Mental Representation and the Discovery of New Strategies

Abstract

Managers' mental representations affect the perceived payoffs and alternatives that managers consider. Thus, mental representations affect how managers search for profitable strategies as well as the quality of strategies they discover. To study how mental representation and search interact, we formally model the dual search over possible representations and over policy choices of a strategy 'landscape.' We analyze when it is preferable to emphasize searching for the best policies rather than the best mental representation, and vice versa. We show that in the long run a balance between the two search modes not only results in better expected performance but also reduces the variation in performance. Additionally, the paper describes conditions under which increased accuracy of mental representations can actually worsen firm performance.

Keywords: cognition, mental representation, search, NK models

JEL Classification: D21, D23, D81, D83, M13, O31, O32