The surge of bitcoin brought cryptocurrencies from tech-nerd toy to household name, and they’re increasingly showing up in investment portfolios. Yet it’s still a mystery to most people how these digital currencies work. Are they even currency? And do they belong in an everyday person’s portfolio?
Haas News posed these questions to Prof. Christine Parlour, a leading scholar of financial markets and the banking system. In the past few years, Parlour has focused on how digital technologies, including new electronic payment methods like PayPal, are transforming the financial system and affecting the stability of banks. She taught a pioneering fintech course at Haas in 2015, and she is now organizing a new FinTech Center, which will be a hub for research on emerging financial technologies.
Recently, Parlour has given close attention to the value of bitcoin and other cryptocurrencies, a burning question in the world of finance. In a working paper, she analyzed market pricing on 222 digital coins and examined the initial coin offering market. Parlour, who holds the Sylvan C. Coleman Chair in Finance and Accounting at Berkeley Haas, shared some of her thoughts on the burgeoning cryptocurrency market.
Prof. Christine Parlour
Q: Many people have heard of bitcoin and other cryptocurrencies, but not many really understand what they are. So, what exactly are cryptocurrencies?
A: Essentially, they’re digital codes that give people the ability to consume and use services. As such, they can be traded and so they do have some sort of transfer-of-value characteristics.
Q: Do they meet the classic economic definition of money—that is, a medium of exchange, a unit of accounting, and a store of value?
A: Despite the great alliterative mouth-feel of “cryptocurrency,” they’re not really currency. Perhaps a more accurate designation would be “cryptocoupons.”
Turning cryptos into cash
Q: Whether they’re cryptocoupons or cryptocurrencies, what can they be used for?
A: Most cryptocurrencies essentially have a use-value associated with a specific underlying commodity or service. For example, sometimes they’re used as a way to compensate artists who are providing their intellectual property. Sometimes they’re used to compensate people who are providing some of their cloud storage capacity to other vendors. So, it’s pretty much anything that you can think of. I’ve even seen marketing specialists and influencers being paid with cryptocurrencies.
Q: Suppose the artist who is paid with cryptocurrency wants cold cash. How can he or she turn the cryptocurrency into conventional money?
A: There are many different exchanges that allow you to convert cryptocurrencies to U.S. dollars or whatever currency you prefer. So, you can switch them out for cash.
New asset class
Q: They’re often described as a new asset class. What’s distinctive about cryptocurrencies as an asset?
A: From a finance point of view, there are lots of things that we view as being assets. And the only thing we care about is that we can use them to get money. I can buy these claims and then, at some point, I can cash the claims back into dollar bills. Hopefully, my money, my piles of dollar bills, will have grown. So inasmuch as you can convert any of these cryptocurrencies to fiat money and back again, you can essentially view them as an asset class.
“Despite the great alliterative mouth-feel of ‘cryptocurrency,’ they’re not really currency.”
Q: Do they have any advantages as an addition to an investment portfolio?
A: What’s interesting about them from a portfolio construction point of view is they essentially add an element of diversification to the standard assets that most people have in their 401(k) plans.
Cryptocurrency mining
Overvalued or undervalued
Q: Bitcoin and other cryptocurrencies have been among the fastest appreciating assets on record. What has driven the phenomenal increases—and subsequent price plunges?
A: That question presupposes that we know exactly why prices move, but the fact is we don’t. You might as well ask why people like Pokémon Go. I hate to get metaphysical, but essentially there are sometimes things that capture the popular imagination and people just view them as being valuable.
Q: But the market price of bitcoin isn’t metaphysical. It’s real, which raises the question of why it moved the way it did.
A: Why do we have the valuations we currently have in the stock market? People will pontificate about growth rates and outlooks, but they really have no idea.
Q: The price appreciation of bitcoin and other cryptocurrencies has drawn a lot of attention, but how can we determine their value as opposed to their price?
A: I don’t really think that’s a question that should be posed to somebody in finance.
Q: Why?
A: Well, what is the value of a Treasury bond? I can tell you what the price is and I can tell you how much I can convert it into U.S. dollars tomorrow. But the value is not clear. So, instead of asking about value, we look at changes in wealth in terms of U.S. dollars and you can certainly do that for cryptocurrencies.
Q: Do you have a personal opinion about whether cryptocurrencies are overvalued or undervalued?
A: The thing I feel very comfortable saying is that there are diversification properties associated with having some cryptocurrencies in your portfolio. We know that the returns are pretty much driven by something that’s independent of the standard things we put in portfolios. A well-diversified portfolio should have a little bit of exposure to crypto.
Buyer beware
Q: Wouldn’t it be reasonable for investors to be skittish, given the price volatility of these assets and the lack of regulation of the marketplace?
A: Yes, absolutely. But we have a lot of attempts to start up exchange-traded funds that track cryptos and these are under the usual regulatory umbrellas.
“ICOs are basically created in the febrile brain of the underlying inventor of the coin. It’s just all over the map. They’re fundamentally unregulated and the asset that’s issued doesn’t necessarily bear any resemblance to a security.”
Q: Isn’t there a concern about buying at the top of the market or buying into a heavily speculative market?
A: Yeah, but you can say the same thing about people who bought condominiums in San Francisco.
Q: I want to ask about the related area of initial coin offerings (ICOs). How does an ICO, which gives investors digital coins or tokens, differ from a standard initial public offering in which the investor gets stock providing an ownership claim in the issuing enterprise?
A: ICOs sound like IPOs linguistically, but they’re very, very different. ICOs are basically created in the febrile brain of the underlying inventor of the coin. It’s just all over the map. They’re fundamentally unregulated and the asset that’s issued doesn’t necessarily bear any resemblance to a security. If you are a smaller investor, I would say “caveat emptor,” capitalized, in italics and bold, underlined with stars around it. Basically, only buy a new coin after it has appeared on one of the crypto exchanges—or after the SEC moves forward with more oversight.
Research by Berkeley Haas Prof. Jennifer Chatman shows that narcissistic CEOs are more likely to engage in protracted lawsuits—and are no more likely to win.
In the classic myth of Narcissus, a handsome hunter falls in love with his reflection in pool. Unable to tear himself away, he wastes away and dies. In business, the real problem with excessive self-regard comes less from inaction than from reckless action—such as plunging into the dangerous waters of litigation.
“People who exhibit high levels of narcissism can make charming, extroverted leaders who are bold in taking risks and persisting against formidable odds,” says organizational culture and leadership expertJennifer Chatman, Paul J. Cortese Distinguished Professor of Management at the Haas School of Business. “The downside is they are overconfident and tend to focus on the potential benefits and minimize the costs of risky actions. One manifestation of this is that narcissistic CEOs are more likely to lead their organizations into court.”
The dark sides of narcissism
Prof. Jennifer Chatman
In a new paper published inThe Leadership Quarterly, Chatman and her colleagues found that narcissistic CEOs are significantly more likely to engage their firms in lawsuits and less likely to settle cases. The paper, co-authored by Stanford’s Charles O’Reilly (Berkeley MBA 71 and PhD 75) and UC Berkeley researcher Bernadette Doerr, is part of a series of four studies that examine the effects that narcissistic leaders have on their organizations.
“It’s true that some level of narcissism can help a leader succeed,” Chatman says. “But there are some very real problems with excessive narcissism that can have drastically negative consequences for companies.”
Those dark sides—according to a growing body of research—include a greater tendency to cross ethical lines, such as engaging in financial fraud or tax avoidance, as well as toxic behaviors such as aggression, bullying, or sexual harassment.In an earlier study, Chatman and her colleagues found that narcissistic CEOs also command significantly higher salaries, winning over boards with their confidence of success, and that the gap between narcissistic CEOs’ compensation and those of their top management teams widened over time.
Employees rate their CEOs
Past research has characterized narcissism with such traits as a sense of personal superiority, overconfidence, a desire for power and admiration, a willingness to manipulate others for personal gain, and an inclination toward hostility when faced with criticism. To gauge the narcissism of CEOs, Chatman and her colleagues went straight to those most likely to feel its effects: their employees. Surveying a sample of 250 employees from 32 of the largest publicly traded US hardware and software firms, the researchers asked employees to rate how much on a scale of 1 to 7 their bosses were “arrogant,” “egotistical,” “temperamental,” “extroverted,”and other adjectives that describe narcissistic personalities.
In addition, the researchers cross-referenced these scores with other measures, such as the number of times CEOs used first-person pronouns in letters and the size of their signatures—both measures associated with narcissism—in order to develop a narcissism score for each executive.
Chatman and her colleagues then correlated these numbers with the number and length of lawsuits each firm noted in its annual report. They found that CEOs who were rated as more highly narcissistic led firms that were more likely to be named as defendants in a lawsuit. Lawsuits involving narcissistic CEOs also lasted longer, implying that those leaders were less willing to settle suits quickly—even though they were no more likely to win them.
Why do narcissistic CEOs engage in lawsuits?
In order to better understand why narcissistic CEOs were more likely to become involved in lawsuits, Chatman and her colleagues also ran two experiments. They used a personality test to gauge participants’ degree of narcissism and then they randomly assigned them to imagine one of two different scenarios: what would they do if they were a CEO launching a new product, and the company’s lawyers said there was either low chance or a high chance they would be sued?
The researchers found a striking difference between those who scored low on narcissistic traits and those who scored high. When the chances of being sued were 20 percent, the narcissists and non-narcissists were equally likely to proceed. Yet when told there was an 80 percent chance of being sued, the narcissists were almost three times as likely to go forward with the launch, with about 62 percent saying they’d proceed.
“Narcissists appear to be both less sensitive to high risk and less likely to listen to advice from expert advisors, especially when there’s a chance of a high payoff,” says Chatman. “Further, this greater propensity for risk reflects narcissists’ confidence in their own judgment and suggests that they may be more likely to engage in extremely risky behavior.”
In another experiment, the researchers found a similar pattern in participants’ likelihood of settling a lawsuit. When told the risk of losing was high, 79 percent of non-narcissistic individuals were willing to settle, while only 40 percent of the narcissists said they’d settle.
