Reference Selection in Strategic Decisions

In this research stream, we adopt a behavioral theory of decision making to study how individuals and firms select and use reference points when making strategic decisions. Decision making rarely occurs in a vacuum – it is often reference dependent. For example, for many individuals or organizations, the impetus to engage in decision making arises through lateral comparisons with others. Such comparisons carry important informational value, as they provide cues about whether a focal actor is “doing well” or not. For example, when performance falls short relative to peers, this may signal an underlying issue that requires attention, triggering problemistic search, i.e. the process of diagnosing problems and seeking solutions.

In the context of firms, it is commonly assumed that such lateral comparisons are given or predetermined – for instance, that firms in similar industries automatically serve as comparison benchmarks. However, we argue that this is unlikely to be the case. Instead, firms appear to be agentic, actively selecting their reference groups based on specific needs or strategic motives. This makes the reference selection process endogenous, not exogenous.

In this research project, we aim to better understand this endogenous process of reference selection. When references are known to be powerful predictors of decision making, as established by many prior studies, but are themselves endogenously chosen, there is a strong need for a first-stage model of reference selection. Such a model would offer substantial explanatory power for understanding and predicting strategic decision making.

Methodologically, this project combines quantitative analyses with laboratory experiments to uncover both patterns and mechanisms of reference selection.

The main researchers involved in this project are Johannes Luger, Yuqi Zheng, and Carolin Heinemann.