Bringing cognition into strategic interactions: Strategic mental models and open questions

• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/smj.2700
• Author: Anoop Menon

RESEARCH ARTICLE

Bringing cognition into strategic interactions:

Strategic mental models and open questions

Anoop Menon

Management Department, The Wharton School,

University of Pennsylvania, Philadelphia,

Pennsylvania

Correspondence

Anoop Menon, Management Department, The

Wharton School, University of Pennsylvania,

3620 Locust Walk, Philadelphia, PA 19104.

Email: armenon@wharton.upenn.edu

Research Summary: This article explicitly introduces

cognitive considerations into the treatment of strategic

interactions, using the value-based framework as an

extended example. Through real-world examples and

prior empirical findings, it shows that many of the

implicit assumptions of the framework are regularly vio-

lated in practice when actors simplify their complex reali-

ties into incomplete, inaccurate mental models. These

violations lead to outcomes that are often contrary to the

predictions of the classical framework. As initial steps

toward developing a cognitively grounded theory of stra-

tegic interactions, the article characterizes the core com-

ponents of strategic mental models that might form the

foundation of such a theory and then lays out some open

questions that this theory would need to address. These

questions, when answered, can point to novel cognitive

capabilities.

Managerial Summary: This article argues that a realistic

analysis of interactions between strategic agents requires

us to include the mental models, that is, belief systems,

of those agents into the analysis. Real-world examples

and prior empirical findings are used to show that if such

mental models are not accounted for, the outcomes pre-

dicted by the analysis could be quite different from those

obtained in reality. The article identifies a few key

aspects of these strategic mental models that deserve

attention. It also identifies a few central questions that,

when answered, could allow firms to develop novel cog-

nitive capabilities that confer competitive advantage.

KEYWORDS

cognition, cognitive capabilities, strategic interactions,

strategic mental models, value-based strategy

Received: 16 October 2016 Revised: 1 July 2017 Accepted: 5 July 2017 Published on: 19 October 2017

DOI: 10.1002/smj.2700

168 Copyright © 2017 John Wiley & Sons, Ltd. wileyonlinelibrary.com/journal/smj Strat Mgmt J. 2018;39:168–192.

1|INTRODUCTION

Strategic interactions are those situations where the outcomes of the actions of an agent depend on

the actions of one or more other agents. Strategy is replete with such interactions, with competition

between firms being the most obvious, but also seen in supplier, customer, and complementor rela-

tions, among others. A proper assessment of the potential of a strategy to confer sustainable compet-

itive advantage relies on a deep understanding of these interactions, and on the ability to analyze

and predict their outcomes. In other words, strategic interactions are fundamental to strategic

management.

Given this importance, strategic interactions have received extensive treatment in the strategic

management literature. This has ranged from studies on competitive dynamics (e.g., Baum & Korn,

1996; Caves & Porter, 1977; Chen & MacMillan, 1992), through frameworks using interactional

arguments (e.g., Ghemawat, 1991; Porter, 1980), to game theoretic treatments of interfirm interac-

tions, both using noncooperative game theory (e.g., Casadesus-Masanell & Yoffie, 2007; Ghema-

wat, 1997), as well as cooperative game theory (e.g., Brandenburger & Stuart, 1996, 2007;

Lippman & Rumelt, 2003). Traditionally, these models and frameworks do not take into account the

cognitions of the strategic actors, that is, their belief systems and mental representations of the stra-

tegic environment. However, there has long been a recognition in game theory that an empirically

realistic treatment of the problem of strategic interaction, one that can account for real-world out-

comes of strategic interactions, will have to take into account the beliefs and cognitions of the actors

involved. For instance, Daniel Ellsberg, one of the pioneers of decision theory, was of the opin-

ion that:

These particular uncertainties—as to the other players’beliefs about oneself—are

almost universal, and it would constrict the application of a game theory fatally to rule

them out. Daniel Ellsberg (The Review of Economics and Statistics, 1959)—from

Brandenburger (2010)

Recently, a branch of game theory, called epistemic game theory, has begun to investigate the

belief systems that are required to sustain standard game theoretic outcomes (e.g., Aumann & Bran-

denburger, 1995). They have noted how different beliefs can lead to very different outcomes for the

“same”strategic interactions. While this approach has been from the theoretical side, behavioral

game theorists, in a more empirical spirit, have begun to explore experimentally the limits of human

reasoning ability in strategic interactions (e.g., Camerer, 2003; Camerer, Ho, & Chong, 2015). How-

ever, these streams of work have had limited impact on strategic management, and our mainstream

strategic interaction models and frameworks remain largely a-cognitive.

At the same time, there is a rich tradition in strategy that has focused on the fundamental impor-

tance of cognition and mental representations in strategic decision making, and thus firm perfor-

mance. Tracing its roots to the seminal work of Herbert Simon (1947), this school of thought

focuses on the bounds on cognition and decision making that agents face in real-world organizations

(Cyert & March, 1963; March & Simon, 1958) as well as the coping mechanisms they deploy to

address these bounds, including using simplified representations of the strategic landscape

(Gavetti & Levinthal, 2000; Porac, Thomas, & Baden-Fuller, 1989). In fact, this mechanism of

using mental simplifications, or mental models, of a complex reality, an idea with deep intellectual

roots in cognitive psychology (Craik, 1943), has been pointed out as being the first step when deal-

ing with any but the most trivial of problems (Levinthal, 2011). The use, and misuse, of these sim-

plifying mental models has been shown to have a significant impact on strategic decision making

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