2015-09-25 - Cultivating Your Mind's Sixth Sense is Wise

Nicholas Epley 
University of Chicago  Booth School of Business

John T. Keller Professor of Behavioral Science at the University of Chicago Booth School of Business, Dr. Epley has published over 50 scholarly in his field and written for the New York Times. He has been named a “professor to watch” by the Financial Times, is the winner of the 2008 Theoretical Innovation Prize from the Society for Personality and Social Psychology, and was awarded the 2011 Distinguished Scientific Award for Early Career Contribution to Psychology from the American Psychological Association. He teaches Managing in Organizations in the Booth MBA Program in addition to Ph.D. seminars on Social Psychology and Topics in Behavioral Science.

1. What motivated you to write your recent book Mindwise?

A couple of things motivated me. The big thing is that I have been doing research trying to understand how people understand each other for about the last two decades ever since entering graduate school. I reached a point in my career when I wondered whether there was something bigger I could do with the research that we had been conducting, making it of broader interest to a wider range of people than just the typical academic audience. I thought there was something bigger I could do with it, so I took on that challenge.

The great thing about being an academic is that you can really do the stuff that you want to do. If you one day decide that you want to make your research of broader interest than just to other academics, then you can give that a shot. That was the motivation. It wasn’t anything more pressing than wanting to take on another challenge from my perspective and also thinking that our field of psychology had some research findings that would be helpful to people. Those two factors together motivated me.

Follow-Up Question: Mindwise seems to have received quite a bit of acclaim. Were you surprised by this response?

It’s funny that you ask that question. An author’s perspective, discussed in the book, is very different from an observer’s perspective, as you can probably imagine. As an observer, you might have noticed that the book has been praised by some. I have been very happy with that praise. I have received some nice reviews by serious people who have reviewed it. I have been very happy with that. Of course, as an author, you are also very sensitive to the criticism that you receive. There is a little bit of that, too. I will read through a review that is generally very favorable, but contain one line that is not, and that is the line that I will remember. My experience of the reaction to my book has been a bit more humbling than you might imagine.

2. In your book, you introduce various works on our “sixth sense”—our ability to read people--,

    concluding we are not good at it. What do you think the root causes of this inability are? Why do

    you think increased awareness of our errors in judgment improves our sixth sense?

There are several components to that question. Let me take each one in turn. First, you mention that I think that we are not very good at this, that I make that argument in the book. Part of that is right, but the argument is actually more subtle than that. I would not say that we’re unable to understand each other. To varying degrees, every one of us on this planet has an ability that no other species has as far as we know. That is the ability to think about the minds of others, their intentions, their motives. It is the ability to communicate ideas to other people, to share our minds with others using very sophisticated language.

In general, we do this better than any other species on the planet. This is the reason why we are able to live in these enormous social collectives, where we cooperate and compete. We work together efficiently and smoothly in really complicated social settings. At a base level, we are generally pretty good at this. We are better than zero accuracy. But the main finding of research over and over is that we are far less than perfect, so there is plenty of room to improve our social understanding. Other people are the most complicated thing you will ever encounter in your entire life and you need to understand each other better.

The other finding that comes out of research over and over again is that however good we are at understanding each other, predicting what my wife wants for her birthday, for example, or what’s going on with my kids at school and how they are feeling today, we are not quite as good as we think we are. I think the main problem is not incompetence, not the inability to do this. It’s hubris, a lack of humility, thinking that we understand each other better than we actually do. What’s the root cause of this hubris? I think there are two main sources of error. We will focus on the reasons why we are not perfect. One broad class of errors comes from not engaging this ability when we should. It’s a little bit like any ability: You use it effectively when you try to use it. It’s a little like walking around with your eyes closed. You can see the world with your eyes open, but you can also close your eyes. Then, you do not use that sense.

Our sense about the minds of others works the same. We do not always turn it on when we should. The consequences of that are a little bit like when you close your eyes. You can’t really see what is in front of you. If you don’t engage with the mind of the other person, you can’t see it at all. You might sometimes conclude they do not have one. That is, you think of them as mindless. That creates a phenomenon we refer to as dehumanization. You are not engaged with the mind of the other person.

The other class of errors comes from the mistakes we make when we are actually trying to engage the mind of another person. Right now, for instance, I’m experiencing one of the central challenges that we all face as we behave like mind readers. I’m trying to communicate with you in an interview where I cannot see you. You’re not right here in front of me. You are on the other side of the planet! I know nothing about what you were doing earlier today. I know very little about your background. I’m trying to communicate something complicated to a mind that is fairly different from my own. That’s a challenge for us because one of the ways we understand other people is by using our own mind as a guide.

I am telling you about this book, which I know inside and out. I spent four years on every detail, thinking about the book, writing it and editing it before it was published. I know it every which way. That would lead me to conclude that the book is clearer to you than it actually is. Because it’s clear to me, I am likely to assume that it is clear to you. That represents the first challenge that we have in thinking about the minds of others. It’s called egocentrism, the assumption that people think the way we do.

The second challenge is that once we know more about someone, we apply stereotypes. I’m talking to you from Chicago. I’m American. You are talking to me from Tokyo, and you’re Japanese. There are stereotypes about what American and Japanese people are like that filter into our judgments of each other in ways that are not entirely inaccurate. For instance, when you learn something about another’s political beliefs, when you learn they are a liberal or conservative, that gives you some accuracy that is above chance levels [in reading their minds].

But the problem with these stereotypes is that they tend to focus on differences between groups rather than similarities. The stereotypes you have about an American are about qualities and attributes that make Americans different from other people, not what makes them the same. That can lead us to exaggerate differences between a group when, in fact, there are many similarities. We all love our kids. We all enjoy great food and interesting experiences. We all like to learn new things and have some sense of autonomy in our lives. There is a lot more similarity that comes from being a human being, but stereotypes tend to focus on differences, overlooking these similarities. Sometimes this tendency can lead us to imagine that differences between people are greater than they actually are.

In mindreading, for instance, there are very strong beliefs about the differences between men and women: Women are more socially sensitive than men. They are better able to understand others’ emotions and more sensitive to social cues. They are better able to keep track of what they want or think they need. There is some truth to this stereotype, but not a lot. The effect sizes are relatively small. They correspond to a correlation of about 0.2 as compared to no correlation at all, which would be 0. But if you ask people to predict the size of the effect of gender, they do not predict a difference of 0.2 but of about 0.8. That is, they exaggerate the differences between men and women hugely. You will find very popular books, international best sellers like Men are from Mars, Women are from Venus, which suggest that men and women are very different. In fact, those stereotypes tend to exaggerate the differences between the minds of men and women.

That last challenge in understanding the mind of another person is that once we know even more about a person, we can see their behavior over time the way I am around my graduate students. If you and I spend some time together, I come to know all about you. I see your behavior. Then, I use your behavior as a guide to what your thoughts are. The problem is that behavior can be misleading as well because we tend to take behavior at face value. We tend to overlook the context in which the behavior occurred, making it appear very different.

For instance, if you are trying to understand what I’m like as a person, how sociable, extraverted or outgoing, you might use my behavior in this interview as a guide. I’m pretty talkative, pretty chatty. I ramble on and on. The truth is that I am actually quite shy most of the time. You have me in a situation where my job is to talk because I am being interviewed by you. You ask me questions, and I respond. The problem with behavior is that it can be somewhat misleading because behavior is complicated to interpret. My behavior now is a function both of the kind of person I am as well as the context that I am in. Our understanding of each other tends to overlook the context, focusing too much on the behavior we observe. This tendency can lead to some mistakes.

To summarize, I think there are two main challenges that make it difficult to read others’ minds. One is that we don’t always turn on this ability to understand the minds of others when we should. Then, the processes we go through to understand each other can lead to systematic mistakes stemming from egocentrism, stereotyping, and relying too much on the person’s observable behavior.

3.  In Japan and other countries where high-context languages are common, individuals are even

     less inclined to clearly speak their minds. Furthermore, power distance seems to be much 

     greater. What suggestions would you make for increasing direct, transparent communications 

     in such organizations? What recommendations can you make for Westerners who must work 

     with Asians?

One thought that I have is that there are Japanese institutions that are exceptionally well known for facilitating open and honest communication with employees. For instance, I see the Skype image of you I have on my screen right now has the Toyota insignia behind it. Toyota has seven pillars in their management philosophy. One of them is this notion of kaizen, constant improvement. Toyota is a very interesting example. When they first came to the U.S., that is, first began moving their manufacturing to the U.S., their first plant was the N.U.M.M.I. joint venture with General Motors in Freemont, California at a plant that GM had closed two years prior. It had been the worst plant at GM at a time when GM was a disaster. They were really making bad cars. They had a large share of the American market, but they were essentially making junk, and everyone knew it. But the plant in Fremont was the worst in their entire line of vehicles. So GM shut it down.

