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date: 25 February 2021

Abstract and Keywords

Modern strategic decision theory focuses on those actions taken by senior executives (on behalf of the owners) that commit substantial resources, set precedents, and create waves of less important decisions. This chapter explores key behavioral assumptions that dispute the notion that strategic decisions are wholly rational in a neoclassical economics sense. It classifies deviations from rationality as non-standard preferences, non-standard beliefs, and non-standard decisions. Insights are provided on how behavioral economics can be applied to strategic decisions in organizational settings, and moreover on how behavioral economics can be enriched by asking questions that are unique to the role of executives making strategic decisions within firms.

Keywords: Strategic decision making, preferences, beliefs, choices, heuristics and biases, rationality

Massimo Garbuio

Massimo Garbuio is a Lecturer at the University of Sydney Business School.

Dan Lovallo

Dan Lovallo is Professor of Business Strategy at the University of Sydney Business School. His research focuses on the psychology of strategic decision making and has been published in the American Economic Review, Management Science, and the Harvard Business Review. He has previously held positions at Wharton, the Australian Graduate School of Management, and McKinsey & Co.

Elif Ketenciouglu

Elif Ketenciouglu is a PhD student at the University of Sydney Business School.

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