Trading Places
Predicting the Next Big Thing: Success as a Signal of Poor Judgment
Jerker Denrell & Christina Fang
Management Science, October 2010, Pages 1653-1667
Abstract:
Successfully predicting that something will become a big hit seems impressive. Managers and entrepreneurs who have made successful predictions and have invested money on this basis are promoted, become rich, and may end up on the cover of business magazines. In this paper, we show that an accurate prediction about such an extreme event, e.g., a big hit, may in fact be an indication of poor rather than good forecasting ability. We first demonstrate how this conclusion can be derived from a formal model of forecasting. We then illustrate that the basic result is consistent with data from two lab experiments as well as field data on professional forecasts from the Wall Street Journal Survey of Economic Forecasts.
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Wage Inequality and Team Production: An Experimental Analysis
Björn Bartling & Ferdinand von Siemens
Journal of Economic Psychology, forthcoming
Abstract:
Numerous survey studies report that human resource managers curb wage inequality with the intent to avoid detrimental effects on workers' morale. However, there exists little controlled empirical evidence demonstrating that horizontal social comparisons and wage inequality have adverse effects on worker behavior. In this paper, we present data from a laboratory experiment that studies the impact of wage inequality on participation and effort choices in team production. Overall, we do not find evidence that wage inequality has a significant impact on either participation or effort choices.
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I fear your envy, I rejoice in your coveting: On the ambivalent experience of being envied by others
Patricia Rodriguez Mosquera, Gerrod Parrott & Alejandra Hurtado de Mendoza
Journal of Personality and Social Psychology, November 2010, Pages 842-854
Abstract:
We present 2 studies on being envied. Study 1 used an emotional narrative methodology. We asked 44 Spanish (23 women, 21 men) and 48 European American (36 women, 12 men) participants to tell us about a recent experience in which others envied them. We classified the antecedents, relationship context, markers of envy, coping strategies, and positive and negative implications of being envied. In Study 2, 174 Spanish (88 women, 86 men) and 205 European American (106 women, 99 men) participants responded to a situation in which they had something someone else wanted. We manipulated the object of desire (academic achievement or having "a better life"). We measured individual differences in orientation to achievement (i.e., vertical individualism), cooperation and interpersonal harmony (i.e., horizontal collectivism), a zero-sum view of success, beliefs that success begets hostile coveting, fear of success, and dispositional envy. We also measured participants' appraisals, positive and negative emotions, and coping strategies. The findings from both studies indicate that being envied has both positive (e.g., increased self-confidence) and negative consequences (e.g., fear of ill will from others). Being envied had more positive and more negative psychological and relational consequences among those participants who were achievement oriented (European Americans) than among participants who were oriented to cooperation and interpersonal harmony (Spanish).
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Generous Paupers and Stingy Princes: Power Drives Consumer Spending on Self versus Others
Derek Rucker, David Dubois & Adam Galinsky
Journal of Consumer Research, forthcoming
Abstract:
This research examines how consumers' spending on themselves versus others can be affected by temporary shifts in their states of power. Five experiments found that individuals experiencing a state of power spent more money on themselves than on others, whereas those experiencing a state of powerlessness spent more money on others than on themselves. This effect was observed using a variety of power manipulations (hierarchical roles, print advertisements, episodic recall, and mental role-playing), across spending intentions and actual dollars spent, and among college and national samples. We propose that this effect occurs because power and powerlessness affect the psychological utility of self versus others, and this in turn affects the monetary worth allocated to spending on self versus others. The research makes novel contributions to appreciating how the spending on the self versus others varies as a function of psychological states and increases our understanding of the role of power in consumer behavior.
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Financial Literacy, Schooling, and Wealth Accumulation
Jere Behrman, Olivia Mitchell, Cindy Soo & David Bravo
NBER Working Paper, October 2010
Abstract:
Financial literacy and schooling attainment have been linked to household wealth accumulation. Yet prior findings may be biased due to noisy measures of financial literacy and schooling, as well as unobserved factors such as ability, intelligence, and motivation that could enhance financial literacy and schooling but also directly affect wealth accumulation. We use a new household dataset and an instrumental variables approach to isolate the causal effects of financial literacy and schooling on wealth accumulation. While financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, our approach reveals even stronger and larger effects of financial literacy on wealth. Estimated impacts are substantial enough to suggest that investments in financial literacy could have large positive effects on household wealth accumulation.
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Perceived unfairness in CEO compensation and work morale
T. Cornelißen, O. Himmler & T. Koenig
Economics Letters, forthcoming
Abstract:
CEO compensation that is perceived to be excessive regularly causes agitation in the population. Using German data, we show that perceiving CEO pay to be unfair has economic repercussions in terms of lower work morale.
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Jason Ferguson & Douglas Ready
Early Childhood Research Quarterly, forthcoming
Abstract:
Inherited privilege and status remain powerful factors in the distribution of opportunity in American life. These transfers of socioeconomic resources across generations are facilitated by the links between adult educational attainment and children's cognitive skills. Our current study expands the notion of social reproduction beyond this narrow two-generation approach to investigate the links between grandparents' educational attainment and their grandchildren's academic abilities. Using a nationally representative sample of over 13,000 children who participated in the Early Childhood Longitudinal Study-Kindergarten Cohort (ECLS-K), we find that familial advantages in human capital persist over time and that these advantages are associated with improved cognitive outcomes among later generations. Even after controlling for a wide array of socioeconomic and demographic characteristics, young children with college-educated grandparents possess stronger literacy and mathematics skills at the start of formal schooling. Propensity score approaches, which address concerns regarding the endogeneity inherent in the topic, yield similar results, suggesting the robustness of our findings.