Harmful to the bottom line
Taken together, Chatman and her colleagues’ research joins a growing body of literature that shows that narcissism isn’t merely an annoying personality trait that carries with it some ancillary benefits; rather, it can be dangerous to a company’s long-term stability and bottom line.
“We already know that most people—and even the boards of directors who hire CEOs—confuse strong leadership attributes and some of the key attributes of narcissists, such as grandiosity and overconfidence, so CEOs are significantly more likely to be higher in narcissism,” Chatman says. “It’s important to pay attention to the difference, because narcissists appear to have a significant, and negative, impact on the organizations they lead.”
Chatman adds that boards should look for CEOs who have a track record of incorporating expert views into their own thinking, and those who can develop inspiring and strategically relevant visions that bring others along with them, and avoid hiring those with narcissistic personalities.
In Afghanistan, where fake or “ghost” workers siphon off government paychecks and some rural teachers get paid through bursars who carry bags of cash to remote areas, can mobile money reduce corruption in public payrolls?
In Sierra Leone, where just 10 percent of households own a TV and opposition parties are weak, can screenings of videotaped candidate debates at large public gatherings help increase voter knowledge and improve candidates’ accountability?
Of these and the myriad efforts to reform public institutions in the developing world, which ones are proving to be most effective?
That was the central question occupying the researchers, funders, and “public sector entrepreneurs” from across the globe who gathered at the Haas School this week to share knowledge and strategies on how to achieve positive institutional change in developing nations.
Prof. Ernesto Dal Bó opened the conference. (Photo credit: CEGA)
Professors Ernesto Dal Bó and Frederico Finan, both from the Business and Public Policy group at Haas, convened the three-day forum as part of the Economic Development and Institutions (EDI) initiative, a five-year, $19 million international effort funded by UK Aid from the UK Department for International Development and managed by Oxford Policy Management. The professors, working with Berkeley’s Center for Effective Global Action (CEGA), are overseeing $5.5 million in randomized control trials of institutional reform efforts throughout the world in order to build on what works.
Public sector entrepreneurs
The forum brought together the people behind these evidence-based reforms to share progress and challenges, spark new research, and build connections. Visitors include high-level officials from the Mexico City Labor Court, the Judiciary of Kenya Law Reform Commission, the Uganda Ministry of Lands, Housing and Urban Development, Pakistan’s Punjab Commission on the Status of Women, the City of Dakar tax authority, and others.
“Over a number of years here at Berkeley we have been devoted to the study of the institutional roots of economic development,” Dal Bó said in his opening remarks. “We have learned that when you scratch beneath the surface, you find that behind every successful institutional reform project is an individual who, in some part of a public organization, decided that he or she had had enough and that something needed to change. In every single case there is a figure that we like to call a ‘public sector entrepreneur,’ who is somehow combining resources to make something happen.”
Judiciary of Kenya Deputy Director Paul Kimalu asks a question during a session. (Photo credit: CEGA)
30 studies underway
Launched two years ago, the EDI initiative has already allocated allocated $5.5 million in funding to 30 randomized control studies involving 80 researchers across 12 countries, Dal Bó said. They include academics, research institutions, and reform-minded public organizations working to increase government transparency, accountability, and other reforms to political and legal systems.
Randomized control trials are considered the gold standard in field research, reducing bias and providing data on which reforms actually make a difference. EDI is focusing on programs that work closely with local institutions and government, rather than efforts by outside groups alone that may be less sustainable. While there are many initiatives funding impact evaluations in the developing world, EDI has a broader goal, Dal Bó said.
“We want to go beyond the individual impact evaluations and create linkages to build more cohesive, generalizable knowledge,” said Dal Bó, the Philips Girgich Professor of Business and an expert on government corruption and reform, who holds a joint appointment in the Political Science Department. “The other thing we want to do is put the lens on these public sector entrepreneurs and endow these people with instruments that might be helpful.”
Researchers, funders, and public sector entrepreneurs from across the globe gathered at Haas to strategize about their work. (Photo credit: CEGA)
Frontiers of evidence-based policy
The forum included interactive sessions with leaders of the studies that are underway, discussions about the state of science and open policy questions, funding priorities, and presentations from the “frontiers of evidence-based policy.” Two of the presenters were professors Katherine Casey of Stanford’s Graduate School of Business, who conducted the study of citizen engagement and election reforms in Sierra Leone, and Michael Callen of UC San Diego’s Rady School of Management, who led the experiment on using mobile money to fight corruption in Afghanistan (which was not funded by EDI but presented as an example of a large-scale public sector experiment).
Callen worked with the Afghan Ministries of Finance, Labor, and Education and the Office of the President to register all workers and then test whether paying them through mobile money would reduce the substantial “leakage” of government funds. The program was successful enough that Office of the President and the Ministry of Finance are bringing it to scale with the goal of paying all public employees using mobile money.
“The evidence-based smart policy movement is creating innovations at a remarkable pace,” he said. “But for something like this to succeed it needs to be anchored in government so that innovators can hand it over to implementers.”
Asst. Prof. Frederico Finan presented research that found mobile phones improved performance of agricultural agents in Paraguay. (Photo credit: CEGA)
Dal Bó and Finan, who act as the scientific leads for EDI’s randomized control trial program, also presented on their own research on reform efforts in Mexico and Paraguay. Their experiments (not funded by EDI) showed how financial rewards, and mobile technology, can help with the recruiting and monitoring of frontline public service workers. In one study, they rolled out mobile phones to the government agents who support small-scale farmers in Paraguay. They found the phones improved their performance, allowing them to not only document their farm visits but also for their government supervisors to track and monitor their locations.
Three new assistant professors have joined the Berkeley Haas faculty, with research interests that range from how financial news influences markets to the unintended consequences of mortgage market regulations to developing more accurate ways to predict consumer behavior.
Anastassia Fedyk and Matteo Benetton will join the Finance Group, while Giovanni Compiani will be part of the Marketing Group.
“We’re thrilled to have these three rising stars join us this year,” said Prof. Candace Yano, associate dean for academic affairs and chair of the faculty.
The three new faculty members have already won awards for their research and have published in top journals. As is customary, they will spend the fall semester working on their research and plan to begin teaching in the spring semester.
Assistant Professor Anastassia Fedyk, Finance
Asst. Prof. Anastassia Fedyk
For Anastassia Fedyk, coming to Haas is a homecoming of sorts. Though she was born in Ukraine and moved to the United States at age 10, she spent her high school years in Berkeley while her mother earned her PhD in accounting at Haas.
“I really loved living here back in high school, so it was always a dream to move back,” says Fedyk. “And the fact that there are so many people here working in behavioral economics makes it a perfect fit with my work.”
Knowing early on that she wanted to become a research economist, Fedyk majored in math at Princeton and did a two-year stint doing research at Goldman Sachs before heading to Harvard University to earn her PhD in business economics.
Her work spans finance and behavioral economics, and she has pursued three main research threads so far. The first focuses on financial news and how it translates into prices and trading volume in the markets. She’s looked at trading around news events and how the news is presented. “For example, if the news is printed on the front page that will prompt a much faster price response than if it’s less prominent,” she said. Or, when two old news stories are reprinted together, they are perceived as a new piece of information.
Her second line of research centers on present bias and procrastination. She’s found that although people fail to recognize these tendencies in themselves—and really do believe they’ll follow through on their plans for a new gym routine or diet—they easily recognize them in others.
Fedyk’s third line of inquiry looks at how employees’ skills relate to companies’ performance, working with a large dataset of resumes from a startup that collects public profiles. She has found that companies with an unusually high focus on sales-oriented skills tend to outperform, while companies that are heavy on administrative and bureaucratic personnel tend to do worse.
She will be teaching core finance in the evening & weekend MBA program.
Assistant Professor Matteo Benetton, Finance
Asst. Prof. Matteo Benetton
Matteo Benetton also feels a kinship with Berkeley, although he had only spent three days here interviewing before moving 5,500 miles this month from the U.K, where he completed his PhD at the London School of Economics.
“The vast majority of Italian economists study at Bocconi, which is a private university, but I went to the University of Pisa’s Sant’Anna School of Advanced Studies, which is public,” said Benetton, who originally hails from Treviso near Venice. “I love the idea of a high-quality public university, and the research mindset that goes with that. That’s something I value a lot. Plus, after six years in London I’m looking forward to some sunshine.”
Benetton, whose work centers on the intersection between competition in the lending market, mortgage product design, and regulation, says he was excited to find so many faculty at Haas who share his interests, both in the Finance and Real Estate groups.
Benetton’s research has shown that some banking regulations put in place after the global financial crisis have had unintended consequences, giving more advantages to big banks over smaller banks. “The regulation can actually distort competition, and increase market concentration,” he said. In one paper, Benetton recommended that regulations apply evenly to big banks and smaller lenders, to prevent established banks from gaining additional advantages.
He has also researched how innovative mortgage product design can benefit consumers and prevent the buildup of risk in the housing market. He’s looked at shared-equity mortgages, in which a government or bank lender provides a homebuyer with part of the down payment but takes some of the equity. These profit-sharing contracts can reduce risk, but homebuyers who expect prices to go up tend to avoid the since they don’t want to share the gains.
While much of his work has been focused on Europe, with his new proximity to Silicon Valley Benetton says he’s interested in exploring how fintech is changing banking and payment systems, as well as branching out into household finance.
Benetton will be finishing up a research project this fall and will begin teaching finance in the undergraduate program in January.
Assistant Professor Giovanni Compiani, Marketing
Asst. Prof. Giovanni Compiani
Giovanni Compiani is also a native of Italy, who comes to Haas via Yale University, where he earned a PhD in economics. He’s looking forward to opportunities for working across disciplines at Berkeley, and also to the proximity to Silicon Valley and its trove of consumer data.
“Being at a business school and at Berkeley in particular, there’s a more question-oriented approach—rather than a focus on methods it’s about ‘What real-world question do we want to address?’”, Compiani said. “At Yale, I acquired a rich set of econometrics and structural methods tools which I now look forward to applying. There are so many relevant topics in the digital economy, and at Berkeley an economist can work with a computer scientist and say something very meaningful and interesting.”
Compiani grew up in Bologna before studying economics at Italy’s prestigious Bocconi University in Milan. He completed part of his master’s at Yale and returned for his doctorate.
