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The Entrepreneur as Business Leader


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The Entrepreneur asBusiness LeaderCognitive Leadership in the Firm

Silke Scheer

Max Planck Institute o Economics, Jena, Germany

Edward ElgarCheltenham, UK Northampton, MA, USA


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Silke Scheer 2009

All rights reserved. No part of this publication may be reproduced, storedin a retrieval system or transmitted in any form or by any means, electronic,mechanical or photocopying, recording, or otherwise without the priorpermission of the publisher.

Published byEdward Elgar Publishing Limited

The Lypiatts15 Lansdown RoadCheltenhamGlos GL50 2JAUK

Edward Elgar Publishing, Inc.William Pratt House9 Dewey CourtNorthamptonMassachusetts 01060USA

A catalogue record for this bookis available from the British Library

Library of Congress Control Number 2009922770

ISBN 978 1 84844 333 4

Printed and bound by MPG Books Group, UK


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v

Contents

Forewordby Ulrich Witt vii

Acknowledgments ix

1 Introduction 1

1.1 Finding solutions to the problem o coordination and

motivation o employees 21.2 Coordination and motivation rom an alternative

perspective 3

1.3 Diferences rom charismatic leadership 5

1.4 Aims and structure o the book 7

2 The theory o cognitive leadership and its oundation in

cognitive psychology 12

2.1 The theory o cognitive leadership 13

2.2 Foundations o the theory o cognitive leadership in

cognitive psychology 192.3 Summary 28

3. Dyadic processes: cognitive leader to employee 31

3.1 A newcomers motivation to learn about a rm 32

3.2 Shaping mental models by learning 35

3.3 Summary 49

4 Group processes: work group to employee 53

4.1 A newcomers perspective on joining a group 54

4.2 A work groups perspective on a newcomer 60

4.3 Deviant behavior in work groups 654.4 Summary 72

5 Exploring the theory o cognitive leadership empirically 79

5.1 Hypotheses development 79

5.2 Method 86

5.3 Results 88

5.4 Summary 105

6 Implications and open research questions 109

6.1 Implications rom the present work 109

6.2 Outlook 115

6.3 Summary 120


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vi The entrepreneur as business leader

Appendix A: Questionnaire used in the study 124

Appendix B: Figures and table data rom the study 130

Reerences 145

Index 167


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ix

Acknowledgments

This book has taken years o development a development that has been

supported by many people. I would like to thank Pro. Witt as my mentor

and supervisor and my colleagues and companions at the Max Planck

Institute o Economics, especially Thomas Brenner, Guido Bnstor, Dirk

Fornahl, Uta-Maria Niederle, Inken Poszner, Klaus Rathe, Christian

Schubert, Georg von Wangenheim and Hagen Worch. I am also indebtedto Fabian Eser who helped with the preparation o the empirical part o the

project. Besides the scientic resources I enjoyed, the background support

o the IT department and the library were o great help. Thereore my thanks

go to Thomas Baumann, Thomas Brckner and Jrgen Rosenstengel as

well as to Hella Bruns, Brigitte Homann and Katja Mller.

I am also grateul to the participants o my study. Without them taking

the time involved this project would have had a diferent scope.

O course, this work would not have been possible without the support

o my riends and amily. I am appreciative o Heike Hahns prooreading,my athers advice and Gesine Hongers. And, nally, thank you so much

or time, space and tolerance, Matthias, Amrei and Tjarde!


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1

1. Introduction

The existence o rms has occupied researchers minds or some time and

still does. In transaction-costs economics it is assumed that rms exist

because under certain constellations organizing the work ow by a rm

can help to minimize transaction costs, hold-ups and post-contractual

hazards while economies o scale can be internalized (or example, Coase

1992; Shelanski and Klein 1995; Williamson 1985, 2002). In contrast tomarket transactions or realizing ones entrepreneurial ventures, choos-

ing a rm to do so can also be advantageous, because within the organi-

zational ramework o a rm it is, or example, possible to accumulate

intangible assets like knowledge and skills (Foss 1993; Teece et al. 1994)

and to achieve su cient adherence to a rms goals (see Witt 1998). This

issue is especially relevant when the knowledge or skills a rm requires are

implicit and/or not available to one single employee which necessitates

coordination to tap on these resources (ibid.). It is these rm-specic com-

petencies that rom an evolutionary point o view explain the existence orms (Pelikan 1989; Langlois 1992; Nooteboom 1992; Foss 1993; Teece et

al. 1994; Kogut and Zander 1996).

However, organizing the production process by means o a rm and to

introduce a division o labor, and thus specialization, also entails some

drawbacks that have to be outweighed against potential benets. As

Hayek (1945, p. 520) said, the problem is precisely how to expand the

span o our utilization o resources beyond the span o control o any one

mind.

First, a rm ounder has to resort to incomplete contracts because theuture demands o the work process are unknown to her (Simon 1951;

Grossman and Hart 1986). To put it diferently [n]ew rms and rms

that are orced to relentlessly create new businesses, cannot be operated

with detailed plans based on the ction that all possible contingencies can

be anticipated (Witt 1998, p. 172). Thus, contracts have to be written that

rather commit the employees to engage in their work tasks or the best o

their company rather than to pin down an individual employees specic

work tasks completely and exhaustively (Witt 2005). Moreover, a rms

intangible assets are also impossible to dene. It ollows that the coordina-

tion o employees has to be arranged.

Second, it has been assumed in the literature that in rms inormation is


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2 The entrepreneur as business leader

distributed asymmetrically, which may result in moral hazards. Employees

may pursue their (hidden) personal interests, behave opportunistically and

avor their personal interests over those o the rm i the marginal benets

or doing so exceed the marginal costs (or example, Grossman and Hart1983). Since the observation o the employees actions or achievements

are costly to the employer and employees may thus be induced to shirk,

incentives have to be provided to the employees in order to balance the

potential losses incurred by their opportunistic behavior, on the one hand,

and the potential gains on transaction costs resulting rom the ounding o

the rm, on the other hand (Williamson 1985; Foss 2001).

1.1 FINDING SOLUTIONS TO THE PROBLEMOF COORDINATION AND MOTIVATION OFEMPLOYEES

Solutions that have been suggested to the problems o coordinating

and motivating employees revolve around conceptions like monitoring

(Alchian and Demsetz 1972), governance (Williamson 1975, 1979) or more

abstract incentive structures like those proposed by Grossman and Hart

(1983) in their principalagent model.

Characteristic o the principalagent model is the notion o asymmetricinormation which enables the agent to hide her true interests rom the

principal and to act in an opportunistic way. Following the reasoning o

the principalagent theory, one way to counteract opportunistic tenden-

cies is to implement a close monitoring regime whereby the behavior o the

employees can be kept under tight control. Thus, they can be prevented

rom shirking. The degree to which the asymmetric inormation prevails

depends on how di cult and costly it is or the principal to judge the per-

ormance o the agents.

Close monitoring requires a hierarchical organizational structure that iscostly not only in terms o money but also in terms o time; the more so, the

bigger the organization grows (Witt 2000). In the end, managerial disecono-

mies o scale might result (Mueller 1972, pp. 203f.). Furthermore, monitor-

ing can also have negative efects on the monitored employees motivation

in that it dampens the employees creativity and intrinsic motivation (Enzle

and Anderson 1993; Williams and Yang 1999). Taking into account these

negative efects o monitoring, it seems debatable whether monitoring indeed

presents a solution to the coordination and motivation o employees.

Ensuring the employees motivation can also be approached by intro-

ducing contracts that imply an incentive to the employees not to shirk but

to contribute their best eforts to the rms productivity. Consequently,


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Introduction 3

incentive compatible contracts may reduce the need or monitoring.

However, these kind o contracts may also entail a number o drawbacks

that have to be balanced against these benets. First, their implementation

may entail substantial costs. Second, they may ail, or example, becausethey are incomplete, not enorceable by a third party or because their

costs outweigh their returns (Foss 2000). Third, under certain conditions

incentive compatible contracts bear the risk o crowding out the employ-

ees potentially existent intrinsic motivation (see Frey 1997). And, ourth,

assuming that an employee has to ulll multiple tasks or multi-dimensional

tasks that entail diferent costs o measuring may induce the employee to

preerably put her eforts into those tasks that are more easily measurable

than others, that may be essential but comparably hard to measure and

may thereore be neglected (Holmstrm and Milgrom 1991).Barnard (1948, p. 141, emphasis added) has pointed out that an organi-

zation can secure the eforts necessary to its existence . . . either by the

objective inducements it provides or by changing states o mind. Whereas

the organizational regimes presented above avor the ormer way o secur-

ing a rms existence, the regime that is presented in the ollowing rather

adheres to the latter.

