Beyond Bounded Rationality: CEO Reflective Capacity and Firm Sustainability Performance

Abstract

Optimal or rational decision making is not possible due to informational constraints and limits in computation capability of humans (March & Simon, 1958; March, 1978). This bounded rationality serves as a filtering process in decision making among business executives (Hambrick & Mason, 1984). In this study, we propose the concept of CEO reflective capacity as a behavior-oriented cognitive capability that may overcome to some extent the pervasive limitation of bounded rationality in executive decision-making. Following Hinkin's (1998) method and two executive samples, we developed and validated a three-dimensional measure of CEO reflective capacity. Based on two-wave surveys of CEOs and their executive-subordinates in 213 Chinese small-medium sized firms, we tested and confirmed three hypotheses on how CEO reflective capacity is related to a firm's sustainability performance (including economic, societal, and environmental dimensions) through the mediating mechanisms of strategic decision comprehensiveness and CEO behavioral complexity. We discuss the contribution of this study to the literature on the upper echelons and information processing perspectives. We also identify the implications for future research on strategic leadership and managerial cognition in complex and dynamic contexts.

From Traditional Research to Responsible Research: The Necessity of Scientific Freedom and Scientific Responsibility for Better Societies

“…Wang et al (2011) related relationship-oriented and task-oriented leadership behavior of CEOs to middle managers performance and firm performance. We analyzed the influence of CEOs' personal values (self-enhancement and self-transcendence) on the efficacy of transformation leadership in obtaining employee commitment (Fu et al 2010), CEO humility on empowering culture and middle manager response (Ou et al 2014), and CEOs' reflective capacity ( Jia et al 2021) on firms' sustainability performance (economic, social, and environmental). In , we analyzed how Chinese leadership practices reflected the Chinese philosophy of Confucianism, Daoism, and Legalism.…”

“…These projects involve some contextualization of existing theories and measures. Only two projects (Tsui et al 2017, Jia et al 2021) may qualify as indigenous research, investigating executive behaviors and mental processes, unbounded by an existing theory of leadership. Reflecting on the development of research in China and other emerging contexts gave me a great appreciation for the importance of the phrase "knowledge is contextual" (Polanyi 1966).…”

Remembering James March

“…Attention is a key concept in Cyert and March's (1963) behavioral theory of the firm, and the attention-based view has become an important perspective in strategic management and organizational studies. Closely linked to the article by Jia, Tsui, and Yu (2021), the study by He, Huang, and Yang (2021) emphasizes the important role of managerial cognition and attention allocation in firms' decision-making and learning processes. Contributing to the performance feedback theory of organizational learning, this article argues that organizational learning and search are not only influenced by aspirations based on past experiences but also affected by a cognitive process based on a forward-looking process.…”

“…Entitled 'Beyond Bounded Rationality: CEO Reflective Capacity and Firm Sustainability Performance', the article by Jia, Tsui, and Yu (2021) focuses on applying March's decision-making insights to the issue of CEOs' optimum decision-making by evoking a personal attribute of reflective capacity as the cognitive capability to increase awareness of the firm's current and future opportunities, which presumably allows CEOs to enjoy expanded information search and processing ability. By defining reflective capacity and demonstrating its relevance to the firm's sustainability performance, this study develops a conceptual model of CEO reflective capacity.…”

CEO Overconfidence, Corporate Governance, and R&D Smoothing in Technology-Based Entrepreneurial Firms

“…More specifically, the literature on the determinants of R&D smoothing mainly focuses on organizational and contingent factors, and individual-level factors are not well-understood. In particular, firms' chief executive officers (CEOs) are their most important decision-makers; thus, CEOs' personal attributes might have a substantial impact on their firms' strategic activities (Lin et al, 2020 ; Jia et al, 2021 ; Yu et al, 2022c ), which motivates a deeper exploration of CEO-level factors.…”