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Journal of Evolutionary Economics

, Volume 25, Issue 2, pp 475–511 | Cite as

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

  • Lennart ErixonEmail author
  • Louise Johannesson
Regular Article

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.

Keywords

Transformation pressure Bounded rationality Economic psychology Productivity growth Innovation Status quo bias 

JEL classification

B52 E32 L21 O31 

Notes

Acknowledgments

We are very grateful for the comments of the referees and the participants in the 4th National Conference of Swedish Economists, Umeå, Sweden, 25–26 September 2014.

Compliance with ethical standards

We declare that the following information is true to the best of our knowledge.

Conflict of interest

The authors declare that they have no conflict of interest.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Department of EconomicsStockholm UniversityStockholmSweden
  2. 2.Örebro University and Research Institute of Industrial Economics (IFN)StockholmSweden

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