Mental Models, Decision Rules, Strategies and Performance Heterogeneity

Abstract

A central topic in strategy research is explaining heterogeneity in strategies and performance among firms. This paper focuses on the role of managerial decision making as a source of heterogeneity by examining the relationships connecting diversity in mental models, decision rules, and strategies to performance heterogeneity in a management simulation. Our results demonstrate there is substantial variation in mental model accuracy and decision makers with more accurate mental models achieve higher performance levels. In addition, estimates of information weights indicate considerable variation in participants' decision rules, and more accurate mental models result in more effective decision rules. We also find a number of distinctive strategies or patterns in participants' decision rules. There are significant differences in mental model accuracy across these different strategies, and these different strategies account for significant variation in performance outcomes. Overall, our findings provide empirical evidence for the links between mental models, decision rules, strategies, and performance outcomes, and help explain why some managers and not others adopt strategies that are ultimately associated with competitive success.

Keywords: mental models, decision making, system dynamics, simulation

JEL Classification: C91, C63, D81