Category: Research

The latest research news and insights from the faculty at UC Berkeley’s Haas School of Business

How the “I approve” tagline boosts nasty political ads

| by Laura Counts

I Approve This MessageWith primary season just around the corner, voters will soon start hearing a familiar refrain: “I’m Candidate X, and I approve this message.” Since 2002, federal law has required the tagline on all ads paid for by candidates for federal office.

The aim was to discourage negative campaigning. But newly published Berkeley Haas research shows that it’s actually made attack ads more powerful.

“People tend to be suspicious of political rhetoric—especially negative political rhetoric,” says Assoc. Prof. Clayton Critcher of the Haas Marketing Group. “But we found that the mandatory tagline has an unintended effect: It makes ads attacking an opponent’s policy positions seem more credible.”

Ironic effect

Assoc. Prof. Clayton Critcher

In a series of experiments, Critcher and co-researcher Minah Jung of New York University’s Stern School of Business found that adding the tagline to policy-based attack ads not only makes them more believable, but gives people a more positive view of the candidate who gives the tagline endorsement. Their paper, “How Encouraging Niceness Can Incentivize Nastiness: An Unintended Consequence of Advertising Reform,” was published this month in the Journal of Marketing Research.

“Although we think political consultants are not currently aware of this ironic effect, we clearly know regulators did not mean to help to legitimize negative and often misleading ads,” Critcher said.

As a psychologist who studies judgment and decision making, Critcher had long been curious about whether the ubiquitous taglines had any effect on voters. The “I approve this message” tagline originated with the “Stand by Your Ad” (SBYA) provision of the Bipartisan Campaign Reform Act of 2002, better known as McCain-Feingold.

“John McCain had this great speech from the Senate floor in which he said that candidates wouldn’t approve the trash their campaigns were putting out if they had to put their face on screen and stand behind it,” Critcher said. “We now know that despite the law, there has been no slowdown, and in fact an escalation, in negative political advertising.”

The percentage of negative ads swelled from 29 percent in 2000 to 64 percent in 2012, according to research cited in the paper. A CNN analysis found that in the week before the 2016 presidential election, a full 92 percent of ads were negative. While the rise of SuperPACs explains a lot of the growth in negativity, the candidates own messaging has grown more negative as well.

How do voters respond to “I approve”?

But rather than look at whether the mandatory tagline has encouraged politicians to change their messages, Critcher and Jung wanted to know whether it changes how voters respond to those messages—and if so, why.

Past research has found that negative ads can be more effective than positive ones, but campaigners who go negative face the added hurdle of overcoming voter skepticism. This hurdle is higher with character-based hit pieces, which voters may not see as relevant. Does someone’s affair or tax evasion penalty mean they will be a poor leader? In contrast, attacks on an opponent’s policy positions are clearly relevant to the job, but what undermines them are suspicions of their truthfulness. The researchers suspected the tagline might influence that.

The researchers experimented with real and fictional ads in video, audio, and print formats, conducting four experiments on about 2,000 people recruited from universities and Amazon’s Mechanical Turk. They used ads from Congressional races from 2006 to 2010, as well as fictional ads they created by editing together snippets from real advertisements.

They began by asking about 400 people to watch eight TV ads aired by Democratic and Republican candidates in recent Congressional races. In this set were positive and negative ads from each party focused on candidates’ character and policy record. Crucially, the researchers edited out the tagline on half of the ads each viewer saw.

What they found is that although the tagline did not consistently change people’s reaction to positive ads or ad hominem attacks, the tagline did give a clear boost to the policy-based attack ads. In addition, people had a more favorable view of candidates running negative ads when the tagline was included. The researchers found the same pattern in a second experiment using ads they wrote themselves, which allowed them to more precisely control for the ads’ content.

The effect was substantial: Across all their experiments, the researchers found that the tagline had an even stronger effect than did partisanship. “It may seem intuitive that Democrats and Republicans believe that Democrats and Republicans, respectively, run truer ads. It is remarkable that mandatory
endorsements can have effects that are at least as large,” they wrote in their paper.

Critcher cautioned, however, that the effect may sound exaggerated, because participants were not generally familiar with the candidates in the ads, and most ads, designed for broad appeal, don’t state candidates’ party affiliation. Still, given the closeness by which many races are decided, campaigns invest heavily in turnout operations that have much smaller effects, he noted.

Why the boost?

The researchers were also surprised when they began parsing out why the tagline works. Do voters not realize the tagline is simply required of all ads? Does it confuse them into thinking regulators have vetted the ads’ content?

They ran two more experiments with large sample sizes (639 people and 565 people) and found that even when participants were told the tagline was required by law, and that no regulators had vetted the content’s veracity, they still said the ads that included a tagline were more believable. Participants also were largely unaware of the tagline’s effect: Even those who said that it didn’t influence their evaluation of the ad were indeed influenced by it.

The researchers were able to invent brand new taglines (which they had voice actors deliver), attach them to ads, and tell participants that the law required candidates to deliver the tagline. They observed the same boost to ad credibility.

