In our increasingly dynamic and fluid world (particularly with technology and social change), successful entrepreneurs practise specific ways of thinking and approach risk and uncertainty with a bias toward action to gain and maintain control. This topic will look at uncertainty in the new normal.
Welcome to Topic 2: Prediction, Risk and Uncertainty (The New Normal). In this topic, you will learn about:
- Myths about entrepreneurs
- Prediction, risk and uncertainty
- Bankers take more risks than entrepreneurs
- Uncertainty is the new normal.
These relate to the Subject Learning Outcomes:
- Identify the forces of change in our increasingly globalised and complex world which put new demands on entrepreneurs.
- Identify the different types of uncertainty as put forward by economist Frank Knight and the implications for entrepreneurs.
Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.
Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.
Read the following sections of the text – Read, S, Sarasvathy, S, Dew, N & Wiltbank, R 2016, Effectual Entrepreneurship, 2nd edn., Routledge.
- Chapter 1: Roadmaps, Myths and the Bahamas (pp. 2-10)
- Chapter 2: Good ideas are everywhere (pp. 11-19)
- Chapter 3: Most ventures require little startup capital (pp. 20-28)
- Chapter 6: Prediction, risk and uncertainty (pp. 57-71).
Read and watch the following content.
Introduction to prediction, risk and uncertainty
We like to predict, take actions to minimise risk, yet we are always faced with uncertainty. So, what do expert entrepreneurs do to not just deal with uncertainty, but capitalise on it?
Myths and uncertainty
In our increasingly dynamic and fluid world (particularly with technology and social change), successful entrepreneurs practise specific ways of thinking and approach risk and uncertainty with a bias toward action to gain and maintain control.
Expert entrepreneurs (as defined by Saras Sarasvathy) do their best to influence a given situation, as they are willing to take meaningful action in order to see their ideas evolve. As they practice this trait, their self-efficacy increases; this is the belief in themselves. In this way, the expert entrepreneur is able to understand the way in which they are able to control (or not able to control) any scenario as it happens and feels confident under unknown circumstances. We will look at common myths about entrepreneurs, including that they are risk-takers willing to bet everything on their business idea... In fact, they take fewer risks than bankers!
Learning Task 1: Questions before we get started
It is good to get you thinking about these things as we launch into the material of this topic.
Based on your own experience and observations, think through and add your responses to the following questions to your reflective journal. You can access the reflective journal by clicking on ‘Journal’ in the navigation bar for this subject.
- Do predictions help entrepreneurs deal with risk?
- What is the connection between risk and uncertainty?
- Do entrepreneurs take more risks than established businesspeople?
- What do you think is the best approach to dealing with uncertainty?
Myths about entrepreneurs
Hold up a mirror and ask yourself what you are capable of doing, and what you care about. Then take the initiative - don't wait for someone else to ask you to act.Sylvia Earle (Rafferty, n.d.)
A seeming 'fairy tale' success story
Legendary National Geographic Explorer-In-Residence, Sylvia Earle, has spent more than 60 years exploring, protecting and researching the world’s oceans. With more than a hundred expeditions under her belt and over 7,000 hours logged underwater, she has been a pioneer of deep ocean exploration for decades.
Sylvia's love of the sea began at an early age, however, her time in the water has not always been smooth sailing. During her younger years, Sylvia was enjoying some time at the beach, where, on this occasion, she was knocked over by a wave. When her mother saw that little Sylvia was smiling, she let her jump right back in the water. Sylvia, now in her 80s, has enjoyed a long and successful career in and around the water.
Enjoy the following engaging video, which outlines the underwater experiences of Sylvia Earle.
Sylvia's story is inspirational, but she too had difficulties and setbacks. As the author of the textbook Effectual Entrepreneurship writes, "Popular mythology around entrepreneurship has created a number of barriers that hold people back from becoming entrepreneurs. Most of them are not true" (Read et al. 2016, p. 9).
I never dreamed about success, I worked for itEstee Lauder
Some of the most successful entrepreneurs began with an idea, worked hard and stuck with it and are now extremely successful. Success takes time, grit and perseverance, along with avoiding mythical distractions along the way.
We all know success does not come overnight, but we often tell a story about the journey to success. Sarasvathy, Dew & Wiltbank (2016, p.3) state the following:
“Let us begin by sketching out the roadmap generally ascribed to the mythical entrepreneur”:
- “Entrepreneur” searches for a “new, high-potential” opportunity.
- In a lightbulb moment, there are discoveries nobody has thought of before.
