Knowledge that Transforms

Isabel Fernandez-Mateo, Zella King Gender job-category segregation and differentials in wages are often rationalized with firm-specific human capital and expectations of future commitment. Such theories would not apply for a temporary worker agency. The authors examine the roots of gender segregation in the screening process by using a longitudinal data set of candidates considered for temporary projects at a staffing firm and following their progress through the hiring pipeline. They find that the staffing firm is more likely to shortlist women for low-paying projects and is less likely to do so for high-paying ones. These effects are due to women being considered for different projects from men and are associated at least partially with the level of competition within vacancies. The insight for management: Evidence of gender segregation of job categories and resulting wage differentials has been found in the context of temporary project employment. Charlotte R. Ren, Ye Hu, Yu (Jeffrey) Hu, Jerry Hausman Best Buy offers a “Price Match Guarantee” to its customers, but this guarantee is put to test only if there is a nearby competitor such as Circuit City with the same product. The authors ask the question: Will a store change its level of product variety if there is a key competitor in its market area? Are variety and product overlap further affected if the competing store is collocated? The authors study a unique data set that contains all Best Buy and Circuit City stores in the United States and find that a store's product variety as measured by the number of stock-keeping units increases if a rival store exists in its market but decreases when the rival store is collocated within one mile of the focal store. Moreover, collocated rival stores tend to differentiate themselves by overlapping less in product range than do noncollocated rivals. This smaller and more differentiated product variety may be because of coordinated interactions between collocated stores. The insight for management: There is evidence of both coordination and competition in retailers' use of product variety for collocated stores. Holger Kraft, Claus Munk What is the optimal mix of rental and real estate ownership, consumption, and investment over a lifetime? The authors provide solutions to life-cycle utility maximization problems involving stock and bond investment, perishable consumption, and the rental and ownership of residential real estate. The authors note that the prices of houses, stocks and bonds, and labor income are correlated. Because of the positive correlation between house prices and labor income, young individuals want little exposure to house price risk and tend to rent their homes. Later in life the desired housing investment increases and will eventually reach and exceed the desired consumption, suggesting that the individuals should buy their homes—and either additional housing units (for renting out) or house price–linked financial assets. In the final years, preferences shift back to home rental. The insight for management: Optimal housing, consumption, and investment behavior can be explained in a life-cycle model. Elena Katok, Enno Siemsen “Keep it simple, stupid” is an expression that promotes the simplest approach as the most likely to succeed. The authors conduct an experiment to test whether research and development (R&D) professionals follow this design principle. The authors find that the need of R&D professionals to prove their talent within their organization or their broader community drives them to implement design solutions that are unnecessarily difficult, resulting in a higher likelihood of project failure. The authors also show that, for the same reason, the most capable designers tend toward the most complex problems. The insight for management: Your best and brightest might be trying to prove their talents as much as complete their projects successfully; be wary of unnecessarily complicated design. Push for Einstein's ideal: “Everything should be as simple as possible, but no simpler.” Leon Yang Chu, Hao Zhang The iPad tablet, the Droid smartphone, the video game Halo 3, and the seventh Harry Potter novel, Harry Potter and the Deathly Hallows, all were heavily preordered. What might cause a consumer to order a product before its release, and how can sellers best integrate preorder and retail prices? The authors find that the optimal pricing strategy may be highly dependent on the amount of information available at preorder and the relative spreads of profit potential and customer valuation of the product. When the spread in profit potential is large, less information and a large discount at the preorder stage enable the seller to sell more at preorder, when