A Playbook for Uncertain Times: What Entrepreneurs Can Teach Us

The Trump administration’s tariff policies have heightened economic and business uncertainty, causing companies to grapple with a rollercoaster of trade conditions and rising costs. The widely watched Economic Policy Uncertainty Index, which uses keyword mentions in news outlets as a proxy for uncertainty, has reached its highest level since the pandemic, indicating growing anxiety among businesses and consumers.

To help business leaders navigate this uncertainty, Ideas to Action spoke with University of Virginia Darden School of Business Professor Saras Sarasvathy, an expert on high-performance entrepreneurship. As Sarasvathy has found, entrepreneurs become experts at navigating the extreme uncertainty inherent in starting a new venture. They follow a unique logic and a set of rules Sarasvathy has dubbed effectuation.

Effectual entrepreneurs prefer to work with things they can control and risk only what they can afford to lose. Instead of relying on predictions about the future, they take an active role in shaping it — collaborating with partners such as customers, suppliers and other stakeholders.

What follows is an edited transcript of the conversation.

Q: What should leaders understand about uncertainty?

A: We must remember that there are different uncertainties. For example, a tree could come down on your house, so there’s always this uncertainty that the unexpected could happen.

We also have the kind of uncertainty that comes from the fact that people innovate and create new things. Technologies change, and new possibilities emerge, and sometimes, that creates new challenges. For example, as we improve healthcare, we live longer, and that’s good. But it also means that now we have to figure out how to keep up with the costs of people living longer.

And then there’s this uncertainty that’s so out of our control, so large and sudden, that it changes the world in a few weeks, like the COVID-19 pandemic. And maybe that’s what we’re experiencing now, with the tariffs and their impact on the macro economy.

Q: We often hear that uncertainty is bad for the economy and bad for businesses. Is that true?

A: It depends. Imagine you’re Google, and AI is eating your lunch. It’s possible that people won’t need search engines anymore. This exemplifies the classic concept of “creative destruction,” where one market is being replaced by a new, better and more efficient one.

But is that bad for the world? Should we not have AI? No. But if you’re Google, or a Google employee, you’re going to worry. Yes, in the short term it’s going to be bad. However, people are resilient, and we know from history that when one industry disappears, people retool and survive, and the economy prospers because of a new technology. For example, people who lost their jobs making horse carriages ended up building the carriages for the railways. So, you must think about the source of uncertainty before you just say it's bad for the economy.

The uncertainty we are facing now is much more difficult to think about because it's not driven by the market. Whenever a central authority is making sweeping changes without the buy-in of most of the players, historically it hasn’t been good. And even if you want to make sweeping changes, there are better and worse ways to do it. You could do it in a way that provides a safety net for the people most affected by the changes.

Q: What advice do you have for startup founders and small business owners navigating the impact of tariffs on sourcing, manufacturing and shipping?

A: If you run a company, a small business, or a nonprofit, the first thing you can do is ask yourself, “Given all the stuff that’s happening at the macro level, where am I?” Remember, you’re not trying to solve the whole problem of where the U.S. is going. But you can look at your own situation, and you can identify what is predictable, what is totally out of your control, and especially, what is within your control. That’s the first step.

So, be realistic, identify what you can control, but then immediately ask yourself, “With whom can I face this?” Start building partnerships for facing uncertainty where you say, “If this happens, I'm there for you. If this happens, will you be there for me?” If you’re a small business facing this uncertainty, find four other businesses and ask, “How can we help each other? How are we going to have each other's back?” So that's my second lesson from expert entrepreneurs.

Q: What’s the next lesson?

A: The third and most important thing is to keep in mind that bad things happen but there are smart and not-so-smart ways to fail. A smart way to fail is not to fail alone, that’s why partnerships are so important.

It’s also important to be more proactive, instead of waiting for the world to shut you down. Maybe now is a good time to take a break and invest in education. Maybe you should diversify or do something else. In many cases there are amazing opportunities, precisely because of the uncertainty, so try to lean into those opportunities. For example, during the COVID-19 pandemic, restaurants had to close dining rooms due to lockdowns, but companies like CloudKitchens gained significant traction.

Many companies were started during times of great uncertainty, so look for the upside in the uncertainty. But you need to think about your problem as a problem that provides you with an opportunity to do new things both inside and outside your venture. So those are the three ways I would approach the current situation.

Q: Are there any cognitive biases that become more pronounced in times of unprecedented uncertainty?

A: That’s an excellent question. Perhaps the strongest bias is loss aversion. It’s a concept from behavioral economics that describes how we’re wired to feel the pain of a loss more strongly than the pleasure of an equivalent gain. A loss of $100 hurts us more than the joy we might experience from gaining $100. Because we are more motivated to avoid a loss than we are to pursue a gain of the same magnitude, loss aversion impacts our decision-making. People often shut down when things become very uncertain, even though it may be the right time for partnerships to happen and the right time to start a new venture. But most people won’t do it.

Q: Are you saying that now is a suitable time to start a new venture?

A: Any time is a good time to launch a venture. It's not about when but how you start it. It's always about, "Given the current situation, how can I create something amazing? How can I solve a problem in such a way that new value is created, and new win-win situations are created?" This mentality and asking, "What can we do in this situation that we couldn't do before," is the way to create something new. Of course, there are no guarantees because things are fundamentally unpredictable. And that's why, when you start something effectually, you have an advantage because you're not investing more than you can afford to lose.

Professor Sarasvathy was this month awarded the prestigious Schumpeter School Prize from the Schumpeter School of Business and Economics in Germany. The prize, which is endowed with 10,000 euros, is awarded every two years in recognition of outstanding scientific achievements in the field of Schumpeterian economic and innovation research.