He has focused much of his research so far on consumer behavior, building a model that gives more flexibility than established models allow for in predicting consumer reactions to price changes. “Let’s say a tax is levied on a supermarket. The market could lower the price of products to keep the final price to consumers unchanged, or they could pass on the full increase to consumers. The best strategy depends on knowing how consumers react,” he said. “This model relaxes certain strict assumptions typically made for ease of programming, and thus delivers more robust results.”
Compiani is also investigating patterns of how consumers search across different product characteristics, such as price. “Understanding these patterns has implications both for policy and for firm strategy,” he said.
With the possibility of increased access to data sources from Silicon Valley companies, Compiani is interested in exploring new lines of research on how concerns about data privacy influence consumer behavior.
He will begin teaching marketing analytics in the undergraduate program in the spring.
The federal Clean Air Act and associated regulations have driven steep declines in air pollution emissions over the past several decades—even as U.S. manufacturers increased production, according to a study by two University of California, Berkeley economists.
The study, co-authored by Berkeley Haas Assoc. Prof Reed Walker and forthcoming in the American Economic Review, found that polluting emissions from U.S. manufacturing fell by 60 percent between 1990 and 2008—a period in which manufacturing output grew significantly—primarily because manufacturers adopted cleaner production methods to meet increasingly strict environmental regulation.
Assoc. Prof. Reed Walker
“People often assume that manufacturing production pollutes less today because manufacturing output has declined, when in fact output was 30 percent greater in 2008 than in 1990. Others argue that manufacturing has shifted towards cleaner, high-tech products, or that the manufacturing of ‘dirty’ products like steel has moved to China, Mexico, or other foreign countries,” Walker said. “Our analysis showed that changes in the product-mix of U.S. manufacturing do not explain much of the reduction in emissions—instead, manufacturers are producing the same types of goods, but they’ve taken significant steps to clean up their production processes.”
Cleaner technology
Walker co-author Joseph Shapiro, an associate professor of agriculture and resource economics, analyzed newly available data on over 1,400 different products produced by U.S. plants between 1990 and 2008. They combined this with plant-level pollution emissions data over the same period. The authors then categorized reductions in overall emissions into those that can be explained by changes in manufacturing output, changes in the types of goods produced, or changes in production technologies. The researchers found that most of the decreases in emissions of important pollutants from manufacturing—such as nitrogen oxides, sulfur dioxide, and carbon monoxide—came from changes in production technologies.
Assoc. Prof. Joseph Shapiro
“In the 1960s and 1970s, people worried that Los Angeles, New York, and other U.S. cities would have unbearable air pollution levels by the end of the 20th century,” said Shapiro. “Instead, air pollution levels have plummeted, and the evidence shows that environmental regulation and the associated cleanup of production processes have played important roles in those steep declines.”
Regulations drive change
The researchers sought to identify the key driver of the change in production technology. They quantified the importance of reductions in tariffs and other trade costs, improved productivity, and environmental regulation in explaining decreases in air pollution emissions. Then they showed that the stringency of environmental regulation for manufacturing firms nearly doubled between 1990 and 2008. The researchers demonstrate that this increase in regulatory stringency—rather than improvements in manufacturing productivity or trade exposure—accounted for most of the decreases in pollution emissions.
The study was funded in part by grants from the National Science Foundation and the U.S. Department of Energy. Shapiro conducted much of the research in his former position at Yale University.
Research by Berkeley Haas Asst. Prof. Juliana Schroeder finds the simple act of shaking hands can be a powerful expression of cooperative purpose.
Like any ritual, a handshake may seem like a bizarre gesture when you really stop to consider it. “Why do we touch hands and move them up and down?” says Juliana Schroeder, an assistant professor in the Berkeley Haas Management of Organizations Group. “If you were an alien coming to earth and looking at what people do, you would think, ‘What is the purpose of this thing?’”
In new research set to be published in the Journal of Personality and Social Psychology, Schroeder has found a profound effect to the simple ritual: Shaking hands can improve the outcome of negotiations for both sides. “When you shake hands with someone, you make an immediate inference that ‘They are going to cooperate with me; they are not going to do me harm,’” she says. “And so you decide to cooperate with them.”
Why do we shake hands?
As far as Schroeder has been able to determine, handshaking has two origin stories. Some believe that it was a way for people in ancient times to show that they weren’t carrying weapons—even going so far as to pump hands up and down to dislodge any hidden knives up their sleeves. Another theory is that it was to seal a promise or an oath. “Both of these things are related to the idea of trustworthiness and cooperation,” Schroeder says. “The gesture cements an understanding we have between us.”
Schroeder has long examined the effect that rituals play in our psychology, looking for example, on how daily rituals around eating can cut calories, or how rituals performed before public speaking can decrease anxiety. In her study, co-written with Jane Risen of the University of Chicago’s Booth Business School and Franscesca Gino and Michael Norton of Harvard Business School, the researchers tested how handshakes changed negotiations in a series of experiments involving classic negotiation games. In one game, for example, two participants negotiated over a car, considering six aspects including price, color, and model. Each participant had different goals in the negotiation, some of which were aligned and some of which weren’t, and they scored points based on how many of their goals they met. Participants were not prompted to shake hands, but researchers noticed that when partners decided of their accord to start their negotiations with a handshake, both ended up scoring more points overall.
Talking more, lying less
That doesn’t necessarily mean that shaking hands produced that outcome. “Maybe handshaking people are just nicer, more conscientious people who tend to be more cooperative,” Schroeder says. In order to test cause and effect, she and her colleagues set up a new negotiation over a job offer, this time encouraging some partners to shake hands before negotiating while sitting others down right away before they had the chance to shake. Once again, those who shook hands reached greater agreement and scored more points. Moreover, the researchers videotaped the exchange, and observers scored how cooperative the two negotiators were. Not only did they score more points, but the pairs that shook hands also lied less, tended to talk more after the negotiation was over, and even leaned closer to each other while talking.
In another experiment, handshaking even seemed to make a difference in zero-sum negotiations in which one side had to lose in order for the other side to win. In that experiment, involving a real estate transaction, the “seller” had the opportunity to withhold crucial information from the buyer that would drive up the price. When the participants shook hands beforehand, however, the seller was more likely to be honest and divulge that information, even if it meant they achieved a lower price overall. “People say they felt less comfortable lying to their partner when they shook hands,” says Schroeder.
Psychological effect
In explaining why handshaking has such an effect on negotiations, Schroeder believes that it goes beyond the physical act of touching and moving together: the ritualistic gesture has a psychological effect, she says. “It changes the way you perceive not just the other person, but the way you frame the whole game,” she says. “You say to yourself, ‘Now we are in a cooperative setting rather than an antagonistic one.’”
Signaling goodwill
In fact, another experiment demonstrated that the power of handshaking is less tied to the specific physical gesture than the meaning we’ve attributed to it. The researchers instructed some participants to not shake hands, and instead to tell their partner that they were sick and didn’t want to infect them. Others were instructed to shake and later tell their partner about their germy hands. In that case, the results were completely reversed, with those who didn’t shake hands achieving a more cooperative settlement. “The same physical behavior takes on a totally different meaning,” Schroeder says. “It’s not so much the physical act, it’s more about thinking this person is behaving in a cooperative way.”
For those entering negotiations in a business context, a handshake can be a surprisingly easy way to demonstrate that spirit of cooperation, perhaps leading to a better, fairer deal for both sides. That makes it all the more surprising that in the researchers’ first experiment—in which participants decided on their own, without prompting, whether to shake hands or not—only 30 percent of them did so. “It’s a seemingly small gesture that influences negotiations,” Schroeder says. “Engaging in the everyday ritual of handshaking can improve cooperative outcomes.”
The article, co-written with Jessica Kennedy of Vanderbilt University, explores the challenges that women face in rising through the ranks and achieving equal pay. Kray and Kennedy contend that the stereotype of women as innately poor advocates for themselves distracts from the fact that women possess unique advantages as negotiators. In fact, Kray’s past research has shown that women tend to be both more cooperative and more ethical than men in negotiations. The article presents practical strategies for managers and negotiators of both genders to close existing performance gaps.
“Only when women are given the credit they deserve will we bridge the gender divide,” they write.
The article was selected by a committee from the Academy of Management’s Organizational Behavior (OB) Division. “[Kray’s research] shines a light on a very timely topic as the conversation around women is changing in many parts of the world. Moreover, it represents one of the few articles that attempt to arm organizations with solutions to the challenges around a perceived gender gap. Rather than focusing on how men and women are different (and how one should be more like the other to fit a situation), it focuses on how we may want to change how we look at certain practices or competencies. That is, it advocates to change the practice rather than change the person,” the judges wrote.
Kray and Kennedy will accept the award at the Academy of Management Conference in Chicago on August 11.
As part of California Management Review’s 60th anniversary special issue, Kray’s research was featured alongside six other contributions from Berkeley Haas faculty authors. Other articles included research on personnel selection by Prof. Don Moore, language as a window into culture by Assoc. Prof. Sameer Srivastava, overclaiming by Asst. Prof. Juliana Schroeder, cross-sector careers by Adj. Prof. Nora Silver, and sustainability at Patagonia by Robert Strand, executive director of the Center for Responsible Business.
In a famous psychological study performed 20 years ago, researchers gave two groups of participants a trivia test. Beforehand, they asked members of the first group to imagine what their daily lives would be like if they were a “professor”; they asked a second group to imagine their lives as a “soccer hooligan.” Amazingly, the first group scored 13 percent higher on the test.
“That’s a huge effect,” says Haas doctoral candidate Michael O’Donnell, who says the study also had a huge effect on the field of psychology. Cited more than 800 times to date, the study helped establish the concept of behavioral priming, the theory that people’s behavior can be influenced by subtle suggestions. “For psychologists, it’s seductive to think that we can address these weighty issues through simple manipulations,” says O’Donnell, PhD 2019.
Turns out, you can’t make yourself smarter by imagining you’re a professor.
