Three Essays on Exploration and Exploitation: Behavioral Insights and Individual Decision-Making

Since James G. March introduced the concepts of exploration and exploitation in 1991, they have become ubiquitous in research on organizations and management. According to March (1991), exploration and exploitation are two sets of activities that allow systems (i.e., agents, either organizations or individuals) to adapt to their environment. On the one hand, exploitation activities are based on pre-existing knowledge, and consist of its implementation and/or refinement (e.g., production). On the other hand, exploration is based on knowledge that is not currently possessed by the system and, hence, refers to those activities that allow to acquire such new knowledge (e.g., search and experimentation). Scholars have produced a large number of contributions that have expanded our knowledge of exploration and exploitation even going beyond the initial boundaries of the field of organizational learning. Today, this large body of contributions that has developed over 30 years appears complex and divided into a plethora of research subfields (e.g., Almahendra and Ambos, 2015). Thus, research on exploration and exploitation has reached a level of conceptual and methodological sophistication that demands a high level of effort from researchers wishing to approach it. Among the multiple strands of emerging research, some scholars (such as Wilden et al., 2018) have recently begun to propose a return to the adoption of a behavioral approach to the study of exploration and exploitation. The earliest behavioral approach adopted in organizational studies is that of the "Carnegie School", which included Herbert Simon, Richard Cyert, and James March himself. Such an approach focuses the investigation of organizations on human behavior. In other words, adopting a behavioral approach involves studying organizations from the attitudes of their members, cognition, rationality, motivation, relationships, conflicts, and many other instances of psychological, economic, and social factors that influence human behavior (see, for example, March and Simon, 1958; Cyert and March, 1963). Today, this return to the behavioral approach is also associated with the "micro-foundations of strategy" movement (e.g., Felin et al., 2015) and so-called behavioral strategy (Powell et al., 2011). In essence, while the former is based on the importance of studying organizations and strategy by adopting a level of analysis below the collective/systemic (i.e., organizational) level, the latter includes all the elements that already characterized the behavioral approach (i.e., psychological, and social factors), reinforced by insights from the behavioral economics literature and the adoption of multiple methods, including experiments. This Doctoral dissertation enters this discussion and aims to investigate exploration and exploitation by adopting a behavioral approach, a "micro-foundational" perspective, and research methods that include laboratory experiments and computer simulations. The first study is a literature review paper with three purposes, each pursued in one of its three sections. First, it addresses the conceptual development of the exploration-exploitation literature that led to the emergence of the complex body of contributions mentioned above, providing a kind of "road map" of the research field based on the major literature reviews published over the past three decades. This is intended as a contribution towards researchers who want to take the first steps in the study of exploration-exploitation research. At the end of this road map, the paper by Wilden et al. (2018) is presented, linking the entire field of research to an emerging stream of research directed toward a return to James March's behavioral approach, enhanced by contributions in the areas of "micro-foundations" (e.g., Felin et al., 2015) and behavioral strategy (Powell et al., 2011). Second, based on the approach promoted in such research stream, a review of the literature on experimental studies of exploration and exploitation is provided. Laboratory experiments are considered key methods for advancing the study of exploration and exploitation by adopting a behavioral approach. Finally, the first essay is concluded with three suggested directions for further research: the improvement of existing conceptualizations through modeling, the further sophistication of existing experimental designs to capture features of managerial decision making that are currently beyond the scope of the state-of-the-art models underlying the mainly adopted experimental investigations, and the consideration of a multilevel approach to the study of individual exploration and exploitation, which consists of examining the variables that influence individual behavior at different organizational levels. The second study consists of an experimental investigation of the role of different sources of uncertainty on individual exploration-exploitation. It is based on the rationale underlying the third further research path proposed in the first study. Although an increasing adoption of laboratory experiments can be acknowledged in the research field, it is here argued that scholars have not experimentally disentangled the effects of two different types of uncertainty that emerge in the managerial and psychological literature, namely internal uncertainty, and external uncertainty. The former consists in the inability of individuals to predict future performance; while the latter results from the external environment and consists of unknown information about phenomena that may affect the final outcomes of a decision. The experimental design deployed in the study exposes a group of participants to the presence of the sole internal uncertainty, and a treatment group to the combined presence of the two sources. Findings show that the combined presence of these two sources of uncertainty may lead to the over-exploitation of initial routines, and, consequently, to the inability of individuals to exploit new opportunities stemming by alternatives discovered over time. Finally, the third study focuses on imitation, and exploration and exploitation, and builds on an agent-based model and computer simulations. This essay follows the first research trajectory suggested in the first study. While prominent research has defined imitation as a less costly alternative to experimentation (i.e., exploration), the possible role of imitation in the exploration-exploitation trade-off appears to be under-investigated. The interplay between imitation and exploration is rendered by the modeling of two types of agents: imitators and explorers. Differently from previous studies based on modeling, agent types are explicitly modeled as Simonian "satisficers". Experimentation is modeled as random search, whereas imitation builds on research on imitative heuristics. When engaging in adaptation in a competitive environment, both the types of agent experience "over-crowding" effects depending on the characteristics of their type. The paper concludes with the acknowledgement of limitations of the adopted model and proposes further investigation paths that include the calibration through experimental data.