This study sheds light on the generalization problem in the context of strategic decision-making: how to generalize from prior experience in order to deal with new situations that are similar but different from the past? In particular, the study addresses a set of interrelated questions on learning and decision-making in novel environments: when presented with a stream of novel opportunities that generates uncertain outcomes, how do decision-makers infer the value of the opportunities using their prior experiences, and how do they decide to capture the opportunities based on their evaluations? Using a web-based experiment, which presents a task setting in which one either seizes a unique opportunity or not, the study provides novel findings about generalization and risk-taking. When holding positive expectations about novel opportunities, the decision-makers commit to the opportunities almost irrespective of the magnitude of the expectation. In contrast, when having negative expectations, they execute the reward opportunities to a noticeable degree, in proportion to the magnitude of their expectation. We interpret this pattern of behavior as a novel variant of the familiar exploration-exploitation tradeoff. In the positive domain of expectations, there is not an exploration-exploitation tradeoff − merely the incentive to “exploit.” In contrast, in the domain of negative expectations, there is a motivation to learn about the opportunity space as well, which leads the decision-makers to “explore” by taking risks.
KEYWORDS: Learning, Decision-Making, Generalization, Risk Taking, Experiment