consumers are less certain about their valuations. When consumer valuation spread is large, the seller should target high-end valuation customers through a limited information release and small discounts. Interestingly, the seller should never release all information. The insight for management: Information release and preorder pricing strategies depend on the relative spread of consumer perceptions and product profit level potential. Victor Martínez-de-Albéniz, Kalyan Talluri Revenue management in airlines, car rental companies, and hospitals is a well-known and widely utilized approach to pricing a fixed, ephemeral capacity. Most research has dealt with optimal pricing with respect to uncertain demand conditions. Here the authors study the effect of such pricing practices on the competitive structure of the market. Whether there are fewer competitors, such as in airlines, or more, such as in hotels, affects typical revenue management strategies by introducing interdependent pricing strategies. The insight for management: In markets with fewer competitors, optimal revenue management strategies might depend not only on one's own capacity and expected demands, but also on competitors' capacities, demand, and price response to same. Enrico G. De Giorgi, Thierry Post Decision makers often evaluate alternative outcomes' gain or loss relative to some reference point. The authors investigate such reference-dependent choice when the outcome of the reference point is uncertain. For example, the investment performance of money managers is often measured relative to a risky benchmark portfolio such as the S&P 500 index rather than a fixed target return. Does the same loss aversion apply? The authors find that the optimal reference-dependent solution equals the optimal consumption solution (no loss aversion) if the reference point is selected fully endogenously. Given that loss aversion is widespread, the authors conclude that the reference point generally includes an important exogenously fixed component. Using historical U.S. investment benchmark data, they show that this model is consistent with diversification across bonds and stocks for a wide range of evaluation horizons despite the historically high-risk premium of stocks compared to bonds. The insight for management: Loss aversion behavior is relevant even in cases where the reference point is of uncertain value. Özalp Özer, Yanchong Zheng, Kay-Yut Chen Information sharing is widely believed to improve supply chain efficiency, but this is true only if the information itself is to be believed. Customer forecasts provide great information for suppliers if they are accurate, but, if the forecasts are inflated, planning around them can be disastrous. As a well-known case in point, Cisco in 2001 had to write off $2.1 billion in excess inventory because of overly optimistic customer forecasts. Simply, if the forecast is costless, nonbinding, and nonverifiable, it is just “cheap talk,” and the buyer has an incentive to inflate its forecast. The authors observe in controlled laboratory experiments that parties do tend to provide more accurate information than previously thought because of trust that is built between the parties over time. The authors determine when trust is important in forecast information sharing, how trust is affected by changes in the supply chain environment, and how trust affects related operational decisions. The insight for management: If capacity cost expansion is low or product variability is low, simple “cheap talk” forecast sharing is relatively reliable because of trust factors, but, for highly variable demand and high-cost capacity expansion industries, more complex contracts are in order. Karl A. Muller, III, Edward J. Riedl, Thorsten Sellhorn With the adoption of International Financial Reporting Standards (IFRS) in more than 100 countries and the growing convergence of U.S. generally accepted accounting principles (GAAP) with IFRS, the U.S. Securities and Exchange Commission (SEC) is currently considering making IFRS mandatory for U.S. public companies by 2015. The authors examine the effects of mandating the provision of fair-value information for long-lived tangible assets on firms' information asymmetry. They find that mandatory adoption firms exhibit a larger decline in information asymmetry, as reflected in lower bid–ask spreads. However, they also find that mandatory adoption firms continue to have higher information asymmetry than voluntary adoption firms, which appears partially attributable to the lower reliability of fair values reported by the mandatory adoption firms. The insight for management: Common adoption of fair value, even for long-lived tangible assets, under a mandatory reporting regime c

