
bounds. Similarly, if they believe they are deal- preexisting knowledge, such as expertise in a
ing with relatively unpredictable phenomena, particular new technology, forms the source of
they will try to gather information through ex- competitive advantage, causation models might
perimental and iterative learning techniques be preferable. Effectuation, however, would be
aimed at first discovering the underlying distri- better for exploiting contingencies that arose
bution of the future. This logically implies that unexpectedly over time,
the decision makers' underlying beliefs about 4. Controlling an unpredictable future rather
the future phenomena that impact a particular than predicting an uncertain one: Causation
decision can be deduced by examining the types processes focus on the predictable aspects of an
of heuristics and logical approaches they use in uncertain future. The logic for using causation
making the decision. processes is: To the extent that we can predict
In terms of the urn metaphor used to describe the future, we can control it. Effectuation, how-
causation processes of risk and uncertainty, the ever, focuses on the confroiJabie aspects of an
process of effectuation seems to suggest the fol- unpredictable future. The logic for using effec-
lowing conjecture about a decision maker's log- tuation processes is: To the extent that we can
ic: "I do not care what color the balls are in the control the future, we do not need to predict it.
urn or what their underlying distribution is. If I This logic is particularly useful in areas
am playing a game where drawing a red ball where human action (locally or in the aggre-
wins $50, I will go acquire red balls and put gate) is the predominant factor shaping the fu-
them in the urn. I will also look for other people ture. For example, instead of defining a market
who have red balls and induce them to put them as the universe of all possible customers as Kot-
in the urn and play the game as my partners. As ler defines it, an effectuator would define his or
time goes by, there will be so many red balls in her market as a community of people willing
the distribution as to make almost every draw a and able to commit enough resources and tal-
red ball. Furthermore, if neither I nor my ac- ents to sustain the particular enterprise. In the
quaintances have red balls, but only green ones, former case, the market is assumed to exist in-
we will put enough of them in the urn so as to dependent of the firm or entrepreneur, and the
make the original game obsolete and create a task of the entrepreneur becomes to grab as
new game where green balls win." much of that market as possible. In the latter
In sum, this conjecture can be embodied in the case, however, the founder, along with others,
following four principles that form the core of a creates the market by bringing together enough
rudimentary theory of effectuation, graphically stakeholders who "buy into" the idea to sustain
depicted in Figure 1: the enterprise. Since the structure of what ex-
I. Affordable loss rather than expected actly the enterprise is is left open and is depen-
returns: Causation models focus on maximizing dent upon the particular commitments made by
the potential returns for a decision by selecting the stakeholders, the need for prediction is
optimal strategies. Effectuation predetermines greatly reduced, if not completely obliterated. In
2001 Sarasvathy 253

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2S4 Academy of Management Review April

Other words, the particular firm created becomes .., We should indeed be able to develop better
fhe residual of a process of constructing a net- techniques. Whatever those techniques may be,
however, they will almost certainly undermine
work of partnerships and precommitments (Burt, the superstructure of biases erected on purpose,
1992), and the market itself is an aggregated consistency, and rationality. They will involve
taxonomy of such sustainable sets of partner- some way of thinking about action now as occur-
ships and commitments. ring in terms of a set of unknown future values
(March, 1982: 75),

