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Near-Term Liability of Exploitation: Exploration and Exploitation in Multistage Problems

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  • Christina Fang

    (Department of Management and Organization, Stern School of Business, New York University, New York, New York 10012)

  • Daniel Levinthal

    (Department of Management, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

The classic trade-off between exploration and exploitation reflects the tension between gaining new information about alternatives to improve future returns and using the information currently available to improve present returns. By considering these issues in the context of a multistage, as opposed to a repeated, problem environment, we show that exploratory behavior has value quite apart from its role in revising beliefs. We show that even if current beliefs provide an unbiased characterization of the problem environment, maximizing with respect to these beliefs may lead to an inferior expected payoff relative to other mechanisms that make less aggressive use of the organization's beliefs. Search can lead to more robust actions in multistage decision problems than maximization, a benefit quite apart from its role in the updating of beliefs.

Suggested Citation

  • Christina Fang & Daniel Levinthal, 2009. "Near-Term Liability of Exploitation: Exploration and Exploitation in Multistage Problems," Organization Science, INFORMS, vol. 20(3), pages 538-551, June.
    • Handle: RePEc:inm:ororsc:v:20:y:2009:i:3:p:538-551
    DOI: 10.1287/orsc.1080.0376
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    References listed on IDEAS

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    3. Daniel G. Goldstein & R. Preston McAfee & Siddharth Suri & James R. Wright, 2020. "Learning When to Stop Searching," Management Science, INFORMS, vol. 66(3), pages 1375-1394, March.
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    5. Juha Uotila, 2018. "Punctuated equilibrium or ambidexterity: dynamics of incremental and radical organizational change over time," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 27(1), pages 131-148.
    6. Tang, Jianyun & Rowe, W. Glenn, 2012. "The liability of closeness: Business relatedness and foreign subsidiary performance," Journal of World Business, Elsevier, vol. 47(2), pages 288-296.
    7. Adilson Carlos Yoshikuni & José Eduardo R. Favaretto & Alberto Luiz Albertin & Fernando de Souza Meirelles, 2018. "The Influences of Strategic Information Systems on the Relationship between Innovation and Organizational Performance," Brazilian Business Review, Fucape Business School, vol. 15(5), pages 444-459, September.
    8. Pittnauer, Sabine & Hohnisch, Martin, 2023. "Observing the creation of new knowledge in the economics laboratory—Do participants discover how to learn from outcome feedback in a dynamic decision problem?," Journal of Economic Behavior & Organization, Elsevier, vol. 215(C), pages 382-405.
    9. Christina Fang & Jeho Lee & Melissa A. Schilling, 2010. "Balancing Exploration and Exploitation Through Structural Design: The Isolation of Subgroups and Organizational Learning," Organization Science, INFORMS, vol. 21(3), pages 625-642, June.
    10. Schubert, Torben & Neuhaeusler, Peter, 2012. "Towards a Richer Specification of the Exploration/Exploitation Trade-off: Hidden Knowledge-based Aspects and Empirical Results for a Set of Large R&D-Performing Firms," Papers in Innovation Studies 2012/8, Lund University, CIRCLE - Centre for Innovation Research.
    11. Nils Stieglitz & Thorbjørn Knudsen & Markus C. Becker, 2016. "Adaptation and inertia in dynamic environments," Strategic Management Journal, Wiley Blackwell, vol. 37(9), pages 1854-1864, September.

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