Are the worlds of academia and business out of touch?
What can be done to bring them closer?
How can we leverage work being done in fields like human psychology or even biology to develop better business models?
These were some of the questions asked by many of the world’s leading thinkers in business strategy at a conference hosted by IESE New York this month.
Organized by IESE Professor Pankaj Ghemawat and Daniel A. Levinthal, Reginald H. Jones Professor of Corporate Strategy at Wharton, the "Business Strategy Interfaces and Frontiers" conference heard from leading scholars from the likes of Princeton, Stern, Harvard and LSE – all keen to address what Ghemawat describes as the "unsatisfactory interchange between academia and the field since the 1990s."
Some of the world’s finest thinkers in business research, strategy, psychology, ecology and evolutionary biology gave talks on topics that ranged from "mental models, reasoning and decision-making" to "evolutionary perspectives on strategy."
The Psychology of Decision-Making
First speaker, Philip Johnson-Laird, Stuart Professor of Psychology Emeritus at Princeton University, opened the conference with a panel session on the psychological processes that underpin how we make decisions – and how fallible these processes can be.
Business strategies are rooted in executive decisions. So understanding how executives – and consumers – think, how they reason, and how they make choices is essential in terms of developing efficient business models, he said.
And this, in turn, is rooted in psychology.
According to Johnson-Laird, the mind is not a particularly logical or ‘probabilistic’ apparatus. Instead of reaching logical conclusions based on what we actually know, we tend to create ‘mental simulations’ in order to make decisions. These in turn stem from pre-existing models of possibilities.
Suffering From Tunnel Vision?
All well and good, says Johnson-Laird, however we tend to suffer from a sort of tunnel vision that limits our ability to recognize all the models of possibilities. Worse still, when we make a decision, we have a tendency to fixate on one single possibility at the expense of others.
"When there are lots of alternative possibilities, life gets very difficult. Our intuitions depend upon a single model of possibility, and alternatives soon defeat us. We also tend to focus on what we know to be true about different scenarios or premises – while we ignore what is false."
This kind of tunnel vision also extends to our capacity to imagine other people’s perspectives or decisions, says Johnson-Laird.
Light at the End of the Tunnel
The good news is that, despite this, we are generally fairly adept at "thinking about thinking." Which means that when we come across an open-ended problem that confounds our original assumptions, most of us produce what Johnson-Laird calls "creative simulations."
These allow us to construct combinations of possible events, which can then be examined and explained by "causal links" – the relation between two things where one thing is caused by the other.
"It is almost impossible," he says, "to give people a scenario that they are not, given enough time, fully able to explain."
Useful Analogies
People form causal links in different ways. One way is by using analogies to make hard-to-grasp concepts feel real.
This strategy is particularly relevant for business strategists, said Jan Rivkin, Senior Associate Dean for Research at Harvard Business School, who took the role of discussant in the opening panel. He agreed that analogies can help executives "bring cognitively distant ideas closer. This is one way in which reasoning can be used to tackle strategic problems."
Business is built on decision-making and choice, he said. So understanding human reasoning is essential.
"The most valuable thing to do is to take a very strong stance about what we do well and what we do poorly when we reason."
IESE New York: A Hub for Research
The "Business Strategy Interfaces and Frontiers" conference was held between May 14 and 15 at IESE’s New York campus.
Among the panelists were Lawrence J. White, Robert Kavesh Professor of Economics, NYU Stern School; Roger Martin, Director, Martin Prosperity Institute, Rotman School, University of Toronto; David Collis, Thomas Henry Carroll Ford Foundation Adjunct Professor of Business Administration at Harvard Business School; John Sutton, Sir John Hicks Professor of Economics at the London School of Economics; and Simon Levin, Professor of Ecology and Evolutionary Biology and Director of the Center at Princeton University.