Seductive maybe, but in this particular case, it turns out not to be true. Working with Haas Prof. Leif Nelson, O’Donnell recently ran an exhaustive experiment to try and replicate the “professor priming” study. Their effort—one of the first to answer a call from the Association for Psychological Science for systematic replication studies—involved 23 labs and more than 4,400 participants around the world.
Depending on the lab, the “professor” group scored anywhere from 4.99 percent higher to 4.24 lower on the test. On average, they scored just 0.14 percent better—essentially, a statistically insignificant result. “It was 1/100th the size of the original effect,” O’Donnell says. “That’s pretty strong evidence there was no effect.”
Crisis of conscience
Over the past eight years, the field of social psychology has been undergoing something of a crisis of conscience, sparked by the work of Nelson and other skeptics who began calling into question research results that seemed too good to be true. It’s grown into a full-blown movement—which Nelson and co-authors Joseph Simmons and Uri Simonsohn of Wharton refer to as “Psychology’s Renaissance” in a new paper in Annual Review of Psychology. Researchers are systematically re-visiting bedrock findings, examining new research under new standards, and establishing new methodologies for how research is conducted and validated.
Nelson says he started to suspect something was amiss in social psychology about a decade ago, during weekly meetings he organized with colleagues to discuss scientific journals. “I had noticed that more and more of the comments seemed to boil down to something like, ‘this just does not sound possible…’ A challenge of plausibility is a challenge of truth, and I started to feel as though there wasn’t enough truth in what we were reading.”
P-hacking
Leif Nelson
In 2011, Nelson joined with Simmons and Simonsohn to publish “False-Positive Psychology,” which identified and pinned the blame on certain practices they dubbed “P-hacking.” The term refers to the P-value, a calculation which researchers use to determine a study’s validity. A P-value of less than 5 percent is the gold standard—meaning the probability that the results were due to pure chance rather than experimental conditions is less than 5 percent. In analyzing papers, Nelson noticed that many of them had P-values just a hair under that limit, implying that researchers were slicing and dicing their data and squeaking in under the wire with publishers. For example, a wildly outlying data point might be seen as a glitch and tossed—a practice accepted as “researchers degree of freedom”.
“Basically, P-hacking references a set of often well-intentioned behaviors that lead to the selective reporting of results,” Nelson says. “If scientists report selectively, then they will tend to select only those results that will look most positive.”
These were practices that everybody knew about but rarely confessed. Haas Prof. Don Moore compares the 2011 paper to the child in the story “The Emperor’s New Clothes.” “Nelson’s paper changed the world of social science research,” he says. “After he had the courage to speak the truth, people couldn’t ignore it any more. Everyone knew that everyone else knew, and the emperor had been exposed as naked.”
The replication challenge
Taking up the challenge, other researchers attempted to reproduce the findings of a number of suspect studies, and in many cases, were unable to do so. Most famously, Simmons and Simonsohn called into question a small 2010 study co-authored by Dana Carney and Andy Yap, then of Columbia University, and Amy Cuddy, then of Harvard, which found that holding “power poses” could increase risk taking, increase testosterone levels, and lower cortisol levels. The study had involved a sample size of just 42 people, but power posing had become a pop-culture phenomenon after Cuddy created a TED talk that garnered 64 million views.
Lead author Carney—now an associate professor at Haas—joined the skeptics, serving as a reviewer on failed replication attempts, and as evidence mounted, publicly disavowing the findings. In 2016, she posted a statement detailing the problems in the original work, including several points where P-hacking had occurred.
Not surprisingly, the battle over validity in this and other cases got heated. The effort by the Association for Psychological Science aims to cool down the vitriol through comprehensive Registered Replication Reports (RRRs). For each RRR, the original author participates in approving the protocol for the study, which is registered beforehand, and then performed by dozens of labs, all of whom have their results peer-reviewed.
“An operational definition of scientific truth is that if you follow an identical procedure you expect to observe the same result,” says Nelson. “Running replications helps the field keep track of that goal.”
More transparency
The replication movement now extends far beyond psychology across a wide range of disciplines—for example, in a recent Nature article, “How to Make Replication the Norm,” Haas Prof. Paul Gertler made recommendations on how to lower barriers for replication studies in economics research.
For the “professor priming” study, O’Donnell worked with the original author, Dutch psychologist Ap Dijksterhuis, who accepted the results. “Science is supposed to be constantly updating our views and testing things, but in practice it doesn’t always work like that,” says O’Donnell. “I hope something like this will contribute to the process of updating, and encourage the kind of skepticism we are supposed to have.”
Nelson and his co-authors strike a hopeful note in “Psychology’s Renaissance,” concluding that the new scientific practices have dramatically improved their field. They argue for even more transparency, including that researchers pre-register their hypotheses and subject their methods to peer-review before they run their experiments—something that Moore has also been outspoken about. That way, once the data come in, psychologists can be confident about their validity.
California was founded on the most environmentally destructive industry of the era: hydraulic gold mining. Meanwhile, loggers sought their own gold by harvesting the state’s ancient redwoods and sequoias. And oil companies struck black gold in rich on- and off-shore drilling sites.
Yet despite these powerful economic incentives to plunder the Golden State’s resources, California became the nation’s environmental leader—going out ahead to protect vast swaths of wilderness and coastline, adopt stringent emissions and energy efficiency standards, and enact the country’s most ambitious climate change regulation. It also became the richest state in the union.
“Things could just as easily have not turned out so well: the state could have been a paradise lost,” says Berkeley Haas Prof. Emeritus David Vogel.
In his new book, California Greenin’: How the Golden State Became an Environmental Leader, released this month by Princeton University Press, Vogel set out to answer a key question: “Why California? What is it about this state in particular that made it such an important regulatory innovator over so many years, in so many areas?”
A remarkable success story
His detailed account of the forces and feuds that shaped California’s environmental history is the first comprehensive look at California’s environmental leadership. It is, on balance, a remarkable success story. “California has often been on the verge of ecological, as well as economic, catastrophe, but it’s been resilient,” says Vogel. “Its environmental performance has been uneven and there are gaps, but California proves that you can combine environmental protection and economic growth.”
Prof. Emeritus David Vogel
Vogel, an expert in international environmental regulation who has held a joint appointment at the Political Science Department and Haas, coined the term “the California effect” more than two decades ago to contrast with the regulatory race-to-the-bottom known as “the Delaware effect.” Vogel had noticed that other states and even countries had upped their environmental standards to meet trading partners’ requirements. For example, Germany had strengthened its auto emissions rules so that it could continue to export cars to California—its most important U.S. market.
Surprising business support
Though he had written extensively about the state’s regulatory history, Vogel said he was in for some surprises when he began delving more deeply into the reasons behind California’s green streak. Environmental wins are often cast as a triumph of citizens and regulators over business interests. But while grassroots and government forces have played a huge part in pushing for regulatory breakthroughs in the state, business support has been critical, he found.
“One of the things that was most striking to me was the importance of a politically divided business community, and how often some influential businesses found that they could benefit by protecting the state’s environmental quality,” says Vogel, the Soloman P. Lee Professor Emeritus of Business Ethics. “Without business backing, California regulatory laws would, without a doubt, be much weaker.”
In fact, one of the first victories for the state’s environment was the result of the rising power of the agricultural industry, rather than environmental activism. Hydraulic gold miners had choked the major waterways flowing from the Sierra with billions of cubic yards of debris. (At one point the Yuba River flowed 60 feet higher than in its pre-Gold Rush days, Vogel notes.) Sacramento Valley farmers, plagued by recurring flooding, sued the mining companies and ultimately won an 1884 ban on hydraulic mining—the first important environmental ruling issued by a federal court.
Wilderness allies
Yosemite and the Sierra’s sequoias also had powerful business allies, Vogel points out. The Southern Pacific Railway and the Central American Steamship Transit Company recognized their value as tourist attractions. Thanks to the support of the steamship firms, Yosemite Valley and the Mariposa Grove became the country’s first federally protected wilderness in 1864, while lobbyists for the Southern Pacific played a critical role in persuading the federal government to expand the size of national parks in the Sierras.
Another example: As its infamous smog threatened to obscure Los Angeles’ glamour, the real estate community helped lead the fight for pollution controls. From the 1940s to the 1960s, L.A. led the nation in its research and enforcement against air pollution; in 1964, California passed the world’s first emissions standards for motor vehicle pollutants.
That led to the most influential example of the “California effect”. In a 1967 victory supported by an array of business interests, California won out over the Detroit auto industry and gained the right to enact its own automotive emission regulations, stricter than the federal government’s. After other states were given the option of adopting either EPA standards or California standards, thirteen states, plus the District of Columbia, followed California’s lead, representing one-third of the U.S. car market. Nine other states later followed California’s zero emissions rules. In 2012, California’s tailpipe greenhouse gas emissions rules became the basis for the Obama Administration’s new national rules—rules that are now under attack by the Trump administration.
Creating new markets
Vogel devotes chapters to efforts to protect the land, the coast, water resources, and air quality, as well as improve energy efficiency and fight climate change. He also details the extent to which regulation has benefited business, even opening up entirely new industries. As he noted in a recent op-ed, “How California turned green into gold,” more than 200 individual firms and business associations backed the 2006 Global Warming Solutions Act, including Silicon Valley venture capitalists who had invested $2 billion in clean technology.
California is now the nation’s leader in solar energy, with half the country’s rooftop installations and a quarter of its jobs, and in electric vehicle adoption, with 200,000 EVs on the road‚ not to mention Tesla headquarters and other manufacturing facilities. Energy efficiency standards for homes and appliances have kept per-person energy use nearly flat in the state over the past 30 years, while it’s risen nearly 75 percent nationwide.
Vogel, who has lived in California since 1973 and dedicates the book to his twin native Californian grandsons, says the research was a personal eye-opener. “I wasn’t aware of the extent to which so much of what we now take for granted as California’s natural beauty is only here for us to enjoy because of those who backed stronger environmental regulations. We owe those firms and activists an enormous debt.”
Continued threats
He ultimately concludes that in addition to its geography, it was these repeated and high-profile threats to its beauty that set California on its path of environmental leadership. “A lot of other places in the world have beautiful and fragile environments, but few places were threatened so continuously by resource extraction and rapid economic and population growth—which would have destroyed all the things people loved about it,” he says.
