Module 1
FALLING FORWARD: REAL OPTIONS REASONING AND ENTREPRENEURIAL FAILURE RITA
GUNTHER MCGRATH
Key terms
1. Antifailure Bias: According to the idea of an antifailure bias (McGrath, 1999),
preventing failure in some circumstances can be detrimental.
2. Real Options Reasoning: Real options reasoning (ROR) is a conceptual approach to
strategic investment that takes into. account the value of preserving the right to make
future choices under uncertain conditions.
Introduction
A widespread bias in entrepreneurial theory is introduced by a propensity to see failure
adversely.
It starts by defining business endeavors as actual possibilities(real options), whose worth
is essentially influenced by uncertainty rather than variations, random mutations, or
daring new adventures.
Real options perspective on Ent. Failure
Here, the term "entrepreneurial process" refers to a collection of actions by which new
combinations of production components, in both the manufacturing and service sectors,
are altered.
Market inefficiencies are one of the most well-known sources of entrepreneurship
inspiration.
Failure is the discontinuation of a project after it has failed to meet its objectives. Those
objectives are peculiar.
Failure thresholds entail subjective evaluations of alternatives, which is consistent with
behavioral choice theory and theories of human decision making.
Real asset investment classes that resemble financial options in structure are the focus of
real option theory.
Losses can be contained if investments are structured such that expenditures terminate in
unfavorable circumstances.
Researchers using a real choices framework have stressed its benefits over traditional
methods (such calculating net present value) in uncertain situations.
Entrepreneurial Initiatives and Wealth Creation
Economy level impacts
o Technical and other advancements brought about by entrepreneurial activity have
long been linked to economic progress because they allow for increasing—rather
than decreasing—returns on capital deployed.
, o Governments can impact endogenous growth through taxation, upholding the rule
of law, and providing infrastructure services.
Endogenous growth theory maintains that economic growth is primarily
the result of internal forces, rather than external ones
Firm level impacts
o A firm can have an entr. Orientation
Entrepreneurial Orientation: The tendency of a company to support
activities that reconfigure and renew its resource base is known as
entrepreneurial orientation.
o The incentives and penalties for entrepreneurship inside a company are influenced
by business policy.
o Senior executives have an impact on entrepreneurial activity through their
policies, such as salary, promotion, and recognition, as well as how they manage
firm-controlled assets, such as capital and physical facilities.
Implications of using real options reasoning
1. Options are valued as part of the bundle
2. Uncertainty is key to the value of an option
3. Failures can have +ve consequence
4. Preventing failure can mean letting go of an opportunity
Unintended Negative Consequences of an Antifailure Bias
1. Extrapolating to the future from past success
a. a tendency to bring into the future not only the valuable lessons learned from
the past but also the distortions of those lessons.
2. Cognitive Bias
a. When making decisions, people may see information with negative connotations
as being less vivid, credible, apparent, or available, in contrast to information with
positive connotations, which they are more likely to embrace.
i. For example: Positive connotation is that there is a growing market –
everyone starts entering but you disregard the probability of success
(which is low due to the high number of entrants) so was the positive
connotation really positive?
b. The second cognitive bias is the propensity to blame failure on bad luck while
attributing success to one's own efforts.
3. Direct Manipulation
a. Behavior that seeks to avoid failure
i. Metric manipulation eg: GMAT score
ii. Diversion of resources towards an initiative which would otherwise fail
FALLING FORWARD: REAL OPTIONS REASONING AND ENTREPRENEURIAL FAILURE RITA
GUNTHER MCGRATH
Key terms
1. Antifailure Bias: According to the idea of an antifailure bias (McGrath, 1999),
preventing failure in some circumstances can be detrimental.
2. Real Options Reasoning: Real options reasoning (ROR) is a conceptual approach to
strategic investment that takes into. account the value of preserving the right to make
future choices under uncertain conditions.
Introduction
A widespread bias in entrepreneurial theory is introduced by a propensity to see failure
adversely.
It starts by defining business endeavors as actual possibilities(real options), whose worth
is essentially influenced by uncertainty rather than variations, random mutations, or
daring new adventures.
Real options perspective on Ent. Failure
Here, the term "entrepreneurial process" refers to a collection of actions by which new
combinations of production components, in both the manufacturing and service sectors,
are altered.
Market inefficiencies are one of the most well-known sources of entrepreneurship
inspiration.
Failure is the discontinuation of a project after it has failed to meet its objectives. Those
objectives are peculiar.
Failure thresholds entail subjective evaluations of alternatives, which is consistent with
behavioral choice theory and theories of human decision making.
Real asset investment classes that resemble financial options in structure are the focus of
real option theory.
Losses can be contained if investments are structured such that expenditures terminate in
unfavorable circumstances.
Researchers using a real choices framework have stressed its benefits over traditional
methods (such calculating net present value) in uncertain situations.
Entrepreneurial Initiatives and Wealth Creation
Economy level impacts
o Technical and other advancements brought about by entrepreneurial activity have
long been linked to economic progress because they allow for increasing—rather
than decreasing—returns on capital deployed.
, o Governments can impact endogenous growth through taxation, upholding the rule
of law, and providing infrastructure services.
Endogenous growth theory maintains that economic growth is primarily
the result of internal forces, rather than external ones
Firm level impacts
o A firm can have an entr. Orientation
Entrepreneurial Orientation: The tendency of a company to support
activities that reconfigure and renew its resource base is known as
entrepreneurial orientation.
o The incentives and penalties for entrepreneurship inside a company are influenced
by business policy.
o Senior executives have an impact on entrepreneurial activity through their
policies, such as salary, promotion, and recognition, as well as how they manage
firm-controlled assets, such as capital and physical facilities.
Implications of using real options reasoning
1. Options are valued as part of the bundle
2. Uncertainty is key to the value of an option
3. Failures can have +ve consequence
4. Preventing failure can mean letting go of an opportunity
Unintended Negative Consequences of an Antifailure Bias
1. Extrapolating to the future from past success
a. a tendency to bring into the future not only the valuable lessons learned from
the past but also the distortions of those lessons.
2. Cognitive Bias
a. When making decisions, people may see information with negative connotations
as being less vivid, credible, apparent, or available, in contrast to information with
positive connotations, which they are more likely to embrace.
i. For example: Positive connotation is that there is a growing market –
everyone starts entering but you disregard the probability of success
(which is low due to the high number of entrants) so was the positive
connotation really positive?
b. The second cognitive bias is the propensity to blame failure on bad luck while
attributing success to one's own efforts.
3. Direct Manipulation
a. Behavior that seeks to avoid failure
i. Metric manipulation eg: GMAT score
ii. Diversion of resources towards an initiative which would otherwise fail
