Friday, September 12, 2014

Forgive or Forget? How people react to firm misbehavior

Last week I wrote about the surprising news that asset management unit Skandia had made a decision that annoyed its customers (Once Bitten Twice Shy? How Reputation Problems hit Mutual Fund Manager Skandia Again). The news are surprising because Skandia is familiar with customer reactions to reputation problems, as it is just over 10 years ago that it was hit by asset withdrawals as a result of a scandal in similar-name (but different management) firm Skandia Insurance. Part of what it learned is that customers leave and don't come back soon; we estimated that a typical fund would take three years to get back to the asset levels it had before the scandal. This would suggest caution, especially because the three years are after a scandal in which the mutual fund manager is actually innocent. It just happens to have the same name as its owner, an insurance firm with a scandal. Another mutual fund management company also owned by Skandia but differently named avoided this damage.

In addition to our research on how the scandal spread to many firms other than Skandia, Takako Fujiwara-Greve, Stefan Jonsson, and I also looked carefully at how customers withdrew and came back to Skandia during and after the scandal. The results will be published in International Economic Review, and are available here in longer form. We found that each mention of the scandal caused customers to withdraw money from the firm. So, either more scandal mentions meant that more people knew about it, or more scandal mentions meant that more people lost patience with Skandia. This is natural, but useful to show.

A more interesting part is the return of funds to Skandia. Here, we might assume that customers forgive – as a period goes without scandal mention, they will come back. Alternatively, we can assume that customers forget – with the meaning of forget being that new customers or customers of different firms than Skandia don’t really pay attention to a Skandia scandal, and may stumble into Skandia funds after a scandal. The idea of forgiveness appeals to us morally, and would be useful for a large firm that could have many potential forgiving customers after a scandal. The idea of forgetfulness is less appealing, and it means that large firms suffer more after a scandal than small firms would. So which is true?

First, it is clear that a model of forgiveness would have some relation between the people leaving and the people entering afterwards, typically in the form of some proportion of the people having left forgiving and returning. Forgetfulness is even easier to model because it just means that some portion of all customers available will start business with the firm, for example if they start disliking their current firm. And – our model of forgetfulness did in fact describe the return of customers very well. For Skandia, which was a large firm, forgetfulness was bad news because there would be more funds coming if customers were forgiving than if they were just forgetful. For other large firms it is potentially bad news too, because forgetfulness means that there is no loyalty or size advantage when the firm gets involved in a scandal. 

People may forgive other people, but firms they just forget.