Effectuation and Over-Trust

These findings largely support the work of Goel and Karri (2006, p477) who argue that ‘entrepreneurs need to trust each other and serve as trustees in order to form and grow their organisations’ and thus imply that without the element of trust, it would be impossible to acquire the network of social capital required to develop a business venture.

60 This study develops from the principle of ‘effectuation’ as applied by Sarasvathy (2001) to entrepreneurial behaviour, which suggests that trust may play a part in bridging information gaps and aiding decision making where there is limited knowledge and a requirement for a business owner to take action in times of uncertainty. Effectuation would involve a period of adjustment through assessing the outcomes of various decisions until a preferable outcome is achieved. In these terms, the process of finding an appropriate level of trust in others, given the uncertainties of human behaviour, is difficult to achieve and an effectual process allows learning to inform these adjustments over time.

Goel and Karri (2006) consider the owner-manager’s attribution of risk and find that a reliance on effectual logic can lead to ‘over-trust’ by entrepreneurs, which can then be damaging for the business; although this is not a certain outcome as their proposition is ‘value neutral’. However it is likely that such over-trust would occur where insufficient learning has taken place about the motivations of other business owners and where those entrepreneurs, acting on limited knowledge, avoid considering the future consequences of trust placed in others.

This over-trust outcome is a common risk associated with new venture creation and is deemed an acceptable one by non-risk-averse entrepreneurs. Trusting in others is therefore seen as an inevitable necessity in the development of networks important for the growth of the firm.

Goel and Karri (2006, p488) develop a series of propositions which they term ‘a model of why entrepreneurs may over-trust’. This model is replicated in table 2.7. As can be seen from the model, Goel and Karri (2006) propose that the effectuation process, interacting with entrepreneurial characteristics, behaviours, context and experiences helps explain why the entrepreneur may over trust. In a direct response to the authors, Sarasvathy and Dew (2008) critique this argument and posit that the model appears to predict levels of trust. Given that effectuation occurs where there are high degrees of uncertainty, they argue that it is not possible for an effectuation process to predict, nor assume, a degree of trust or over-trust.

Sarasvathy and Dew (2008, p729) state explicitly that ‘effectual logic is non-predictive’. They further argue that effectual logic does not suggest that entrepreneurs, in the circumstances described by the model, are predisposed to ‘over-trust’ but that the networks of the entrepreneur, which may develop sporadically and opportunistically, inform the choices that

61 Table 2.7 Why Entrepreneurs May Over-Trust

Entrepreneurial characteristics

Proposition 1- Entrepreneurs with a high degree of non- conformity are more likely to over- trust

Proposition 2- Entrepreneurs with a high self-efficacy are more likely to over-trust

Proposition 3- Entrepreneurs with a high achievement orientation are more likely to over- trust

Proposition 4- Entrepreneurs with a preference for innovation are more likely to over-trust Culture- contributor to over-trust

Proposition 5- Entrepreneurs in collectivist cultures are more likely to over trust than do entrepreneurs in individualistic cultures

Proposition 6- Entrepreneurs with low uncertainty avoidant values are less likely to over trust than do entrepreneurs who are high uncertainty avoidant

Past experience- contributor to over-trust

Proposition 7- Serial entrepreneurs with positive experiences from trusting others are more likely to be prone to over-trust

Proposition 8- Entrepreneurs with prior negative experiences in trust- based relationships combined with diversified trust relationships are prone to over-trust

Proposition 9- Entrepreneurs may commit more cross domain errors leading to over-trust Source: Goel and Karri (2006), p488

they make. Certain circumstances may lead to the strategic decision to accept that there may be a risk in a trust based relationship and a certain degree of risk is acceptable given the potential outcome.

Fundamentally, the decision to trust in an associate is based on an educated assessment of the likely outcomes and some acceptance of the fact that there may be an initial benefit to the associate but a loss to the entrepreneur but that the longer term outcome may be beneficial to the latter. Sarasvathy and Dew (2008) propose that knowledge about when to trust depends on experience and, as a corollary, experienced business owners are able to use effectual logic more effectively than the less experienced.

