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Chaos theory, economics and information: The implications for strategic decision-making

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 Journal of Information Science
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Chaos theory, economics and information: the implications for strategic decision-making
Tim Hayward and Judith Preston
Journal of Information Science 1999; 25; 173
DOI: 10.1177/016555159902500301

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Citations http://jis.sagepub.com/cgi/content/refs/25/3/173

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 The effect of postings information on searching behaviour

1
2
3
Chaos theory, economics and
4
5
6
information: the implications for
7
8
9
strategic decision-making
1110
1
2
3
4 Tim Hayward and Judith Preston Introduction
5
University of Wales, Aberystwyth, UK
6 In 1994, Handy observed:
7
Life will never be easy, nor perfectible, nor completely
8 Received 23 June 1998
predictable. It will be best understood backwards, but we
9 Revised 12 November 1998 have to live it forwards. To make it liveable, at all levels,
20 we have to learn to use the paradoxes, to balance the contra-
1 dictions and the inconsistencies and to use them as an invi-
2 tation to find a better way [1].
Abstract.
113
4 Traditionally, rational models of decision-making assume For organisations to make decisions in such an uncer-
5 perfect information is available to the manager. In reality, tain environment, they need an understanding of wider
6 the paradox of rationality is that full information relates economic and societal conditions. To this end, strategy
only to the past; choices for the future must be of limited is designed to help to identify a path through the envi-
7
rationality as the future contains both risk and uncertainty. ronment that will accomplish future goals. However, it
8
An analysis of rationality and uncertainty in relation to may be argued that, in the 1990s, ‘rational’ strategic
9 decision-making, therefore leads to a consideration of Chaos
30 decision-making is still often regarded as the only
Theory. Whilst recognising that the future is unknowable,
1 conceivable approach for managing an organisation’s
nonetheless, Chaos Theory allows for the possibility of an
2 awareness of a range of future states. In addition, it suggests
future. Indeed, the discipline of scientific management
3 that complete and accurate information, so necessary for is wholly consistent with ensuring regularity, pre-
4 rational decision-making, is unobtainable, and the past is not dictability and rationality. As Bowles [2] points out,
5 an accurate guide to the future. this rational approach to management decisions centres
6 Thus, the terms of reference for strategic management on information, analysis and reducing organisational
7 should be changed; conditions must be created whereby phenomena to numbers:
effective learning takes place, from which new strategies
8 As such, management analysis based on the rational model
may or may not emerge. Managers should not problem-solve
9 their way out of chaos, instead, generate bold solutions mostly trivialises and simplifies organisational phenomena in
40 which integrate all the information. Information is thus acti- its obsession for control [2].
1 vating a process by which strategy can emerge from across Thus, alternative explanations for coping with future
2 all levels of the organisation, to provide at least some struc- organisational direction are being sought, evidenced by
3 tured futures thinking.
the growing interest in areas such as chaos theory and
4
quantum theory. As Ballman [3] suggests, while a
5
society obsessed with Newtonian rationality expects all
6
things to be quantifiable and predictable, given the
7
collection of enough information, this neglects an
8
element of common sense:
9 Correspondence to: T. Hayward, Department of Information
50 and Library Studies, University of Wales, Llanbadarn Fawr, Firstly, the data points that are required exist in the future
1 Aberystwyth SY23 3AS, UK. Tel: +44 1970 623111, ext: 4621. (e.g. what the market will do). Therefore they are unpre-
2 Fax: +44 1970 622190. E-mail: teh@aber.ac.uk/jbp@aber.ac.uk dictable. Secondly, even if the data were all available now,

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Chaos theory, economics and information: the implications for strategic decision-making

