Heuristics, thinking about others, and strategic management: Insights from behavioral game theory

Davide Marchiori, Rosemarie Nagel, Jens Schmidt

Publikation: Working paperForskningpeer review


The outcome of strategic decisions (such as market entry or technology adoption) depends on the structure of the situation and the decisions made by others (such as competitors, customers, or suppliers). Therefore, to anticipate and influence others’ decisions, managers must understand the strategic features of the situation and form beliefs about of others and consider that, in turn, also others may form such higher order beliefs. We introduce a two-part heuristic model of interactive decision-making drawing on insights from behavioral game theory, with the aim to guide and support managerial and strategy decisions involving multiple actors. In the first part, the decision maker designs and analyzes the situation under consideration. As a toolbox for such formulations, we provide a classification of interactive decision settings (games) drawing from the theoretical framework of aggregative games, like the Keynesian Beauty contest game, and their most simplified instances in discrete choice strategies, i.e., two-person two-strategy (2x2) games. Altogether, these games represent important interactive decision settings relevant for the business strategy field. We show how higher-order reasoning differently matters in these games. In the second part, we construct a two-step behavioral model of anchoring and adjustment, informed by the level-k model of strategic reasoning, a belief-based model about other players’ beliefs and actions. We discuss the implications of our analysis for the field of business strategy and suggest a feasible roadmap from simple to complex scenarios.
StatusUdgivet - sep. 2019