Toyota wanted to come in and build a manufacturing base here in the United States. In exchange, GM thought they would get some technological innovations from Toyota. So they decided to re-open this plant in Fremont. The U.S. labor union—the UAW (United Auto-Workers) union leader Bruce Lee demanded that this new venture called N.U.M.M.I. (New United Motor Manufacturing Incorporated) hire back all of the executives from the General Motors plant. Toyota did not want to do that. GM did not want to it, but they had to.  And they ended up hiring back basically all of the workers that they had laid off—around 90% of them. These were all the same workers who had been at the worst plant General Motors had in its line.

Toyota Management, though, was based on a different philosophy from the American one. Toyota management fundamentally believed that people want to do a good job. They take pride in their work. They want to have some sense of respect about what they do. They want to have some sense of autonomy, some sense that their work matters. They wanted to have a sense of the sort that the nurse I spoke to on the train this morning was lacking in her job. GM management had a very different philosophy about what their employees were like that they had acquired over the years. That belief was that their employees were idiots who were just there for a pay check. Toyota management had this philosophy that people want to do a good job and that they would tell you how to do a better job if only you would listen to them.

Here was a case where the management had this philosophy that made them very open to feedback from their employees, a philosophy that runs contrary to the cultural stereotype that you just described though it may be true in lots of other social settings in both the U.S. and Japan. Here in GM was a plant that wanted to hear nothing from their employees. Management did not care at all what their employees thought about their jobs. Management just thought of employees as cogs in a machine. “Just sit down there in the assembly line, and do your job!”

Toyota management came in and said, “We care about what our employees think and believe, and we’re going to tell them we think they know how to do their jobs better. And we are going to give them the ability to tell us how to create a better plant.” Management communicated this belief to their employees. Management went down to the factory floor, something GM employees said they had never, ever seen. Toyota management was there all of the time. Toyota also installed a device, the Andon cord, which has since become famous. It’s a cord that employees could pull to stop the line. The cord did not stop the line on the first pull, but on the second. Employees pulled this cord when they noticed something that could be improved, something that could become a problem. This environment, this world that Toyota had created for the employees, was driven by management’s belief in kaizen, and the recognition that their employees are human beings who care about doing a good job. Employees will tell you how to do their job better if you just enable them to tell you.

The success of this JV is rather astonishing. Within a year of reopening this plant, which had been the worst in the line producing more defects than any other; with ridiculous absenteeism rates, drugs, sex, everything you could imagine that could reduce productivity, became the best plant in the GM line. Working with the very same management under a different philosophy and environment, they now had the fewest defects and very low absenteeism. Employees took great pride in their work. Industry analysts calculated that the old factory line would have to be manned by 50% more employees to produce the same kind of output being produced at the NUMMI plant, and that output would be full of defects.

I think there is a valuable lesson here. Regardless of the place they happen to be, management around the world can facilitate open dialogue. As a manager or leader, if you recognize your employees are human beings, they are trying to do the best jobs they can, they probably know more about their job than you do as a leader or manager, and if you maintain a sense of humility—the belief there are some things you don’t know—that becomes the starting part for creating a space where employees can tell you what they think. Wherever you are on the planet, if you keep this Toyota example in mind, you will know what you have to do to enable employees to speak their minds.

On the employee side, this is more of a challenge. Here, you are trying to influence someone over whom you really do not have any formal influence. So you need to find opportunities for open dialogue wherever you can. I don’t have any insights into where your readers will find those openings. But individuals probably can see times when they can bring up something they would want to talk about. They need to think about where these opportunities are and how to use them. The advice that I would give for using those opportunities to foster open dialogue are twofold. One is to recognize that you are probably talking about some issue that’s not a reality. If you are unsatisfied in your job, or you think that you are underpaid, what you are talking about is a matter of perceptions, which can differ between employees and employers. So you need to approach the process with a humble attitude.

The other thing that helps in difficult conversations is to focus on the future more so than on the present. Let’s say you are having trouble with your spouse right now, and you are trying to figure out how to have that conversation. That’s a difficult conversation to have. It’s difficult to express your mind, and it’s difficult to get your partner to express his or her mind in this context because you get defensiveness. The standard approach is to talk about what’s happening in the relationship right now or focus on what has happened in the relationship in the past. Doing that is a way to make people really defensive.

A way to take some of the edge of that defensiveness is not to talk about the past or present, but rather to open the dialogue by talking about the future. You can go to your spouse and say, “Look. I have committed to being with you for the rest of my life. That means I want us to have the best marriage that we possibly can for the next twenty, thirty, or forty years until death do us part. I want to help us have that kind of marriage going forward. I am not worried about where things are right now. I want us to think about how we can develop the best marriage possible over the next five to ten years.” Because you both want that, I think starting out that way, trying to focus on things down the road, might help you to talk about difficult things in the present.

You can do this in your firm, too. You can tell your boss, “Look. I want to be in this job for the long haul. I think this is a great place for me to work. I would like to be able to excel in my job over the years, and I really want to figure out how to best do that. I’m worried that I may not be doing that to my maximum ability right now. Here’s where I am right now. Here is where I would like for both of us to be two years down the road. Can you and I come up with a development plan for getting there? Opening the conversation by focusing on the future can open dialogue because people do not get defensive about the future. It hasn’t happened yet. It’s easy to align perspectives about the future. Both you and your boss want you to succeed over the next two years. You are on the same page.

4.  In your New York Times article, you refer to framing effects to explain how a greater 

     percentage of a tax refund is typically spent when described as a tax bonus rather than a rebate.

    In what situations in companies are framing effects likely? Can you give a few concrete 

    examples?

Let me give an example of a framing effect from our research that is close to your (upcoming) question on the recent increase in the Japanese consumption tax. That was some research that we did a few years ago, where we were looking at how people handle or spend money when it’s described in different ways. This may seem like an odd place to go to study this kind of behavior, because money, after all, is money. But it turns out that people don’t treat all money as the same interestingly. Framing is simply a difference that you get in behavior or in how people treat or evaluate some stimulus or object depending on how it’s described. A credit-card tax and a credit-card surcharge might be the same thing, but tax and surcharge sound different. The government can give money back to citizens at the end of the year in ways intended to stimulate the economy. That is what our government was trying to do a few years ago. They can give that money out in a few different ways. They can describe it, for instance, as a tax rebate. That is, they are giving taxes you have already paid back to you. Or they could describe the money as a bonus.

Both of these things are objectively true. Neither of these descriptions is truer than the other. The government is giving you money back. That’s a bonus. They are taking it out of tax paid so it could be called a refund. Both are money, and a dollar is a dollar, just the way a yen is a yen, and a euro a euro. The money is the same no matter how you describe it. But changing the name changes how people think about it. What we found in our experiments is that people were much more likely to spend the money when we referred to it as a bonus rather than a rebate. The reason is that when I give you a rebate, the way that you understand that or interpret or construe that money is as money that you are getting back.

It’s as if I walked up to you on the street, tapped you on the shoulder, and said, “Here’s money I found on the street. It looks as if you dropped it out of your wallet.” I could also walk up to you and say, “Here’s some money. I just found it on the street, and I thought you might like to have it.” In both cases you are richer by the amount of money I gave you, but in one case, you probably don’t feel like you’re richer. I just returned money that you already had. You do not have any additional money in your bank account than you did in some objective sense.

In the other case, when I give you money that described as a bonus, it feels like you somehow received money that you did not have before. Again, you are richer by the same amount in both cases. But psychologically, it feels different. If you have extra money, you are more likely to spend it than if you don’t feel like you have extra money. In our experiments, we found that when we described the money as a bonus, participants were much more likely to spend it than when we described that money as a rebate. In fact, they were eight times more likely to spend it. These framing effects were some of the largest I have ever seen. People saved the rebate, but they spent the bonus money.

That’s an example of a framing effect. Framing effects can come up almost anywhere. You can talk about the number of lives that a policy will save as opposed to the number of lives that would be lost without it. In terms of calories, a big deal in the United States, where people want to eat healthier, you can describe the meat that you eat as 80% lean versus 20% fat. Both of those descriptions are the same, but you will eat the meat described as 80% lean, and not the meat described as 20% fat. You are describing the exact same objective reality, but the descriptions conjure very different images. Framing effects like these are greatest when there is some uncertainty or ambiguity in the stimulus that you are evaluating. Is this meat that you are eating healthy? Well, we can’t be too sure. It depends on how you describe it. If you describe it as 80% lean, it sounds healthier than when you describe it as 20% fat.

