Do Senior Managers Make Better Decisions Than Students?
| 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.