1.2 COORDINATION AND MOTIVATION FROM ANALTERNATIVE PERSPECTIVE

The theory o cognitive leadership suggests an alternative approach or

resolving the coordination and motivation problems a rm ounder has

to tackle (Witt 1998, 2000, 2002, 2003, 2005). Central to this theory is the

person o the entrepreneur and rm ounder (see Schneider 1987; Casson

2000; Foss 2001). She is argued to have a business conception she aims at

realizing. Since the entrepreneur cannot do so on her own, she ounds a

rm, hires employees and consequently aces the problems that havebeen outlined above: in order to realize her business conception she has to

coordinate her employees inputs and to motivate the employees to put in

their best eforts.1 In other words, she becomes a leader to her employees.

The theory o cognitive leadership argues that a rm ounder can solve

these problems by conveying her business conception to her employees.

This kind o leadership is called cognitive leadership because the convey-

ance o the business conception it is argued mainly depends on cognitive

processes. The underlying reasoning o this assumption is outlined below.

The business conception o the rm ounder expresses what kind o busi-

ness she wants to pursue and how she wants to do it. It provides a reerence

point or the processing and assessment o incoming inormation or the


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rm ounder as well as or her employees (or example, Witt 1998). In this

sense, it provides a coordination unction to them. Furthermore, through

the adoption o the business conception the employees personal interests

are assumed to merge with those o the rm. Consequently, their motiva-tion to achieve their tasks can be assumed to be predominantly intrinsic in

nature (see Bnabou and Tirole 2003).2 The high level o cognitive coher-

ence allows the rm ounder to grant substantial degrees o reedom to

her employees a measure that is argued to urther boost their intrinsic

motivation (Deci et al. 1999). Hence, the employees rely less on extrinsic

rewards which it is argued pose a threat to their intrinsic motivation since

extrinsic incentives potentially crowd out intrinsic motivation. Thus, a

business conception is what Ghoshal et al. (1995, p. 749) in reerence to

Hayek describe as a coherent institutional context:

To be able to simultaneously exploit [the] benets o distributed and localizedresources and knowledge and achieve e ciency through the economies o scaleand scope and the reduction o transaction costs, [. . .] rms cannot rely eitherwholly or even primarily on hierarchical governance and must depend insteadon creating a coherent institutional context which motivates individuals to dothe desirable things without anyone having to tell them what to do. (Hayek1945, p. 527)3

The rm ounder or cognitive leader conveys her business concep-tion by means o communication and by being a model to her employees.

Moreover, she can point out other people to her employees who can serve

as models. Colleagues are also considered to potentially have an impact

on the employees cognitive agendas by means o communication and

observational learning.

For the conveyance o the business conception the cognitive leader is

crucial because it depends on her capabilities and her business concep-

tions characteristics whether the employees adopt the business concep-

tion in the rst place. Since communication and observational learningdepend on the requency o social interaction, it is urther argued that a

rm ounders requent interaction with her employees is necessary to have

an impact on their cognitive agendas and to align these according to the

business conception (see Reichers 1987; Langeld-Smith 1992).4

Within the ramework o the theory o cognitive leadership people are

assumed to be boundedly rational, that is, people have limited capacities

or processing inormation and their attention and inormation processing

are guided by cues. The adoption o the business conception by employees

thus inuences their cognitive agendas in such a way that incoming inor-

mation is processed rom the perspective o the business conception and

decisions are made conorming to it.


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Introduction 5

Contingent on the described processes, the theory o cognitive leader-

ship puts orward a pattern o organizational development according to

which a growing rm is assumed to expand (or example, Witt 2005). It is

claimed that cognitive leaders and their business conceptions have a deci-sive inuence in the evolution o rm organizations.

A number o aspects that are implied in the theory o cognitive leader-

ship or that the theory o cognitive leadership is based on are, however,

not included in it. The theory o cognitive leadership does not, or example,

explain the cognitive processes basic to its assumptions nor does it explain

the conditions the exertion and the success o cognitive leadership are

dependent on. While it outlines characteristics o the cognitive leader that

oster the conveyance o the business conception, characteristics o the

employees or situational aspects are not discussed. Also, the view on theimpact o incumbent employees on the exertion o cognitive leadership is

limited in that they are reduced to their prospective unction as models

to their colleagues or to their potential to pose a threat to the initial busi-

ness conception by behaving in a deviant manner. A work groups posi-

tive contribution to cognitive leadership is not considered. Furthermore,

the assumptions o the theory o cognitive leadership have not yet been

subject to any empirical validation. This volume sets out to improve on

this situation.

1.3 DIFFERENCES FROM CHARISMATICLEADERSHIP

Beore the aims o this volume are presented in more detail, we have to

dene the theory o cognitive leadership in relation to charismatic leader-

ship. Foss and Klein (2005) have categorized cognitive leadership as one

orm o charismatic leadership a perspective not adopted in the present

thesis. The diferences between cognitive leadership and charismatic lead-ership can be outlined as ollows.

Charismatic leadership theories assume that a charismatic leader can

inuence her ollowers basic values, belies and attitudes so that they

are willing to perorm beyond what would normally be expected o them

(Podsakof et al. 1996; Conger 1999). She is able to do so by communi-

cating her vision, by inspiring and empowering her ollowers, by being a

model to her ollowers, by providing intellectual stimulation and meaning

to her ollowers, by appealing to higher-order needs, by the setting o high

expectations in her ollowers and by ostering a collective identity.

Although the theory o cognitive leadership is also based on the

orming and shaping o the ollowers cognitive agendas by making use o


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communication and modeling processes, it neither includes the shaping o

the more basic values nor does it explicitly aim at inspiring, empowering

or intellectual stimulation o subordinates. Also, a cognitive leader is not

assumed to appeal to higher-order needs or to set high expectations in herollowers. That cognitive leadership in act osters the emergence o a col-

lective identity is indeed argued in the present thesis. This is put down to

the development o shared mental models or on a more general level o

an organizational culture (Levine and Moreland 1991).

The employees personal growth or personal needs are more indirectly

addressed by cognitive leadership in that it is assumed that business con-

ceptions that ofer possibilities o personal growth and the realization o

personal needs are more likely to succeed. However, a cognitive leader acts

as a meaning-maker in that she determines and communicates events oracts that relate to her business conception.

Just how much the characteristics o charismatic (or transormational

leadership; see Shamir et al. 1993; Hunt 1999) difer rom that o cogni-

tive leadership becomes clear when the seminal paper by Conger and

Kanungo (1987) is considered. With this paper the authors have outlined a

ramework that aims at pinning down the observable behavioral processes

going on in charismatic leadership. To this end, the authors ormulated

13 hypotheses concerning the basic characteristics o charismatic leader-

ship. Seeing cognitive leadership through the lens o these hypothesesreveals that it difers markedly rom charismatic leadership. Although

the behavioral components o cognitive leadership can be assumed to be

interrelated and, as such, orm a constellation o components (Conger

and Kanungos rst hypothesis), none o the ollowing 12 hypotheses

serves as a necessary characteristic or cognitive leadership. For example,

in charismatic leadership the charismatic leaders vision is assumed to be

highly discrepant rom the status quo (ibid., p. 642). Further, a charis-

matic leader is assumed to take on high personal risks (ibid.), to engage

in novel, unconventional and counternormative behavior (Conger andKanungo 1987, p. 643) and to portray the status quo as negative or intol-

erable and the uture vision as the most attractive and attainable alterna-

tive (Conger and Kanungo 1987, p. 644). No such eatures are included in

the theory o cognitive leadership as characterizing cognitive leadership.

