Prioritizing beliefs and the formation of expectations

• Published date: 01 December 2023
• Author: Timo Ehrig
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/emre.12602

SPECIAL ISSUE ARTICLE

Prioritizing beliefs and the formation of expectations

Timo Ehrig

Université libre de Bruxelles, Solvay Brussels

School of Economics and Management,

Brussels, Belgium

Correspondence

Timo Ehrig, Université libre de Bruxelles,

Solvay Brussels School of Economics and

Management, Av. Franklin Roosevelt 42, 1050

Brussels, Belgium.

Email: timo.ehrig@ulb.be

Abstract

How do expectations for novel opportunities—like Amazon from the perspective

of 1998—come about? To form such expectations, decision-makers need to derive

plausible conclusions that go beyond the available information by interpreting it

with the help of theories. I explain why asymmetric expectations among rational

individuals can exist, even when information is symmetric: Differences in the will-

ingness to question of (defined as “a preference ordering over”) elementary theo-

retical explanations of the novelty bring about heterogeneity in final expectations.

I further argue that one source of better expectations is the skill to choose the rela-

tive willingness to question beliefs and thus the skill to integrate theories. I iden-

tify the skills of decision-makers to detect and resolve inconsistencies and to

decide when to give up beliefs again as sources of advantages in forming

expectations.

KEYWORDS

belief revision, contradictions, expectations, novel opportunities, theory-based view

INTRODUCTION

How individuals form expectations, and if they can form

expectations that allow them to acquire resources at

prices below their rent-generating potential, are two cen-

tral questions underlying the explanation of the origins of

competitive advantages. The currently emerging theory-

based view (TBV) of strategy (Felin & Zenger, 2009,

2017; Ehrig & Schmidt, 2022a) explains heterogeneous

expectations by differences in visions, intentions, or sim-

ply theoretical assumptions used to evaluate information.

In the perspective of the TBV, differences in expectations

can be explained, even if we assume equal intuitive statis-

tical skills, equal skill in analogical transfer, and equal

access to factual information among all involved

decision-makers. They are explained by different

theories—imagined causal models of how and why a

novel opportunity may become viable. Accepting this

proposition about the origin of heterogeneity, the ques-

tion then is which reasoning skills are conducive to better

expectation formation. Here, “reasoning skill”cannot be

reduced to intuitive statistic inference and analogical

transfer. Rather, we need insights into how basic con-

cepts proposed by the TBV, like belief revision (Ehrig &

Foss, 2022; Ehrig & Schmidt, 2022b; Zellweger &

Zenger, 2023), relate to psychological processes, what

exactly augments or even replaces Bayesianism as a

normative ideal, and if reasoning skills can be improved

by learning prescriptive reasoning procedures that are tai-

lored to thinking in theories. Is there a “rational”founda-

tion of the TBV beyond Bayesianism (Grandori, 2010)?

To make progress in answering these questions, this

paper explores rational components of theory-based rea-

soning, a line of thought that arguably started with Felin

and Zenger (2009). I argue that if strategists think in the-

ories, they will necessarily need to resolve contradictions.

Resolving contradictions requires strategists to let go of

beliefs, while these beliefs may have originated in experi-

ence and/or imagination. As such, the process of resolv-

ing contradictions is an inescapable part of strategic

reasoning and how it is handled can make a key differ-

ence for arriving at superior expectations. The skill to

resolve contradictions is very different from accumulating

factual information and processing it. As I shall discuss,

key to this skill is the ability of the strategist to wisely

decide which beliefs he/she should let go first—the skill to

order beliefs by the willingness to question them (Ehrig &

Schmidt, 2022a). Extending prior results, I discuss the

psychological origins of this skill and how it relates to the

skill of forming a coherent logical subjective theory of a

novel opportunity while being exposed to a debate in

which contradictory fragments of theories about the

novel opportunity are proposed. I ground this discussion

by proposing a belief revision procedure that decision-

DOI: 10.1111/emre.12602

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