Management Insights
Authors: Gorman Michael F. 
Published: January 2012

Martijn J. van den Assem, Dennie van Dolder, Richard H. Thaler Split or steal? That's the primary question in the British game show Golden Balls. As it turns out, the game show tests a variation on the famous “prisoner's dilemma” game theoretic problem. The two contestants are better off collectively if they cooperate and agree to share, but they have individual incentives to try to “steal” the entire pot that averages more than $20,000. If they both steal, they get nothing. The variation from the classic game theoretic problem is that the contestants can communicate their intentions, even if they might be dishonest. The authors study the show and make a number of observations. First, cooperation is surprisingly high for amounts that would usually be considered consequential but look tiny in the context of the game, what the authors call a “big peanuts” phenomenon. Second, the authors find evidence that people demonstrate reciprocity; that is, contestants repay kindness with kindness or unkindness with unkindness. The authors find little support for contestants cooperating based on rational projections of competitors' behavior based on their stated intentions; that is, players do not seem to be more likely to cooperate if their opponent might be expected to cooperate. Third, the authors' findings support prior game theoretic findings that young males are less cooperative than females but that this gender effect reverses for older contestants: Men become increasingly cooperative as their age increases. The insight for management: There are behavioral implications in cooperate or compete decisions that directly affect outcomes.

David Cesarini, Magnus Johannesson, Patrik K. E. Magnusson, Björn Wallace Are our economic decisions—such as consumption, savings, and portfolio selection decisions—a function of heredity or environment? Using evidence from more than 11,000 Swedish twins, the authors demonstrate that a number of economic behaviors are moderately heritable and that variation in common environment explains only a small share of individual differences. However, heterogeneity of economic decisions may be partially due to genetic variance in cognitive ability. The insight for management: Genetic differences are a source of heterogeneity in economic and financial decision making.

Nicholas Barberis Why do people go to casinos? In 2007, 55 million people made 376 million trips to casinos in the United States alone, despite their obviously negative expected payoff. Prospect theory helps explain why lottery tickets are popular despite their negative expected payout—so little to lose, so much to gain; however, this skewed payout does not apply to casinos, where payouts are not so highly skewed. The author describes a time inconsistency: At the moment a gambler enters a casino, he plans to follow one particular gambling strategy; but after he starts playing, he wants to switch to a different strategy. Interestingly, the model predicts heterogeneity in gambling behavior: How a gambler behaves depends on whether he is aware of the time inconsistency. The insight for management: Gambler behaviors can be better understood, increasing potential earnings from gamblers.

Michael P. Haselhuhn, Devin G. Pope, Maurice E. Schweitzer, Peter Fishman After renting the movie Apollo 13, Reed Hastings misplaced his video cassette. He found the cassette six weeks later and faced a $40 late fee. The experience of paying this late fee was so aversive for Hastings that it motivated him to take an action that would fundamentally change the entire video-rental industry: In 1997, Hastings founded Netflix. In short, personal experience matters. But how much? In a field setting with longitudinal data, the authors disentangle the effects of learning new information from the effects of personal experience. They find that after a customer experiences a fine they are much more likely to comply in the future. The effect is more significant after a large fine. They also note that the influence of experience with both large and small fines decays sharply over time. The insight for management: Negative financial incentives have a significant effect on future behavior.

Judd B. Kessler, Stephen Leider Can I get that in writing… or do I need to? The authors find that “handshake agreements” (unenforceable components of a contract) establish “induced norms” that are endogenous to a relationship and that agents feel beholden to follow. The disutility of deviating from norms in a relationship is enough to hold participants to agreements. The insight for management: Norms for unenforceable “handshake agreements” can effectively substitute for weak enforceable restrictions.

Jose Apesteguia, Ghazala Azmat, Nagore Iriberri Researchers have long evaluated gender preferences as they relate to decision making. Generally, researchers have found that women are more risk averse than men and women are more averse to competition. How do these preferences translate to a group setting? The authors investigate whether the gender composition of teams affects their economic performance. In experiments with both undergraduates and MBA students, the authors show that teams formed by three women are significantly outperformed by all other gender combinations. Undergraduate women are outperformed throughout, but top-performing women are closer to men at the top of the distribution. The authors show that, for MBA students, the best-performing group constitution is two men and one woman. The authors show that the differences in performance are explained by differences in gender-specific approaches to decision making. They suggest that, generally, three-women teams are less aggressive in their pricing strategies, invest less in research and development, and invest more in social sustainability initiatives than does any other gender combination. The insight for management: The gender constitution of a group directly affects its approach to decision making and its performance.

Camelia M. Kuhnen, Agnieszka Tymula How do both positive and negative feedback affect performance? The authors examine whether feedback improves performance in competitive environments by modifying the agents' self-esteem. In their experiments, even the prospect of getting feedback is motivating; people work harder when told that they may learn their ranking, relative to cases when they don't get feedback. Interestingly, feedback has an inverse relationship with performance. Individuals who ranked better than expected decreased their subsequent output, whereas those who ranked worse than expected increased their output. Employees are rational; their expected future ranking changes with learned feedback on current rank. They are competitive as well; ranking feedback helps create a ratcheting effect in the fight for dominance. The insight for management: Organizations can improve employee productivity by changing the likelihood of feedback, the reference group used to calculate relative performance, and the quality of the information of the feedback message.