Big challenges remain, he acknowledges, especially in transportation and water efficiency. Yet as the Trump administration roles back federal environmental regulations, California is more important than ever as a model for how states can lead the way on protecting their natural resources, he says.
David Vogel will discuss “California Greenin’” at 7pm, May 10, at Books Inc., 1491 Shattuck Ave, Berkeley.
Assoc. Prof. Jonathan Kolstad has received the top award from the American Society of Health Economists for researchers under age 40 who have made the most significant contributions to the field of health economics.
He shares the 2018 ASHEcon Medal with his collaborator, Assoc. Prof. Benjamin Handel of Berkeley’s Economics Department.
Kolstad said he’s honored to be recognized, relatively early in his career, for a larger contribution than just one paper, and for an ongoing collaboration.
“The fact that this was given jointly to Ben Handel and myself reflects an appreciation for some of the new avenues we’ve taken in health economics,” he said. “Much of our joint work has brought new data to bear on old problems that have really different implications when you get into how people actually behave, not just how we assume they behave. ”
Drawing on big data and behavioral economics
Kolstad’s research focuses on the intersection of health economics and public economics, and his work with Handel has also combined approaches from industrial organizations as well as behavioral economics. Their interdisciplinary, cross-departmental collaboration reflects the strength of health economics at UC Berkeley.
“We are very happy to have (Kolstad) at Haas, and we’re pleased by how he is helping to build interest in healthcare economics at Haas and across the Berkeley campus,” said Prof. Candi Yano, associate dean for academic affairs and chair of the faculty.
Recently, Kolstad and Handel have been working with a massive trove of health data on the entire population of the State of Utah over a long time period. The richness of the data has allowed them to analyze the different outcomes from different health insurers and health plans.
“We’re finding very large effects and big differences,” Kolstad said. “Simply changing insurers at the same employer—something most people encounter with some frequency—has huge effects not only on how much is spent on your health care, but also on how your healthcare is delivered.”
The researchers are now looking at what employers look for in choosing insurers and health plans, to answer the question of whether competition actually leads to “productive innovation”—i.e, improving care and lowering costs.
Data partnerships
Assoc. Prof. Benjamin Handel, Berkeley Economics
Kolstad and Handel are also working on partnerships with a number of private companies, from digital health to employers and health care providers, to leverage their data for new research. “This is a particularly exciting area,” he says. “Collaboration between academics and private firms, particularly technology companies, is driving a lot of new findings. We hope to make similar strides on big health care questions.”
Since arriving at Haas from Wharton in 2015, Kolstad has brought his expertise with big data into the MBA curriculum, including developing a new “Big Data and Better Decisions” course that he co-taught with Prof. Paul Gertler this spring. Earlier this year, he was honored as a “40 Under 40” business leader by the San Francisco Business Times for his work as a cutting edge researcher, teacher, and entrepreneur. He founded a startup, Picwell, which now provides more than 1 million personalized insurance recommendations per year.
He said he’s excited by the practical applications of his academic work. “We all deal with our health, and the policies and products in the industry affect our everyday lives. The recognition for this work and its importance to the field will hopefully continue to push health economics more in this direction.”
A small number of scientists stand at the top of their fields, commanding the lion’s share of research funding, awards, citations, and prestigious academic appointments. But are they better and smarter than their peers? Or is this a classic example of success breeding success—a phenomenon known as the “Matthew effect”?
Asst. Prof. Mathijs De Vaan
Mathijs De Vaan, an assistant professor in the Haas Management of Organizations Group, believes it’s clearly the latter. In a paper published this week in Proceedings of the National Academy of Sciences, “The Matthew Effect in Science Funding,” De Vaan presents the results of a study of Dutch research grants that shows precisely how much of an advantage early achievement confers, and identifies the reasons behind the boost. De Vaan, who came to Haas in 2015 after earning a PhD in sociology from Columbia University, co-authored the paper with Thijs Bol of the University of Amsterdam and Arnout van de Rijt of Utrecht University.
“To those who have, more will be given”
The term “Matthew effect” was coined by sociologist Robert Merton in the 1960s to describe how eminent scientists get more recognition for their work than less-well-known researchers—the reference is to the New Testament parable that, to those who have, more will be given. Previous attempts to study this phenomenon have yielded inconclusive results, in part because it is hard to prove that differences in achievement don’t reflect differences in work quality.
To get around the quality question, De Vaan and his co-authors took advantage of special features of the main science funding organization in the Netherlands, IRIS, which awards grants based on a point system. Everyone whose application scores above the point threshold gets money, while everyone below is left out. The authors zeroed in on researchers who came in just above and just below the funding threshold, assuming that, for practical purposes, their applications were equal in quality.
First off, they found the benefits of winning an early-career grant were enormous. Recent PhDs who scored just above the funding threshold later received more than twice as much research money as their counterparts who scored immediately below the threshold. The winners also had a 47 percent greater chance of eventually landing a full professorship. “Even though the differences between individuals were virtually zero, over time a giant gap in success became evident,” De Vaan notes.
Status and participation
De Vaan says that two main mechanisms may explain the Matthew effect in science funding. First, winners achieve status that can tilt the playing field in their direction when it comes to funding, awards, and job opportunities. The second is participation, meaning that successful applicants continue seeking grant money, while unsuccessful applicants often give up, withdrawing from future competition.
De Vaan and his coauthors argue that the Matthew effect erodes the quality of scientific research because projects tend to get funded based on an applicant’s status, not merit. Groundbreaking work may not get done because the researchers are unknown or too discouraged to compete for funds. They recommend several reforms to the funding process, including limiting information grant application reviewers have about previous awards. They also suggest that rejected applicants learn their scores, which might encourage those just below the threshold to try again.
These findings may apply in many areas beyond science. For example, the Matthew effect may also widen a gulf between winning and losing entrepreneurs in the race for venture capital. Even the Academy Awards may favor big movie industry names over lesser-known talent. “There are a lot of social settings with large amounts of inequality, which could be ripe for the study of the Matthew effect,” De Vaan stresses.
As an undergrad at Berkeley, Ori Brafman had been many things—a peace and conflict studies major, anti-war protestor, and vegan activist whose McVegan campaign had taken on McDonald’s and won. The last place he thought he’d find himself a decade later was in the office of a 4-star army general. “At the time, I had no idea what a 4-star general was,” admits Brafman, BA 97, a Berkeley Haas lecturer who teaches improvisational leadership in the MBA and undergraduate programs. “My first question was, ‘Is there a 5-star general?’”
Yet, that meeting in 2009 with Former Chairman of the Joint Chiefs of Staff Martin Dempsy would lead to an unlikely collaboration examining just how much the definition of leadership has changed in the era between the Twin Towers attack and the rise of “fake news.” Their ongoing conversation has culminated in the publication of a new book, Radical Inclusion: What the Post-9/11 World Should Have Taught Us About Leadership.
The economic case for inclusion
The book makes the case that in military bunkers and corporate boardrooms alike, leadership today means bringing everyone into the fold.
“Typically we look at inclusion as something that’s nice to have from a psychological perspective,” Brafman says. But he and Dempsey argue that including everyone in a way that gives them stake in decision-making makes economic sense as well. Members of an organization who don’t feel a sense of buy-in will be a drag on productivity, or jump ship altogether, costing time and energy in finding their replacements. “From an economic perspective, you are actually paying a cost for control. You need to ask yourself if you could achieve the results through inclusion in a more economically efficient way,” Brafman says.
At the same time, inclusion is vital to communication, for leaders to both receive and transmit essential truths. “You need inclusion to get better information from the edges of the network and also to be able to analyze that data. And you need enough different people around you, so you are not surprised by a piece of data when it comes in,” Brafman says.
Radical inclusion lessons from Burning Man
Dempsey contacted Brafman after the publication of his first book, the Starfish and the Spider, which argues for the effectiveness of distributed networks over top-down hierarchy. A New York Times bestseller, the book resonated with everyone from Greenpeace to the Tea Party. It also struck a chord in the military, which had been struggling to diffuse authority in order to counter the threat posed by distributed terrorist networks in the wake of 9/11.
In their first meeting, Brafman showed the general slides from Burning Man, the famously hedonistic annual gathering of artists and iconoclasts in the Nevada desert. The power of the event, Brafman insisted, came from the fact that everyone is welcomed—and everyone is encouraged to participate—creating an intimate sense of shared purpose among diverse individuals which enables them to create a successful gathering in the harshest of conditions.
As Brafman began talking to Dempsey, however, he realized that he had just as much to learn from the Army’s strengths in this same area. “A big part of their sauce is that they engender a sense of belonging,” he says. That sense of belonging is the first key to inclusion, the authors write. “The most important responsibility of leaders—no matter how busy they are and how many other priorities demand their attention—is to make their people feel like they belong.” The way to do that, they continue, is to devote time into building shared memories—whether it’s a kind word in the hallway or on the battlefield, or an unexpected phone call or visit—that makes people feel like they are valued participants whose work matters to the organization.
Amplifying voices
Beyond making employees feel included, Brafman and Dempsey say, leaders must also communicate both inside and outside the organization in an inclusive way. In a world of distributed information, organizations can no longer count on persuading audiences with facts alone. As organizations compete with viral videos and “fake news,” they must also create the best story. “As a leader you are responsible for creating a narrative of the organization both internally and externally,” says Brafman. “Then your job becomes how do I create a sense of ownership and involvement with that narrative.”
Brafman and Dempsey further distill their own message into six leadership lessons, such as “Co-Create Context” and “Relinquish Control,” which help to apply the principles of inclusion to create a successful organization. “If you are saying I need to control my people, then you might have control, but you are not going to win in this market,” Brafman says. “Right now, listening and amplifying voices and winning the competition of narratives is much more important.”
Despite tough banking rules put in place after last decade’s housing crash, the mortgage market again faces the risk of a meltdown that could endanger the U.S. economy, warn two Berkeley Haas professors in a paper co-authored by Federal Reserve economists. The threat reflects a boom in nonbank mortgage companies, a category of independent lenders that are more lightly regulated and more financially fragile than banks—and which now originate half of all US home mortgages.
