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BEHAVIORAL STRATEGY

Author(s): THOMAS C. POWELL, DAN LOVALLO and CRAIG R. FOX


Source: Strategic Management Journal, Vol. 32, No. 13, Psychological Foundations of
Strategic Management (December 2011), pp. 1369-1386
Published by: Wiley
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Strategie Management Journal
Strat. Mgmt. 7., 32: 1369-1386 (2011)
Published online Early View in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.968

L
/ BEHAVIORAL STRATEGY
( THOMAS C. POWELL,1* DAN LOVALLO,2 and CRAIG R. FOX3
' 1 Said Business School, University of Oxford and St. Hugh's College, Oxford, U.K.
' 2 International Business, University of Sydney, Sydney, Australia
' 3 Anderson School of Management, University of California, Los Angeles, Los
'

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INTRODUCTION and Lovallo, 1993; Schwenk, 1984; Moore, Oesch,


and Zietsma, 2007); the behavioral theory of the
Behavioral strategy applies cognitive and firm (Cyert and March, 1963; Bromiley, 2005;
social
psychology to strategic management theory Gavetti, Levinthal, and Ocasio, 2007); cognitive
and
schema,in-
practice. It aims to strengthen the empirical maps, sensemaking, and cognitive rivalry
(Porac
tegrity and practical usefulness of strategy and Thomas, 1990; Reger and Huff, 1993;
theory
by grounding strategic management inLant and Baum, 1995; Weick, 1995); and top-
realistic
assumptions about human cognition, emotion, ics suchand
as escalation (Staw, 1981), aspirations
social interaction. (Greve, 1998), attribution (Salancik and Meindl,
Of course, this is not a new idea. Psychol- 1984), attention (Ocasio, 1997), emotions (Nick-
ogy influenced the early development of businesserson and Zenger, 2008), CEO pathology (Kets de
policy and strategy and continues to influence Vries and Miller, 1984), hubris (Bollaert and Petit,
strategic management through many streams of 2010), and top management teams (Hambrick and
research: behavioral decision research (Kahneman Mason, 1984). Papers on dominant logic (Praha-
lad and Bettis, 1986) and the myopia of learning
(Levinthal and March, 1993) received the SMJ
Keywords: behavioral strategy; psychology; cognition; Best Paper Prize.
judgment; decision making
We believe the time has come for new begin-
Correspondence to: Thomas C. Powell, University of Oxford,
Said Business School, Park End Street, Oxford OX1 1HP U.K. nings in behavioral strategy, for three reasons.
E-mail: thomas.powell@sbs.ox.ac.uk First, strategic management has not kept pace with

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1370 . . Powell D. Lovallo, and . . Fox

behavioral movements in economics and finance. designs, for example combining mathematical
modelling, simulation, behavioral experiments,
This is surprising, since strategy research has fewer
field interviews, and brain scans to gain multi-
inhibiting assumptions about decision rationality.
Nonetheless, behavioral economics and behavioral
ple perspectives on the same phenomenon. These
finance have led the way in generating new ideas
developments are nascent, but as strategic manage-
and research methods and in building intellec-
ment matures as a field, psychology offers a rich
tual bridges with psychology and neuroscience.
source of insights in theory and method.
We believe behavioral strategy can do the same Behavioral strategy has the luxury of building
in strategic management. on past research in cognition, behavioral deci-
Second, strategic management theory lacks ade- sion theory, organizational behavior, and strategy.
quate psychological grounding. Strategy theory hasBut much work remains to be done. Behavioral
converged on a view that the crucial problemstrategyin is a patchwork of theories and findings,
strategic management is firm heterogeneity - why and cognitive psychology has not captured the
firms adopt different strategies and structures, hearts and minds of strategy researchers. In busi-
why heterogeneity persists, and why competitors ness schools, strategy departments routinely hire
perform differently. Given these aims, existing economists and sociologists, but seldom psychol-
ogists. Indeed, despite a large volume of output,
theories are surprisingly parochial, explaining het-
erogeneity as Bainian market power protected experimental
by psychology has done little to address
monopoly barriers, Penrosian resource advantages the problems of strategy theory and practice. Many
protected by factor scarcity, and Schumpeterian strategy researchers regard the core unit of analy-
innovation driven by entrepreneurship and tech- sis in strategy as the firm or business unit rather
nology. These are the three pillars of strategic than the individual, and there is skepticism about
management theory.1 the scaling of psychological concepts to firms and
Do these theories really explain firm hetero- industries. Strategy practitioners are, if anything,
geneity? Recent performance shocks of compa- more skeptical than researchers, doubting whether
nies like Lehman Brothers, Bear Stearns, and BP, the field can go beyond cognitive biases to pro-
and failed mergers such as AOL/Time- Warner and duce useful frameworks that integrate psychology
HP/Compaq, evidently do not stem from monopoly and strategy practice.
rents, factor scarcity, or entrepreneurship. TheTo some degree, the problem comes down to
facts overwhelmingly implicate poor executive inadequate paradigm development in behavioral
strategy. The term 'behavioral strategy' is not
judgment, or larger macro-cultures of poor judg-
widely
ment. Conversely, sound executive judgment, and used and means different things to differ-
ent
contextual architectures that promote sound judg- people. Behavioral strategy does not have an
agreed statement of purpose, definition of bound-
ment, can enhance firm performance. Until strategy
theory builds stronger foundations in psychology, aries, conceptual framework, core research prob-
lems, methodological standards, communities of
it will struggle to explain the facts of firm perfor-
scholarship, or supporting institutions (such as an
mance. To achieve empirical fidelity, we believe
interest group in the Strategic Management Soci-
the field needs a robust subfield of behavioral
ety). Despite more than 30 years of research, the
strategy to serve as the fourth pillar of strategic
management theory. output as a whole lacks integration and is too
detached from central concerns in the field. A
Third, recent developments provide new oppor-
tunities for merging psychology and strategy.recent review of interdisciplinary influences on
Advances in cognitive neuroscience make itstrategic
pos- management included economics, soci-
ology,
sible to examine brain activity in strategic deci- and marketing, but not psychology (Nag,
Hambrick,
sions, and these technologies have spread quickly and Chen, 2007). Quoting Mintzberg,
Ahlstrand,
in economics, politics, marketing, and other social and Lampel's (1998: 172) review of
the
sciences. In experimental psychology, researchers 'cognitive school' of strategy: 'this school is
characterized
are increasingly turning to multimethod research more by its potential than by its con-
tributions. The central idea is valid. . .but strate-
gic management has yet to gain sufficiently from
1 This is not to minimize other key influences, such as institu-
tional theories (Meyer and Rowan, 1977; Oliver, 1997) and thecognitive psychology. Or, perhaps more accu-
bargaining view (Lippman and Rumelt, 2003). rately, cognitive psychology has yet to address
Copyright 2011 John Wiley & Sons, Ltd. Strat. Mgmt. J., 32: 1369-1386 (2011)
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Special Issue Introduction 1371