- Writes a business plan.
- Raises lots of investment money—especially from venture capitalists (VCs).
- Hires a great team.
- Builds a product.
- Orchestrates a big launch.
- Achieves steady, or better yet, hockey-stick growth.
- Sells the venture or has an initial public offering.
- … and, finally, retires to the Bahamas."
This fairy tale journey is just that, as these data points indicate:
- Only 28 per cent of a sample of including 500 firms had completed a formal business plan (Bhidé 2000)
- More than 73 per cent of IPOs are not funded by VCs (Gompers and Lerner 2001: 145)
- The average amount of money it takes to create a business in the United States is less than $30,000 (Kaufmann 2009).
So, what is wrong with a fairy tale? Nothing, if it only entertains. But sometimes fairy tales lead people to believe that their reality is so very different from the fairy tale needed, that they will only see barriers, such as are discussed in (Read et al. 2016, p 9):
- "I do not have a good idea." – As much as the story of 'divine inspiration' (the famous lightbulb moment) is lovely, it is not real. In hindsight Amazon, Apple and Facebook look brilliant, but in fact, they only got there through a long process of trial-and-error. More reason to get started trying things out.
- "I do not have the money." – "A little quick math indicates that only 0.2 per cent of new firms received venture funding in 2014 (these numbers are very similar year after year). The rest of us, 99.8 per cent of United States entrepreneurs, somehow manage to get a new firm going without big investment money from a venture capitalist." (Read et al. 2016, p. 4).
- "I am afraid to fail." – Richard Branson's path to success is littered with many, many failures. He knows this, saying “Business opportunities are like buses, there's always another one coming” (Branson 2012). A failed opportunity is not a failed career, but rather an opportunity to learn for the next attempt.
- "I do not know where to start." – This is why Read, Sarasvathy, Dew and Wiltbank wrote the textbook Effectual Entrepreneurship, so buckle up for the ride the authors would like you to enjoy and learn from.
The entrepreneurial method
Watch the following TEDx talk, Myths Of Entrepreneurship, which identifies some common misconceptions about entrepreneurship and ways to redefine the term.
The entrepreneurial method, which is called 'effectuation', is a cornerstone concept of this entrepreneurship. The theory of effectuation is based on research by Professor Saras Sarasvathy, who found that successful entrepreneurs are not goal-driven, but rather means-driven. In other words, they focus on already available means and co-create with others to take the next step in the right direction, iterating their approach based on feedback from their co-creators and the market.
Prediction, risk and uncertainty
An entrepreneur assumes the risk and is dedicated and committed to the success of whatever he or she undertakesVictor Kiam
Let us take a look at uncertainty, which became more obvious for everyone around the world when the COVID-19 pandemic broke out in the year 2019. Believe it or not, entrepreneurs see uncertainty as a source of opportunities...
We like to predict, take actions to minimise risk, yet we are always faced with uncertainty. So, what do expert entrepreneurs do, to not just deal with uncertainty, but capitalise on it?
The work of Professor Saras Sarasvathy has found that in contrast to the myth, expert entrepreneurs do not seek to predict nor take uncalculated risks. They do their utmost to take control of Knightian uncertainty by playing a different game and actively avoiding prediction (Sarasvathy 2001).
Others such as Martin Reeves take a similar approach, suggesting using adaptive strategy (adeptly responding to change), visionary strategy (being the source of change) and collaborative strategy (co-creation to respond to change) (Reeves, Love & Tillmanns 2012).
Three urns: What game entrepreneurs usually choose
So, what is the difference between prediction, risk and uncertainty? Here is the great thinker on the entrepreneurial mindset, Dr. Saras Sarasvathy. Dr. Saras Sarasvathy will address the myth about entrepreneurs being big risk-takers and how it relates to the concept of Knightian uncertainty in the following video.
Entrepreneurs avoid prediction
How do entrepreneurs function? Understanding Frank Knight's three (3) types of uncertainty will help you understand the mind of an entrepreneur. Not only do entrepreneurs usually choose to play a different game by choosing the third urn of uncertainty and changing the rules, they actively avoid prediction, as the following clip from a TED Talk Saras Sarasvathy gave a number of years ago. Watch the video TEDxMidAtlantic from 7:08-9.16.
Overview of the differences between prediction, risk and uncertainty
The most valuable thing you can make is a mistake — you can’t learn anything from being perfectAdam Osborne, innovator of the first portable computer
Stuart Read, Saras Sarasvathy, Nick Dew and Robert Wiltbank co-authored the excellent text called Effectual Entrepreneurship. A free audiobook of Effectual Entrepreneurship, Edition 1 is available.
