Behavioral Corporate Strategy

7 April 2010 at 7:48 am Peter G. Klein 1 comment

| Peter Klein |

I’m not a huge fan of behavioral economics, though I obviously recognize its substantial and growing influence in economics, finance, entrepreneurship, and potentially, strategy. Many academics and commentators see the financial crisis as a vindication for behavioral economics research. Behavioral reasoning underlies the New Paternalism. I see the importance and implications of behavioral economics as overstated — the literature typically focuses on straw-man versions of “rationality” and largely ignores the effect of biases and heuristics on political decision-making — but it raises interesting issues in applied psychology.

My old friend Dan Lovallo has a nice piece (with Olivier Sibony) in the new McKinsey Quarterly making “The Case for Behavioral Strategy.” (It’s gated, but registration is free.) They make good arguments for applying behavioral insights into corporate decision making. The basic claim is that “we need new norms for activities such as managing meetings . . . , gathering data, discussing analogies, and stimulating debate that together can diminish the impact of cognitive biases on critical decisions. To support those new norms, we also need a simple language for recognizing and discussing biases, one that is grounded in the reality of corporate life, as opposed to the sometimes-arcane language of academia.” I agree, and urge you to check it out.

Entry filed under: - Klein -, Management Theory, Strategic Management.

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1 Comment Add your own

1. Rafe | 8 April 2010 at 1:05 am

Yes. For most purposes the subjective elements of the situation can be described in terms of intentions and plans without any attempt at deep psychological analysis. The financial crisis can be explained in terms of institutional structures that generated perverse incentives which led to “irrational” acts but they make sense in the context, for example where there was the expectation of a bailout, votes to be bought using other people’s money etc.