Thus, we can conclude that cognitive leadership cannot be completely

merged in Conger and Kanungos ramework o charismatic leadership

(see Witt 2005). Cognitive leadership relies on inuencing the ollowers

mental models by communication and learning processes, without needing

counternormative, novel or unconventional behavior, without high per-

sonal risks taken on by the cognitive leader and without characterizing the

status quo as intolerable. Also, the business conception is not idealized as


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Introduction 7

the most attractive and attainable alternative to the status quo (Conger

and Kanungo 1987, p. 644) but as the desirable alternative envisioned by

the cognitive leader that stands in competition with other entrepreneurs

business conceptions (Witt 1998).5 A context avoring the emergence ocharismatic leadership is periods o stress or crisis, a hypothesis developed

by political scientists that examined charismatic leaders in political and

religious contexts, respectively (Cell 1974; Toth 1981). Reerring to the

empirical study conducted by Roberts and Bradley (1988) Conger con-

cludes that critical periods as well as certain organizational characteristics,

inuencing the requency and quality o interaction between a leader

and her subordinates, acilitate the emergence o charismatic leadership.

Although cognitive leadership views the requency o interaction as key to

the leadership process, critical periods are not assumed to have a positiveimpact on cognitive leadership. Bearing these diferences between char-

ismatic and cognitive leadership in mind, we can conclude that cognitive

leadership is in a sense much less demanding on the cognitive leader and

the context than charismatic leadership is on the charismatic leader and

the context.

1.4 AIMS AND STRUCTURE OF THE BOOK

The scope o the theory o cognitive leadership ranges rom explaining why

an entrepreneur ounds a rm, how she can succeed in coordinating and

motivating her employees, to what path-dependent developmental pat-

terns o rm growth can be assumed based on this theoretical ramework.

Thus, it includes more than approaching the coordination and motivation

o employees rom a cognitive perspective. This volume ocuses on the

latter. It sets out to achieve three main aims. First, it will bridge some o

the missing links that can be identied in the theory o cognitive leadership

with regard to the coordination and motivation o employees. Second, itwill broaden the theory o cognitive leaderships scope by investigating

the group level processes that can be assumed to have an impact on the

socialization o newcomers. Third, it will explore the assumptions o the

theory o cognitive leadership empirically. Furthermore, the implications

o the present volume as well as open questions are presented. These aims

are elaborated in the ollowing.

At the outset, in Chapter 2 the theory o cognitive leadership is pre-

sented (Section 2.1). First, the role o the entrepreneur who has a business

conception and who by ounding a rm and hiring employees turns

into a leader is explained. As a cognitive leader it is her aim to shape her

employees cognitive rames according to her business conception. How


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this can be achieved is explained. Beore the hypothesized benets o cog-

nitive leadership are presented, the potential impact o deviant behavior

is explained. Finally, the path-dependent development o a rm that is

in the beginning run by cognitive leadership is briey outlined. However,this part o the theory o cognitive leadership is not considered urther in

the present volume since it ocuses on social inuence processes and their

determining actors in dyadic interactions as well as in group situations.

Within the ramework o the theory o cognitive leadership, the under-

lying assumption is that we have limited cognitive capacities or in other

words that we are boundedly rational. In order to economize on our

cognitive capacities our attention is guided by cues. Consequently, we per-

ceive and process inormation selectively. The present volume elaborates

on these processes in more detail in Section 2.2. It explains the unctioningo attention and inormation processing as they are based on the organi-

zation o long-term memory. The concepts an employee a newcomer

has to learn on her way to becoming an oldtimer are identied to be

related to the tasks as well as to social issues. It is urther explained that

rather than employing the notion o cognitive rames as the theory o cog-

nitive leadership originally does, the present volume preers the notion o

mental models.

It is argued that our limited inormation processing capacities result in a

more or less engaged processing o incoming inormation. The actors thatdetermine the extent o an individuals engagement in inormation process-

ing are presented and it is reasoned that most o the time a rather superu-

ous processing o inormation that relies on our long-term memory can be

assumed or most individuals. Section 2.3 summarizes Chapter 2.

A cognitive leader takes advantage o this selectivity by aiming at estab-

lishing her business conception as a basis to her employees attention and

inormation processing. This is achieved by requently communicating

with the employees. Moreover, the employees learn about the business

conception by observational learning.These issues are discussed in Chapter 3. This volume argues that or an

individual employee to adopt a business conception she has to be motivated

to do so. It is argued that she can be assumed to be motivated because o

her need or certainty and a liation (Section 3.1). Furthermore, it is con-

cluded that immediately ater joining a new organization a newcomer is

most susceptible to the inuence o others be it the cognitive leader or

her colleagues.

Whereas the theory o cognitive leadership concentrates on communica-

tion and observational learning or the conveyance o the business concep-

tion, this ocus is broadened in the present volume (Section 3.2). Classical

conditioning as well as operant learning are presented as the most basic


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Introduction 9

orms o learning that, on the one hand, are important to observational

learning but that, on the other hand, also contribute to an individuals

learning in their own right. With regard to observational learning, the

ocus o the theory o cognitive leadership is widened in that this volumeoutlines the determining actors o an individuals learning by observing

others. The same approach is taken with regard to learning rom commu-

nication. Again, the determining actors o learning rom communication

are explored. It is argued that the efects o communication depend on the

individuals engagement in inormation processing, the cognitive leaders

characteristics and behavior and the business conceptions characteristics.

A summary o Chapter 3 is ofered in Section 3.3.

The theory o cognitive leadership addresses the impact o employees

on the implementation and maintenance o cognitive leadership to alimited extent by proposing that employees can serve as models to their

colleagues. While these models may be coherent with the business concep-

tion, in some cases they may potentially threaten the cognitive leadership

by introducing deviant behavior to the work group.

Social inuence has been shown to be a dyadic as well as a group-level

phenomenon. The Chapter 4 thereore broadens the approach o the

theory o cognitive leadership by directing the attention to group-level

processes. These are argued to have a substantial impact on the imple-

mentation and maintenance o cognitive leadership. As an example othe potential impact a work group can have on an individual employee,

a newcomers joining o a rm is analysed rom both perspectives, that o

the newcomer as well as that o the work group she enters (Sections 4.1

and 4.2, respectively).

From a newcomers point o view, she has to learn task-related con-

cepts (or example, shared mental models about the work groups way

o processing the mail) as well as group-related concepts (that is, shared

mental models about the work groups social norms and social roles) on

her way to become a ull group member. These shared mental modelsconstitute a common rame o reerence or in other words the work

groups culture (Levine and Moreland 1991). The tactics a newcomer

employs or gaining such inormation are outlined.

Taking the oldtimers perspective, the unctions o social norms, social

roles and other work-related shared mental models are then presented.

What motivation osters the provision o inormation to a newcomer is

discussed as well as what tactics oldtimers employ or doing so. Since the

impact on a newcomer is reasoned to be highest during her initial time

spent with a rm the analysis ocuses on this period. It is concluded that

the socialization o newcomers is likely to have a stabilizing efect on the

work groups social norms, social role and other work-related shared


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mental models and that individual employees who cannot be socialized

successully leave the work group or organization. Consequently, work

groups and organizations can be expected to grow more homogenous over

time (Schneider 1987; OReilly et al. 1989). Section 4.3 turns to the occur-rence o deviant behavior in work groups. The origins o deviant behavior

are shown to lie with the oldtimers as well as with the newcomers. The

conditions under which deviant behavior are ound attractive by others

are more closely examined. Section 4.4 summarizes Chapter 4.

The theory o cognitive leadership argues that cognitive leadership mainly

has two intertwined efects. On the one hand, the cognitive coherence

achieved by it acilitates the employees coordination. On the other hand,

the cognitive coherence between the rms goals and the personal interests

o the employees constitutes the employees intrinsic motivation while itallows the cognitive leader to grant substantial liberties to her employees.

Chapter 5 returns to this dyadic perspective o social inuence processes and

explores the characteristics o cognitive leaders as well as the hypothesized

efects o cognitive leadership on the employees coordination and motiva-

tion empirically. To this end, 14 hypotheses concerning the employees co-

ordination and motivation are proposed. Subsequently, the method

employed in the exploration is described in Section 5.2. Beore the measures

and the analyses are described, the sample is presented. The data collected

rom 107 participants is analysed with regard to the characteristics ocognitive leaders. The results o the empirical exploration are presented in

Section 5.3. The actor analysis reveals that the 25 characteristics o cogni-

tive leaders assumed in the theory o cognitive leadership can be grouped on

seven meaningul dimensions. The actor values o all participants on each

o the seven actors are divided into our percentiles and the resulting groups

are interpreted to indicate the extent to which the respective participant

exerts this characteristic actor. The correlations o the actor values with

the efects items are computed and it turns out that some o the hypothesized

efects are ound, whereas some hypotheses are not supported. Section 5.4summarizes Chapter 5.

