Research

July/August 2014

Reputation in the Information Age

Today's 24/7 online media and social networks have the power to send information around the world in a matter of minutes—and many business leaders and policymakers still are uncertain about how this 21st-century reality could affect their institutions' reputations. That's the topic of a white paper from Saïd Business School's Oxford University Centre for Corporate Reputation in the United Kingdom and the University of San Diego School of Law in California.

"The effects of information networks and 21st-century instant communication work in surprising and often counterintuitive ways," says Rupert Younger, center director at Oxford. "These effects can distort markets and damage the reputation and health of businesses and governments. But they also provide particular challenges and opportunities in terms of how reputations can be created, sustained, and rebuilt."

The paper covers reasons why people post extreme views online, the positive and negative impact of networks, the kind of content that influences an institution's reputation, and the psychological "herding" tendency that can unduly influence online ratings of products and services. It also suggests ways to counteract biased information and guard against the threat it poses to reputation.

These suggestions include adopting strategies to embrace, not fight, what the authors call "the democratization of information"—that is, how large groups can use information networks to influence change. To that end, the authors encourage business leaders and policymakers to engage with the public and build trust on these networks, rather than maintain distance for fear of losing control of their messages.

The paper outlines several recommendations to leaders charged with the reputations of their organizations. First, they should do more to manage today's lightning-speed information cycle, rather than simply react or fall victim to it. Second, they can counteract biases both by welcoming discordant views and by responding quickly to misinformation. Finally, they can invest in socially driven initiatives and incentives at the business and government levels that support the desire of their stakeholders to do good works.

In general, "private and public leaders [should] attempt to harness the power of 'yes and' rather than 'yes but,'" the authors recommend. "For example, businesses could focus their risk management efforts not on regulatory requirements and negative possibilities, but on the potential for positive outcomes."

Contributors to "How Reputations Are Won and Lost in Modern Information Markets" include Twitter co-founder Biz Stone; senior executives from companies such as Experian and Millennium Management; journalists from Reuters, CNBC, and The New York Times; and academics from Stanford, Oxford, MIT, and the University of San Diego. The paper is available at www.sbs.ox.ac.uk/sites/default/files/CCR/Docs/whitepaperfinalpdf.pdf.

Patience Pays Off For Startups

Although small startups might be eager to get their products to market to raise much-needed cash, they might do so to their future detriment, say Sreekumar Bhaskaran of Southern Methodist University's Cox School of Business in Dallas, Texas; Sinan Erzurumlu of Babson College in Babson Park, Massachusetts; and Karthik Ramachandran of the Georgia Institute of Technology's Scheller College of Business in Atlanta.

Conventional wisdom holds that startups should launch quickly, starting with the first viable version of their offerings, so they can raise the capital needed to further develop and refine the product for a second launch. But if their first versions prove faulty, they can lose a great deal of goodwill.

The authors cite one startup's hasty launch of an orthopedic implant. Convinced by the entrepreneurs of the product's benefits, doctors used the implant only to cope with post-surgical patient complications. Even though the firm's second version addressed the initial problems, the firm's reputation had suffered. Its founders eventually were able to convince doctors to give the product a second chance, but only after issuing apologies and losing potential sales.

Although cash levels are always of concern to a fledgling company, it is in a startup's best interest to delay a new product's launch until it has developed a better, later version, the authors emphasize. That's true even if the first version is fairly strong.

"What may seem to be immediately profit maximizing may lead you to bankruptcy sooner," says Bhaskaran. "'Failing forward' is not the best strategy for startups."

"Sequential Innovation by Start-ups: Balancing Survival and Profitability" is under review. A working version is available at ssrn.com/abstract=2325530.

Feel Sad, Indulge Less?

When people are sad, the negative emotion might deter them from eating unhealthy foods, according to a study by Anthony Salerno, a doctoral candidate, and Juliano Laran, an associate professor of marketing, both of the University of Miami School of Business in Florida; and Chris Janiszewski, a professor at the University of Florida's Warrington College of Business Administration in Gainesville.

In five experiments, researchers exposed participants to advertisements that included either indulgent words or images (of pizza or chocolate cake, for example) or neutral words or images (of washing machines or electric cars). They then asked participants to write about something that made them feel sad. Then, at the end of the study, they were offered indulgent foods like M&Ms or chocolate chip cookies.

The researchers found that those who were exposed to the indulgent advertisements and then asked to recall a sad topic consumed less of the post-experiment treats; they also were more likely to link those treats to future health problems. Those exposed to neutral information before writing about a sad topic ate more.

The researchers believe that the participants' sadness highlighted the negative consequences of indulging and encouraged them to indulge less. This research can help better people's understanding of "the link between advertisements and their emotional state and how this impacts their eating behavior," says Laren. "For marketers of products encouraging a healthy lifestyle, this work offers more data regarding [influences] that help or hinder one's ability to eat healthy."