CONNECTIONS WITH EXISTING THEORIES From the pioneering work Organizations (March
AND EMPIRICAL EVIDENCE & Simon, 1958) to several recent articles in man-
agement journals, March has created a substan-
A theory, however rudimentary, should not tial body of theories and empirical evidence on
only identify gaps in our existing understanding how human beings behave, make decisions, and
of phenomena but should also be able to inte- interact with one another and with the external
grate existing theories and evidence that do not environment in organizations. Of particular value
quite fit the current paradigm and, ultimately, to building a theory of effectuation are his ideas
should provide new hypotheses and predictions on the tradeoffs between exploration and exploi-
to be tested through future work. In this section tation in organizational learning (March, 1991) and
I examine an important subset of existing theo- his inspirational exhortation to researchers to
ries and evidence that does not quite fit into the challenge the assumption of preexistent goals in
current paradigm of decision making using cau- decision making (March, 1982). .. ;
sation processes. In the next section I set out a
list of propositions for decision making at all Organizational learning involves decisions in
four levels of business phenomena. which scarce resources (including attention) are
The intellectual lineage of the ideas influenc- allocated between the exploration of new possi-
ing the theory of effectuation presented in this bilities and the exploitation of old certainties.
article includes a very large and impressive list These decisions are complicated by the fact that
of thinkers, ranging from the pragmatic philos- their costs and benefits may be dispersed over
ophers at the turn of the century to current lead- time and space and that they are subject to the
ers of thought in economics and management: effects of ecological interaction. Yet, balancing
Peirce (1878), James (1912), Knight (1921), Lind- the allocation between exploration and exploi-
blom (1959), Simon (1959), Vickers (1965), Allison tation is crucial to the survival and sustenance
(1989), Weick (1979), Nystrom & Starbuck (1981), of the organization. Understanding the relation-
Buchanan & Vanberg (1991), March (1982), Burt ship between these two horns of a continuing
(1992), and Mintzberg (1994). I examine a limited dilemma in organizational evolution leads us
subset of the theoretical work done by three of away from a linear approach to such concepts
these researchers here and follow with some as "success" and "sustainable competitive ad-
additional empirical evidence that does not fit vantage," For example, by introducing a new
into the current paradigm. I also present brief technology, such as a computerized decision
outlines of future theoretical development out- support system, an organization may decrease
side the scope of the current paper. Along the its chances of being the worst competitor, but it
way, I highlight connections to effectuation. may reduce its chances of being the overall win-
ner in the game (March, 1991: 84).
It would be rather obvious to speculate that
lames G. March decision units of exploration would contain pro-
To say that we make decisions now in terms of
cesses of effectuation, whereas causation mod-
goals that will only be knowable later is nonsen- els would dominate exploitation. But, more in-
sical—as long as we accept the basic framework teresting, one could speculate that the problem
of the theory of choice and its presumptions of of allocation of resources between exploration
pre-existent goals, and exploitation might itself be modeled more
I do not know in detail what is required, but I effectively using an effectuation rather than a
think it will be substantial. As we challenge the
dogma of pre-existent goals, we will be forced causation modei. March's exposition on explo-
to reexamine some of our most precious pre- ration and exploitation also brings out that
judices , , , , causal reasoning and effectual reasoning need
2001 Sarasvathy 255