adequately the questions of prime interest to strate- to encourage a wide range of psychology per-
gic management.' spectives, and our definition of 'cognitive and
On the positive side, there are signs that strat- social psychology' is probably broader than most;
egy scholars recognize these problems. Symposia for example, we do not exclude nonexperimental
in behavioral strategy have become a mainstay in methods, and we believe that behavioral strategy is
recent Academy of Management meetings, sup- best supported by multiple methods and measures.
ported by the Academy's Management and Second, we assume that the crucial problem
Organizational Cognition Division and with in- in behavioral strategy is not a shortage of good
creasing submissions and attendance. Journal edi- research, but a lack of conceptual unity. The
tors report an increasing number of submissions field does not need more psychology research per
linking strategy and psychology, and more are se, but more integration of appropriate psychol-
being published. The SMJ Special Issue on the ogy into strategic management theory. We do not
Psychological Foundations of Strategic Manage- promote psychology for its own sake, but for
ment received an unprecedented number of sub- achieving two specific aims - bringing strategy
missions, and the range and quality of the papers theory closer to the empirical facts and integrating
were impressive. On the whole, there are reasons strategy research with strategy practice.
for optimism in behavioral strategy. With these caveats in mind, our definition em-
The remainder of this paper sketches, in broad braces topics in the existing core of behavioral
outline, a vision for the future of behavioral strat- strategy (such as decision biases and cognitive
egy. The next section defines the field, gives a schema), while encouraging innovations that go
typology of existing research, and proposes four beyond the status quo (which we will discuss).
core research problems in behavioral strategy. The Research methodologies may include experiments,
subsequent section presents an integrated concep- mathematical modelling, simulations, brain imag-
tual view of the field, and the concluding section ing, field studies, ethnography, and textual anal-
introduces the papers in the Special Issue. We do ysis, always with a preference for multimethod
not presume to have all the answers, but we are studies. We believe methodological diversity will
convinced that behavioral strategy has much to prove essential for improving our understanding of
contribute to strategic management and that schol- individual and social behavior in organizations.
ars can take positive steps to make it happen. Behavioral strategy encompasses a mind-
boggling diversity of topics and methods. As
shown in previous reviews, conceptual unity has
DEFINING BEHAVIORAL STRATEGY been hard to achieve and the domain of possi-
ble research is, to say the least, varied (see, for
example, Hodgkinson and Healey, 2008; Hodgkin-
We define behavioral strategy as follows:
son, 2008; Walsh, 1995; Eisenhardt and Zbaracki,
1992).
Behavioral strategy merges cognitiveOnand the other hand, the diversity of behavioral
social psychology with strategic management
strategy research mirrors, to a large degree, actual
theory and practice. Behavioral strategy aimsin the empirical domain. This is shown
diversity
to bring realistic assumptions about more
humanclearly in Table 1, which categorizes existing
cognition, emotions, and social behavior
research to
into three schools of thought, which we
the strategic management of organizations
call the Reductionist, Pluralist, and Contextualist
and, thereby, to enrich strategy theory,schools
empir-(see Tetlock, 1990, 2000).
ical research, and real-world practice. Reductionist research relies on positivist, real-
ist, and objectivist philosophies of science and
This definition is based on two assumptions.favors quantitative hypothesis testing using meth-
First, we assume that behavioral strategy ods suchneeds
as mathematical modelling, simulation,
theoretical grounding in cognitive andand social psy-
laboratory decision experiments. The Reduc-
chology. The definition allows many research top- is influenced by theoretical work
tionist school
ics and methods, but we intend it to exclude in behavioral decision research (Edwards, 1954,
work that lacks rigorous theoretical grounding 1961; Tversky and Kahneman, 1974; Kahneman
in psychology. At the same time, we intend it and Tversky, 1979; Nisbett and Ross, 1980) and

Copyright 2011 John Wiley & Sons, Ltd. Strat. Mgmt. J., 32: 1369-1386 (2011)
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1372 . . Powell D. Lovallo, and . R. Fox

Table 1 . Three schools of behavioral strategy

REDUCTIONIST PLURALIST CONTEXTUALIST

Philosophical foundations Positivism, objectivism, Nominalism, Phenomenology,


materialism, scientific pragmatism, existentialism, critical
realism, evolutionism theory,
verificationism postmodernism,
symbolic
interactionism,
contextualism, social
construction of reality
Core processes of interest Individual decision Intergroup bargaining, Sensemaking, perception,
making, intragroup problem solving, enactment, action
decision making politics, conflict generation
resolution,
organizational
learning, resource
allocation
Key psychological Bounded rationality, Reference groups, social Cognitive schema,
concepts prospect theory, cognition, social language, meaning,
heuristics and biases, identity theory, signs, ideology, action
dynamic inconsistency self-categorization rationality, culture
Methodologies Hypothesis testing, Field studies, event Interpretive histories,
decision experiments, studies, multivariate ethnography, grounded
simulation, statistics, cases, mixed theorizing,
mathematical and methods hermeneutics, textual
computational analysis, discourse
modelling, neural analysis, semiotics,
methods cases
Assumptions about firms Firms' decisions are Firms consist of Firms and environments
made by top subgroups with are socially
executives, conflicting goals and constructed; firms are
entrepreneurs, and top perspectives; firms ideological; decisions
management teams; resolve strategy and actions are
decisions are subject problems via conflict decoupled; actions are
to cognitive biases resolution and emergent, externally
intergroup bargaining influenced
Contributions to strategic Cognitive biases in Behavioral theory of the Action rationality,
management strategic decisions firm, group cognitive schema,
(e.g., competitive identification, cognitive maps,
blind spots, aspirations, cognitive rivalry,
competition neglect, maladaptive learning, dominant logic,
winner's curse, hubris, organizational sensemaking,
escalation of neuroses misperception,
commitment); enactment,
dynamic inconsistency mindfulness, critical
theory
Some contributors past Selten, Edwards, Simon, March, Cyert, Simon, Weick, Starbuck,
and present Von Neumann- Lawrence-Lorsch, Pettigrew, Brunsson,
Morgenstern, Tajfel, Turner, March, Staw,
Luce-Raiffa, Fiske-Taylor, Bower, Smircich, Hardy,
Tversky-Kahneman, Miller, Kets de Vries, Mintzberg, Thomas,
Schelling, Akerlof, Hambrick, Levinthal, Van Maanan,
Smith, Thaler-Shefrin, Denrell, Bromiley, Abrahamson, Reger,
Elster, Bazerman, Rumelt, Winter, Huff, Fiol, Porac,
Loewenstein, Camerer, Feigenbaum-Hart- Dutton, Mezias, Lant,
Hogarth, Nisbett-Ross, Schendel Milliken, Hodgkinson,
Moore, Fox, Lovallo Thomas, Bettis,
Mitroff

