Posts filed under ‘Management Theory’
Short Piece on Probability Theory
| Peter Klein |
“Risk, Uncertainty, and Economic Organization” is my contribution to the Hoppe Festschrift. I got the topic idea from some blogger guy. My chapter focuses, as the title suggests, on Knightian uncertainty. Hoppe places Knight, along with Ludwig von Mises, squarely in the frequentist camp (typically associated with Ludwig’s brother Richard). I tend to agree with Hoppe although, as I discuss in the paper, there are many interpretations of Knight, and some commentators argue that subjective (Bayesian) probability theory renders untenable the Knightian distinction between insurable risk and true uncertainty (see, for example, Dick’s 1982 paper).
Ultimately, however, I don’t think the approach to the firm promoted on this blog depends on a particular interpretation of Knight. The central claim is that judgment represents a kind of decision-making that cannot be traded on the market, and that therefore requires the entrepreneur exercising such judgment to establish a firm (more specifically, to take ownership of capital resources). To put it differently, ownership of assets implies a kind of ultimate responsibility that the owner cannot delegate. I think one can be agnostic about exactly why judgment isn’t tradable — it could be a form of asymmetric information, rather than ontological differences between types of knowledge — and still buy the basic Knight-Mises-Foss-Klein approach to the firm.
HR Graphic of the Week
| Peter Klein |
From Wired’s “New Rules for Highly Evolved Humans” feature: “Use a Plausible Excuse When You Call In Sick.”
Special Issue of HRM on “HRM and Knowledge Processes”
| Nicolai Foss |
With Scott Snell (Darden Graduate School of Business) and my SMG colleague Dana Minbaeva, I have edited this just-published special issue of Human Resource Management on the intersection of knowledge management and HRM. One of this highlights of the special issue is an excellent paper by Teppo Felin, Todd Zenger, and Joshua Tomsik that takes issue with some influential ideas on how “knowledge” prompts the emergence of “communal” forms of organizing.
Organizations, Markets, and Health Care Reform
| Russ Coff |
Amidst the fierce debate about the U.S. health care system is a raving lack of clarity. At the core, is whether organizations and markets fail to produce an optimal solution. Even the most neoclassical of economists these days acknowledge that market externalities exist and that these should be the focus of government intervention. Unfortunately, I don’t feel that the debate has been rigorous or well-informed in defining the market failure or why a government run system would be superior.
Liberal Economist Paul Krugman explains why markets fail summarizing Kenneth Arrow’s arguments (here). Basically, the third-party payee system and the information asymmetries render comparison shopping ineffective (and hence competition fails to yield an optimal solution).
Indeed, there is a good bit of inefficiency in the current U.S. system. A recent NY Times article notes that health care costs the average U.S. household $6,500 more each year than other comparable wealthy nations. Unfortunately, looking at many of the important outcomes, it appears that consumers are not getting much for their money on many dimensions (e.g., chronic disease outcomes). So it should be possible to lower costs and improve outcomes. Of course, this ignores the question of whether costs are higher to subsidize R&D that ultimately spills over into other countries.
Unfortunately, the article continues to point out how the reform efforts seem to ignore this low-hanging fruit. (more…)
Federal Reserve “Independence”
| Peter Klein |
I was invited to sign the Open Letter in support of Fed independence but, like Jerry O’Driscoll, Bob Higgs, and Larry White, I don’t support the cause. Follow the links above for detailed arguments. For my part:
1. The Open Letter focuses exclusively on monetary policy, as if the Fed’s Congressional critics like Ron Paul just want to know how the Federal Funds Rate is set. But the Fed conducts not only monetary policy, but fiscal policy as well, especially during the last 18 months. If the Fed can buy and hold any assets it likes, if it works hand-in-hand with the White House and the Treasury to coordinate trillion-dollar bailouts, isn’t it reasonable to have some oversight? (And don’t forget bank supervision. Even the Fed’s defenders recognize a need to separate its monetary-policy and bank-supervision roles. But as long as the Fed continues as a bank regulator, shouldn’t someone should be watching the watchmen?)
