Management Insights
Authors: Gorman Michael F. 
Published: July 2013

Cade Massey, Richard H. Thaler Should NFL teams trade for a top pick in the draft? There is so much financial pressure to make a good decision in the NFL draft; does that pressure create a decision-making bias among owners? The authors analyze the decision making of NFL teams during their annual player draft. They suggest that teams may overvalue the chance to pick early in the draft. Using archival data on draft-day trades, player performance, and compensation, the authors compare the market value of draft picks with the surplus value to teams provided by the drafted players. The insight for management: Consistent with psychological research, top draft picks are significantly overvalued in a manner that is inconsistent with efficient markets.

Florian Ederer, Gustavo Manso Should managers exploit or explore? Previous research in economics shows that compensation based on the pay-for-performance principle is effective in inducing higher levels of effort and productivity (exploiting existing competencies). On the other hand, research in psychology argues that performance-based financial incentives inhibit creativity and innovation (exploring new opportunities). How should managerial compensation be structured if the goal is to induce managers to pursue more innovative business strategies? In a controlled laboratory setting, the authors find evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. The authors also find that the threat of termination can undermine incentives for innovation, whereas golden parachutes can alleviate these innovation-reducing effects. The insight for management: Pushing employees on production can stifle creativity and long-run innovation.

Sander Hoogendoorn, Hessel Oosterbeek, Mirjam van Praag Can gender balance improve team performance? The authors estimate the impact of the share of women in business teams on the performance of undergraduate students in business studies who start up a venture as part of their curriculum. They intentionally manipulated the gender composition of teams and assigned students randomly to teams, conditional on their gender, and they find that teams with an equal gender mix perform better than male-dominated teams in terms of sales and profits. The authors look for an explanation for the mixed-gender team superior performance, including gender complementarities and differences in learning styles and conflict resolution, but they find no support for these reasons. The insight for management: There's no explaining why, but mixing the gender composition of teams might improve performance.

C. Fritz Foley, William R. Kerr What is the impact of ethnic innovators, and thus immigration, on U.S. innovation? Over the 1975–1982 period, 81.3% of the names on U.S. patent applications were of Anglo-Saxon origin, but by the 2000–2004 period, this share had fallen to 68.0%. Much of this shift, and in fact much of the recent growth in the number of U.S.-based scientists and engineers, is a consequence of immigration. In the 2000 Census of Populations, immigrants constituted 25% and 48% of the U.S. workforce employed in science and engineering occupations with bachelor's and doctorate educations, respectively. The authors find that increases in the share of a firm's innovation performed by inventors of a particular ethnicity are associated with increases in the share of that firm's affiliate activity in countries related to that ethnicity. Ethnic innovators also appear to facilitate the disintegration of innovative activity across borders and to allow U.S. multinationals to form new affiliates abroad without the support of local joint venture partners. The insight for management: Ethnic diversity of research teams may spur cross-border collaboration and increased innovation.

Simon P. Anderson, André de Palma Does an ad—any ad—catch the attention of the consumer? We've gone from being exposed to approximately 500 ads per day in the 1970s to as many as 5,000 per day today. Advertising competes for scarce consumer attention, so more profitable advertisers send more messages to break through the others' clutter. A cycle results: More messages in aggregate induce more “shouting to be heard,” which hurts all advertisers' profits. All advertisers would prefer for there to be less shouting, but none can afford to not get its message out in a loud and crowded advertising environment. In a market of “quiet whisperers,” all advertisers are better off through lower required advertising effort to get their messages heard. Given this tendency, increasing the cost of sending messages can make all advertisers better off by reducing the shouting. The insight for management: Advertising in a crowded market costs all participants who are trying to make their message heard.

Ho-Yin Mak, Ying Rong, Zuo-Jun Max Shen The transportation sector holds the key to a greener environment, and there is a lot at stake. According to the U.S. Environmental Protection Agency, in 2003, the transportation sector was accountable for 29.6% of the total greenhouse gas (GHG) emissions in the United States. GHG emissions by transportation also grew the fastest among all economic sectors, accounting for 47% of the net increase in total emissions since 1990. Electric vehicles (EVs) have been proposed as a key technology to help cut down the massive GHG emissions from the transportation sector. Why aren't more EVs on the roads? Because of the limited capacity of batteries, typical EVs can travel for only approximately 100 miles on a single charge and require hours to be recharged. The industry has proposed a novel solution centered around the use of “swapping stations,” at which depleted batteries can be exchanged for recharged ones in the middle of long trips. The possible success of this solution hinges on the ability of the charging service provider to deploy a cost-effective infrastructure network, given only limited information regarding adoption rates. The authors develop optimization models that could aid the planning process for deploying a battery-swapping infrastructure. The insight for management: Analytical models can help estimate the potential impacts of battery standardization and technology advancements on the optimal infrastructure deployment strategy.

Bin Hu, Izak Duenyas, Damian R. Beil Consider two buyers facing uncertain demands who need to purchase a common critical component from a powerful sole-source supplier. If the two buyers pool their demands and purchase from the supplier as a single entity, will they necessarily earn higher profits than they would if they purchased separately? The authors show that when a powerful supplier extracts profits from the buyers through optimal contract design, the demand variability reduction achieved by pooling can harm the buyers because it makes extracting profits easier for the supplier when pricing of the component is endogenous. The insight for management: Given a price, demand pooling is good for buyers, but if pricing is endogenous, demand pooling can be bad for buyers.

