Pivot Rules for (Overconfident) Entrepreneurs

Abstract

Recent advances in entrepreneurial practice associated with 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 to pivot your way to success. Yet this normative prescription is not as yet accompanied by a well developed theoretical logic. We seek to develop such a logic that informs our understanding of the factors that determine whether, when, and how often a new venture should pivot. The logic we propose, and examine via a computational model, is built on the relation between two key elements of an entrepreneur’s pivot strategy: the number of experiments she will undertake and her pivot threshold for evaluating the results. In our model, ventures that experiment and pivot outperform those that do not. At the same time, we identify an experimentation-pivot trade-off that dictates pairing extensive experimentation with conservative pivot thresholds to avoid pivoting too often and too early. The intensity of this trade-off depends critically on entrepreneurs’ bias. We find that pivoting may serve as a remedy for bias, and overconfident entrepreneurs perform better when following a more aggressive pivoting strategy than their unbiased counterparts.