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Is the psychology of high profits detrimental to industrial renewal? Experimental evidence for the theory of transformation pressure

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  • Lennart Erixon

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  • Louise Johannesson

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Abstract

The theory of transformation pressure maintains, by reference to cognitive and emotional factors, that productivity and innovation are stimulated by a decline in actual profits. In periods of increasing profits, firms governed by historical relativism, the peak-end rule and overconfidence will opt for the status quo. In the following profit recession, actors become more alert, calculating and creative, favoring a transformation, especially if they fear that the survival of the firm is at stake. The theory of transformation pressure was tested by a within-subjects experiment where undergraduate students in macroeconomics acted as managers for an established company. The role play sheds light on the students’ investment strategy choices and underlying psychological perceptions under varying profit conditions. The theory was only partly confirmed by the experiment. There are arguments in industrial economics, psychology and neuroscience for a qualified theory of transformation pressure. Productivity is enhanced by moderate pressure or by periodic shifts between hard pressure and good opportunity. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Lennart Erixon & Louise Johannesson, 2015. "Is the psychology of high profits detrimental to industrial renewal? Experimental evidence for the theory of transformation pressure," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 475-511, April.
  • Handle: RePEc:spr:joevec:v:25:y:2015:i:2:p:475-511
    DOI: 10.1007/s00191-015-0399-3
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    Cited by:

    1. Liping Fu & Xiaodi Jiang & Lanping He, 2019. "How Natural Resource-Based Industry Affect Sustainable Development? An Evolutionary Study of China," Sustainability, MDPI, Open Access Journal, vol. 12(1), pages 1-14, December.

    More about this item

    Keywords

    Transformation pressure; Bounded rationality; Economic psychology; Productivity growth; Innovation; Status quo bias; B52; E32; L21; O31;

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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