A theory based analysis of path dependence

Inspired by [David, Paul A. 2007. “Path Dependence, Its Critics and the Quest for ‘historical Economics’.” In The Evolution of Economic Institutions: A Critical Reader, 120–142.], this paper models the internal initial conditions of path dependence from a theory-based view of strategy. By grounding decision makers' early beliefs and priors in theories, we demonstrate how the internal framing of uncertainty drives subsequent path-dependent outcomes. Our analysis identifies four distinct approaches to prior formation through theories–from overlooking path dependence entirely to employing multiple evolving theories–that critically shape strategic decision making and the risk of suboptimal lock-ins. Using the QWERTY keyboard as a guiding example, we show that integrating the theory-based view not only clarifies the internal dynamics of initial condition setting but also offers actionable insights for anticipating unforeseen contingencies and managing cognitive biases in complex economic environments.