we would require an impossibly fine level of detail to antici- How can agents be said to be rational at a given point in time 111
pate chaotic outcomes [3]. when they are in the process of learning and acquiring 2
relevant information? The very act of learning means that not 3
The problems involved with the concept of ration- all information is processed and global rationality is ruled 4
ality at a macroeconomic level have already been out [8].
5
discussed by Hayward and Broady [4]. Similar prob- This paper examines the concept of information as it 6
lems also apply at the micro level, that of the organisa- relates to decision making and economic theory, with 7
tion. To this extent, economic theory has, hitherto, the aim of linking this to new thinking in the strategic 8
played an important role in the evolution of business management of organisations and thus achieving a 9
strategy. Thus, concepts of competition, rational cross-disciplinary approach. What is of importance to 10
choice, full information and equilibrium have provided information scientists is that assumptions concerning 1
the bedrock on which strategists have attempted to information are seen to be pivotal to the way that deci- 2
understand their environment and make decisions. sion making operates in organisations and, indeed, in 3
There are problems with a traditional microeconomic the economy as a whole. 4
approach, however: 5
6
. . . it is the assumptions of rationality and abstract clarity Decision making: rationality and 7
which are most dangerous . . . in reality managers do not have
the privilege of the comprehensive information such models uncertainty 8
assume [5]. 9
Before considering further the linkage between eco- 20
Clearly, rational economic models have provided nomic and organisational theory, it is necessary to 1
a strong foundation for strategists attempting to discuss the theoretical foundations behind rational 2
come to terms with a turbulent competitive environ- decision-making models. This is important because 3
ment. However, since Porter’s adaptation of industrial it underlies the tradition of linear decision-making 4
economics to strategic analysis, there has been con- which has had such an impact on the management of 5
tinuing research by economists which attempts to organisations. The work of economists such as Loasby 6
make their science more relevant to management and Gerrard (see below) is particularly instructive 7
thinking. As Kay [6] suggests, economics is the natural here, not least because they recognise the importance 8
integrative discipline for most management science, of information problems in their own field. As Parker 9
but its neglect of the firm as a unit of organisation and Stacey state, the rational model of management 30
has limited the role it has played. During the past two describes a process of decision making and control 1
decades, the neoclassical model of the firm, which oper- which is simply a particular way of choosing and acting: 2
ates in a world without uncertainty, has felt 3
What happens to an organisation is assumed to be determined 4
the impact of new thinking, focusing largely on un- primarily by the shared intention or the joint choices about
certainty, information asymmetry and bounded 5
long-term outcomes of its managers, as embodied in their
rationality. 6
plans, and these choices are the result of a ‘rational’ decision-
Undoubtedly, the work of Porter [7] and others, who making process [9]. 7
have developed generic strategies within the microeco- 8
nomic framework, has the advantage of tractability and The decision-making process, therefore, is an integral 9
has proved successful. However, wholly rational and part of organisational strategy and it is the assumptions 40
prescriptive approaches to strategy conveniently omit made about decision makers that are so clearly linked 1
information problems and inhibit long-term future to neoclassical economic theory. Daft and Seers [10] 2
thinking. argue that rational decision-making models assume that 3
Strategic decision-making draws heavily on decisions maximise goal achievement and that indi- 4
economic theory. Therefore, the situation whereby viduals behave in an economically rational manner. 5
economic theory is in crisis should be of very real Thus, in reality, the model is more suited to decisions 6
concern to those engaged with both management where a problem is well defined and information on 7
research and information theory. As Hodgson [8] alternatives is widely available. This position describes 8
observes, Bell and Kristol’s 1981 proclamation of a essentially the logical theory of rational choice. Gerrard 9
‘crisis in economic theory’ may now be seen as an [11] suggests that here information assumptions play a 50
understatement. Studies in game theory, for example, crucial role, both in the use of the logical approach in 1
have undermined the concept of rationality: a theoretical model of choice and in its operation as a 2