not always pull in opposite directions. Instead, the considered opinions of mutual fund experts
they can work in a complementary fashion, just (Borges, Goldstein, Ortmann, & Gigerenzer,
as exploration and exploitation can both be 1999), Another example of the benefits of not
used by a firm to sustain its market share over having expertise comes from the area of re-
different spatial and temporal contexts. search methods, embodied in Gersick's discov-
ery of a new model of group development. Es-
chewing the normative linear movement of
Henry Mintzberg
research—from careful literature review to de-
I would like to introduce just one fact* here. In duction of hypotheses, to careful operation-
one sense, it is the only real fact I know in all of alization, to design, to inference making—she
the literature of strategic management,,, adopted a mode of unconstrained curiosity and
.,, Honda's success, (in capturing two thirds of
the American motorcycle market) if we are to be- immersion in the phenomena, which led her to
lieve those who did it and not those who figured it, the element of surprise that was crucial to her
was built precisely on what they initially believed discovery (Gersick, 1992).
to be a probable non-starter—namely the small mo- The prolificacy of successful nonstarters in hu-
torcycle. Their own priors were that a market with-
out small motorcycles would not buy small motor- man affairs is matched only by sure things that
cycles. Had they had a proper planning process in fail disastrously. In a detailed review of the pre-
place ,,, this non-starter would have been elimi- dictive accuracy of forecasting by experts in vari-
nated at the outset—plan rationally and be done ous fields, including population, economics, tech-
with it. But Honda was badly managed in this re- nology, and so forth, Hogarth and Makridakis
gard, and so a few Japanese managers, riding (1981) conclude that the evidence indicated fore-
around on those little things in Los Angeles, were
pleasantly surprised. They learned, (General Mo- casting errors varied from a few to a few hundred
tors was apparently well managed in this regard, percentage points and that forecasting was noto-
because a product development manager there riously inaccurate. Also, using hundreds of stud-
once told me that they had a mini-van on the draw- ies in management and other areas of human
ing boards long before Chrysler ever did but that behavior, Mintzberg makes a powerful argument
this probable non-starter was scuttled in the plan- that strategic planning is "not" strategy formation
ning process) (Mintzberg, 1991: 92),
(Mintzberg, 1994), Once again, the evidence seems
Success stories of probable nonstarters to suggest that a different model of decision mak-
abound in the history of economics, manage- ing is required: one that does not focus on analysis
ment, and human affairs in general. For exam- and prediction but on synthesis and action. Effec-
ple, Polanyi comments on one of his contribu- tuation provides one possible altemative, partic-
tions to physics: ularly in the problem of strategy formafion,
I would never have conceived my theory, let alone
which belongs in the category of existence prob-
have made a great effort to verify it, if I had been lems such as those listed in the beginning of
more familiar with major developments in physics this article.
that were taking place. Moreover, my initial igno-
rance of the powerful, false objections that were
raised against my ideas protected those ideas from Karl E. Weick
being nipped in the bud (Polanyi, 1963: 1013),
I want to argue that one reason we theorize
Researchers in cognitive science have explored poorly about what matters most is because we
the importance of so-called ignorance in the use discourse that makes it hard to capture living
forward. Living forward is a blend of thrownness,
form of a recognition heuristic. This research making do, journeys stitched together by faith,
into ignorance-based heuristics explains phe- presumptions, expectations, alertness, and ac-
nomena such as (1) the success of Benetton's ad tions—all of which may amount to something,
campaign that conveyed nothing about the although we will know for sure what that some-
product but sought only to induce name recog- thing may be only when it is too late to do much
about it. Unsettled, emergent, contingent living
nition (Goldstein & Gigerenzer, 1999) and (2) the forward contrasts sharply with our backward-
striking stock market returns generated by the oriented theoretical propositions that depict that
recognition knowledge of pedestrians that beat living as settled, causally connected, and coher-
ent after the fact (Weick, 1999: 135),

*The fact he is referring to is the title of the article, Weick's theory of enactment-retention-selec-
"Learning 1, Plarming 0," tion puts decision makers in organizations at
256 Academy of Management Review April

the center stage of the organization's evolution Effectuation in areas other than the creation of
(Weick, 1979). Unlike in commonly accepted economic artifacts. I have primarily brought out
models of evolution, where selection is exclu- the role of effectuation within the normative de-
sively the prerogative of the environment, Weick cision theory literature, but there is a substan-
argues that "decision makers in organizations tial body of theoretical and empirical work pro-
intervene between the environment and its ef- viding altemative perspectives that need to be
fects inside the organization, which means that examined in more detail. Connections of effec-
selection criteria become lodged more in tuation with such theories as March's "garbage
the decision-makers than in the environment" can" model, Weick's enactment processes, Lind-
(Weick, 1979: 125), blom's successive comparisons framework, Gig-
But this intervention is not coherently planned erenzer's ignorance-based heuristics, Simon's
or causally prescribed as most mainstream re- bounded rationality, and several others (e.g., the
search on organizations seems to emphasize. literature on improvisation and bricolage) have
Instead, in the theory of enactment, a nonlinear to be explored in depth. For example, in consid-
process that is strongly evocative of the "living ering the issue of endogenous goal creation in
forward" model of effectuation is assumed. the context of public policy formulation, Lind-
Using such examples as Mozart's description of blom develops an alternative to traditional ra-
how he composed music, Weick links enactment tional comprehensive models of decision mak-
to the idea that actors in organizations are in- ing (Lindblom, 1959), In his "successive limited
volved more in making retrospective sense of comparisons" method of policy making, the pol-
their actions than in acting based on predeter- icy maker directly chooses between policies
mined goals and causal rationality (Weick, rather than first developing an ordered set of
1995), Although Weick does not especially focus values and subsequently evaluating the poli-
on the creation of an organization from scratch, cies on how well they attain the prioritized val-
the basic decision unit of the larger organiza- ues. In other words, the policy maker does not
tional processes of enactment and sensemaking separate ends from means; the choice of means
can be posited as a model of effectuation rather embodies within it the policy maker's selection
than causation,^ of ends,
Lindblom's model is clearly not one of causal
Future Theoretical Work on Effectuation reasoning. It embodies several principles of ef-
fectual reasoning. Particularly, in the model,
Integrating March, Mintzberg, and Weick. Lindblom embraces bounded rationality and en-
March's ideas on exploration and the challenge dogenous and contingent goal creation, and ex-
to preexistent goals, Mintzberg's gathering of plicitly eschews prediction. Instead of with
evidence against planning and prediction, and "means," in the sense in which they have been
Weick's emphasis on enactment and living for- discussed in the current exposition on effectua-
ward are all integrated in this article into a tion, Lindblom's model begins with a very lim-
model of effectual reasoning that explicitly ad- ited set of actual policies, and in it Lindblom
dresses (1) a logic of control (rather than predic- seeks to select between the marginal combina-
tion), (2) endogenous goal creation, and (3) a tions of values (ends) that the policy maker
(partially) constructed environment. Addition- wishes to attain, Lindblom's successive compar-
ally, building upon the preceding theories' sub- isons model is an application of effectual rea-
concepts, which basically pose a disconnect of soning to a very different context of decision
intention, action, and meaning, here I show how making than the creation of economic artifacts.
effectuation inverts causal reasoning to indicate The central focus in the Lindblom model is on
a new connection among means, imagination, conflicting values: both conflicts between deci-
and action that helps generate intentions and sion makers and the reiafive conflicts among
meaning in an endogenous fashion. the value priorities of an individual decision
maker under different spatial and temporal con-
^ I am attempting a more detailed examination of the
texts of decision making, Lindblom's theory in-
links between effectuation and the ideas of March and dicates that it would be interesting to identify
Weick, as well as others, such as Lindblom and Simon, in a and examine areas other than the creation of
subsequent paper. economic artifacts for applications of effectual
2001 Sarasvathy 257

