2007/13 LEM Working Paper Series

Boom and Bust Behavior: On the Persistence of Strategic Decision Biases and their Collective Outcome

Michael Shayne Gary, Giovanni Dosi and Dan Lovallo
Boom and bust; Overconfidence; Capacity adjustment; Adaptive behavior

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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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