| SHOULD I STAY OR SHOULD I GO? THE COGNITION OF EXPLORATION AND EXPLOITATION |
Received:October 20, 2017 Revised:October 20, 2017 |
Key Words: Cognition, Exploration-Exploitation, Experiment, Strategy, Exploration, exploitation, performance, feedback, individual |
| Author Name | Affiliation | | S Levine* | N/A |
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Abstract: |
| Decision-makers face a frequent tension: Repeat a past action in expectation of a familiar outcome (exploitation) or choose a novel action whose outcome is uncertain (exploration). Such decisions are fundamental in humans and animals. They are central to organizations, strategy, innovation, and entrepreneurship, where they have been studied extensively, mostly through simulations of agent-based models or econometric analysis of archival or survey data. Here we add evidence from protocol analysis and behavioral economic experiments, conceptually and directly replicated in four populations, in the laboratory and the field, in developed and emerging economies. We designed an experimental task that embodies exploration–exploration environment, introduced resource constraints, and offered incentives for performance. The design allows us to directly investigate the cognitive assumptions at the heart of the theory. The findings affirm some theoretical expectations, contradict others, and offer new antecedents. Exploration–exploitation choices, we find, are largely driven by recent experiences: Expectedly, exceeding past performance motivates exploitation while trailing performance encourages exploration. But the effect is moderated by overall performance (or slack), which amplifies exploitation when high and drives exploration when low. Ambiguity, experienced as performance variance, reduces exploration, and, through interaction with performance, amplifies the tendency to exploit as performance increases. As the effects coalesce, a cycle is formed: Exploration brings variance, which promotes exploitation, and if performance recedes, it furthers exploitation, inching decision-makers away from experimentation and innovation. Inertia, then, is not only organizational, but also rooted in cognition. The results provide an insight into how decisions are made, substantiating the microfoundations of strategy and may assist in balancing exploration with exploitation. |
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