Organizational Learning

Fundamentals

As James G. March points out in his 2007 reflective essay on the behavioral theory of the firm,

Subsequent work has elaborated on several implications of the behavioral theory of the firm, which will be discussed here: (a) implications for risk taking, (b) implications for traveling on a rugged domain, (c) implications for organizations as interpersonal networks, and (d) implications for organizational learning curves.

First, a set of models have elaborated on the original idea by studying the impact of experiential learning on organizational risk taking. One stream argues that risk-taking tendencies are not constant or fixed but are responsive to changing fortune creating psychological responses to danger, slack, aspirations, and perception as well as self-confidence. In the aspiration reference point model, risk is seen as a function of the ratio of aspiration to the wealth level of the organizations. Risk preference is thus positively related to the aspiration level and negatively related to wealth levels. Given this simple assumption, the model shows that those who accumulate losses become risk prone whereas those who accumulate gains become risk averse.

Aspiration can also be socially determined by other firms in the same population. The dual reference point model further refines the aspiration point model, by introducing risk taking as a function of survival in addition to aspirations. Both models produce behaviors that approximate observed empirical regularities. A second stream of work argues that risk taking and the selection among alternatives are not a calculated, consequential process but are a response learned from experience. Individuals learn how to respond to situations involving risks the same way they learn other things, by experiencing the apparent consequences of their behavior and modifying their rules of behavior as a result of cumulated experience. The main finding is that learning in the domain of gains (where expected returns of alternatives are positive) leads to behavior that is decidedly more risk averse than does learning in the domain of losses. Thus, risk preferences are interpreted as a learned response, rather than as an inexplicable personal trait. In addition, such learning involves a process of sequential sampling. Because humans learn from experience by reducing the probability of sampling alternatives with poor past outcomes, the reproduction of successful actions inherent in adaptive processes results in a bias against alternatives that initially may appear to be worse than they [Page 564]actually are. Adaptive search, rather than fixed or variable risk preferences, may explain the empirical association between performance and organizational risk taking. These models of learning from experience and selected samples provide alternative theories of risk aversion and risk taking.

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