Curtis R. Price How does a manager's gender affect the choice of compensation plans for employees? In experiments, the author gave managers a choice of performance-based compensation plan for a subordinate: either a piece rate or a tournament payment scheme. The author finds that, given information about worker ability, male managers chose the tournament significantly less often for a female worker. On the other hand, when no information about worker ability was given to the manager, there was no difference in compensation choice for the worker. The insight for management: Choice of compensation plans depends not only on the information the manager has on worker performance, but importantly on the gender of the manager making the choice.

Lian Jian, Rahul Sami Prediction markets—markets in which traders buy and sell bets on future events—are designed to explicitly take advantage of the information aggregation function of market prices to provide decision makers with forecasts of future events. Such markets have been created for a wide range of applications such as the Iowa Electronic Market for forecasting elections and the Hollywood Stock Exchange for forecasting movie box office receipts. Often, such markets are conducted as a continuous double auction, but increasingly market scoring rules are being used as an alternative. The authors conduct laboratory experiments on variants of market scoring rule prediction markets, under different information distribution patterns, to evaluate the efficiency and speed of information aggregation, and they test recent theoretical results on manipulative behavior by traders. The authors find that markets structured to have a fixed sequence of trades exhibit greater accuracy of information aggregation than the typical form that has unstructured trade. In comparing two commonly used mechanisms, they find no significant difference between the performance of the direct probability-report form and the indirect security-trading form of the market scoring rule. In the case of the markets with a structured order, they find evidence supporting the theoretical prediction that information aggregation is slower when information is complementary. The insight for management: Different market structures and information dissemination methods help to improve the accuracy of predictive markets.

Benjamin Ho “Love means never having to say you're sorry” is a famous line from the 1970 movie Love Story. Is the expression true? More than just romantic relationships, apologies are part of a social institution designed to restore frayed relationships not only in personal life but also in corporate domains such as product recalls, medical malpractice litigation, political malfeasance, and the like. When and why do people and institutions apologize? Interestingly, the author suggests that Ryan O'Neal and Ali McGraw (who said the famous quote) were wrong—apologies are more frequent in long relationships, early in relationships, and between better-matched partners. So, an apology is, in fact, an indicator of a healthy and sustainable relationship. The insight for management: The words “I am sorry,” or their equivalent, don't necessarily suggest weakness or guilt of past events; instead, apologies are forward looking—a desire to sustain an ongoing relationship into the future.

Lyle A. Brenner, Dale W. Griffin, Derek J. Koehler Are assets priced rationally and accurately in an environment of uncertainty? The authors show that, despite giving participants incentives for accurate pricing and an opportunity for experiential learning, people demonstrate systematic biases in their experiment of a simulated stock market. The insight for management: People exhibit distinct patterns of miscalibration for buying prices, selling prices, and probability judgments.

Ayelet Gneezy, Alex Imas, Amber Brown, Leif D. Nelson, Michael I. Norton Do we give until it hurts? The authors suggest that we tend to make giving a habit only if it hurts. The authors find in a laboratory experiment and a large field study that a major contributor to charitable behavior is the costliness of an initial gift. If that initial gift is costly, then the decision maker may develop a prosocial identity that spurs future giving. However, if it is not costly, the decision maker may not try to live up to the reputation of being prosocial and, in fact, might exhibit more greedy behaviors subsequent to the initial gift. The insight for management: Charitable behavior is more likely to become a habit if initial gifts impose some cost on the giver.

Ayala Arad, Gabrielle Gayer Suppose you have to undergo some medical treatment. You have the precise information that the treatment was successful in 25 of 50 past cases. Now imagine that, in addition to that information, you are notified that the outcomes of 20 other cases were lost because of some technical problem, making the overall success rate of the treatment unknown. How would you feel about undergoing the treatment in the second scenario compared to the first? Would the presence of imprecise information lower your confidence in the treatment, or would you ignore the unknown data? The insight for management: With precise data, subjects behave as if there were no ambiguity, whereas with imprecise data subjects turn out to be ambiguity averse.

Stephen V. Burks, Erin L. Krupka How do ethical expectations and norms affect decision making in cases such as whistle-blowing on a peer, an incentive clash between serving the client and earning commissions, or a dilemma about fiduciary responsibility to a client? The authors use both economic experiments and surveys at a large financial services firm to identify the norms for on-the-job behavior among financial advisers and their leaders, and the effect that the expectations of each group has on the other. The authors find patterns of agreement among advisers, among leaders, and between the two groups that are consistent with company guidelines. However, the authors do find measurable differences between what leaders expect and the actual norms of advisers. The authors are able to distinguish between differences that result from miscommunication and ethical disagreement between leaders and advisers. The insight for management: If advisers' personal ethical opinions do not match group norms, job dissatisfaction can result.