Chapter 6 presents some implications o the present volume along

with an outlook. Implications apply to dyadic interactions as well as to

the shaping o group processes (Section 6.1). It is argued that a cognitive

leader can aim at shaping dyadic and group-level processes by adhering to

some basic rules which are explained.

An exhaustive treatise o the theory o cognitive leadership is not pos-

sible to achieve within the scope o this volume and, thus, a number o

questions remain unanswered. These are outlined in Section 6.2. Since

the importance o the socialization o newcomers has already been

pointed out, the importance o selecting the right employees is especially


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Introduction 11

highlighted. It is argued that the selection o employees who t the organi-

zation can lessen the need or socialization (or example, Rentsch and Hall

1994). Dimensions o t that can be ound in the literature and those that

relate to the theory o cognitive leadership are presented. It is suggestedthat they include the employees background as well as the t o the new-

comer to the organization, the work group and the supervisor with regard

to their values and personalities.

The importance o a t between a newcomer and the new organization

is urther emphasized by the ndings o Higgins (2005). She argues that it

is not the accumulated experiences o an employee that predominate her

behavior in the workplace but that an employees early and midcareer

proessional socialization experiences have an enduring impact on her

behavior throughout her proessional lie. This career imprint resultsrom the combined impact o three actors: (1) the place (including an

organizations strategy, structure and culture), (2) the individuals charac-

teristics and (3) the individuals career paths ollowed within a particular

organization. Higgins suggests that the greater the alignment o these

three actors is, the stronger the career imprint. Hence, the socialization

o a newcomer can be assumed to be acilitated as well as impeded by

the individuals career imprint and choosing recruits who do not t to an

organization may result in substantial investments in their socialization

that may turn out to be to no avail. Further open questions are discussed.A summary o Chapter 6 is ofered in Section 6.3.

NOTES

1. Other constellations o a rm ounding, or example by a group o entrepreneurs, areneither considered in the theory o cognitive leadership nor in this volume.

2. Note that this volumes perspective on the issue o intrinsic and extrinsic motivation isbased on the assumption that in principle both kinds o motivation co-exist and that

only their extents vary. Consequently, when speaking, or example, about intrinsicallyvs extrinsically motivated employees this is to say that their predominant source omotivation is either intrinsic or extrinsic and that the respective counter motivation isalso present albeit to a lesser extent. This perspective acknowledges that intrinsicallymotivated employees desire air pay just as extrinsically motivated employees do.

3. See also Barnards moral actor (Barnard 1948).4. Formal training programs designed to train a newcomer on her entry to a rm are

excluded rom the present discussion.5. However, we cannot conclude that a cognitive leaders aura o charisma is by any means

harmul to cognitive leadership.


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12

2. The theory o cognitive leadershipand its oundation in cognitivepsychology

Founding a rm and being an entrepreneur almost certainly involves exert-

ing leadership over other people. At least, once the workload exceeds thecapacities o the entrepreneur hersel. Although a lot o people have to do

it everyday, leading other people or in other, more inormal words getting

them to do what one wants them to do is at times di cult. Numerous

research programs have been conducted on the subject, both theoretical

and empirical in nature (or an overview see Yukl 2002). Some o these

projects have approached the subject rom a static perspective ocusing,

or example, on the leaders traits (or a meta-analysis on this subject see

Zaccaro et al. 2004); others have approached it rom a dynamic perspec-

tive ocusing, or example, on the exchange between the leader and her

subordinates (LeaderMember Exchange Theory, Dansereau et al. 1975;

Graen and Cashman 1975). These, however, discuss the leadership process

on the background o individuals or work groups in incumbent rms that

have to be led and their interaction with the leader.

On the other hand, research projects deal with the development o newly

ounded rms and actors that contribute to their growth or decline (see,

or example, Greiner 1972; Cliford 1973; Albach et al. 1985; Garnsey

1998; Kaufeld et al. 2002).

The theory o cognitive leadership combines both perspectives by ocus-

ing on the dynamics o leadership shortly ater the ounding o a rm, thatis, when a person has a business conception, ounds a company and rom

thereon has to make sure that her employees do things as she would like

them to. How to take care o this task is the subject o the theory o cog-

nitive leadership that is presented in this chapter (Witt 1998, 2000, 2002,

2003, 2005). The presentation o the theory o cognitive leadership is ol-

lowed by a section on the cognitive oundations o the theory, namely the

unctioning o perception and inormation processing, the organization o

the long-term memory as a basis to perception and inormation processing

and the efects o our limited capacities or inormation processing. Thechapter concludes with a summary.


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Cognitive leadership and its oundation in cognitive psychology 13

2.1 THE THEORY OF COGNITIVE LEADERSHIP

The theory o cognitive leadership is a dynamic leadership theory. It sets

out to answer the question whose imagined ventures are to be ollowedby the rm members (Witt 1998, p. 163), that is, who succeeds in leading

the rm members to ollow a certain agenda which is called a business

conception (Witt 2005, p. 4). This section outlines the core concepts o

the theory o cognitive leadership as they have been introduced by Witt

(1998, 2000, 2002, 2003, 2005).1 The rst subsection introduces the rm

ounder in the role o a cognitive leader who ounds a rm in order to

realize her business conception. To this end, the cognitive leader has to

induce her employees to ollow this business conception. How this can

be achieved is discussed. Beore the benets o cognitive leadership arepresented the occurrence o deviant behavior is ocused on. Finally, three

potential developmental routes o cognitive leadership in growing rms

are presented.

The Firm Founder as a Cognitive Leader

The theory o cognitive leadership ocuses on the rm ounder as the key

element initiating the ounding o a rm. By this act the rm ounder exerts

the genuine entrepreneurial act o providing the constitutive service oincessant (re-) structuring o production and trade and thus turns into an

entrepreneur (ibid., p. 2).2 The rm ounder is assumed to have the inten-

tion to realize her unique vision o what business is to be created and how

to do it; this vision is called the business conception (Witt 2005, p. 4). A

business conception is dened as the representation o an interpretative

ramework which urnishes the decision maker with a general orientation

and a general associative basis or deriving and assessing action inorma-

tion . . . it leaves room to cover up-coming inormation and has the ea-

tures o a cognitive rame (Witt 1998, p. 166f.). As such, it is largely tacitbut can, or example, be partly overtly expressed in a business plan which

is based on a business conception (Witt 2005).3

In case the workload that is needed or realizing the business conception

exceeds the entrepreneurs personal capacities, she will hire employees and

thus turn into a leader. In the theory o cognitive leadership the leading

o these employees means inducing them to ollow the leaders business

conception a process argued to mainly depend on cognitive processes.

The person o the leader is crucial to the development o the rm because

it is mainly dependent on her whether the employees o her newly ounded

and possibly growing rm ollow her business conception. As presented in

the ollowing section, the concepts o bounded rationality (Simon 1995)


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and observational learning (Bandura 1986) are key to the realization o

cognitive leadership (see Witt 2000).

Shaping the Employees Cognitive Frames

In order to realize cognitive leadership the cognitive leader aims at occupy-

ing the employees current cognitive agenda with the business conception

(see Witt 2005). However, the adoption o a new cognitive rame as that

o a business conception cannot be ordered. It is not a matter o conscious

decision making or or against a certain cognitive rame (see Witt 2005, p.

11). Also, the theory o cognitive leadership claims that the thriving and

propagation o a business conception is dependent on external contingen-

cies that do not lie in the cognitive leaders hands (or example, marketdevelopment and local economies, level o aggregate economic activity,

entry and behavior o competitors (Witt 2000, p. 741).

