Abstract

Prior research alludes to the possibility that managers often suffer from a biased pattern of competitive cognition,such that they systematically assess that their competitors will make more threatening moves than thecompetitors are actually making. However, few studies shed light on the true nature, causes, and performanceconsequences of such a cognitive paranoia. This paper attempts to fill the knowledge gap. Through a strategysimulation study, we found that participants indeed generally predicted lower prices and larger advertisingexpenditures than were the actual moves made by their competitors. However, the degree of paranoia wasreduced as participants gain experience. We also found that paranoid teams tended to be those that were highlypreoccupied with competitive planning. Interestingly, while being paranoid initially did not matter to firmperformance, teams that grew more paranoid toward the late stage of the simulation tended to actually improvetheir performance over time, suggesting that a “seasoned” form of paranoia may in fact benefit firmperformance. The theoretical and practical implications of these results are discussed.

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