Behavioral Economics and Strategic Decision Making

Abstract

Modern strategic decision theory focuses on those actions taken by senior executives (on behalf of the owners) that commit substantial resources, set precedents, and create waves of less important decisions. This chapter explores key behavioral assumptions that dispute the notion that strategic decisions are wholly rational in a neoclassical economics sense. It classifies deviations from rationality as non-standard preferences, non-standard beliefs, and non-standard decisions. Insights are provided on how behavioral economics can be applied to strategic decisions in organizational settings, and moreover on how behavioral economics can be enriched by asking questions that are unique to the role of executives making strategic decisions within firms.

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