62 They also suggest that the term ‘entrepreneur’ is a misnomer as any human can use effectual logic with enough experience of scenarios and growing expertise - which itself describes a learning process available to all. Thus, it can be said that the changes that people experience with time and in different contexts means that it is difficult to categorise them as simply ‘entrepreneurial’. Sarasvathy and Dew (2008) argue therefore, that Goel and Karri (2006) have overemphasised a trait based approach to understanding the behaviour of owner-managers.

In terms of trust, those business owners adept at effectuation may appear to ‘over-trust’ when examined empirically but this may in fact be based on a rational judgment to accept a loss in the expectation that a beneficial outcome is likely and is thus not ‘over’ trusting as such but rather ‘intelligent altruism’ (Sarasvathy and Dew, 2008, p 734). They add that such intelligent altruism will encourage similar behaviour in those exposed to it and is thus mutually beneficial. This behaviour has been described elsewhere as the characteristic of the ‘mature’ entrepreneur, one who has ‘the audacity to know’ and ‘is someone who is acutely aware of the situation in which they find themselves’ but can ‘adopt sufficient critical distance to see how it might be otherwise’ (Thorpe et al, 2006, p239).

Responding to the Sarasvathy and Dew (2008) critique, Goel and Karri (2008, p740) argue that they were not advocating a trait based approach but that such an approach can make a useful contribution to the understanding of behaviour providing that it was not considered ‘to the exclusion of everything else’. They further argue that the concept of ‘over-trust’ is appropriate and, rather than enabling the entrepreneur to predict an outcome, instead enables them to ‘create resources that they could not create under a causal scenario’ and thus enables them to ‘generate options subject to… affordable loss’ (p741). Therefore, the term ‘over-trust’ is appropriate to effectuation.

The authors do not dispute the likelihood of entrepreneurs behaving as intelligent altruists but they argue that such an approach to transactions is so common among entrepreneurs as to have become a cultural norm. Such behaviours leave selfish individuals isolated and unable to access entrepreneurial networks. They argue that this is a more convincing account than the argument proposed by Sarasvathy and Dew (2008) that intelligent altruism is a rational behaviour because it encourages such behaviours in an entrepreneur’s stakeholders.

Goel and Karri (2008) also defend their model which seeks to explain why entrepreneurs may over trust (table 2.4, above). Rather than espouse a trait based approach, they state that their

63 model identifies key areas of expertise that are necessary for development if the entrepreneur is likely to be successful in their venture. Thus the model considers those skills that may develop as the business owner becomes more adept at their role. This implies learning, which is required for the problem solving capacity of effectual logic, and the authors subsequently associate this with propensity to trust, or over-trust. They argue that this does not preclude and indeed may encourage changes in beliefs and attitudes, which accounts for a dynamism not present in a singular application of trait theory.

In spite of the complexities of this debate, there appears to be common ground between Goel and Karri (2008) and Sarasvathy and Dew (2008). Both appear to agree that business owners exhibit a tendency to seek a trade-off between affordable risk and allocation of trust, although the latter authors dispute the term ‘over-trust’ and prefer ‘intelligent altruism’. Nonetheless, it can be seen that the consideration of the allocation of trust is important to the business owner and a series of experience- dependent adjustments allow for a modification in their trusting behaviour.

Goel and Karri (2008, p746) conclude that those entrepreneurs that choose to trust or over- trust are willing to ‘trivialise the risk inherent in (over) trusting to achieve non trivial benefits’. Thus, they are able to rationalise their behaviour by accepting a degree of affordable short term loss in return for long term gain. This does not appear to be predictive of specific outcomes and therefore does appear to respond well to the Sarasvathy and Dew (2008) critique. The debate helps frame an understanding of trusting behaviour by the owner-manager and may be useful when exploring the attitudes of employers to their employees. Most usefully, the discussion provides a dynamic understanding of the allocation of trust that may be applied to a company experiencing a period of employment growth.