The text includes the following detailed overview of the differences between prediction, risk, and uncertainty.
| The differences between prediction, risk and uncertainty | |||
|---|---|---|---|
|
Prediction An environment with enough stability that future events can be determined based on past recurring patterns. |
Risk An environment characterised by general trends and local variance. The decision-maker seeks to model these data to tolerances that meaningfully inform decision-making. |
Uncertainty A situation in which no historical data exists to help the decision-maker. Uncertainty cannot be modelled or predicted. It is a future that is not only unknown but also unknowable. |
|
| What matters | Data, information that was collected in the past | Variance and possibility | Expertise, influence and control |
| How You Move Ahead | Refine prior efforts - strive for a perfect business plan | Robustness, preparedness - scenarios | Co-creation and affordable loss |
| Dealing with Surprises | Quality checking (must have been my mistake) | Weather the storm, work to stay on track/on plan | Embrace and rethink: it provides new opportunities |
| Measuring Success | Actual versus plan, execution | Actual versus plan, closeness to the vision, within the margin | Valued novelty, getting to somewhere that has potential |
The table could be summarised as follows:
"Prediction is a particularly challenging activity when creating new markets and new ventures. Handling uncertainty is at the very core of why entrepreneurs are able to create wealth, but betting on predictions isn't often how they do it. Instead, they look for ways to control the future, so they do not have to predict it.” (Read et al. 2016, p.71)
Strategies with respect to prediction and control
Business strategists often rely on the following two (2) tools to assist in decision-making:
- Prediction
- Control
These form the axes of the following graphic from Read et al (2016, pp.83-85).
It is important to understand in what situations each of the tools (prediction and control) are best used. Click on each of the four quadrants listed to learn more.
Businesses in a stable environment (with plenty of reliable information from the past) can safely use prediction in creating a strategy. This might be, for instance, a food product like cheese. If all the data for the last two hundred years (through wars, pandemics and boom time) shows regular predictable consumption, a cheese manufacturer can probably make relatively accurate predictions for the future, and hence viable strategies.
Businesses in a less stable environment, where predictions are not reliable, need to be very good at adapting. An example of this would be another dairy product, ice cream, which is dependent not only on seasons and weather but also on the hospitality industry. So that ice cream manufacturers would be well-served to not invest as much time in predicting what will happen, but in preparing for various scenarios, which might mean having various packaging, warehousing and distribution options to respond to market changes. Switching from large restaurant packages of ice cream distributed by wholesalers to smaller family-sized packages delivered to the home might be a flexible way of dealing with risk in a low predictability and low control situation.
For businesses that have the market power to heavily influence the situation and produce predictable results, taking a visionary approach to creating the future is a viable strategy. Examples of this are monopolies such as utilities or even social media platforms such as Facebook.
Successful entrepreneurs usually choose the uncertainty quadrant. Their general distrust of predictions and willingness to co-create with others (particularly customers and suppliers) to shape their own future demonstrates not market power, but power in flexibility. This often happens with limited means and plenty of creativity. An example of this is the new drinks category created by Red Bull, in direct competition with the major brands of Coca-Cola and Pepsi.
Uncertainty and strategy
Building on this, but using different terminology, let us hear from Martin Reeves of Boston Consulting Group, who talks about the implications for uncertainty on strategy.
More recently, Martin Reeves featured in the following video clip, which responds directly to recent developments in terms of uncertainty. He suggests using adaptive strategy (adeptly responding to change), visionary strategy (being the source of change) and collaborative strategy (co-creation to respond to change).
Bankers take more risks than entrepreneurs
If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky businessGary Cohn
Entrepreneurs are widely considered to be bigger risk-takers than bankers. In their research, Sarasvathy and co-authors found that the two take markedly different approaches. Bankers try to minimise risk while maintaining return and conversely, entrepreneurs accept a certain level of risk, then seek to maximise return (Read et al. 2016, pp.66-67).
Risk-taking: Comparing entrepreneurs and bankers
Entrepreneurs are widely considered as bigger risk-takers than bankers. The authors of "Effectual Entrepreneurship" Second Edition (pp. 66-67) put this to the test – they literally tested entrepreneurs and bankers with a problem-solving exercise.
Interestingly, bankers and entrepreneurs saw financial problems differently, namely, bankers sought to manage (minimise) risks based on a pre-set profit target.