If something is very concrete, it’s very clear what the truth of the matter is. In these cases, framing effects do not appear very much. But you find that there are situations where there is some ambiguity. Those cases are actually very common. You can see how common it is in our studies when we take money, which is arguably the most objective thing of all that you could evaluate. A dollar is a dollar, a yen a yen, a euro a euro. They are all the same. They are objective values. The way I describe the money is not going to effect the amount that you have: If I give you $50 or fifty yen or whatever you can tell me how much it is. But the decision about whether you are going to spend that money is ambiguous. That is where you will see framing effects.

5. As you may know, the Japanese government recently raised the consumption (sales) tax from 

    5% to 8% after many years at the former level, with planned increases in the near future. If you 

    were a consultant for the government, how would you suggest they refer to the tax or explain it 

    in order to achieve their ultimately goal of stimulating the economy overall?

Referring to the consumption tax, are you wondering how you can change people’s feelings about it? Is that kind of the idea?

Follow-Up Question: Is there a way of applying your research on framing effects to help the Japanese government better sell the tax to the Japanese people, making it possible for the former to achieve their conflicting goals of increasing state revenue while simultaneously stimulating the economy?

Most of my advice will be very context sensitive, so your wisdom will be important here. If I were a policy maker, what I would consider doing is based on our research in the U.S. These were government programs. Both in 2001 and again in 2006, the Bush Administration gave rebates to U.S. citizens, hoping they would spend that money, thereby stimulating the economy. The programs were intended as an economic stimulus package. They were based on the simple philosophy that people will spend money if they have it. The government is giving people money to spend. The problem was that they described the program to people as a tax rebate. That term did not give anyone the sense that they had more money. It was like getting money back. The program was not presented to U.S. citizens in a way that enticed them to spend with patriotic abandon. In fact, people saved this money. Depending on which rebates you look at and how you interpret the figures, people saved about 80% of the money at a time when the savings rate was actually negative. On average, people where spending more money than they were earning at the time.

If I had been a policy maker at that time, I would have thought about different ways of distributing that money that would encourage more consumption. The government could have appealed to Americans’ patriotism. They could have had “Economic Upturn Weekends,” where you encourage people to bring in their tax bonus checks to stimulate the American economy. You could easily have gotten marketers on this case. They think about these types of issues all the time. Marketers could have made it possible for policy makers to present their programs in a way that would encourage some degree of nationalism, some sense that the money they are giving the people is intended for spending. “Make America better by spending this money in a particular way.”

This question about the consumption tax is in Japan is really a question for people familiar with the context to think through. Can we describe this consumption tax in a way that will appeal to Japanese consumers’ pride and encourage them to stimulate the economy? “This tax it not meant to hurt you. It is meant to help all of us.” I certainly would not call it a consumption tax. I might call it, the “Rising Japan Plan.” Even the simple description “Stimulus Plan” might be sufficient.

6. You have co-authored several studies on anthropomorphism. Can you explain the meaning of 

    this word using some concrete examples?

Anthropomorphism is simply attributing human-like characteristics to non-human agents. Most often, what that means psychologically is attributing a human-like mind to one of these agents. If you ask people on the street the defining feature of humans —what makes them different from chimpanzees or dogs, from cats or trees—people will not likely tell you, “Two arms, “ or “Two legs.” They will not mention parts of the body. Instead, they will tell you things about the human mind. We can think. We are better able to feel. We have more sophisticated tastes and preferences. We can reason. This thinking goes back to Jeremy Bentham and Emmanuel Kant, philosophers who made the very same kinds of arguments.

When we study anthropomorphism, the way we define it is as attributing a human-like mind to a non-human agent. For instance, thinking that your car is able to think. That it’s intelligent, that it can sense what is occurring around it. These are all instances of anthropomorphism. We have done some recently-published research funded by General Motors here in the U.S. Adam Waytz , Joy Heafner and I completed the research together. We looked at the consequences of anthropomorphizing these autonomous vehicles for people’s trust in them. This is a challenging case for engineers to handle. You have a car that drives itself, but you have to get willing users behind the wheel. That’s a real challenge, not an engineering challenge, but a psychological one. You have to get people to trust this thing.

We conducted some experiments where we had some people behind the wheel. These were not real autonomous vehicles. They were simulators. But they were real enough that when we get people in the simulator to have an accident, they can be very traumatized. The simulator was a very real, immersive device. In the experiment, we put people in three different conditions. In one condition, they drove the autonomous vehicle as they would a regular car. They controlled the steering and breaking and the like. In another condition, they drove the autonomous vehicle. They would turn on the features, and the car would drive itself.

In the third condition, the anthropomorphic one, we added some features that we thought would enable drivers to anthropomorphize the vehicle. That is, we added features that would make them believe it was thoughtful and intelligent, and able to do things with a plan. Planning is a mental capacity, something that our minds do. We felt the features would lead participants to believe that the autonomous vehicle could control its behavior. We gave the car a name like Iris. We gave it a human voice that could talk to the driver. This enabled real interaction. In other experiments, we find that a person’s voice is really essential in recognizing that the person has a mind. If I can hear you speaking, even if it’s the exact same content, I judge you to be more thoughtful, more reasonable, more rational than if I had just read the content of your voice. The voice is the essential feature. The car talks to you in a real human voice with intonation and pitch variance. These factors are critical to communicating the presence of mind.

We found when we give a car a voice, a real voice, as opposed to a flat, computerized one, people trust that vehicle more. They feel safer. They’re more relaxed while driving it, particularly when they are involved in a stressful event like an accident.

In this experiment, everyone got into an accident at the end. To ensure that everyone had the same accident, we had to manufacture it. We had to make sure they had been hit by another vehicle. The accident was another driver’s fault. Subjecting all participants to the same accident ensured experimental control. We asked the people how much they blamed the car, the engineers who designed the car. We found that when people anthropomorphize the vehicle, when they regarded it as more thoughtful and intelligent, better able to sense what was around it and plan, they also tended to blame the car the least. If your car is thoughtful, if it can think and feel, if it gets into an accident caused by another person, it’s clearly the other’s fault, not yours. We found that when we anthropomorphed the car, people treated it as more human. They regarded it as more intelligent.

We think that is one of many kinds of implications of anthropomorphizing technology. The late Clifford Nass, formerly a researcher in computer science at Stanford, studied this phenomenon for many years. He wrote a great book titled The Man Who Talked to His Laptop. I recommend that your audience take a look at the book if they are really interested in the topic. He described a lot of interesting, related consequences of anthropomorphism. I think it important for engineers to recognize that when people are interacting with their technology, they are interacting with it based on some model they have about how the interaction should occur. One of the easiest models to adopt or use is a human-like one. We spend lots of time interacting with other people. If you anthropomorphize technology, then you get the same types of consequences that you have when you see people interact. Engineers certainly need to keep this fact in mind.

7. According to a web article I recently read, you were an offensive lineman on your college     

    football team (and suffered a broken nose during your first game). Reflecting on your 

   experience as an athlete, can you think of how your Mindwise theories might apply in other 

   arenas like competitive sports, especially ones such as tennis, boxing and others where 

   individuals compete one to one?

Sports are a great example of why mind reading is essential for success in competition. On the football field when I was playing, if I knew what my other players were planning to do, and if I knew what the opposing team was planning to do perfectly, we would have won every game. Certainly, there is a skill component. Even if I know what you plan to do, if I do not have the talent to anticipate your actions and counter them, I am not going to win. If I were playing basketball against one of the greatest players in the world, I would still lose even if I knew exactly what he is going to do. But in most sports, skill is actually relatively well managed.

The competitive advantage derives from other attributes, like the ability to anticipate what a player is going to do before he or she does it. That’s a case where the importance of being able to understand the other side’s mind is clear and obvious. I think lots of sports teams spend time trying to figure that out. “Can I read my opponent better?” This skill is less obvious in sports. People think less about it in other domains with very much the same attributes as competitive sports. Negotiations, where you are really trying to maximize value not only for your side, but also for the other side as well, are a good example. Mind reading is every bit as essential in these domains as in sports.

Follow-Up Question: Due to the influence of behavioral economics, do you think more MBA students in the United States take psychological aspects of business more seriously rather than focusing exclusively on number crunching?

The field of psychology is going through a really interesting period right now. Behavioral economics is not really about economics but about psychology applied to economics. Either economists are trying to incorporate psychology into their work, or psychologists are interested in economic problems. It’s a really interesting interdisciplinary effort. Here in the U.S., more and more MBA classes on behavioral economics are being offered. There are some widely read books on the topic, too. Daniel Kahneman’s book, Thinking Fast, and Slow, for example, is doing exceptionally well. My colleague Rick Thaler’s book Nudge with Cass Sunstein is also popular.

