3) Behavioral Strategy (foundations) Flashcards
Simon (1956)
Asch (1956)
SIMON
- Bounded Rationality
- Decision-Making must consider, “logic and psychology of human choice”
- Rejects the omnipresence of ‘economic man’ capable of making decisions that bring the greatest utility, introduced the idea of ‘administrative man’ who ‘satisfices—looks for a course of action that is satisfactory’”.
- laid the foundation for the economic movement known as the Carnegie School (Behavioral Economics, Behavioral Finance, and now Behavioral Strategy).
ASCH
- Conformity / Herding / Information Cascades
- people identify with groups
- priming In-Group/Out-Group is easy (later)
Cyert & March (1963) / March (1988)
‘63- A behavioral theory of the firm (Carnegie School guys).
- Before the “Behavioral Theory of the Firm” Model was formed, the existing theory of the firm had 2 main assumptions: 1) profit maximization and 2) perfect knowledge. Cyert and March questioned these two critical assumptions. —> Paved the way for TCE, Agency, and Behavioral Strategy.
‘88 - Simulation model specifying how RISK is Behavioral (changes with reference point to Aspirations).
- Targets change (the Risk Function is Not Stable/Linear).
Kahneman & Tversky (1979)
Prospect Theory. Explains how people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known.
(Heuristic, Bias)
- The model is descriptive, model real-life choices (more accurate depiction of psychological influences in decision-making), rather than optimal decisions.
- Prospect Theory introduces the idea that “Losses hurt more than gains feel good (loss aversion)”. This differs from expected utility theory, in which a rational agent is indifferent to the reference point.
* The theory describes the decision processes in two stages: editing and evaluation. During editing, outcomes of a decision are ordered according to a certain heuristic. In particular, people decide which outcomes they consider equivalent, set a reference point and then consider lesser outcomes as losses and greater ones as gains. In the subsequent evaluation phase, people compute a utility (imperfectly) based on the potential outcomes and their respective probabilities, and then choose the alternative having a higher utility.
Hambrick & Mason (1984)
Upper-echelons theory (also referred to as “top management team” theory) focuses on a firm’s top executives.
- The theory looks at the TMT’s as a whole rather than at individuals within the team (as a unit of analysis).
DRAWS ON: Barnard (1938) functions of the executive / Carnegie school.
- 1984 article mostly theorized about demographic characteristics of TMT executives.
- Over-time, these demographics and functional backgrounds of the executives have been found to be reliable predictors of how the team will act and what the outcomes of these actions will be.
CRITICISM:
1) Hambrick & Mason (1984) did not propose any psychological mechanisms (rather they just stuck to demographics). This helped the field get moving though.
2) One limitation, however, is that the theory has been tested mostly in the context of U.S. firms or on executives within just one country such as the United Kingdom
Prahalad & Bettis (1986; 1995) ReverseOrder
Dominant Logic
- describes the cultural norms and beliefs that the company espouses.
1994: - Like a funnel (memorize the picture)
- P&B describe this as the DNA of the firm. P&B say it “is hard to change”, requires “unlearning”- the “unlearning curve”, and “evolves” like evolutionary process.
BUT, Is it DNA/ can it be changed? (We need Time Series latent growth modeling methods to explore this question).
- Very applicable to new understudied concept of “Business Models”.. How companies think about their model, how they make money, how the form strategic relationships.
Priem & Harrison (1994)
Express the need to incorporate the “behavioral approach” of Strategic Judgment into Strategy research.
Draw a Box Labelled Strategic Choice Between TMT Characteristics (Hambrick) & Performance
Occasio (1997)
Attention Based View of the Firm.
Main Assumptions:
1) Focused Attention - what people do depends on where they focus their attention
2) Situated Attention - What people attend to is altered by context (Littering, Childini)
3) Structural Distribution of Attention - The firm’s “Rules of the Game” / Structures / Relationships dictates the context that decision makers find themselves in.
CRITIQUE - what does this add beyond Simon?
Behavioral Finance:
Camerer & Lovallo (1999)
Shiller (2005)
Camerer & Lovallo (1999): Overconfidence and excess entry: An experimental approach.
CONCLUSION: People are generally overconfident and in entrepreneurship that means people flood into the market (irrationally).
Shiller (2005):
“irrational exuberance”
Behavioral Finance
Market Bubbles
Behavioral Economics
Levitt (2005;2006), Ariely (2006;2009), (Gino), Gneezy
Behavioral economics / Ethics / Consumer Research
Levitt - Behavioral Economics made popular.
Ariely (2006;2009) and others (Gino)
- The ikea effect (irrational attachment to things we build, buy, and sell)
- InGroup/OutGroup cheating
- Motivation (Lego & PowerPoint Study)
Powell, Lovallo & Fox (2011)
1) Provide Definition - B.S = merges strategic management theory with psychology and cognitive science.
2) B.S should be studied at the collective behavior level
3) Needs mixed methods
4) Need to develop a community of BS scholars
5) Need to integrate findings from other Behavioral fields.
Mitchell & Shepherd (2011)
Erratic Strategic Decisions
1) MetaCognition —> Less Erratic decisions
2) Industry Hostility —–> More Erratic decisions
3) Dynamic Environments —> Less Erratic Decisions (surprise result)
METHOD: Conjoint analysis, decision-making task in which they evaluated a series of hypothetical opportunities (2000 decisions made by 64 CEOs)
March (1988) / Hu (2011)
PURPOSE: Evolving the behavioral theory of the firm (Draws on Cyert&March ‘63,Kahneman ‘79, March (‘88)
METHOD: Simulation (similar to March, but modified to have 3-reference points in the risk preference function (Survival-Aspiration-Success) which essentially changes risk preference of the actor at those points (instead of 1 in March, aspiration).
CONCLUSION:
- Draw Function
- A 3-reference-point model is a better fit of firm behavior.
- Findings consistent with psychology Lit (proximal vs distant goals).
- Highlights the “bundled nature of goal setting”
Lechner (2012)
CONCLUSION: Formal Authority & Coalition Building have more of an impact on performance of strategic initiatives in exploratory settings (More ambigous settings, Implication for Entrepreneurship, etc.)
Drawing on:-Power, -Institutions
CRITICISMS: Aggregated Ind. scores for a mean group score
Narayanan et al. (2010)
PURPOSE: Review of the cognitive perspective in strategy.
CONCLUSIONS:
1) Memorize Figure 1
2) Surprisingly, the area is pretty big (164 articles included in the review)
3) The articles are published in many different journals ( SMJ, ASQ, JOM, AMJ, OrgSc, Human Relations, JAP). Function of a boundary spanning discipline that was legitimizing over the last 2 decades.
Reitzig (2013)
PURPOSE: investigate in-group bias / Middle managers role
METHOD: archival data (from one Large Firm) Idea Submission System (Innovation),
CONCLUSION:
1) People in the InGroup are more likely to favor ideas of other InGroup members.
“Not Invented Here syndrome”
2) High Status of OutGroup attenuates bias of Lower Status Groups. (they want to replicate what high status Firms do).
3) Larger Groups are less biased (implications for crowdfunding)
CRITIQUE: - Single Org, Some Operationalizations not convincing (nationalism not coded as InGroup).
