Performance Feedback and Information Processing: How Do Organizations Regulate Risk-Taking?

Abstract

The Behavioral Theory of the Firm has often viewed risk-taking as an almost mechanistic response to performance feedback. In this study, we develop a more fine-grained model of the performance feedback risk-taking relationship and argue that performance feedback drives how decision makers process information regarding risky opportunities. Specifically, we argue that organizations process information regarding two attributes characterizing risky opportunities (magnitude of potential losses/gains and the likelihood of adverse/positive outcomes) depending upon two dimensions of performance feedback (performance level and deadline proximity). We test our ideas by analyzing 26,514 fourth down decisions from the National Football League (NFL) between seasons 2009–2016. Specifically, we show that organizational risk-taking becomes more sensitive to the magnitude of the potential losses/gains as the distance of performance from the aspiration level increases (both below and above aspirations), and less sensitive to the likelihood of adverse/positive outcomes as performance improves above the aspiration level; we further show that as the deadline to meet the goal approaches, organizational risk-taking becomes less sensitive to the two attributes characterizing the risky opportunity and more so to the current level of performance. Keywords: Risk-taking, Behavioral Theory of the Firm, Aspirations, Performance Feedback

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