Misperceiving Interactions: Organizational Consequences

Systems composed of activity choices that interact in non-simple ways can allow firms to create and sustain a competitive advantage. However, in complex systems, decision makers may not always have a precise understanding about the exact strength of the interaction between activities. This paper studies formally the consequences of misperceiving interaction effects between activity choices. Our results suggest that misperceptions with respect to complements are more costly than with respect to substitutes. It is also shown that system fragility is not necessarily positively correlated with the strength of the interaction between choices. While systems of complements become increasingly fragile as the strength of interaction increases, systems of substitutes can become increasingly stable. By pointing towards those types of activities for which increased information about their interactions tends to yield high benefits, the model offers insights with respect to organizational design.