Pelin Atahan, Sumit Sarkar How helpful is a website for a user? A regular user might have profile information that helps him use the site more efficiently; for example, weather.com might have the zip codes he has previously queried, or Expedia might retain the last destination he wanted to fly to. These sites might also offer specials, discounts, and other links of interest that relate to his recent visits or profile options. But if the user is new to the site, it cannot effectively target products, promotions, and advertisements. In those situations, the site can learn the profile of a user as the user traverses the site. Naturally, the faster the site can learn a user's profile, the sooner the site can benefit from personalization. The authors develop a technique that sites can use to learn the profile as quickly as possible. The approach effectively learns multiple attributes simultaneously and works particularly well when a user's traversal is influenced by the most recently visited pages on a site. The insight for management: New methods that lead to quick interpretation of mouse clicks can lead to more effective target marketing on the Internet. Michael S. Dahl Who Moved My Cheese? by Dr. Spencer Johnson addresses the psychological elements of change management in organizations; people generally resist change because they are afraid of change. But rarely have researchers considered or quantified this cost on an organizational level. Researchers have quantified the organizational cost of change such as employee attrition, and hiring and firing costs and training costs from loss of productivity as an organization changes direction. The author delves into the cost of change to the employees themselves: What human toll is there, then, in a changing, evolving organization? The author analyzes detailed data on stress-related medicine prescriptions for 92,860 employees working in 1,517 of the largest Danish organizations to analyze the relationship between organizational change and employee health. The findings suggest that the risk of receiving stress-related medication increases significantly for employees at organizations that undergo change and that, as the breadth and scope of the organizational tumult expand, so does the use of such stress-related medication. The insight for management: Radical organizational change has a real cost for your employees. Waverly W. Ding This paper investigates the effect of founders' professional-education background on the adoption of an “open science” technology strategy, which allows a firm's research personnel to do basic science research and publish the results in academic journals. Using a sample of 512 young biotechnology firms, the author finds that firms with proportionally more Ph.D.-holding entrepreneurs on the founding team have a higher probability of adopting an open science policy. This Ph.D. influence on open policy is especially notable in crowded technological niches and in an institutional environment in which open science has yet to become the industry norm. The insight for management: Entrepreneurial founders' background is an important factor in new-venture open science strategy and research structure. Timothy S. Simcoe, Dave M. Waguespack John Grisham, James Patterson, Mary Higgins Clark, and Danielle Steel, among others, are all well-known authors whose works are regularly New York Times Best Sellers. But does nearly every book they write deserve to be a best seller based on the merits of the work, or are they best sellers predominantly because of the reputation of the authors? If the author's name were not on the cover, would the book be as well received? The authors of this article ask this question: How much are we influenced by an author's identity when evaluating the quality of his or her work? The authors find that in academic circles name-based signals can explain up to three-quarters of the difference in publication rates between high- and low-status authors. That is, well-known authors get the benefit of the doubt and are more likely to be accepted for publication than those who are less well known. Interestingly, when attention is scarce, or search costs are high, the reputation effect is more pronounced. So the broader the pool of potential authors, the more pronounced the reputation effect can be. Furthermore, the better the reputation one has, the more attention one's idea gets, which helps give the idea more credibility and momentum, resulting in a virtuous cycle driven by author reputation. The insight for management: Don't be overly swayed by reputation when evaluating the quality of new ideas. Mei Xue, Lorin M. Hitt, Pei-yu Chen What factors drive the decision to adopt an Internet banking service and subsequent customer profitability? The authors examine the drivers of adoption of Internet banking and the linkages among adoption drivers and outcomes such as product acquisition, service activity, profitability, and customer loyalty. They relate Internet banking adoption to customer demand for banking services, the availability of alternative channels, customers' efficiency in service coproduction, and local Internet banking penetration. They find that customers who have greater transaction demand and higher efficiency and reside in areas with a greater density of online banking adopters are faster to adopt online banking. Consistent with prior research the authors find that online customers significantly increase their banking activity, acquire more products, and perform more transactions. These changes in behavior are not associated with short-run increases in customer profitability, but customers who adopt online banking have a lower propensity to leave the bank. Customers who live in areas with a high branch density or high Internet banking penetration increase their product acquisition and transaction activity more than Internet banking adopters in other regions. The insight for management: Efficient customers and those with high service demand show greater postadoption profitability. D. J. Johnstone How are forecasting and risk aversion related? The author evaluates forecasting methodologies in the face of the user's risk aversion and finds that the two are related. Simply, a highly risk-averse forecast user may need a much bolder forecast to obtain the same certainty equivalent as a more risk-tolerant one. Probabilities produced by maximum likelihood estimation can be either too conservative or too bold relative to those found by maximizing utility under more risk-tolerant or risk-averse score functions. A very (not very) risk-averse user who bets characteristically small (large) fractions of wealth based on a conservative forecast is bound to make a rapidly (slowly) increasing bet as the forecast probability becomes progressively bolder or more distant from the market probability. The insight for management: Professional forecasters should anticipate how a client with given risk aversion expects to gain from any given forecast, or forecast revision, before committing resources toward making a better informed forecast. Xue Dong He, Xun Yu Zhou That “losses loom large” is a basic tenet of understanding individuals' choices under uncertainty. The well-known cumulative prospect theory (CPT) holds that most people evaluate an outcome relative to a reference point; falling below that point can create more disutility than exceeding it by the same amount. People tend to evaluate options relative to a benchmark rather than according to a final wealth position. The authors extend CPT with a new measure of loss aversion for large payoffs, called the large-loss aversion degree (LLAD), and they show that the size of the loss relative to a benchmark is important for accurately describing and predicting behaviors. The insight for management: A better understanding of individuals' decision making under uncertainty helps to reveal the psychology and outcomes of investment and other decisions. Guoming Lai, Laurens Debo, Lin Nan Does desire to meet end-of-the quarter sales targets to placate investors and inflate the firm's short-term market value result in “channel stuffing”? A channel stuffing manager ships excess inventory to the downstream channel, allowing him to report sales in excess of demand in order to influence investors' valuation of the firm. The authors' modeling shows that when demand is lower than a certain proportion of the initial inventory level, the manager will pad sales and release the inflated sales report. Interestingly, savvy investors are able to “correct” the reported sales and are able to accurately infer the firm's value. However, when the demand exceeds this proportion of inventory, the manager will report that the initial inventory is sold out. Then the investors infer only that the real demand is relatively high, and the short-term value of the firm can be artificially inflated. Interestingly, this result influences the inventory decision, too. The authors find that both over- and underinvestment in the initial inventory can arise in this situation. The insight for management: Short-term managerial focus can result in inflated sales claims and poor inventory decisions and in some cases will not generate the anticipated short-term boost in company valuation. Jeffrey D. Shulman, Anne T. Coughlan, R. Canan Savaskan The day after Christmas is a nightmare for retailers, as hoards of shoppers descend upon them with merchandise to return. Between one-fifth and one-third of

