Toward an Economic Theory of Leadership: Leading Adaptive Change

Abstract

This paper develops a model of adaptive leadership, which is leadership that helps organizations adapt to new or existing realities. A manager provides adaptive leadership by exposing the organization to a novel experience that demonstrates that the firm's beliefs do not match reality. Exposure to the novel experience creates distress, which decreases utility for managers and lowers productivity. The prospects for increasing profits by improving beliefs, the desire to decrease distress by engaging in adaptive learning, and the possibility of improving productivity by lowering distress and stimulating controlled cognitive processes motivate managers to engage in adaptive work, which requires effort and consumes resources. If there is no novel experience, managers might engage in interesting work because it stimulates cognitive processes, which improve productivity. Casualties may result from adaptive leadership: Some managers will find the distress too much and leave the firm. The manager practicing adaptive leadership may lose her job if the authority figure finds the novel experience too distressful.