Vicarious Learning, Undersampling of Failure, and the Myths of Management
Denrell argues that organisations learn by observing other organisations, but the firms they can see are mostly survivors of a selection process that removed many others. Books and the business press add to the skew by concentrating on successful companies, so failure is under-represented in what observers see. This undersampling can lead to false conclusions about what drives performance: risky practices can appear linked to success even when they are unrelated to performance across the whole population. Unreliable practices and concentrated resource allocation can then look better than reliable, well-informed practices or diversified allocation. The paper concludes that such observations give compelling but potentially misleading evidence for several common managerial practices.
Denrell argues that organisations learn by observing other organisations, but the firms they can see are mostly survivors of a selection process that removed many others. Books and the business press add to the skew by concentrating on successful companies, so failure is under-represented in what observers see. This undersampling can lead to false conclusions about what drives performance: risky practices can appear linked to success even when they are unrelated to performance across the whole population. Unreliable practices and concentrated resource allocation can then look better than reliable, well-informed practices or diversified allocation. The paper concludes that such observations give compelling but potentially misleading evidence for several common managerial practices.
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Denrell, J. (2003). Vicarious Learning, Undersampling of Failure, and the Myths of Management. Organization Science, 14(3), 227-243. doi:10.1287/orsc.14.2.227.15164