Theory-driven strategic management decisions

This paper studies strategic decisions under uncertainty for which past data are not available. It provides microfoundations of the theory-based view of the firm by showing that the strategic problem starts with the selection of theories rather than choosing actions and that theories are selected through experiments. The value of experimenting with theories increases with the number of theories and with their uncertainty. Moreover,uncertainty makes theories superadditive — that is, experimenting with a more uncertaintheory increases the benefits of experimenting with other more uncertain theories. The paper also shows that decision makers should experiment with more “surprising” theories because in this case experiments are more informative and enable more learning. A leading example helps to illustrate our concepts throughout the paper.