Institutional Memory, Inertia, and Impulsiveness

Posted: 2 Sep 1999

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Abstract

This paper examines how imperfect institutional memory affects organizational decisions. In our model, new managers are aware of their firm's previous actions but not the rationale for these actions. If the environment is stable, we find that a firm that has followed an old investment policy long enough and then changes management generally exhibits greater INERTIA, that is a greater tendency to follow old actions than a firm in which the old manager with full memory would have continued. On the other hand, if the environment is volatile or if the old manager has followed a policy only briefly, previous investment decisions are not very informative, and new managers can be excessively IMPULSIVE (prone to follow their latest information with less regard to history). The model implies relationships among various variables, such as the frequency of policy changes (e.g., reversal of project choices), managerial turnover, the quality of record-keeping, the history of the project, and the stability of the underlying environment.

JEL Classification: G31, G32

Suggested Citation

Hirshleifer, David A. and Welch, Ivo, Institutional Memory, Inertia, and Impulsiveness. Available at SSRN: https://ssrn.com/abstract=5369

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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