The Effect of Performance Feedback on the Exploration and Exploitation Tradeoff

Abstract

March (1991) concluded that when organizations seek to balance exploration and exploitation, the choice is primarily driven by learning from performance feedback. This research tests this conclusion of March at the aggregate organizational level. We examine the impact of the performance feedback using textual analysis of quarterly earnings releases. Unexpectedly, we find that better performance is related to a subsequent increase in exploration relative to exploitation. Since prospect theory is based on individual risk-taking, our findings suggest different mechanisms of risk-taking as a response to performance feedback at the aggregate, organizational level. Our research highlights the performance feedback process at the aggregate organizational level as a determinant of the tradeoff between exploration and exploitation.