Exploration and Exploitation in Organizational Learning by James G. March

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

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The Worldly Wisdom Project #4

One of the most influential articles for my development of mental models regarding learning and knowledge creation is written by March, J, Sproull, L, & Tamuz, M in 1991. The reason why I find it so influential is that it stresses a very important fact that is often overlooked in organisations, investing and life in general. That is, we learn and create knowledge from very small pool of outcomes. The article does not only make us aware of this fact but also how we can learn from samples of one and fewer with minimised effect from lady Fortuna and here companion Mr Noise.

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.

Five worldly wisdom’s from Learning from Samples of One or Fewer by March et al.

Because experiencing an outcome as a success or failure depends on the relation between the outcome and adaptive aspirations for it, what is learned from any particular kind of experience can vary substantially across time and across organizations. (p.4)

In trying to understand unique experiences, organizations make implicit choices between two alternative perspectives on history. In the first perspective, realized events are seen as necessary consequences of antecedent historical conditions. In the second perspective, realized events are seen as draws from a distribution of possible events. If historical events are (possibly unlikely) draws from a wealth of possibilities, an understanding of history requires attention to the whole distribution of possible events, including those that did not occur (Fischhoff 1980, Hogarth 1983). The organizational problem is to infer an underlying distribution of possible events from a series of realized events having varying, but possibly quite low, probabilities. (p.4)

Future admirals learn not only from the battle but also from its near-histories. Standard folkloric observations that great failures often are the consequence of bad luck or timing and great successes the consequence of good luck or timing suggest an implicit distribution of possible outcomes around the observed outliers. They emphasize that the near-histories of genius and foolishness are more similar than their realized histories. (p.5)

The learning process is generally conservative, sustaining existing structures of belief, including existing differences, while coping with surprises in the unfolding of history. Organizations create the same kinds of coherent systems of belief that in science are called knowledge, in religion are called morality, and in other people’s societies are called myths. Experience is used to strengthen and elaborate previously believed theories of life. (p.7)

Every unique historical event is a collection of micro events, each of which can be experienced. In this sense, the learning potential of any historical event is indeterminate. Because both the scope of an event and the depth of its decomposition into elements are arbitrary, so also is the richness of experience. By considering additional aspects of experience and new dimensions of preferences, an organization expands the information gained from a particular case. The pursuit of rich experience, however, requires a method for absorbing detail without molding it. Great organizational histories, like great novels, are written, not by first constructing interpretations of events and then filling in the details, but by first identifying the details and allowing the interpretations to emerge from them. As a result, openness to a variety of (possibly irrelevant) dimensions of experience and preference is often more valuable than a clear prior model and unambiguous objectives (Maier 1963; March 1978, 1987). (p.8)

March, J, Sproull, L, & Tamuz, M 1991, ‘Learning from Samples of One or Fewer’, Organization Science.

The Worldly Wisdom Project #3

A few weeks back I came across an interesting article about rewards named On the folly of rewarding A while hoping for B written by Steven Kerr. As I’m a strong sceptic of stock options program and alike I always find stuff like this interesting to read. Although it was written in 1995 the lessons given by Kerr in the article have no expiration date. Instead, the article has over the years become an classic in its field of study. In the article Kerr gives numerous examples that showcase how we humans as every other organism on this planet “seek information concerning what activities are rewarded, and then seek to do (or at least pretend to do) those things, often to the virtual exclusion of activities not rewarded“. (p.7) Other than stating examples, Kerr dives into the discussion about causes and what might be done to improve the situation of rewards. In this worldly wisdom post I will focus on some of the examples as they were the ones that really caught my attention while reading. However, I do recommend reading the whole article as it is only 9 pages long and can easily be find with a Google search.

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 On the folly of rewarding A while hoping for B by Steven Kerr

In War

If some oversimplification may be permitted, let it be assumed that the primary goal of the organization (Pentagon, Luftwaffe, or whatever) is to win. Let it be assumed further that the primary goal of most individuals on the front lines is to get home alive. Then there appears to be an important conflict in goals—personally rational behavior by those at the bottom will endanger goal attainment by those at the top.

Consider, however, some critical differences in the reward system in use during the two conflicts. What did the GI in World War II want? To go home. And when did he get to go home? When the war was won!

Consider the reward system in use in Vietnam. What did the soldier at the bottom want? To go home. And when did he get to go home? When his tour of duty was over! This was the case whether or not the war was won.” (p.8)

In Medicine

Theoretically, physicians can make either of two types of error, and intuitively one seems as bad as the other. Doctors can pronouncepatients sick when they are actually well (a type 1 error), thus causing them needless anxiety and expense, curtailment of enjoyable foods and activities, and even physical danger by subjecting them to needless medication and surgery. Alternately, a doctor can label a sick person well (a type 2 error), and thus avoid treating what may be a serious, even fatal ailment. It might be natural to conclude that physicians seek to minimize both types of error.

Such a conclusion would be wrong. It has been estimated that numerous Americans have been afflicted with iatrogenic (physician caused) illnesses.* This occurs when the doctor is approached by someone complaining of a few stray symptoms. The doctor classifies and organizes these symptoms, gives them a name, and obligingly tells the patient what further symptoms may be expected. This information often acts as a self-fulfilling prophecy, with the result that from that day on the patient for all practical purposes is sick. Why does this happen? Why are physicians so reluctant to sustain a type 2 error (pronouncing a sick person well) that they will tolerate many type 1 errors? Again, a look at the reward system is needed. The punishments for a type 2 error are real: guilt, embarrassment, and the threat of a malpractice suit. On the other hand, a type 1 error (labeling a well person sick) is a much safer and conservative approach to medicine in today’s litigious society.” (p. 8-9)

In Universities

Society hopes that professors will not neglect their teaching responsibilities but rewards them almost entirely for research and publications. This is most true at the large and prestigious universities. Cliches such as “good research and good teaching go together” notwithstanding, professors often find that they must choose between teaching and research-oriented activities when allocating their time. Rewards for good teaching are usually limited to outstanding teacher awards, which are given to only a small percentage of good teachers and usually bestow little money and fleeting prestige. Punishments for poor teaching are also rare.” (p. 9)

In Sports

Most coaches disdain to discuss individual accomplishments, preferring to speak of teamwork, proper attitude, and one-for-all spirit. Usually, however, rewards are distributed according to individual performance. The college basketball player who passes the ball to teammates instead of shooting will not compile impressive scoring statistics and is less likely to be drafted by the pros. The ballplayer who hits to right field to advance the runners will win neither the batting nor home run titles, and will be offered smaller raises. It therefore is rational for players to think of themselves first, and the team second.” (p.10)

Kerr S. (1995) On the folly of rewarding A while hoping for B. Academy of Management Executive; 9(1): 7-14.