reasoning. Such an endeavor would be particu- (sometimes called "teleology"). The simplest
larly necessary to develop a general theory of way to understand the four causes is to consider
effectuation—a task clearly beyond the scope of a phenomenon such as a house and ask, "Why
this paper. house?" According to Aristotle, four categories
For now, the primary enhancement that effec- of answers emerge:
tuation brings to earlier theories, particularly in
economics and management, is the connection 1, The house is what it is because of the
materials that went into the building of it
with causal reasoning and the explicit logic of (material cause),
control versus prediction in human affairs. This 2, The house is what it is because of the peo-
enhancement is important in that it outlines the ple (masons, bricklayers, and so forth) who
existence of a form of reasoning that is not actually built it—their skills, care, and so on
merely a deviation from causal reasoning. In- (efficient cause),
3, The house is what it is because of the archi-
stead, effectuation suggests a hitherto unspeci- tect's plan (formal cause),
fied altemative logic that might unite several of 4, The house is what it is because of the peo-
the earlier theories into a newly coherent para- ple who own it and live in it: whether they
digm of decision making. wish to raise children or have wild parties
there, for example, will determine what the
Connections with other nonlinear approaches. house is (final cause).
In a similar vein, the connection of effectuation
to nonlinear approaches, such as chaos/com- The conversation on causation, of course, has
plexity theories, needs to be investigated. I am developed well beyond Aristotle's ideas. Partic-
attempting this in a separate essay in which the ularly, the work of biomathematician Robert
processes of effectual reasoning are united with Rosen in Life Itself suggests that the conversa-
the structural property of near decomposability tion since Aristotle (all of the conversation of
in complex systems that has been proven to modern science, for example) has been almost
speed up their evolution (Simon, 1996), Together, exclusively limited to the first three causes: ma-
effectuation and near decomposability may ex- terial, formal, and efficient (Rosen, 1991), Rosen
plain not only the creation of new firms but also argues that the standard form of a mathematical
the creation of rapidly growing, innovative, and function f^(x) incorporates the three causes, with
enduring firms (Sarasvathy & Simon, 2000). "x" being the material cause, "/" the efficient,
Connections with the philosophical underpin- and "a" the formal. But scientists in general do
nings of causation. Causation has a very old not seem to tackle final cause or teleology very
and venerable lineage in philosophy. In "ab- well. While physical scientists have tended to
ducting"' a theory of effectual reasoning, one avoid teleology altogether, social scientists,
must pay attention to the several centuries of particularly in economic sciences, have, in gen-
continuing conversation about causation—from eral, exogenously imposed one on the phenom-
Aristotle down to more recent theorizing, such as ena they study, Buchanan and Vanberg point
John Mackie's INUS condition (Mackie, 1998). that out in detail in an article entitled "The Mar-
Mackie defines a cause as an /nsufficient but ket As a Creative Process":
Necessary component of an Unnecessary but We have suggested that a perceptual vision of
Sufficient condition, offering potentially a more the market as a creative process offers more in-
precise way of introducing plurality, nonlinear- sight and understanding than the alternative vi-
ity, and contingency into causal reasoning with- sions that elicit interpretations of the market as a
discovery process, or, more familiarly, as an al-
out assuming away the qualitative variables. locative process,^ In either of the latter alterna-
Aristotle argued that there are four causes to tives, there is a telos imposed by the scientist's
all phenomena—namely, material cause, effi- own perception, a telos that is nonexistent in the
cient cause, formal cause, and final cause first stance (1991: 183).

