Sutton Alert

6 April 2009 at 2:08 pm 8 comments

| Peter Klein |

I haven’t made way through all of Bob Sutton’s contribution to the HBR symposium, “How to Fix Business Schools,” but I read the summary on Sutton’s blog, and Bob manages to work two whoppers into the opening paragraph. First, he calls Oliver Williamson “a major proponent of Agency Theory.” (Bob, for the differences between agency theory and transaction cost economics, try Williamson’s 1988 Journal of Finance paper. Or any introductory textbook.) OK, a nit-pick. But consider this: “Many economists teach and believe that humans are selfish and greedy.” Apparently Bob has read Williamson’s description of opportunism as “self-interest seeking with guile.” Rather than think about what this means, or consider the context in which Williamson uses the term, Bob turns to his dictionary, which tells him that guile means “treacherous cunning, skillfull deceit.” Ergo, economics teaches cunning and deceit!

In the HBR piece itself, Bob manages to make the obligatory link between Alan Greenspan and Ayn Rand, though calling Greenspan a follower of Rand is a bit like saying the Black Panthers were inspired by Gandhi. (As Greenspan repeatedly reminded us, he believed in Rand’s ideas “at the high philosophical level,” i.e., not at all, where actual policies were concerned.) The opening of the HBR piece is informative, however, in suggesting how Sutton may have came to his views about economics and economists:

In my experience, most economists at top business schools are clueless about the nitty-gritty of management, which can’t be captured in elegant mathematical models. They treat any teaching remotely related to what leaders actually do on their jobs as a low status activity; at faculty meetings, I’ve seen economists and their followers dismiss and ridicule professors who teach “soft” skills. Those who speak in simple language and use words instead of numbers are often screened out, expelled or sentenced to spend their days at the bottom of the pecking order. And even faculty who bring rigorous evidence that challenges economic assumptions are badly treated.

I’m sorry that Sutton’s interactions with economists haven’t been more pleasant. But, really, what do his personal experiences have to do with the substance of economic doctrine, or its application to management? You won’t learn anything about these from reading this stuff.

Entry filed under: - Klein -, Management Theory, Myths and Realities.

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8 Comments Add your own

  • 1. Bob Sutton  |  6 April 2009 at 4:13 pm

    Peter, I think you are confounding my two comments. The many economists and other b school professors who act as if if the nitty-gritty of organizational life is beneath them is a different point. But to stay with self-serving with guile, which is exactly what was written and assumed in those papers, is a suspect and context dependent (rather than hard-wired) assumption that is baked into many hiring and firing and practices and reward systems. I think you make light of Williamson’s assumption and the word “guile” not mattering, as it is something that many students come away believing — and if you look at research on the effects of studying the subject — and acting like after the study, or simply are primed in, the language of economics.

  • 2. Peter Klein  |  6 April 2009 at 5:27 pm

    Bob, there are two issues to consider: (1) What does Williamson mean by “guile,” and (2) what are MBA students taught about opportunism?

    On the first, consider what Williamson actually says about opportunism (e.g., Economic Institutions of Capitalism, pp. 47-49):

    [O]pportunism refers to the incomplete or distorted disclosure if information, especially to calculated efforts to mislead, distort, disguise, obfuscate, or otherwise confuse. It is responsible for real or contrived conditions of information asymmetry, which vastly complicate problems of economic organization. Both principals and third parties (arbitrators, courts, and the like) confront much more difficult ex post inference problems as a consequence. . . .

    Plainly, were it not for opportunism, all behavior could be rule governed. . . . The more important lesson, for the purposes of studying economic organization, is this: Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised ex ante. Rather than reply to opportunism in kind, therefore, the wise prince is one who seeks both to give and to receive “credible commitments.” Incentives may be realigned, and/or superior governance structures within which to organize transactions may be devised.

    Opportunism here means simply that agents cannot be trusted to tell the truth, to fulfill their promises, etc., without an incentive for doing so. Clearly Williamson is raising these issues not to offer general statements about human behavior, but to explain why people sign contracts, why courts and arbitrators exist — i.e., why governance is necessary. This doesn’t sound to me like “treacherous cunning, skillful deceit.”

    The more important point, however, is that for MBA teaching, none of this really matters. Why? Because students are not taught transaction cost economics or agency theory from reading the original texts by Williamson and Jensen but from textbooks, case notes, lectures, etc., and I would venture to say that virtually no MBA courses taught by economists at major universities features the language of “guile” or the concept of opportunism precisely as Williamson uses it. Williamson, as is well known, has his own idiosyncratic vocabulary, one that is not shared by his peers.

    Let’s look at how self-interest is described in a few of the leading managerial economics textbooks:

    “Economic analysis is based on the notion that individual assign priorities to their wants and choose their most preferred options from among the available alternatives. . . . Economists do not assert that people are selfish in the sense that they care only about their own personal consumption. Within the economic paradigm, people also care about such things as charity, family, religion, and society” (Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture, 5e, p. 18).

    “Some people believe that the only important component of the job is the level of monetary compensation. But as we have already suggested, people have an incredibly broad range of interests, extending substantially beyond money. . . . Some of this confusion can result from a misinterpretation of standard economic analysis” (ibid., p. 35).

