Assumptions of Rationality and Equilibrium in Strategy Research: The Limits of Traditional Economic Analysis

Abstract

We argue that two core assumptions of economic analysis - managers and employees make optimal decisions and markets operate in equilibrium - have undesirable implications in strategic management research. To show how these assumptions lead to dubious implications, we analyze two exemplars of the rigorous application of these assumptions in strategic management research: Barney's (1986a) `Types of competition and the theory of strategy: toward an integrative framework' and Mosakowski's (1998) `Managerial prescriptions under the resource-based view of strategy: the example of motivational techniques'. We also introduce the basics of a behavioral theory of the firm, which we claim is prefer-able to traditional economic analysis and its severely limiting assumptions. Finally, we argue that most research in strategic management takes an implicitly behavioral view and would benefit from making that view explicit.