2. The Open Letter itself is poorly crafted, full of unsubstantiated assertions and misleading statements. There’s no argument there, as Higgs emphasizes. Actually, neither the time-series or cross-sectional evidence suggests any correlation between central-bank independence (whatever that means) and economic performance.
3. More generally, the Fed is a central planning agency, and it performs about as well as every central planning agency in history. Have we learned nothing from the huge literature on comparative economic systems? “Independence,” in this context, simply means the absence of external constraint. There are no performance incentives and no monitoring or governance. There is no feedback or selection mechanism. There is no outside evaluation (outside the blogosphere). Why on earth would we expect an organization operating in that environment to improve social welfare? Is this institution run by men, or gods?
Bounded Rationality or Skilled Performance?
| Nicolai Foss |
In my 2003 contribution to the Festschrift for Richard Nelson and Sidney Winter (here), I argued that Nelson and Winter’s main oeuvre, their 1982 book, An Evolutionary Theory of Economic Change, is much more about tacit knowledge than about bounded rationality. The notion of routines is intended to capture the firm-specific and tacit character of productive knowledge rather than heuristics, satistificing search, and the like (these may not be opposed, though).
I am reading Great Minds in Management at the moment (highly recommended!). In his chapter, “Developing Evolutionary Theory for Economics and Management,” Sidney Winter seems to agree:
Skill provides a compelling model of effective behavior that is different, and deeply different, from what we are told either by theories of rational decision or by behavioral theories featuring ‘bounded rationality.’ As far as I can see, the latter theories do not lead one to expect that the word ‘awesome’ will ever be needed to describe human behavior” (p. 533).
Indeed, as my frequent co-author, Teppo Felin, argues, bounded rationality is almost always about people’s foolishness (notably the heuristics and biases literature), rather than about how and why people actually cope, sometimes quite successfully, with most of the decision situations they confront. It is about decision failure, rather than decision success (possibly premised on the implicit assumption that the standard model of rational decision is the only existing model of decision success). The problem with Winter’s alternative, namely that of behavior as skilled performance, is that it seems unclear what are the available models. Skilled performance seems as arbitrary as bounded rationality.
Does Economics Training Hinder Managers’ Ability?
| 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. (more…)
McNamara
| Peter Klein |
I haven’t read all the obituaries of Robert S. McNamara, who died early this morning, but the ones I’ve seen focus almost exclusively on his tenure as US Secretary of Defense during the Vietnam War. Few mention how he got to be Secretary — an HBS professorship, WWII experience in procurement as a member of Tex Thornton’s “Whiz Kids,” a stint at Ford Motor Company after the war, and the presidency of Ford just before taking the job as Defense Secretary. The Times notes, in passing, that “Mr. McNamara had risen by his mastery of systems analysis, the business of making sense of large organizations — taking on a big problem, sorting it out, studying every facet, finding simplicity in the complexity.” Um, OK, I guess that’s one way to describe it. In any case, none of the obituaries I’ve seen so far discusses this in any detail, or seems to realize that McNamara’s approach to managing large organizations is controversial among researchers and practitioners.
Here’s a brief comment I made last year on McNamara’s management style.
Inspirational Weekend Reading
| Nicolai Foss |
I am reading Ben Goldacre’s Bad Science in which Dr. Goldacre explodes the ridiculous claims of medical quacks of all stripes (e.g., homeopathy, the idiocies of the media re the interpretation of research results, hostility towards “mainstream medicine,” etc.). The book is much needed and very, very entertaining.
And it makes me think that management research needs its Goldacre. A few quick ideas:
- Perhaps we need something akin to the Cochrane Collaboration. We can all agree that “evidence-based management” is a good idea. Indeed, it is such a good idea that there should be no need for writing books or blogs about it. We should all embrace and internalize the idea. However, in practice, there is probably much too little effort devoted to meta-analysis and other synthetic efforts in management research.
- There are quacks in management. Some of them write books. Some consult. Shrugging the shoulder is the typical reaction on the part of management academics. Should we treat them more harshly? Should management quacks be identified and fought?
