(When) are We Dynamically Optimal? A Psychological Field Guide for Marketing Modelers

Abstract

A common assumption made in structural approaches to empirical strategy research in marketing is that firms and consumers satisfy the assumptions of dynamic optimality when making decisions. When faced with problems of how best to allocate resources, firms are assumed consider the future consequences of different strategic options and, in each point in time, choose the option that maximizes long-term utility. The validity of such assumptions, however, is often called into question by behavioral researchers who point to work in psychology that finds that assumptions of optimality are frequently violated in experimental settings. If this is indeed the case, it would lend support to approaches that argue that markets have inefficiencies that can be discovered and exploited by simpler, largely correlational, methods. In this article, the authors attempt to reconcile these contrasting views by proposing a framework for assessing when assumptions of dynamic optimality are likely to be good ones and when they are likely to be untenable in empirical analysis.

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