Are you one of those people who believe that you should not put all your eggs in one basket? If you are, it may be time for you reflect on how this belief may be governing many critical decisions you make in your life.
For example, when you invest in the stock market, do you find yourself buying shares of companies across a wide range of industries and within each industry across a wide range of companies?
If the answer to this is yes, it may be time you paid heed to the work of Prof. Mathew Manimala of IIM Bangalore, a piece of work that has been awarded the Certificate of Distinction for Outstanding Research by the prestigious Academy of Management of the United States.
Beliefs such as "Don't put all your eggs in one basket," says Prof Manimala, are "heuristics," rules of thumb that people use to make decisions in situations where many alternative courses of action exist and information is unclear or conflicting.
But, consider, he says, what happens if you hold the opposite belief: that it is good to put all your eggs in one basket. You may then spend your time and energy watching over them and making sure the eggs hatch. In the stock market example, you would then put most of your money in a few industries and a few companies within these industries and then follow the market closely, moving in and out of these industries and companies as more information is revealed. You may end up with a much higher return than you would have got with the earlier belief. But the risk, of course, is that some event that you had not foreseen, for example, a change in government policy, may put paid to all your careful calculations and you may end up losing all your money.
As you can see, an innocuous "heuristic" such as "Don't put all your eggs in one basket" is a way of dealing with risk and uncertainty and may well be very appropriate in an environment filled with events that are difficult or even impossible to see in advance. It could equally be the path to mediocre returns if mindlessly pursued in an environment where the environment is relatively placid and riskless.
Manimala believes that entrepreneurs often make decisions not by rationally evaluating the data in front of them but by relying on a set "heuristics" such as this. His research on how entrepreneurs who run innovation-driven companies differ from those who run run-of-the-mill companies shows the different set of heuristics each group operates on.
"Ideas are the most important resources for a business, so, look for them everywhere -- among your employees, your customers, your acquaintances ," say the entrepreneurs who run innovative companies. On the other hand, "Trust only opinions of external experts or paid consultants," say the entrepreneurs who run the not-so-innovative companies.
"Your business is like your child; you have created it but it is also an autonomous individual, so allow it and the people within it to set their own paths," say the innovative entrepreneurs. The not-so-innovative entrepreneurs see their business as their personal property, a vehicle to increase their own personal income or wealth.
Entrepreneurs who drive innovative companies start with a clear vision of the future and look constantly for opportunities and resources that take them there. The not-so-innovative entrepreneurs have no specific goals and believe that it is opportunities that determine their goals.
What makes the field of "entrepreneurial heuristics" exciting is that till it came along, management theorists believed that entrepreneurial behaviour was either a function of inherent traits that people possessed or came from the environment they operated in. The problem with these approaches is that they assume that no intervention is easily possible to spark entrepreneurship -- you either wait to chance upon an entrepreneur with the requisite traits or go invest in locations which seem to have the right environment.
On the other hand, accepting that entrepreneurs' decisions flow from a set of heuristics opens the possibility of training the entrepreneur to take a relook at his heuristics. For example, many small entrepreneurs (and frankly, many big ones too) have a heuristic: "It is risky to trust anyone other than a family member." A rational exploration of the consequences of this heuristic may reveal to the entrepreneur that it puts a limit to the future of his business -- there are so many talented and ethical professionals around who will help him grow his business exponentially but the chances of finding a family member as talented as these may be slim. By discarding this dysfunctional heuristic, the entrepreneur may open himself out to a new world of growth and prosperity.
Ajit Balakrishnan is the founder and chief executive officer, rediff.com.
Comments welcome at ajitb.rediffiland.com
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