Are the attitudes and beliefs of chief executive officers (CEOs) linked to their firms' innovative performance? This paper uses a measure of overconfidence, based on CEO stock-option exercise, to study the relationship between a CEO's “revealed beliefs” about future performance and standard measures of corporate innovation. We begin by developing a career concern model where CEOs innovate to provide evidence of their ability. The model predicts that overconfident CEOs, who underestimate the probability of failure, are more likely to pursue innovation, and that this effect is larger in more competitive industries. We test these predictions on a panel of large publicly traded firms for the years from 1980 to 1994. We find a robust positive association between overconfidence and citation-weighted patent counts in both cross-sectional and fixed-effect models. This effect is larger in more competitive industries. Our results suggest that overconfident CEOs are more likely to take their firms in a new technological direction.

This study investigates reference-dependent choice with a stochastic, state-dependent reference point. The optimal reference-dependent solution equals the optimal consumption solution (no loss aversion) if the reference point is selected fully endogenously. Given that loss aversion is widespread, we conclude that the reference point generally includes an important exogenously fixed component. We develop a choice model in which adjustment costs can cause stickiness relative to an initial, exogenous reference point. Using historical U.S. investment benchmark data, we show that this model is consistent with diversification across bonds and stocks for a wide range of evaluation horizons, despite the historically high-risk premium of stocks compared to bonds.

Many markets have historically been dominated by a small number of best-selling products. The Pareto principle, also known as the 80/20 rule, describes this common pattern of sales concentration. However, information technology in general and Internet markets in particular have the potential to substantially increase the collective share of niche products, thereby creating a longer tail in the distribution of sales. This paper investigates the Internet's “long tail” phenomenon. By analyzing data collected from a multichannel retailer, it provides empirical evidence that the Internet channel exhibits a significantly less concentrated sales distribution when compared with traditional channels. Previous explanations for this result have focused on differences in product availability between channels. However, we demonstrate that the result survives even when the Internet and traditional channels share exactly the same product availability and prices. Instead, we find that consumers' usage of Internet search and discovery tools, such as recommendation engines, are associated with an increase the share of niche products. We conclude that the Internet's long tail is not solely due to the increase in product selection but may also partly reflect lower search costs on the Internet. If the relationships we uncover persist, the underlying trends in technology portend an ongoing shift in the distribution of product sales.

A fast fashion system combines quick response production capabilities with enhanced product design capabilities to both design “hot” products that capture the latest consumer trends and exploit minimal production lead times to match supply with uncertain demand. We develop a model of such a system and compare its performance to three alternative systems: quick-response-only systems, enhanced-design-only systems, and traditional systems (which lack both enhanced design and quick response capabilities). In particular, we focus on the impact of each of the four systems on “strategic” or forward-looking consumer purchasing behavior, i.e., the intentional delay in purchasing an item at the full price to obtain it during an end-of-season clearance. We find that enhanced design helps to mitigate strategic behavior by offering consumers a product they value more, making them less willing to risk waiting for a clearance sale and possibly experiencing a stockout. Quick response mitigates strategic behavior through a different mechanism: by better matching supply to demand, it reduces the chance of a clearance sale. Most importantly, we find that although it is possible for quick response and enhanced design to be either complements or substitutes, the complementarity effect tends to dominate. Hence, when both quick response and enhanced design are combined in a fast fashion system, the firm typically enjoys a greater incremental increase in profit than the sum of the increases resulting from employing either system in isolation. Furthermore, complementarity is strongest when customers are very strategic. We conclude that fast fashion systems can be of significant value, particularly when consumers exhibit strategic behavior.