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Special Issue Introduction 1373

Table 1. (Continued)

REDUCTIONIST PLURALIST CONTEXTUALIST

Linkages to traditional Structuralism, Functionalism, Existentialism,


schools of psychology behaviorism, cognitive functionalist social humanism, critical
psychology, psychology, schools, feminist
experimental social gestaltism, psychology,
psychology, evolutionary postmodern
neuroscience psychology psychology
Historical influences in Wundt, Titchener, James, Stumpf, Dewey, Merleau-Ponty, Blumer,
psychology and social Pavlov, Ebbinghaus, Darwin, Mead, Glazer-Strauss,
science Watson, Thorndike, Wertheimer, Koffka, Giddens,
Tolman, Skinner, F. Kohler, Merton, Berger-Luckmann,
Allport, Neisser Lewin, Asch, Heider, Fromm
Festinger
Historical influences in Aristotle, Bacon, Comte, Plato, Berkeley, Hume, Hegel, Kierkegaard,
ontology and Carnap, Nagel, Vienna Kant, Mach, James, Brentano, Husserl,
epistemology Circle, Popper, Ayer, Dewey Schutz, Peirce, Sartre,
early Wittgenstein Horkheimer, Adorno,
later Wittgenstein,
Rorty, Foucault

capacity,
has made important contributions Fiol (1991) on
in strategic organization culture and
deci-
sion making, cognitive biases, identity,
risk perception,
Terry and Callan (1998) on ingroup bias
and intertemporal choice. Examples of the
and merger, Reduc- Hart, and Schendel
and Fiegenbaum,
tionist influence in strategy include Duhaime and groups.
(1996) on strategic reference
Schwenk (1985) on cognitive errors in acquisi-
The Contextualist school is grounded in phe-
tion and divestment, Camerer nomenological,
and Lovallo (1999) and critical philoso-
constructivist,
on overconfidence and market phies of science.
entry, March Contextualist
and research is
Shapira (1987) on managerial riskconcerned
preferences, and
with management perception, sense-
Bromiley (2009) on prospect theory and resource
making, cognitive schema, language, meaning, and
allocation. Much of the recent enacted
progressenvironments. The school is 'contextual'
in behav-
ioral game theory and neuroeconomics derives
in emphasizing the primacy of context - claiming,
from Reductionist assumptions for(Camerer, 2003;
example, that the difference between a sea-
Camerer, Loewenstein, and Prelec, 2005). in the boardroom and a subject
soned executive
Pluralist research is so named because it draws playing an ultimatum game in a lab experiment is
on multiple theoretical traditions and uses meth- ontologically large. As such, Contextualists con-
ods ranging from case studies and simulations toduct empirical work 'in context,' favoring qualita-
large sample field research. The Pluralist school tive and interpretive methods such as ethnography
is grounded in positivist, nominalist, pragmatist,and textual analysis and rejecting positivism and
or evolutionary philosophies of science. Pluralist quantitative hypothesis testing. In the Contextu-
research is less concerned with individual decisionalist view, subjective beliefs, shared ideologies,
making than with the overall decision environ- and cognitive frames matter more than explicit
ment of the firm. Combining behavioral decisionex ante decisions, which seldom correspond with
theory with political theory (March, 1962; Wil- what people or firms actually do. Examples of the
davsky, 1972), organization theory (March and Contextualist influence in strategy include Bougon,
Simon, 1958), and social cognition psychologyWeick, and Binkhorst (1977) on cognition in a jazz
(Fiske and Taylor, 2008; Bandura, 1977; Fes- orchestra, Brunsson (1982) on ideology and action
tinger, 1954), Pluralist research studies the con- rationality, Starbuck and Milliken (1988a) on the
sequences of bounded rationality, group conflict, Challenger disaster, and Hodgkinson, Maule, and
learning, and executive decision making in organi- Bown (2004) on cognitive mapping.
zations. Examples of Pluralist influence in strategy The three schools give only a rough picture
include Cohen and Levinthal (1990) on absorptive of research in behavioral strategy. The schools

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1374 . . Powell, D. Lovallo, and . R. Fox

of theories and methods, we believe that behavioral


are not as clearly bounded as the table suggests,
and hybrid approaches shade into one another bystrategy should apply all of its tools to a smaller
degrees. Some researchers operate in more thannumber of core research problems. The unsystem-
one school, which is not surprising - the typologyatic approach of the past has left many opportuni-
categorizes outputs rather than people, and many ties neglected and gaps to be filled. Collectively,
researchers work from multiple points of view. the field has been ineffective in using psychol-
Table 1 brings the extreme heterogeneity ofogy to build strategy theory or link theory with
behavioral strategy into sharp relief. There is lit-
practice.
tle agreement, even on issues as fundamental as The remainder of this section identifies four
the unit of analysis, with Reductionists focus-core research problems in behavioral strategy. The
ing on individual judgments and decision making, problems span all three schools of behavioral strat-
PJuralists on organizationally situated managers egy and need contributions from each. By applying
or groups, and Contextualists on cognitive maps, their respective strengths to the core problems and
schema, and management perceptions. All too by finding imaginative ways to interact and collab-
often, researchers in different schools study sim- orate, we believe the Reductionist, Pluralist, and
ilar problems with minimal concern for cross-Contextualist schools can work synergistically to
fertilization or knowledge accumulation. In theaccumulate theoretical and applied knowledge.
end, researchers have produced an impressive vol-
ume of output, much of it very insightful, but
HOW DOES INDIVIDUAL COGNITION
with little or no collective synergy. As a whole,
SCALE TO COLLECTIVE BEHAVIOR?
the enterprise resembles a growth-driven conglom-
erate more than a focused, competence-driven
corporation. Cognitive psychology focuses on mental proc
Many scholars believe that behavioral strat-within an individual, whereas strategic man
ment has traditionally focused on the firm, busi
egy could achieve greater synergies by redefin-
ing its boundaries - for example, by focusing on unit, or corporation. We believe the perceived
one of the three schools of behavioral strategy. between individual cognition and collective s
The preferred candidate is often the Reductionistegy has done more to impede behavioral stra
school, following the examples of economics and than any other problem.
finance. According to this view, a tightly definedDecision researchers often assume the strat
field of behavioral strategy, focused on measure-actions of firms reflect choices by a CEO or
management team. This assumption may ind
ment, experiment, and hypothesis testing, with new
hold if the firm is small, entrepreneurial, autocr
extensions into cognitive neuroscience, offers the
best chance of paradigmatic unity and cumulative or family owned or if the decision falls out
progress. annual planning processes (Lovallo and Sib
The Reductionist school will play a major role in 2010). But research in behavioral strategy m
the future of behavioral strategy. However, we do avoid the trap of making simplistic assump
not advocate restricting behavioral strategy to oneabout mental scaling - for example, assuming
school of thought. The diversity in Table 1 is not a firm or corporation has the psychology of an i
vidual, that one person chooses for the collec
an aberration but an inherent feature of psychology
and the empirical domain of strategic management.that the firm's actions correspond to a pers
decisions, or that many individual choices su
The Reductionist school cannot cover the problem
a collective choice.
space of behavioral strategy, and none of the three
schools has a monopoly on truth. Strategic out- Behavioral strategy has a long way to go in
linking individual psychology with organizational
comes stem from individuals, groups, and organi-
zations interacting in uncertain environments. Westrategies. One of the distinctive features of strate-
gic management is its emphasis on collective
believe diversity is the only reasonable option and
behavior, and behavioral strategy must explain
that leveraging and integrating the three schools of
thought should become the first priority of behav-the psychological or social mechanisms by which
ioral strategy. mental processes affect organizations. Researchers'
So how can behavioral strategy move toward scaling assumptions can and should be made
intellectual unity? Instead of restricting its toolkit explicit (Elster, 1982; Ostrom, 1997) and in
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Special Issue Introduction 1375

