The Shape of Utility Functions and Organizational Behavior

Based on measurements with 332 owner-managers, the global shape of the utility function (i.e., S-shaped versus concave or convex over the total range of outcomes) appears to discriminate organizational behavior. Whereas the degree of risk aversion, based on the local shape of the utility function, may be important in explaining owner-manager's trading behavior, the global shape of the utility function appears to drive more structural organizational behavior.utility theory;prospect theory;risk aversion;organizational behavior

The Shape of Utility Functions and Organizational Behavior

Based on measurements with 332 owner-managers, the global shape of the utility function (i.e., S-shaped versus concave or convex over the total range of outcomes) appears to discriminate organizational behavior. Whereas the degree of risk aversion, based on the local shape of the utility function, may be important in explaining owner-manager's trading behavior, the global shape of the utility function appears to drive more structural organizational behavior

Estimated Parameters Do Not Get the "Wrong Sign" Due To Collinearity Across Included Variables

Estimation results in linear regression models are sometimes in contrast with what was expected on the basis of a certain set of hypotheses or theory, in the sense that one or more parameters have the "wrong sign". One could be inclined to think that this is due to collinearity across explanatory variables, suggesting one should leave out one or more of the collinear variables. In this note we show that this is not a valid approach. Additionally, we show that "wrong signs" can occur because of correlations between included and omitted variables, so that "wrong signs" may occur if the model is not correctly specified. That is, if we find 'wrong signs" we should start questioning our model choice, not the data.parameter estimation;collinearity;misspecification

Expected Utility or Prospect Theory Maximizers? Results from a Structural Model based on Field-experiment Data

We elicit risk preferences of French farmers in a field experimental setting under expected utility theory and cumulative prospect theory. We use two different estimation methods, namely the interval approach and the estimation of a random preference model. On average, farmers are risk averse and loss averse. They also exhibit an inverse S-shaped probability weighting function, meaning that they tend to overweight small probabilities and underweight high probabilities. We infer from our results that CPT explains farmers’ behaviour better than EUT in the context of our experiment. We also investigate how preferences correlate with individual socio-demographic characteristics. We find that education and agricultural innovation are negatively linked with risk aversion. Our results also show that age, education, household size and the level of secured income tend to lower farmers’ loss aversion. Finally, older farmers and farmers with large farms distort probabilities less than the others. These findings contribute to the literature which compares expected utility with competing decision theories. They also give important insights into farmers’ behaviour towards risk, which is critical for relevant public policy design.risk preferences, field experiment, experimental economics, prospect theory, Risk and Uncertainty, C91, D81, J16, Q12,

The shape of the utility function under risk in the loss domain and the "ruinous losses" hypothesis: some experimental results

This paper reports some preliminary experimental results as regards the shape of the utility function for losses when elicited over a wide interval of consequences. Individual utility functions are elicited using the trade-off method, which, unlike standard elicitation procedures, is robust to probability weighting (and avoids most cognitive biases). Even though most utility functions exhibit the usual convex shape, nearly 25% of them appear to be inverse-S shaped, with convexity over moderate losses changing to concavity as losses grow. Though not conclusive (due mainly to the small size of our subject pool), this result brings some new support to the old idea that ruinous or unacceptable losses may induce some abrupt change in the shape of the utility function. Most importantly, it paves the way for more systematic investigation of the "ruinous losses" hypothesis.utility under risk, large losses, ruin, trade-off method, individual decision making under risk

Further Thoughts on CRM

Skepticism and disappointment have replaced the initialenthusiasm about CRM. The disappointing results ofCRM-projects are often related to difficulties thatmanagers encounter in embedding CRM in their strategyand organization structure. In this article we presenta classification scheme on how CRM can be strategicallyembedded in organizations using the value disciplinesof Treacy and Wiersema. We use the findings from threecase studies to illustrate our classification. Based onthese case studies and interviews with managers wedistinguish between strategic and tactical CRM, andderive important issues that managers should considerbefore successfully implementing CRM.customer relationship management;marketing strategy;marketing performance

Service Processes as a Sequence of Events

In this paper the service process is considered as a sequence ofevents. Using theory from economics and psychology a model isformulated that explains how the utility of each event affects theoverall evaluation of the service process. In this model we especiallyaccount for the peak-and-end rule and negative consumer timepreference. This model is tested in the context of telephone servicecalls in the financial service market. Our results show that both theaverage utility and the positive peak of the events positively affectcustomer satisfaction with the service call. Surprisingly, the end ofthe sequence has a negative effect. Theoretical and managerialimplications of these findings are discussed.satisfaction;economic psychology;consumers;sequence of events;services

Do Transaction Costs and Risk Preferences Influence Marketing Arrangements in the Illinois Hog Industry?

Studies of hog industry structure often invoke risk reduction and transaction costs explanations for empirical observations but fail to directly examine the core concepts of risk behavior and transaction costs theories. Using a more unified conceptual framework and unique survey and accounting data, this study demonstrates that that risk preferences and asset specificity impact Illinois producers’ use of contracts and spot markets as suggested by theory. Factor analytic methods limit measurement error for indirectly observable risk and transaction costs variables employed in logit regressions. In particular, related investments in specific hog genetics and specific human capital regarding the production process increase the probability of selecting long-tem contracts over spot markets. Producers who perceive greater levels of price risk and/or are more averse to it appear more (less) likely to use long-term contracts (spot markets), and hence, to make such investments.risk behavior, transaction costs economics, risk attitude and risk perception, asset specificity, contracts, hogs, Agricultural Finance,

An exploration on the nexus between managers’ present bias and corporate investment

This study aims to explore the role of top manager’s present bias as a main driver of corporate investment. For this purpose, we embed an experiment in a firm-level panel survey with a sample of top managers from 623 textile and garment firms in Vietnam. The experiment enables us to elicit present bias for each individual manager. We find that firms led by managers with a greater level of present bias are more likely to have a lower investment. There also exists evidence that the effect of managers’ present bias on corporate investment is stronger for SMEs than for large firms

What is the Predictive Power of Market Orientation?

The majority of studies on market orientation claim that compellingevidence exists that market orientation has a positive effect onbusiness performance. This study takes a closer look at forty studiesthat have addressed the relationship between market orientation andbusiness performance in the past thirteen years. The results show thatthere is no unequivocal evidence as to if and when market orientationhas a positive impact on business performance. There is however someunequivocal proof, albeit limited, on how market orientationinfluences business performance. These findings are unsettling foracademics and managers because market orientation is the foundation ofmarketing strategy.market orientation;predictive validity;business performance