- Perhaps the majority of research articles in management end with a variation over “There is a need for more research.” Articles in medicine used to end similarly. However, as Goldacre notes (p. 57), “… it is a little known fact that this very phrase has been banned from the British Medical Journal for many years, on the grounds that it adds nothing: you may say what research is missing, on whom, how, measuring what, and why you want to do it, but the hand-waving, superficially open-minded call for ‘more research’ is meaningless and unhelpful.” Amen!
Slides from Foss-Klein PhD Course
| Peter Klein |
Slides from the PhD course, “The Theory of the Firm and Its Applications in Management Research I,” are now available on the course webpage (scroll down to the bottom).
PS: Did you notice the course title ends with “I,” implying there will be a II and maybe a III? Gotta love that precommitment device. It’s as if Stallone had named his first film “Rocky I.”
Management Journal Impact Factors 2008
| Nicolai Foss |
The new ISI impact factors for 2008 have just been released. There are lots of surprises this time. The biggest one is arguably that Organization Science is now out of the top 10 range, a long drop from its #4 status in 2006 (this sucks when you got two recent papers, one forthcoming and one R&R, at this journal :-( ). The second surprise, at least to me, is that the Journal of Management has made it to #5. One possible explanation is its rather influential yearly review issues. Another surprise is that Organization Studies, which was among the top 10 in 2006, has now moved down a lot to close to #30. The Journal of Management Studies, while not among the top 10 this year, has not been harmed as badly, dropping to #14. ASQ, once the undisputed top-management journal, is now #9. Less surprising is Academy of Management Review’s #1 position (it is usually among the top 3), and that the Strategic Management Journal is #4.
The rank order down to LRP at # 36 is: AMR – AMJ – MIS Q – SMJ – JoM – ORM – JIBS – AMLE – ASQ – OBHD – RP – JPIM – Org. Sci. – JMS – RoB – JoM – JOperationsM – IMA – JMIS – Man Sci -DS – IRS – LQ – Omega – R&D Man – GOM – JIT – Techno. – Org. Stud. – Brit. JoM – Adv. Strat Man. – HBR – Int Small Bus. J – Int. J. Oper. Prod. M. – Int. J. Man. Rev. – Int. J of Forec. – LRP
A new feature of the list is the inclusion of a five-year impact factor which, given the rather turbulent movements from year to year, makes a lot of sense (and which produces a rather different rank order from the above!).
The MBA Oath
| Peter Klein |
As a manager, my purpose is to serve the greater good by bringing people and resources together to create value that no single individual can create alone. Therefore I will seek a course that enhances the value my enterprise can create for society over the long term. I recognize my decisions can have far-reaching consequences that affect the well-being of individuals inside and outside my enterprise, today and in the future. As I reconcile the interests of different constituencies, I will face choices that are not easy for me and others.
Therefore I promise:
- I will act with utmost integrity and pursue my work in an ethical manner.
- I will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate.
- I will manage my enterprise in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.
- I will understand and uphold, both in letter and in spirit, the laws and contracts governing my own conduct and that of my enterprise.
- I will take responsibility for my actions, and I will represent the performance and risks of my enterprise accurately and honestly.
- I will develop both myself and other managers under my supervision so that the profession continues to grow and contribute to the well-being of society.
- I will strive to create sustainable economic, social, and environmental prosperity worldwide.
- I will be accountable to my peers and they will be accountable to me for living by this oath.
This oath I make freely, and upon my honor.
This comes from a group of second-year Harvard MBAs and was featured in last Friday’s New York Times (HT: MGK). Here’s their blog. I eagerly await the analysis of the O&M commentariat.
Seat-of-the-Pants Sports Management
| Peter Klein |
The WSJ recently ran a sort of anti-Moneyball piece on the NBA’s Denver Nuggets that belongs in our “by the numbers” series. Love the title: “Textbook Management? Hardly. — Assembled Largely by Instinct, the Denver Nuggets Keep Winning; Mastering a ‘Curious Business.'” Here’s the central passage:
[The Nuggets] don’t describe their success as the inevitable result of a carefully designed strategy. Rather, in an era when sports executives like to play themselves off as masters of mathematical analysis and risk management — and in a year when most NBA teams chose fiscal prudence over expensive superstars — the Nuggets are an anomaly. They owe their success to a bizarre combination of luck, good health, opportunism and a management strategy that is more six-shooter than Six Sigma.