“If these firms go out of business, the mortgage market shuts down, and that has dire Implications for the overall health of the economy,” says Richard Stanton, professor of finance and Kingsford Capital Management Chair in Business at Haas. Stanton authored the Brookings paper, “Liquidity Crises in the Mortgage Market,” with Nancy Wallace, the Lisle and Roslyn Payne Chair in Real Estate Capital Markets and chair of the Haas Real Estate Group. You Suk Kim, Steven M. Laufer, and Karen Pence of the Federal Reserve Board were coauthors.
Bank regulation fueled boom in nonbank lenders
Prof. Richard Stanton
During the housing bust, nonbank lenders failed in droves as home prices fell and borrowers stopped making payments, fueling a wider financial crisis. Yet when banks dramatically cut back home loans after the crisis, it was nonbank mortgage companies that stepped into the breach. Now, nonbanks are a larger force in residential lending than ever. In 2016, they accounted for half of all mortgages, up from 20 percent in 2007, the Brookings Institution paper notes. Their share of mortgages with explicit government backing is even higher: nonbanks originate about 75 percent of loans guaranteed by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).
Nonbank lenders are regulated by a patchwork of state and federal agencies that lack the resources to watch over them adequately, so risk can easily build up without a check. While the Federal Reserve lends money to banks in a pinch, it does not do the same for independent mortgage companies.
Scant access to cash
Prof. Nancy Wallace
In stark contrast with banks, independent mortgage companies have little capital of their own and scant access to cash in an emergency. They have come to rely on a type of short-term funding known as warehouse lines of credit, usually provided by larger commercial and investments banks. It’s a murky area since most nonbank lenders are private companies which are not required to disclose their financial structures, so Stanton and Wallace’s paper provides the first public tabulation of the scale of this warehouse lending. They calculated that there was a $34 billion commitment on warehouse loans at the end of 2016, up from $17 billion at the end of 2013. That translates to about $1 trillion in short-term “warehouse loans” funded over the course of a year.
If rising interest rates were to choke off the mortgage refinance market, if an economic slowdown prompted more homeowners to default, or if the banks that extend credit to mortgage lenders cut them off, many of these companies would find themselves in trouble with no way out. “There is great fragility. These lenders could disappear from the map,” Stanton notes.
Risk to taxpayers
The ripple effects of a market collapse would be severe, and taxpayers would potentially be on the hook for losses posted by failed mortgage companies. In addition to loans backed by the FHA or VA, the government is exposed through Ginnie Mae, the federal agency that provides payment guarantees when mortgages are pooled and sold as securities to investors. The mortgage companies are supposed to bear the losses if these securitized loans go bad. But if those companies go under, the government “will probably bear the majority of the increased credit and operational losses,” the paper concludes. Ginnie Mae is especially vulnerable because almost 60 percent of the dollar volume of the mortgages it guarantees comes from nonbank lenders.
Vulnerable communities would be hit hardest. In 2016, nonbank lenders made 64 percent of the home loans extended to black and Latino borrowers, and 58 percent of the mortgages to homeowners living in low- or moderate-income tracts, the paper reports.
The authors emphasize that they hope their paper raises awareness of the risks posed by the growth of the nonbank sector. Most of the policy discussion on preventing another housing crash has focused on supervision of banks and other deposit-taking institutions. “Less thought is being given, in the housing finance reform discussions and elsewhere, to the question of whether it is wise to concentrate so much risk in a sector with such little capacity to bear it,” the paper concludes.
Stanton adds, “We want to make the nonbank side part of the debate.”
Federal Reserve policymakers are among the best informed and most knowledgeable experts on the economy, and their decisions on interest rates are supposed to be based on exhaustive analysis of data. But Ulrike Malmendier, the Edward J. and Mollie Arnold Professor of Finance at Haas, believes something else may also be at work: the personal experiences of inflation that Fed decision makers have had over their lifetimes.
Prof. Ulrike Malmendier
In a working paper coauthored with Stefan Nagel of the University of Chicago and Zhen Yan of the University of Michigan, “The Making of Hawks and Doves,” Malmendier offers evidence that Fed policymakers’ lifetime experiences with rising prices help shape their projections of future inflation, influence their votes on monetary policy, and color the tone of their speeches. If they lived as adults through periods of high inflation, such as the 1970s, they tend to be much more leery of runaway prices than if they came of age during later decades, when inflation was largely under control. In short, lifetime inflation experience is important in determining whether members of the Fed’s policy body, the Federal Open Market Committee (FOMC), are “hawks” or “doves”—that is, whether they emphasize keeping prices in check or also give high priority to fostering economic growth and employment.
“Our central hypothesis is that FOMC members’ voting decisions are influenced by the inflation experiences they have accumulated during their lifetimes,” Malmendier and her coauthors conclude. “When forming beliefs about future inflation, people overweight realizations of past inflation that they have experienced in their lives so far.”
Behavioral economics lens
The study has been hailed as a landmark analysis of the policymaking process using the principles of behavioral economics, a field of study with deep roots at UC Berkeley that takes insights from psychology and has introduced ideas such as irrationality, emotion, and force of habit into economic research. The paper “is the first to provide evidence of the impact of personal experience on the decisions and expectations of central bankers,” economist Daniela Bergmann wrote in Chicago Policy Review.
Malmendier, who holds joint appointments at Haas and in UC Berkeley’s Economics Department, is a rising star in behavioral economics and a past winner of the American Finance Association’s Fisher Black Prize, awarded every second year to a leading finance scholar under 40. Along with Economics Prof. Stefano DellaVigna, Malmendier co-founded the Initiative for Behavioral Economics and Finance at UC Berkeley. In previous work, Malmendier and Nagel have explored other ways personal experience affects economic behavior, such as how willing investors are to take risks. They concluded that appetite for risk in the stock and bond markets depends on how those markets have performed over an investor’s lifetime, challenging the conventional notion that investors act rationally to maximize gains.
Going against the tide
The paper on Fed policymakers also goes against the tide. Standard economic analysis holds that FOMC members’ inflation expectations and votes on policy reflect objective information on how the economy is performing. If that were the case though, each FOMC member would take the same policy position, since all of them have access to the same information. “We’re trying to understand why these experts have very different views,” Malmendier explains. “We think the inflation experience they have had in their lifetimes is an important reason why some people are optimistic and some pessimistic” about rising prices.
In the paper, Malmendier and her coauthors implemented a new model of experience-based learning, which holds that Fed policymakers forecast inflation based on how prices have behaved up to the time of an FOMC meeting. The researchers then applied statistical analysis to economic data to create an econometric model that incorporates lifetime inflation experience to forecast each FOMC member’s voting behavior. They controlled for changing attitudes by age, as well as political party affiliation and academic background in economics (i.e., whether the members held a PhD in the field). When the authors compared their experience-based forecasts with members’ actual voting behavior from March 1951 to January 2014, they found that those with more inflation experience were more likely to have hawkish voting patterns. The effect was striking: An FOMC member had an above-average experience with inflation (according to the experience-based forecast) was one-third more likely to take a hawkish stance that went against the committee majority, and also one-third less likely to take a dovish stance.
Speech analysis
They also looked at whether FOMC members’ attitudes about monetary policy could be detected in their speeches. When they performed a linguistic analysis of FOMC members’ public statements, they found that those with higher experience-based inflation forecasts used more hawkish language. In addition, they were more likely to issue higher inflation projections than internal Fed staff forecasts that had been derived from rigorous data analysis.
The authors’ most striking finding was that FOMC members’ personal experience with inflation is a key determinant of Fed policy. Specifically, the interest rate targets set at FOMC meetings—the Fed’s most important policy decisions—have often strayed from levels suggested by Fed staff and tilted toward the subjective forecasts of FOMC members. Malmendier and her coauthors estimate that, throughout most of the 2000s, the Fed’s interest rate targets would have been 0.50 to 1 percentage point lower if policy had been based exclusively on staff forecasts.
One of the implications of this research is that age matters when choosing Fed policymakers since experience of inflation differs largely according to date of birth. It’s a point The New York Times noted in 2014 when it pointed out that inflation had averaged 3.8 percent during the adult life of Charles Plosser, one of the FOMC’s most prominent hawks, but only 2.5 percent during the adult life of Narayana Kocherlakota, one of its most outspoken doves.
Malmendier’s work suggests that the times a person has lived through may someday be considered in the selection of central bank policymakers. “Our results add a twist to the practical notion that the choice of a policy maker can have a long-lasting impact on policy outcomes,” the paper concludes. “To predict a policy maker’s leanings, it is helpful to look at the person’s prior lifetime experiences.”
When a high-profile disaster occurs—from the BP Deepwater Horizon spill to Pacific Gas & Electric’s San Bruno pipeline explosion—the public scramble for answers and accountability begins. Oftentimes, among the teams of investigators called in from law enforcement and government agencies, you’ll find organizational behavior experts Berkeley Haas Prof. Emeritus Karlene Roberts or Vanderbilt Owen’s Prof. Rangaraj Ramanujam.
Prof. Emeritus Karlene Roberts
That’s because about three decades ago, researchers at Berkeley pioneered a new way to understand man-made disasters, looking beyond human error and technical glitches to the organizational causes of catastrophes. Roberts was one of these trailblazers—her early aha moments came on Navy ships, where she observed a culture and systems that allowed for risky, technical work while minimizing errors.
A new field was born: the study of high reliability, and the practices that “highly reliable organizations” use to avoid disasters before they start. Researchers went on to apply this new lens to the study nuclear power plants, commercial aviation, utilities, the health care system, and other industries.
We sat down with Roberts and Ramanujam to get a better understanding of the field, the special qualities of highly reliable organizations, and the work that has taken them to the aftermath of disasters around the world.
Prof. Rangaraj Ramanujam of Vanderbilt’s Owen School
Q: First off, what is a “highly reliable organization”?
KR: The original definition was an organization that operates in technically demanding conditions and prevents errors that lead to catastrophic consequences. My former Berkeley Haas dean, Ray Miles, once said to me, “High reliability is nothing but good management.” And I’d agree with that in part, but it’s good management in a particular direction. It’s not the same as saying “Our production was much higher this week.” It’s saying, “Our production levels are fine and we did it in a very safe manner.”