According to the theory o cognitive leadership cognitive rames are

ormed by individuals socialization, the learning o language as well as the

identication o meaning. The ormation and shaping o cognitive rames

extends to a lielong process through experiencing and (social) learning

(see Section 3.3). To put it diferently, people orm and reorm their cog-

nitive rames constantly through contact with their environment, both

physical and social. The more requent and the more intense the employ-ees contacts with the desired business conception are the more likely that

there are some similarities in the subjective representation o knowledge

(Witt 1998, p. 164). Thus, gradually, groups o employees that have an

intense communication with the leader and among each other develop

[s]ocially shared interpretation patterns and rames (ibid., p. 165). Also

common tacit knowledge o acts, hypotheses, practices and skills as well

as shared knowledge o rewarding or aversive experiences and correspond-

ing preerences and models o behavior develop within a closely interact-

ing group via observational learning (ibid.). This is especially the case innon-ormal communication (or example, Witt 2000). The ormation o

[s]ocially shared interpretation patterns and rames (Witt 1998, p. 165)

is assumed to be due to the agents bounded rationality (Simon 1995) and

the observational learning that takes place during the agents interaction

(Bandura 1986).

The concept o bounded rationality implies that the human capacity or

processing inormation is limited. Thereore, humans perceive and process

inormation selectively, being guided by cues. Because o their bounded

rationality people are not able to consider unlimited amounts o inorma-

tion. Instead, their inormation processing is guided by the current cogni-

tive rame that has been elicited by the cues. In an organizational context


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the predominance over the employees cognitive rame ensures that they try

to solve their tasks in the spirit o the business conception (see Witt 2000).

The theory o cognitive leadership assumes the success o the propaga-

tion and the adoption o the business conception to be dependent on thequalities o the business conception as well as on the characteristics o the

cognitive leader.

A sound and appealing business conception is assumed to induce

the employees to believe in the success o the entire venture in which

they are participating; urthermore, the business conception may also

promise to be personally rewarding in terms o qualication, enhance-

ment, working conditions, career options and remuneration (Witt 1998,

p. 168). Advantageous characteristics o a cognitive leader are assumed to

be eloquence, persuasiveness, patience and persistence, the capacity orgaining sympathy and condence (ibid.), communicativeness, . . ., air-

ness, credibility and appreciativeness (Witt 2000, p. 746).

Since inuencing the employees via communication and observational

learning can only take place in social interaction, the interaction intensity

and requency between the leader and her employees is crucial to her

potential inuence on them. To uphold su cient personal contact with the

employees is bound to get harder the more employees are hired. A lack o

personal contact though can lead to a crisis in leadership and can entail a

major e ciency loss (Witt 1998, p. 174).

Deviant Behavior

It is assumed that the predominance over the employees cognitive rames

cannot be achieved completely. Consequently, deviations rom com-

monalities in opinions and behavior occur. They are likely to be noticed

by the other employees and the entrepreneur has to constantly check her

employees behavior or whether it ts the business conception or not (or

example, Witt 2000). Behavior that runs contrary to the business concep-tion should be sanctioned, whereas complementing behavior should be

rewarded. In case the deviating behavior is rewarded or i the respective

person can get away with her behavior (and the direct reward gained by

the deviating behavior itsel is high enough) then vicarious learning will

take place in the group and the respective kind o behavior is likely to be

imitated by its members. Thereore, the cognitive leader has to constantly

control or deviating behavior, that is, or potentially rivaling cognitive

rames and reward or punish it in time beore it occurs too oten and in the

end shits the prevailing cognitive rames o the group to one less desirable

in the eyes o the entrepreneur. This is what Witt has called the wrestling

or cognitive leadership (see Witt 2005, p. 9).


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Benefts o Cognitive Leadership

The benets o cognitive leadership are argued to be twoold and inter-

dependent. I the cognitive leader via intensive communication and obser-vational learning succeeds in implementing her business conception as a

maxim and i the employees develop a common understanding about all

other work-related issues the employees decide and act in accordance with

the business conception and in a coordinated manner. Thus, a high level o

cognitive coherence among its members consistent with the leaders busi-

ness conception can be attained and dispersed knowledge and individual

endeavor can be coordinated most efectively (Witt 2000, p. 743).

This allows the leader to grant substantial room or discretionary or

sel-determined decision-making (Witt 2005, p. 6) which boosts intrinsicmotivation (Deci et al. 1999). Consequently, under the regime o cogni-

tive leadership the employee is motivated to show initiative, to engage in

problem solving and to use her creativity in the work process in line with

the business conception (Williams and Yang 1999). Thus, the properties

o cognitive leadership are particularly relevant in markets and industries

in which entrepreneurial ventures demand a high level o creativity (Witt

2005, p. 7). Witt (2005) urther notes that extrinsic incentives that are

usually ofered to support the employees motivation can have a detrimen-

tal efect on the employees intrinsic motivation because they can crowdit out.

Cognitive Leadership in Growing Firms

Up to this point, the theory o cognitive leadership has been described as

static in the sense that it looks at the interaction between the leader and the

individual employee. There is, however, a urther dimension to the theory

that includes propositions about the changing characteristics o cognitive

leadership in case the (nucleus) rm is successul and has to hire new staf(Witt 2000, 2002, 2003, 2005).4

As has been outlined, the success and ailure o cognitive leadership

hinges to a large part on the business conception, on the person o the

leader, her abilities and traits. It also hinges on the personal contact

between the leader and her employees because this is how the leader shapes

the cognitive rames o her employees. I the rm starts growing in terms

o the number o employees, the requency o personal contact between

the cognitive leader and her employees decreases (or example, Witt 2005).

Consequently, the impact the cognitive leader exerts on her employees

also decreases and the likelihood o a rivaling cognitive rame to take over

(or o diverse rivaling rames to take over) rises signicantly. Hence, the


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benets o cognitive leadership regarding the internal coordination o the

rm and the employees motivation decline correspondingly. The number

o employees that marks this point in the history o a rm depends as

has been argued on the skills and characteristics o the entrepreneur aswell as on the qualities o the business conception. When rivaling business

conceptions have an increasing inuence on the employees probably

accompanied by signs o crisis (Cliford 1973) three diferent kinds o

development are possible.

The entrepreneur may or reasons not discussed here not notice the

changes that undermine her leading position in the rm. She may thereore

not react appropriately and lose the predominance over her employees

cognitive rames. This loss goes along with a declining coordination o

the rm. Rivaling cognitive rames will take over and the interests o theemployees will split into diverse directions. Thus, the intrinsic motivation

o the employees is likely to ocus on other aspects than those desired by

the original business conception. Some employees may lose their intrinsic

motivation to behave according to the business conception completely and

instead rely on extrinsic motivators such as remuneration and so on. These

employees are assumed to soon adopt slack ways o working. Witt (2005,

p. 16) summarizes the efects o this muddling through in the ollow-

ing way: the rm organization is likely to perorm in a signicantly less

e cient way with negative efects on protability; however, the lack ocoordination and motivation tends to impede the rms growth, but does

not necessarily threaten the survival o the rm. A return rom extrinsic

to intrinsic motivation is assumed to be highly unlikely or even impossible

since it is hard to undo the double incidence o a changed cognitive rame

o the employees . . . and the crowding out o their intrinsic motivation

(Witt 2005, p. 17). I the reduction in productivity does not endanger the

rm so greatly that it has to close down, it may leave enough time or the

entrepreneur to sell the rm or to organize the rms takeover by a third

party (Witt 2005).I, however, the entrepreneur does notice the changes going on in her

rm, she can decide to stop cognitive leadership altogether and replace it

by ad hoc instructions to the employees and supervision o the carrying

out (Witt 2002, p. 8), that is, a monitoring regime that induces the rm to

operate in much the way accounted or by the transaction costs approach

to the rm (Witt 2000, p. 752). In such a case, the entrepreneur is likely

to divide up the rm into hierarchically organized departments that are

supervised by a corresponding hierarchy o managers (this is equivalent to

what Witt (2002, p. 16) calls an extended monitoring regime). O course,

this has a serious impact on the employees cognitive rames and intrinsic

motivation. Deviating models o behavior are assumed to develop within


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2.2 FOUNDATIONS OF THE THEORY OFCOGNITIVE LEADERSHIP IN COGNITIVEPSYCHOLOGY

As has been outlined above, the cognitive leader (that is, the ounder) aims

at inuencing her employees so that they internalize the business concep-

tion as a maxim or deducing rules and so on. Intense communication also

contributes to the development o a common pool o reerences which

leads to similar interpretations o the same events. This section ocuses

on explaining the unctioning o the theory o cognitive leadership as it is

based on psychological processes. The rst subsection explains the unc-

tioning o perception and inormation processing. Then, the organization

o the long-term memory will be presented along with how a maxim anda common pool o reerences can be conceptualized in cognitive terms.

