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Article
Subjective Rationality, Self-Confirming Equilibrium and Corporate Strategy
Management Science (2003)
  • Michael D Ryall, Melbourne Business School
Abstract

This paper presents a formal theory of subjective rationality and demonstrates its applica- tion to corporate strategy. An agent is said to be subjectively rational when decisions are consistent with the available facts and, where these are lacking, with the agent’s own sub- jective assessments. A self-confirming equilibrium arises when agents’ subjectively rational actions generate events that are consistent with their own expectations. Equilibrium strate- gies may be suboptimal because certain counterfactual beliefs may be erroneous and yet fail to be contradicted by events observed in equilibrium. This weakening of the stronger ratio- nality assumptions inherent in many of the more familiar equilibrium ideas appears well suited to applications in strategy. In particular, performance advantage may be sustained by a firm when its subjectively rational competitors persistently employ suboptimal self- confirming strategies.

Keywords
  • Subjective rationality,
  • business strategy self-confirming equilibrium
Disciplines
Publication Date
2003
Citation Information
Michael D Ryall. "Subjective Rationality, Self-Confirming Equilibrium and Corporate Strategy" Management Science Vol. 49 Iss. 7 (2003)
Available at: http://works.bepress.com/michael_ryall/2/