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111 predictive tool. Theoretically, agents are assumed to
2 have complete information, so as to be able to make a
3 single, rational choice. In this sense, the objectivity or
4 subjectivity of the information is irrelevant. An agent
5 makes an optimal choice given his objective function
6 and the information set. The advantage here, clearly, is
7 that an assumption of perfect information makes the
8 empirical problem of predicting agent behaviour more
9 manageable.
10 While rational models assume perfect information,
1 this does not necessarily mean that agents have
2 complete, correct information. If agents are assumed
3 only to use information which they know and believe
4 to be true, then clearly there is room for rational
5 mistakes [11]; however, an agent may still be making an
6 objective, optimal choice. As Daft and Seers [10]
7 suggest, however, the problem with this approach is
8 that it describes how managers should make decisions,
9 rather than how they actually make them. Its explana-
1120 tory abilities, therefore, are limited.
1 Conversely, Friedman [12] argues that there is no
2 requirement to provide a realistic account of how
3 choices are made. Agents make decisions ‘as if’ they
4 were optimising, and a model constructed with these
5 precepts need not describe the actual process of choice.
6 While it may be argued that this is true in situations
7 where agents have a simple choice to make, it does
8 not necessarily hold for more complex circumstances.
9 Friedman’s argument for optimising behaviour on
1130 the part of decision makers relies on the assumption
1 that ruthless market conditions will always mean
2 that only profit-maximising firms will survive. This
3 has necessary implications for information. If
4 Friedman’s argument is held to be true, then, as Browne
5 suggests:
6 The concepts of uncertainty and risk are also con-
A decision maker . . . would seek to ‘maximise’, that is to
7 collect and evaluate all information about all possible alter-
8 sation remains intact under conditions of risk, under
natives and solutions simultaneously [13].
9 uncertainty, agents may adjust their behaviour to deal
1140 In an attempt to deal with the problems surrounding
1 decision making under conditions of uncertainty,
2 Simon [14] introduced the idea of bounded rationality.
3 Thus, managers have a boundary on their rationality,
4 and problem situations are simplified [10]. Once situa-
5 tions become complex, the idea of rationality becomes
6 one of procedural rationality. Agents do not always seek
7 the best alternative, but rather one which satisfies. Thus,
8 when a satisfactory solution is found, the search for fur-
9 ther information stops. This approach would seem to
50 recognise the cost in both human and financial terms of
1 an endless quest for perfect information. In complex sit-
112 uations, all choices are unlikely to be known.
Journal of Information Science, 25 (3) 1999, pp. 173–182
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TIM HAYWARD AND JUDITH PRESTON
Gerrard [11] suggests that Simon’s work is primarily
concerned with the use of rules in the search process.
In this sense, he appears largely concerned with objec-
tive choice situations and therefore with the quantity of
information possessed by decision makers:
The status of the agent’s information is not seen as problem-
atic [11].
However, if it is assumed that agents do not have
perfect information, then they must interpret what they
do have in the context of some set of assumptions about
the choice situations. If the information set can no
longer be treated as certain knowledge, then it is not
objective but open to interpretation [11]. Thus, it is
knowledge fallibility which differentiates uncertainty
from certainty. In the same way, uncertainty can be
differentiated from risk. Kay argues that risk can be
predicted from the laws of chance:
. . . objective probability distributions of expected likelihood
of occurrence can be constructed [15].
Uncertainty, meanwhile, is associated with only
partial knowledge, the results of which cannot be deter-
mined objectively. A probability distribution, there-
fore, is not available. There is also a problem here with
differentiating between information and knowledge. As
Davenport et al. [16] argue, knowledge is information
combined with experience, producing a high-value
form of information that is ready to apply to decision
making:
While knowledge and information may be difficult to distin-
guish at times, both are more valuable and involve more
human participation than the raw data on which we have
lavished computerisation during the past forty years [16].
fused in decision-making analysis. Thus, while optimi-
with the fallibility of their knowledge [11]. Similarly,
Hodgson [17] argues that most economic theory covers
nothing more than risk and ignores uncertainty.
At the furthest end of the informational spectrum lies
ignorance. Kay [15] notes that, in this respect, uncer-
tainty should not be seen as the negation of informa-
tion. Loasby agrees:
Certainly one cannot make sensible decisions in ignorance,
but uncertainty is not ignorance – it is knowledge [18].
Thus, a state of uncertainty requires at least some
knowledge, even if that knowledge is known to be
fallible. In economic analysis, the acknowledgement
175
Chaos theory, economics and information: the implications for strategic decision-making

