Risk,uncertainty, and heuristics

Nearly a century ago, Frank Knight famously distinguished between risk and uncertainty with respect to the nature of decisions made in a business enterprise. He associated generating economic profit with making entrepreneurial decisions in the face of fundamental uncertainties. This uncertainty is complex because it cannot be reliably hedged unless it is reducible to risk. In making sense of uncertainty, the mathematics of probability that is used for risk calculations may lose relevance. Fast-and-frugal heuristics, on the other hand, provide robust strategies that can perform well under uncertainty. The present paper describes the structure and nature of such heuristics and provides conditions under which each class of heuristics performs successfully. Dealing with uncertainty requires knowledge but not necessarily an exhaustive use of information. In many business situations, effective heuristic decision-making deliberately ignores information and hence uses fewer resources. In an uncertain world, less often proves to be more.     

What's in a logo? The impact of complex visual cues in equity crowdfunding

Visual cues are pervasive on crowdfunding platforms. However, whether and how low validity visual cues can impact the behavior of backers remains largely unknown. In this article, we propose a disfluency-based heuristic framework for understanding the influence of low validity visual cues on equity crowdfunding platforms. Drawing on processing fluency theory and visual heuristics, we propose that backers often automatically process visual cues, and that the subjective experience of ease/difficulty with which backers perceptually process low validity visual cues serves as a heuristic and informs their perceptions of early-stage entrepreneurial ventures. We test our propositions focusing on logos (low validity visual cues that are particularly salient and ubiquitous on equity crowdfunding platforms) and logo complexity (a fundamental characteristic of logo design and established antecedent of processing disfluency). We contend that logo complexity can be interpreted by backers as a signal of venture innovativeness because more (vs. less) complex logos are more difficult to process, and thus, feel less familiar and more unique, original, and novel to backers. Since backers often value innovativeness, we further contend that logo complexity can positively impact backers' funding decisions. We find support for our framework and propositions using a multimethod approach comprising three studies: one survey, one field study, and one experiment. Theoretical contributions and managerial implications are also discussed.     

Interorganizational imitation heuristics arising from cognitive frames

The literature on organizational imitation mostly disregards its cognitive aspect. Yet, imitation is a cognitive heuristic. The study draws a unifying framework of imitation theories through a cognitive lens in the context of innovation adoptions. The premise is that organizations imitate in order to improve the status quo or to avoid losing it. The interaction of the framing of imitation and the organization's evaluation of an innovation as threats or opportunities results in the use of combinations of the two most popular imitation heuristics – “imitate the successful” and “imitate the majority.” Since the framings dictate different imitation timings, the speed of innovation diffusion depends on these interactions. The study contributes to the organizational learning literature by proposing that social learning is subject to interpretations resulting in the use of different imitation heuristics. Its contribution to the decision-making literature is that complex strategic decisions employ imitation heuristics from Gigerenzer's adaptive toolbox.     

Consideration-set heuristics

Consumers often choose products by first forming a consideration set and then choosing from among considered products. When there are many products to screen (or many features to evaluate), it is rational for consumers to use consider-then-choose decision processes and to do so with heuristic decision rules. Managerial decisions (product development, marketing communications, etc.) depend upon the ability to identify and react to consumers' heuristic consideration-set rules. We provide managerial examples and review the state-of-the-art in the theory and measurement of consumers' heuristic consideration-set rules. Advances in greedoid methods, Bayesian inference, machine-learning, incentive alignment, measurement formats, and unstructured direct elicitation make it feasible and cost-effective to understand, quantify, and simulate “what-if” scenarios for a variety of heuristics. These methods now apply to a broad set of managerial problems including applications in complex product categories with large numbers of product features and feature-levels.     

Choosing among alternative new product development projects: The role of heuristics

The initial screening decision that marketing managers make is critical. It requires the selection of what innovation project to invest in, which is fundamental to marketing success. However, our knowledge of how managers make these decisions and how this impacts performance is limited. By drawing upon cognitive psychology and the managerial decision-making literature, we address two critical questions. The first question focuses on identifying specific decision-making types (e.g., specific heuristics, intuition) used when making an innovation screening decision. Based on this analysis and prior research, we develop specific decision-maker profiles about how an individual manager decides. The second research question is about connecting these profiles with performance. Specifically, it addresses what the consequences of different decision-maker profiles are on the perceived accuracy and speed of decision-making? Data were collected from 122 senior managers in these industries. We find that when heuristics are used alone, or concurrently with intuition, managers make decisions that are as accurate as when they rely on analytical decision-making. However, the process is significantly faster. The findings provide an important step toward a more comprehensive understanding of decision-making at the front-end of innovation.     