“We initially thought the boost came from what sounded like an implicit promise of the ads’ truthfulness—with the candidate putting themselves and their credibility on the line by affirming that they ‘approved’ the message,” Critcher said. “That was a factor, but the bigger effect was the fact that the ad had been touched by regulation. That gave a legitimating halo to the message as a whole.”

Critcher and Jung close their paper by considering whether the tagline should be ditched altogether. Although they didn’t find a perfect solution, they did find that a more neutral tagline—one that can’t be confused for an implicit promise of message truth value (e.g., “My name is X, and I am running for Y”) significantly decreased the unintended consequences.

“We hope that by bringing this to light, policymakers might realize this provision is not serving the public good and find a better way,” he said.

 

More research by Clayton Critcher:

Judging moral character: A matter of principle, not good deeds

 

 

 

Truth or consequences? The negative results of concealing who you really are on the job.

 

 

Prof. Aaker’s new book shows the power of story

| by Michael Blanding

In Creating Signature Stories, emeritus marketing professor David Aaker explains why storytelling is essential for brand marketing.

Back in 1984, Zhang Ruimin was promoted to lead a struggling Chinese refrigerator company that would later become Haier. When a customer brought in a defective fridge, he went through an inventory of 400 units to find a replacement; unfortunately, he found that 20 percent of them were also faulty. Zhang promptly ordered all of the defective units to be brought to the factory floor and gave the employees sledgehammers, inviting them to destroy them.

Prof. Emeritus David Aaker's new book explores the power of Signature Stories.
Prof. Emeritus David Aaker

“That dramatic story led to a change in the firm’s quality culture that is a foundation of Haier today,” says David Aaker, emeritus professor of marketing strategy. “Asserting that the firm was going to have a quality-first culture would not be noticed or believed. But the story penetrates.”

Aaker uses that example in his new book, Creating Signature Stories: Strategic Messaging that Energizes, Persuades and Inspires, to show how effective stories can be in creating an organizational culture or managing a brand’s image. “It is so difficult today to cut through the clutter and engage a disinterested and skeptical audience,” Aaker says. “Stories are enormously powerful, and can be much more impactful than facts.”

“Father of modern branding”

Author of 100 articles and 15 books who has been called the “father of modern branding,” Aaker is currently vice chairman of the brand consultancy Prophet. He was inspired to write the book by conversations with his daughter, Jennifer Aaker, a behavioral psychologist at Stanford Graduate School of Business. Stories work, studies have found, because they engage the emotions, allow listeners to deduce the logic for themselves, and are much more difficult to argue against than facts. “There are hundreds of studies that demonstrate the power stories have,” says Aaker.

For businesses, stories can be helpful in engaging both employees and customers. “There is a whole cadre of young employees who will not work for companies they are not proud of,” says Aaker. “If you want to compete for the best people, you need to have a higher purpose, and the way to communicate that is with a story.” At the same time, a small but meaningful subset of customers are looking for authentic engagement with a brand. “Even if this percentage of the market is small, it can still be the difference between making money and losing money.”

Creating a signature story

Creating Signature Stories by David Aaker book coverFor companies looking to find or create a “signature story,” Aaker first recommends they hone the strategic message they are trying to communicate. Then, he suggests that they focus on a protagonist who can exemplify that messages—whether it’s a customer, an employee, a leader, or a product. L.L. Bean company founder Leon L. Bean, for example, had a stitching problem with the first 100 boots he sold that made them less than watertight. He refunded every customer’s money, though it nearly put him out of business. Nordstrom often repeats the story of an employee in Alaska, who—when a customer brought in a pair of tires to return—gave him a full refund even though the store didn’t sell tires.

If a company doesn’t have a ready-made story of their own, they can borrow a story from elsewhere. In the 1990s, incoming Columbia CEO Peter Guber faced a dysfunctional workplace of competing departments. He united them with the story of Lawrence of Arabia, who famously united warring Arab tribes to capture the strategic city of Aqaba. He presented executives with pictures of actor Peter O’Toole playing Lawrence in the eponymous Columbia film, and made “Aqaba” a rallying cry in the company.

Authenticity is key

While there is “no checklist of elements a signature story has to have,” Aaker says it helps if it is intriguing, authentic, and engaging. Generating and testing such stories can take serious investment by companies, some of which have hired editors, videographers, and social media experts, and even chief story officers to make up a storytelling team. After creating a signature story, it can become an art in itself to disseminate it and keep it alive over time. To this day, Haier has a sledgehammer on display at its corporate offices in China.

One of the most effective signature stories that Aaker describes in his book is Lifebuoy soap, which has worked to educate children in developing countries on the importance of handwashing to prevent disease. The company has created a series of videos of parents and children in India as part of its “Help a Child Reach 5” campaign—in one of them, for example, a mother is dancing joyously by a tree. It turns out that the custom in the village is to mark a child’s birthday on the tree, and she was celebrating the fact that her child turned five, in a place where many don’t reach that milestone. “Compare that with any effort to explain why Lifebuoy bar soap was better than others, or even to factually describe the hand-washing program,” Aaker says.

