Working Paper: CEPR ID: DP17664
Authors: Arnaldo Camuffo; Alfonso Gambardella; Andrea Pignataro
Abstract: This paper studies strategic decisions under uncertainty for which past data are not available. It provides microfoundations of the theory-based view of the firm by showing that the strategic problem starts with the selection of theories rather than choosing actions and that theories are selected through experiments. The value of experimenting with theories increases with the number of theories and with their uncertainty. Moreover, uncertainty makes theories super-additive -- that is, experimenting with a more uncertain theory increases the benefits of experimenting with other more uncertain theories. The paper also shows that decision-makers should experiment with more "surprising" theories because in this case experiments are more informative and enable more learning. A leading example helps to illustrate our concepts throughout the paper.
Keywords: decision problem
JEL Codes: L21; L26; M13; M21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| theory selection (C52) | effectiveness of subsequent actions (C52) |
| higher uncertainty (D89) | greater benefits from experimentation (C90) |
| more uncertain theories (D89) | amplified benefits of experiments (C90) |
| prioritizing surprising theories (D80) | more informative results (Y50) |