Making customer relationship decisions: Analytics v rules of thumb

This article explores how customer management decisions are made in the leading Nordic retail banks and whether these decisions are driven by mainstream analytical approaches to customer lifetime value available through the banks' CRM systems, or by rule of thumb heuristics. The results indicate that the use of managerial heuristics is surprisingly widespread and, counter-intuitively, that rule of thumb heuristic-based decision making frequently outweighs measures such as customer lifetime value with regard to customer management decisions. The implications are considerable because if successful banks are making widespread use of heuristics, managers and academics would benefit from understanding the conditions under which heuristic decision making can be more successful than an analytic approach. This understanding, in turn, may highlight a limitation of CRM systems and point to a more flexible approach to customer management decisions in which experience-based managerial heuristics modify data from formal CRM systems.     

Retail investors and financial advisors: New evidence on trust and advice taking heuristics

This paper investigates factors that influence trust and advice taking among retail investors when consulting with financial advisors and making real-world portfolio decisions. The data reveal that non-expert retail investors trust their advisors a lot. Trust formation appears to be well described by a simple heuristic that relies substantially on the advisor's communication style when deciding how much to trust and delegate investment decisions. Portfolio decisions appear to depend more on investors' perceptions about the investor–advisor relationship than on the risk and return characteristics of investments comprising the portfolio choice set. This evidence supports Pentland's (2008) “honest signals” as a more powerful mechanism underlying investor trust than standard metrics based on past performance. Trust and advice-taking heuristics can be interpreted as well adapted to the environment of the non-profit bank cooperatives in which they are observed, implying that trusting based on simple honest signals, although vulnerable to exploitation, can be interpreted as ecologically rational. Features of the investor's environment typical of non-profit cooperative banks imply that the heuristics investors use can perform rather well without requiring investment experience or financial sophistication, which most investors in our sample are well aware they lack.     

Quantitative and qualitative insights into consumers’ sustainable purchasing behaviour: a segmentation approach based on motives and heuristic cues

The present study draws on the concepts of motives and heuristics to thoroughly understand consumers’ sustainable consumption behaviour in the context of personal care products. The mixed-methods approach combines real purchasing data with in-depth qualitative data to generate insights with a high external validity. In the first section of the study, quantitative analysis is applied to actual purchasing behaviour (n = 10,772,477) to identify market trends. Three main groupings, along with specific heuristic cues, are established. In the second step, a qualitative study (n = 21) provides deeper insights into consumers’ motives and decision-making processes. By synthesising the quantitative and qualitative research findings, a segmentation approach is developed. Relevant motives and values, and corresponding specific heuristic cues are identified for each consumer segment. Analysis suggests that consumers are motivated by self-interest and environmental motives, and that they use simple heuristic cues to make quick and satisfying purchasing decisions. Both retailers and manufacturers can leverage these insights to seize the opportunities of the developing market for sustainable personal care products.     

Assessing the Influence of Attitudes,Skills and Experience on International Marketing Investment Decision-Making: A Behavioral/Systems Approach

A lack of rigorous theories and validated research instruments have been serious impediments to the development of research models to test the relative importance of managerial attitudes, skills and experience as influences on the international marketing decision-making process and, ultimately, on levels of company performance and internationalization. The author has drawn on a wide range of organizational theories and the results of empirical studies in the international marketing, management and business spheres to devise a more eclectice, behavioral/environmental systems model to assess the importance of intra-firm and extra-firm influences on key marketing managers' international investment decisions.     