The story caught my eye partly because it profiles Nuggest owner Stan Kroenke, a real estate developer who lives here in Columbia, Missouri and whose son Josh was Mizzou’s starting shooting guard from 2000 to 2003. (Stan’s wife also happens to be Ann Walton Kroenke, one of Sam Walton’s two nieces; it’s nice to have connections!)
The Hawthorne Effect Revisited
| Peter Klein |
The ever-resourceful Steve Levitt, working with John List, uncovers the original data from the Hawthorne experiments — data long thought to have been lost or destroyed — and finds there actually wasn’t much of a Hawthorne effect:
Our analysis of the newly found data reveals little evidence to support the existence of a Hawthorne effect as commonly described; i.e., there is no systematic evidence that productivity jumped whenever changes in lighting occurred. On the other hand, we do uncover some weak evidence consistent with more subtle manifestations of Hawthorne effects in the data. In particular, output tends to be higher when experimental manipulations are ongoing relative to when there is no experimentation. Also consistent with a Hawthorne effect is that productivity is more responsive to experimenter manipulations of light than naturally-occurring fluctuations. . . . We conclude that the evidence for a Hawthorne effect in the studies that gave the phenomenon its name is far more subtle than has been previously acknowledged.
The short paper, “Was there Really a Hawthorne Effect at the Hawthorne Plant? An Analysis of the Original Illumination Experiments,” is available from NBER. I couldn’t find an ungated copy but the search led me to a large secondary literature, much of it by organizational and industrial psychologists, also questioning the original findings, though apparently without use of the primary data.
How Many Strategists Does It Take to Change a Light Bulb?
| Peter Klein |
More profound musings from Joe Mahoney and Christos Pitelis, with additional contributions from Anita McGahan, Yasemin Kor, and myself (no attribution is given for individual entries, for our own protection). Please add your suggestions in the comments.
How many strategists does it take to change a light bulb?
“Only one, that will be $125, please.” — strategy consultant
“One, and the one who changes it achieves sustained competitive advantage.” — mainstream strategy scholar
“Approximately 1.0000000000000000000.” — one of the small cadre of mathematicians in the strategy field
“The first person who discovers the burned-out light bulb has an opportunity for entrepreneurial gain.” — Kirznerian strategic entrepreneurship scholar
“The old bulb will be swept away by the perennial gale of creative
destruction.” — Schumpeterian strategic entrepreneurship scholar“Light bulbs are social constructs.” — trendy contemporary management scholar
“I can’t answer without first knowing the relevant players, strategy spaces, and preference maps.” — game theorist (more…)
Elfenbein and Zenger on Social Capital
| Peter Klein |
Congratulations to Dan Elfenbein and Todd Zenger for winning the ACAC Best Paper Award for “The Economics of Social Capital in De-Socialized Exchange.” Their paper addresses one of my pet peeves, the expansive use of “capital” to describe any ill-defined substance that accumulates and has value. Hence knowledge, experience, and skills become “human capital” or “knowledge capital”; relationships become “social capital”; brand names become “reputation capital”; and so on. I fear this terminology obfuscates more than it clarifies.
I don’t mind using these terms in a loose, colloquial sense: By going to school I’m investing in human capital or diversifying my stock of human capital; if this gets me a high-paying job I’m earning a good return on my human capital; as I get old I forget new things, so my human capital is depreciating rapidly; and so on.
But we shouldn’t take these metaphors too literally. In economic theory capital refers either to financial capital or to a stock of heterogeneous alienable assets, goods that can be exchanged in markets and analyzed using price theory. Their rental prices are determined by marginal revenue products and their purchase prices are given by the present discounted value of these future rents. Knowledge is not, strictly speaking, capital, because it is not traded in markets does not have a rental or purchase price. What markets trade and price is labor services, and it is impossible to decompose the payments to labor (wages) into separate “effort” and “rental return on human capital” components. Some labor services command a higher market price than others because they have a higher marginal revenue product. Some of this wage premium may be due to intelligence or experience, some due to complementarities with other human or nonhuman assets, some due to hard work, and so on. But these are all determinants of the MRP, and hence the wage, not different kinds of factor returns. (more…)
New Editorial Team at the EMR
| Nicolai Foss |
Not long ago after the start of O&M I blogged on the change of editor at the European Management Review, paraphrasing Keynes’s examination of Lloyd George’s pledge on unemployment policy. While EMR is not yet ISI listed and has not surpassed the Journal of Management Studies as the leading Euro management journal, Kogut has most certainly “done it” in terms of boosting the general reputation of the journal. This is another demonstration that an editor with a clear mission, a strong network, and well-defined objectives can rather quickly do wonders for a journal (think Arie Lewin with Organization Science or Joel Baum (et al.) with Strategic Organization).
