In the News and Journals

Does Being Poor Lead to Poor Decisions?

Anuj ShahThe rise out of poverty can seem like a Sisyphean undertaking, a constant struggle to meet financial demands with a lack of resources. For many of the poor, this balancing act can lead to costly financial decisions - such as buying lottery tickets, taking out high interest loans, or failing to enroll in assistance programs - that only make their situation worse.

In the past, these unproductive decisions have been attributed to individual shortcomings or to environmental issues such as inadequate education or substandard living conditions. But research from Anuj Shah, assistant professor of behavioral science, points to another factor: scarcity changes a person's psychology.

When resources such as time, money, or food are scarce, each decision about how best to use those resources takes on urgency. This focus can have positive effects in the short term, but it comes at the cost of neglecting other, less urgent demands. For example, faced with immediate expenses such as rent and groceries, a car owner may forego routine car maintenance and end up with costly and avoidable repairs down the road.

Shah, along with colleagues from Harvard and Princeton universities, published five studies in which the researchers used games to study the effects of scarcity on decision making. The most recent study, "Some Consequences of Having Too Little," was published in Science magazine.

In each of the games, some participants received ample resources with which to play, while others received few. Moreover, in some games the players had the opportunity to borrow additional resources with interest. The researchers then observed how scarcity affected the players' borrowing behavior, their performance, and the psychological processes at play.

The researchers found that players with fewer resources became more focused on the tasks at hand, but at a cost of mental fatigue - precipitating costly borrowing decisions - and poor overall performance.

Although these experimental games do not approximate actual problems faced by the poor, the results suggest that otherwise routine decisions can take on great urgency when coupled with scarcity. This added urgency can lead to bad decision making in other matters by monopolizing attention and draining cognitive resources. - Dave Nussbaum

Photo by Chris Strong

 

What Drives Supermarket Shoppers Online?

Pradeep Chintagunta

What makes shoppers decide whether to buy groceries online or in a store? A variety of factors go into this seemingly straightforward decision, according to a paper by Pradeep Chintagunta, Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing, coauthored with colleagues from the National University of Singapore Business School and the Public University of Navarra in Spain.

The study, "Quantifying Transaction Costs in Online/Off-line Grocery Channel Choice," was funded in part by the James M. Kilts Center for Marketing and published in Marketing Science.

Chintagunta and his coauthors examined data from 3,556 households in Spain that shop online and in the stores of a major retail grocery chain. They found that the decision about where to shop is shaped by a range of "transaction costs" - those above and beyond the sticker price of the groceries.

For example, shoppers who live far away from stores who wanted to buy a lot of items or were looking to buy heavy or bulky goods were more likely to buy their groceries online. Bad weather also prompted customers to shop online rather than brave the elements.

Conversely, if shoppers wanted perishable items such as fresh produce, they preferred to buy in a store where they could check the quality of their purchases. Delivery charges for online orders pushed more shoppers to go to the stores, even though they had to pay for their own travel. Overall, price promotions tended to drive shoppers to supermarkets rather than online, unless there were sales on heavy or bulky items.

Chintagunta and his collaborators suggest that retailers can use the study to shape their sales strategies. For example, they could promote online sales by emphasizing the convenience of having heavy or bulky items delivered, or of avoiding checkout lines. "The American online grocer Peapod's tagline is 'Smart shopping for busy people,'" the authors note. "We find that the online channel is not only for busy people but also for busy days." - Hal Weitzman

Photo by Chris Lake

 

Not Necessarily Flights of Fancy

Joseph Gerakos

The corporate jet in recent years has become a symbol of lavish and excessive corporate perks. But a new study by Joseph Gerakos, associate professor of accounting, with colleagues from the University of Pennsylvania and Boston College, finds that tracking corporate jet flights provides insight into managers' private interactions with investors and analysts.

Gerakos and his colleagues collected corporate flight data from the Wall Street Journal's Jet Tracker database and analyzed the factors that prompted managers to seek private meetings in "money centers" - cities with a high concentration of investors such as Boston, Chicago, New York, and San Francisco.

According to the authors in their working paper "Corporate Jets and Private Meetings with Investors," corporate jet flight patterns are indicative of managers' face-to-face meetings meant to help investors and analysts better understand their company, which, in turn, can affect the company's value.

Corporate jet flights to a money center are more likely if a company has intangible, difficult to value assets, as meetings can help address such information gaps with investors and analysts, the authors conclude.

In addition, flights to a money center are more likely if institutional investors own a big piece of the company, if the company is about to raise capital, and if a recent disclosure such as an earnings announcement creates uncertainty that could depress the company's share price.

These flights are indicative of meetings and conversations that likely enable investors to update and revise their valuations, thereby leading to significant changes in the company's stock price, volume, and ownership.

Gerakos and his colleagues found that stock volatility in the three trading days following a flight to a money center (including the day of the flight) was higher than the average three-day volatility of the same stock during a sample comparative period when managers weren't on the road. This was especially true during road shows when managers flew to multiple money centers in three days.

The authors also found that share turnover was abnormally high during these three-day windows and that the changes in regional flight patterns were associated with changes in regional institutional investment. Because of fair disclosure laws, it's unlikely that managers divulged material information during private meetings. It's more likely that they shared information that complemented what investors already believed to be true. - Vanessa Sumo

Photo by Beth Rooney 

 

The Behavioral Science behind Gift Giving

Nicholas Epley

When you choose a gift for someone you care about, you probably spend a lot of time and energy picking out just the right thing. After all, in gift giving it's the thought that counts, right?

Actually, research by Nicholas Epley, John Templeton Keller Professor of Behavioral Science, with Yan Zhang, MBA '09, PhD '09, assistant professor at the National University of Singapore Business School, suggests that gift givers often overestimate how much recipients value the thought behind a gift. Their research was reported in the Wall Street Journal and other publications.

In four studies published late last year in the Journal of Experimental Psychology: General, Epley and Zhang found that people who received gifts they enjoyed were grateful but paid little attention to how much thought had gone into choosing them.

As a gift giver you're aware of all the thought you invested in making the perfect choice, but, as Epley and Zhang explain, "mental states are, after all, inherently invisible, making them relatively easy [for the receiver] to overlook." For the thoughtfulness of a gift to be appreciated, Epley and Zhang propose, you may have to prompt the recipient to consider the thought behind it.

How? Epley and Zhang suggest gifts that make your "thoughtfulness relatively more transparent, such as highly personalized gifts." You also could try slipping the story of how you chose the gift into conversation. Being thoughtful also could come to your rescue when your gift misfires - Epley and Zhang find that while people often don't perceive the thoughtfulness of gifts they like, a disappointing gift may make them wonder, "what was she thinking?" - helping them to recognize its thoughtfulness.

Even if you don't get credit for the thought you put into a gift, thoughtfulness has benefits. Epley and Zhang's research reveals that putting more thought into a gift makes the giver feel more socially connected to the receiver. And because research shows that social connection is an essential source of happiness, it may turn out that it really is better to give than to receive. - Dave Nussbaum

Photo by Chris Lake

 

Last Updated 1/16/14