^ The logician Charles Sander Peirce developed the con- ° The three models of market process described by
cept of "abduction" as a third altemative to "deduction" and Buchanan and Vanberg are evocative of the statistical met-
"induction," Abduction involves creating new hypotheses aphor of the urn used in an earlier section, AJJocafive pro-
purely from imagination, as opposed to deducing them from cess suggests the urn with the known distribution, discovery
first principles or axioms or inducing them from data or process suggests the urn with the unknown distribution, and
empirical findings. creative process evokes effectuation.
258 Academy of Management Review April

As researchers, we seem to do this (impute an successful entrepreneurs and compared them

exogenous telos) mostly because it allows us to with failed entrepreneurs and nonentrepre-
apply the other three causes relatively easily to neurs. Results, however, have been disappoint-
human behavior or, more precisely, allows us to ingly mixed (see Gartner, 1988, for a comprehen-
"explain" and seemingly "predict" human be- sive review).
havior in terms of the first three causes alone. The "successful entrepreneur" seems to be an
The key, however, is to find a way to theorize elusive, many-splendored beast. Successful en-
about human behavior without either ignoring trepreneurs range all over the risk-preference
telos altogether or imposing/assuming one ex- spectrum (Palich & Bagby, 1995); they make it to
ogenously. It is clear, without going into further both lists: the ten easiest bosses to work for and
detail, that a comparison of different causation the ten most difficult bosses to work for. Bleed-
theories—mechanical, narrative fiction, genera- ing heart liberals and tough libertarians, and
tive, successionist, and so on—and a detailed shades in between, all build thriving firms. Fur-
review of the entire historical flow on causal thermore, firms succeed by being bold and
reasoning—exploring where effectual reason- brash and churning in change as much as by
ing would join in and branch out—would be a being narrowly focused and conservative and
necessary endeavor for developing a compre- extremely understated in their strategies; both
hensive theory of effectuation. formal strategic planning and lack of it seem to
Differentiating the ideas in this paper from have worked (Schwenk, 1988; Schwenk &
earlier theories. There are two key factors that Shrader, 1993), In current theories based on cau-
distinguish the ideas presented here from ear- sation, scholars have a tough time explaining
lier theories that have each partially assaulted some of these phenomena and, particularly,
the bastions of predictive rationality, preexis- suggesting courses of action for particular indi-
tent goals, and environmental selection. The viduals in creating particular economic arti-
first consists of the juxtaposition of effectual facts.
reasoning with causality, and the second in- The theory of effectuation brings another per-
volves the logic of control instead of the focus on spective to the table. It suggests we need to give
prediction. up ideas such as the successful personality or
These two factors powerfully combine to help clearly superior characteristics of the successful
us build the theoretical foundations for explain- firm or organization. Rather, we need to learn to
ing the origins of economic artifacts as a func- deal with a rain forest of individuals and firms
tion of the decision processes used by actual and markets and societies, intermeshed and wo-
entrepreneurs in creating and growing firms in ven together with completely coherent yet vastly
the real world. Empirical explorations (whether diverse local patterns that add up to a complex,
historical, anecdotal, out in the field, or inside interdependent ecology of human artifacts. We
the lab) are rife with examples of entrepreneurs' need to move away from the vision of (he "mar-
and entrepreneurial firms' using decision pro- ket" as a monolithic construct that rides rough-
cesses other than those posited by traditional shod over vast farmlands of homogenous
causal reasoning. Examples include Eisenhardt commodities, relentlessly separating the wheat
(1989), Ehringer (1995), Moorman and Miner from the chaff, and start researching "markets"
(1998), and others. The theory of effectuation pro- as groups of individuals and communities de-
vides the beginning of a robust and rigorous veloping a variety of gardens and parks based
basis for an empirically validated (and testable) on their particular tastes in landscaping and
model of entrepreneurial decision making. architecture. Only then can we begin to explain
Connections to some recent empirical find- why people of all types seem to build successful
ings. Besides integrating previous theories that companies and other economic artifacts.
challenge traditional assumptions of causal The focus in our journals and classrooms, for
reasoning and providing a testable model of example, would shift from "how to build a suc-
entrepreneurial decision making, a theory of cessful firm" or "how to become a successful
effectuation could explain some empirical find- entrepreneur" to "What types of ideas and op-
ings (or the lack of them) in such areas as entre- portunities should YOU pursue?" and "Given
preneurship. For several decades now, re- who you are, what you know, and whom you
searchers have investigated the traits of know, what types of economic and/or social ar-
2001 Sarasvathy 259