This section urther explicates how our cognitive structures guide our

perception and inormation processing. Last, the efects o our limited

inormation processing capacities are discussed. At large, it is argued that

our limited inormation processing capacities are a undamental condition

or cognitive leadership.

Attention Management and Inormation Processing

Humans perceive and process inormation selectively, because the human

capacity or inormation processing is limited (see the concept o bounded

rationality, Simon 1995). The resources, that is, the arousal capacity o

an inormation processing system like the short-term memory, that are

necessary or processing the incoming stimuli are managed by the limited

capacity control system.7 The limited capacity control system deals out the

available capacities on an anticipatory basis: beore the actual stimulus is

presented to the system it reacts to warning signals (that is, cues; Gopher

and Donchin 1985) by providing the required resources.Automated behavior can be perormed without any extra cognitive

efort. All other behavior requires a minimum o cognitive efort or which

a minimum concentration is needed. The limited capacity control system

is responsible or the individuals ability to ocus on a situation or the

apparently most important aspects o a situation when doing two things.

First, it additionally arouses those systems that are involved in inorma-

tion processing. Second, the limited capacity control system inhibits those

systems that are not involved in this process (see Birbaumer and Schmidt

1991, p. 485; see also Treismans attenuation theory (1964) and its empiri-

cal validation by, or example, Johnston and Heinz 1978). To do this, the

limited capacity control system must apply some sort o ltering process


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by means o which stimuli can be assessed as (un)important. We adapt our

attentional capacities to the necessities o our environment by inerring

rom our past experiences what aspects o a current situation are the most

likely aspects to change or its most important eatures (see Kahneman2003; Drners HyPercept-program in Drner 1999, pp. 144f.; Neisser

1967; Yarbus 1967). Thus, perception is guided by external inormation

and memory. In other words, perception is organized rom the bottom up

(external inormation is perceived) as well as rom the top down (memo-

ries guide the ocus o attention, hence ltering the available inormation)

(Abelson and Black 1986). Alternative messages only get to us when they

are (a) physically striking (a loud noise) (see Posner et al. 1978), (b) par-

ticularly important (our name) or (c) consistent with the message we are

processing (Anderson 2000 [1980], p. 81).However, we can overcome the physical salience o a stimulus by delib-

erately ocusing our attention on something (Kahneman 2003). Also, high

emotional or motivational arousal can greatly increase the accessibility

o thoughts that relate to the immediate emotion and to the current needs

and reduce the accessibility o other thoughts (Loewenstein 1996, 2000;

Elster 1998) (Kahneman 2003, p. 1454).8

The quantity o the resource capacities allocated by the limited capac-

ity control system depends on automatically perormed pattern matching

processes. A given stimulus presents a cue or a warning signal to thecorresponding sensory organ. It arouses a node in the mental network

which also acilitates the activation o neighboring nodes. Hence, asso-

ciated concepts emerge more easily than unrelated ideas (associative

priming; Meyer and Schvaneveldt 1971). We then perorm a pattern

matching process: by comparing the current stimulus with the invoked

stored concepts we assess and interpret the situation. How this process

actually works and its importance or the theory o cognitive leadership is

described in the ollowing section.

Organization o the Long-term Memory

As a starting point or the approach to the pattern-matching process we

use the organization o the long-term memory because the long-term

memory ofers the material we use or pattern matching processes. The

long-term memory is organized as a hierarchical neural network. On the

lowest level o this hierarchy we nd propositions that are more or less

strongly related to each other. Propositions represent what is important

about specic things (Anderson 2000 [1980], p. 155). The strength o

the relations between them determines how closely two propositions are

related. It can be imagined to range rom 0 to 1. The higher the strength o


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a relation, the more easily related propositions are accessible i a neighbor-

ing (that is, related) proposition is active. The act that one proposition A

is related to another proposition B with a strength o, or example, 0.7 is

equivalent to the belie that i proposition A is active then with a likeli-hood o 0.7 proposition B is also active.

On the next higher level, propositions orm schemas and scripts.

Schemas represent what specic things tend to have in common (ibid.),

whereas scripts represent what events tend to have in common (or

example, going to a restaurant; see Anderson 2000 [1980], p. 159f.; see

also Nisbett and Ross 1980 or a distinction between schemas and scripts).

Schemas and scripts are represented by their prototypes, that is, schemas

and scripts that combine all necessary characteristics o an object or an

event. Possible characteristics o an object or an event are linked with acertain strength to the respective prototype. The strength indicates how

likely it is or an object or an event to possess the respective eature. Thus,

we are able to not only identiy and process typical objects or events but

also less typical objects and events.

Again on the next higher level, schemas and scripts are combined into

mental models. Mental models are also organized hierarchically, that is,

a more abstract mental model is ormed by a number o layers o more

concrete mental models. The act that perception and thus inormation

processing is in part a top down process implies that mental models aredecreased images o the actual circumstances. According to Denzau and

Norths denition mental models are the internal representation that indi-

vidual cognitive systems create to interpret the environment (Denzau and

North 1994, p. 4; see also Hayek 1952, 1963). These interpretations (that

is, the meaning we attach to each situation) are the basis or our behavior

(Berger and Luckmann 1966; Gioia and Poole 1984; Lord and Kernan

1987). We urther use mental models to guide our ocus o attention and to

generate descriptions o system purpose and orm, explanations o system

unctioning and observed system states and predictions (or expectations)o uture system states (Rouse et al. 1992, p. 1300; see also James and

James 1989), that is, we use them or inormation processing and problem

solving. We can do so because mental models enable us to exibly combine

schemas and scripts (see Holland et al. 1986).

In pattern matching we compare our stored mental models to the current

situation, that is, or example, an external stimulus. To be considered in

inormation processing the external stimulus rst has to pass a lter that

only lets those cues pass that t into the currently active mental model or

that invoke our attention by, or example, being particularly important

to us. The stimulus is then processed on the basis o the currently active

mental model. The outcome o the inormation process is ed backward to


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about the work groups standard operation procedures) but also group-

related knowledge (knowledge about the work groups way o unction-

ing, its social norms and the social roles o the group members) (see

Schein 1971; Feldman 1976, 1983, 1984; Van Maanen and Schein 1979;

Orasanu 1990; Levine and Moreland 1991; Cannon-Bowers et al. 1993).The common rame o reerence which shared mental models constitute

is oten described as the groups culture (Levine and Moreland 1991,

p. 258). On the basis o shared mental models group members interpret

events similarly. These interpretations are typically initiated by the leader

o a group (Aldrich 1999). According to Klimoski and Mohammed (1994)

shared mental models may ensure the coordination o a work group more

efectively than leadership exerted by a person could.

Coming back to the theory o cognitive leadership, we can conclude that

a cognitive leader aims at shaping her employees mental models or to

put it diferently aims at setting their cognitive agenda so that shared

mental models with regard to work-related issues develop and so that the

Propositions andRelations

Schemas and Scripts

Mental models

Propositions andRelations

Schemas and Scripts

Mentalmodels

Sharedmental

models

Individual 2

Individual 1

Figure 2.2 Stylized portrayal o the hierarchical organization o an

individuals long-term memory and its potential social

dimension in the orm o shared mental models


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cognitive leaders business conception is adopted as a maxim in relation

to all o the other work-related mental models. This intersubjectivity

that is, a shared understanding o what is being discussed or worked on

(Levine et al. 1993, p. 600) is the prerequisite or coordinated activityamong the employees.

Witts notion o a business conception has the eatures o a mental

model (see, or example, Witt 1998; see also Anderson 2000 [1980]). Under

the regime o successul cognitive leadership the business conception is

superior to all other work-related mental models in the hierarchical organ-

ization o the long-term memory. It states undamental business-related

principles or rules o conduct and is thus suitable or deducing lower-order

rules. It is very strongly connected to all other work-related mental models

and thus is accessed whenever work-related inormation is processed. Inthis sense it serves as a maxim or all work-related inormation processing

that guides all business-related inormation processing.

