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

Stretch goals and the distribution of organizational performance

Many academics, consultants, and managers advocate stretch goals to attain superior organizational performance. However, existing theory speculates that, although stretch goals may benefit some organizations, they are not a “rule for riches” for all organizations. To address this speculation, we use two experimental studies to explore the effects on the mean, median, variance, and skewness of performance of stretch compared with moderate goals. Participants were assigned moderate or stretch goals to manage a widely used business simulation. Compared with moderate goals, stretch goals improve performance for a few participants, but many abandon the stretch goals in favor of lower self-set goals, or adopt a survival goal when faced with the threat of bankruptcy. Consequently, stretch goals generate higher performance variance across organizations and a right-skewed performance distribution. Contrary to conventional wisdom, we find no positive stretch goal main effect on performance. Instead, stretch goals compared with moderate goals generate large attainment discrepancies that increase willingness to take risks, undermine goal commitment, and generate lower risk-adjusted performance. The results provide a richer theoretical and empirical appreciation of how stretch goals influence performance

Delays Impair Learning and Can Drive Convergence to Inefficient Strategies

With so many possible choices, why do managers adopt the strategies they do? We identify delays between adopting a strategy and observing the full implications of that choice as a critical factor influencing strategic choices. Using a simulation of a service firm, we conduct two behavioral experiments to investigate how delays interact with outcome uncertainty to shape learning, strategy adaptation, and performance outcomes. Two mechanisms emerge from how different subject groups perceive, react to, and learn in the presence of delayed feedback and uncertainty. First, when multiple viable strategies exist, longer delays lead both general participants and experienced managers toward alternatives that have rapid returns. When those alternatives are suboptimal, delays may strengthen convergence to inefficient strategies. Second, delays and uncertainty may also induce learners to persist with their a priori strategies. Managers show larger confidence in their priors and thus underperform general participants when the underlying task structure diverges from those priors. Both mechanisms can undermine performance. Moreover, delays and uncertainty may reduce heterogeneity in strategies and performance in more dynamic, uncertain environments, leading to convergence as tasks grow more complex and where decision makers possess similar priors. </jats:p