Making the story effective required a real commitment on the part of Lifebuoy, which has set a goal of changing handwashing for 1 billion people by 2020. But that commitment has paid off: to date, the videos have had more than 44 million views. By learning how to tell those kind of authentic and emotionally engaging signature stories, companies can assure that their employees and companies associate them with a higher purpose, creating loyalty to the brand for years to come.

David Aaker will talk more about Signature Stories at his Dean’s Speaker Series at 12:30 pm Tuesday, Feb. 13, in Chou Hall’s Spieker Forum. The paperback goes on sale March 8 (Kindle version now available). 

New case study examines how Haas can sustain its culture

| by Krysten Crawford

During a busy last year as dean, Rich Lyons continues to question the status quo, co-authoring a new case study that takes a candid look at his culture initiative and whether the School’s Defining Leadership Principles will endure.

The study, “The Berkeley Haas School of Business: Codifying, Embedding, and Sustaining Culture,” co-authored with Prof. Jenny Chatman, offers a detailed history of the dean’s initiative, its successes, and the gaps that remain. As all effective cases do, it also asks provocative questions about what will happen when Haas’ chief purpose officer passes the leadership mantle in June 2018.

“The acid test of effective leadership is how well an organization does when a leader is gone,” says Chatman, the Paul J. Cortese Distinguished Professor of Management. “There is some risk that once the champion of the Defining Principles leaves that the principles themselves will evaporate in some way, or at least become less forceful.”

Chatman, an expert on organizational culture, was an early champion of the Defining Principles—now referred to as the Defining Leadership Principles: Question the Status Quo, Confidence without Attitude, Students Always, and Beyond Yourself.

Dean Rich Lyons codified the Defining Leadership Principles
Dean Rich Lyons (Photo: Noah Berger)

“The rudder of the ship”

Keeping the principles going for generations has been top-of-mind for Lyons, who made sure that they were prominent in the job announcement for his replacement.

The Haas School Board, whose input will be important for the selection of the new dean, is one crucial link to future support for the principles. Haas board member Michael Gallagher said that the hiring process will be critical to the dean’s legacy.

“The dean is the rudder of the ship, and if that person comes in and wants to redefine the culture, it would be a grave mistake,” he said. “The dean should be selected on his or her ability to understand, to support, and to have a passion for advancing these Defining Leadership Principles. If that happens, they will be sustainable for a long, long time.”

Prof. Jennifer Chatman
Prof. Jennifer Chatman

The case study grew out of a 2016 lunch meeting between Lyons and Chatman. In addition to being Chatman’s longtime friend and teaching colleague, Lyons had read some of Chatman’s research on culture and developed a deep appreciation for how powerful a tool it can be for organizations.

He was further convinced of culture’s significance after a 20-month stint as the Chief Learning Officer at Goldman Sachs, a position that he left to rejoin Haas as dean in 2008. In recent years, Lyons has been a regular guest speaker on the topic of culture in one of Chatman’s courses in the UC Berkeley Executive Leadership Program.

Chatman says she suggested they co-author the case study because the process behind implementing the culture initiative was ideal for such an analysis, and because she felt that creating an official record of the principles’ development was important to the school’s history and evolution.

The principles’ growing influence

Since 2010, when they were first codified, the Defining Leadership Principles have proven a quantifiable success. About 75 percent of students from all three MBA programs and the undergraduate program cite them as a strong reason for choosing Haas. Similarly, more than 90 percent of alumni surveyed from the past decade said they were familiar with the principles and use them when navigating both their careers and personal lives.

In the MBA programs, the principles influence everything from who is admitted to key elements of the curriculum. For staff, the Annual Outstanding Staff Awards were altered to reflect the principles, among other changes.

While students, staff, and alumni have strongly embraced the principles, faculty acceptance has varied.

“Some of the faculty have always been on board with the principles, and others— including significant skeptics—have come around,” Chatman said. “But I’m still not sure that faculty live by them day to day. Filling in those gaps is, I think, an opportunity for this dean in his final year and for the next dean.”

Perhaps the biggest hurdle for Lyons was how to bring the principles into the faculty’s world, where success is measured by research and teaching—and skepticism is part of the job. As Prof. Steven Tadelis put it, “soft” things like culture, especially 10 years ago, were viewed by some as “fluff and irrelevant.”

Yet Tadelis said that his work experiences with eBay and Amazon helped change his view of the principles. “Before I had that practical wisdom of working at companies, I couldn’t fully grasp the objective of the Defining Principles,” he said. “I now think these are core to being a successful team member in any organization.”

“The kind of people they want to fund”

Feedback from the Berkeley Haas community continues to encourage Lyons that the principles will live on—in part because they have been implicit in the school’s identity for decades.

Stephanie Fujii, former assistant dean of MBA admissions, said over time the fit of the students admitted to Haas increasingly aligned with the principles. Venture capitalists, Lyons said, tell him that “our principles describe the kind of people they want to fund.”

“Recruiters tell me that when they hire for senior positions, it comes down to fit over skills nearly every time,” Lyons added.

Both Lyons and Chatman view the case study as one way to ensure that needed work continues to happen this year and under a new dean. Lyons has already identified 12 “culture champions”—including faculty and staff—who meet regularly to discuss ways to continue the culture-building work.