behavioral strategy, the whole question is how group polarization (Isenberg, 1986), common
particular forms of behavior arise in and among information sampling bias (Stasser and Titus,
organizations. If we do not show the mechanism, 1985), social facilitation (Zajonc, 1965), social
we do not explain the phenomenon. loafing (Latane, Williams, and Harkins, 1979),
The problem of aggregation is not unique to and transactive memory systems, through which
behavioral strategy. Behavioral economists since groups collectively encode, store, and retrieve
at least Schelling (1978) have studied relation- knowledge (Wegner, 1987).
ships between individual choices and collective The problem of scaling has also been addressed
outcomes. Fehr and Tyran (2005) argued that the in management science and organization theory.
mode of aggregation depends on market con- From Reductionist assumptions, Marschak (1955)
ditions - in particular, whether 'strategic substi- proposed a mathematical model of team pro-
tutability' or 'strategic complementarity' determine duction. From Contextualist assumptions, Harris
aggregate outcomes. Substitutability obtains when (1994) examined how organizations, groups, and
the presence of a few rational decision makers cultures are represented in the cognitive schema of
is enough to produce collective rationality; com- individuals. From a Pluralist perspective, Freeman
plementarity obtains when a small number of (1999) surveyed aggregation issues arising from
irrational decision makers can skew collective out- transaction cost and agency theories. Freeman's
comes. For example, Firm A' s decision to increase (1999: 175) conclusions about organizational psy-
output may influence Firm not to build a newchology also apply to behavioral strategy: 'if
plant (substitutability), whereas Firm A' s decision organizational psychology is simply psychology
to cut price may cause Firm to cut price evenapplied to people who happen to be located in
more (complementarity). As Fehr and Tyran (2005: organizations, then it is hard to see why a sepa-
43) note, 'there is no general reason to believe that rate field is needed. . .(A) way out of the box is to
markets automatically render individual decisionsposit a true social psychology of organizations: a
more rational over time.' theory of aggregation that explains how individu-
In behavioral finance, researchers have studied als combine their behaviors to produce collective
how noise traders affect market outcomes. In the outcomes.'
model proposed by DeLong et al. (1991), it is pos- Freeman (1999) did not propose a 'way out
sible for irrational traders to earn higher returns of the box,' but he recommended as a starting
than rational investors and dominate the market point the organization theories of Cyert, March,
in the long run. Barber, Heath, and Odean (2003) Simon, and colleagues at Carnegie. The behav-
compared the investment strategies of individualsioral theory of the firm views organizations as
and groups (stock clubs). They found that groups, comprised of differentiated subunits with conflict-
ing goals, resources, and time horizons (Cyert
to a greater extent than individuals, try to justify
their stock choices with defensible reasons. Groupsand March, 1963). In the Carnegie view, orga-
do this even when their choices contradict sound nizational strategy is largely a political process,
investment policy - for example, justifying popu-involving coalition building, bargaining, and con-
lar growth stocks over lesser-known value stocks.
flict resolution among representatives of differen-
tiated subunits (see also Lawrence and Lorsch,
In this context, cognitive scaling stems less from
'complementarity' (increasing returns to individ-1967; Bower, 1970; Miles and Snow, 1978). The
ual irrationality) than from the social psychology
CEO must orchestrate an organization-wide polit-
of group membership: 'in situations where peopleical process, and subunit managers face what
must exchange reasons to convince others. . .theBlake (1959) called the 'crisis of statesmanship,'
process we document may yield alternatives that in which they try to reconcile firm-level priorities
have notable disadvantages but that happen towith personal goals and political status with peers
come attached to a good reason.' (DeLong et al, and constituents.
1991: 1651). We agree with Freeman that the Carnegie model
In social psychology and behavioral decision
offers a solid foundation for linking individual
theory, researchers have dealt in various ways
psychology with organizational strategy (see also
with the aggregation of mental processes, some
Bromiley, 2005; Argote and Greve, 2007). The
of which offer insights to behavioral strategy.
model's emphasis on bargaining and political pro-
cesses allows researchers to deploy a range of
This includes research on groupthink (Janis, 1972),

