What makes dynamic strategic problems difficult? Evidence from an experimental study

Hazhir Rahmandad, Jerker Denrell and Drazen Prelec

Strategic Management Journal, 2021, vol. 42, issue 5, 865-897

Abstract: Research Summary Managers regularly deal with dynamic tasks, where decisions impact immediate payoffs as well as long‐term capabilities. Research shows that people do poorly in dynamic tasks, but the underlying mechanisms are unclear. These may range from unsystematic problem‐solving to rational learning in complex environments. In a series of experiments, we tease apart alternative explanations, showing that poor performance is due to behavioral difficulties. Remarkably, we find that people do poorly even if provided with complete information about the payoff function, thus, eliminating any need for learning. They unsystematically search among possible solutions and end up with inefficient heuristics. The results show that differences in thinking through a dynamic problem may lead to substantial variation in performance, even if common sources of complexity and ambiguity are excluded. Managerial Summary Why do people, including managers, have difficulty managing systems where taking action today impacts future outcomes? Difficulty of learning in a complex environment has been proposed as the key challenge. Using experiments, we show that people find such tasks difficult even when all relevant information is provided to them and there is nothing to learn. Using trial and error most participants learn satisfactory, but inferior, heuristics. Those who systematically think through tradeoffs over time significantly outperform others even in a simple task, suggesting such thinking adds value in realistic managerial settings as well.

Date: 2021
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