The theory o cognitive leadership states that at any point in time only

one cognitive rame can be in operation (Witt 2005, p. 6), thus the entre-

preneurs and the employees capacities or considering alternatives that lie

outside the currently active mental model are assumed to be unavailable.

This assumption is crucial to cognitive leadership because it implies that

once a business conception has been adopted and serves as a maxim the

individual is limited in her potentials to interpret upcoming inormation. Toput it diferently, the outcomes o an employees inormation processing is

predestined by the business conception i she has adopted a cognitive lead-

ers business conception as a maxim and thus processes upcoming inorma-

tion through the lens o it. This is caused by the business conceptions strong

relation to all sub-ordered work-related mental models that make sure that

the arousal o any work-related mental model also arouses the business

conception (see the ollowing section on the efects o our limited inorma-

tion processing capacities). In the present thesis the notion o mental models

is preerred to the notion o cognitive rames because in the literature theormer notion is most commonly used.

Eects o Limited Inormation Processing Capacities

From an evolutionary point o view our cognitive limitations in inorma-

tion processing have led to the development o ways to economize on our

scarce resources (see Drner 1999; Lord and Maher 1990; McFadden

1999; Busenitz and Barney 1997 or an application to the entrepreneurial/

managerial context). The top down/bottom up organization o perception

and inormation processing that has been presented in the previous sub-

section are only two ways or economizing on our scarce cognitive resources.


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With the path-breaking research Kahneman did mainly in collaboration

with Tversky (or example, Tversky and Kahneman 1974; Kahneman and

Tversky 1979, 2000), he has pointed out numerous systematic biases in

inormation processing that play a crucial role or cognitive leadership.Kahneman assumes that the human cognitive system is divided into

three parts: the perception, System 1 and System 2 (Stanovich and West

2000).11 The operations o System 1 are characterized as being ast,

automatic, efortless, associative and oten emotionally charged; they are

also governed by habit and are thereore di cult to control or modiy

(Kahneman 2003, p. 1451). The outcomes o System 1 are not voluntary

and need not be verbally explicit (Kahneman 2003, p. 1452). Conversely,

the operations o System 2 are described as slower, serial, efortul and

deliberately controlled; they are also relatively exible and potentiallyrule-governed (ibid.). The outcomes o System 2 are always explicit and

intentional, whether or not they are overtly expressed (ibid.). Hence,

System 2 is involved in all judgments, whether they originate in impres-

sions or in deliberate reasoning (ibid.). System 1 and System 2 both

operate on the basis o perceptions as well as memories; that is, bottom up

as well as top down. In inormation processing System 1 and System 2 col-

laborate closely: System 1 delivers impressions and inclinations whereas

System 2 takes over the monitoring and correction although quite

lightly (Kahneman 2003, p. 1467). That is to say that most o our inor-mation processing is done in the System 1 mode: ast, automatic, without

much efort, on an associative basis, oten emotionally charged and guided

by habit. These eatures o System 1 come at the price o systematic biases

in inormation processing. The so-called raming efect explains why the

top down characteristics o perception and inormation processing limit

the possible outcomes o inormation processing (Tversky and Kahneman

1981). It states that people make diferent choices depending on the

relative salience o diferent aspects o a problem that we generally accept

without questioning (see Johnson et al. 1993). Reerring to mental modelsthis efect is due to the initial arousal o certain nodes and neighboring

nodes that ocus the individuals attention and determine the inormation

processing. Hence, a problems rame acilitates access to some proposi-

tions whereas it inhibits access to others. Consequently, the mental area

o search with respect to solutions is limited. A tendency to search locally

has been ound in cognitive contexts (March and Simon 1958; Cyert and

March 1963) as well as organizational contexts (Cohen and Levinthal

1990; March 1991; Srensen and Stuart 2000). The salient eatures are

partly inherent in the presentation o a problem; partly they are evoked in

relation to our long-term memory. In addition, they are inuenced by our

current emotional and/or motivational state (see Loewenstein 1996, 2000;


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Elster 1998). In the theory o cognitive leadership it is assumed that the

business conception largely determines what characteristics o a situation

are assessed as relevant (top down inormation processing). Additionally,

the salient eatures o a situation co-determine the inormation processing(bottom up characteristic o inormation processing).

As can be inerred rom the top down character o perception and

inormation processing, an individuals expectations contribute largely to

the accessibility o related mental models. I an individual (consciously or

not) expects a situation to develop in a specic way, mental models related

to the assumed uture development o the situation will be activated (see

Kiesler et al. 1984; Levine et al. 1993).

The efect o our expectations and our rst perception o a stimulus is

augmented by our tendency to pay more attention to those stimuli thatconrm our initial hypotheses and to interpret them accordingly (the so-

called conrmation bias; Wason 1960). Hutchins (1991) illustrates the

conrmation bias by presenting an example about an accident at sea taken

rom Perrows (1984) book Normal Accidents. In that example two ships

collide because the captain o one o the ships succumbs to the conrma-

tion bias and does not interpret the stimuli presented in the correct way

(which would have enabled him to avoid the accident altogether).

The conrmation bias does not only apply to physical stimuli but has

been ound or attributions (Anderson et al. 1980), personality traits(Hastie and Kumar 1979), logical inerence tasks (Wason 1968; Wason

and Johnson-Laird 1972), belies about important social issues (Lord et

al. 1979) and scientic reasoning tasks (Fleck 1979; Tweney et al. 1981,

Parts III and IV) (according to Hutchins 1991). Take, or example, the rst

encounter o a person. The salient eatures present at this event are eatures

like that persons gender, appearance and so on generally those things

which are observable quite easily. Based on these cues we iner urther

attributes o the person in question by drawing on our stored mental

models that may contain such inormation as women tend to wear skirtsmore oten than men. But also more serious and proound conclusions

may be drawn based on such thin knowledge as a persons gender. For

example, a common stereotype is that women are less skilled in intellectual

tasks than men. The observation o a woman outdoing male contestants,

that is, the observation o inormation that counter-runs the stereotype,

does not necessarily lead to a revision o it. Rather, the reason or that

woman winning is attributed to external circumstances like her trying very

hard so that the stereotype can be maintained (Yarkin et al. 1982).

Whether System 2 takes over rom System 1 is a matter o how much

cognitive efort the individual is willing and able to bring up or processing

the task at hand. Louis and Sutton (1991) identied three conditions under


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which individuals are likely to switch to a cognitively more efortul way o

inormation processing. This is the case i the situation the individual aces

is unusual or novel, i a situation develops contrary to the individuals

expectations and i the individual willingly engages in the task at hand.However, Kahneman (2003) states that people have trouble working in

System 2 i they are (a) under time pressure (Finucane et al. 2000; see

also Fiedler and Garcias (1987) cognitive resource theory), (b) currently

involved in a diferent efortul task (Gilbert 1989, 1991, 2002), (c) at odds

with their biorhythm (Bodenhausen 1990) or (d) in a bad mood (Isen et al.

1988); on the other hand, the operation o System 2 is acilitated i people

(a) are intelligent (Stanovich and West 2002), (b) have a need or cogni-

tion12 (Shar and LeBoeu 2002) and (c) are exposed to statistical thinking

(Nisbett et al. 1983; Agnoli and Krantz 1989; Agnoli 1991).Kahneman (2003, p. 1450) resumes that we make most judgments and

most choices . . . intuitively (see also Taylor and Fiske 1978). Moreover,

the cognitive system tends to see what it expects to see (Kahneman 2003,

p. 1454; see also Bruner and Minturn 1955; Reason 1990; Drner 1995).13

As we have learned rom Kahneman (2003) and Stahlberg and Frey

(1996) the accessibility o our mental models to a large extent determines

the outcomes o inormation processing. So what are the specic mecha-

nisms that acilitate access to our long-term memory?

