Do Senior Managers Make Better Decisions Than Students?

12 June 2011 at 2:30 pm 8 comments

| Nicolai Foss |

Even management students may occasionally suffer from confidence and self-esteem problems. I have had many students confide that they were more than a little scared at the prospect of landing a real job where their decision-making skills would be compared to older, wiser, smarter, etc. colleagues. Rather than directing them to this site, in the future I am going to give such students a copy of Gary E. Bolton, Axel Ockenfels and Ulrich Thonemann’s “Who Is the Best at Making Decisions? Managers or Students?” They set up a simple experiment based on a simple profit maximizing problem, and find that practitioner performance isn’t as good as graduate business students’. Moreover, the learning curve of the latter is steeper than that of practicioners.

Here is the abstract:

The newsvendor problem is a common teaching device in business schools. Demand for her product is volatile and unpredictable, but she still has to order stock in advance of sales. How much should she order when the only information she has is past sales? In experiments, people presented with this problem tend to create orders close to average demand, even though this does not optimize profits. This tendency is called ‘anchoring bias’. However, most of these experiments have been conducted with students. Would industry managers perform any better? Given their high levels of experience, you might think so. But they did not. In fact, when given the chance to learn ways to improve ordering strategies, even though managers’ performance improved, it did not improve as much as the students’. Anchoring bias, it seems, is as strong among professionals as it is among amateurs. What lessons can companies draw from this?

HT to Henrik Lando for the pointer.

Entry filed under: - Foss -, Management Theory, Myths and Realities, Papers, Recommended Reading. Tags: .

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8 Comments Add your own

  • [...] Do Senior Managers Make Better Decisions Than Students? – via Organizations & Markets – Even management students may occasionally suffer from confidence and self-esteem problems. I have had many students confide that they were more than a little scared at the prospect of landing a real job where their decision-making skills would be compared to older, wiser, smarter, etc. colleagues. Rather than directing them to this site, in the future I am going to give such students a copy of Gary E. Bolton, Axel Ockenfels and Ulrich Thonemann’s “Who Is the Best at Making Decisions? Managers or Students?” They set up a simple experiment based on a simple profit maximizing problem, and find that practitioner performance isn’t as good as graduate business students’. Moreover, the learning curve of the latter is steeper than that of practicioners. [...]

  • 2. Michael Marotta  |  14 June 2011 at 5:32 am

    This is surprising. Reading papers on decision-making for “Complex Organizations” with Ron Westrum as an undergraduate, I found that experience wins. Without digging all that out now, one example was easy to remember – perhaps a confirmation bias.

    In combat simulations, experienced squad leaders do better than newbies.

    Perhaps firefights are metaphysically different from markets, despite our colorful language about conquering and victories. It may be that the example here – the Newsvendor – represents a species of problem, as does close infantry combat. The classes of challenge may not be analogous.

    In this case, it may be that being in learning mode, the students are oriented to improvement, whereas (as is to be expected), experience leaves you set in your ways. Bill Gates said that success is a terrible teacher.

  • 3. Aidan  |  15 June 2011 at 10:07 am

    When you join a firm, you are new the culture. The existing senior manager will be very familiar with it. All decisions will be made within that culture. This is why students, no matter how smart or well educated are right to be apprehensive; it’s good for them, it will raise their senses.

    In relation to the newsvendor game, what types of companies did the managers come from? What could have been interesting would have been to break up the managers by the company/division they came from and see if that resulted in anchoring around the same points?

  • 4. SkepticProf  |  16 June 2011 at 5:59 pm

    I wonder whether this is the MBA version of “Are You Smarter Than a Fifth Grader?” Amazingly, students are somewhat self-selected to be good at learning. (Given the shape of their ability distribution in this self-selected sample, it is, of course, scary that this is the activity that we expect them to be BEST at.)

  • 5. Bo  |  19 June 2011 at 5:42 am

    Interesting indeed! To me this represents two different experiments (issues);

    1) Does experience matter (given a particular situation, problem and type of experience?

    2) Learning curves.

    Ad1: Research on TMTs show clearly that of course experience matters (though we do not compare to generic MBA students..) – but it depends on what type of experience and how well this experience is related to the problem at hand (i.e. if you ask a manager of food processing to comment on the newsgame I would expect little or no (or even negative) effects of his/her experience on the outcome. An example is international experience; while it DOES matter for domestic strategy issues as well (because such experience is somewhat related to strategy in general), it matters far less than when compared to international strategic issues (i.e. expansion strategies).

    Many studies of TMTs simply measure industry experience (for instance as the number of years a manager has worked in a particular industry – based on SIC codes or something vague like this) and then the question is to what extent you would expect this to exert significant and consistent (systematic) influence on firm strategy (broadly defined) and performance? Well – if all strategy problems are alike and all firms’ performance is determined by similar factors then maybe…

    Ad2: It is hardly surprising (to me) that students learn faster (and steeper?) than managers…given the (supposed) lower starting point and the environmental conditions of being a student, I should think that anything else would be a failure of educational institutions….

    A somewhat related issue is the role of simulation games in industry. While students have long been subjected to these games, some firms are also experimenting with simulations in order to better forecast about the future and how various parts of their organization will be influenced by stategic change. I wonder how well the students would do here and whether their “fresh” minds may indeed provide novel insights and perspectives?

  • 6. Blog Archive: GOSt.uniud - Classe dirigente  |  23 June 2011 at 5:14 pm

    [...] Se fosse possibile fare questo test da noi? http://organizationsandmarkets.com/…than-students/ [...]

  • 7. Tom Knox  |  23 June 2011 at 11:09 pm

    I am under-persuaded by studies which take no account of the radically different opportunity costs of participants. If I make $1,000 a day and someone asks me an irrelevant question, I have an incentive to say “Whatever! Get me outta here.” whereas if I make $0 per day I can spend as long as I like on the problem.

    I assume the managers have much higher incomes than students.

  • [...] Do Senior Managers Make Better Decisions Than Students? – via Organizations & Markets – Even management students may occasionally suffer from confidence and self-esteem problems. I have had many students confide that they were more than a little scared at the prospect of landing a real job where their decision-making skills would be compared to older, wiser, smarter, etc. colleagues. Rather than directing them to this site, in the future I am going to give such students a copy of Gary E. Bolton, Axel Ockenfels and Ulrich Thonemann’s “Who Is the Best at Making Decisions? Managers or Students?” They set up a simple experiment based on a simple profit maximizing problem, and find that practitioner performance isn’t as good as graduate business students’. Moreover, the learning curve of the latter is steeper than that of practicioners. [...]

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