Kenneth C. Lichtendahl Jr., Yael Grushka-Cockayne, Robert L. Winkler The authors consider two ways to aggregate expert opinions using simple averages: averaging probabilities and averaging quantiles. They examine analytical properties of these forecasts and compare their ability to harness the wisdom of the crowd. In terms of location, the two average forecasts have the same mean. However, the average quantile forecast is always sharper: It has lower variance than the average probability forecast. Even when the average probability forecast is overconfident, the shape of the average quantile forecast still offers the possibility of a better forecast. The insight for management: Averaging quantiles is a viable alternative and under some conditions may be more useful than averaging probabilities.

Ajay Subramanian The author develops a model of competing firms in an industry to show how the distribution of firm qualities, moral hazard, and product market characteristics interact to affect firm size, managerial compensation, and market structure. He suggests that different determinants of product market competition have contrasting effects on firm size and managerial compensation. Although both firm size and managerial compensation increase with the entry cost, they increase with the elasticity of substitution if and only if firm size exceeds a high threshold but decrease if it is below a low threshold. The insight for management: Different determinants of competition indeed have contrasting effects.

Sang-Hyun Kim, Brian Tomlin An ounce of prevention or a pound of cure? Should firms invest in failure prevention or recovery capacity? The authors examine technological systems that have unplanned outages with significant costs, a system outage if one or more of its subsystems fails, subsystem failures that occur simultaneously, and subsystem recovery that requires specific resources and capabilities that are provided by different firms. The authors find that, if recovery capacity investment is the only option, the firms in a decentralized setting overinvest in capacity, resulting in higher system availability but at a higher cost. They find that, if both investments can be made, the firms underinvest in failure prevention and overinvest in recovery capacity. The insight for management: Firms in a decentralized setting shift their focus from preventing failures to responding to failures, resulting in lower system availability.

Hamed Mamani, Stephen E. Chick, David Simchi-Levi According to the World Health Organization, influenza outbreaks cost between $1 million and $6 million per 100,000 inhabitants in industrialized countries yearly, and the World Bank forecasts economic losses between $2 trillion and $3 trillion in the event of a global pandemic. How can vaccinations be better administered to reduce these costs? A major challenge is the coordination of incentives of different purchasers of influenza vaccines across borders. Influenza vaccination decisions in one country can influence the size of an outbreak in other countries due to interdependent risks from infectious disease transmission. The authors propose a contract based on an epidemic model that accounts for intranational transmission and that from a source country where the dominant strain emerges. The contract reduces the overall financial burden of infection globally and improves the total number of people infected by seasonal influenza outbreaks. The insight for management: Analytical methods can prevent millions of influenza cases and save tens of millions of dollars.

Hakan J. Holm, Sonja Opper, Victor Nee Are entrepreneurs more risk taking than non-entrepreneurs? The authors collect a sample of 700 chief executive officers from the Yangzi River Delta region in China and compare them to a control group of 200 members. Their findings suggest that, in economic decisions, entrepreneurs are more willing to accept strategic uncertainty related to multilateral competition and trust. However, entrepreneurs do not differ from ordinary people when it comes to nonstrategic forms of uncertainty, such as risk and ambiguity. The insight for management: Entrepreneurs are willing to accept more strategic uncertainty, but they react similarly to others when it comes to mitigating more tactical forms of risk.

Henock Louis, Amy X. Sun, Oktay Urcan Analysts deviate from management guidance to correct for perceived earnings management. Although the deviations reduce forecast accuracy, they improve forecast informativeness, bringing the forecasts closer to the unmanaged earnings and reducing accruals mispricing. Generally, one would think that more accurate analyst forecasts (i.e., estimates that are closer to the reported earnings) are better for investors and that analysts' objective is to forecast the reported (managed) earnings accurately. The authors suggest that this is not necessarily the case; an inaccurate forecast can actually be more informative than an accurate one. While it may be perceived that deviations from management guidance focus on analysts' incentives to issue estimates that managers can beat, this would assume that analysts side with management against the interests of their clients, and this is not always true. The insight for management: Analysts may deviate from management guidance to provide useful valuation information to their clients.

Hong Yuan, Miguel I. Gómez, Vithala R. Rao In the United States, consumer packaged goods manufacturers increased their trade promotions to retailers more than fourfold (from $71 billion to $312 billion) between 1996 and 2004, and trade promotions grew to 18% of total sales by 2010. How should such trade promotions be structured? The authors examine trade promotion discounts offered either as off-invoices or as scan-backs. A manufacturer may offer “off-invoices”, retailer discount-based trade promotions, in which a per-case discount is given for all retailer purchases of a given brand during a limited period of time. Or a manufacturer may negotiate with “scan-backs,” retailer performance-based trade promotions, in which a discount per case is given after a prespecified level of retail sales performance (e.g., target sales volume per week) has been attained and verified by retail sales scanning data. The authors compare wholesale and retail prices, retailer order quantities, and profits given the same trade promotion discount. The authors find that scan-backs result in higher wholesale and retail prices and lower retailer order quantities. They find that, in expanding markets, manufacturers offer deeper discounts when trade promotions are allocated to off-invoices versus scan-backs. The insight for management: The choice of off-invoices or scan-backs results in different market price and quantity dynamics.