tifacts can you, would you want to, and should 2, strategic alliances, rather than competitive
you create?" The old adage about invention cap- analyses:
tures this shift rather pithily: Both the optimist 3, exploitation of contingencies, rather than
preexisting knowledge: and
and the pessimist contribute to successful inven- 4, control of an unpredictable future, rather
tions. The optimist invents the airplane: the pes- than prediction of an uncertain one.
simist, the parachute.
More important, the theory of effectuation sug- Based on the foregoing exposition on pro-
gests that to normatively unpack the critical fac- cesses of effectuation, in this section I give a set
tors of success and failure, we first need to dis- of propositions that could be used as a basis for
connect the success of the individual future empirical work.
entrepreneur from the success of the firm he or
she creates. In fact, effectuation prescribes that
the concept of success/failure is not a 0-1 vari-
At the Level of the Economy
able—that is, "success" is not the logical equiv-
alent of "not failing," and vice versa. Rather, One of the most important concerns in macro-
within the theory of effectuation, any specific economic policy is the fostering of entrepreneur-
firm is only one of many possible viable and ial activity (both in start-ups and existing corpo-
contingent combinations of a given set of means rations) to spur innovation, productivity, and
with which the entrepreneur begins. Thus, effec- growth in the economy. In free-market capital-
tuation posits a plurality of "failed" firms for any ism both job creation and increases in real per
one or more "successful" firms that actually get capita income have been shown to depend on
created by any given entrepreneur. The norma- entrepreneurial activity, particularly in the form
tive aspects of effectuation, if any, for the cre- of new firm formation (Birch, 1987; Shane, 1995),
ation of successful firms would have to do with Because of this, governments at all levels—
the "management" of failures rather than with local, state, and national—seek to enact policies
their avoidance. Given the scope of this article, encouraging start-up entrepreneurs. Currently,
what exactly those normative features are is left such policies are usually focused on encourag-
as an empirical question for future research. ing entry in large numbers, in the hope that time
will weed out the failures, rather than encour-
aging certain fypes of enterprises or entrepre-
PROPOSITIONS FOR THE ROLE OF neurial strategies. According to Kenneth Arrow,
EFFECTUATION PROCESSES IN BUSINESSES the conventional wisdom of encouraging entry
is based on modeling the market as a stochastic
To summarize, effectuation processes are pos- process (see Sarasvathy, 2000), In this accepted
ited as the fundamental decision units in expla- theory, it is assumed that the creation of firms
nations of how economic artifacts such as firms, and the creation of markets are independent
markets, and economies come to be. Effectua- processes. To be more precise, it is assumed that
tion begins with a given set of causes, consist- markets exist either concurrently or latently and
ing of (mostly) unalterable characteristics and that the markets determine, in a stochastic fash-
circumstances of the decision maker, and the ion, which firms survive and which fail.
focus is on choosing among alternative (desir-
able) effects that can be produced with the given The theory is based on data, from the National
set of means, thereby eliminating the assump- Venture Capital Association, that suggest that
tion of preexistent goals. Unlike in causation the expected success rate for new ventures is
very low (estimated at less than two in ten). In
models, which are usually static and in which
light of this, the quest to reduce the failure rate
decision makers are assumed independent, in
is one of the holy grails of research in entrepre-
effectuation a dynamic decision environment in-
neurship. The predominant method in this liter-
volving multiple interacting decision makers is ature consists of trying to connect the perfor-
assumed. As explicated earlier, the four princi- mance of a firm to a variety of factors, such as
ples of effectuation, in contrast with causation, liability of newness, entrepreneurial orienta-
involve tion, and so forth. The results using this line of
research have, at best, been mixed (Henderson,
1, affordable loss, rather than expected re-
turns; 1999; Lumpkin & Dess, 1996),
aeo Academy of Management Review April