Lyons and Chatman also plan to follow up with a second case study chronicling what was actually done in Lyons’ final year to further cement the culture.

“Cultures need to change over time; while I don’t feel the four principles should change anytime soon, the specifics of how they impact the way we do our work should change,” said Lyons. “There are a lot of institutions that maintain very strong cultures over many leader successions because organic support is so strong.”

 

A handout or a helping hand? How we judge others guides how we help others

| by Michael Blanding

Asst. Prof. Juliana Schroeder_headshotCharities often emphasize the desperation and dependence of those they assist—as in heart-tugging videos of starving children in Africa. Yet a focus on helplessness may change how we choose to help those in need, and not necessarily for the better, according to research by Berkeley Haas Asst. Prof. Juliana Schroeder.

“Charities want to motivate people to give more, but they may also make people think poor people don’t have the ability to take care of themselves,” says Schroeder, a social psychologist who studies judgment and decision-making as well as interpersonal and intergroup processes. “If you perceive of someone as having less mental capacity to think or feel, then you are subtly degrading and dehumanizing them.”

In a study published in the Journal of Experimental Psychology, Schroeder and co-authors Adam Waytz of Northwestern University and Nicholas Epley of the University of Chicago found that people act more paternalistically towards those they believe have lower mental capacity. What’s more, they found, people often believe they have more mental capacity than do others.

Their findings reveal fundamental truths about how people think about giving and receiving aid. These insights have implications not just for international charity, but also for policies on a wide range of issues, from soda taxes to gun control.

Paternalistic aid_Juliana Schroeder researchPaternalistic aid

Schroeder and her colleagues conducted a series of nine experiments, making a distinction between paternalistic aid, in which givers make a decision about what recipients need, and agentic aid, in which recipients can decide for themselves what they need.

In the first experiment, they asked people to rate their perceptions of poor people in Kenya and Uganda, using an eight-point scale that measured perceived self-control, memory, planning, thoughtfulness, and cognition. They then asked subjects to decide whether they’d rather contribute to a charity called GiveDirectly, a relatively agentic charity which transfers money to poor people with no strings attached, or to a more traditional, paternalistic charity such as the Red Cross, which provides food, medicine, and other services.

They found that those who rated the mental capacity of the African aid recipients more highly were also more likely to choose GiveDirectly, and less likely to believe the recipients would waste the money. “When you think of a person having less self-control and willpower, you think they will make bad decisions and will be more likely to waste the aid,” says Schroeder. “They don’t know what is good for themselves.”

(Schroeder’s study didn’t examine which charity was actually more effective, focusing rather on which charity people thought would be better. However,  a controlled experiment  by Princeton professors Johannes Haushofer and Jeremy Shapiro found no evidence that recipients of GiveDirectly’s unconditional cash transfers waste the money; rather, the cash transfers measurably increase food security and economic and psychological well-being. A group of researchers, including Berkeley’s Michael Walker and Ted Miguel, are currently conducting a larger study on the program.)

Helplessness vs entrepreneurial spirit

Moreover, the researchers found that people’s ideas about aid recipients’ mental capacity could be easily manipulated. In another experiment, they gave more than 500 visitors to Chicago’s Museum of Science and Industry a token representing a dollar, and then asked them to drop it in one of two slots—one for GiveDirectly and the other for OxFam, a more paternalistic global charity that seeks to alleviate poverty.

Beforehand, they gave participants one of two descriptions about charity recipients: one highlighted their drive and entrepreneurial spirit; the other, their neediness and resignation. While overall, 58 percent of participants gave to OxFam versus 42 percent to GiveDirectly, those who were told of the recipients’ pluck were 23 percent more likely to choose GiveDirectly. “Even when the recipient group is exactly the same, the information you give someone about them meaningfully influences their giving behavior,” Schroeder says.

Different rules for ourselves

Schroeder and colleagues also found that when it comes to themselves, however, people tend to prefer a more hands-off approach. In another set of experiments, they presented participants with a series of policies on issues including healthy eating, credit card debt, retirement savings, and gun control. They then asked them whether a paternalistic or agentic policy would be more effective for the average citizen, as well as which policy would be more effective for themselves.

Participants were much more likely to choose the paternalistic policy for others. For example, 35 percent recommended a ban on unhealthy foods over a policy of listing calories in restaurants for others, whereas only 28 percent recommended it for themselves. Likewise, 55 percent recommended mandatory retirement accounts rather than optional accounts for others, versus 39 percent for themselves. A similar 55 percent recommended bans on certain firearms over a gun safety course for others, but only 39 percent for themselves.

Using statistical analysis, the researchers found that the results were largely determined by how people rated others’ mental capacities versus their own. “People are pretty convinced they have a lot of willpower, while others don’t have the same level of self-control,” Schroeder says.

Thinking twice about assumptions

In yet another experiment, however, researchers found this assumption too is changeable. The day before Thanksgiving, the researchers asked participants whether they had high willpower; they then asked a different group of people the same question the day after Thanksgiving—presumably after they’d had one or two extra helpings of turkey and apple pie. The second group not only rated themselves as having lower willpower, but they were also more open to paternalistic policies on healthy eating, both for themselves and others.

