A mental model that doesn’t get the attention that it deserves, at least in my opinion, is the model of ambidexterity for exploration vs exploitation. “Exploration includes things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation. Exploitation includes such things as refinement, choice, production, efficiency, selection, implementation, execution.” (p.71) Based on these definitions and the fact that there is a trade-off between exploration of new possibilities and the exploitation of old certainties I think you understand why I find this mental model to be so important. The mental model of ambidexterity for exploration vs exploitation is not only important in investing, business and sports but also in everyday life. The article that i present today and that I base my mental model of ambidexterity for exploration vs exploitation on is written by professor emeritus James G. March. The article was published in 1991 and is called Exploration and Exploitation in Organizational Learning.
Please comment if you have read the article and what you thought of it. Also, if you have found a worldly wisdom in the article that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.
Four worldly wisdom’s from the article
“Both exploration and exploitation are essential for organizations, but they compete for scarce resources. As a result, organizations make explicit and implicit choices between the two. The explicit choices are found in calculated decisions about alternative investments and competitive strategies. The implicit choices are buried in many features of organizational forms and customs, for example, in organizational procedures for accumulating and reducing slack, in search rules and practices, in the ways in which targets are set and changed, and in incentive systems.“ (p.71)
“The certainty, speed, proximity, and clarity of feedback ties exploitation to its consequences more quickly and more precisely than is the case with exploration. The story is told in many forms. Basic research has less certain outcomes, longer time horizons, and more diffuse effects than does product development. The search for new ideas, markets, or relations has less certain outcomes, longer time horizons, and more diffuse effects than does further development of existing ones.“ (p.73)
“Since performance is a joint function of potential return from an activity and present competence of an organization at it, organizations exhibit increasing returns to experience (Arthur 1984). Positive local feedback produces strong path dependence (David 1990) and can lead to suboptimal equilibria. It is quite possible for competence in an inferior activity to become great enough to exclude superior activities with which an organization has little experience (Herriott, Levinthal, and March 1985). Since long-run intelligence depends on sustaining a reasonable level of exploration, these tendencies to increase exploitation and reduce exploration make adaptive processes potentially self-destructive.“ (p.73)
“But it may be instructive to reconfirm some elements of folk wisdom asserting that the returns to fast learning are not all positive, that rapid socialization may hurt the socializers even as it helps the socialized, that the development of knowledge may depend on maintaining an influx of the naive and ignorant, and that competitive victory does not reliably go to the properly educated.“ (p.85)
James G. March (1991), ‘Exploration and Exploitation in Organizational Learning’, Organization Science