The Revision of Beliefs Underlying Organizational Expectations

How do expectations for novel opportunities - like Amazon from the perspective of 1998 - come about? To form such expectations deliberatively decision-makers need to make use of induction: they add explanations to factual information to derive plausible expectations. Belief revision theories can help to explain why asymmetric expectations among rational individuals can exist, even when information is symmetric: differences in the epistemic entrenchment of (defined as 'a preference ordering over') elementary inductive explanations of the novel opportunity may bring about heterogeneity in final expectations. We apply formal belief revision theories to derive predictions about the process of the revision of explanations that underlie organisational expectations. Our first result is a refined understanding of cognitive inertia: resistance to a new belief by an organisation is a function of the system of its existing beliefs, their logical structure, and the relative entrenchment of the new belief. Our second result is that organisations that react to a disruptive event by an action that contradicts the current industry logic, necessarily needed to be prepared by counterfactual beliefs. The introduced model is, to our knowledge, the first model that captures expectation formation in novel, probabilistically unknown, but already publicly discussed business environments. It covers the middle ground between models of full rationality, and models of incremental search.