More on ACAC
| Peter Klein |
About a decade ago I served a term as a Senior Economist with the Council of Economic Advisers. The Junior Economist assigned to work with me was a young Harvard PhD student named Dan Elfenbein. Dan turned out to be not only the brawn, but the brains of the partnership as well. (He may have had me in the looks department too.) Dan has gone on to do great things at Washington University and I was delighted to see him receive the ACAC Best Paper Award yesterday for his joint work with Anne Marie Knott, “No Exit: Failure to Exit under Uncertainty.” Here’s the abstract:
Delayed exit is a substantial economic problem. Studies indicate if VCs exited ventures optimally, returns would triple, and if corporations divested underperforming business units, shareholder wealth would increase 13.6%. A prevalent explanation for delayed exit is behavioral biases associated with escalated commitment. In general however exit will exhibit inertia even absent bias. This arises both from decision maker efforts to avoid Type I error while discovering the long run prospects of an endeavor (passive learning) and from the option value of exit. Solutions to exit delays differ depending upon which source predominates, yet empirical tests to date have not disentangled the relative importance of these sources. We characterize exit delay in the population of U.S. banks between 1984 and 1997, and examine its causes. We find that a substantial proportion of exit occurs beyond “rational” benchmarks that incorporate option value. While the bulk of this delay appears to represent efforts to minimize Type I error, there is also evidence of the behavioral biases associated with escalated commitment.
As noted by Bill Bogner at the awards seminar, this makes Dan the only two-time winner of this important award.
Also at ACAC: A fascinating address by Joel Baum about the intellectual history of two strands of literature, one on competitive advantage and one on network advantage. It turns out these strands share a common intellectual heritage, one I’ll have more to say about later. (Hint: the University of Vienna plays a critical role.) Rebecca Henderson also gave an excellent talk about the role played by relational contracts within firms (from a joint research project with Bob Gibbons, the leading authority on relational contracting). Relational contracts are often seen as more flexible and adaptive than formal contracts but, as Rebecca pointed out, it is difficult for managers to implement strategic changes when they cannot commit to explicit rewards and punishments — hence relational contracting may impede the adoption of superior work practices (such as the Toyota Production System). Look for a forthcoming Gibbons-Henderson paper in Organization Science spelling this out.
Entry filed under: Ephemera.