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Small Business Economics

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28-02-2019

Toward a theory of affordable loss

Author: Richard A. Martina

Published in: Small Business Economics | Issue 3/2020

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Abstract

Although dozens of empirical studies have been published on effectuation as a whole, much work remains to be done on elaborating each principle in more depth. Based on an exploratory study of seven ventures from the Caribbean island of Curacao, this paper develops an elaborated process model of the affordable loss heuristic in effectuation. The model breaks affordable loss into two components—ability and willingness, and connects these to the concept of loss aversion from prospect theory. Furthermore, these components are encapsulated in a process involving identity, affect, and resourcefulness leading to the entry-stage entrepreneurial investment decision.

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Effectuation is considered to be in the domain of expert decision-making (Sarasvathy 2008), which views decision-making as nonsequential processes (e.g., Sinclair and Ashkanasy 2005). However, I put forward a sequential process to facilitate the discussion of the conceptual model.

Together with the bird-in-hand, crazy-quilt, lemonade, and pilot-in-the-plane principles.

Effectuation is a multidimensional construct (Werhahn et al. 2015), and the AL is dependent on the other principles of effectuation with the exception of the crazy-quilt and cocreation partnership principles (Chandler et al. 2011; Fisher 2012).

I view the components as the stages of the process model of the AL.

Resourcefulness is defined as “attempting to deal with problems or opportunities despite ostensibly inadequate resources” (Powell and Baker 2014) and is considered to be a process of cognitive self-regulation (Bradley et al. 2011).

Gendron and Barrett (2009) argue that affect is not equal to emotion. These authors argue that affect is more fundamental to the psyche of the individual and that “an emotion emerges when a person’s internal state is understood in some way as related to or caused by the situation.”

For three cases—namely, GameCo, PostCo, and SecurityCo—I interviewed only the founder, either because the founders indicated that there were no other individuals who contributed to the development of the product and exploitation of the opportunity, or because the individuals were not available for interview.

Besides applying the AL, entrepreneurs can also make efforts to decrease or subdue the uncertainty (Lipshitz and Strauss 1997).

Part-time entrepreneurs are those who work regular wage jobs some of the time and the rest of the time invest in their own entrepreneurial endeavors.

Some studies conceptualize the reference point as aspiration levels (Morgan and Sisak 2016): the aspired level of the performance of entrepreneurs relative to their current level of resources (Wennberg et al. 2016, p. 410). I distance myself from this view since it requires entrepreneurs to have an expected level of return. In the process model of the AL, I seek to advance the view that entrepreneurs rely on the downside of their investments and not the expected levels of return.

There might be cases wherein, though the entrepreneur has the willingness to invest, it is not possible due to regulatory policies. For example, foreigners are not allowed to own more than between 25% and 50% of newspaper portfolios in Australia.

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Title: Toward a theory of affordable loss
Author: Richard A. Martina
Publication date: 28-02-2019
Publisher: Springer US
Published in: Small Business Economics / Issue 3/2020
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-019-00151-y

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