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1376 . . Powell D. Lovallo, and . R. Fox

ideas in social cognition and group identification, researchers from strategy, behavioral finance,
including self-categorization, conformity, obedi- and behavioral decision theory/economics to
ence, status, reputation, accountability, trust, social examine the issue of market efficiency and
learning, and reference groups (Fiske and Tay- strategy. The idea is not to review research
lor, 2008; Bandura, 1977; Tajfel, 1978; Turner, on biases and irrationality. Rather, the ambi-
1975; Festinger, 1954). The psychology of iden- tion is to flesh out a research agenda for
tification, and research on social identity in par- 'behavioral strategy." (Winter et al, 2008)
ticular, offers many avenues for bridging the gap
between individual cognition and organizational The proposal then identified five research que
strategy (Haslam, 2004; Ashforth and Mael, 1989; tions in behavioral strategy:
Hogg and Terry, 2000; Dutton, Dukerich, and Har-
quail, 1994; Huber and Lewis, 2010). For exam- When and why are resources and input facto
ple, Terry and Callan (1998) used social identity undervalued?
theory to examine out-group bias in a hospital When and why can arbitrage opportunities exist
merger; Rumelt (1995) proposed a model linkingin factor and product markets?
psychology and organizational inertia through sub- What are the limits to arbitrage in factor and
unit conflict resolution; and Livengood and Regerproduct markets?
(2010) combined identity theory with awareness- What are the implications for strategy?
motivation-capability (AMC) theory to explore Is a normative theory of strategy possible?
competitive interactions (see also Huy, 2011).
The scaling problem is far from solved, and it is These questions do not, in our opinion, consti-
often improperly framed. As Freeman (1999) sug- tute the whole of behavioral strategy. However,
gested, the question is not about scaling or aggre-they raise important issues in strategic manage-
gation per se, which assume a kind of adding up ment research, some of which can be addressed
of individual cognition. Rather the question is howthrough a closer alignment of psychology and
we integrate individual and collective psychology strategy.
in organizations to produce a social psychology Denrell, Fang, and Winter (2003) argue that
of behavioral strategy. The behavioral theory strategy
of theories rely too much on theories of
the firm is a good starting point, and Reduction- market efficiency and equilibrium. If market par-
ist and Contextualist approaches (including social ticipants acted optimally on information about
neuroscience) can add texture and insight to the resources and market positions, firms could not
Carnegie view. To deal effectively with the prob- improve performance by following systematic
lem, the field needs contributions from all three rules. In strategy theory, there are 'no rules for
schools of behavioral strategy. riches;' if such a rule existed, other firms would
follow it and compete away its value (Barney,
1986). However, managers do take actions that
WHAT ARE THE PSYCHOLOGICAL improve firm performance, and not all of these
UNDERPINNINGS OF STRATEGIC actions can be ascribed to luck. According to Den-
MANAGEMENT THEORY? rell et al. (2003: 978), 'the discovery of a valuable
strategic opportunity is often a matter of 'serendip-
In 2008, a proposal for an Academy ofity' Manage-
in the strict sense - not just luck, but effort and
ment symposium on behavioral strategyluck joined by alertness and flexibility. To appre-
began:
ciate these points it is necessary to break out of
'Strategy is concerned with finding the equilibrium mindset that dominates so much
profit
of economic theory.'
opportunities. In teaching as well as practice,
It is possible that firms differ from each other
the implicit assumption is that not all oppor-
for precisely
tunities have been exploited. Rather, there is the reasons emphasized in strategy
money left on the table. We argue that theory, ansuch as resource scarcity, mobility bar-
riers, causal ambiguity, and uncertain imitabil-
appropriate theoretical foundation for strat-
egy should start with the assumption ity.that
However, this assumes market participants
there are arbitrage opportunities. . .Theare
pur-paying attention to markets and acting on
what they know. An alternative hypothesis is that
pose of this symposium is to bring together
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Special Issue Introduction 1377

firms generally fail to capture their opportunities, fully incorporate psychology, the empirical facts
solve their problems, or imitate imitable resources will continue to frustrate our attempts to explain
(Powell, 2004). This could happen, for example, them, and researchers will find it impossible to
if decision makers are subject to self-confirming integrate theory with strategy practice.
beliefs (Ryall, 2003), overoptimism in strategic
forecasting (Lovallo and Kahneman, 2003), com-
petitive blind spots (Zajac and Bazerman, 1991), CAN BEHAVIORAL STRATEGY
self-interested causal attributions (Powell, Lovallo, EXPLAIN COMPLEX EXECUTIVE
and Caringal, 2006), disordered learning processes JUDGMENTS?
(Denrell, 2008), institutional conformity (Abra-
hamson, 1991), unwillingness to imitate (Jonsson Research in behavioral decision theory (BDT)
and Regner, 2009), or perceptual filtering (Star- shows that individuals lack the cognitive capac-
buck and Milliken, 1988b). Suboptimal behavior ity to make fully informed and unbiased decisions
could also emerge from emotions such as envy, in complex environments (Kahneman, Slovic, and
prejudice, anger, hubris, and impulsivity (Elfen- Tversky, 1982; Payne, Bettman, and Johnson,
bein, 2007; Rafaeli and Sutton 1989; Postel and 1988). To cope with complex judgments and deci-
Rumelt, 1992), which can jeopardize or improve sions, people use simplifying heuristics that are
performance (Staw and Barsade, 1993; Huy, 1999; prone to systematic biases. Decision makers do not
Pfeffer and Sutton, 1999; Howard, 1993). Even maximize the subjective expected utility of total
large firms might behave erratically due to poor wealth, but focus on deviations from cognitive ref-
executive judgment, as we observe. Under any erence points. BDT has found many applications
such conditions, some market participants would in the social sciences, including strategic manage-
find opportunities to adopt strategies that improve ment (Bazerman and Moore, 2008).
firm performance. As Bromiley and Papenhausen BDT has not yet realized its full potential in
(2003: 432) point out, 'the entire 'no rules for strategic management (Hodgkinson and Sparrow,
riches' story. . .collapses if we have rules that could 2002). It does not link seamlessly with strategy
improve performance. This would arise when some theory and it has not made large impacts on
firms either do not know the rules exist or do not strategy practice. The decision context of strate-
act on them.' gic management involves organizationally situ-
Studies show that actual distributions of firm ated managers, widespread uncertainty, and poorly
profitability are consistent with generating pro- defined problems with unknowable social and eco-
cesses that contain a great deal of randomness nomic consequences. In the circumstances, we
(Levinthal, 1991; Powell, 2003; Denrell, 2004), believe strategy research should increase its
and some forms of competitive behavior derive emphasis on executive judgment in the actual con-
from the inherent uncertainty or randomness of ditions of high-stakes, complex problem solving in
markets (Bertrand and Mullainathan, 2001; Lipp- organizations.
man and Rumelt, 1982). For example, corporate Management scholars have always recognized
success induces self-serving attributions, and exec- the complexity of strategic problem solving in
utives are likely to attribute success to their own organizations. Peter Drucker (1974) viewed execu-
abilities, even when success is due to excessive tive work as a practice, not unlike problem solving
risk taking or luck (Salancik and Meindl, 1984). If in medicine, architecture, military affairs, and for-
executive decisions are informed by false or over- eign policy. He wrote that 'decision making is not
confident attributions, some market participants a mechanical job. It is risk-taking and a challenge
may find it possible to exploit market opportunities to judgment. The 'right answer' (which usually
(Denrell and Fang, 2010). cannot be found anyway) is not central. Central
We agree with those who argue that strate- is understanding of the problem. Decision making,
gic management theory needs deep reformulation further, is not an intellectual exercise. It mobilizes
along behavioral lines. The assumption that firm the vision, energies and resources of the organiza-
heterogeneity stems from economic barriers does tion for effective action' (Drucker, 1974: 480).
not align with what we know about human cog- Herbert Simon (1987) distinguished two kinds
nition, emotions, learning, social interactions, and of organizational decisions: logical and judgmen-
institutions. Until theories of firm heterogeneity tal. Simon cited Chester Barnard, who defined