Entrepreneurs did just the opposite. Based on an acceptable level of risk, they sought to manage (maximise) their profits. In other words, they very consciously did not take any more risks than necessary, understanding that the pre-set risk level could influence their profits as is shown in the following figure:
Entrepreneurs: For a given level of risk, entrepreneurs feel they can expand the problem space and increase returns.
Bankers: For a given level of return, bankers feel they can reduce the problem space and decrease risk.
Example from the market
The entrepreneurial Freitag brothers in Zurich took a very low-risk approach to solve a problem. They could have never predicted that the first simple bicycle bags they created out of used truck tarps in their kitchen would become not just a fashion statement but in fact a roaring success. Today, the Freitag bags are sold around the world. The following video outlines their story.
Uncertainty is the new normal
Uncertainty has long been a driver of entrepreneurship
The three (3) urns (prediction, risk and uncertainty) described by Saras Sarasvathy (2005) have always been a part of human life. But our world has moved increasingly from prediction to risk, and particularly in the last 10 to 20 years, to more uncertainty. But uncertainty has always been part of life. In fact, uncertainty drives innovation and entrepreneurship. The following video offers a short explanation of the concept of 'uncertainty'.
When black swans dance with chance
Taking this idea further, let us listen to four authors and academics (Nassim Taleb, Spyros Makridakis, Robin Hogarth, and Anil Gaba talking about the idea that control is actually just an illusion in today's world and what that means for us.
VUCA - a term that sounds scary...
If you have not heard the acronym VUCA (volatile, uncertain, complex and ambiguous), it is a term to know...and respect! Marc Timmerman, Partner at Axiom Consulting Partners, gives us an introduction to the concept of VUCA in the following video.
Hopefully, all this talk about volatility, uncertainty, complexity and ambiguity does not make you nervous. As we proceed in the course and you learn the tools of the entrepreneurial trade, you will begin to see uncertainty as an opportunity, not least because most people run the other way!
Learning Task 2: How do you feel about uncertainty?
To finish this section, share your experience in dealing with uncertainty in Topic 2: Forum Activity 1. You can also navigate to the forum by clicking on 'ENT101 Subject Forum' in the navigation bar for this subject.
Key Takeouts:
Congratulations, we made it to the end of the topic! Some key takeouts from Topic 2:
- Common myths about entrepreneurs (that they plan it all out, have a lot of money to start and have a genius idea) are incorrect. Successful entrepreneurs start with little resources, a simple idea and feel their way forward, learning as they go.
- Prediction, risk and uncertainty have always been a part of human life. But it would appear that in many ways our world has moved increasingly from prediction to risk, particularly in the last 10-20 years, to more uncertainty.
- Entrepreneurs approach risk differently from bankers. They tend to accept a certain level of risk and seek to expand returns. Bankers, on the other hand, seek a specific level of return and seek to minimise risks.
- Expert entrepreneurs have built up self-efficacy (confidence) to deal with the unexpected and have a bias toward action.
- Expert entrepreneurs (as defined by Saras Sarasvathy) do not try to predict. They seek to shape the future by taking action.
Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your seminar.
The following learning tasks will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
In-seminar learning tasks
The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.
Your lecturer will review the most important points from the pre-seminar learning tasks and discuss them with you.
This interactive game will give you a chance to put the concepts of prediction, risk and uncertainty to use. Who will win the game and will be due to applied learning or luck?
Watch the following video, eBay: A Company that Thrives on Uncertainty. If you listen to the media, particularly lately, you might believe that all companies want certainty and predictability. The online marketplace eBay took a very different approach, using simple rules to make the most out of uncertainty and create a global giant.
Welcome to your post-seminar learning task for this week. Please ensure you complete these after attending your scheduled seminar with your lecturer. Your lecturer will advise you if any of these are to be completed during your consultation session. Click on the following heading to read more about the requirements for your post-seminar learning task.
This task will be completed during the consultation session. Together with fellow students, this small group activity will show how you do not need a good idea and money to get started. You will prepare to take the plunge (toes first) to build up courage and not be afraid of failing. This will be followed by a debrief and discussion to collectively share the learning.
Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your consultation session.
Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
These are optional readings to deepen your understanding of the topic material:
- Anonymous 1997, 'Risk management at the heart of good corporate governance,' Management Accounting (British), vol. 75, no. (1), p. :24.