Behavior economics is having some real impact on people’s lives. Particularly in the U.K., where these ideas have been adopted most extensively, government interventions are being made. In the United States, I think students are beginning to take behavioral economics more seriously because they are likely to be seeing the impact it is having on the world more clearly. The proof is still in the pudding for us, though. We still need to do more work in the field to show the real impact of this approach to understanding people. I think that this is less of a problem in the interpersonal world. Psychology has always been front and center when thinking about leadership and management issues in the corporate world, too. But in the realm of public policy, psychology is just coming to the fore, so I can’t tell you how much impact it is going to have or how much MBA students are going to appreciate it in the long run. That story is still unfolding. 

This is my recent Kindle book with colleague Dr. Yuzo Sugimoto. It presents real English dialogues introducing American culture with supplemental usage problems for standardized test preparation. 

2015-08-25 Econometric Modeling as a Strategic Weapon

Dr. Michael Sinkinson of the University of Pennsylvania (Wharton School)

Econometric Modeling as a Strategic Weapon

An Assistant Professor of Business Economics and Public Policy at the University of Pennsylvania, Michael Sinkinson specializes in Applied Microeconomics and Industrial Organization. He has researched market structure in the media, technology, and telecommunications industries, publishing work in leading journals like The American Economic Review. An outstanding teacher as well as research, Dr. Sinkinson was listed among the best 40 business school professors in the 2014 Poets & Quants rankings. Dr. Sinkinson received his Ph.D. in Business Economics from Harvard University.

1.   You have conducted several studies of the effects of printed newspapers on politics. Why does this field of inquiry interest you? To what other areas have you applied econometric analysis? What areas of U.S. government policy do you feel could benefit from more extensive and / or rigorous use of such analysis?

I find newspapers and the media really interesting because they cut across everything. Media is about information. With poor or biased information, no government, firm, or individual can make the right decision. For this reason, I find that media is central to everything. For example, some coauthors and I looked at the effect of media on politics. We looked at how newspapers compete, how they choose the types of viewpoints they represent in the market. We also looked at the impacts of newspapers on political outcomes. For example, we actually showed that when more newspapers are being read in a market, more people are actually participating in the political process. If you think democracy is a good system, that is a big deal. Right away, you see that the news media are important because of their informational value.  I think media is fascinating; it touches everything. That’s one area of interest where I have done research over time.

I’ve also looked at other areas. I would describe my research agenda as looking at areas of non-price competition in the fields of technology, media, and telecom. What I mean by non-price competition is that I kind of assume that firms get prices right:  the prices that clear the market. That is going to happen given a set of products. So then the relevant question is, “What is the set of products that go to market?” Taking the case of newspapers, they would think about the viewpoint they will represent. What are they going to choose as the characteristics of their paper?

In telecom, I conducted a study looking at exclusive contracts. Wireless companies sign exclusive contracts with different hand-set manufacturers. They choose to make products available only from certain carriers. This is a form of non-price competition. Prices will then be set in the market to rationalize that competition, but why do some manufacturers only use some carriers? For example, why did Apple not offer their hand set to other carriers? When Apple launched the iPhone in the U.S., it was available only from AT&T. This same situation applies in Japan, as well. Softbank was the exclusive provider for a long time there. This is another form of non-price competition.

A more recent project is on advertising, another important form of non-price competition. In the U.S., prescription drugs are advertised on television. Few countries allow this form of advertising, a very American phenomenon. This is a form of non-price competition:  companies compete against their rivals by making information available directly to consumers through TV ads. I wanted to understand the effect of this form of non-price competition, which is a great area in terms of policy analysis. We are finding that the ads generate a positive spillover, a positive externality in economic parlance: Consumers who see ads about drugs go to physicians to consult with their doctors about health problems. By doing so, they enjoy benefits that were not necessarily intended by the pharmaceutical company that ran the ads.

In regard to your question about what areas of policy would benefit from more economic analysis, I would say that this area of externalities is a big one. What I mean, specifically, is lots of things firms do create positive spillovers. Society should encourage companies to do this more. The area is a difficult one to quantify, but a great opportunity for the application of economic research to policy. For example, the U.S. government is currently debating whether or not to extend the research and development tax credit. For a long time, economists have argued that the credit should be made permanent because we feel that R&D has a positive spillover on society. This area has a tendency to become politicized quickly, but the area is one were economists can provide research on the right level of subsidies to generate desired spillovers.

2.   Can you give us an overview you of your research on pricing and entry incentives with exclusive contracts using data from smart phones? What motivated the research? To what extent can the results be applied to other industries? To other countries like Japan?

In 2007, when Apple launched the iPhone in the U.S., AT&T was the exclusive provider. I wanted an iPhone, but Verizon was my service provider. To get an iPhone, I had to switch carriers. Because AT&T had terrible service, I could not receive phone calls in my office. The quality was terrible, too. I began to think, “This makes no sense? A, Why would Apple make the iPhone available only through one carrier, and B, why would they choose a carrier that did not even provide a reliable signal?” My iPhone had become an expensive answering machine. It did nothing but collect messages. This frustration prompted me to reflect on the theory behind why Apple would sign an exclusive contract with AT&T, leading to a piece of research that shows something interesting. If all carriers offered hand-sets from all manufacturers, the only differentiation would be the service carriers offer. That would be good for consumers because you get perfect competition. If you have an exclusive contract, you can obviously charge a bit more; you are not competing against a bundle from another carrier with the same handset. Not only can I raise the price of an iPhone that is exclusive, but as a second-level effect, all other carriers can raise the prices on their handsets—even the Blackberries. The whole industry benefits. My research showed that this effect could be very large. I collected data from wireless carriers to show just how large.

Along the way, I made an additional discovery. I learned which provider would be willing to pay the most for exclusivity. Why did AT&T, and not Verizon, the largest carrier, pay more? When you work out the theory, you realize that the second-best or biggest in the industry can has a lot more to lose if the leading competitor lands the exclusive contract. In the U.S., Verizon has a very strong network. They were not going to lose much if they did not get the iPhone. Because AT&T had a weaker network, they would have been really hurt had Verizon offered the iPhone. For this reason, AT&T was willing to pay a lot.

Analogizing to Japan, NTT Docomo was the largest carrier. Softbank purchased Vodafone’s wireless network. In some sense, Softbank was the insurgent. If the iPhone had been exclusive to NTT, Softbank would have been in trouble. They would have had no way to compete. So Softbank was willing to pay a lot to have an exclusive iPhone contract. It gave them a way to differentiate their product from NTT. If you survey world markets, you realize that Apple used a similar strategy in just about all of them. In China, Apple launched with the second largest carrier, and in other countries too, they launched with the second-best rival because those companies were willing to pay the most.

I studied this effect in the context of telecom, but other economists are studying the effect in other industries. The same problem applies to video game systems. There, the problem is more complicated because you might purchase ten different games when you buy an X-Box. The ratio changes in this case. It is no longer one-to-one as in the case of handsets and wireless carriers. Researchers have looked at exclusive video games for different platforms. If you think about what Netflix, Hulu, and Amazon are doing right now with exclusive content, the idea is the same. Netflix is trying to differentiate itself from rivals by featuring exclusive content. This move really changes the dynamic of the market.

3.   As I am sure you know, the Japanese Prime Minister Shinzo Abe has introduced major macroeconomic reforms under the rubric of Abenomics. Based on your expertise in microeconomics, can you make recommendations to specific industries like mobile telecom and consumer electronics for increasing their global competitiveness, thereby intensifying the effect of macroeconomic reforms already in place?

I need to caveat that international trade and macroeconomics are not my forte. The policy gave incentives to companies to modernize, to invest. I think this is a good thing. Realistically, with industries like consumer electronics and telecom, the market is global. In the end, the winners are going to be the most efficient, highest-quality producers. I think one of your other questions relates to protectionist policies, bailouts, and the like. Firms need to be competitive. Creating incentives to invest in equipment are effective in the long run, so I do think the policies will be good for firms. Firms need to be given the correct incentives to ensure that they will survive the shakeout and still be around in ten or twenty years.

4.   As internet technologies evolve and improve, more traditional newspaper and magazine publishing companies are having difficulties surviving. Even the Washington Post has been acquired by Amazon founder Jeff Bezos, as I am sure you know. What are your suggestions for helping print-media companies survive in the current era of technology-driven turbulence?

The reality is that these companies may not survive in their current form. Historically, printed media had geographic protections. In general, you were isolated in your own market. If you were a newspaper in Cleveland, Ohio, you were exposed to competition from other newspapers in the area. The first hint that the climate was changing was the cable news channels. All of  a sudden, the papers and television stations in Cleveland catering to local tastes had to compete with cable news channels broadcasting news from all over the country. Local viewers began switching to channels and stations that offered content better tailored to their interests.