RR: There were originally two main features that make an organization highly reliable: It had an extended track record of avoiding errors and adverse outcomes, and it accomplished this despite operating in environments which were extremely challenging and where you’d have expected to see far more errors and adverse outcomes.
Q: How did this field get started?
KR: Accident research, as it was in those years, was mostly about slips, trips and falls. Those are things individuals do, and they’re usually linked to technological issues, such as stairs that weren’t built well, rather than any organizational process. This approach is different from that: if you see a really good thing in the organization going on consistently, then you have to look deep below the surface to see how that happens. You need to look at the individual embedded in the organization. How are pilots able to consistently land on aircraft carriers and rarely crash? That’s where I started off. You have to look into the culture, the decision-making, the communication, the training.
“If you see a really good thing in the organization going on consistently, then you have to look deep below the surface to see how that happens.” —Karlene Roberts
RR: There had been prior work which did look at an organizational approach to accidents, but without a doubt Karlene was one of the pioneers in drawing attention to the exceptional ability of some organizations to be so highly reliable for over such a long period of time.
Expanding the definition of Highly Reliable Organizations
Q: How this definition changed over time?
RR: It continues to evolve and expand. The original focus was on reliability-attaining organizations, whereas it’s pretty clear right now most organizations are seeking reliability without always attaining it. The definition has also expanded beyond preventing major accidents to also include recovering effectively from accidents and shocks. More and more industries face a shrinking public tolerance for error and coming to terms with reliability as an imperative.
BH: Could you give a couple of examples of the most successful HROs, and some that are not?
KR: Commercial aviation, as an industry, has been successful. There have been accidents, yes, but you couldn’t sell airline tickets if planes kept dropping out of the sky. Ranga can speak to the healthcare industry—I think there’s minimal success there.
RR: I would say that healthcare as a whole cannot be characterized as a highly reliable organization, but there are pockets or islands of high reliability for sure. For example, anesthesiology has been ahead of the curve when it comes to minimizing harm from preventable errors. I study patient safety and medical errors, so people sometimes ask me, when they have a family member who is in the hospital for a serious procedure, “What should we do to make sure they are safe?” My answer is, “If you’re very concerned about the risks from a complicated procedure, that’s probably the part that is much better managed from a reliability viewpoint. Be much more alert to the seemingly simple parts of the post-op care such as medication administration and hand-wash compliance.” An especially frequent kind of medical error is the inability of the system to provide the right doses of the right drug to the right patient at the right time. The point here is you could have an organization with some parts that are highly reliable and some that are not. Reliability is highly local.
Q: That doesn’t give me a lot of confidence in the healthcare system. What sets these organizations apart from other organizations? What do they have in common?
Prof. Ramanujam teaching (Vanderbilt Photo / Daniel Dubois)
RR: Actually, healthcare has been one industry that has been especially receptive to new ideas for enhancing reliability, and therefore, patient safety. In fact, the edited volume has an entire chapter about reliability in healthcare. So, the situation in healthcare in the U.S. is much more encouraging now. As for your question about what is different or distinctive about highly reliable organizations, I’d first of all note they have an explicit organizational or team-level commitment to outcomes of reliability, such as safety. The second is they put a lot of emphasis on training and deliberately cultivating practices within teams so that they are continuously aware of the situation around them and very alert to the possibility of risk.
Mindful organizing
Q: One concept that’s highlighted in the book is “mindful organizing.” What is it?
RR: The idea of mindful organizing originated in the work that Karlene did with Karl Weick on board aircraft carriers, in what is a now classic paper in the field called “Collective Mind in Organizations: Heedful Interrelating on Flight Decks.” It’s a very highly cited and widely admired piece about what enables nuclear aircraft carrier operations to be highly reliable. In it, Karl and Karlene pointed to the quality of interactions among team members as an important part of the answer. Later on, Karl Weick and his colleague Kathy Sutcliffe have worked on—she wrote a chapter in our volume—have continued to formally study and refine the idea of mindful organizing. In essence, they have identified five distinct collective practices that constitute mindful organizing: a preoccupation with failure; a reluctance to simplify interpretations; sensitivity to operations—which means a good awareness of who knows what, in real time; commitment to resilience; and deference to expertise, rather than to authority. Karlene’s paper on “heedful interrelating” has a memorable example about deference to expertise.
Deference to expertise over authority
KR: I was just getting used to being aboard ships at the time, so this struck me. On aircraft carriers, planes land very rapidly. Unlike in commercial aviation where planes slow down to land, these guys speed up, because they’re going to get caught by the arresting gear. This pilot was coming in full steam ahead and suddenly the landing was called off. He pulled up and got out. Well, there was a kid on the deck who waved him off because he found a tool left on the deck. This was the lowest-level guy on the deck who called off the landing. What happened next is the air boss, who controls the aviation tower, shouts out over a loudspeaker to get this kid up to the tower quickly. I was thinking, “I’m going to get to witness this kid being drummed out of the Navy.” The 18-year-old shows up in the tower shaking, and I’m trying to be a fly on the wall watching the whole thing. The air boss congratulated him and told him he did a wonderful job, and he rewarded all the kid’s buddies on the deck as well. If that tool had gotten sucked up into an engine, it was going to cause a pretty dramatic accident. The engine could have been destroyed, the plane could have crashed. If the enemy had been near, they would have taken advantage of it.
It was very powerful. I saw that stuff over and over and over again in the time I spent on Navy ships. And until I understood how the organization really worked I was surprised by it. So that is one of the fundamentals that feed into the mindful organizing features: deference to the person who knows what is going on.
The importance of citizenship behaviors
Q: Wow, really interesting. Ranga, you’ve also talked about how the quality of social interactions affects the reliability of the outcomes.
RR: Yes, it takes lots of things for operations to be reliable. Clearly, technology matters a lot, design matters a lot, procedures matter a lot. But the reality is, even the best-designed technology, when put into operation, can produce situations which cannot be anticipated. Therefore, you depend on people to respond collectively rather than as individuals. If all everyone did was just to follow rules and comply with rules, lots of things will go wrong. As systems become more technologically complex, people must consistently go beyond the call of duty. That’s what we call citizenship behaviors, and people are much more likely to do it when they are part of a team because of team cohesion or motivation.
I did a study with a collaborator on patient safety in hospitals and the concept of silence—specifically the silence of nurses. Oftentimes frontline providers observe something that they think is unsafe or potentially harmful, but they choose not to speak because they think they have low status. And their inability to speak up can lead to a very bad outcome. Silence is not passive. This is a voluntary choice. We found that nurses were more likely to choose to remain silent if they feel their manager is unfair, procedurally. In this sense, a safe culture is also a fair culture.
KR: That’s why if I were to list the top predictors of reliability, I would put communication right at the very top of that kind of list. Open communication is extremely important.
RR: It’s communication in two ways. One is voluntary speaking of every individual in the system, and the other is communication within teams or amongst teams. Number two I would say is respectful interactions. I know it sounds very soft or fluffy, but I do really think that the extent to which people are respectful of one another in their interactions goes to the heart of the organization. And third is a clear commitment to reliability. It sounds very obvious, but I think most organizations or leaders take reliability for granted and think of it as something that folks at the lower levels of the operation do.
I know it sounds very soft or fluffy, but I do really think that the extent to which people are respectful of one another in their interactions goes to the heart of the organization. —Rangaraj Ramanujam
Why do we still have so many catastrophes?
Q: If we know these things about creating reliability, and organizations are spending a lot of money on it, why do we still have so many catastrophes?
KR: A simple answer is that people don’t implement all the things we tell them they should implement. I get called in on a lot of accidents, and all I have to do is look at it and say, “There it goes again.”
Q: What’s the “it” there?
KR: Well, it’s a lot of things and the same things over and over. Take PG&E in the San Bruno explosion, for example, there’s a long list: they didn’t have a good understanding of where their pipes were or what condition the pipes were in. Within the company, there was a lack of coordination and thought given to this issue. Then, if you look a little bit broader, they had never thought about or coordinated with the California Highway Patrol. It was rush hour when the accident happened, and they couldn’t get the cops and firetrucks up there quickly.
RR: Another thing is the scale of operations and the technology are getting more and more complex. It’s quite possible that, like the Red Queen says in Through the Looking Glass, that to stay in the same place you need to keep running. The growth and scale in technology is outpacing organizations’ ability to adopt these practices.
And one more important thing is a reality of life in corporate American today, where any efforts towards reliability happens in the context of escalating pressures for profits and speed. Even organizations that are aware of high-reliability principles might be subordinating reliability to profits and speed.
Increasing complexity
Q: Has technology made us safer?
KR: Yes and no.
RR: Exactly. Ultimately, we need a socio-technical system. The social and technical have to work in tandem.
KR: Very frequently they don’t. We have people right now looking at the Oroville Dam. The government report was written by engineers and no one else. But the problem on the face of that dam wasn’t just caused by engineers not taking into consideration weaknesses. The question is, why didn’t they take those things into consideration? I think it’s pretty clear that somehow the incentives weren’t there to do it. Now, they’re focusing on a large number of other dams where the problem may be the same. I’m glad I don’t live at the bottom of any of those dams.
RR: That’s true. I can think of several examples where technology has made things safer. One of the statistics I think doesn’t get as much respect as it should get is the decrease in car fatalities. There are certain models of cars, like Volvo, for example, where the fatalities are near zero for one or two-year periods. The problem is, even if technology is getting safer, that hasn’t stopped people from trying riskier and riskier things. As Karlene said, the challenge is ensuring that the social organization is keeping pace with the technological advances.
KR: It never does.
Beyond highly reliable organizations
Q: You said earlier you wouldn’t necessarily apply most of these principles to a regular organization that is not high risk. But can other organizations benefit from becoming more reliable?
RR: Earlier, Karlene started by talking about her former dean who told her that high reliability is really just good management. And I think that some of that is true, and some of the practices that HRO researchers brought to the surface are really practices or good communication, good coordination, situational awareness and responding to surprises. If you think about it in those general terms, you can see how those practices could enhance not just outcomes like reliability, but also outcomes such as innovation, speed, flexibility. There is some new research that is applying it in that way.
