Programs of Experimentation and Pivoting for (Overconfident) Entrepreneurs
Abstract
The Lean Startup has brought a sea-change in conventional wisdom to the practice of entrepreneurship: rather than commit and persevere, the advice is now that experimenting and pivoting is the key to success. Emerging scholarship suggests an entrepreneur should experiment, and examines the implications of pivoting; however, this literature has yet to fully articulate the conceptual logic underlying how much to experiment and its implications for how frequently to pivot. We focus on the design of what we call the program of experimentation — a sequentially interdependent set of experiments and pivot decisions undertaken as an entrepreneur seeks to develop a viable business idea. We conceptualize the program along two design dimensions: the number of experiments to run and the pivot threshold for evaluating experimental outcomes. We address two critical issues. First, how much should an entrepreneur experiment and what are the implications for when to pivot? Second, how is the design of the program of experimentation conditioned by the nature of an entrepreneur’s behavioral biases? Our computational model suggests that while experimenting and pivoting can improve new venture performance, it can also be taken too far. Programs of experimentation that generate frequent and early pivots may impede learning and underperform more conservative programs that generate fewer pivots. We also show that an effectively designed program of experiments can partially remedy entrepreneurs’ behavioral bias. Overconfidence (specifically, over-estimation bias) favors a program design with a more aggressive pivot threshold, though this may not necessitate an increase in the number of experiments.
