The purpose of this paper is to develop and validate a model of how cognitive biases and framing effects influence managerial decision‐making about strategic initiatives.
Because the author was interested in understanding real‐world practices about strategic decisions, he chose to conduct a quasi‐experimental field study over a three‐year period with managers in a multinational corporation. He developed a questionnaire and a series of vignettes for the independent measures, and examined database records of decisions for the dependent measures.
After validating the instrument items, the author conducted a confirmatory factor analysis for model fit, and then tested the model's predictive ability and interactions. The model indicated that risk aversion, overconfidence, anchoring, and expected utility affected commitment decisions, and these factors interacted with framing effects.
Decision‐makers often fall victim to biases and make sub‐optimal decisions, especially regarding long‐term strategic initiatives. To illustrate, some managers may continue to invest in initiatives that have little or no hope of succeeding because they have already invested heavily in them, or they may prematurely terminate them. An explanatory model is helpful to management and organizational developers to learn how to make optimal decisions using normative rules.