The internet has taken this trend to the limit. Now, every view point is accessible. Regardless of your tastes or interests, you can find a blog or other information sources that cater to you. Catering to a local market is now difficult to do as a result. Different people in Cleveland want different content in their news. Blogs or other online media that cater to a particular taste are going to scoop up readers sharing that taste in all local markets. These media will cobble together a base, leavening most of the print media out in the cold. The few papers like The New York Times and Wall Street Journal that have become successful achieve this success by A, becoming national to solve the geography problem and B, offering very high quality. They are able to attract high-end readers willing to pay a premium for a high-quality product. This strategy is not useful for a local paper in Cleveland, Ohio.

If you look at what is happening right now, there are a few choices. Some papers are becoming online outlets. The Seattle Post-Intelligencer has shut down print operations to become an online news outlet. Sounds good, but they had to cut down their newsroom considerably, as well. When you do that, you become a fundamentally different publication, something that could be bad for consumers. Because journalists provide a public good, exposing scandals, for example, this progression is not necessarily a good one. But in terms of a business model, it is one of only a few choices. The old business model just does not work anymore. Going forward, a lot of traditional newspapers may not survive.

The only other option to going online is to become ultra-local, something the San Diego newspaper is trying to do. They are sending journalists into neighborhoods to report on everything. Ultra-local content is another strategy. The San Diego paper is trying it out, but I do not know if they are sure that it will work. We are definitely going to see new business models emerge because even ones from ten years ago are no longer viable.

5.   You once quipped, "If I weren't a B-school professor, I would be an entrepreneur." What attracts you to entrepreneurship? Have you done research in this field? What did you learn about entrepreneurship from your part-time work as a bartender during graduate school?

Let me start with your question about why I am attracted to entrepreneurship. What I like about it and academic work as a professor is the freedom to pursue your interests. For better and worse, you are your own boss. Like your failures, your successes are your own. I like that personal freedom and responsibility to pursue whatever I like to do. Academia is ideal for people like me. If I think a question is interesting, like why I can not get an iPhone from Verizon, I can explore the question, research it. This attribute that attracts me to academia also applies to entrepreneurship. In this sense, I think the two fields are actually related. In academia, you are an entrepreneur:  You have kind of your own brand, and you are judged by your own work. If you do not perform well, you will not be tenured. Academia is like being an entrepreneur with a bit more of a safety net. This similarity to academia is the reason why I think I would be drawn to entrepreneurship.

To answer your question about what I learned as a bartender, one, being on the front lines, I gained a lot of direct experiences with the problems and challenges of the business. It was a great way to understand the market and industry and an opportunity to learn how to solve problems. As I bartender, I saw all kinds of problems. Because owners and managers may not see them, you have to be the problem solver all of the time. If you really want to make money as an entrepreneur, you should find a problem that no one has solved, and solve it. This is one lesson I learned from being a bartender. I also learned that I did not want to be a bartender for the rest of my life. The experience motivated me to work hard to further my education so I did not have to be a bartender forever.

6.   Students have noted that you have never been asked a question that you have been unable to answer in considerable detail. How did you acquire this extensive knowledge at such a young age? What are your suggestions for young scholars and business professionals on dealing with information overload and increasing their retention of useful knowledge?

People who have a strong curiosity about the world tend to be drawn to academia and teaching. They love learning. For these people, it is a life-long pursuit. I am glad that students feel that I possess this curiosity, because it is an aspiration.

Retaining information is a challenge. I sometimes have difficulty getting work done due to information overload. I am constantly being bombarded with emails. For me, the answer was the decision to block off days. I do not hold meetings, I do not respond to emails on these days or check emails frequently, either. I just focus on my research. I go to a white board, and I focus. For some people, the act of putting down their phone seems unnatural. But I think that it is important to do so, especially if you want to solve difficult or complex problems. You cannot be distracted every five to ten minutes.

I am also a morning person. During the semester when I am teaching, I usually awake at 5:30 am. Because I teach my first class at 9 am, I have a few hours. Due to the early time, no one is emailing me or knocking on my door. No one is calling me, either. My office is quiet, allowing me to concentrate. I can ensure that my lectures are well prepared. These morning hours when no one is trying to contact me are the best time to work. I need time during the day and the week when I am not being bombarded to think and solve some problems.

7.   In the review written about you in Poets & Quants, where you are listed as one of the best 40 best business-school professors under 40, you explained that teaching has been a life-long interest. What aspects of teaching do you enjoy? What have you learned from your students? What aspects of teaching do you find tedious or displeasurable?

I enjoy interacting with highly engaged, intelligent students. At Wharton, I teach three classes a year to roughly 200 students. All sharp, they do not let me get away with anything. To really teach a topic, you must first master it completely. Hearkening back to your previous question about my detailed knowledge of a broad range of topics, I enjoy learning a subject in detail so that even when intelligent people challenge me, I know the answer. I know that I am right. And I can explain the answer perfectly. Mastering a topic at the level is a thrill for me. I love it. The students here hold me to task. They are paying customers who want a good product. They push me to know the topics I teach cold.

I learn lots from my students. Hearing them talk about the problems they face in the real world, in their work environment, is useful, especially since the students are so diverse. Some have been in the military, others in industry—all sorts of industries. We have students who are or have been professional athletes. They are involved in all sorts of different activities. Listening to them apply economic principles to their experiences is fantastic. I often receive emails from students discussing these applications: “I saw a great soccer game showing what you explained about game theory. Here you go.” Their experiences benefit future classes because those experiences become examples I use in future classes. I view the whole educational process as a virtuous cycle:  I learn from the students who learn from me.

Because the students are from diverse backgrounds, teaching them is also challenging. Some students majored in economics as undergraduates. Others have never previously studied the subject. Yet I have to craft lectures that are interesting and engaging for students across this continuum. This requirement challenges me, and sometimes worries me, in part because students have different preferences. Some want only global examples whereas others prefer U.S. ones. Some students want heavy theory and mathematics; others would prefer none. Designing interesting, engaging lecturers balancing these different needs and preferences is challenging.

8.   Many scholars write books to share their research results and ideas with broader readership. Do you plan to pen a book in the not-too-distant future? If so, please tell us about it.

To be perfectly honest, I have a ten-year research agenda ahead of me that I need to complete first. At this point in my career, starting a book does not make any sense. I might also add that I would only write one if I had something I felt were important enough to write about, ideas that would have an impact on government and industries. I have seen people rush to write books, but I would only do so if I felt I could make a contribution, helping governments set better policies. Publishing a book is not high on my list of current priorities, but if you ask me again in ten years, I might respond differently.

9.   How would you evaluate behavioral economics? To what extent are you interested in incorporating psychological theories into your own research?

Behavioral economics has been popular for the last ten years or so, and there have been a variety of advances. I think behavioral economics is interesting as a field. The challenge lies in the lack of a model. We do not yet have a good model, a comprehensive theory of all the individual differences. The lack of a model makes it frustrating for me to work with behavioral economics from a research perspective. I often joke that this is the reason I like to study firms:  They tend to be more rational. For this reason, doing research on them is easier than on people.

However, behavioral economic issues are relevant for managers. My students often make comments like, “I may not be perfectly rational, so why would I make that choice?” However, I have only done about half a lecture on this still-young field for my students because I spend most of the time discussing the rational economic behavior of firms. I think behavioral economics is important, useful, and interesting, but it’s not my area. I am hoping that other sharp researchers develop a unified theory of behavior economics soon. It would become a great toolbox for future research. Currently, the conclusion of behavioral economics seems to be “we are not all rational.”

This is my recent Kindle book with colleague Dr. Yuzo Sugimoto. It presents real English dialogues introducing American culture with supplemental usage problems for standardized test preparation. 

2015-07-25 - Innovation necessitates experimentation!

  Rodrigo Canales Interview Transcript

Dr. Rodrigo Canales of Yale University

Innovation necessitates experimentation!

An associate professor of organizational behavior, Dr. Canales researches the role of institutions in entrepreneurship and economic development. Specifically, Rodrigo studies how individuals purposefully change complex organizations or systems. His research and teaching interests include microfinance, business ethics, leadership education, and the Mexican war on drugs. You will enjoy his interesting insights on these topics.

1.   You have done considerable research in the area of microfinance and other areas of social enterprise. What has attracted you to this relatively new field?

I’ll start by saying that microfinance is actually not really new. It’s been around since the 1970s. There’s been a considerable amount of research done in the field, but most of the research has been done from the economic side of things: trying to understand what kinds of contractual structures, what kind of incentives allow microfinance to be as effective as it has been through history. As an economic phenomenon, microfinance is not that new.

