Abstract
Entrepreneurs make strategic decisions under high uncertainty, often relying on reasoning-led approaches where theory, mental models, or analysis guide actions like experiments or trials, or on action-led ones where reasoning emerges from execution. Yet what shapes whether they choose either approach remains under-examined. This study theorizes that entrepreneurs’ perceived cost of mistakes shapes which approach they pursue. When entrepreneurs perceive mistakes to be costlier, they place greater value on accuracy—minimizing losses from expected outcomes—which a reasoning-led approach tends to provide. An action-led approach, in contrast, may sacrifice such accuracy to gain speed, both in executing decisions and in discovering more optimal strategies. Using interviews covering more than 1,200 strategic choices made by scaling software startups around the world and large language models (LLMs), the study finds that a one standard deviation increase in the perceived cost of mistakes is associated with a nearly 5-percentage-point increase in the probability of pursuing a reasoning-led approach. Entrepreneurs in more resource-constrained environments, facing higher-commitment organizational decisions, and with less of a promotion and more of a prevention orientation perceive mistakes as costlier. A supplementary experiment that exogenously varies the cost of mistakes around a key scaling decision yields consistent results: The high-cost treatment increases the probability that subjects choose to reason first by 7-10 percentage points. Together, the findings suggest that the perceived cost of mistakes is an important mechanism shaping how entrepreneurs make strategic decisions.