Does Economics Training Hinder Managers’ Ability?

8 July 2009 at 2:43 am 4 comments

| Benito Arruñada |

In a new paper with Xosé H. Vázquez we explore the consequences of using different behavioral assumptions in training managers on their future performance. We argue that training with an emphasis on the standard assumptions used in economics (rationality and self-interest) leads future managers to rely excessively on rational and explicit safeguarding, crowding out instinctive contractual heuristics and signaling a “bad” type to potential partners. In contrast, the behavioral assumptions used in management theories, because of their diverse, implicit, and even contradictory nature, do not conflict with the innate set of cooperative tools and may provide a good training ground for such tools.

We present tentative confirmatory evidence by examining how the weight given to behavioral assumptions in the core courses of the top 100 business schools influences the average salaries of their MBA graduates. Controlling for the average quality of their students and some other school characteristics, we find that average salaries are significantly higher at those schools whose core MBA courses contain a higher proportion of management courses as opposed to courses based on economics or technical disciplines.

Analytical education based on rationality and self-interest is not necessarily wrong. But blind emphasis on conscious, “rationalistic” safeguarding may be as damaging as full reliance on gut feelings for establishing one’s relationships. The point is that although calculative safeguarding may play an important role in specific transactions, economic agents need to consider its tricky interaction with automatic contractual heuristics. Thus, whereas economics may offer a good education for certain impersonal tasks, it may be harmful for individuals playing a leadership role.

MBA programs with a higher proportion of courses using management theories produce better-paid managers not because of the quality of these theories but because their courses present a less dogmatic and more descriptive approach to the contractual process. This helps future managers identify different relational frameworks, encouraging a contingent — and more successful — approach to economic and social exchanges. Management theories, which  not only handle concepts related to rationalistic opportunism but also involve others like trust, intrinsic motivation, ethical values or, more generally, emotions, do not interfere with the adaptive nature of our contractual heuristics. They present a diverse and sometimes even contradictory nature of human behavior.

Our results have implications for contract theory, changing the nature of the contracting problem. If there were a single type of human being prone to moral hazard or opportunism, the recipe would consist of designing incentive alignment mechanisms. However, if there are actually several human types or, if individuals are actually programmed to respond differently depending on the particular situation and partners they face, then the main challenge in contracting is not necessarily to protect parties against opportunism but to discriminate potential partners and contracting situations in order to display a different relational strategy in each transaction.

Entry filed under: Education, Former Guest Bloggers, Management Theory.

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4 Comments Add your own

  • 1. David Croson  |  8 July 2009 at 7:42 am

    (Reposted from Facebook discussion, at Peter Klein’s request.)

    I love this sentence: “In contrast, the behavioral assumptions used in management theories, because of their diverse, implicit, and even contradictory nature, do not conflict with the innate set of cooperative tools and may provide a good training ground for such tools.” The same could be said of beer: it doesn’t conflict with these tools and the bar may provide a good training ground.

    The author also seems to confuse “economics” with “transactions costs econ, a la Williamson” — even though Williamson is not the type of economics taught in these “technical programs.” This seems like a serious problem with the study’s validity.

    I agree that managers need to know how to cooperate. How about teaching them explicitly about the rewards (and hazards) of cooperation? There are several areas of economics devoted to studying that (e.g., cooperative game theory, team theory, supermodularity, joint production functions…) that aren’t “diverse, implicit, and even contradictory.”

  • 2. David Croson  |  8 July 2009 at 8:01 am

    Let me gently suggest another hypothesis (now that I’ve had the opportunity to examine the regression tables.) I think that controlling for GMAT (and, implicitly, by school selection, as pointed out in the paper) introduces a confound to the socialization story so thoroughly expounded in the paper.

    Is there a way to control for the type of jobs that the students take upon graduation? Many schools report it. I know that collecting it requires more legwork than average salary, but given the other explanatory variables the authors have collected, I was surprised that the equivalent of “case mix” didn’t show up in this study. Here’s why I think it matters:

    (1) Students with high GMAT scores go to top-ranked programs. They take jobs in finance, consulting, and venture capital — all of which are highly economics oriented (and not “technical” according to the definition used in the paper.) They get high salaries.

    (2) Students with low GMAT scores go to lower-ranked programs. They almost never get jobs in finance, consulting, or venture capital (which causes the average salary of MBA graduates from those schools to be lower). Given that they can’t get jobs in fields that use a lot of econ classes, they aim at fields that use a lot of “softer, managerial skills” (not that there’s anything wrong with that; I’m just pointing out the voluntary separation by career type.) Having an MBA that teaches the softer skills of managing people adds a lot of value to these types of students; they’ll never be super-high earners no matter what they do, so the schools might as well offer for the bread-and-butter management courses that at least make them hireable. The schools that DON’T offer these courses that have a high marginal value for the student who will never get the top jobs have truly terrible job-market outcomes, leading to lower average salaries. This makes the coefficient on the courses that have high marginal return TO THE LOWER-ABILITY TYPES positive. Similarly, getting an MBA to be “technical” (which I read as “non-economics, non-ethics, non-managerial) doesn’t lead to an MBA-level salary; these students (e.g., in MIS or industrial engineering) get paid comparably to masters’-degree holders in the underlying discipline, which are respectable but hardly stellar. This makes the coefficient on the courses that don’t grant “MBA status” (effectively reducing the constant term) negative.

  • 3. Odzyskiwanie Danych  |  10 July 2009 at 4:56 am

    This is weird. I thought it was preferable for a manager to be skilled in economics. Guess I was wrong.

  • 4. arrunada  |  13 July 2009 at 1:24 am

    Teaching explicitly how to cooperate may not work as well as it is often assumed. Human interaction is supported by sophisticated instincts and emotions. Calculative rationality often collides with them. A sort of Heisenberg effect goes on: in many contexts, weighing the pros and cons of strategic options crowds out contractual heuristics.

    Moreover, we explicitly admit in the paper that “our results could be consistent with other explanations…. For instance, it is possible that students self-select into business schools according to students’ and schools’ characteristics and that the observed differences in schools’ average salaries are caused by unobserved students’ characteristics.” However, the model does already control for self-selection in terms of student quality.

    More importantly, in any case, inability to prove causation above all doubts should not serve as an excuse to disregard the argument. Especially because it is consistent with plenty of experimental evidence in cognitive sciences.

    Economists are responsible for the social consequences of economics. We will be much more successful once we find the way of applying it successfully.

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