Human behavior and decision-making

Human behavior and decision-making is a featured research topic at Harvard Business School.
 
Ever since their origins about three decades ago, the Behavioral Science areas of economics, ethics and managerial psychology have been rapidly evolving. In the 1980's and 1990's, early work by Max Bazerman in judgment and negotiation, Matthew Rabin in behavioral economics, and James Sebenius in negotiations was instrumental in shaping research on Human Behavior & Decision-Making. Today, our research focuses on individual and interactive judgment and decision making and explores the role of personal bias, cognition and learning, time, perception, ethics and morality, and emotion.  
  1. Risk Management—The Revealing Hand

    Robert S. Kaplan and Anette Mikes

    Many believe that the recent emphasis on enterprise risk management function is misguided, especially after the failure of sophisticated quantitative risk models during the global financial crisis. The concern is that top-down risk management will inhibit innovation and entrepreneurial activities. We disagree and argue that risk management should function as a Revealing Hand to identify, assess, and mitigate risks in a cost-efficient manner. Done well, the Revealing Hand of risk management adds value to firms by allowing them to take on riskier projects and strategies. But risk management must overcome severe individual and organizational biases that prevent managers and employees from thinking deeply and analytically about their risk exposure. In this paper, we draw lessons from seven case studies about the multiple and contingent ways that a corporate risk function can foster highly interactive and intrusive dialogues to surface and prioritize risks, help to allocate resources to mitigate them, and bring clarity to the value trade-offs and moral dilemmas that lurk in those decisions.

    Keywords: Risk Management;

    Citation:

    Kaplan, Robert S., and Anette Mikes. "Risk Management—The Revealing Hand." Journal of Applied Corporate Finance 28, no. 1 (Winter 2016): 8–18. View Details
  2. Financial Regulation in a Quantitative Model of the Modern Banking System

    Juliane Begenau and Tim Landvoigt

    How does the shadow banking system respond to changes in the capital regulation of commercial banks? This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. A key feature of our model is defaultable bank liabilities that provide liquidity services to households. The quality of the liquidity services provided by bank liabilities depends on their safety in case of default. Commercial bank debt is fully insured and thus provides full liquidity. However, commercial banks do not internalize the social costs of higher leverage in the form of greater bankruptcy losses (moral hazard) and are subject to a regulatory capital requirement. In contrast, shadow bank liabilities are subject to runs and credit risk and thus typically less liquid compared to commercial banks. Shadow banks endogenously limit their leverage as they internalize the costs. Tightening the commercial banks' capital requirement from the status quo leads to safer commercial banks and more shadow banking activity in the economy. While the safety of the financial system increases, it provides less liquidity. Calibrating the model to data from the Financial Accounts of the U.S., the optimal capital requirement is around 20%.

    Keywords: Capital; Commercial Banking;

    Citation:

    Begenau, Juliane, and Tim Landvoigt. "Financial Regulation in a Quantitative Model of the Modern Banking System." Harvard Business School Working Paper, No. 16-140, June 2016. (Revised July 2016.) View Details
  3. Why Brexit Is a Big Deal

    John A. Quelch

    The consequences of yesterday's vote by the British people to leave the European Union will be far-reaching, but there is no reason for global markets to panic.
    Brexit is a vote against the European Union. Once heralded as the engine of a one-for-all and all-for-one economic growth, the EU is now seen by many Britons as an expensive, interfering and sclerotic bureaucracy.

    Keywords: British Vote; Brexit; European Union; Impact; Historical Result; Governing Rules, Regulations, and Reforms; Disruption; Transition; Volatility; Decision Making; Globalization; Government and Politics; History; Leadership; Outcome or Result; Risk and Uncertainty; Strategy; European Union; Republic of Ireland; United Kingdom;

    Citation:

    Quelch, John A. "Why Brexit Is a Big Deal." Harvard Business School Working Knowledge (June 24, 2016). (Republished by Forbes.com on June 24, 2016 at: http://www.forbes.com/sites/hbsworkingknowledge/2016/06/24/why-brexit-is-a-big-deal/#2c5e5c587297.) View Details
  4. The Impact of Campus Scandals on College Applications

    Michael Luca, Patrick Rooney and Jonathan Smith

    In recent years, there have been a number of high profile scandals on college campuses, ranging from cheating to hazing to rape. With so much information regarding a college’s academic and nonacademic attributes available to students, how do these scandals affect their applications? To investigate, we construct a dataset of scandals at the top 100 U.S. universities between 2001 and 2013. Scandals with a high level of media coverage significantly reduce applications. For example, a scandal covered in a long-form news article leads to a 10% drop in applications the following year. This is roughly the same as the impact on applications of dropping 10 spots in the U.S. News and World Report college rankings. Moreover, colleges react to scandals—the probability of another incident in the subsequent years falls—but this effect dissipates within five years. Combined, these results suggest important demand-side and supply-side responses to incidents with negative media coverage.

    Keywords: Media Economics; College Choice; reputation; Economics of Information; Crime and Corruption; Higher Education; Ethics; Media; Decision Choices and Conditions; Reputation; Education Industry; United States;

    Citation:

    Luca, Michael, Patrick Rooney, and Jonathan Smith. "The Impact of Campus Scandals on College Applications." Harvard Business School Working Paper, No. 16-137, June 2016. View Details
  5. Augustine Heard & Co.: Building a Family Business in the China Trade (B)

    William C. Kirby and Joycelyn W. Eby

    In 1861, the Heard brothers faced a decision: should they continue their family firm's business model that had made them a successful commission house in China, or was it time to make fundamental adjustments to their work? This case reveals that the brothers decided to maintain the status quo, primarily because of a lack of decision-making mechanism amongst the brothers. The firm rapidly went downhill, before declaring bankruptcy in 1875.

