The Near-Term Liability of Exploitation: Exploration and Exploitation in Multi-Stage Problems

Organization Science, Vol. 20, No. 3, pp. 538-551, 2009

36 Pages Posted: 7 Apr 2008 Last revised: 27 Dec 2011

Christina Fang

New York University (NYU) - Department of Management and Organizational Behavior

Daniel Levinthal

University of Pennsylvania - Management Department

Abstract

The classic tradeoff between exploration and exploitation reflects the tension between gaining new information about alternatives to improve future returns and using the information currently available to improve present returns (March, 1991). By considering these issues in the context of a multi-stage, as opposed to a repeated, problem environment, we show that exploratory behavior has value quite apart from its role in revising beliefs. We show that even if current beliefs provide an unbiased characterization of the problem environment, maximizing with respect to these beliefs may lead to an inferior expected payoff relative to other mechanisms that make less aggressive use of the organization's beliefs. Search can lead to more robust actions in multi-stage decision problems than maximization, a benefit quite apart from its role in the updating of beliefs.

Keywords: Exploration and exploitation, maximization, multi-stage problems, reinforcement learning, softmax choice rule

Suggested Citation

Fang, Christina and Levinthal, Daniel, The Near-Term Liability of Exploitation: Exploration and Exploitation in Multi-Stage Problems. Organization Science, Vol. 20, No. 3, pp. 538-551, 2009. Available at SSRN: https://ssrn.com/abstract=1117082

Christina Fang (Contact Author)

New York University (NYU) - Department of Management and Organizational Behavior ( email )

44 West 4th Street
New York, NY 10012
United States

Daniel A. Levinthal

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
215-898-6826 (Phone)
215-898-0401 (Fax)

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