Working Paper: NBER ID: w27379
Authors: Ajay K. Agrawal; Joshua S. Gans; Scott Stern
Abstract: Entrepreneurs must choose between alternative strategies for bringing their idea to market. They face uncertainty regarding both the quality of their idea as well as the efficacy of each strategy. While entrepreneurs can reduce this uncertainty by conducting tests, any single test conflates the signal of the efficacy of the particular strategy and the quality of the idea. Resolving this conflation requires exploring multiple strategies. Consequently, entrepreneurial choice is enhanced by finding ways to lower the cost of testing multiple strategies, receiving guidance as to the types of tests likely to reduce signal conflation, and optimally sequencing tests based on prior beliefs. This creates a role for judgment that may be provided by third parties such as mentors and investors. We hypothesize that institutions that lower the cost of transmitting and aggregating judgment spur entrepreneurial success.
Keywords: Entrepreneurship; Experimentation; Decision-making; Mentorship; Judgment
JEL Codes: D83; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutions lowering the cost of transmitting judgment (K41) | Entrepreneurial success (L26) |
| Effective testing reduces uncertainty about quality of the idea (C90) | Entrepreneurial success (L26) |
| Confidence in idea's value (D46) | Continued testing of strategies (C90) |
| Number of tests (C12) | Entrepreneurial learning (L26) |
| Negative signals (D91) | Pivot in strategy or abandonment of venture (L21) |
| Optimal sequencing of strategies (C73) | Better entrepreneurial decisions (L26) |