psychological foundations of strategic management Mark P. Healey and Gerard P. Hodgkinson INTRODUCTION Although scholars often trace the intellectual lineage of strategic management to economics, views of human behavior emanating from the psychological sciences have also shaped the strategy feld’s development in important ways. From accounts of managers and frms as boundedly rational entities, to studies of top management team dynamics, to the cognitive construction of competitive industry struc- tures, psychological theory and research is often invoked to answer questions of why managers and frms act in particular ways. Despite these developments, standing back to look at the feld it is diffcult to point to a clear and coherent set of psychological foundations. Moreover, the psychology of strategic management can appear a somewhat fragmented affair, seemingly distant from the feld’s central concerns. However, there is a growing recognition that behavioral theory is ultimately required to explain some of the feld’s enduring questions, not least those concerning the sources of frm heterogeneity, the reasons behind resource advantages, and the origins of strategic innovation and change. Going further, some argue that realistic assumptions about human behavior should be the starting point for useful theory and practice in strategic management. BEHAVIORAL EXPLANATIONS OF STRATEGIC ACTION From an economics perspective, the central question of strategy is why frms differ in their performance. Traditionally, this question is answered with reference to factors such as susceptibility to industry forces, scarcity of resources, or barriers to mobility. In this view, economic actors try to act optimally on information about resources, positions, and opportunities. One key contribution of the psychological perspective has been to iden- tify a range of behavioral factors that impede strategists’ attempts to optimize, that is, to heed and act upon full information. Behavioral factors are typically equated with the mental processes of knowledge representation and information processing. For instance, frms fail to imitate resources and pursue promising market positions because of selective perception (Hambrick and Mason, 1984), competitive blind spots (Zajac and Bazerman, 1991), and the limited cognitive ability to form reliable causal links between frm actions and results (Powell, Lovallo, and Caringal, 2006). A second – and potentially more funda- mental – contribution of a behavioural perspective has been to question: (i) whether frm activity actually proceeds via optimization and (ii) whether optimization is even possible in the domain of strategy. In answer to these ques- tions, scholars have noted that economic actors often make decisions by choosing actions that are appropriate to the situation (March and Simon, 1993) or based on emotional reactions to choice alternatives (Hodgkinson and Healey, 2011) rather than calculating probable consequences. In a related vein, Levinthal (2011) argues that because strategic choice is by necessity exercised with reference to a simplifed mental represen- tation of the problem at hand, even intendedly rational strategizing is inherently behavioral. HISTORY OF PSYCHOLOGY IN STRATEGIC MANAGEMENT As with many academic felds, the psychology of strategic management has developed in fts and starts. Early strategy writers such as Andrews (1971) acknowledged the importance of psychological factors such as the infuence of personal values or perceptions of the external environment on strategy formation. However, these writers largely confned behavioral factors to the fringes of their analyses (Stubbart, 1989). This would change with the advent of formal attempts to consider strategic manage- ment – and the executive control of formal organizations more generally – as a special case of problem solving and decision making, drawing on the Carnegie School’s foundational ideas – not least bounded rationality, satisfcing, and bargaining among competing internal coali- tions (e.g., Cyert and March, 1963; Simon, 1947). Applying the insights of this important Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper. Copyright © 2014 John Wiley & Sons, Ltd.