EP101x – Do Your Venture | Prof.

Suresh Bhagavatula
Week 5

Hi everyone. In this week, we're going to look at effectuation.

So, what does this mean? Before we start on a venture, the big question that we have is, “How
do we know before we start whether we would be successful or not?” Even before that, how
do we know whether we should take that entrepreneurial plunge or not. While these two
questions have some correlation with each other, it is very difficult for us to tell how things
are going to pan out. So, where can we get answers from?

Here is the thought experiment that you can engage in to get you to understand uncertainty.
Imagine you have a transparent jar, and the jar is filled with various colored chocolates, and
the game is, you have to dip your hand into the jar, state the color, and then pick up a
chocolate. If the color of the chocolate matches the color that you’ve stated, then you keep
the chocolate, else you put it back, and the person next to you has a go at it. Since it is a glass
jar, we can see through, and we will be able to state a color and pick that chocolate of that
color. Very simple you can say blue and reach out to a blue chocolate or say red and reach
out to a red chocolate, this is easy.

Now we move to the next jar, but this jar is not transparent but opaque. So, as it is with the
previous jar, you need to tell the color, put your hand in, and if the color matches what you
have stated, you keep the chocolate, else put it back. So, what do you do in this situation? So,
what usually happens is, you randomly pick a color, say blue. Because you're primed from the
previous game, you could start with blue. You put your hand in and pick out a chocolate, you
realize that it's black. So, you need to put it back in. So, the person next to you now knows
that there is black chocolate. So, he doesn't know if there is blue, he doesn't know if there is
red, but he certainly knows that there is black. So, the best chance that he has is to say black,
so he puts his hand in and comes out with a red chocolate. So, the person after that knows
that there are two kind of chocolates the red chocolates or the black chocolates. So, he says
red, maybe he gets a red, the person next to him says red again and he gets a black. So, what
happens is over time as this game is played you start to realize that you have a fair
understanding of the probability of the distribution of chocolates inside the jar.

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 EP101x – Do Your Venture | Prof. Suresh Bhagavatula
Week 5

So, at some point of during the experiment when you are not getting any new colors, perhaps
in this game let us say there are four chocolates, so the ‘Nth’ person or let’s say the 10th person
or the 20th person, once they know there are no new colors coming in, he can pick a color and
is likely to have high probability, right. For instance, if there are four colors, the probability of
the 25th person getting it right is one-fourth, because he or she knows that there are no more
new colors, right.

So now go to a third jar and you play this game again. So, you put your hand in, state a color,
and you pull out, it's not a chocolate; maybe you get a knife, so you put it back. And the next
person says blue but gets a spoon. So, the third person may quickly realize that there are no
chocolates but maybe there are kitchen objects. So, he may say “a rolling pin”, but he gets a
pencil, the fourth person gets an eraser; the fifth person gets a keychain. So, what if, in this
jar, no number of attempts will give you an idea of what is going to come next, that you have
no clue of what is in there or what is going to come next.

So, if you look at these three jars, the first jar would be what we call as a ‘perfect information’
scenario. The second jar is what is known as a ‘risk’ that you know the outcomes and you're
taking a risk. Like for instance, you have one-fourth chance of you getting the right chocolate
in the second. In the third, is what is known as ‘uncertainty’. You have no clue what was going
to come out, you have no idea based on the history of interactions, or the history of what is
coming out, you would be able to predict what's going to come now. This is known
as Knightian uncertainty and it is unknowable. So, most entrepreneurship is in this
unknowable uncertainty and this is where Sara’s idea of effectuation comes in useful.

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