2007/13 | LEM Working Paper Series | |
Boom and Bust Behavior: On the Persistence of Strategic Decision Biases and their Collective Outcome |
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Michael Shayne Gary, Giovanni Dosi and Dan Lovallo |
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Keywords | ||
Boom and bust; Overconfidence; Capacity adjustment; Adaptive behavior
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Abstract | ||
This work discusses the boom and bust dynamics which are a common feature of a large
range of different industries. especially but not only new born ones.
The common managerial behavior underpinning such dynamics is aggressive capacity
expansion in the boom period ultimately yielding excess capacity turning the boom into bust.
This paper examines the underlying cognitive and behavioral factors responsible for strategic
decisions driving boom and busts, nested in the interaction between cognitive biases and
capacity adjustment delay, and together tries to identify some tentative heuristics which tend
to mitigate them. At the same time, we shall conjecturally conclude, there might be a positive
collective side to boom and bust behavio r fostering accumulation of knowledge and physical
infrastructure, especially regarding new technological paradigms.
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