    Keywords: family business; China; mercantilism; Family Business; China;

    Citation:

    Kirby, William C., and Joycelyn W. Eby. "Augustine Heard & Co.: Building a Family Business in the China Trade (B)." Harvard Business School Case 316-186, June 2016. View Details
  6. The Dyadic Ties of Managers and Financial Analysts and Their Externality on a Firm's Information Environment

    Zengquan Li, T.J. Wong and Gwen Yu

    When emerging market firms raise external capital, they face a tradeoff where greater transparency may lead to a lower cost of capital but at the cost of revealing proprietary information in their relational business practices. We find that firms overcome this challenge by relying on financial analysts within their private networks, who then transmit the information to arm’s length analysts outside the network. Specifically, we show that firms with more connected analysts have more accurate and informative firm-level consensus forecasts. Likewise, when a connected analyst drops coverage of a firm, there is a decrease in the accuracy and informativeness of the unconnected (arm’s length) analysts’ forecasts, suggesting that the connected analyst’s knowledge spills over to those outside the private network. The spillover effect is stronger when firms have plans to access external capital or rely heavily on non-arm’s length transactions. The findings suggest that managers’ private networks with financial analysts can have positive externalities for firms’ information environments.

    Keywords: emerging market; financial analysts; Information; Emerging Markets; Forecasting and Prediction; Corporate Governance;

    Citation:

    Li, Zengquan, T.J. Wong, and Gwen Yu. "The Dyadic Ties of Managers and Financial Analysts and Their Externality on a Firm's Information Environment." Harvard Business School Working Paper, No. 16-135, June 2016. View Details
  7. Can Brand Trump Win a Presidency?

    John A. Quelch

    In the marketplace, Brand Trump is authentic. It stands for aspiration and success, but more the ostentatious and flashy success that appeals to the newly wealthy, the entrepreneur, the outsider. For these consumers, brand Trump clearly delivers; Trump hotels, and resorts average a 4.5 rating on TripAdvisor.

    Brand Trump has been extended to other categories, from steaks, to education, to apparel. Not all of these ventures have succeeded. Few guests see the competencies of a good hotelier as relevant to designing distinctive quality suits. But, for a minority of consumers who embrace the Trump lifestyle, these other products can add brand value and, being produced by others under license, they deliver some extra profit to the Trump organization.

    Keywords: brand; Umbrella Brands; political brands; political campaigns; Successful brands; personal brand; Demographics; History; Information; Innovation and Invention; Leadership; Management; Marketing; Outcome or Result; Problems and Challenges; Strategy; Value; Public Administration Industry; Public Relations Industry; United States;

    Citation:

    Quelch, John A. "Can Brand Trump Win a Presidency?" Harvard Business School Working Knowledge (June 7, 2016). (Republished by Forbes.com on June 7, 2016.) View Details
  8. Searching for a New CEO: TiVo 2016

    David B. Yoffie

    In 2015, TiVo initiated a search for a new CEO. This case provides a profile of the CEO search and background on the company.

    Keywords: strategy; technological change; succession planning; Technology; Strategy; Strategic Planning; Management Succession; Forecasting and Prediction; Change; Entertainment and Recreation Industry; Media and Broadcasting Industry;

    Citation:

    Yoffie, David B. "Searching for a New CEO: TiVo 2016." Harvard Business School Case 716-470, June 2016. View Details
  9. Bias in Official Fiscal Forecasts: Can Private Forecasts Help?

    Jeffrey A. Frankel and Jesse Schreger

    Government forecasts of GDP growth and budget balances are generally more over optimistic than private sector forecasts. When official forecasts are especially optimistic relative to private forecasts ex ante, they are more likely also to be over optimistic relative to realizations ex post. For example, euro area governments during the period 1999–2007 assiduously and inaccurately avoided forecasting deficit levels that would exceed the 3% Stability and Growth Pact threshold; meanwhile, private sector forecasters were not subject to this crude bias. As a result, using private sector forecasts as an input into the government budgeting-making process would probably reduce official forecast errors for budget deficits.

    Keywords: Forecasting and Prediction; Macroeconomics;

    Citation:

    Frankel, Jeffrey A., and Jesse Schreger. "Bias in Official Fiscal Forecasts: Can Private Forecasts Help?" NBER Working Paper Series, No. 22349, June 2016. View Details
  10. Who Pays for White-Collar Crime?

    Paul Healy and George Serafeim

    Using a proprietary dataset of 667 companies around the world that experienced white-collar crime we investigate what drives punishment of perpetrators of crime. We find a significantly lower propensity to punish crime in our sample, where most crimes are not reported to the regulator, relative to samples in studies investigating punishment of perpetrators in cases investigated by U.S. regulatory authorities. Punishment severity is significantly lower for senior executives, for perpetrators of crimes that do not directly steal from the company and at smaller companies. While economic reasons could explain these associations we show that gender and frequency of crimes moderate the relation between punishment severity and seniority. Male senior executives and senior executives in organizations with widespread crime are treated more leniently compared to senior female perpetrators or compared to senior perpetrators in organizations with isolated cases of crime. These results suggest that agency problems could partly explain punishment severity.

    Keywords: crime; Crime and Corruption; gender; Gender bias; women; women executives; corruption; legal aspects of business; firing; human capital; human resource management; corporate governance; Prejudice and Bias; Crime and Corruption; Judgments; Law Enforcement; Human Resources; Corporate Governance; Gender;

    Citation:

    Healy, Paul, and George Serafeim. "Who Pays for White-Collar Crime?" Harvard Business School Working Paper, No. 16-148, June 2016. View Details
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