Besides the characteristics o the stimulus (physical salience, importanceand consistency with the currently active mental models; Anderson 2000

[1980]) and those o the individual (being under time pressure or not,

being currently involved in a diferent efortul task or not, being at odds

with ones biorhythm or not, being in a bad mood or not, being intelligent

or not, being exposed to statistical thinking or not or having a need or

cognition or not; according to Kahneman 2003), practice has a strong

impact on the accessibility o mental models. Every time we think about a

specic schema or script on a neurological level we channel the employed

connections o this assembly o nodes. Already existent connections arere-enorced every time they are used. And the more oten a connection

is used (that is, the more oten one thinks about a certain concept, prob-

ably triggered by requent encounters with the stimulus), the more active

they can get and the easier they are accessible (see Hebb 2002). The more

strongly related propositions are with other currently active propositions,

the more rapidly they are veried. This means that we process inormation

systematically aster i it ts our current schemas and scripts (Anderson

2000 [1980]). Anderson (2000 [1980], p. 187) points out that the efects

o practice on memory retrieval are extremely regular and very large (see

Newell and Rosenblooms (1981) power law learning).

Getting back to the theory o cognitive leadership we can conclude that


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the ast and automatic perception and inormation processing on a System

1 level dominates most o our cognitive activities. Under the regime o

cognitive leadership, that is, assuming that the cognitive leaders business

conception has been implemented successully as a maxim to all o theemployees work-related mental models, this means that the business con-

ception dominates the employees perception and inormation processing.

This dominance is augmented by the conrmation bias and practice. We can

conclude that a shit rom a System 1 level o perception and inormation

processing to a System 2 level in which the business conception (and other

work-related mental models) are questioned is contingent on the described

actors and that generally our inormation processing (and hence our

learning) is inert because it is path-dependent and subject to economization

with regard to time and mental efort (Rizzello and Turvani 2002).

2.3 SUMMARY

This chapter presented the theory o cognitive leadership and the cogni-

tive underpinnings o it. The theory o cognitive leadership ocuses on the

person o the entrepreneur who has a business conception she wants to

realize. In order to do so she ounds a rm and becomes a cognitive leader

to her employees.A cognitive leader is characterized by having a business conception that

guides her inormation processing and decision making and by having the

aim to convey her business conception to her employees via personal com-

munication and observational learning. The theory o cognitive leader-

ship assumes that i the cognitive leadership is successully exerted the

employees adopt the cognitive leaders business conception and use it as

a maxim or all work-relevant inormation processing. Furthermore, they

are assumed to develop a common pool o reerences.

The efects o cognitive leadership are twoold and interdependent. Onthe one hand, the rms internal coordination runs smoothly because the

employees all reer to the same business conception and the same pool

o reerences in their work-related inormation processing and decision

making. This allows the cognitive leader to grant substantial degrees o

reedom to her employees. On the other hand, the individual employees

degrees o reedom in her daily work and her eeling to contribute to a

common goal boost her intrinsic motivation. Thus, the cognitive leader

can be sure that her employees aim at contributing their best to the work

process without having to implement an extrinsic reward scheme.

It has been explained that an individuals cognitive structure consists o

hierarchically organized mental models that again consist o hierarchically


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organized propositions, schemas and scripts. The cognitive leaders busi-

ness conception has been dened as being the most superior mental model

to all other work-related mental models that states work-related principles

and serves as a maxim. As such it guides all work-related inormationprocessing. Besides the business conception, employees learn a number o

other work-related shared mental models that contain task- as well as work

group-related knowledge. The common rame o reerence constituted by

a work groups shared mental models is the work groups culture.

The evaluation o a stimulus determines whether the individual will

ocus her attention on the stimulus at all. The pattern matching process

that is perormed automatically assesses the similarity between the cur-

rently encountered inormation and the existing mental models. On the

basis o this match we assess and interpret the situation and develop plansor possible reactions. As has been pointed out, our mental models are

reduced images o the world that only include those eatures that the indi-

vidual assumes to be most important. They are ormed by learning.

Besides the top down/bottom up organization o the perception and

inormation processing, cognitive resources are urther economized on.

The main mode we use or inormation processing is the so-called System

1 a mode that is characterized as being ast, automatic, efortless, assoc-

iative and oten emotionally charged and that is governed by habit, which

makes it di cult to control or to modiy. Conversely, the slower, serial,efortul and deliberately controlled System 2 is relatively exible and

potentially rule-governed and takes over i monitoring and corrections

seem indicated. Thus, most inormation processing is perormed in the

allible System 1 and hence subject to systematic biases (or example,

the raming efect). Although we are o course able to include alternative

stimuli in our perception and inormation processing we can conclude that

our inormation processing assumes a path-dependent character and is

driven by the principle to economize on time and mental energy.

The ollowing chapter turns to the analysis o a cognitive leaders inu-ence on individual employees. It explains why a cognitive leader can be

assumed to have a lasting impact on newly hired employees, although

they can be supposed to have work-related mental models prior to joining

the respective cognitive leader, and what determines a cognitive leaders

impact on her employees.

NOTES

1. Additional literature that is reerred to is cited according to Witt.2. In the denition o entrepreneurship Witt ollows Penrose who diferentiates between


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entrepreneurial services and managerial services. The ormer services denote those con-tributions to the operations o a rm which relate to the introduction and acceptanceon behal o the rm o new ideas . . ., to the acquisition o new managerial personnel,to undamental changes in the administrative organization o the rm, to the raisingo capital and to the making o plans or expansion, including the choice o method oexpansion (these services are viewed as independent rom the entrepreneurs position inthe hierarchy o the rm) (Penrose 1995, p. 31). Conversely, the latter services relate tothe execution o entrepreneurial ideas and proposals and to the supervision o existingoperations (Penrose 1995, p. 32). However, the same individuals may . . . provide bothtypes o service to the rm (ibid.).

3. The term metaphor as proposed by Hill and Levenhagen (1995) gives an impression ohow a business conception can be operationalized and over time is molded in concretemental models. However, their concept ocuses on what a business sets out to achieve,not on how these aims are to be achieved.

4. As Witt has pointed out (2005, p. 15), the reasons or, and the conditions o, the growtho a rm are a complex issue o its own and can be assumed to be exogenous or our

purposes.5. The course o reasoning presented in this section also applies albeit with adaptations

to the introduction o a 3rd, 4th, . . ., nth layer o management.6. For case studies in business history reporting such a successul regime change rom a

single entrepreneur to a subdivided rm with a group o sub-entrepreneurs as a secondmanagerial layer see Chandler 1977, Part V; Bernstein 1999; Olegario1999; Murmann2003, Chapter 3).

7. That is the totality o the brain structures being involved in attentional processes. Mainparts o the limited capacity control system are the reticular thalamus, parts o thebasal ganglia as well as the prerontal and the parietal cortex (Schmidt and Thews 1995,pp. 141f.).

8. Shah (2003) has conducted research on the inuence our mental representations o

signicant others (or example, colleagues) can have on the accessibility o memories(that is, stored mental models). His results show that the mental presence o a signi-cant other may prime goals in the participants. Thus, the participants commitment tothe goals, her persistence and perormance increases. The closer the participant elt tothe primed person, the stronger the observable efect. It was also shown that the efectinhibited unrelated mental models.

9. Note that an individuals learning is not necessarily guided by an objective improve-ment o the individuals adaptation to her environment. Rather, an individuals learn-ing is guided by her initial mental models and thus subjective in nature.

10. The same concept has been given diverse names in the literature, or example teammental model (Klimoski and Mohammed 1994); organizational cognition (Laukkanen1994); collective cognitive map (Axelrod 1976), dominant logic (Prahalad and Bettis

1986).11. See Lord and Mahers (1993) diferentiation between automatic and controlledprocesses.

12. An individuals need or cognition captures her tendency to engage in and enjoy efort-ul cognitive endeavors (Cacioppo et al. 1984, p. 306).

13. Chapman and Johnson (2002) come to an interesting conclusion concerning the cor-rection o such misinterpretation. They observe that the individual will only detect hermistake i the opposing cues (that is, the opposing pieces o inormation the situationofers) are salient. She then will try to correct this mistake but nevertheless the nal

judgment is likely to remain anchored on the initial intuitive impression (Kahneman2003, p. 1468).


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31

3. Dyadic processes: cognitive leaderto employee

In the theory o cognitive leadership the cognitive leader is assumed to

have two main ways or inuencing the mental models o her employees

and hence to difuse her business conception and a common pool o reer-

ences to them in other words, to set her employees cognitive agendasor to act as a meaning manager (Smircich and Morgan 1982): personal

communication and observational learning (see Poole et al. 1989; Poole et

al. 1990; Innami 1992; Orasanu 1994).1 This chapter ex

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