Strategy by Rule of Thumb

UNC's Christopher Bingham and Stanford's Kathy Eisenhardt have produced some fascinating new research on entrepreneurial firms make decisions in turbulent environments (building on a long stream of excellent research Kathy has done in this area).  These scholars found that the more successful firms frequently rely on heuristics – simple rules of thumb (example: for international expansion, enter English-speaking countries first).   These heuristics become more cognitively sophisticated as managers gain experience and the firm grows.  Moreover, managers learn how to eliminate some rules of thumb over time, as they recognize the limitations or flaws of certain heuristics.   Bingham and Eisenhardt argue that such simple rules of thumb help guide organizational action more effectively than complex processes and procedures. 

Interestingly, this work seems to stand in stark contrast to the psychological research on cognitive biases.  That stream of research suggests that many heuristics can be problematic.  They can lead to highly flawed decisions.   Bingham explains the dichotomy between his work and most of the studies conducted by cognitive psychologists (excerpt from UNC business school's research insights magazine):

He argues that psychologists reached this conclusion by testing people in lab settings and asked binary choice questions that have a definitive correct answer, such as: Which German city has the higher population, Munich or Dusseldorf? Psychologists say that people often base their answer on the city that is most familiar to them, creating a heuristic of answering what first comes to mind, which might not lead to the correct answer.  “Yet in real life, strategists rarely face such clear-cut situations,” Bingham said. Lab studies often stack the deck against heuristics by putting people in unrealistic situations. But by viewing heuristics in the context of the unpredictable environments in which firms compete, Bingham argued that heuristics can be rational and even optimal strategy.