The reason why I became attracted to it is because even though there is a lot of work on the contractual structures of microfinance and the incentive structures, actually when you look around the world and see microfinance organizations, you see organizations that have very different contractual structures, very different sets of incentives both for the clients and for the loan officers. Nonetheless, the organizations all seem to be performing well.

To me, the fact that virtually all of the research had focused on contracts even though they did not seem to be explaining most of the variation out there in the world meant there was something that people were missing. Surprisingly for me, no one had looked at the organizational side of microfinance, or the organizational structure of microfinance. This is interesting because microfinance is a very labor-intensive phenomenon, a labor-intensive type of service. For this reason, the micro-dynamics of organizations in microfinance were bound to be interesting and complex. That’s what drew me to the field.

There’s that side, the fact that no one had looked at the organizational dynamics, and there is also the side that all over the world, microfinance is often hailed as an example of the type of social-enterprise model that will allow us to fight poverty through market mechanisms. I was a little skeptical about that notion, because I also saw very mixed results in terms of how much microfinance was truly having a social impact. For these two reasons, I was attracted to microfinance. I was trying to understand why some organizations were delivering a social impact.

The second driver was the desire to understand what organizational structures allow microfinance to operate well. As an organizational scholar, I was attracted by this question. Furthermore, as someone interested in the developing world, someone interested in figuring out better solutions to development problems, I was initially attracted to microfinance. This work eventually led to an interest in other forms of social enterprise. Studying microfinance, I began observing some of the tensions and contradictions that any social-enterprise model is bound to encounter.

2.   In your compelling, recent T.E.D. Talk, you employed economic principles to explain how Mexican drug cartels are actually sophisticated enterprises. What can we learn from your analysis about how to reduce drug consumption in the United States and elsewhere?

I would say two things. First, I am not only applying economic principles, but also broader social principles, to understand the institutional implications of the way we have structured the world drug market. Let me break my explanation down into the two parts.

What I argue in that T.E.D. Talk is that if you actually look at the core of the issue, what is really driving the dynamics of drug trade and drug violence in the world, you realize we are always attacking the phenomenon as a supply problem. We are always going after the criminals. Actually, the problem is that the market is a multi-billion dollar one. The U.S. market is gigantic; the demand for drugs here is enormous. If you look at the margins available to the people willing to take the risk to deliver the drugs, you reach the unavoidable conclusion that as long as that demand is present, there will always be someone willing to do whatever it takes to fulfill that demand.

It’s impossible to deny this fact if you look at the size of the market, the margins that market provides, and the resilience of the demand. Drug users are willing to absorb large changes in the quality and price of their product and continue using it, so it is a very attractive type of demand. The supply will find a way to that demand. For this reason, no matter how much we try to combat the supply, we are never going to be able to halt it. The demand will always be there.

If you start from that premise, everything we are doing to stop the supply becomes absurd. You are not going to be able to eradicate the supply. Furthermore, you start realizing not only that it is absurd to go after the supply, but also that by doing so, we are only making matters worse. Why? Because if you are going after drug traders, you are obviously going to catch some. But the more you do this, the more you create an evolutionary dynamic ensuring that the only people who can survive as providers to this market for drugs are the most ruthless, aggressive, and sophisticated, the most strategically complex organizations, ones that can survive in a world in which they are being chased.

In fact, it is our approach of going after supply that has created these increasingly violent organizations. We have created an environment where only the most ruthless and sophisticated enterprises can survive. There is no doubt they are going to strive to survive because there is this massive market that we are not doing anything about. In going after a symptom we don’t like, namely, the drug dealers whom we don’t like, we ignore the root cause for their existence, and we are making things much worse. The situation is like creating antibiotic-resistant bacteria. By using antibiotics for the wrong illnesses at the wrong times, you end up creating super-resistant bacteria. This is part of the problem.

Applying economic demand principles and examining the incentives and the structure of the market created by that demand, we realize we are making things worse. Because we have created an environment where the organizations have to be very sophisticated in order to survive, they do not just have well-designed strategies for serving the market in terms of their distribution and transportation networks. They’ve also developed pretty sophisticated strategies to legitimize themselves, to institutionalize themselves within both the Mexican and international landscape. They’ve developed sophisticated public-relations and media campaigns seeking to institutionalize what they do within the Mexican market. In the process, they have managed to weaken the institutional position of the state in very important ways. Not only are we failing to weaken these organizations, we are actually weakening the state, the tool we were trying to use to fight them. This situation is caused by our misguided approach to the problem, which stems from our failure to understand the root cause of the problem.

If you ask me what we are supposed to learn from this situation, number one, our solution is just not going to work. It is going to make things worse. Therefore, number two, we have to change the entire narrative around what this problem is about. I am not certain what the solutions would be. I’m not a proponent of legalization, but I do not oppose it, either. What I am proposing is that we need to accept that going after the supply is not only ridiculous, but also counterproductive. Therefore, we need to have a more honest debate about what it is that we can and should do to address this problem. This debate must begin with our acceptance of the enormous demand and our inability to curb it. We need to start from there. At that point, we might decide we should legalize everything, but find ways of limiting people’s consumption. We should stop thinking, “Let’s just put all the drug dealers in jail.” That is not going to happen.

We tend to experience drug violence as something happening separate from us: There are these criminals fighting each other in Mexico. I just want people to realize that if you either are a consumer or friends with a consumer, or you tolerate that consumption, if you are not doing anything to change policy, you are part of the problem. You are making it worse. One of the goals of my T.E.D. Talk was to generate some awareness that we need to become much more active in changing the policy. By we, I mean everyone because we are all responsible.

3.    Reading your vita, I was struck by the title of your 2010 Working Paper “From Buddha to the Boardroom: Leadership Education and the Four Pillars of Courageous Leadership Type.” What is that paper about? Where did you conceive of the idea of relating Buddhism to management education?

The title is a play on words on two or three different levels. The framework that we introduce in the paper was developed through a series of transformative leadership workshops that we designed for the Dalai Lama Center for Ethics and Transformative Values at MIT. I am a member of the Center’s Steering Committee. One of the goals of the Center is to design and provide executive education programs that are aimed at bringing tools and frameworks to help leaders be more ethical, more value driven in their decisions.

Another goal of the Center is to bring ethics-based / values-based training to professional schools: MBA students, medical students, lawyers, police officers, etc. We had been experimenting, and we ended up designing executive workshops about ethics- and values-based leadership. The paper discusses the four pillars we aim to introduce through our workshops. Regarding the question about the title “from Buddah to the Board room”, the workshops use some of the tools from Buddhism although the workshops are completely secular and non-religious in both content and presentation.

The founder and director of the Dalai Lama Center is actually a Buddhist monk who has also received very significant training in the West, and I’m a Buddhism practitioner, so a lot of the workshop content came from Buddhist practices, including some of the exercises we use for introspection and exercises to help participants become more aware of their emotional state, as well as exercises to help them become more aware of their connections to the people around them and those intended to help participants develop more humility so they are able to ask for help.

The other way in which the title is a play on words is that one of the most interesting things we found out throughout these workshops is we got some very powerful results from combining populations of Buddhist monks, with, for example, MBA students. When we conducted these workshops across populations, we found very interesting complementarities between the strengths and weaknesses of Buddhist monks versus the strengths and weaknesses of MBA students in the U.S. We found that the strengths and weaknesses were almost perfectly complementary. Whereas the Buddhist monks are incredibly humble and introspective, able to achieve amazing insights, they struggle a lot with making their thoughts practical. They struggle with the question, “How can I transform these insights into something I can do today?” The monks struggle to structure activities that would allow them to exercise their insights and leadership.

The MBAs have exactly the opposite problem. They are all about taking action, structuring activities, doing things. But they have a really difficult time connecting internally and truly reaching deep insights about themselves. MBAs have been trained to overlook a lot, so they have a hard time making the connection. When you bring these two populations together, they can help each other in very interesting ways. The workshops were a wonderful experience and another origin of the title of the paper. We are weaving Buddhist practices into worships with these two populations and getting some interesting results in the process. 

4.   In an August 2012 interview, you noted that existing organizations are naturally resistant to innovations, which involve change. Like organizations, some countries, notably Japan, resist change, especially dynamic, dramatic change. Japanese people and organizations typically favor low-risk maintenance of the status quo over the pursuit of high-risk opportunities. For this reason, Japan continues to suffer from the effects of the lost “two decades,” characterized by prolonged recession despite some recent improvements following the introduction of Abenomics. What would be your suggestions for helping the Japanese government, Japanese enterprises, and the people to become more innovative about improving the economy and their nation’s overall competitiveness in global markets?  

