Prior Experience of Managers and Maladaptive Responses to Performance Feedback: Evidence from Mutual Funds

Vibha Gaba (), Sunkee Lee (), Philipp Meyer-Doyle () and Amy Zhao-Ding ()
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Vibha Gaba: INSEAD Singapore, Singapore 138676, Singapore
Sunkee Lee: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Philipp Meyer-Doyle: INSEAD Singapore, Singapore 138676, Singapore
Amy Zhao-Ding: TUM School of Management, Technical University of Munich, 80333 Munich, Germany

Organization Science, 2023, vol. 34, issue 2, 894-915

Abstract: In this study, we examine how the prior experiences of decision makers systematically influence their assessment of and responses to negative performance feedback. We posit that, although greater and more specialized experiences enable managers to build relevant knowledge and expertise in specific domains, they also make them overconfident in their abilities and strategies. Such experience-induced overconfidence further leads to distortions in the performance assessment process, hindering a firm’s ability to recognize and respond to poor performance. We empirically test these arguments in the context of U.S. mutual fund managers making investment decisions in response to fund performance below aspirations. As hypothesized, we find that more experienced and more specialized fund managers change their investment decisions less when faced with negative performance feedback than managers who are less experienced and less specialized. In additional analyses, we further show that the lower responsiveness of more experienced (specialized) managers is associated with the fund’s lower future performance, supporting our proposed theoretical mechanism (overconfidence). This study augments existing performance feedback research by showing how decision makers’ prior experience can impede problem-solving behavior in organizations. It also contributes to the literature on human capital and organizational learning by documenting an unintended consequence of accumulated human capital on firm adaptive behavior.

Keywords: performance feedback; prior experience; human capital; organizational learning; behavioral theory of the firm; overconfidence; microfoundations of firm behavior and performance (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:34:y:2023:i:2:p:894-915

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