Behavioral strategy, my how you’ve grown!
The evolving understanding of psychological drivers of management choices over the past 50 years
In a nutshell: This study charts a 50-year trajectory during which the illusion of rational, perfectable decision-making has been eroded, and has collapse, to be replaced by an understanding of the psychological and social factors that influence every strategic choice.
Source: https://doi.org/10.1108/MD-01-2023-0072
In non-predictable, non-rational world, it has long been clear that making good strategic choices requires more than rational, linear or quantitative processes. It is also apparent that understanding management decisions as solely the product of rationality is to miss the many psychological and group-dynamics processes that enter every decision.
With this recognition, since more-or-less 2010, the field of behavioral strategy has emerged to illuminate, account for and improve non-rational management choice processes. This also improves our future view of what decisions will be made.
But there is a long prehistory to this, and authors Matteo Cristofaro, Pier Luigi Giardino, Riccardo Camilli, and Ivo Hristov in “Understanding behavioral strategy: a historical evolutionary perspective in Management Decision” chart its evolution from 1967, via a review of articles published in one journal, Management Decision.
They find three eras during which the field has developed, which they summarize as “interest passed from the rules that rationally govern strategic decision-making processes, to studying what causes cognitive errors, to understanding how to avoid biases and to being prepared for dramatic changes.”
The first era (1967-1989) is where models of decision-making influenced by classical and neoclassical economic theories are eroded. Behavioural Decision Theory in the late 1970s acknowledging the impact of bounded rationality (originally theorized in 1947) and cognitive limitations. Research begins to acknowledge the role of social and psychological dynamics in decision-making, highlighting the influence of personal values, cognitive differences, group dynamics and the environment. Upper Echelons Theory emerges in the mid-80s, emphasizing the influence of top managers' socio-demographic and psychological characteristics on their strategic choices.
The second era (1989-2011) sees a shift towards a human-centered understandings of choice, recognizing the importance of skills and abilities within organisations. Upper Echelons combined with Behavioral Decision Theory guides research on the impact of decision-makers personality traits and attitudes on their strategic choices. The importance of "thinking" and "perception" in strategic decision-making is increasingly acknowledged.
The third era (2011-present) is marked by the formal recognition of behavioral strategy as a distinct field in management studies, with the significant Powell et al. 2011 “Behavioral Strategy. During this period, awareness of decision-makers’ biases grows, and ongoing industry disruption and global crises has prompted research on behavioral responses to unpredictable events, emphasizing the importance of improvisation and non-linear thinking in crisis situations.
The authors identify six current themes carrying expected future research in this field:
Positive heuristics: This challenges the traditional view of heuristics as suboptimal, exploring their potential benefits in problem-solving and prediction-making.
Context-embedded mental processes: This investigates the intricate relationship between individual cognitive capabilities and their surrounding social, cultural, and physical contexts in shaping decision-making.
Non-conventional thinking: This explores the interplay of intuition and rationality in navigating complex business challenges and generating innovative solutions.
Cognitive evolutionary triggers: This focuses on how external events and crises can act as catalysts for the evolution of decision-makers' cognitive abilities.
Debiasing strategies: This emphasizes the development and implementation of effective strategies to mitigate biases and improve the objectivity of strategic decision-making.
Behavioural theories for new strategic challenges: This calls for adapting and developing new behavioral theories to address emerging challenges posed by recent global changes and technological advancements.
Overall, this piece does what an academic literature review should do: summarize a field’s evolution and key themes, and point to what is current and coming next. The big takeaway is how significantly behavioral strategy has established itself in 50 years. It is not that rational decision making or what is sometimes called “cold cognition”—processing of data, weighing of options and probabilities, calculation of future gains and losses—is bad, more that it is always only part of what drives decisions.
The myth of rationality hegemonic both is academic and popular conceptions of good decision-making. But, as this article shows, a reliable understanding of how decisions are made, and therein what choices organization or government leaders will make, must marry cold cognition with the swirling tide of human preference, bias, instinct, affect, bravado and group relations. This produces a better view of what decisions to actually expect.