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Faculty of Economics

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Feduzi, A., Runde, J., Cabantous, L., Faulkner, P. and Loch, C.

Updating “Small World Representations” In Strategic Decision-Making Under Extreme Uncertainty

Proceedings of the Seventy-eighth Annual Meeting of the Academy of Management

Vol. 2018 no. 1 (2018)

Abstract: The behavioral strategy literature investigates how decision makers might use Small World Representations (SWRs) to guide their actions in situations of extreme uncertainty, but says little about how such representations should be updated during the implementation phase. In this paper, we provide a framework to capture the relationship between SWRs, unknowns and Black Swans, and, drawing on the psychology of reasoning literature, explore different heuristic methods of inquiry that decision makers might use to update their SWRs. We compare the performance of two such methods⎯disconfirmation and counterfactual reasoning⎯in highly uncertain situations characterized by ambiguous and non-definite information. We find that counterfactual reasoning is superior to disconfirmation with respect to (1) counteracting the confirmation bias, (2) promoting the exploration of the scenario space, and (3) favoring the adoption of actions able to mitigate or exploit the consequences of Black Swans.

Author links: Phil Faulkner  

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