KR: I’d add a caveat that I don’t worry about this stuff in a mom-and-pop grocery store. Frustration or lack of communication is not likely to kill anybody there. We’re talking about organizations where reliability of outcome is really important. It’s an extraordinarily expensive thing for an organization to do, and you wouldn’t be able to put the money into it unless you were getting into very complex organizations.
Prof. Ross Levine has found a new way to encourage businesses to be environmentally friendly: Make it easier for them to borrow.
Research by Levine, the Willis H. Booth Chair in Banking and Finance, is the first to show that when lending conditions ease, businesses invest more in projects to cut pollution. In a new paper published by the National Bureau of Economic Research (NBER), “Bank Liquidity, Credit Supply, and the Environment,” Levine and co-authors from two Hong Kong universities conclude that easier borrowing promotes environmental responsibility in two ways: First, as the supply of credit rises, loans to finance environmental projects become more readily available. Second, as interest rates drop, lower financing costs boost the payoff from green investments.
Professor Ross Levine
“Changes in credit conditions have an impact on the environment,” Levine says. “When a company can borrow more than it could in the past and interest rates fall, the company is more likely to invest in reducing pollution.”
While these expenditures help the environment, companies are not going green merely for the sake of the environment. These investments offer real benefits to the businesses themselves, slashing the fines they pay for pollution, improving the health and productivity of their workers, and burnishing their public reputation.
Surprising results
The link between credit and the environment is largely unexplored territory in the academic literature, exemplifying Levine’s talent for uncovering economic and social connections that are important but not obvious. For example, he has previously studied links between banking deregulation and income inequality.
In his latest work, Levine says he was surprised that easier credit led to more environmental spending because he had assumed business investments in green projects were largely dictated by legal requirements. “I would have bet heavily that firms only invested in pollution abatement in a manner that satisfied minimum regulatory requirements,” he stresses.
Fracking windfalls provide test case
The NBER paper, written jointly with Chen Lin and Zigan Wang of the University of Hong Kong, and Wensi Xie of Chinese University of Hong Kong, investigates how a sudden increase in the amount of money banks have available for lending affects the environmental performance of their business customers. The authors used an ingenious method to isolate the effects of credit: They examined what happened to the environment when banks got a windfall in lendable funds because of the fracking boom.
Fracking developed explosively starting in the early 2000s as the technology to extract natural gas from shale deposits became economically viable. Energy companies began buying mineral leases from landowners in shale areas, and the landowners in turn deposited some of those payments in local banks. This surge of funds rapidly expanded the amount of money those banks had to lend. To see what effect this increase in bank deposits had on the environment, Levine and his co-authors looked at emissions of benzene—a widely used industrial chemical present in exhaust from many industries—and other pollutants in selected counties where banks receiving fracking money were active. They excluded counties where fracking was taking place to avoid having their results affected by economic changes due to gas production itself. Instead, they studied counties that weren’t producing gas, but had branches of banks that received a fracking windfall elsewhere.
The results were dramatic. Benzene levels fell 26 percent in non-gas-producing counties that had the biggest gains in credit availability—due to their banks receiving deposit windfalls in other counties—compared with benzene level changes in the average county. Other toxic pollutants showed similar declines. “After controlling for many factors and influences, including industrial and economic activity in the county, we observe sharp reductions in air pollution in those … non-shale counties,” Levine noted. The authors attribute the environmental improvements to easier credit terms.
EPA records show lower toxic emissions
The authors also analyzed the environmental performance of individual companies that got better credit terms because of the fracking bonanza. They used data on large syndicated loans to identify companies whose main lender recorded a bump in deposits because of shale gas production. The researchers then checked the Environmental Protection Agency records on these borrowers and found they reduced toxic emissions more than similar companies whose main lender did not get a shale windfall. These companies also received higher performance ratings from environmental groups and spoke out more forcefully in public on green issues than the control group.
Levine cautions that his research draws no conclusions about the environmental effects of fracking itself, which has been linked with a range of problems including groundwater contamination, release of greenhouse gases, and greater earthquake risk. Rather, he and his coauthors use fracking as a way to study the effect of easier credit on the environment.
The research on credit and the environment fits in with Levine’s broad interest in the social effects of financial regulation and credit. As a follow-up, he says he wants to explore how borrowing conditions influence worker safety.
Insights from Prof. Jennifer Chatman, Prof. Don Moore, and Distinguished Teaching Fellow Kellie McElhaney
Research has long shown that companies with more women on their senior management teams see above-average financial returns. But with a steady stream of news about workplace sexual harassment, the gender pay gap, and the small percentage of women at the top, it seems the business world has a long way to go in achieving gender equity.
Yet there are many research-proven strategies and practices that organizations can employ to reduce both overt and unconscious bias. For Women’s History Month, we highlight insights from three Berkeley Haas researchers on what organizations can do to reduce gender bias and create fair, equitable, and highly successful workplaces.
Make culture transparent
Political correctness has generally become a term of contempt, used to disparage a culture seen as stifling free expression—as when fired Google engineer James Damore railed against “PC-authoritarians.”
Prof. Jennifer Chatman
So Prof. Jennifer Chatman was surprised when she found, in a 2015 study, that mixed-gender groups who talked about rules of “political correctness” were significantly more creative than those who were simply told to be polite or sensitive.
“We were stunned by the results,” says Chatman, an expert on organizational culture who co-authored the study. “Those exposed to the PC norm had noticeably more divergent, novel, and interesting ideas than any of the other groups.”
Chatman’s study challenged both conventional wisdom and prior research on creativity, which presumes that imaginations flourish when constraints are removed. But in today’s diverse workplaces, uncertainty about how to act in mixed settings may actually inhibit creativity in other areas, the researchers concluded.
“Men are likely to worry about looking overbearing or sexist and fear social disapproval, while women concerned about whether their ideas will be accepted might self-censor,” Chatman says. “Spelling out the rules removes the ambiguity.”
For example, specifically stating that sexist language will not be tolerated reduces uncertainty, the researchers noted. In their experiments, the participants who discussed PC norms said they paid more attention to the words they used and tried to avoid offending other group members. Even with those self-restrictions, their groups came up with more ideas—and more innovative ideas—in a brainstorming session then those not given instructions.
“People can simultaneously be thoughtful, reasonable and respectful, while at the same time being wildly creative,” Chatman says.
To build a culture of respect, companies must clearly articulate their values and expected norms, and also be willing to enforce them, Chatman says.
Make hiring transparent
When the London Symphony Orchestra noticed all their musicians were male, leaders realized gender bias had crept into their hiring. They started asking people to audition behind a screen and barefoot—so they wouldn’t unconsciously be influenced by the click-clack of high heels on the stage.
Prof. Don Moore
“Once they made that decision, they got better musicians and more female representation,” says Prof. Don Moore, an organizational behavior expert who studies decision making, overconfidence, and ethical choice.
Hiring and promoting the most capable people is critical to the success of any organization, yet many still rely on unstructured interviews that vary from person to person and introduce the probability of bias. “We’ve known for decades that interviews are terrible predictors of performance—it’s one of the best-established findings in organizational behavior research—yet somehow the word has not spread,” Moore says.
The simplest solution: Structure interviews so that all candidates are asked the same questions in the same order, and score the responses. Even better: use assessments of intelligence or other relevant skills to rate applicants in a quantifiable way, Moore says.
“It’s possible to get very well-designed tests that have been validated over many years and don’t include factors that we’d rather not consider, such as race, gender, or cultural background,” he says.
What about “fit”?
“I know that people believe they can assess ‘fit’, but when pushed as to what that means, most people have only the vaguest of responses: ‘Well, if I like them,'” Moore says. “But think about where your feelings of liking come from. Is it because the person looks like you? Talks like you? Went to the same schools? Without having a clear definition of ‘fit’ I worry that it opens the door to many prejudices that you don’t want influencing your decision.”
Even though it may be tough to create a perfectly non-biased hiring system, Moore says, “it’s a dream worth reaching for. It will make us better decision makers, it will make us better people, and it will pay dividends.”
Make pay practices transparent
On a national level, progress on closing the gender pay gap has been slow. Yet Gap Inc., proved it’s very much possible to achieve pay equity at the company level.
Adj. Assoc. Prof. Kellie McElhaney
In 2014, Gap became the first Fortune 500 company to conduct a robust analysis and announce that it pays female and male employees equally for equal work, on average, across its global workforce of about 135,000. How did Gap do it? Distinguished Teaching Fellow Kellie McElhaney, founding director of the Berkeley Haas Center for Gender, Equity & Leadership, analyzed the company’s pay equity success in a case study published last July.
Gap has a strong history of strong women: It was co-founded by Doris and Don Fisher, who chipped in 50-50 to open their first store; it’s had senior women at the table from the start; and its workforce is 74 percent female. But that doesn’t mean gender parity was a fait accompli—in fact, female-dominated sectors such as retail, tend to have higher-than-average wage disparities since women tend to be clustered at the bottom, McElhaney notes.
Instead, the company’s equity success was the result of a concerted effort to engage and support women and help them rise through the ranks, through flexible work policies, and a culture that’s collaborative and inclusive. It’s also very much due to an intentional approach to minimize unconscious bias in pay, through transparency, accountability, and statistical analysis—practices other organizations can learn from.
Some best practices to make pay more transparent:
Create pay equity processes grounded in statistical analysis: Gap analyzed pay rates organization-wide and also by comparing comparable positions, grouping jobs based on responsibilities and experience required, and controlling for variables such as geography. Its analysis was validated externally.
Provide managers with data: The company gives managers pay data on their teams annually, including market ranges for each role. It also gives managers resources and discretion to correct pay differences.
Don’t require salary history: Women suffer a career-long wage loss when their salaries are anchored to prior inequities. Gap doesn’t require applicants to provide prior salary information during the initial hiring process (although it’s optional).
Put salary policies in writing: Gap publishes the company’s compensation practices on GapWeb, which all employees can access (they are not privy to specific pay ranges unless their managers share them).
In the case study, Keith White, Gap’s senior vice president of loss prevention, notes, “When operating eyes wide open, and not just treating people as if they are in a vacuum, [gender equality in pay] becomes a non-issue.”
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