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.
- Subjective rationality,
- business strategy self-confirming equilibrium
Available at: http://works.bepress.com/michael_ryall/2/