that information is usually less than perfect has led to time, only that is fully known which is already beyond 111
two modifications. The analysis of risk assumes that the reach of choice, having already become actual and thus 2
while decision makers do not have precise knowledge knowable [20]. 3
concerning the outcome of every choice, they do have Boulding [21] agrees with this insight, arguing that 4
a list of all possible outcomes relevant to each choice the study of decision must concentrate on how future 5
[18]. This set of outcomes is regarded as objective images are derived from the inputs of the past. This 6
knowledge; there is no room for subjective behaviour implies the influence of experience on beliefs which in 7
on the part of the decision maker: turn would deny the existence of a common pattern of 8
experience crucial to general equilibrium economics. 9
It is . . . not clear what precisely can be objective about a prob-
ability distribution defined over future states or events [18]. Indeed, evidence would suggest that most organisa- 10
tional structures produce false images in the decision 1
To avoid this problem, a second modification, known maker, and the larger the organisation, the more likely 2
as the analysis of uncertainty, can be introduced. Here, that top decision-makers operate in a fictional world 3
the decision maker may not know the probability distri- [21]. Nevertheless, economic theory assumes complete 4
bution, but may still possess a list of the outcomes [18]. rationality or, as Loasby notes, an injection of irra- 5
For the economic analyst, the crucial problem is tionality into a rational system: 6
predicting the decision makers’ validation process. The 7
traditional way around this problem has been the use In neither case is there any learning; the influence of experi- 8
of subjective probabilities, so converting the problem ence on beliefs is carefully excluded [19]. 9
into a form equivalent to a state of risk [19]. 20
These criticisms of the assumptions of economic theo- 1
rists are not universally applicable. Marshall [22], for 2
Economic and organisational theory example, developed a theory whereby expectations were 3
based on trial and error and where errors have small con- 4
As mentioned above, decision-making analysis is com- sequence. Marshallian values differ from the modern the- 5
mon to the theories of economics and organisations: ory of rational choice, as they are based on the application 6
of reason to beliefs derived from repeated trial [19]. For 7
Both groups are concerned with similar issues: the allocation consideration of situations where errors may have greater
of problem areas among decision makers, in ways to avoid or 8
consequence, it is possible to reflect on Keynes’ discus- 9
mitigate discordant decisions; information requirements and sion of the investment decision, where, in the absence of
information channels; and the effects of incentives on behav- 30
knowledge, agents tend to rely on conventional assump- 1
iour [19].
tions concerning the uniformity of nature [11]. In terms of 2
The idea that economic analysis, with its foundation investment decisions, therefore, people assume that the 3
of mathematic formulae, is in some way superior to future will be similar to the present, unless specific infor- 4
organisational theory neglects the view that, in reality, mation suggests otherwise. Past experience, therefore, is 5
the two disciplines are confronted by the same infor- crucial. Keynes also argues that the behaviour of agents 6
mational problems. The concepts of Pareto optimality depends on long-term expectations. These consist of the 7
and perfect competition both apply to unreal worlds, predicted rate of return and the level of confidence. Thus, 8
clearly ignoring the problems of uncertainty. As Loasby agents may attempt to assess their degree of uncertainty 9
[19] argues, the supposed inferiority of organisational in terms of the confidence of their predictions. Behaviour 40
theory rests in its belief in the limitations inherent in may change not only because predictions change, but 1
receiving and processing information. Thus, complex because the level of confidence with which they are made 2
problems have to be shared. Conversely, in economic changes. The cautious behaviour which results from a 3
equilibrium there is no reason that one person should drop in the level of confidence underlies much of Keynes’ 4
not decide everything, as there is nothing to decide. theory of involuntary unemployment [11]. Thus, the 5
This world of perfect knowledge ignores the issue that introduction of future situations into an equation involv- 6
real choice would imply that knowledge is not perfect. ing rationality necessarily introduces ignorance and 7
As Shackle [20] points out, rational choice must be fully brings into question the whole basis of a rationality 8
informed choice, but there can be no full information theory: 9
except that which is past. Thus: 50
Keynes makes it quite clear that it is not a modification of
The paradox of rationality is that it must concern itself with accepted economic rationality but its destruction by igno- 1
choosing amongst things fully known; but in the world of rance which he is writing about [19]. 2