Schroeder points to the fact that such perceptions are malleable as a good reason to question how our perceptions of ourselves and others may affect the way we behave. Charities that emphasize the helplessness of aid recipients may unintentionally send a signal they have low mental capacity. “When you dehumanize an individual or a group it can affect how you help them,” Schroeder says.

Meanwhile, those donating to charities or setting policies for fellow citizens may want to think twice about the assumptions they are bringing to their own altruistic impulses, and what is most likely to empower those they seek to help. “People can be more cognizant about the ways they are thinking about their own mental capacity and that of others,” says Schroeder, “and pause to get more information before they start helping.”

More research by Asst. Prof. Juliana Schroeder:

Donald or Hillary? Why listening to them matters to voters.

 

 

 

“Rising Star” award for Asst. Prof. Juliana Schroeder

| by Laura Counts

Juliana SchroederAsst. Prof. Juliana Schroeder_headshot, an assistant professor in the Berkeley Haas Management of Organizations Group, has been honored as a Rising Star by the Association for Psychological Science.

The award is presented to “outstanding psychological scientists in the earliest stages of their research careers post-PhD.” It’s based on significant publications and recognitions; work with potentially broad impact; and significant discoveries, methodological innovation, or theoretical contributions.

“I’m very honored to have been recognized with this prestigious award,” said Schroeder, who began at Haas in fall 2015 after earning her PhD in psychology and business from the University of Chicago’s Booth School of Business.

Schroeder’s research on judgment, decision-making, and social cognition offers insights into how people make inferences about others’ mental capacities. One paper found that when people listen to their political opponents’ spoken opinions, they are more receptive—and believe their opponents are smarter—than when they read the very same opinions. The findings underscore the importance of speaking with people who disagree with you.

Another recent series of experiments found that people tend to judge others as less mentally competent than themselves, and consequently less able to take care of themselves. This comes into play in charitable giving, when people choose charities that provide goods and services rather than cash assistance, as well as public policy issues from soda taxes to gun control.

Schroeder’s work has been published in the Journal of Personality and Social Psychology, Journal of Experimental Psychology, and Psychological Science. It has been featured in news outlets such as the The New York Times, The Washington Post, and Newsweek.

Schroeder teaches “Negotiation & Conflict Resolution” in the MBA program and “Research in Micro-Organizational Behavior” in the PhD program. Last fall, she was a Haas “Club 6” member—an honor for faculty who receive high teaching evaluations.

 

More research by Asst. Prof. Juliana Schroeder:

 


Donald or Hillary? Why listening to them matters to voters.

 

 

 

Paternalistic aid_Juliana Schroeder researchA handout or a hand up? How we judge others guides how we help others.

 

 

 

In motivating innovation, golden parachutes may have silver linings

| by Sam Zuckerman

When an executive fails to turn a profit yet still gets a rich payout, it’s certain to raise eyebrows—and possibly trigger a backlash from shareholders wary of corporate excess.

Yet in an age when companies must innovate to survive, it may be necessary to reward corporate leaders in spite of failure.

Assoc. Prof. Gustavo Manso
Gustavo Manso

A new body of research by Assoc. Prof Gustavo Manso has demonstrated benefits to compensation arrangements that many corporate governance experts have come to frown upon. His central argument: companies that want to blaze new trails should not penalize managers whose efforts don’t quickly bear fruit.

“When you want managers to innovate, the types of incentives you use are very different from traditional pay-for-performance arrangements,” explains Manso, who holds the William A. and Betty H. Hasler Chair in New Enterprise Development. “You need to reward early failure and focus on long-term results.”

Golden parachutes and other perks

Pay for performance became a watchword in the business world after last decade’s financial crisis, when the leaders of some of the nation’s largest banks and brokerages walked away with tens of millions while their companies needed taxpayer bailouts or fire-sale takeovers. Golden parachutes and generous stock options for executives who don’t perform came to be seen as improper, while linking compensation more tightly to success came into favor.

Manso has re-examined compensation for an age of innovation. In particular, his research finds that provisions such as incentive packages that pay well despite short-term failure, stock options that keep their value when share prices fall, and even generous payments when corporate leaders lose their jobs—precisely the perks shareholder activists hate—may sometimes be needed to motivate managers to take risks and try new things.

In motivating innovation, golden parachutes may have silver liningsExploitation vs exploration

Manso’s work comprises a groundbreaking mix of theory, data analysis, and experimentation. In a landmark 2011 article in The Journal of Finance, he built on the classic distinction between two approaches to management: “exploitation” and “exploration.” The first relies on tried-and-true practices that are likely to pay off. The second seeks better ways of doing things, but can lead down blind alleys.

Using a theoretical model, Manso showed that the ideal compensation plan to motivate exploration is different from the best plan for exploitation. Pay-for-performance works well when the goal is to achieve the best results from known techniques. But managers who are expected to innovate must be paid for long-term, not short-term results, and they should not have to worry about losing their jobs if new methods fall short.

