The Hiding Hand: Startups, Risk and the Economic Theory Behind the Pivot

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In his column in this week’s New Yorker, Malcom Gladwell reviews the biography of Albert Hirschman, a German American economist who studied creativity and risk-taking. Hirschman wrote an essay called “The Principle of the Hiding Hand.”

His essay highlights the creativity that erupts during quandaries, particularly large infrastructure projects, like building railroads and constructing factories, that predictably face much greater difficulties than anticipated. Hirschman argued that the creative response of those teams enables the projects to greatly surpass the original goals of the project, despite the unexpected obstacles.

Entrepreneurship and large infrastructure projects have a lot in common. Both are long-term initiatives whose plans invariably change when confronted with the realities of the terrain.

According to Hirschman, the key to success in both initiatives is downplaying the risks and relying on the creativity of the team:

Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In other words, we would not consciously engage upon tasks whose success clearly requires that creativity be forthcoming. Hence, the only way in which we can bring our creative resources fully into play is by misjudging the nature of the task, by presenting it to ourselves as more routine, simple, undemanding of genuine creativity than it will turn out to be.

People are “apt to take on and plunge into new tasks because of the erroneously presumed absence of a challenge—because the task looks easier and more manageable than it will turn out to be.” This is the Hiding Hand principle.

The Hiding Hand Principle may be the economic theory behind the pivot.

25 June 2013

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