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111 In light of this, Loasby [19] emphasises Keynes’ argu-
2 ment that the required informational inputs to make
3 decisions regarding future time are simply not avail-
4 able. Without these inputs, formal rational models are
5 unable to work. This same problem confronts manage-
6 rial decision-makers and economists alike, the solution
7 to which, argues Keynes, has been to rely on three tech-
8 niques: (i) we assume that the present is a much more
9 serviceable guide to the future than a candid examina-
10 tion of past experience; (ii) we assume that the existing
1 state of opinion as expressed in price is based on a
2 correct summing up of future prospects; (iii) we rely on
3 the judgement of the rest of the world, which is perhaps
4 better informed [19]. This suggests, if nothing else, the
5 importance of subjective judgement in the decision-
6 making process.
7 The debate concerning the logical theory of rational
8 choice is essentially one of manageability or realism
9 in the construction of decision-making models. While
1120 acknowledging the limitations of rational choice
1 models, Gerrard [11] believes that there is room for
2 both views, within a framework which acknowledges
3 the need for different theories in different situations.
4 In this sense, he suggests that Simon’s notion of pro-
5 cedural rationality and Keynes’ analysis of the invest-
6 ment decision may provide a useful starting point.
7 There are also political implications. Zey argues, for
8 instance, that the assumptions of rational-choice
9 models lie at the heart of the economic and political
1130 theories of those who advocate minimal government
1 and libertarianism:
2 thus, a socio-economic system, the institution, com-
Using rational choice logic, many types of organisation are
3 being subjected to economic analysis in attempts to make
4 way, chaos theory suggests that even apparent indeter-
them more accountable or productive or competitive [23].
5
6 Rational-choice models do indeed make a number of
7 arguable assumptions about human and organisational
8 behaviour. The ‘evolutionary’ argument of Friedman
9 contends that fit and maximising individuals and
1140 organisations are the only ones likely to survive. Thus,
1 it is of little importance whether they deliberately
2 maximise. Not only would this line of argument seem
3 to deny the existence of choice, but it is far from clear
4 whether ‘rationality’ can then be applied to organisa-
5 tions and individuals alike [24]. If firms go bankrupt
6 because of irrational choice on the part of managers, it
7 is improbable, for most decisions, that the same fate
8 awaits the irrational consumer. Nelson and Winters’
9 [25] insight into the evolutionary process would seem
50 to suggest that the habits and routines to be found in an
1 organisation have a genetic quality which can be passed
112 on. As Hodgson points out:
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TIM HAYWARD AND JUDITH PRESTON
. . . whilst Nelson and Winters criticise Friedman for the
evolutionary analogy, their emphasis on habit and routine
provides the requisite mechanisms and units of selection for
a more rigorous evolutionary theory [24].
These concerns highlight one of the overriding
concepts of rational-choice models: the individual as
an appropriate unit of analysis. If we question this and
instead place emphasis on the collective, then, as Zey
[23] argues, we can concentrate on non-rational deci-
sions of groups and organisations that are lodged in
values and habits.
Indeed, this line of argument may begin to attack the
root of the problem. In concentrating on the rationality
of individual information processing capabilities, mod-
ern economic theory is reductionist in nature. To under-
take any kind of scientific analysis, it is necessary to
develop principles of invariance and this is presumably
why rational economic man has been so convenient to
neoclassical economists. However, as Hodgson [8] sug-
gests, the institution as a ‘socially constructed invariant’
can instead be used as a unit of analysis principally
because institutions enable ordered thought and action
by imposing consistency on the activities of individu-
als. Moreover, institutions have an explicit structure
for information, which becomes knowledge when it is
embedded in organisational processes. Within an insti-
tution, information can be defined as non-codifiable
(knowledge) or codifiable (information held within
computer systems, for example). The latter responds to
external conditions far more readily than the former;
bines elements of stability with instability. In the same
minacy may have deterministic roots, although, while
some structural stability may make predictions feasible,
major changes cannot be forecast.
Chaos theory
The development of chaos theory has questioned the
idea that economics can proceed on the criterion of ‘cor-
rect prediction’, and its non-linear approach to decision
making has encouraged the use of the firm as a unit of
analysis. Chaos theory, then, has very real implications
for the management of organisations. As Parker and
Stacey [9] state, in linear systems, actions can only have
one outcome; in non-linear systems, action can have
many outcomes. Similarly, linear systems may be
viewed as the sum of their parts, while, conversely,
non-linear systems are greater than the sum of their
177
Chaos theory, economics and information: the implications for strategic decision-making

