Rationalizing Outcomes: Mental-Model-Guided Learning in Competitive Markets

Strategy & Business Policy

Speaker: Anoop Menon 
Assistant Professor of Management , The Wharton School, University of Pennsylvania

HEC Campus - Jouy-En-Josas - Buil. T - Room T105

This paper explores how competitive market interactions between agents with different mental models can lead to dysfunctional learning which can, in turn, have significant implications for an agent’s performance. We build a simulation model where two agents with different mental models about their demand environment compete over many periods, with the decisions of one period leading to market outcomes that are then used to recalibrate the mental models which, in turn, are used to make the decisions in the following period. Three model variants, exploring different mental models about the demand structure, the cost structure, and the market are studied. Dysfunctional learning occurs through dynamic mechanisms involving rationalization of observations within flexible mental models and misinterpretation of observations because of poor understanding of rival mental models. These mechanisms sometimes lead to distortion of an agent’s own initially correct mental model of the demand environment and to superior relative performance by the agent with an incorrect model of that environment. The insights from the models are used to interpret the ascension of GM over Ford in the late 1920’s, the slow adoption of radial tires in the U.S., and the rise of Nirma over incumbent Hindustan Lever in the Indian detergent market.