Opening the Black Box of Upper Echelons: Drivers of Poor Information Processing During the Financial Crisis


Institute of Organization and Administrative Science, University of Zurich, Universitätsstrasse 84, 8006 Zürich. Tel: +41 44 634 29 17; Fax: +41 44 634 49 42; E-mail:


Manuscript Type: Empirical

Research Question/Issue: Why did the majority of directors prior to the financial crisis not have the foresight to predict the problems of taking on too much risk? We analyze whether executives' characteristics affect strategic choices due to bounded rationality, as proposed by the theory of upper echelons. The literature has thus far not empirically opened this black box. Relying on psychological economics, we develop hypotheses under which conditions expertise and gender can lead to biased information-processing.

Research Findings/Insights: To test the hypotheses, we propose a two-study methodology and take the financial crisis as a natural experimental setting. In Study 1, we analyze individual phenomena and show that under conditions of uncertainty, the processing of information by financial experts and men is worse than by non-financial experts and women. In Study 2, we test these findings for organizational phenomena. We show that banks with a higher percentage of financial experts within TMTs perform better in stable environments, but are more negatively affected by the financial crisis.

Theoretical/Academic Implications: An important moderator within the theory of upper echelons is financial market discipline during turbulent periods, explaining why the performance of homogenous TMTs is volatile and why the performance of diverse TMTs is sustainable. The theory can be strengthened by including the insights of psychological economics as a micro-foundation.

Practitioner/Policy Implications: For a sustainable performance, greater TMT diversity in public companies should be instituted by the board of directors.