parts. Thus, it is impossible to understand a non-linear Despite its assumptions of uncertain futures, chaos 111
system by the reductionist method of breaking it down. theory does allow for patterns and regularities within a 2
Given these differences, traditional approaches to chaotic system: 3
decision making have employed a linear approximation The concept of the strange attractor enables the chaotic
4
of a non-linear system, by introducing error terms to system to be described, both mathematically and graphically, 5
take care of any random shocks to the system. The to reveal such patterns [26]. 6
assumption has always been that random shocks to the 7
system do not take over and change the behaviour of Thus, while the future is essentially unknowable, it 8
the system. However, chaos theory suggests that non- is possible to be aware of a range of future states. Stacey 9
linear feedback systems are sensitive to initial condi- [27] likens this to the intertwining of order and 10
tions, while cause and effect can disappear in the disorder, so that as chaos is bounded by recognisable 1
complexity of interactions. qualitative patterns, humans can still cope with a given 2
Moreover, chaos theory holds that a wide range of situation. Burlando [26] views such a scenario as a 3
phenomena is unpredictable and that to try to foresee pictorial representation of a time series. With each 4
the future is a futile activity: seemingly random event, new information can be 5
obtained and time patterns begin to emerge: 6
It focuses on phenomena that are unpredictable, follow no
Events seem to cluster around what appear to be strange 7
known rules, have no logical consequence and seem to defy
rational description. In short, it is not unlike decisions made attractors . . . In chaos theory, repetitive behaviour always 8
under conditions of extreme uncertainty [26]. produces information. The observer need only know where to 9
look for it [26]. 20
Thus, in one respect, chaos theory confirms the 1
This, of course, is not to say that chaos theory can
position of bounded rationality, i.e. that human infor- 2
predict the future. It does not lend itself to quantitative
mation-processing abilities are limited, but also takes the 3
analysis concerned with the final stable behaviour of a
argument further. At base, however, and as argued 4
system. In other words, it is not concerned with the
above, the theory questions assumptions of linearity in 5
predictability of final outcomes, but with observing the
decision making, particularly the use of past and current 6
observable and the hidden patterns [26].
information to predict the future. From a Newtonian 7
Thus, chaos theory has necessary implications for
point of view, if we have perfect knowledge of initial 8
decision making, not least in confronting the very
conditions, we can make some attempt to predict the 9
rational, linear nature of many decision-making
future, although this may be an impossible task. Indeed, 30
models. If rational models stress the importance of
in their 1994 Hobart Paper, Parker and Stacey argue that 1
historical information to make decisions, then chaos
systems which demonstrate sensitive dependence on 2
theory highlights discontinuity, contradicting the belief
initial conditions cannot successfully be planned for: 3
that decision making is part of a continuous chain.
Similarly, if a rational approach believes decision 4
They cannot be controlled through monitoring their perfor-
mance against some standard [9]. making can only be achieved successfully by the exis- 5
tence of complete and accurate information, then chaos 6
If we accept that human systems are complex, to the 7
suggests that this is unobtainable and events bear little
extent that sensitivity to initial conditions make them 8
relationship to what has happened previously [28].
difficult to control, then it is possible to question the 9
This, then, may imply a need to change the terms of
use of linear, rational models for long-term strategic 40
reference for strategic management:
planning. 1
It may even be argued that the sensitivity of initial The new frame of reference exposes much of the received 2
conditions means that the future cannot be predicted, wisdom on strategic management to be a fantasy defence 3
whatever the quality of the information. Similarly, against anxiety, and points instead to the essential role of 4
Burlando argues that risk managers must appreciate the managers in creating the necessary unstable conditions 5
link between small innocuous events and large cata- required for that effective learning and political interaction
6
from which new strategic direction may or may not emerge
strophic results: 7
[27].
The intertwining of small scales with larger ones is not a 8
quirk, bad luck or fortuitous. A hidden structure always exists The unstable conditions referred to above may 9
. . . The problem is that it is not evident exactly how the arguably be directly linked to information problems. 50
consequences may change and whether or not the direction Flower [29] uses the term ‘chaos’ to describe a situation 1
of change will be desirable [26]. whereby strategists feel confused and overwhelmed by 2