This paper introduces a parameter-free method for measuring the weighting functions of prospect theory and rank-dependent utility. These weighting functions capture risk attitudes, subjective beliefs, and ambiguity attitudes. Our method, called the midweight method, is based on a convenient way to obtain midpoints in the weighting function scale. It can be used both for risk (known probabilities) and for uncertainty (unknown probabilities). The resulting integrated treatment of risk and uncertainty is particularly useful for measuring ambiguity, i.e., the difference between uncertainty and risk. Compared to existing methods to measure weighting functions and attitudes toward uncertainty and ambiguity, our method is more efficient and can accommodate violations of expected utility under risk. An experiment demonstrates the tractability of our method, yielding plausible results such as ambiguity aversion for moderate and high likelihoods but ambiguity seeking for low likelihoods, as predicted by Ellsberg.

How can firms extract value from already-implemented information technologies (IT) that support the work processes of employees? One approach is to stimulate employees to engage in post-adoptive extended use, i.e., to learn and apply more of the available functions of the implemented technologies to support their work. Such learning behavior of extending functions in use is ingrained in a process by which users make sense of the technologies in the context of their work system. This study draws on sensemaking theory to develop a model to understand the antecedents, contingencies, and consequences of customer service employees' extended use of customer relationship management (CRM) technologies. The model is tested using multisource longitudinal data collected through a field study of one of the world's largest telecommunications service providers. Our results suggest that employees engage in post-adoptive sensemaking at two levels: technology and work system. We found that sensemaking at both of these levels impacts the extended use of CRM technologies. Employees' sensemaking at the technology level is influenced by employees' assessment of technology quality, whereas employees' sensemaking at the work system level is influenced by customers' assessment of service quality. Moreover, in the case of low technology quality and low service quality, specific mechanisms for employee feedback should be conceptualized and aligned at two levels: through employee participation at the technology level and through work system coordination at the work system level. Such alignment can mitigate the undesirable effect of low technology quality and low service quality, thereby facilitating extended use. Importantly, we found that extended use amplifies employees' service capacity, leading to better objective performance. Put together, our findings highlight the critical role of employees' sensemaking about the implemented technologies in promoting their extended use of IT and improving their work performance.

For fossil fuel power plants to be built in the future, carbon capture and storage (CCS) technologies offer the potential for significant reductions in carbon dioxide (CO 2 ) emissions. We examine the break-even value for CCS adoptions, that is, the critical value in the charge for CO 2 emissions that would justify investment in CCS capabilities. Our analysis takes explicitly into account that the supply of electricity at the wholesale level (generation) is organized competitively in some U.S. jurisdictions, whereas in others a regulated utility provides integrated generation and distribution services. For either market structure, we find that emissions charges near $30 per tonne of CO 2 would be the break-even value for adopting CCS capabilities at new coal-fired power plants. The corresponding break-even values for natural gas plants are substantially higher, near $60 per tonne. Our break-even estimates serve as a basis for projecting the change in electricity prices once carbon emissions become costly. CCS capabilities effectively put an upper bound on the increase in electricity prices resulting from carbon regulations, and we estimate this bound to be near 30% at the retail level for both coal and natural gas plants. In contrast to the competitive power supply scenario, however, these price increases materialize only gradually for a regulated utility. The delay in price adjustments reflects that for regulated firms the basis for setting product prices is historical cost, rather than current cost.

We study a period of severe disequilibrium to investigate whether board characteristics are related to corporate investment, debt usage, and firm value. During the 1930-1938 Depression era, when the corporate sector was shocked by an unprecedented downturn, we document a relation between board characteristics and firm performance that varies in economically sensible ways: Complex firms (that would benefit more from board advice) exhibit a positive relation between board size and firm value, and simple firms exhibit a negative relation between board size and firm value. Moreover, simple firms with large boards do not downsize adequately in response to the severe economic contraction: they invest more (or shrink less) and use more debt during the 1930s. We document similar effects for the number of outside directors on the board. Finally, we also find that companies with properly aligned governance structures are more likely to replace the company president following poor performance.