Small Changes With Big Impact: Experimental Evidence Of A Scientific Approach To The Decision-Making Of Entrepreneurial Firms

Identifying the most promising business ideas is key to the introduction of novel firms, but predicting their success can be difficult. It is argued that if entrepreneurs adopt a scientific approach by formulating problems clearly, developing theories about the implications of their actions, and testing these theories, they make better decisions. In particular, this approach helps entrepreneurs to make more precise predictions of the value of their idea and to spot new ideas with higher expected returns. Precision implies that the distribution of value perceived by the entrepreneurs is more concentrated around its mean. While this cuts the right tail, it does not have important implications for the left tail because entrepreneurs will close the firm before making profits smaller than their opportunity cost. Thus, other things being equal, precision reduces expected returns, making it more likely that scientific entrepreneurs close their firm. At the same time, the scientific approach helps to see new ideas with higher probabilities at the right tail. Thus, when they do not close the firm, they perform better. Using a field experiment with 250 nascent entrepreneurs attending a pre-acceleration program, we provide evidence consistent with these mechanisms. The treated group is taught how to formulate the problem scientifically and to develop and test theories about their actions, while the control group follows a standard training approach. 18 data points  are collected on the decision-making and performance of all entrepreneurs for 14 months. Results show that the narrower spread of the prediction of business value of treated entrepreneurs raises the probability that they close their startups. Scientific entrepreneurs are also more likely to see new opportunities with higher odds at the right tail which prompts them to pivot to these new ideas and perform better.