In a later article, Manso modeled the impact of public vs private ownership structures on investment in innovative projects. He and he co-authors found that while public ownership incentivizes the companies to cash in on existing ideas—since the market reacts quickly to good and bad news—while the private ownership gives more leeway for exploring new ideas.

Lee Fleming, director of the Coleman Fung Institute for Engineering Leadership at UC Berkeley, says the originality of Manso’s work lies in the way he applies ideas from organizational theory to complex financial questions, such as the ideal form of executive compensation.

“The gains from exploitation are quicker, less risky, and may be on average more attractive financially, while the gains from exploration take longer to harvest and are more risky,” notes Fleming, who holds a joint appointment at the Haas School. “Gustavo’s genius has been to develop the economic and financial implications of this model.”

Encouraging experimentation

In an experiment to test his ideas about encouraging innovation, Manso and a co-researcher recruited 379 volunteers to operate computerized lemonade stands to earn small amounts of money. Participants were divided into groups and offered different compensation schemes, and then given choices between making minor or major adjustments, such as altering their product mix. Those who were allowed to fail at no cost in the first half of the experiment, and rewarded for their performance at the end of the experiment, were more likely to experiment and discover better ways of operating the lemonade stand.

Manso believes his work is broadly applicable in fields beyond business, such as scientific research and the academic world. Still, he cautions that using compensation plans to motivate innovation can prove tricky in practice. To make sure managers don’t take advantage of arrangements that tolerate short-term failure, their performance must be monitored and they must be given regular feedback. And the burden on boards is intensified because directors must create incentives for innovation while also guarding against abuses.

“It’s always a balancing act,” he says. “It’s not always optimal to experiment. Sometimes you just want to ‘exploit’—and then pay-for-performance works well.”

Haas research on leadership featured in 60th anniversary journal

| by Haas News

California Management Review 60th Anniversary editionNational Energy Finance CompetitionA special 60th anniversary issue of California Management Review features seven articles by Berkeley Haas faculty exploring different aspects of leadership—from incentives for innovation to recognizing women’s unique qualities as negotiators.

The articles in the Fall 2017 journal issue not only show the breadth of Haas faculty research, but also reflect the school’s increasing focus on leadership, writes editor and Prof. Emeritus David Vogel, in the introduction. Haas culture is codified in four defining leadership principles: Question the Status Quo; Confidence Without Attitude, Students Always and Beyond Yourself.

“Each of the Haas School’s four defining principles are essentially about dimensions of leadership,” Vogel said.

As the Haas School’s quarterly peer-reviewed journal, California Management Review serves as bridge of communication between those who study management and those who practice it.

The journal opens with research by Prof. Don Moore pointing out that decades of research on hiring indicates that face-to-face job interviews are terrible at predicting future performance—yet companies continue to use them. In “How to Improve the Accuracy and Reduce the Cost of Personnel Selection,” Moore shows that there more effective and efficient alternatives, including structuring interviews around tests of key skills and abilities.

In “Creating Incentives for Innovation,” Prof. Gustavo Manso presents research demonstrating how employees can be encouraged to experiment by creating incentive systems that both tolerate early failures and reward long-term performance.

Prof. Laura Kray, who has long studied gender differences, writes that women possess unique advantages as negotiators—including stronger ethics and higher levels of cooperation. Yet women still face stereotypes of being poor advocates for themselves. “Changing the Narrative: Women as Negotiators—and Leaders,” co-authored by Jessica A. Kennedy of Vanderbilt University, presents practical strategies for managers and negotiators to change the narrative and close performance gaps.

In “Who’s Really Doing the Work? The Impact of Group Size on Over-Claiming of Responsibility,” Asst. Prof. Juliana Schroeder explores a pervasive phenomenon in today’s workplaces: people believing that they’ve done more than their fair share of work. The article looks at predictors of “over-claiming,” and presents practical steps that managers can use to reduce the damaging effects.

Other articles in the special issue also include a bottom-up look at the relationship between language and corporate culture by Prof. Sameer Srivastava and Amir Goldberg of Stanford; a piece by adj. profs Nora Silver and Paul Jansen on multisector careers; and an article by Center for Responsible Business Exec. Director Robert Strand and Dara O’Rourke, an associate environmental science professor, on the tensions Patagonia has faced in pursuing sustainability and quality products that may have environmental impacts.

Are politicians smarter than CEOs?

|By Rowan Philp
Swedish Parliament Member Jonas Sjöstedt and Prime Minister Stefan Löfven. Creative Commons photo
Swedish Parliament Member Jonas Sjöstedt and Prime Minister Stefan Löfven (Photo by Phil Jamieson 2014; Creative Commons license)

While Americans’ approval of their Congressional representatives are near record lows, new research shows that politicians aren’t necessarily a bunch of good-for- nothings—at least in Sweden.

Prof. Ernesto Dal Bó and four colleagues analyzed a rich trove of public data and found that Swedish voters consistently elect officials who are, on average, significantly smarter and better leaders than the populations they represent.