My course on organizations consists of thirteen sessions where we cover a broad array of topics. One of the sessions is on experimentation and failure. When I teach that session, I always tell me students, “I am aware that you may remember only one of the thirteen sessions of this course. Though I prepare all of the sessions carefully, I am aware that you are going to forget most of them. If I am lucky, you will remember one. If you only remember one, I want you to remember this session on the importance of experimentation and failure.” If you truly internalize how important they are in driving innovation, then you can kind of figure out everything else around innovation. You will be able to develop organizational structures that will help you be more experimental. You will be able to figure out the type of organizational culture you need to cultivate to make failure more acceptable.

All of these decisions must be based on a deep acceptance of the importance of experimentation and failure in driving innovation. The reason is that innovation involves doing something that has not been done before. That means that you do not get to choose whether you are going to fail. No one has previously done what you are trying, so you will fail. The relevant question is how you are going to fail. Are you going to fail in a way that is small and controlled, in a way that teaches you something fundamental that, helps you move forward, to make nimble progress? Or are you going to fail in a massive way that completely impedes your ability to make progress? Given that the only choice is about how you fail rather than whether you will fail when you are dealing with innovation, the implication is that you want to set up as many small, inexpensive experiments as possible so you can figure out what works and what doesn’t.

I don’t know Japan that well, but I have many Japanese students. I also have many Asian students and have taught a lot in Asia. In the culture and history of many countries, especially Japan, I do find that society is very status-based. Hierarchy plays a prominent role in the social system. I also find that the cost of failure is very high. People make a huge deal when someone fails. Powerful shame accompanies mistakes. If you combine these two elements, you create a perfect environment for ensuring people are unwilling to innovate. Innovation usually comes from people lower in the status hierarchy who are closer to the market or the user, more familiar with the problems out there in the world. High-status people are generally far removed from the “real world,” so they tend not to have access to the insights that allow people to generate innovation or address problems. Innovation also requires experimentation and failure. If you have a system where hierarchy and high status are core values and where any type of failure is considered horrible and regarded with tremendous shame, you have the conditions for a perfect storm against innovation.

What I would promote in Japan is empowerment. I would empower people over status so they can be more experimental. I would also tweak the culture around the interpretation of failure. Is the organization interpreting failure to mean “We have failed,” or “Well, we haven’t succeeded yet, but the failure has taught us some important lessons. Let’s incorporate them into the next iteration of our experiment”?

In organizations where failure is not tolerated, people go out of their way to make sure everything is perfect. Innovation is not going to happen because we do not know what we are doing when innovating. In the end, the failures are bigger, and that reinforces the culture of failure because every failure is massive and has deep implications. As a result, people try to avoid failure even more, try to come up with more perfect solutions. This is not going to work, but is going to lead to even more massive failures, resulting in a self-reinforcing system.

What you want to do is reel things back, help people be much more experimental. You also want to change the culture around how everyone experiences the failures. I am not a proponent of celebrating failure. But I do think the culture needs to value failure. We should learn from failure and share the lessons from it. We should frame failure as a critical step in achieving a solution.

5.   You cite IBM as an example of a company that tackled an innovation problem creatively. Do you think Google, Apple, Amazon and Facebook eventually will face innovation problems like IBM given they seem to already have introduced the inner-competition and cross-hierarchical teams you suggest for facilitating innovation? What other measure could these organizations take to maintain innovation at current high levels?

That’s a very interesting question. The short answer is we don’t know.

IBM almost died. It nearly suffered the same fate as the Polaroids and Kodaks of this world. But the CEO, board, and management team began to understand the problem at some point, and they were willing to get rid of everything dragging IMB down. That is extremely difficult to do because all of these things were providing a lot of revenue for the company. It’s not as if these parts were generating losses for IBM. At some point, the parts were core businesses, and they were still generating a lot of revenue for the firm. The management team realized that precisely because these parts were revenue generators, it would be impossible to retain them and transform IBM’s business model in the way required to perform in the changing world that constituted their new operating environment. The firm was willing to cut these things down and get rid of them, something extremely difficult to do.

Dick Foster, a colleague of mine here, and I have a lot of conversations about innovation. We both agree that the challenge for successful, established organizations is balancing several factors required to remain innovative and survive. Number one, the companies have to maintain operational excellence. They have to continue doing whatever provides the revenue today with excellence. As companies’ core source of revenue, these activities are going to draw a lot of energy and resources. But operating with excellence is not the only thing you need to do. You also need to generate options. You need to invest not only in providing incremental innovation to current operations, but also in generating a new portfolio of options for the future, the final value of many of which you will not be able to predict. That is the second imperative. The third is maintaining financial control of your organization. You have to be operating with excellence, generating options, and maintaining financial control all at once.

Amazon is a company that worries me a little because they are not operating under financial control even though they have structured an interesting, operationally excellent company. They are constantly losing money. The stock market has given Amazon a free pass so far, but when the market begins to tighten, something the market has signaled might be coming, that could generate a difficult moment for Amazon because they are not operating in a financially sound way.

A fourth requirement for organizations is the willingness to get rid of things and trade them. Pursuits that were once a core business but have limited potential to remain dynamic and nimble probably should be abandoned. You want to sell these things while they are still valuable. Doing this requires a lot of discipline. 3M is an organization that is very interesting in this respect. They’re always trading and closing companies and divisions not growing at expected rates, and they are always opening new divisions. These activities are part of their discipline. Apple is noteworthy in this respect, as well. They have no qualms about shutting down a product or business line that is no longer dynamic. Even if doing so ruffles customers, Apple will still discontinue a product. Google has also been relatively disciplined in terms of shutting down business lines that are not doing well.

I worry about Facebook. Namely, I am concerned that they have tied their identity to a particular service and product too tightly. Organizations that define their identity around a product put themselves in a fragile position. As their product proceeds through the life cycle the way all products do, the product is going to lose its ability to generate revenue. Companies that have defined their identities around a particular product are going to have great difficulty adapting as the environment changes. If your identity is built around providing solutions and services to clients, you will be much more willing to divest and trade products as the market changes. You see Apple doing this easily. I am not sure that Facebook has truly taken that approach. I see some signs that they are trying to, but I think that their identity is tied to their original product, Facebook, also the name of the company. As Facebook the product begins to cycle out of the market, I believe the company is going to experience some problems.

2015-06-26 What makes big data big is not its volume but its impact on decision making!

Harikesh Nair

What makes big data big is not its volume but its impact on decision making!

This month, I feature an interview with Dr. Harikesh Nair, Professor of Marketing, Graduate School of Business, Stanford University. Specializing in marketing analytics, Dr. Nair blends applied economic theory and econometric tools with marketing data to better understand consumer behavior and to improve the strategic marketing decisions of firms.His research is a must read for anyone interested in big data and marketing through social media 

1.      Last year you delivered a short talk entitled “Building Better Employee Incentives with Big Data.” Can you summarize the highlights of that talk? How would you define Big Data?

I think the “bigness” of data should not be defined by the amount or the quantity of data or the speed at which it can be collected, but by its ability to make big impacts on decision-making and outcomes when utilized properly. For me, big data means the fact that information and analytics can be combined in new ways with domain knowledge that managers already had, to make large impacts on the organization. That is what I consider big data.

A lot of companies have made large investments in collecting data on how the companies interact with customers. We refer to that as CRM, or customer relationship management systems. We now can track a lot about customers—what the touch points are, what the customer did. That has generated a revolution in how consumer interactions with companies are analyzed. What I was discussing in the video was a similar revolution occurring within the firm. Specifically, in much the same was as customer interactions with the firm can now be modeled, we can think about how employees behave, how they interact with one another within the organization, and model employee behavior in a granular way. All of that can be tracked. We can conceive of the firm as an internal market. I think that is a huge change that will occur in the near future: the notion of big data will enter within a firm, an organization.

The fact of the matter is that right now, we really do not have a good understanding of what makes an employee good. We really do not have a systematic understanding of why some employees are good while others are not and what drives productivity. For instance, consider whether teams make employees more productive. Some employees may not perform well when working in isolation, but exceed expectations when grouped together into a team. Who should we group together? Similar or dissimilar people? What works better? We really don’t know. The advantage of the new scenario is we can now track who works with whom, how they interact with each other, and see whether productivity was higher or lower under different team configurations. Also interesting is the fact that all of that information can be combined with traditional HR data on who received a high salary, who was given a bonus, who received a commission. And you can match these data with actions employees took. Then you can ask questions like, “If you give this person so much commission, will you increase his productivity this much?” In other words, we can now quantitatively assess the value of a commission.

2.      In what other areas do you feel Big Data can be particularly useful in improving corporate performance? How can managers and staff systematically collect and analyze such data?