‘Expect the unexpected’: Implications of effectual logic on the internationalization process

International entrepreneurship literature has indicated that entrepreneurs often increase international activities along unexpected lines of reasoning without having a precise goal, resulting in “unplanned” internationalization. We argue that “unplanned” internationalization does not necessarily involve non-logical decisions; but, entrepreneurs can follow an effectual rather than causal logic and may base their decisions on the affordable loss principle rather than on the maximization of expected returns. Based on five case-studies, we discuss the implication of effectual decision-making on the internationalization process. We find that switching from causal to effectual logic allows firms to rapidly increase the level of commitment in the foreign market and could assist in overcoming liabilities of outsidership and, therefore, successfully increase the level of commitment in the foreign market.     

The drivers of the early internationalization of the firm

Time in firm internationalization has different dimensions: it might refer to the early start of international activities, the speed of international growth, or to its pace and rhythm. This contribution considers the first dimension mentioned, viz. precocity, and aims at understanding which variables determine an early international orientation. Building on a literature review, a theoretical framework is proposed in order to integrate a fragmented literature body. The framework is then tested through an analysis on a sample of 144 SMEs. Among the drivers of early internationalization the role of the previous experience of the entrepreneur, and especially of their international experience, frequently nurtured in internationally oriented family firms on one side or in multinational/foreign firms on the other one, was found significant. The positive association between precocity and niche positioning of the business enforces the relevance of entrepreneurship because focalization is a reflection of entrepreneurial orientation and strategic decisions.     

Me,myself and I: The role of CEO narcissism in internationalization decisions

Internationalization decisions represent major objects of international business research; in this context, the respective role of decision-makers, i.e., strategic actors has been under study for now nearly 50 years. However, some important individual characteristics of strategic actors, which seem to influence individual decision-making in a significant way, have been – in contrast to general management research – widely disregarded. Among those characteristics, narcissism plays a decisive role. Trying to provide a first attempt to fill this research gap our paper aims at theorizing on as well as empirically analyzing potential relationships between narcissistic tendencies of CEOs and their internationalization decisions. The empirical study of major German manufacturing firms over the period 2004–2013 shows that CEOs with a high degree of narcissism tend to intensify business activities abroad in general while the expected effect on intensified activities in markets with a high psychic distance cannot be identified. These research results help to better understand the drivers of firms’ internationalization, stress the importance of recognizing managerial decision-making in the context of analyzing business activities abroad, and improve the prediction of CEOs’ decision-making behavior in general.     

The role of MNEs’ internationalization patterns in their regional integration of FDI locations

Multinational enterprises (MNEs) use the regional aggregation and integration of their foreign direct investments as an important part of their internationalization. Internationalization decisions are integrated at the region level; however, little work has focused on explaining the extent of this regional integration. We develop theoretical arguments and test new hypotheses about MNEs’ general international experience and international geographic scope (i.e., institutional diversity and international dispersion) as predictors of their extent of regional integration. The results from a sample of Japanese MNEs validate these different effects, suggesting these MNE level variables are important for regional influences on their internationalization decisions. The results further our understanding of how MNEs organize their internationalization and strategic geographic foci.     

Early internationalization: A transaction cost economics and structural embeddedness perspective

This paper develops and tests a framework for the determinants of early internationalization by drawing on transaction cost economics supplemented with structural embeddedness reasoning. We theoretically explore how asset specificity, prior international experience of the management team, and international network contacts impact early internationalization of the firm. Furthermore, we elaborate how early internationalization is related to foreign market performance. Our results show that asset specificity is negatively related to early internationalization, whereas prior international experience of the management team and international network contacts have a positive impact on early internationalization. Furthermore, our results suggest that early internationalizers are more successful in respect to foreign market performance than companies that have internationalized in later years.     

Does internationalization make a difference? Stock market reaction to announcements of international top executive appointments

In recent years, there has been an increasing scholarly and practical interest in the internationalization of top management teams. It is argued that international firms need international top managers to meet the challenges arising from operating across borders. However, the few existing studies that focus on the link between top managers’ internationalization and firm performance yield inconclusive results. Thus, it is an open question if and to what extent international firms can benefit from international top managers. Drawing on upper-echelons theory, resource-dependence theory, and signaling theory, this paper examines how the stock market reacts to the appointment of an international top manager. Our empirical study of German firms employs an event study to analyze the direct impact of internationalization on a firm's stock price. Piecewise regression analysis reveals that a top manager's internationalization needs to exceed a certain threshold before investors incorporate this individual characteristic into their investment decisions. Furthermore, our analysis shows an inverted U-shaped relationship between internationalization and abnormal returns, suggesting that internationalization may have both positive and negative effects on a firm's stock price. We present several explanations for our empirical findings and discuss future research directions.     

