Adaptive aspirations: performance consequences of risk preferences at extremes and alternative reference groups

Abstract

Goals or aspirations and their relationships to risk taking and performance are important issues in both psychology and strategic management. The concept of adaptive aspirations, as discussed in Cyert and March's Behavioral Theory of the Firm, has long been a topic of interest in both fields. Moreover, many studies in strategy have focused on risk and/or extreme performance. In the current paper, we build on earlier models of adaptive aspirations. We introduce into the models a new risk preference function that incorporates changes in risk preference at extremes of performance. Based on empirical studies and the managerial literature, we also introduce alternative strategies for setting reference groups. Simulations of the resulting models suggest important differences in outcomes from earlier studies and this invites further empirical investigation. These simulations also have significant implications for managerial goal setting. Copyright © 2011 John Wiley & Sons, Ltd.

Modelling Bounded Rationality in Organizations: Progress and Prospects

“…For instance, empirical work in the behavioral theory of the firm tradition argues that organizations increase exploration as a response to underperformance A c c e p t e d M a n u s c r i p t 17 relative to an aspiration level (e.g. Greve, 2003;Hu et al, 2011). Applied to the softmax, this would mean that parameter τ is contingent on performance relative to aspiration, with a higher τ if the organization underperforms relative to its aspiration.…”

Anticipated responses: The positive side of elicited reactions to competitive action

“…For example, a prospector (with large r) tends to be more open and likely to sense market opportunities than a defender (with small r) as it will spend great efforts on market expansion and product innovation (Smith et al, 1991). In addition, if a firm is quite optimistic about its anticipated performance, it will assign a large φ value to set a high performance goal (Sterman et al, 2007;Hu et al, 2011). Note that a performance discrepancy, G, is perceived as the difference between performance goal and actual performance P (Lant, 1992;Hu et al, 2011):…”

“…In addition, if a firm is quite optimistic about its anticipated performance, it will assign a large φ value to set a high performance goal (Sterman et al, 2007;Hu et al, 2011). Note that a performance discrepancy, G, is perceived as the difference between performance goal and actual performance P (Lant, 1992;Hu et al, 2011):…”

“…The feedback loops in Figure 2 have obvious implications for the construction of system dynamics. Yet, resolving the theoretical paradoxes is essential to advance the theory; this can be accomplished by testing its internal validity and experimentally elaborating its propositions, which are strengths of computer simulation methods including system dynamics (eg Sastry, 1997;Kunc and Morecroft, 2007;Sterman et al, 2007;Gary et al, 2008;Vancouver et al, 2010;Hu et al, 2011). We research the notion of anticipated responses by considering simultaneously the interaction effect on organizational performance of a positiveside actor characteristic (P1: firm aggressiveness) and negativeside action characteristic (P4: action visibility), whereas the current literature separately examines these two constructs.…”

“…Davis and colleagues (2007) and Harrison and colleagues (2007) note that when a study does not seek to predict the outcome of a particular set of equations, as is the case in our study, a simulation model using a set of particular parameter values qualifies as a carefully planned and valid experimental process as long as it satisfies the general conditions of the problem studied and illustrates some property of general interest. We follow the practice for developing management theory through computer simulation in the next section (eg Morecroft, 2007;Lomi et al, 2010;Vancouver et al, 2010;Hu et al, 2011;Rahmandad, 2012).…”