Kogut has now stepped down as editor, and Professors Maurizio Zollo and Alfonso Gambardella, both of Bocconi University in Milan, carry the mantle. While Zollo is a fullblown management scholar, Gambardella is much more an economist. They share a basic evolutionary outlook. Needless to say, both a very well connected to the US research context in management and economics. The new team’s inaugural issue with a handful of invited paper is available here. Everything is downloadable for free.
ACAC Schedule
| Peter Klein |
The Atlanta Competitive Advantage Conference begins tomorrow. The updated schedule, along with other logistical information, is here. You can also download many of the papers. Emory, Georgia Tech, and Georgia State Universities have co-hosted this event the past five years and it’s become one of the main events for research in strategy, organizational economics, entrepreneurship, and related fields.
Bad to Awful?
| Peter Klein |
Via John Hagel, here’s a Business Week preview of Jim Collins’s new book, How the Mighty Fall, and How Some Companies Never Give In, a profile of once-successful firms that go under. Will the new book avoid the core methodological fallacy that doomed Collins’s earlier work? Unfortunately, it doesn’t appear so:
At our research lab [sic], we’d already been discussing the possibility of a project on corporate decline, in part because some of the great companies we’d profiled in the books Good to Great and Built to Last had subsequently lost their positions of prominence. On one level this fact didn’t cause much angst; just because a company falls doesn’t invalidate what we can learn by studying that company when it was at its historical best.
True, but without some mechanism for distinguishing treatment and control, such an investigation can never be anything more than a collection of interesting vignettes. Collins and his team seem unable to grasp the fundamental scientific principle of cause and effect. Just because a particular behavior corresponds to a particular outcome (be it success or failure), there is no way to know if that behavior contributed to the outcome, without studying individuals or organizations that exhibited the same behavior but experienced a different outcome.
I eagerly await Phil Rosenzweig’s next book: The Horns-and-Pitchfork Effect.
Design by the Numbers
| Peter Klein |
A new item for our “by the numbers” series. Former Google lead designer Doug Bowman recently quit to take a position at Twitter, citing frustration with Google’s engineer-oriented, data-driven culture:
When a company is filled with engineers, it turns to engineering to solve problems. Reduce each decision to a simple logic problem. Remove all subjectivity and just look at the data. Data in your favor? Ok, launch it. Data shows negative effects? Back to the drawing board. And that data eventually becomes a crutch for every decision, paralyzing the company and preventing it from making any daring design decisions.
Yes, it’s true that a team at Google couldn’t decide between two blues, so they’re testing 41 shades between each blue to see which one performs better. I had a recent debate over whether a border should be 3, 4 or 5 pixels wide, and was asked to prove my case. I can’t operate in an environment like that. . . .
I’ll miss working with the incredibly smart and talented people I got to know there. But I won’t miss a design philosophy that lives or dies strictly by the sword of data.
Adds Keith Sawyer:
Google’s engineer-dominated culture wants to see the numbers, the proof. Artists and designers don’t think that way — they know a design that works in their gut, somehow, when they see it. It’s a holistic phenomenon, and it emerges in some unpredictable way from hundreds of tiny design decisions about line widths and color shades. How, they would ask, could you possibly test every single combination, every possible design? . . . Numbers get you focused on the trees and you forget you’re inside of a forest.
I hold to the basic Misesian position that quantitative empirical analysis is a complement to, not a substitute for, other forms of knowledge acquisition such as a priori theorizing and Verstehen. Needless to say, this doesn’t mean I approve of fuzzy constructs in social-science research.
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