Inspiration and Cynicism in Values Statements

The adoption of codes of ethics or values statements is intended to guide everyday decisions, as well as to influence the perceptions of external stakeholders. Questions have emerged in the literature about whether the effort to substantively direct decision-making in an organization is marginalized by the more obvious symbolic role of values statements. Here the perceived impact of values statements (defined broadly) on decision-making in organizations is explored, and a number of positive effects observed. Respondents report that values statements create positive externalities providing guidelines for decision-making, increasing accountability, and clarifying expectations. Yet, both cynicism and perceived management hypocrisy emerged in the survey, which together had strong negative effects on the perceived decision-making impact of values statements. Finally, positive external effects (e.g., more symbolic effects) are almost never mentioned by respondents who give their firms high marks on the quality of values statement development, training, and implementation. Yet, such external effects get significantly greater representation in the comments of respondents who report less substance in their firms’ values statement development and implementation processes. In all, the results suggest that the substantive and symbolic roles of values statements are not independent and that external symbolism without internal legitimacy may in the long-run be problematic.     

The role of market orientation,relational capital,and internationalization speed in foreign market exit and re-entry decisions under turbulent conditions

Firms’ internationalization strategies can vary with changing environments. Occasionally, a firm may choose to re-enter a foreign market it had abandoned in the past if environmental conditions have improved. The present study provides insight into the foreign market exit and subsequent re-entry processes. Specifically, we utilize the strategic flexibility perspective to investigate the impact of market orientation, relational capital, and internationalization speed on market exit and re-entry decisions under turbulence in a host market. Using a sample of 156 Turkish firms that operated during the Arab Spring in the Egyptian market between 2010 and 2015, we find that the market-oriented firms are more flexible in their market exit decisions than less market-oriented organizations. In addition, relational capital specific to the host country has a negative impact on market exit decisions under conditions of political conflict. The results also suggest that strong ties with partners in the host country increase the propensity to re-enter the market.     

How early opposed to late internationalizers learn: Experience of others and paradigms of interpretation

Although learning plays a pivotal role in the internationalization context of the firm, studies elaborating aspects of learning of early internationalizers (as opposed to late internationalizers) are largely missing. We address this deficit by examining the process of learning in the entry phase of internationalization. Our empirical results show that learning from direct experience is negatively related to early internationalization, whereas learning from others and learning from paradigms of interpretation have a positive impact on early internationalization. Furthermore, our results suggest that early internationalizers compared to late internationalizers continue to prefer cooperative modes of market penetration and show higher entry-mode stability in the same country.     

跨境人民币结算与人民币国际化研究

本轮国际金融危机发生以来,现行国际货币体系的弊端更加凸显。跨境贸易的人民币结算是人民币国际化的第一步,该业务的稳健发展对于人民币国际化尤为重要,及时加强跨境贸易人民币结算与人民币国际化问题研究,对保障我国经济金融稳健发展,推动人民币国际化具有十分重要的理论和现实意义。本文在阐述货币国际化的条件和路径的基础上,考察了四种货币国际化的经验教训,探讨了我国跨境贸易人民币结算业务发展与人民币国际化面临的机遇与挑战,并提出了相关的政策建议。     

Top management team characteristics and firm internationalization: The moderating role of the size of middle managers

This paper examines the influence of the top management teams' (TMTs) characteristics, including tenure and international experience, on the degree of firm internationalization. In addition, this study explores the moderating effect of the size of middle managers (MMs) on the relationship between the TMT characteristics and the degree of firm internationalization. This study use the information-process perspective to emphasize that MMs provide information processing capabilities that assist TMTs as they cope with the high information-processing demands of the strategic decision-making process in international markets. We test the hypotheses using a sample of listed manufacturing firms in the electro-optical and textile industries during the 2006–2010 period. The findings indicate that TMT tenure has an inverted U-shaped relationship with firm internationalization and TMT international experience has a positively affect the firm internationalization. Furthermore, we find that large MM size positively enhances the inverted U-shaped relationship between TMT tenure and firm internationalization.