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Department of Industrial Economics & Strategy, Copenhagen Business School Working Paper Series, Department of Industrial Economics & Strategy, Copenhagen Business School

No 98-8:
How Do Aspiration Levels come About? Bounded Rationality and Dynamic Search

Mie Augier and Volker Mahnke

Abstract: Although the Behavioral Theory of the Firm has served as continuing stimulus in diverse field of inquiry such as organizational learning, the theory of the firm, and decision making research more generally and there is good reason to expect that this influence continues to remain significant, the reach of the theory as it stands in situation of genuine uncertainty remains limited. This paper seeks to address this gap by taking steps towards extending the theory of search. A key departure from earlier approaches to the theory of search is the inclusion of the question How do aspiration levels come about? in addition to the received question How do aspiration levels change. This approach highlights the significance of an extended model of search in situations of Knightian uncertainty and Shacklian surprise. For instance, the concept of dynamic search sheds light on the role of 1) experimentation and play in the creation of aspirations, 2) creating disbelief in situations of lacking prior experience, and 3) disengaging limits of imagination. This paper develops aspects of the theoretical foundations of the concept of dynamic search and clarifies processes leading to new aspirations that guide subsequently firm adaptation. While many implications of dynamic search are still unexplored, building on insights from specifically the economists Shackle, Knight and the recent work of March and more generally from the ‘bounded rationality’ - tradition appears to be a promising avenue for new advances in organization science.

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