Boundedly Rational Decisions on Exploration Versus Exploitation in Alliance Portfolios: Problemistic and Slack Searches Under CEO Overconfidence

Abstract

How do firms configure exploration versus exploitation in alliance portfolios under the premise of bounded rationality? From the behavioural perspective, problemistic and slack searches can be used as behavioural explanations for their configurations. Furthermore, the boundedly rational decision‐maker's limited cognitive capability in the form of CEO overconfidence also causes the subjective interpretation of information. This study investigates the links between below‐aspiration performance, slack, and firms’ boundedly rational decisions under the influence of CEO overconfidence in alliance portfolio configurations. A feasible generalized least‐squares regression is performed to test the model empirically using data from 224 publicly traded high‐tech firms in the United States. We find that below‐aspiration performance and slack both play roles in emphasizing exploration relative to exploitation in alliance portfolios. Further, CEO overconfidence intensifies the positive roles of below‐aspiration levels and slack in preference for exploration alliances. This study contributes to the bounded rationality literature by extending the implications of the behavioural theory of the firm to firms’ preference in alliance portfolio configurations in terms of the exploration‐to‐exploitation ratio. Furthermore, our findings deepen the understanding of the role of overconfidence in CEOs’ subjective interpretations, thus filling a critical research gap in extant behavioural research.

Firm performance feedback and organizational impression management: The moderating role of CEO overconfidence

“…Behavioral theorists study cognitive biases, such as confirmation bias, overconfidence, and anchoring, to understand how these biases affect decision-making processes and lead to suboptimal outcomes (Ahmad, Shah, & Abbass, 2021). For example, analyzing data from 224 publicly traded high-tech firms in the United States, Zhang, Yang, Yuan, and Fan (2024) find that below-aspiration performance and slack both contribute to emphasizing exploration over exploitation in alliance portfolios. Furthermore, CEO overconfidence intensifies the positive roles of below-aspiration levels and 'slack' in the preference for exploration alliances.…”

Artificial Intelligence and Green Total Factor Productivity: The Moderating Effect of Slack Resources

“…In addition, slack resources can alleviate internal conflict among the top management of a firm [49]. Finally, the existence of idle resources in a firm enables managers to focus on long-term sustainability, rather than being forced to address short-term poor performance [50]. From the resource-based perspective, a firm's resources are the source of its competition and development, and slack resources ensure available funds in a complex environment, alleviating the problem of financing constraints and providing opportunities for green growth [51].…”

Friends or Strangers? Antecedents and Consequences of Strategic Alliance Partner Selection

“…The exerted eort to marry these theories and frameworks is novel and complements theoretical attempts to explain the antecedents and consequences of the alliance partner decision. Con®guring exploration versus exploitation in the alliance partnership portfolio is a complex problem faced by a boundedly rational decision-maker (Zhang et al, 2023). The study bestows a channel between the bounded rationality perspective and the rational economic and relational social sequelae.…”

“…The complex decision problem accentuates thein¯uenceoftheboundedrationalityandbehavioralheuristicsexhibitedbythe CEO, stressing the signi®cance of the behavioral drivers of the ®rm's alliance portfolio recon®guration choices. Nevertheless, our knowledge of how the behavioral drivers aect the ®rm's alliance portfolio recon®guration is limited (Zhang et al, 2023;Kavusan and Frankort, 2019).…”

“…Behavioral CEO attributes such as CEO hubris, overcon®dence, and Machiavellianism have been linked to risk taking, acquisitions, and strategic alliance behaviors (Chandler et al, 2021;Dhir and Mital, 2012;Li et al, 2010). Recent work calls attention to further understanding of the behavioral motivations for strategic alliance formation and portfolio recon®guration over long periods (Zhang et al, 2023;Howard et al, 2016). We assess the validity of the proposed model by applying a random-eects negative binomial regression on longitudinal data of Fortune 500 companies between 1995 and 2015, extracted from the Thomson Reuters SDC Joint Ventures and Alliances database and the COMPU-STAT database.…”