Epistemology in Action:
A Framework for Understanding Organizational Due Diligence Processes

Mihnea Moldoveanu

Rotman School of Management, University of Toronto

Abstract

I introduce the idea of a collective or organizational epistemology in order to study and explain the processes by which various organizations inquire into, deliberate about and commit to the pursuit of opportunities. The rational pursuit of opportunities turns on the rational selection of the causal models mapping current conditions (endowments or resources) to future outcomes (payoffs) via organizational actions (choice). The degree to which an organization is instrumentally rational in its identification and pursuit of opportunities depends on the degree to which the organization is epistemically rational in its selection of alternative causal models or maps. To study the epistemic rationality of different organizations, I use basic concepts from epistemology and the philosophy of natural science and focus on the processes of due diligence and commitment of venture capital firms, commercial banks and government agencies to a high-technology start-up company. I suggest that treating the process of due diligence as a process of scientific discovery or creation of knowledge can structure our understanding of organizational exploration and help us build a framework for studying the processes of due diligence. The study suggests an alternative causal explanation for the high differential between the rates of return on investment in venture capital firms and rates of return on investment in large bureaucratic organizations: more adaptive belief revision strategies lead to better causal models on which the investment decisions of venture firms are based.

To appear in "Strategic Management of Intellectual Capital and Organizational Knowledge" edited by Nick Bontis & Chun Wei Choo (Oxford University Press).