Behavioral strategy
Open-knowledge reference entry
Behavioral strategy is an interdisciplinary field within strategic management that integrates insights from cognitive, social, and organizational psychology to better understand how individuals and groups make strategic decisions. It challenges the assumptions of traditional economic models that presume perfect rationality, instead emphasizing how real-world decision-making is shaped by cognitive biases, emotions, social dynamics, and bounded rationality.
Emerging in response to the limitations of purely rational models of strategy, behavioral strategy seeks to incorporate psychologically realistic assumptions into both the theory and practice of strategic management. It applies behavioral perspectives to core strategic topics such as CEO and top management team behavior, market entry decisions, competitive dynamics, and organizational change. It is typically characterized by the following features:
It is microfoundational, drawing on individual-level psychological processes to explain firm-level outcomes;
It draws broadly from psychological subfields—including cognitive, social, and organizational psychology—as well as from behavioral economics and sociology;
It emphasizes empirically grounded assumptions, relying on evidence from laboratory and field experiments rather than abstract models or mathematical tractability.
Methodologically, behavioral strategy embraces pluralism, employing qualitative research, experiments, surveys, agent-based modeling, and traditional formal and statistical methods. Common research topics include cognitive bias in strategic decisions, the use of heuristics in uncertainty, bounded rationality in competitive interactions, and the influence of organizational culture on strategic behavior.
Historical foundations
Early contributions
Herbert Simon's research on cognitive decision making and the concept of bounded rationality contributed to early developments in behavioral strategy. Simon identified four categorical observations on variations in ability to solve complex problems and make decisions:
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