- Frederick, H, O’Connor, A & Kuratko, Donald F 2016, ‘Entrepreneurship and sustainable development' Entrepreneurship: theory, process, practice, 4th edn., Cengage Learning, South Melbourne, Vic., pp. 62-114
- Liesch, Peter, Welch, Lawrence & Buckley, Peter 2011, ‘Risk and Uncertainty in Internationalisation and International Entrepreneurship Studies’, Management International Review, vol. 51, no. (6):, pp. 851-873.
- Martin, R 2010, 'The execution trap. Drawing a line between strategy and execution almost guarantees failure', Harvard Business Review, vol. 88, (no. 7-8),: pp. 64-71.
- Reeves, M, Love, C & Tillmanns, P 2012, 'Your strategy needs a strategy. (The (Surprisingly) Simple Rules of Strategy)', Harvard Business Review, vol. 90, no. (9), p. :76.
References
- Axiom Consulting Partners 2015, Managing in a World of Volatility, Uncertainty, Complexity and Ambiguity, streaming video, https://youtu.be/wQpRfUCI_4c
- Barcelona School of Economics n.d., Robin Hogarth, https://bse.eu/people/hogarth-robin
- BCG 2021, Martin Reeves, https://www.bcg.com/about/people/experts/martin-reeves
- Boston Consulting Group 2017, BCG’s Martin Reeves on Creating Advantage in Times of Uncertainty, streaming video, https://youtu.be/7X-vCI1MgFc
- Branson, R 2012, Twitter, Twitter, https://twitter.com/richardbranson/status/264067714266587136
- DardenMBA 2014, BizBasics: "Entrepreneurship: (Not) Risky Business" with Saras Sarasvathy, streaming video, https://youtu.be/3IJlHfw43mQ
- Freitag n.d., https://www.freitag.ch/en
- Harvard University 2020, Uncertainty Explained, streaming video, https://youtu.be/Bkj1tLwnlpk
- HSGUniStGallen 2012, The 10 Myths of Entrepreneurship, streaming video https://youtu.be/G8gRkJ9cnzo
- INSEAD 2009, 'Black Swan' author Nassim Taleb meets 'Dance with Chance' co-authors, streaming video, https://youtu.be/EiyLsDLfI5I
- INSEAD The Business School for the World n.d., Anil Gaba Professor of Decision Sciences, https://www.insead.edu/faculty-research/faculty/anil-gaba
- INSEAD The Business School for the World n.d., Spyros Makridakis Emeritus Professor of Decision Sciences, https://www.insead.edu/faculty-research/faculty/spyros-makridakis
- Nassim Nicholas Taleb's Home Page, n.d., https://www.fooledbyrandomness.com/
- National Geographic 2016, Exploring the Ocean for Sixty Years | Best Job Ever, streaming video, https://youtu.be/KM-bEVFw8fQ
- Nematrian n.d., ERM Glossary: Knightian uncertainty, http://www.nematrian.com/ERMGlossaryKnightianUncertainty
- Rafferty, JP n.d., Sylvia Earle, Britannica, https://www.britannica.com/biography/Sylvia-Earle
- Read, S, Sarasvathy, S, Dew, N & Wiltbank, R 2016, Effectual Entrepreneurship, 2nd edn., Routledge.
- Reeves, M, Love, C & Tillmanns, P 2012, 'Your strategy needs a strategy. (The (Surprisingly) Simple Rules of Strategy)', Harvard Business Review, 90(9):76.
- Sarasvathy, S 2001, 'Causation and Effectuation: Toward a Theoretical Shift From Economic Inevitability to Entrepreneurial Contingency', Academy of Management Review,26 (2):243-263.
- Sarasvathy, S 2005, 'What makes entrepreneurs entrepreneurial?', University of Virginia Darden School Foundation, Charlottesville, Virginia.
- Society for Effectual Action n.d, Effectual Entrepreneurship (audiobook), https://www.effectuation.org/?p=1319
- TED Institute, 2014, Martin Reeves: Your strategy needs a strategy, streaming video https://youtu.be/YE_ETgaFVo8
- TEDx Talks 2010, TEDxMidAtlantic 2010 - Saras Sarasvathy- 11/5/10, streaming video, https://youtu.be/t5HZW4NqZ-E
- University of Virginia n.d., Saras D. Sarasvathy, https://www.darden.virginia.edu/faculty-research/directory/saras-d-sarasvathy
- VernissageTV, 2012, Freitag - Out of the Bag. Retrospective at Museum of Design Zurich, streaming video, https://youtu.be/4dGrjnSFfRw