One analogy offered by a colleague is that big data is a natural resource like oil. Oil in its original form is not useful. It first has to be extracted and stored. Then, it has to be cleaned. Ultimately, it must be refined in a way making it useful for consumption in a vehicle or jet engine. Data are similar. The first step is data collection. But simply collecting and storing large quantities of data somewhere is not useful. The data need to be systematically cleaned and rendered in a form suitable for answering a business question. And finally - and I think this is the really big gap for an organization - data in and of itself does not “speak” or “tell a story”. It has no value until it is combined with some business and domain knowledge and interpreted correctly. The design of the right experiment or the right question to ask, and when to use a database to broach it, and when not to in order to avoid so called “analysis paralysis,” are all managerial questions.

So, I think the mere collection of data is not going to change much. It’s when the data are used by intelligent individuals who understand how to use analytics in combination with domain knowledge that it’s going to be powerful. I think the most important thing for companies is to try and find those kinds of individuals. This is not easy - the human-capital scarcity is very real. There are good statisticians who may not know the business context. There are people who are trained and credentialed in particular aspects of business but who don’t have the training to think quantitatively, or do not know how to think in a data-oriented manner. You need to find people who can do both. Just one of the two pieces is typically insufficient. Corporations need to focus their attention on this human-capital dimension.

Massive computing innovations are taking place in the collection, cleansing, and visualization of data. Great software is available for these tasks. But this data will not affect the business unless a line manager uses this information to make a decision. I think the collection, cleaning, and visualization aspects are easier to solve than this problem—that is, understanding how this data can be used to drive the business forward. For this, firms need to train existing managers, hire new people, and empower them to make decisions as well. Universities have a role to play in proactively providing more and better training, graduating more people with the requisite skills. The effort will have to be collective. Presently, there is an acute talent shortage.

3.      Not too long ago, you conducted a Big Data study of Facebook messages investigating the effect of social media content on customer engagement. Can you summarize that study for us, highlighting key findings? To what extent do you think they generalize to countries like Japan?

The purpose of the study was to learn about the role of advertising content in the context of social media. To understand the background on the study, lets ask: when a company spends a lot of money on advertising, what should consumers infer? If the product were of low quality, but many people purchased the item as a result of high advertising, the firm would be adversely affected. Thus, the fact that the company is advertising heavily signals to consumers the product is high quality. Punchline - the presence of heavy advertising by a company suggests to consumers that the product is high quality. Knowing this, only really good firms would advertise. Really bad firms would not, thereby validating consumer thinking. This is the so-called signaling model of advertising in a nutshell.

This model is unsatisfactory. It implies you do not necessarily have to advertise heavily in order to get the advertising’s benefits. You simply need to spend some money to signal that you are a good firm to consumers. Yet we see that many companies spend significant resources in hiring ad-agencies and creative directors and others to design compelling advertising messages; that ad-creative firms have a lot of clients and are making money. Some ads center on lifestyle features, others state prices. Some ads describe how good you will feel if you use the product. Yet others simply furnish objective information. All suggests that the ad-creative matters. Also, many people have tried out Pepsi and Coke and know how they taste – they don’t need to see ads to know whether Coke or Pepsi “work for them”. But we see that both companies continue to spend huge sums advertising. This is clearly not simply about signaling. A limitation of the canonical model therefore is its failure to assign a compelling role to the content of the ads. This paper asks how the content of the advertising matters.

We worked with a company to collect a lot of posts that firms are publishing on Facebook. Then, we used Amazon’s Mechanical Turk (a crowdsourced labor platform) in combination with a natural language-processing algorithm to create variables reflecting attributes of the content of the posts. Eg, does the content mention prices? A sale? The brand? Do the posts contain emotional content? Is this content emotionally positive or negative? Our key finding was that information about prices and availability, what we called search attributes, were not effective in generating engagement, which we defined as “Likes” and comments on facebook. Emotional content, in contrast, generate a lot of engagement. From this relatively large-scale study of over one-hundred thousand posts on Facebook, we concluded that emotional content is extremely important for generating engagement. In addition, though search attributes like prices alone do not seem to generate engagement, coupled with emotion, they have a positive effect on engagement. This main finding of the paper underscores the importance of emotional or social content for generating interaction. Information provision alone does not seem to work.

4.      How do you think social networks in specific and the internet in general have changed marketing? What three changes do you feel are most significant? How well have companies adapted overall? What can they do to better adapt?

Social networks have changed marketing in a huge way. Their primary influence has been to create a spillover effect that amplifies the importance of marketing messages. In the pre-social days, I could target a message to the user, exerting an effect on that person. The message might affect other users, but we had no way of knowing. Now, we can target a message at an influential user. Not only will he or she potentially be affected by that message, but that user might share the message with others because of the social nature of the message. Individuals connected to this targeted individual are also affected by the message, which they, in turn, will share with their friends. Thus, social networks increase the efficacy of the impact of messages. Further, much of this is measurable.

Social networks have also changed the power equation between consumers and firms. In the past, if you had a terrible experience at a restaurant or on a plane flight, you could write to the CEO, but then no one else will know of your experience. Or you can tell a few of your friends at home. Now, you can post your experience in Facebook for viewing by a vast circle of friends, some of whom will respond indicating they have had a similar experience. They may repost your experience and tweet it, too. Then, their friends will read about your experience. It may be included as part of a thread in a trending story in Twitter, in which case millions of people may eventually learn about your experience. In this way, social networks have increased the power of the consumers. They now have the ability to explain their viewpoint to a large number of people, a form of influence once enjoyed only by firms with the resources to advertise. That gives consumers more of a voice.

What can firms do to adapt? I think measurement is particularly important. Tracking technology has improved. Advertising channels and social-media options have proliferated. You can advertise on Twitter, post ads on Facebook. You can select from Facebook social ads to ad feeds. Paid content and social content are also options as well as Youtube. Measurement technology in the digital world is advanced compared to the offline world. A large number of firms now sell sophisticated measurement products. The problem, I believe, is on the people side. Human capital in marketing organizations is currently inadequate to effectively leverage all of these tools. People do not know how to use them. They are overwhelmed by the volume of data flowing in and by the proliferation of available options. The first step firms can take is to improve their in-house measurement capability and hire people who understand these tools. Firms can demand better measurement from agencies providing data to them as well.

5.      Google coined the neologism ZMOT—Zero Moment of Truth. In contrast to the classic First Moment of Truth, the five to seven seconds a consumer sees the product on the supermarket shelf, deciding whether or not to purchase it, Google believes consumers now decide before they go based on online research. To what extent do you agree with this Googly notion? To the extent that you agree, what do you think the implications of ZMOT are for company marketing departments? How will they have to alter their marketing strategies?

As an academic, I hesitate to give uni-causal explanations for multi-causal phenomena. Shopping behavior - where and how we choose to buy - is a complex process. It involves obvious considerations related to price, convenience, and mental associations to other brands as well as word of mouth and advertising. I am reluctant to buy into the First Moment of Truth or ZMOT notions for this reason. I do think both concepts apply, but I do not think either applies completely to the exclusion of other considerations.

Compared to the past, the sheer magnitude of information and the ability to access it on the go with a smart phone have changed behavior significantly. Many consumers are no longer influenced by conventional lifestyle advertising or simple branding. If you think about what a well-known brand is in the first place, it is a cue that the product is very good. It comes with the promise that the quality is good. It tells you that you will not be cheated. If I am time constrained or cannot find information related to a purchase, I will trust the well-known brand. Purchasing a well-known brand is lower risk in this case.

Because information is now easy to find and access, this impact is reduced. In some sense, information in lifestyle advertising and information in branding are substitutes. As information becomes easier to access, we will access information from our networks. In that sense, I agree with the Google folks. Lots of decisions are not driven by cues that you see in the stores, but by information about products that consumers have researched.

Two strategies will be important in adapting to this new reality. One is to think deeply about the marginal value of time for people. Time-constrained people may not find reading lots of information and checking prices an optimal course of action. The information-acquisition cost is too high for them. Other individuals may not be all that hungry for information in certain contexts. In other contexts, they might actively search it out. For this reason, it is important for companies to target the content and timing of their messages appropriately. The mass marketing approach has changed to one of a heterogeneity of approaches targeting to consumers for whom the brand matters.

Given that consumers are more active in seeking and using information, the second strategy is for companies to play a role in providing that information. Good companies now need to provide a page explaining what makes them a good company. Simply stating you are a good company is no longer effective. You now have to explain why. Companies can create their own web and product-information pages. Companies need to be in the channels where consumers acquire information. Many consumers type key words in the Google search engine. Companies need to be there. This is the second way companies can respond to the proliferation of information and the reduced transaction cost of acquiring it.