Bounded Rationality Effect on Firm’s Choices on R&D Investments: A Model for Decision-Making Effectiveness Analysis

Abstract

How effective is the taken R&D investment decision, considering the effect of bounded rationality? Guided by this question, it is explored the decision-making process at the group level within the firm. A mathematical model for determining the effectiveness of decision-making based on the group’s experience is proposed. By considering subjective and objective factors, the Decision-making Effectiveness Index – Dei, model was created. To prove theoretical hypotheses and testing the model, a randomly generated dataset was built consisting of 4,000 individuals that were grouped representing 500 hypothetical firms. After performing the simulation, both hypotheses were confirmed, and the model was validated. The main theoretical findings evidenced that the project’s success will depend on decision-makers' cognitive capacity. As a contribution for practitioners, this research highlighted the importance of considering group experience in a self-analysis effectiveness index. Procedures are proposed for comparing the firm effectiveness index with competitors for improving firm decision-making performance.