The theory of effectuation suggests another ket forecasts for computers at around 2,000 units
approach. While the probability of failure in by the end of the twentieth century. And the
new ventures may not be reducible because it founders of Netscape and Amazon.com had to
depends on a seemingly inexhaustible variety demonstrate that revolutions were possible in
of interacting factors—from the genes of the en- the IPO market—that is, billion dollar compa-
trepreneur to changing weather patterns in the nies could be created with virtually no sales
larger socioeconomic-political environment— revenues and/or profits.
the costs of failure are another matter alto- These endeavors that opened up new markets
gether. Because effectuation does not involve and industries plugged into and exploited so-
elaborate planning and prediction costs but re- cial and technological contingencies that could
lies, instead, on precommitments to reduce un- not have been anticipated or planned for. Also,
certainties, we can state the following proposi- they involved changing (not fulfilling), often on
tion about the role of effectuation at the level of a revolutionary scale, the perceptions and ex-
the economy. pectations of their stakeholders, customers and
investors alike—a task that Schumpeter attrib-
Proposifion 1: Piefirms or very early- uted to "creative destruction" when he observed,
stage firms created through processes "It was not enough to produce satisfactory soap,
oi effectuation, if they fail, will fail it was also necessary to induce people to wash"
early and/or at lower levels of invest- (Schumpeter, 1939: 243). Processes of causation
ment than those created through pro- are not much use on the cusps of such cata-
cesses of causation. Ergo, effectuation strophic changes in the economy as the births
processes allow the economy to exper- and deaths of industries, A historic analysis of
iment with more numbers of new companies that pioneered such changes and a
ideas at lower costs. comparison of the commonalities in the decision
processes used by the entrepreneurs who cre-
ated those companies should provide evidence
At the Level of the Market or Industry for the following claim. , < .•.
Economic history is rich in stories about the
birth of new industries. Be they Josiah Wedg- Proposition 2: Successful early en- •..•_
wood and his pots and vases, Edison and his trants in a new industry are more
invention factory. Jobs and Wozniak and per- likely to have used effectuation pro-
sonal computers, or the founders of Netscape cesses than causation processes. With
and Amazon.com and e-commerce, entrepre- later entrants, the trend could be re-
neurs have helped create new markets and new versed.
industries, as well as new firms and organiza-
tions in existing industries. But creating a firm
in an industry that does not yet exist calls for At the Level of the Firm c ^
strategies very different from those used for pen- Researchers trying to understand success and
etrating a predefined and well-structured mar- failure factors in new ventures time and again
ket. Wedgwood's success called for an aware- have proposed longitudinal studies as the most
ness of the revolutionary new concept of "social effective method to understand them and to de-
mobility" in eighteenth-century England and the velop predictions for separating potential win-
understanding that pots and vases can be sym- ners from losers. Again, attempts at such longi-
bols of people's aspirations in this regard tudinal studies have not provided brilliant
(Koehn, 1997), Transforming the invention of a illuminations (Van de Ven, PoUey, Garud, & Ven-
light bulb into the electrification of entire cities kataraman, 1999). Reasons include, among other
involved Edison's educating and convincing things, the difficulties in comparing firms across
thousands of people, including politicians, industries, technologies, and geographical fac-
priests, and the robber barons on Wall Street, to tors. The theory of effectuation opens up possi-
fundamentally rethink their presumptions about bilities for true comparisons across such diverse
light and fire and science and safety (Baldwin, factors. Since all new firms and entrepreneurs,
1995), Jobs and Wozniak had to stumble on the irrespective of which industry or environment
inventions of Xerox PARC and disprove the mar- they are operating in, make decisions, and since
2001 Sarasvathy 261