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Relative Wealth Concerns and Complementarities in Information Acquisition
Diego García
Review of Financial Studies, forthcoming
Abstract:
This article studies how relative wealth concerns, in which a person's satisfaction with their own consumption depends on how much others are consuming, affect investors' incentives to acquire information. We find that such externalities can generate complementarities in information acquisition within the standard rational expectations paradigm. When agents are sensitive to the wealth of others, they herd on the same information, trying to mimic each other's trading strategies. We show that there can be multiple herding equilibria in which different communities pursue different information acquisition strategies. This multiplicity of equilibria generates price discontinuities: An infinitesimal shift in fundamentals can lead to a discrete price movement.
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Nathan Kelly & Peter Enns
American Journal of Political Science, October 2010, Pages 855-870
Abstract:
This article assesses the influence of income inequality on the public's policy mood. Recent work has produced divergent perspectives on the relationship between inequality, public opinion, and government redistribution. One group of scholars suggests that unequal representation of different income groups reproduces inequality as politicians respond to the preferences of the rich. Another group of scholars pays relatively little attention to distributional outcomes but shows that government is generally just as responsive to the poor as to the rich. Utilizing theoretical insights from comparative political economy and time-series data from 1952 to 2006, supplemented with cross-sectional analysis where appropriate, we show that economic inequality is, in fact, self-reinforcing, but that this is fully consistent with the idea that government tends to respond equally to rich and poor in its policy enactments.
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Income Inequality, Trust, and Population Health in 33 Countries
Frank Elgar
American Journal of Public Health, November 2010, Pages 2311-2315
Objectives: I examined the association between income inequality and population health and tested whether this association was mediated by interpersonal trust or public expenditures on health.
Methods: Individual data on trust were collected from 48641 adults in 33 countries. These data were linked to country data on income inequality, public health expenditures, healthy life expectancy, and adult mortality. Regression analyses tested for statistical mediation of the association between income inequality and population health outcomes by country differences in trust and health expenditures.
Results: Income inequality correlated with country differences in trust (r=-0.51), health expenditures (r=-0.45), life expectancy (r=-0.74), and mortality (r=0.55). Trust correlated with life expectancy (r=0.48) and mortality (r=-0.47) and partly mediated their relations to income inequality. Health expenditures did not correlate with life expectancy and mortality, and health expenditures did not mediate links between inequality and health.
Conclusions: Income inequality might contribute to short life expectancy and adult mortality in part because of societal differences in trust. Societies with low levels of trust may lack the capacity to create the kind of social supports and connections that promote health and successful aging.
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Selectivity in hierarchical social systems
Jose Garcia-Martinez
Journal of Economic Theory, forthcoming
Abstract:
We consider a selection process and a hierarchical institution in a dynamic model as in Harrington, where agents are "climbing the pyramid" in a rank-order contest based on the "up or out" policy. Agents are matched in pairs to compete, and each pair faces a particular environment. They are ranked according to the quality of their performances in this particular environment, and a fraction of the highest ranked agents are promoted. The size of this fraction characterizes the selectivity of the process, and we distinguish between local and global selectivity. We study the role of the degree of selectivity in the dynamic process where types of agent differ in their expected performances. Surprisingly, we find that an increase in the selectivity of the process can be detrimental to the agents with the highest expected performances and can increase the survivability of the lesser performing. However, if the selectivity decreases, the only survivor is the agent with the highest expected performance.
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The Envy Premium in Product Evaluation
Niels Van de Ven, Marcel Zeelenberg & Rik Pieters
Journal of Consumer Research, forthcoming
Abstract:
Consumers are willing to pay a premium for products that elicit their envy. The more people compared themselves to a superior other, the higher the envy premium was. Yet, the emotion envy and not the upward comparison drove the final effects. The envy premium only emerged for a desirable product that the superior other owned (iPhone) when people experienced benign envy. Benign envy is elicited when the other's superior position is deserved, and malicious envy when it is undeserved. When people experienced malicious envy, the envy premium emerged for a desirable product that the superior other did not own (BlackBerry). This shows how benign envy places a premium on keeping up, and malicious envy on moving away from, superior others.
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Technological change and the growing inequality in managerial compensation
Hanno Lustig, Chad Syverson & Stijn Van Nieuwerburgh
Journal of Financial Economics, forthcoming
Abstract:
Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth. This shift has stimulated the accumulation of organizational capital in existing firms and reduced the need for reallocating workers to new firms. We characterize the optimal managerial compensation contract when firms accumulate organizational capital but risk-averse managers cannot commit to staying with the firm. A calibrated version of the model reproduces the increase in managerial compensation inequality and the increased sensitivity of pay to performance in the data over the last three decades. This increased sensitivity of compensation to performance provides large, successful firms with the glue to retain their managers and the organizational capital embedded in them.
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Choosing to keep up with the Joneses and income inequality
Richard Barnett, Joydeep Bhattacharya & Helle Bunzel
Economic Theory, December 2010, Pages 469-496
Abstract:
We study a variant of the conventional keeping-up-with-the-Joneses setup, in which heterogeneous-ability agents care both about consumption and leisure and receive an utility premium if their consumption exceeds that of the Joneses'. Unlike the conventional setup in which all agents are assumed to want to participate in the rat race of staying ahead of the Joneses, our formulation explicitly permits the option to drop out. Mean-preserving changes in the spread of the underlying ability distribution, via its effect on the economy-wide composition of rat-race participants and drop-outs, have important consequences for induced distributions of leisure and income, consequences that are unobtainable using conventional keeping-up preferences.