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111 information of which they cannot make sense. He
2 suggests creating intentional chaos by overloading
3 people with important and relevant information until
4 they ‘let go’. Instead of problem solving their way out
5 of chaos, they eventually generate bold solutions which
6 integrate all of the information. Thus, information
7 should be open and abundant:
8 managing and organising are built firmly on the feedback
The science of self-organising systems says that if you want
9 nature of the organisation. They do not account for escalating
order you need a free flow of information, because informa-
10 tion is what living systems use to transform themselves [29].
1
2 In this sense, information is not seen simply as a
3 product to feed into a model which attempts to predict
4 future states; rather, it is seen as activating a process by
5 which strategy can emerge from across an organisation.
6 ‘Self-organisation’, which is implicit in applications of
7 chaos theory, cannot be achieved by a management
8 directive and, because of this, information plays a vital
9 role:
1120
We need to create, as part of the planning function, much
1 scales and they are now known to be common in nature [9].
better information-sensing devices, generating information
2 that then gets fed to all parts of the organisation, so that the
3 Fractal markets are already recognised by managers
organisation can continuously adapt and change as that infor-
4 and analysts. Peters, for example, has applied the the-
mation requires [29].
5 ory to asset management, disputing the conventional
6 If we accept these new terms of reference, we must
7 also accept that long-term planning is futile and that
8 strategists are likely to be more successful by confining
9 themselves to short-term forecasting. Jennings and
1130 Wattam [28] argue that the recognition of unpre-
1 dictability increases the importance of contingency
2 planning and makes it more central to the task of
3 management. To adopt this view involves questioning
4 a fundamental assumption about planning. Stacey [27]
5 suggests that if we believe that the long-term future of
6 an organisation can be determined, then we make an
7 unquestioned assumption between cause and effect in
8 organisational life; between an action and an outcome.
9 Chaos theory argues that simple feedback laws generate
behaviour so complex that the links between cause and
1140
effect disappear. In this sense, chaos lies on the border
1
between organisational disintegration and ossification,
2
where disintegration is seen as decentralisation into
3
numerous business units and ossification as a central-
4
ising process:
5
6 Success clearly lies in a non-equilibrium state between stable
7 and unstable equilibrium and for a non-linear feedback
8 system this is chaos [27].
9
50 Thus, both rational and entrepreneurial approaches
1 to decision making are flawed in as far as their method-
112 ology is constructed from traditional science. The
Journal of Information Science, 25 (3) 1999, pp. 173–182
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TIM HAYWARD AND JUDITH PRESTON
world which they describe is a well-ordered one,
attempting equilibrium states. While it may be argued
that this applies more readily to economic than to
management and organisation models, it is still true
that human behaviour is viewed as being driven by
algorithmic modes of thinking and learning:
The conclusion is that none of today’s prominent models of
small changes and vicious and virtuous circles [30].
In this sense, planning is determined by negative
feedback attempting an equilibrium state by enabling a
system to improve what is already being done. Positive
feedback, implicit in chaos theory, involves disrupting
the equilibrium, but is held in check by the existence
of strange attractors. In this state, non-linear feedback
systems are capable of self-organisation:
Fractals are evidence of self-organising systems. Fractal
shapes are self similar . . . they have similar structures on all
wisdom that markets are perfect mechanisms, ruled by
rational players and digesting available information:
Rather they are complex systems, swept by chaotic forces,
fuelled by imperfect data [31].
Essentially, chaos theory implies that the self-
organisation of economic agents leads to unpredictable
and emergent outcomes. Long-term planning is thus
futile:
In a chaotic system, no matter how much information about
a system we have collected in the past, and no matter how
much number crunching of the data occurs, the specific future
cannot be predicted [9].
However, to expect agents to have full information
before considering possible future states is to be impris-
oned by the same reasoning that has so adversely
affected economic theory. As mentioned earlier, chaotic
dynamics often create their own unique geometry and,
arguably, it may be possible to recognise emerging tra-
jectories of a given non-linear process. Thus, while
strategic managers cannot accurately forecast the future,
it is possible to identify a number of probable pathways
by studying the attractors as they operate:
The application of non-linear science in strategic planning
and management revolves around creating more adaptive and
resilient systems in the face of a mercurial world [32].
179
Chaos theory, economics and information: the implications for strategic decision-making