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1378 . . Powell D. Lovallo, and R. Fox

CAN WE IMPROVE THE


'logical' decisions as those involving 'conscious
thinking which could be expressed in words orPSYCHOLOGICAL ARCHITECTURE
by other symbols,' whereas judgmental decisions, THE FIRM?
OF
which Barnard called 'non-logical,' were those
'not capable of being expressed in words orResearchers
as have proposed a variety of method
reasoning, which are only made known by judg- for overcoming decision biases (Kahneman et al.
1982, chapters 28-32; Russo and Schoemaker
ment, decision or action' (Simon, 1987: 57). Going
further, Barnard (1938: 302) wrote: 'the sources2002). Schwenk and Thomas (1983) proposed
framework for matching strategy problems wit
of these non-logical processes lie in physiologi-
decision aids such as dialectical inquiry, devi
cal conditions or factors, or in the physical and
social environment, mostly impressed upon us advocacy, scenario analysis, and the Delphi pro
unconsciously. . .They also consist of the mass cedure;
of Soil and Larrick (2009) found that peop
generally do better when they average between tw
facts, patterns, concepts, techniques, abstractions,
and generally what we call formal knowledgeproposed
or solutions than when they choose one o
beliefs, which are impressed upon our minds more the other; Gawande (2009) claimed that introduc
or less by conscious effort and study.' ing checklists reduced errors in health care ma
Simon (1987) linked judgment to expert intu- agement and construction; and Donaldson (2010
ition, drawing analogies to expert computer sys- proposed ways for managers to minimize sampling
biases
tems and pattern recognition in chess and medicine. and other errors in statistical reasoning.
But Simon (1987) recognized that executive judg- Despite these methods, individual biases persis
ment in organizations involves more than pro- in organizations. As Tetlock (2000: 324) point
out, decision biases are not 'merely atavistic ves
grammable or expert intuition. Exactly what it
does involve was unclear then and remains unclear tiges of a more primitive social order, soon
be swept away by the intensification of com
today. After reviewing two studies on executive
petitive market forces.' In organizations, peopl
judgment, Simon (1987: 61) concluded that 'these
operate in a world of subgroup norms, political ide
two pieces of research are just drops of water in
ologies, consensus building, and self-presentatio
a large bucket that needs filling. The description,
Cognitive biases are deeply embedded in routine
in detail, of the use of judgmental and analytical
automatic behavior, psycho-physical distortion
processes in expert problem solving and decision
and executives' knowledge structures. In pra
making deserves a high priority in the agenda of
tice, emotional, social, and political realities near
management research.'
always trump decision aids in their influence o
Complex judgments have indeed received atten-
organizational judgments.
tion in decision research - for example, Janis and
This raises two questions:
Mann (1977) developed a descriptive theory of
conflict in complex policy decisions, and Klein What are the intended and unintended
(1998) has described intuition and judgment in a consequences of individual de-biasing in
variety of applied contexts (see also Kahneman and organizations?
KJein, 2009). Judgment has also been addressed in Is it possible to design the psychological arch
strategic management (Priem and Cycyota, 2001; tecture of the firm, including both choice archi-
Hodgkinson, Langan-Fox, and Sadler-Smith, 2008; tecture and decision processes, to yield better
Schoemaker, 1990). However, Simon's statement executive judgments?
generally holds true today. Strategy research has
not produced enough empirical research on com- Thaler and Sunstein (2008) argued that research
plex judgments and does not have a unified view ers should accept that decision makers are ordi
of complex problem solving in organizations. Per- nary human beings with faulty cognition and poor
haps the 'decision' is not the right unit of analysis self control. Instead of trying to fix the hardwired
in behavioral strategy, or not always the right unit. errors of individual cognition, organizations should
One of the key challenges in behavioral strategy focus on managing the psychological architectur
research is to show how decisions fit within the of the choice environment - for example, by con
larger and more complex domain of strategic prob- spicuously displaying the running costs of manu
lem solving in organizations. facturing equipment or designing work spaces that

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Special Issue Introduction 1379

encourage people to seek alternative points of view market entrant. To minimize decision biases, the
(see also Johnson et /., 2011). The authors argue authors recommend that firms link their strategic
that ecological 'nudges,' supplemented by rewards decisions with known decision biases and create
and incentives, offer a workable and human- choice architectures for dealing with the biases
friendly alternative to explicit decision aids. they actually face. For example, all large phar-
Arkes (1991) distinguished three types of maceutical firms engage in basic research and
errors - strategy-based, association-based, and are repeatedly susceptible to escalation bias and
psycho-physically-based - and Larrick (2004) the politics of internal resource allocation. Most
argued that remediation methods should fit the firms link R&D investments to the annual plan-
type of error. Heath, Larrick, and Klayman (1998) ning cycle, in which each business line makes
divided organizational repairs into two categories: a case for resources. However, one leading firm
motivational repairs, which increase the energy addressed escalation bias proactively by forming
and enthusiasm with which people work; and a detached 'divestment team' that scans internal
cognitive repairs, which prevent mental errors projects year-round for possible retirement. Can
or improve decision processes. For example, as such mechanisms lead to better resource alloca-
motivational repairs, managers could increase the tions and, ultimately, to higher returns? Given
decision autonomy of project teams or redesign the difficulties of repairing individual biases, firm-
common areas to enhance 'psychological capital' level solutions may offer the best way forward.
(Luthans, Youssef, and Avolio, 2007); as cognitive The psychological design of organizations is
repairs, managers could address overoptimism in a promising area for strategy research. Experi-
forecasting by investing in training and databases ence suggests that judgmental errors stem from
for case-based decision making. a combination of cognitive errors and the con-
Denrell and March (2001) argued that many text of choice. On the whole, individual cognitive
errors in learning and inference derive from dys- errors have received more attention than the psy-
chological architecture of the firm, even though
functional learning environments and would exist
even if all decision makers were rational. For
the latter now appears more conducive to posi-
example, consider an executive team choosing tive
howintervention (see Kahneman and Klein, 2009).
to enter a foreign market. Suppose the firm We hasbelieve that future research should give equal
previous experience in market entry by jointtime
ven- to the psychological architectures of collec-
ture once (a failure) and by acquisition fourtive choice.
times
(two successes and two failures). By the structure
of the selection process, the team has asymmetric
information - i.e., more information about PUTTING
acqui- IT ALL TOGETHER
sitions than joint ventures. Hence, it has learned
the conditions under which acquisitions succeed
As a nascent field of study, behavioral strate
and fail and is likely to choose a form of faces
acqui-two opposing threats: the threat of irrel
sition that succeeded in the past. Since thevance
team by focusing too narrowly on one mo
has minimal information about joint ventures, (such
and as BDT or cognitive schema); and the thr
all of it is bad, it eliminates this option (the
of 'hot
fragmentation by trying to appease every poin
stove effect'). This is true even if joint venture is
of view in strategy and psychology. In our op
the optimal choice but requires competence ion, behavioral strategy needs to follow a mid
build-
ing by repeat experience. This is not cognitive bias recognizing the diversity of the tasks it fac
path,
but an anomaly in the adaptive learning process.while focusing on a small number of core pro
Rational selection demands the search for success-
lems. Behavioral strategy may converge to on
ful options and avoidance of failed options. As paradigm in a future generation (though we th
a side consequence, it produces undersampling ofthis is unlikely); in the meantime, behavioral stra
failure (see also Markle, 2011). egy needs to find unity within diversity.
Lovallo and Sibony (2010) distinguished be- The good news is that the scope of behavior
tween recurrent strategic decisions, such as re-strategy is not infinite. The field may have multip
source allocations in R&D projects, and large one-paradigms, but it does not have 40 or 50 of the
off decisions for which the firm lacks established Figure 1 depicts the conceptual model we have
choice processes, such as responding to a new mind.