"Sadness and Its Context-Dependent Influence on Indulgent Consumption" was slated to appear in the June issue of the Journal of Consumer Research.

STEM and Stereotypes

Gender bias among hiring managers in STEM fields is alive and well, according to research by Ernesto Reuben of Columbia Business School in New York City; Paola Sapienza of Northwestern University's Kellogg School of Management in Evanston, Illinois; and Luigi Zingales of the University of Chicago Booth School of Business in Illinois.

In one experiment, the researchers asked nearly 200 participants, both male and female, to play the role of hiring managers. These participants first completed computer-based behavioral testing to determine how deeply they held stereotypes about the ability of men and women to succeed in math and science. Then, they were asked to "hire" one of 150 other participants to perform a mathematical task—correctly adding up as many two-digit numbers as possible in four minutes. The job candidates already had completed a test of their aptitude in the task. In some cases, candidates revealed their scores to the hiring managers; in others, they did not.

When the hiring managers had no information other than the candidates' gender, they all were twice as likely to hire a man as a woman. And when candidates were able to reveal their scores? Women were still only half as likely to be hired. In both cases, bias often led individuals to hire someone whose score was lower than that of another candidate.

This kind of outcome leads not only to a less diverse workforce but also to a potentially less capable one, says Reuben. "Leaving your personal experiences out of the process will likely land you the best candidate. Otherwise, you are hurting your company."

"How Stereotypes Impair Women's Careers in Science" was recently published in the Proceedings of the National Academy of Sciences.

Categorization Affects Consumer Predictions

Although humans are wired to predict the future—whether it's what the weather will be, who will win a sporting event or election, or how a stock will perform—they rarely get better at it over time. Even so, consumers often will make major decisions based on their own predictions, according to Aaron Brough, assistant professor of management at Utah State University's Huntsman School of Business in Logan, and Matthew Isaac, assistant professor of marketing at Seattle University's Albers School of Business and Economics in Washington.

Brough and Isaac found that consumers often make bad predictions because they are distracted by how possibilities are categorized, and the size of those categories. The pair conducted a series of experiments. In each, participants consistently made worse predictions when a possibility appeared in a large grouping. For instance:

Participants whose lottery tickets were the same color as the tickets of many other gamblers believed they were more likely to win than those whose tickets matched only a few others'. When betting on their likelihood of winning, the first group wagered 24 percent more, on average, than the second.

They were more likely to predict that a team would win the NCAA basketball tournament if that team's mascot was similar to the mascots of other teams.

They were more likely to act to prevent an IT security threat when they perceived that their actions were among many preventative behaviors, compared to those who viewed their actions as more isolated.

If consumers are aware of this tendency, they can avoid "category size bias" and improve their forecasting accuracy. Moreover, such awareness also could help policymakers make their messaging to consumers more effective, says Brough. For instance, a message that aims to encourage more widespread use of seat belts in cars could be more effective if it includes "car accident" in a list of many preventable causes of death, rather than on its own.

"Judging a part by the size of its whole: The category size bias in probability judgments" is forthcoming in the August 2014 issue of the Journal of Consumer Research.

Crowdfunding and Fraud

As crowdfunding becomes more popular, the possibilities for fraud grow. For that reason, so far the U.S. government has not allowed funders to purchase stakes in the companies. However, England and Australia already have legalized equity-based crowdfunding, and the United States is soon to follow. In 2012, the U.S. Securities Exchange Commission passed the Jumpstart Our Business Startups (JOBS) Act to ease some federal regulations on entrepreneurial ventures. In July 2013, the SEC approved Title II to the JOBS Act, which adds provisions for equity crowdfunding.

Funders could be better protected if governments put mechanisms in place to make entrepreneurs accountable for committing fraud, demonstrating incompetence, or making false promises, according to a recent book chapter by Ajay Agrawal, associate professor of strategic management at the University of Toronto's Rotman School of Management in Canada; Christian Catalini, assistant professor at the MIT Sloan School of Management in Cambridge, Massachusetts; and Avi Goldfarb, professor of marketing at Rotman. They also recommend that governments develop resources that provide funders with information about the startups seeking funding.

That said, Agrawal also points out that the level of concern over equity crowdfunding could be somewhat misplaced. "It feels like we are being far more protective of people making mistakes buying small amounts of equity through crowdfunding than we are of people making mistakes buying other goods and services on the Internet that are sometimes fraudulent, of lower-quality, or overpriced."

"Some Simple Economics of Crowdfunding" can be purchased online at www.nber.org/papers/w19133. The paper appears as a chapter in the book Innovation Policy and the Economy 2013 by the National Bureau of Economic Research in Boston.