Boom and Bust Behavior: On the Persistence of Strategic Decision Biases

Abstract:     
Boom and bust or overshoot and collapse dynamics are common among firms in a large range of different industries. The underlying cognitive and behavioral factors responsible for strategic decisions driving boom and bust dynamics include misperceptions of feedback, attribution errors, and the inside view frame. These cognitive and behavioral factors also act as strong impediments to learning, resulting in repeated boom and bust episodes at the managerial, organizational, and industry level. Two tentative strategies for mitigating boom and bust behavior are identified. The first strategy focuses on developing schema of market diffusion and capacity expansion in managing product lifecycles. A second strategy is to ensure managers adopt an outside view by paying attention to historical time series of similar cases of diffusion/capacity building in order to detect inflection or turning points. At the same time, it is possible that there might be a positive collective side to boom and bust behavior fostering accumulation of knowledge and physical infrastructure, especially regarding new technological paradigms.

Number of Pages in PDF File: 32

Keywords: decision biases, heuristics, system dynamics, schema, decision rules

JEL Classification: D81, E32, O32, D70, D21, C91

Accepted Paper Series