Small Differences in Experience Bring Large Differences in Performance

In many life situations, people choose sequentially between repeating a past action in expectation of a familiar outcome (exploitation), or choosing a novel action whose outcome is largely uncertain (exploration). For instance, in each quarter, a manager can budget advertising for an existing product, earning a predictable boost in sales. Or she can spend to develop a completely new product, whose prospects are more ambiguous. Such decisions are central to economics, psychology, business, and innovation; and they have been studied mostly by modelling in agent-based simulations or examining statistical relationships in archival or survey data. Using experiments across cultures, we add unique evidence about causality and variations. We find that exploration is boosted by three past experiences: When decision-makers fall below top performance; undergo performance stability; or suffer low overall performance. In contrast, individual-level variables, including risk and ambiguity preferences, are poor predictors of exploration. The results provide insights into how decisions are made, substantiating the micro-foundations of strategy and assisting in balancing exploration with exploitation.