The Manager’s Notepad: Working Memory, Exploration, and Performance

This study builds upon March and Simon’s proposition that individual‐level differences must be considered when explaining decision‐making performance. We extend their discussion on the importance of decision‐makers’ attention to explain heterogeneous patterns of exploration and exploitation within the same uncertain environment. We develop a model of decision‐making under uncertainty in which ‘working memory’ – i.e., the ability to hold multiple elements in mind to actively process them – explains the emergence of heterogeneity in exploration‐exploitation choice patterns. We validated the model in a laboratory study and two replications involving 171 individuals. Our findings show that differences in working memory allow us to identify individuals who are more likely to choose exploration over exploitation appropriately, and thus achieve higher performance. We discuss the implications for management theories, and re‐propose the work of March and Simon as a unifying framework that still can be used to generate and test managerially relevant hypotheses.