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

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  • Berg, Nathan

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26594.

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Date of creation: 2010
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Handle: RePEc:pra:mprapa:26594

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Keywords: Process Model; Bounded Rationality; Interview Data; Ethnic; Discrimination; Low income; Neighborhood; Lexicographic; Non-compensatory; Business Owners;

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References

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  1. Berg, Nathan, 2010. "Behavioral Economics," MPRA Paper 26587, University Library of Munich, Germany.
  2. Nathan Berg & Gerd Gigerenzer, 2007. "Psychology Implies Paternalism? Bounded Rationality may Reduce the Rationale to Regulate Risk-Taking," Social Choice and Welfare, Springer, vol. 28(2), pages 337-359, February.
  3. Robin Hogarth & Natalia Karelaia, 2004. "Simple models for multi-attribute choice with many alternatives: When it does and does not pay to face tradeoffs with binary attributes," Economics Working Papers 739, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2005.
  4. Baucells Alibés Manel & Carrasco López Juan Antonio, 2006. "Cumulative Dominance and Heuristic Performance in Binary Multi - Attribute Choice," Working Papers 201047, Fundacion BBVA / BBVA Foundation.
  5. Schwartz, Hugh H., 1987. "Perception, judgment, and motivation in manufacturing enterprises : Findings and preliminary hypotheses from in-depth interviews," Journal of Economic Behavior & Organization, Elsevier, vol. 8(4), pages 543-565, December.
  6. Vernon L. Smith, 2003. "Constructivist and Ecological Rationality in Economics," American Economic Review, American Economic Association, vol. 93(3), pages 465-508, June.
  7. Karl Wennberg & Bjorn Nykvist, 2007. "The psychology of economic forecasting," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 9(2), pages 211-226, January.
  8. Michael Yee & Ely Dahan & John R. Hauser & James Orlin, 2007. "Greedoid-Based Noncompensatory Inference," Marketing Science, INFORMS, vol. 26(4), pages 532-549, 07-08.
  9. Berg, Nathan & Murdoch, James, 2008. "Access to grocery stores in Dallas," MPRA Paper 26585, University Library of Munich, Germany.
  10. Goldstein, Daniel G. & Gigerenzer, Gerd, 2009. "Fast and frugal forecasting," International Journal of Forecasting, Elsevier, vol. 25(4), pages 760-772, October.
  11. Berg, Nathan & Biele, Guido & Gigerenzer, Gerd, 2010. "Does Consistency Predict Accuracy of Beliefs?: Economists Surveyed About PSA," MPRA Paper 24976, University Library of Munich, Germany.
  12. Berg, Nathan & Eckel, Catherine & Johnson, Cathleen, 2010. "Inconsistency Pays?: Time-inconsistent subjects and EU violators earn more," MPRA Paper 26589, University Library of Munich, Germany.
  13. Berg, Nathan & Lein, Donald, 2005. "Does society benefit from investor overconfidence in the ability of financial market experts?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 95-116, September.
  14. Berg, Nathan & Gigerenzer, Gerd, 2010. "As-if behavioral economics: Neoclassical economics in disguise?," MPRA Paper 26586, University Library of Munich, Germany.
  15. Nathan Berg & Ulrich Hoffrage & Katarzyna Abramczuk, 2010. "Fast Acceptance by Common Experience - FACE-recognition in Schelling's model of neighborhood segregation," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 5(5), pages 391-410, August.
  16. Berg, Nathan, 2003. "Normative behavioral economics," The Journal of Socio-Economics, Elsevier, vol. 32(4), pages 411-427, September.
  17. Berg, Nathan & Hoffrage, Ulrich, 2008. "Rational ignoring with unbounded cognitive capacity," Journal of Economic Psychology, Elsevier, vol. 29(6), pages 792-809, December.
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