Luck & Uncertainty & Heuristics

Question 1

courting luck

Answer 1

March 1991

managers can court luck by remaining flexible and open to opportunities

Question 2

Icarus Paradox

Answer 2

businesses bring about their own downfall through success leading to over-confidence and complacency

Question 3

ROR

Answer 3

Myers 1977
Real Options Reasoning is the right, but not the obligation to undertake certain business initiatives
- it forces decision makers to be explicit in assumptions underlying a project and postpone commitment until a considerable amount of uncertainly is resolved - it also allows for the project to be altered as the environment changes

Question 4

ROR in R&D

Answer 4

Mitchell & Hamilton 1988

by treating R&D action as an option, the priority of earlier and more basic R&D is improved

Question 5

example of ROR

Answer 5

Microsoft had a wait-and-see strategy for 3-D Xbox

they developed the technology and waited to let the 3d market further develop

Question 6

Issues with ROR

Answer 6

Adner & Levinthal 2004
it is overly seductive and tempts managers to take on risky projects that might fail
managers need the discipline to know when to let go

Question 7

example of issue with ROR

Answer 7

Procter and Gamble 2005
announced experiment in selling personalized women’s cosmetics, fragrances, and shampoos - it failed after 6 years and more than 60 million invested

Question 8

Attention-based view

Answer 8

Barnett 2008

what decision-makers do depends on where they focus their attention

Question 9

Harrison’s 4 arguments for the role of luck

Answer 9

1. performance data is noisy
2. unpredictable factors matter
3. ability distribution is compressed
4. Even sustained performance could be chance

Question 10

luck & Data issues

Answer 10

Alchian 1950

unpredictable factors reduce the ability of data to signal effective management

Question 11

difficult to distinguish between luck and skilled management

Answer 11

Denrell 2004
even if performance differs often there is no evidence that strategy differs (Denrell is against RBV and traditional strategists)

Question 12

success can indicate low capabilites

Answer 12

Denrell & Fang 2010

individuals who make extreme predictions are likely to be reliant on intuition rather than information

Question 13

uncertainty arrises from?

Answer 13

Kernei & Wenerfelt 1988
4 sources:
demand structure
supply structure
competitors
externalities

Question 14

Heuristics

Answer 14

Tversky and Kahnemann 1973, 1974
people make decisions quickly but not rationally and rely on a number of heuristic principles which reduce the complex tasks to simpler judgement operations (intuition, profiling, common sense) and can lead to systematic errors

Question 15

3 heuristic biases

Answer 15

Tversky & Kahnemann
Representativeness: find representative evidence without probabilities of the event occurring
Availability: assess probability of the event by how easily it is brought to mind
AnchoringL forecasting on outcomes anchored on overly optimistic hope for success

Question 16

Managerial hubris - M&A

Answer 16

Hayward & Hambrick - more hubris more likely to undertake M&A activity

Question 17

Managerial hubris entrepreneurs

Answer 17

Cooper et al 1988 found entrepreneurs assigned a 59% chance of success but in findings by the US Bureau of Labor stats in 2011 only 4% of new small businesses made it to the second year

Question 18

nudge and choice architecture

Answer 18

Felin & Powell 2014
nudge and choice architecture (steer people in a direction but allow them to go their own way - like a reminder) in strategy can nudge organizations to increase variance in overall choice/possibility sets

Question 19

ex nudge and choice

Answer 19

valve corporation: rule of 3 - if people think a project is worthwhile they engage with it
individual biases are checked and social biases are partly checked by the lure of alternatives

Question 20

high performance - industry

Answer 20

McGahan & Porter 2002 - by failing to look at industry differences can’t accurately gauge differences in strategy leading to high profitability - pharma has notoriously high profits but also used in support of competitive advantage

Question 21

selection bias and reverse causality in high performance

Answer 21

Denrell 2005:
strong selection bias towards surviving companies
reverse causality: only looking at high performance companies for clues about high performance - also need to look at failures