47International Studies in Entrepreneurship 53, https://doi.org/10.1007/978-3-030-94273-1_3 S. D. Sarasvathy

38rather than how entrepreneurs act and the lessons they learn. This does not mean that risk-taking is unimportant to entrepreneurship. Instead, it means we need to pay attention to differences between risk-taking and uncertainty-bearing. All individuals, risk loving, risk neutral, and risk averse can learn to tackle uncertainty through effectual approaches. In analyzing markets and states from an effectual perspective, it is therefore important not to confound investor behavior with entrepreneurial behavior. As explained in the brief overview below, effectuation explicitly tackles the three dimensions of the entrepreneurial problem space consisting of Knightian uncertainty, goal ambiguity, and isotropy. These three dimensions also occur in the context of the central question this essay aims to tackle: What are the implications from the theory of effectuation for the design of governance mechanisms, particularly the roles of markets and states in fostering innovation?

I undertake a careful analysis below to show that states, through their representatives, elected or otherwise, tend to act more like causal investors who try to predict the future to justify risky bets than effectual entrepreneurs who eschew or at least minimize the use of predictive information. This may seem counterintuitive, since one would expect states to lead the way under uncertainty. Yet both historical evidence and the analysis below will show why effectual entrepreneurs are necessary in tackling uncertainty, even in cases usually argued for in the purview of public, nonprofit, or governmental action. I begin the analysis with a quick overview of effectuation.