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Bounded Rationality in Strategic Decisions: Undershooting in a Resource Pool-Choice Dilemma

Author

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  • Christopher K. Hsee

    (Booth School of Business, University of Chicago, Chicago, Illinois 60637)

  • Ying Zeng

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada)

  • Xilin Li

    (Booth School of Business, University of Chicago, Chicago, Illinois 60637)

  • Alex Imas

    (Booth School of Business, University of Chicago, Chicago, Illinois 60637)

Abstract

This research studies a resource pool-choice dilemma , in which a group of resource seekers independently choose between a larger pool containing more resources and a smaller pool containing fewer resources, knowing that the resources in each pool will be divided equally among its choosers, so that the more (fewer) people choose a certain pool, the fewer (more) resources each of them will get. This setting corresponds to many real-world situations, ranging from students choosing majors as a function of job opportunities to entrepreneurs choosing markets as a function of customer bases. Ten studies reveal a systematic undershooting bias : fewer people choose the larger pool relative to both the normative equilibrium benchmark and chance (random choice), thus advantaging those who choose the larger pool and disadvantaging those who choose the smaller pool. We present evidence showing that the undershooting bias is driven by bounded rationality in strategic thinking and discuss the relationship between our paradigm and other coordination games.

Suggested Citation

  • Christopher K. Hsee & Ying Zeng & Xilin Li & Alex Imas, 2021. "Bounded Rationality in Strategic Decisions: Undershooting in a Resource Pool-Choice Dilemma," Management Science, INFORMS, vol. 67(10), pages 6553-6567, October.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:10:p:6553-6567
    DOI: 10.1287/mnsc.2020.3814
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    References listed on IDEAS

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