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1380 . . Powell D. Lovallo, and . R. Fox

REDUCTIONISM on well-defined problems within their domains of


specialization. On the other, we do not see a con-
tradiction in seeking within-paradigm and across-
paradigm contributions, along with a greater degree
of openness (Bendersky and McGinn, 2010). We
/ Shared problems '
believe disciplinary unity will flow from three
/ Multiple methods ' practices: attending to a small number of core
/ Shared community ' problems; adopting a policy of methodological
pluralism and multimethod research; and strength-
ening the institutional and social fabric of the
PLURALISM CONTEXTUALISM
community of scholars and practitioners in behav-
ioral strategy.
Figure 1. Behavioral strategy: an integrative view
Our vision for behavioral strategy can be sum-
marized in the following seven points:
In Figure 1, the domain of behavioral strategy
1. Definition: Behavioral strategy merges cog-
is bounded by its three main schools of thought:
Reductionism, Pluralism, and Contextualism. Eachnitive and social psychology with strategic
school tells part of the truth about behavioral strat-management theory and practice. Behavioral
egy; each can reasonably be called a paradigm. Thestrategy aims to bring realistic assumptions
Reductionist paradigm deals with the psychologi-about human cognition, emotions, and social
cal character of economic decision making, whichbehavior to the strategic management of organi-
is best studied quantitatively and experimentally;zations and, thereby, to enrich strategy theory,
its core model is behavioral decision theory. The empirical research, and real-world practice.
Pluralist paradigm deals with the psychological 2. We construe cognitive and social psychology
character of complex political judgments in largebroadly. The domain of behavioral strategy
organizations and is best studied by observationscomprises three paradigms: Reductionist, Plu-
in the field; its core model is the internally differ- ralist, and Contextualist. The field should em-
entiated organization. The Contextualist paradigmbrace insights from all three paradigms.
deals with the character of management percep- 3. Behavioral strategy should strive for greater
tions and mental frames and is best studied by disciplinary unity. The field should welcome the
interpretive, symbolic, ethnographic, or hermeneu- diversity of a three-paradigm world rather than
tic methods; its core model is schema theory. excluding any of them. There are three ways
In past research, the three paradigms operated to build a more unified discipline of behav-
in relative independence. Economically inclined ioral strategy: problem integration, methodol-
researchers conducted experiments on biases,ogy integration, and community integration.
heuristics, and experiments; organizationally in-4. Problem integration: Behavioral strategy should
clined researchers studied CEOs, top managementbring all three paradigms to bear on a small
teams, and organization structures; sociologicallynumber of core research problems. We propose
inclined researchers studied cognitive frames, per- four core problems: (1) scaling individual cog-
ceptions, and schema. nition to collective behavior; (2) defining the
At the same time, some researchers operated psychological underpinnings of strategy theory;
in more than one paradigm - people like Herbert(3) understanding complex judgment in orga-
Simon, James March, Karl Weick, Barry Staw, nizations; and (4) improving the psychological
Sidney Winter, and Bill Starbuck - and manyarchitecture of the firm.
researchers still do. We take this as evidence that
5. Methodology integration: Behavioral strategy
the three paradigms are not incompatible and that should adopt a principle of methodological
research in behavioral strategy can combine a wide pluralism and intellectual sharing. Researchers
field of vision with a capacity for disciplinary should design multimethod studies, and journal
integration. editors and reviewers should set expectations
These are the traits that behavioral strategy accordingly. Researchers should prioritize
needs to cultivate as a field of study. On one knowledge accumulation for the field as a
side, we recognize that researchers need to work whole.

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Special Issue Introduction 1381