“We found evidence that there are plenty of great people available in politics,” said Dal Bó, the Phillips Girgich Professor of Business at Berkeley-Haas. “Moreover, among those candidates who happen to be available, it’s the relatively better ones who make it to the higher echelons of the political structure.”

His paper, “Who Becomes a Politician?” focused on the patterns of how municipal politicians and national legislators were chosen in Sweden over a 30-year period. It was co-authored with Berkeley-Haas Assoc. Professor Frederico Finan; Prof. Torsten Persson and Assoc. Prof. Johanna Rickne of Stockholm University; and Uppsala University researcher Olle Folke. The paper was published by the Oxford University Press in the November 2017 issue of The Quarterly Journal of Economics.

Existing economic research argues that higher-income, smarter people have far more to lose financially when they run for public office, so it’s the less qualified who end up serving. In addition, an old criticism of democracy is that extending the vote to everyone—including those who are less qualified—may result in the election of low quality leaders. Dal Bó and his team took those arguments to task, questioning whether candidates can be both representative of their constituents and highly qualified to serve them.

Building a database

The authors chose to Sweden as a research test bed for several reasons.

First, as an advanced democracy with proportional-representation elections, Sweden has remained stable and fully democratic since 1917. If democracy cannot select leaders who are both representative and competent under such favorable circumstances, then critics of democracy must be right, Dal Bo argued.

Second, the country offered something they couldn’t find elsewhere: a public set of administrative data on males conscripted into the Swedish military between 1951 to 1980. The data included mandatory IQ and leadership tests the military gave between those dates.

The military used two scores during enlistment: a general intelligence test which included problem solving, numerical, verbal, spatial, and technology comprehension; and a leadership test that assessed teachable skills and measures social maturity, psychological energy, intensity, and emotional stability.

The researchers matched that test data with the names of elected members of national parliament and municipal politicians—a total of 50,000 elected candidates who ran for national of municipal office between 1982 and 2010. They also tapped data the Swedish government keeps on all residents over age 16, including age, sex, education level, and occupation, as well as earnings data from the Swedish tax authority.

All combined, they built a complete database of elected officials, test scores, income levels, and family backgrounds.

“Given this information we can precisely characterize how the personal traits of politicians relate to those in the entire population,” the authors wrote.

The researchers reached several conclusions. First, they found that not only do Swedish politicians have higher average IQs and stronger leadership qualities than those they serve, but they are also representative of the electorate: Swedish politics attract competent people beyond the scions of elite families, Dal Bó said.

While ability rises with socioeconomic status, on average, politicians remain highly able when recruited from low socioeconomic backgrounds.

They also found that elected politicians from all socioeconomic levels showed higher cognitive, leadership, and earnings capacity scores than those who simply ran for office.

“In fact, relative to their own social class, politicians from lower social backgrounds are even more strongly selected than politicians from higher social backgrounds,” Dal Bó said.

Mayors versus CEOs

The research even examined competence traits among elected officials and their siblings, and found that among pairs of siblings, “it is the one with the better IQ score, leadership qualities, and earnings capacity who enters politics,” Dal Bó said.

Other surprising findings include:

  • Mayors have exactly the same IQ score as CEOs of medium-size companies (firms of up to 250 employees)—despite earning vastly lower incomes.
  • Elected representatives overall have cognitive and leadership scores similar to CEOs of companies with 10 to 25 employees.
  • Parliamentary legislators had leadership and IQ scores higher than those of CEOs of medium sized companies.

While the results cannot be directly applied to other countries, Sweden could be used as a reference point if data became available from other countries, Dal Bó said. “We have to be careful with country comparisons, but we can now begin to doubt that the only people who run for public office are those who are less intelligent and have less to lose, or that voters may inevitably elect poor leaders.”

“Good leaders are certainly not inevitable under democracy,” he concluded. “But now we know for certain that democracy at least has the capability to select representative and competent politicians.”

New California Management Review explores neuromarketing & the ed tech revolution

| by Kim Girard

Like DNA tests gathered by investigators to solve a crime, human brain scans can provide key evidence for marketers trying to better understand consumer behavior.

At the same time, just like DNA tests, there are clear limits to what a peek into the brain can tell marketers, says Ming Hsu, an associate professor in the Berkeley-Haas Marketing Group and the Helen Wills Neuroscience Institute at UC Berkeley.

In “Neuromarketing: Inside the mind of the consumer,” an article published in the new California Management Review, Hsu aims to set realistic goals and expectations about what the application of neuroscience to marketing can and can’t do. Hsu’s case is among seven new articles included in the current issue, including an article by Berkeley-Haas Dean Rich Lyons on “Strategies for Higher Education in the Digital Age.”

CMR cover summer 2017

In his article, Lyons explores how new technology, including artificial intelligence, machine learning, and mobile, are changing how education is delivered and structured. The article outlines eight examples of ways in which technology will be used to rethink everything from how students learn to how to train faculty to use their classroom time more efficiently.

“Ed tech is already changing the education product,” Lyons writes. “Therein lies its disruptive potential.”

