In the Journals

Uncertainty Does a Number on Markets

Lubos PastorPietro VeronesiSteven DavisPolitical uncertainty affects the world over, and in weak economies it may acutely disrupt financial markets, according to a new research paper by Lubos Pástor, Charles P. McQuaid Professor of Finance and Robert King Steel Faculty Fellow, (pictured, far left) and Pietro Veronesi, Roman Family Professor of Finance and Robert King Steel Faculty Fellow (pictured, middle).

The paper, "Political Uncertainty and Risk Premia," incorporates the political uncertainty index developed by Steven Davis, William H. Abbott Professor of International Business and Economics, (pictured, far right) and his collaborators. The index puts a value on political uncertainty by combining the frequency of media mentions of policy uncertainty, the number of expiring tax provisions, and the extent of disagreement among inflation and government spending forecasters.

Pástor and Veronesi compared this index with the average correlation between the stocks in the S&P 500 index. They found that when the political uncertainty index was high, whether stocks rose or fell, they were more likely to swing together and more strongly. This effect of political uncertainty on stock prices was stronger during weak economic conditions, in which government policy changes tend to be more likely and less predictable. These observations have implications for investors and fund managers because the more uniformly stocks move, the more difficult it is for investors to diversify and for fund managers to pick stocks. - Seth Maxon

Photos, from left: Pastor, Veronesi, Davis, by Beth Rooney


How Friends Create Enemies

Nicholas EpleyStudies have shown that people with a circle of close friends live healthier, happier lives. But close relationships may predispose people to dehumanize those outside that circle, according to a recent paper by Nicholas Epley, John Templeton Keller Professor of Behavioral Science and Neubauer Family Faculty Fellow,  (pictured) and Adam Waytz of Northwestern University.

The paper, "Social Connection Enables Dehumanization," appears in the January 2012 Journal of Experimental Psychology. Epley finds that close relationships satisfy the deep human need for social connection, so connected people aren't motivated to empathize with strangers.

In an experiment, researchers placed subjects in one group with a friend and subjects in another with a stranger. Both groups were shown photographs of people who they were told plotted the September 11, 2001, World Trade Center attacks. Subjects then rated them on a "moral disengagement scale," which tested whether subjects attributed human mental and emotional qualities to the terrorists by asking how strongly they agreed or disagreed with several statements, including "the detainees have to be treated roughly because they lack feelings that can be hurt" and "some detainees deserve to be treated like animals." Finally, participants assessed to what degree they supported using torture techniques to interrogate the detainees. Epley and his colleagues observed that, regardless of political persuasion, those in the friend group dehumanized the detainees significantly more than participants in the control group and were much more willing to endorse harming them.

Another experiment had subjects write essays either about someone close to them or someone with whom they had no social relationship. All participants were then asked to what degree individuals in four groups - disabled individuals, middle-class Americans, drug addicts, and wealthy people - were capable of intentional behavior, cognition, and emotion. Ultimately, participants who wrote about friends or loved ones dehumanized all four groups to a greater degree than participants who wrote about strangers.

While Epley notes that this disconnection often manifests itself as indifference rather than malice, he warns that when connected people disregard others' humanity, they might lay the groundwork for condoning real harm. "Denial of these mental capacities does not necessarily lead to the kinds of violence and inhumane treatment that may be associated with dehumanization, but we believe it is a critical precursor for it," he concludes. - Seth Maxon

Photo by Chris Lake


Brands as People: A Behavioral Response

Ann McGillCan a brand change the way a person behaves? Yes, when he or she views the brand as another person, according to a forthcoming paper by Ann McGill, Sears Roebuck Professor of General Management, Marketing, and Behavioral Science, (pictured) and Pankaj Aggarwal of the University of Toronto–Scarborough.

In "When Brands Seem Human, Do Humans Act Like Brands? Automatic Behavioral Priming Effects of Brand Anthropomorphism," to be published in the August 2012 Journal of Consumer Research, McGill and Aggarwal found that when people put a human face on products, they either adopt the brand's perceived behavioral traits or act in an opposite manner.

Their experiments show that behavioral changes depend on three variables: whether a brand is thought of as a person, whether people like or dislike a brand, and whether they see the brand as a "partner" that works with them or a "servant" that works for them.

One experiment focused on Volvo, an automobile brand known for safety. A group of participants was asked to imagine the brand as a person and what that person might be like. The researchers manipulated participants into seeing Volvo as either a partner or a servant by having them assess fake advertising slogans that suggested the desired condition: For the partner condition, the slogan was "Volvo. Works with You. Helping You Take Care of What's Important"; in the servant condition, it was "Volvo. Works for You. Taking Care of What's Important to You." Participants were then presented with a hypothetical gambling scenario to test what level of risk they were willing to take. Finally, participants were asked whether they liked or disliked Volvo.

Participants who liked Volvo and saw it as a partner acted cautiously in the gambling situation, subconsciously adopting its perceived traits to achieve a common goal, safety. Those who disliked the brand took more risks in the gambling situation.

Conversely, in the servant group, participants who liked Volvo took more risks, showing that they need Volvo to keep them safe, while those who disliked Volvo behaved cautiously in the gambling situation, showing that they did not need it to stay safe. - Seth Maxon

Photo by Chris Lake

Last Updated 10/16/12