6. Community integration: Researchers, practi- SPECIAL ISSUE: PSYCHOLOGICAL


tioners and others should focus on strength- FOUNDATIONS OF STRATEGIC
ening the social and institutional fabric of MANAGEMENT
behavioral strategy. Researchers should orga-
The Call for Papers for the Special Issue wa
nize an interest group in the Strategic Manage-
ment Society and specialized workshops and issued in April 2008, with a submission dead
conferences. Efforts have been made in this line of January 20, 2009. As part of the SM
direction, but much more can be done to build
Annual Meeting, a preconference meeting w
held in Washington, D.C., in October 2009, i
name recognition, reputation, and intellectual
unity in the field. We believe the Strategic Man-
which papers still under consideration were pre
sented and discussed.
agement Society is the right venue for taking
the lead in this effort. The Call for Papers invited submissions
7. Though its three base paradigms are histori- on a broad range of topics and using varied
cally grounded and relatively stable, behavioral
methodologies:
strategy should strive for growth, dynamism,
and creative leadership in defining new research'We invite conceptual or empirical papers
problems and methods. Many changes are hap- dealing with the psychological origins of
pening even now - the shift from decisionsstrategy, with particular emphasis on how
to complex judgments; from individual biasespsychology can inform theory and empiri-
to choice architecture; from introspection tocal research on strategy formation, resource
cognitive neuroscience. We believe behavioral formation and deployment, strategy imple-
strategy should stay abreast of these trendsmentation, market efficiency, and sustained
and take leadership in exploring new research competitive advantage. For empirical studies,
frontiers at the intersection of strategy and we welcome both conventional methods and
psychology. new or emerging methodologies, including
natural or controlled experiments, numeri-
As behavioral strategy expands and develops, cal or agent-based simulation, mathematical
we believe the benefits of methodological plural- modelling, or neuro-physiological research
ism will become increasingly apparent. As coed- such as brain scans.'
itors of the Special Issue, we reviewed papers
covering a wide range of methods: mathematical We received a very large number of submis-
models, simulations, brain scans, lab experiments, sions, more than any previous SMJ Special Issue.
field surveys, case studies, LISREL analyses, event The response demonstrated the scope and rele-
studies, comparative studies, discourse analyses, vance of behavioral strategy, as well as the field's
cognitive mapping, and others. However, we were immense heterogeneity. There were some excep-
surprised by how few papers tried to put these tional papers among the submissions - more than
methods together - for example, combining could be published in the Special Issue. In review-
experiments with event studies, simulations with ing submissions, in addition to the usual standards
discourse analysis, or cognitive maps with brain of contribution, method, and style, we gave pri-
scanning. We see mixed-methods research as the ority to papers with strong links to psychology
future of behavioral strategy. Indeed, the opportu- and papers that presented novel ideas, rather than
nities are so great - intellectually, socially, institu- extensions or restatements of ideas published else-
tionally - that it seems inevitable that the field will where. In some cases, we referred papers to the
move in this direction. Opportunities for mixed- normal SMJ review process.
methods research have been cited earlier, and mod- We would like to express our sincere gratitude
els can be found in other disciplines - for example, to all those who submitted papers to the Special
the Henrich et al (2004) program of combining Issue. We were delighted and overwhelmed by
anthropology and game theory to study ultimatum the response, and we appreciate the patience of
games, dictator games, and public goods games in authors, especially those whose papers we could
international cultures. We believe methodological not publish. We also want to thank the many
pluralism should become the standard for research scholars who gave generously of their time and
in behavioral strategy. energies to review papers for the Special Issue.
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1382 . . Powell, D. Lovallo, and R. Fox

We aimed to use three reviewers on each paper, entrepreneurial firms. The question concerned what
and we recognize that the volume of papers placed organizations learn and how they do it. The authors
unusual demands on our colleagues in behavioral argue from the data that what organizations learn
strategy. Finally, we are grateful for the sage are portfolios of heuristics, and that these heuris-
advice and support of Rich Bettis, who served tics as
follow a specific developmental sequence of
our SMJ advising editor. Rich's availability events. and The authors identify the heuristics and
encouragement were much appreciated. sequences, and link them to collective learning,
In the end, we accepted the nine papers that memory and capability development.
appear in this volume. We believe each of them Bardolet, Fox, and Lovallo (2011) combine field
makes a distinctive contribution to behavioral strat- evidence with experimental methods to examine
egy. The papers cover diverse topics and meth- the cognitive biases of corporate resource alloca-
ods, but also demonstrate the potential for a more tion. The authors find that diversified firms show
unified field of behavioral strategy. Some of the a persistent bias toward allocating capital equally
papers use multiple methods, others point the way across business units, no matter how the units
to new topics and methods, and each of them are partitioned - in effect, cross-subsidizing low-
addresses one or more of the core problems in performing units with the profits of high perform-
behavioral strategy. ers. By eliminating noncognitive explanations, the
The paper by Huy (2011) uses social identity authors reveal the psychological foundations of a
theory to show how individual emotions scale to critical source of corporate inefficiency.
groups and organizations and shows the conse- Two papers are linked to recent developments
quences of collective emotions for strategy in cognitive neuroscience. Powell (2011) evaluates
implementation. The author's field study in a large the prospects of behavioral neuroscience for con-
Canadian service firm illustrates how a psycholog- tributing to behavioral strategy. Powell identifies
ical mechanism such as identification can bridge the potential contributions and limitations of neu-
the gap between individual psychology and orga- roscience and shows how research in neurostrategy
nizational strategy. may lead to useful interdisciplinary collaborations
Dysfunctional learning regimes can lead to firm and innovations in theory development, construct
inefficiency even when the firm and its employ- validation, measurement, and strategy practice.
ees do not commit cognitive errors. Markle (201 1) Hodgkinson and Healey (2011) employ a model
uses a simulation method to study this prob- in social cognitive neuroscience - controlled vs.
lem in the context of employees' responses to automatic processing - to challenge the assump-
wage changes. The paper shows that the exis- tions and conclusions of dynamic capability the-
tence of employees who do not respond to wage ory. The authors argue that emotion and intuition
hikes causes firms to underestimate the output of play essential roles in building individual and col-
high-effort employees and, hence, to set ineffi- lective capabilities and suggest ways of aligning
cient wages. This model has many applications in strategy theory with models of capability develop-
strategic management and represents a new wave ment in cognitive neuroscience.
of research linking individual and organizational We conclude the Special Issue with a com-
learning. mentary by Daniel Levinthal (2011) entitled 'A
Hu, Blettner, and Bettis (2011) combine ref- behavioral approach to strategy - what's the alter-
erence point theory with the behavioral theory native?' He argues that sharp distinctions between
of the firm to produce a two reference point rational and nonrational strategy are unhelpful. The
model of adaptive aspirations. Using simulations, world is neither one nor the other, and what really
the authors examine three strategies for adjusting matters in strategy is whether models help peo-
aspirations - conservative, ambitious, and satisfic- ple solve the problems they face as scholars and
ing - and find that the latter yields better out- strategy practitioners. In Levinthal's (2011) words,
comes. This paper shows the benefits of combining 'the choice is not between whether we should act
Reductionist and Pluralist approaches to improve in a God-like manner or like mortals. We are mor-
our understanding of long-standing problems in tals.' Ultimately, Levinthal argues, we need models
strategic management. that solve the problems faced by thinking and feel-
Bingham and Eisenhardt (2011) conducted a ing human beings, and this requires a robust and
field study of organizational learning in six dynamic field of behavioral strategy.

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Special Issue Introduction 1383

On that point we agree, and we hope you enjoy Bromiley P, Papenhausen C. 2003. Assumptions of
the Special Issue. rationality and equilibrium in strategy research.
Strategic Organization 1(4): 413-437.
Brunsson N. 1982. The irrationality of action and action
rationality: decisions, ideologies, and organizational
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