Overconfidence and Excess Entry: An Experimental Approach

Psychological studies show that most people are overconfident about their own relative abilities, and unreasonably optimistic about their futures (e.g., Neil D. Weinstein, 1980; Shelly E. Taylor and J. D. Brown, 1988). When assessing their position in a distribution of peers on almost any positive trait-like driving ability (Ola Svenson, 1981), income prospects, or longevity-a vast majority of people say they are above the average, although of course, only half can be (if the trait is symmetrically distributed)

To Review or Not to Review? Limited Strategic Thinking at the Movie Box Office

Film distributors occasionally withhold movies from critics before their release. Cold openings provide a natural field setting to test models of limited strategic thinking. In a set of 856 widely released movies, cold opening produces a significant 15% increase in domestic box office revenue (though not in foreign markets and DVD sales), consistent with the hypothesis that some moviegoers do not infer low quality from cold opening. Structural parameter estimates indicate 1–2 steps of strategic thinking by moviegoers (comparable to experimental estimates). However, movie studios appear to think moviegoers are sophisticated since only 7% of movies are opened cold

Boom and Bust Behavior: On the Persistence of Strategic Decision Biases and their Collective Outcome

This work discusses the boom and bust dynamics which are a common feature of a large range of different industries. especially but not only new born ones. The common managerial behavior underpinning such dynamics is aggressive capacity expansion in the boom period ultimately yielding excess capacity turning the boom into bust. This paper examines the underlying cognitive and behavioral factors responsible for strategic decisions driving boom and busts, nested in the interaction between cognitive biases and capacity adjustment delay, and together tries to identify some tentative heuristics which tend to mitigate them. At the same time, we shall conjecturally conclude, there might be a positive collective side to boom and bust behavio r fostering accumulation of knowledge and physical infrastructure, especially regarding new technological paradigms.Boom and bust; Overconfidence; Capacity adjustment; Adaptive behavior

Robust Design Review Conversations

Design reviews and executive conversations at the point of strategic decision-making share an important outcome: they both result in the (nearly) irrevocable allocation of resources to pursue a design concept or strategic option. Our study aims to contribute to the strategic decision-making scholarship by investigating the robustness of these conversations. We define a robust design review conversation as one in which the participants discuss evidence in favor of and against the option and at the same time propose new hypotheses to explain or resolve the evidence in favor of and against the option, hypotheses that can eventually be tested. We describe this second process as generative sensing. Whereas the first process is likely to rely on deductive reasoning from established rules to a definitive conclusion, the second is likely to rely on abductive reasoning, a form of reasoning that generates new hypotheses that are candidate parsimonious explanations for the evidence. We analyze and compare the design review conversations from a junior-level undergraduate course in industrial design and an entrepreneurship course. We find more instances of generative sensing in the industrial design review sessions than in the entrepreneurship project presentations. We believe that generative sensing serves three instrumental purposes: to resolve problems; to provide signals on option quality; and, to test the commitment to the present design concept

Estimating Structural Models of Equilibrium and Cognitive Hierarchy Thinking in the Field: The Case of Withheld Movie Critic Reviews

Film studios occasionally withhold movies from critics before their release. Because the unreviewed movies tend to be below average in quality, this practice provides a useful setting in which to test models of limited strategic thinking: Do moviegoers seem to realize that no review is a sign of low quality? A companion paper showed that in a set of all widely released movies in 2000–2009, cold opening produces a significant 20%–30% increase in domestic box office revenue, which is consistent with moviegoers overestimating quality of unreviewed movies (perhaps due to limited strategic thinking). This paper reviews those findings and provides two models to analyze this data: an equilibrium model and a behavioral cognitive hierarchy model that allows for differing levels of strategic thinking between moviegoers and movie studios. The behavioral model fits the data better, because moviegoer parameters are relatively close to those observed in experimental subjects. These results suggests that limited strategic thinking rather than equilibrium reasoning may be a better explanation for naïve moviegoer behavior

Demystifying the genius of entrepreneurship: How design cognition can help create the next generation of entrepreneurs

Entrepreneurship education is a key beneficiary of design thinking’s recent momentum. Both designers and entrepreneurs create opportunities for innovation in products, services, processes, and business models. More specifically, both design thinking and entrepreneurship education encourage individuals to look at the world with fresh eyes, create hypotheses to explain their surroundings and desired futures, and adopt cognitive acts to reduce the psychological uncertainty associated with ambiguous situations. In this article, we illustrate how we train students to apply four well-established cognitive acts from the design-cognition research paradigm—framing, analogical reasoning, abductive reasoning, and mental simulation—to opportunity creation. Our pedagogical approach is based on scholarship in design cognition that emphasizes creating preferred situations from existing ones, rather than applying a defined set of tools from management scholarship. In doing so, we provide avenues for further development of entrepreneurship education, particularly the integration of design cognition

Five things you should know about cost overrun

This paper gives an overview of good and bad practice for understanding and curbing cost overrun in large capital investment projects, with a critique of Love and Ahiaga-Dagbui (2018) as point of departure. Good practice entails: (a) Consistent definition and measurement of overrun; in contrast to mixing inconsistent baselines, price levels, etc. (b) Data collection that includes all valid and reliable data; as opposed to including idiosyncratically sampled data, data with removed outliers, non-valid data from consultancies, etc. (c) Recognition that cost overrun is systemically fat-tailed; in contrast to understanding overrun in terms of error and randomness. (d) Acknowledgment that the root cause of cost overrun is behavioral bias; in contrast to explanations in terms of scope changes, complexity, etc. (e) De-biasing cost estimates with reference class forecasting or similar methods based in behavioral science; as opposed to conventional methods of estimation, with their century-long track record of inaccuracy and systemic bias. Bad practice is characterized by violating at least one of these five points. Love and Ahiaga-Dagbui violate all five. In so doing, they produce an exceptionally useful and comprehensive catalog of the many pitfalls that exist, and must be avoided, for properly understanding and curbing cost overrun

From framework to theory: an evolutionary view of dynamic capabilities and their microfoundations

Dynamic capabilities (DCs) are organizations' ability to integrate, build, and reconfigure competences, on which they draw to adapt to changes. Despite a significant stream of literature exploring DCs, the following question remains: how do dynamic capabilities allow organizations to adapt to changes and succeed? To fill this gap, this paper outlines a theory of DCs, based on an analysis of strategic behavior (micro)formation at the individual and collective levels. This theory conceptualizes an evolutionary paradigm in which the intentions of organizational agents are intertwined with environmental influences. It defines DCs as ‘instruments able to entrepreneurially solve problems of evolutionary fitness of organizations.’ In doing so, it advances theoretical conceptualization of DCs and their microfoundations to provide insights into how an entrepreneurially led organization may confront and solve problems and ultimately prosper