Seminar: Alina Ferecatu, ESSEC Business School

Understanding Managers’ Tradeoffs between Exploration and Exploitation

Alina Ferecatu
ESSEC Business School

Date: March 28, 2014
Time: 10:00 am - 11:30 am
Location: Room 423

Abstract: 

This paper investigates managers’ tradeoffs between exploration and exploitation, and how their strategies relate to their personality traits. We conduct a lab experiment involving subjects playing a 70-round, three-armed bandit game. Our results show that 75% of decision makers either under-explore – focusing too quickly on a possibility suboptimal alternative – or over-explore – wasting precious time and resources. Specifically, maximizers (vs. satisficers), decision-making prone to regret, and those who have an analytical decision-making style, are most likely to over-explore. In addition, most subjects update their beliefs suboptimally, exhibiting biases such as loss aversion, recency bias, and exploitation bias (tendency to stop updating their beliefs once they enter exploitation stage), which can be partly linked to and predicted by psychographics. Our findings pave the way in introducing a set of guidelines intended to assist managers to optimally balance exploration and exploitation processes.

For more information, please contact Cynthia Wong at: cynthia.wong3 [at] mcgill.ca.