One example is MATLAB, a coding course at UC Berkeley that used to be taught solely in a traditional classroom, but is now also taught online. The online format gives students access to a quick feedback loop that relies on a grading engine: students submit code and get instant feedback and help with problem areas. Students so loved the iterative part of the course that the engine is now used to teach the traditional campus versions of the same course. “This is a different product, not the same product distributed through a new channel,” Lyons writes.

Meantime, Hsu’s case discusses how neuroscience promises products that directly measure customers’ underlying thoughts, feelings, and intentions by testing a multitude of responses coming from the brain. The key differentiator of brain-based techniques is that they separate what people say they think from what they actually think, Hsu says.

Common tools used include EEG, or electroencephalogram, a test that detects electrical activity using small, flat electrodes attached to the scalp; PET, or positron emission tomography imaging; and functional MRI (magnetic resonance imaging), which measures brain activity by detecting changes associated with blood flow. Indeed, these techniques are more expensive than traditional methods such as focus groups, and that expense tends to inflate expectations.

“Managers sometimes have a vision that brain recordings are effortlessly translated into customer insights and delivered with a bow,” Hsu said. “But that’s like asking DNA evidence to completely replace tools likes suspects’ interview, crime scene observation, or general critical thinking. The inability to reconstruct the suspects’ profiles from DNA evidence alone has not made the impact of genetic testing on forensics any less profound.”

Hsu suggests using tools to complement traditional approaches, not replace them; taking insights from focus groups or surveys and testing them using brain-based methods. This is particularly important when it comes to decisions in marketing and brand strategy, which often address questions regarding how customers think, feel, and respond to a company’s offerings.

Getting the wrong answers can mean costly mistakes that take years, even decades, to become apparent, let alone correct, Hsu said.  “A growing problem today is the inundation of data from customer focus groups, surveys, and social media, some of which can be mutually inconsistent and contradictory,” he said. “Brain based methods allow marketers to validate, prioritize, and select among putative insights generated from this mountain of data.”

About California Management Review: Published quarterly, California Management Review is a top-ranked management journal that serves as bridge of communication between those who study management and those who practice it.

To subscribe, visit cmr.berkeley.edu.

Why the sharing economy can be good news for manufacturers

| by Sam Zuckerman

The sharing economy can benefit manufacturers

The rise of Uber and Lyft has taxi companies running scared, while AirBnb is encroaching on hoteliers. Should the firms that make cars, bikes, and even lawnmowers also fear a sales drop as peer-to-peer rental apps make it easy to borrow wheels on demand?

Not necessarily, says Jose Guajardo, a Berkeley-Haas assistant professor in the Operations and Information Technology Management Group. In a recent working paper, he suggests emerging peer-to-peer rental markets represent more opportunity than menace for manufacturers.  That’s because the existence of these markets might tip the scales for ambivalent buyers who know they can recoup some money from a big purchase—and also because these markets open new opportunities for companies savvy enough to exploit them.

“There is a large variety of cases in which the peer-to-peer rentals can be good news for traditional firms,” Guajardo stressed in an interview about the paper, written with Vibhanshu Abhishek and Zhe Zhang of Carnegie Mellon University.

Renting out your ride

The peer-to-peer market is a notable feature of the sharing economy, whose rise represents one of the most innovative business trends of our time. Peer-to-peer rental companies like Turo for cars and SpinLister for bikes allow regular people to rent out their rides—similar to what Airbnb has done for apartment owners. These services are also creating a world in which consumers are not only customers, but potential competitors.

Guajardo and his co-authors built a model to analyze this rental market’s effects on manufacturers. They found that whether these companies are hurt or helped depends critically on how often people use the products.

Take car sharing, for example. Guajardo’s model showed that in a scenario where nearly all drivers use their cars with about the same frequency, manufacturers are better off without peer-to-peer rentals, which might cut in to sales. In a scenario where some car owners do a lot of driving and others just a little, a company’s best option would be to simply sell to frequent drivers and rent to occasional motorists.

It is when there is a moderate disparity in driving habits within a marketplace that manufacturers can benefit from peer-to-peer rentals. The explanation is simple: If I’m considering buying a car, even though I don’t plan to use it every day, the presence of an active car-sharing market may convince me to make the purchase. I know I can make back some of the price by renting it out on days I’m not driving. In this way, the peer-to-peer market gets some middle-range users to buy and enables infrequent drivers to rent, boosting overall consumption.

Sharing economy benefits

Guajardo and his co-authors say they believe their paper is the first to highlight variation in usage as a key factor determining peer-to-peer market effects. He says he hopes the research demonstrates the benefits available to manufacturers, which can exploit this new market by adjusting their business models and investing in or starting their own peer-to-peer operations.

It’s a lesson not lost on some of the nation’s largest corporations, especially in the auto industry. Ford has invested in bike sharing—recently rolling out a fleet of Ford GoBikes in the Bay Area. And Tesla CEO Elon Musk has declared that his company will let Tesla owners tap a button on their phones to rent out their vehicles, generating income that could make the pricy electric cars more affordable.

Meanwhile, peer-to-peer markets can save consumers money whether they’re owners or renters. “It can be a win-win situation for both manufacturers and consumers,” Guajardo says.