Success from Satisficing and Imitation: Entrepreneurs’ Location Choice and Implications of Heuristics for Local Economic Development

Berg, Nathan (2010): Success from Satisficing and Imitation: Entrepreneurs’ Location Choice and Implications of Heuristics for Local Economic Development.

Abstract

Decisions about location choice provide an opportunity to compare the predictions of optimization models, which require exhaustive search through very large choice sets, against the actual decision processes used by entrepreneurs choosing where to allocate investment capital. This paper presents new data on entrepreneurs’ self-described decision processes when choosing where to locate, based on scripted interviews with 49 well-placed business owners and senior managers in charge of location choice. Consideration sets are surprisingly small, especially among those who are successful. According to entrepreneurs’ own accounts, locations are frequently discovered by chance rather than systematic search. Few describe decision processes that bear any resemblance to equating marginal benefit with marginal cost as prescribed by standard optimization theory. Nearly all interviewees describe location choice decisions based on threshold conditions, providing direct evidence of satisficing rather than optimization. Imitation is beneficial for small investment projects. Decision process data collected here suggests a need to rethink standard policy tools used to stimulate local economic development.

• Item Type: MPRA Paper
• Language: English
• Keywords: Process Model, Bounded Rationality, Interview Data, Ethnic, Discrimination, Low income, Neighborhood, Lexicographic, Non-compensatory, Business Owners
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles

References

Baucells, M., Carrasco, J.A., and Hogarth, R.M. (2008). Cumulative dominance and heuristic performance in binary multi-attribute choice, Operations Research, 56 (5), 1289-1304.

Berg, N. (2003). Normative behavioral economics, Journal of Socio-Economics 32, 411-427.

Berg, N. (2010). Behavioral Economics, In Free, R. C. (Ed.) 21st Century Economics: A Reference Handbook, Vol. 2, Los Angeles: Sage Publications, pp. 861-872.

Berg, N., Biele, G. and Gigerenzer, G. (2010), Does consistency predict accuracy of beliefs?: Economists surveyed about PSA, Working Paper, University of Texas-Dallas.

Berg, N., Eckel, C. and Johnson, C. (2010), Inconsistency Pays?: Time-inconsistent subjects and EU violators earn more, Working Paper, University of Texas-Dallas.

Berg, N., and Gigerenzer, G. (2010). As-if behavioral economics: Neoclassical economics in disguise?, History of Economic Ideas 18(1), 133-166.

Berg, N., and Gigerenzer, G. (2007). Psychology implies paternalism?: Bounded rationality may reduce the rationale to regulate risk-taking, Social Choice and Welfare 28(2), 337-359.

Berg, N., and Hoffrage, U. (2008). Rational ignoring with unbounded cognitive capacity, Journal of Economic Psychology, 29(6), 792-809.

Berg, N., Hoffrage, U., and Abramczuk, K. (2010). Fast Acceptance by Common Experience: FACE-recognition in Schelling’s model of neighborhood segregation, Judgment and Decision Making, 5(5), 391-410.

Berg, N., and Lien, D. (2005). Does society benefit from investor overconfidence in the ability of financial market experts?, Journal of Economic Behavior and Organization, 58, 95-116.

Berg, N., and Murdoch, J. (2008). Access to grocery stores in Dallas, International Journal of Behavioural and Healthcare Research, 1(1), 22-37.

Bewley, T.F. (1999). Why Wages Don't Fall During a Recession, Cambridge, MA., Harvard University Press.

Florida, R. (2002). The Rise of the Creative Class, New York, Basic Books.

Francica, J. (2000). Location analysis tools help Starbucks brew up new ideas, Business Geographics, 8, 32–33.

Frey, B.S. (2005). What values should count in the arts? The tension between economic effects and cultural value, CREMA Working Paper Series 2005-24, Center for Research in Economics, Management and the Arts (CREMA).

Gigerenzer, G., Todd, P. M., and the ABC Research Group, (1999). Simple Heuristics That Make Us Smart. New York: Oxford University Press.

Gigerenzer, G., and Selten, R. (2001). Bounded Rationality: The Adaptive Toolbox. Cambridge: MIT Press.

Goldstein, D. G., and Gigerenzer, G. (2009). Fast and frugal forecasting, International Journal of Forecasting, 25 (2009), 760-772.

Helling, A. and Sawicki, D. (2003). Race and residential accessibility to shopping and services, Housing Policy Debate,14, 69–101.

Hogarth, R. M., and N. Karelaia, (2005). Simple models for multi-attribute choice with many alternatives: when it does and does not pay to face tradeoffs with binary attributes, Management Science, 51(12), 1860-1872.

Hogarth, R. M., and N. Karelaia, (2006). ’Take-The-Best’ and other simple strategies: Why and when they work ‘well’ with binary cues, Theory and Decision, 61, 205-249.

Jolls, C., Sunstein, C. R., and Thaler, R. H. (1998). A behavioral approach to law and economics. Stanford Law Review, 50, 1471-1541.

Sabety, P., and Carlson, V. (2003). Using Information to Drive Change: New Ways of Moving Markets. Washington, DC: Brookings Institution.

Schwartz B. (2004). The paradox of choice: Why more is less. New York: Harper Perennial.

Schwartz, H. (1987). Perception, judgment and motivation in manufacturing enterprises: Findings and preliminary hypotheses from in-depth interviews, Journal of Economic Behavior and Organization, 8(4), 543-65.

Schwartz, H. (2004). The economic analysis underlying corporate decision making: What economists do when confronted with business realities, Business Economics, 39(3), 50- 59.

Smith, V. L. (2003). Constructivist and ecological rationality in economics. American Economic Review, 93(3), 465–508.

Weissbourd, R. (1999). The market potential of inner-city neighborhoods: Filling the information gap. Washington, DC: The Brookings Institution.

Wennberg, K., and Nykvist, B. (2007). The psychology of economic forecasting, Global Business and Economics Review, 9(2), 211-226.

Yee, M., Dahan, E., Hauser, J. R., and Orlin, J. (2007). Greedoid-based noncompensatory inference. Marketing Science, 26(4), 532-549.

Yonay, Y. (2000). An ethnographer's credo: Methodological reflections following an anthropological journey among the econ, Journal of Economic Issues, 34(2), 341-356.

Yonay, Y. and Breslau, D. (2006). Marketing models: The culture of mathematical. economics, Sociological Forum, 21(3), 345–386.