    “To say that economics forms the basis of the analysis does not imply that human factors are ignored. For example, the importance of nonmonetary components of job satisfaction like status, pride, and pleasantness of work are all analyzable in an economics framework. A significant portion of this book is devoted to exactly those kinds of issues. Using economics as the framework merely implies that workers and firms take actions that are in their own best interests . . . The economic approach assumes that tastes, while possibly unusual, are stable over time. This, behavior is predicted based on the assumption that individuals and firms do what they can to further their well-defined and consistent goals. There is nothing noneconomic about a worker stating that he is willing to trade 10 percent of his salary in order to obtain a corner office. But the economic approach does imply that if he is later offered the corner office for 8 percent of his salary, he will accept” (Lazear, Personnel Economics for Managers, p. 2).

    “The key insight here is that team-based performance measures mean that the benefits from an individual’s actions are shared with the entire team. Hence, if there are n members in the team, the individual taking the action receives just 1/n of the benefit. . . . The mismatch between the total benefit to the team and the personal benefit to the [agent] means that the [agent’s] effort choices may not be the ones that maximize overall welfare. This effect is known as the free-rider problem. . . .” (Besanko, Dranove, Shanley, and Schaefer, Economics of Strategy, 3e, pp. 521-22).

    Where is “treacherous cunning, skillful deceit” even remotely suggested in these texts? Can you provide examples of course materials that focus on “self-interest seeking with guile,” rather than simple self-interest?

  • 3. Warren Miller  |  6 April 2009 at 9:53 pm

    I find it passing strange–indeed, downright ironic–that Prof. Sutton is haranguing economists at top b-schools for being “clueless about the nitty-gritty of management.” This is the same Bob Sutton whom Bob Oviatt and I quoted in the lead of our 1989 AME paper, Irrelevance, Intransigence, and Business Professors as saying the following: “I’ve been in the real world. It stinks.”

    In fairness to Mr. Sutton, he later said that he was misquoted. Instead of “It stinks,” he said that what he really said was “It sucks.” Perhaps the Wall Street Journal, which originated the quoting in a story about the Academy of Management Meeting in 1988,, was more of a family newspaper in those days.

    Mr. Sutton really seems to get into the teeny-bopper/MBA vernacular, as evidenced by his recent book, The No-A**hole Rule: Building a Civilized Workplace and Surviving One That Isn’t. Now that I think about it, though, Mr. Sutton is probably better qualified to recognize a**holes than most people. And for good reason.

    Though the late Sen. Paul Tsongas used it to describe Bill Clinton in 1992, his wonderful phrase is perfect for guys like Bob: “pander bears.” Sutton is still at it, “still crazy after all these years.” And pandering down the stretch.

  • 4. Steve Phelan  |  6 April 2009 at 10:04 pm

    I have been pondering this issue in my own teaching for some time now. I agree with Peter’s view that maximizing one’s own preferences does not preclude altruism.

    However, what if teaching the concepts of opportunism and holdup (not to mention moral hazard and adverse selection) gives a new portfolio of behaviors to those that may not have thought about acting in such a way? What if a student’s preferences change as a result of exposure to economic thinking? If students are asked to examine issues in a utilitarian (cost/benefit) framework then they might often reach the conclusion that breaking the law is justified if the benefits outweigh the negative consequences?

    For instance, perjury in family court is rarely punished so, using a simple utilitarian calculus, it becomes rational to commit perjury. Similarly, when it is costly for one party to enforce a contract then it is rational for the other party to attempt to renegotiate a binding contract in its favor.

    This can be contrasted with a deontological approach which would argue that contracts should always be honored and perjury is always bad. In this view, teaching utilitarian thinking undermines the rule of law (and other key institutions) that are vital for a well-functioning society.

    The B-school is in something of a bind, do they teach what actually occurs (descriptive), what should occur in an ideal society (normative), or a third way that considers the practical constraints but strives for a better system (prescriptive)?

  • 5. DJ  |  7 April 2009 at 7:58 am

    Do you think that the “soft” social science folk are using the “economic crisis” as an opportunity to grab power in B-schools through increasing their participation in the curriculum? This was true soon after Enron and Worldcom, when B-schools added leadership and ethics curricula during first-year MBA orientation. In my experience the “soft” skills folk have a deep insecurity about their value to business schools, hence their resentment towards economics based disciplines (e.g. accounting, finance, etc.)

  • […] Peter Klein offers his own response to Bob Sutton here. […]

  • 7. michael webster  |  9 April 2009 at 4:33 pm

    Here is a simple test of Sutton’s views.

    Introduce the dollar auction game to two classes, one MBA’s and the other say Spanish majors.

    Test which group, consistently day in and day out, produces the more irrational outcome.

  • 8. REW  |  9 April 2009 at 6:34 pm

    Michael,
    Testing the hypothesis makes sense to me, but it may take a very sophisticated tool to do so. Read any of Richard Thaler’s books and you will see that MBAs and non-MBAs have fallen for the same framing experiments and decision heuristics in like numbers. Hubris experiments, as well. Design for your experiment would have to be precise, so that outcomes do not confound greed and stupidity, for example.

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