Hitherto, the problem has been the preoccupation of come from the domains of strategic planning, where the 111
strategic management with the theory and methods use of non-linear thinking revolves around creating 2
of economics. What actually matters in real-life situa- more flexible systems in an increasingly volatile world. 3
tions is not the bounded rationality of decision makers, Although strategic management has been preoccupied 4
but the unpredictability of the world. Thus, as dis- with the theory and methods of economics, the fit 5
cussed, non-linear strategising would seem to imply a between strategy and economics is far from perfect. 6
focus on self-organisation and organisational learning. Daneke views management in the 1990s as having 7
Tetenbaum identifies Visa, for example, as a self- returned to more systemic types of analysis, foreshad- 8
organising company which operates on the basis of owing the development of non-linear perspectives: 9
imagining the world as it ought to be, then taking deci- 10
The main message of non-linear strategising focuses attention
sions accordingly: 1
on organisational learning [32].
2
Despite its size and growth, you don’t know where its located,
how its operated, or who owns it. That’s because Visa is It was previously assumed that decision making 3
decentralised, non-hierarchical, evolving, self-organising and required the ability to predict possible outcomes of 4
self-regulating [33]. alternative courses of action; based on these predic- 5
tions, strategists made and communicated plans: 6
Needless to state, in such organisations, the sharing 7
of knowledge and information becomes imperative. This leads to the development of ever more sophisticated
8
Thus, companies must rely on the collective knowledge information systems and ever more sophisticated algorithms
for manipulation of this information [34]. 9
of their employees in order to create a desired future: 20
The concept of collective intelligence presupposes system- Thus, the underlying assumption is still one of perfect 1
wide sharing of information so internal barriers, such as those information; if information is complete, it is possible to 2
that prevent cross-functional learning, must be eradicated predict the future. As McDaniel argues, however, if the 3
[33]. future is unknowable, success for organisations can 4
only come through organisational learning: 5
This idea is also supported by McDaniel [34], who
Learning replaces control as complex adaptive systems antic- 6
views information as flowing in unpredictable ways, cre-
ipate the future. Strategic leaders, therefore, should help 7
ating new structures and forms as the situation requires.
organisations focus on learning rather than knowing [34]. 8
In practical terms, Pascarella [35] notes that McKinsey &
9
Co have investigated ways in which the flow of knowl- The implications for information in strategic decision- 30
edge and information acquired by its consultants could making are then far removed from equilibrium models 1
be encouraged. Methods have included conferences, assuming rationality on the part of agents. Instead: 2
informal gatherings and a move from paper-based
3
libraries to electronic libraries and electronic networks. One key characteristic of good connections in an organisation
is the capacity to carry rich exchanges of information. This is 4
In relation to these kinds of organisational changes,
accomplished by using a wide range of information media 5
Daneke [32] argues that as the adoption of non-linear
and through a willingness to experiment with new ways of 6
science becomes more widely used in the solution of
communicating. Channels of information flow do not neces- 7
management problems, it may herald more holistic
sarily follow channels of authority. Rather, information is 8
alternatives to logical positivism and neoclassical
delivered directly to those who can use it without going 9
economic theory. Despite the fact that experiments through a chain of command [34]. 40
with chaos theory in economics still appear to be
1
closely associated with methodological individualism
2
and rational choice, the field of management has seen
a definite move towards non-linear thinking. Dooley et
Conclusion 3
4
al. [36], for example, have argued that total quality
Clearly, the application of chaos theory to organisations 5
management (TQM) is the embodiment of various non-
and economics has important implications for strategic 6
linear concepts. Their study investigated the connec-
decision-making, not least because it challenges the 7
tions (i) between the Newtonian model, scientific
mechanistic, Newtonian view of the world on which 8
management and TQM and (ii) between chaos and
management theory has developed. If we accept the 9
complexity, the learning organisation and TQM.
notion that human systems behave in a similar way to 50
However, as Daneke [32] argues, perhaps the most
systems in the natural world, then, arguably, theories 1
far-reaching implications of non-linear science will
based on assumptions of equilibrium states may be 2

180 Journal of Information Science, 25 (3) 1999, pp. 173–182

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 TIM HAYWARD AND JUDITH PRESTON

111 questioned. Thus, if economic theory is in crisis (Routledge, London, 1993).

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