Abstract
Entrepreneurs form strategy under high uncertainty, often relying on either reasoning-oriented approaches that prioritize analysis ahead of decisions or action-oriented approaches that emphasize learning through execution. Yet when and why entrepreneurs lean toward one approach over the other remains under-examined. This study theorizes that entrepreneurs' perceived cost of mistakes shapes this choice. When entrepreneurs perceive mistakes to be costlier, they place greater value on accuracy—minimizing deviations from expected outcomes—which reasoning-oriented approaches tend to provide. Action-oriented approaches, 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 higher perceived cost of mistakes is associated with 6% greater use of reasoning-oriented approaches and 11% lower use of action-oriented approaches. Entrepreneurs in more resource-constrained environments, facing higher-commitment organizational decisions, and with 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. Together, the findings suggest that the cost of mistakes is an important mechanism shaping how entrepreneurs form strategy.