their decisions can clearly be classified into the Conjecture 3: In organizational deci-
two categories of causation and effectuation (us- sions, in contrast to traditional deci-
ing the four contrasting principles listed earlier), sion makers, effectuators are more
longitudinal studies can be used to compare likely to build strong participatory
them on this one dimension, with a view to sep- cultures, rather than hierarchical, pro-
arating potential successes and failures. For ex- cedures-based ones. In fact, in con-
ample, this leads to the following conjecture. trast to traditional decision makers,
effectuators are likely to be less effec-
Proposifion 3; Successful firms, in their tive in running large organizations
early stages, are more likely to have with well-oiled procedures.
focused on forming alliances and
-.;; partnerships than on other types of • Conjecture 4: Effectuators are more
•'••' competitive strategies, such as sophis- likely to fail more often but are also
ticated market research and competi- more likely to manage the failures
tive analyses, long-term planning and more effectively and to create larger,
forecasting, and formal management more successful firms in the long run
practices in recruitment and training " (although they may need fo hire pro-
of employees. fessional chief operating officers to
actually run them!).

Within the Firm—At the Level of

Founders/Decision Makers CONTINGENT ASPIRATIONS AND THE
In addition to carefully separating their ana- ENTREPRENEURIAL IMAGINATION
tomical structures, I have clearly delineated four Economics and management have long rested
principles on which effectuation processes can on primitives, such as "product" and "market,"
be contrasted with causation models in individ- and on institutions, such as "firm," "industry,"
ual decision making. Yet a lot remains to be and "economy." But these concepts and institu-
done in terms of identifying and categorizing tions are artifacts that begin as gleams in the
particular decisions in particular functional eyes of individuals. Values get created in every
areas inside firms. Methods such as grounded sphere of human endeavor, from the arts and
theory building using case studies and qualita- sciences to sports and philosophy. These fruits
tive analyses of detailed decision-making ex- of the human imagination may be used in a
periments might be required to accomplish this variety of ways to fulfill human aspirations. The
empirical objective. As a first step in that direc- possible uses and the breadth of their dissemi-
tion, I offer the following conjectures. nation are limited only by the economic ingenu-
ity of the entrepreneurs who create the artifacts
Conjecture 1: In marketing decisions, that transform the fruits of human imagination
in contrast to traditional decision into goods and services for truck and trade.
• makers, effectuators are less likely to Before there are products, there is human
' use traditional types of market re- imagination, and before there is a market, there
search, such as carefully designed are human aspirations. Successful entrepre-
•• surveys and test marketing; instead, neurs have long created firms, industries, and
they are likely to dive straight into even economies by matching up the offspring of
seat-of-the-pants marketing/selling human imagination with human aspirations.
activities and alliances. They have realized that this matching does not
Conjecture 2: In financial decisions, in occur spontaneously or "inevitably." Rather, the
contrast to traditional decision mak- creation of economic artifacts demands imagi-
ers, effectuators are less likely to use nation, inspiration, and protracted endeavor—
long-term planning or net present both cooperative and competitive.
value (NPV) analyses: instead, they In fact, in mainstream economics, researchers
are likely to be focused on the short have thus far explained entrepreneurship not as
term and, at most, to use informal ver- the creation of artifacts by imaginative actors
sions of real options. fashioning purpose and meaning out of contin-
 Academy of Management Review April

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tic processes, or environmental selection. The Dickson, P. R., & Giglierano, J. J. 1986. Missing the boat and
essential agent of economics is a rational actor, sinking the boat: A conceptual model of entrepreneurial
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Saras D. Sarasvathy is an assistant professor of entrepreneurship at the University of

Washington. She received her Ph.D. from Camegie Mellon University. Her research
involves developing the theory of effectuation through in-depth studies of entrepre-
neurial decision making and exploring its connections with value creation, new
venture performance, and the philosophy of pragmatism.