Sunday, August 20, 2017

Power from Arbitrary Places: What Awards Can Do

We have a general idea that status and prestige can do things – good things – to a person or organization. We are all familiar with how the prestigious classes of wine demand higher prices, even for a given quality level; there is evidence on this in research on French and California wines. Status effects are also well known from many other contexts, and a more-consequential example is financial markets, in which the most prestigious banks gain price and distribution advantages over all others.

A new paper by Anne Bowers and Matteo Prato in Administrative Science Quarterly gives interesting new details on the effects of status. They look at equity analysts, who seek to help investors in the stock market by issuing reports on firms and estimating their future earnings. This is difficult work, both in getting the estimates right and in gaining the confidence of investors, but some analysts are so highly regarded that their estimates can move the price of stock they report on. They have market power even though they just act as observers and forecasters. But how can an investor determine what analyst to pay attention to?

Conveniently, there is the magazine Institutional Investor, which caters to the large (and very powerful) institutional investors such as mutual funds and pension funds, as well as ordinary investors. The magazine has an annual All-Star award, given mostly for accurate estimates but also for other qualities such as high service to customers (again, institutional investors). This award is prestigious, but it is also a sign of quality. If the market could consider the quality and prestige aspects of the award separately, someone who was nearly good enough for the award should gain nearly as much power as someone actually getting it. You are probably guessing that this is not what happens. And you are right.

Bowers and Prato had a very clever way of finding this out. The award is given across many categories of equities, and these categories often change through addition, deletion, combination, and splitting.  This is neat because it means that an analyst could become an All-Star, or lose an All-Star award designation from a prior year, simply because the categories changed. Focusing only on these changes in awards, they found that the difference between having an award and not having one was a great deal of market power. Gaining an award meant that an analyst moved stock prices much more; losing one meant that an analyst moved prices much less.

The second of these effects should give you pause. Financial markets are supposed to be smart and to be able to predict the average outcome of many future events. But the loss of market power when an analyst loses the All-Star distinction because of a category change suggests that the markets are forgetting what they knew. The quality of an analyst doesn’t suddenly change, so if the market power changes, we know that the market has forgotten the quality. This is not good news for those of us who let institutional investors such as mutual funds or pension funds hold our pension investments.

Monday, August 14, 2017

Underselling Labors of Love: Why Give Discounts to Rich Tourists?

The world is full of people in creative occupations. Taking a broad view of creative occupations as those involving work with personal shaping of the product and service, about 40 percent of the world’s workers are in these occupations. Among them, artists and craftspeople are the ones we most readily associate with creative work because they instill their work not only with personal design and careful craftwork but also with a passion that makes each piece a labor of love. We recognize this most readily with artists making one-of-a-kind works, but many craftspeople turning out decorative items also make each piece an individual expression. They should get paid well for this, right?

Maybe not. In a new article in Administrative Science Quarterly, Aruna Ranganathan studied the pricing of wood bangles made by craftspeople in southern India, finding that the artistic ambitions of the craftspeople had a surprising effect on the prices they charged, relative to prices charged by traders selling exactly the same goods but not involved in their creation: they gave a discount to buyers who appeared to be especially appreciative of their work. The reason became clear from how they described their work. Unlike traders, who freely admitted selling crafted work just to make money, the craftspeople took personal pride in every piece they made and were especially attached to the best ones. Some items they refused to sell; others they made sure to sell to people who seemed likely to appreciate them and display them prominently.

This makes sense, because every artist wants to be acknowledged and wants the work to be appreciated. Indeed, this was especially important to the craftspeople Ranganathan studied, who saw their work as having such strong elements of the sacred that they viewed their workshops as being like temples. But what’s harder to understand is how craftspeople determine whether someone will appreciate their work. Not every transaction involves words, especially in an area that attracts many tourists who don’t speak the local language, as was the case in Ranganathan’s study. Instead, the craftspeople looked at the customers. And the financial decisions they made based on what they saw might be surprising.

If a customer wore handcrafted jewelry or clothing, or carried a handbag made from natural fibers, the craftspeople considered these clear signals that they would appreciate great craftwork. The craftspeople also believed that foreign tourists, who are fairly easily identified, would see their work as more exotic and be more likely to appreciate it. These two groups have something in common: they are likely to be wealthier than local customers wearing inexpensive items such as plastic jewelry and carrying synthetic handbags. Yet the craftspeople offered discounts to both of the wealthier groups and charged more—market price or even above—to the poorer customers. Market price (or higher) for the poor, discounts for the rich. It seems strange and unfair, but in creative work money is just part of the transaction—appreciation is the other part, and for the artist, this is a tradeoff.

In reporting evidence from social science, we often end up looking at behaviors that make sense on one dimension and not on another. I perfectly understand the artist who is willing to give a discount to have a piece appreciated. I don’t like the idea of the richest customers getting discounts. I suppose the best thing to do is not to bargain too much when buying art as a tourist. Hand-crafted items from local artisans should provide the artisan with both appreciation and a better standard of living.

Wednesday, August 9, 2017

When Occupations Rule the Workplace, Which Matters Most?

 “The modern workplace” is an expression often used as if there is just one kind, while the reality is that workplaces are complex and differentiated. But if one workplace deserves to be ranked as increasingly important, it is the multi-occupational workplace that has not only multiple occupations creating a product or service together, but also no order in the form of top-down hierarchy or start–finish sequence. The occupations in such a workplace work together, and the potential for failure anywhere to ruin the output gives every one of them power. Think of the large and growing medical sector, the many new services using information and communication technology, and the increased customization allowed by computer-aided design and manufacturing.

So how do occupations interact when all are interdependent, all at once? Beth Bechky and Daisy Chung showed in a new article in Administrative Science Quarterly that it depends on how the organization acknowledges occupational power. They studied firms doing equipment manufacturing and film production: both places with multiple occupations interacting at a high level of expertise to achieve customized, high-quality output. It turns out that the procedures in the two types of workplaces were very different, although they shared the feature of each occupation having significant power over its own work and influence on the other occupations. This combination of having power and being influenced was not a battleground, but a complicated and pragmatic interaction.

The differences in procedures were clear. The equipment-making firm maintained the semblance of hierarchy and temporal order, with products starting out as engineering documentation and proceeding to test assembly and manufacturing, but the actual work involved feedback and adjustments that led to cycles as the later stages made clarifications and corrected mistakes. Importantly, everything was in theory documented formally, even the adjustments, and work was done “by the book.” Film production, on the other hand, did not seek to define a hierarchy among occupations and had simultaneous interaction as production proceeded. In film production, the power of each occupation over its own work was fully acknowledged, and interaction among various occupations was direct and egalitarian; in equipment production, the power of each occupation over its own work was hidden, and interaction among various occupations was channeled through the process of documenting the product specifications.

These differences also affected how each occupation functioned internally. Because some occupations in equipment manufacturing were formally seen as subordinate, they conducted close internal quality checks to ensure that their members’ work was perfect along the dimensions they controlled. That way they maintained as much control as possible. Because film production lacked such ranking, the emphasis was not on internal control to keep quality uniformly high, but more on recognizing each member’s specific strengths and mentoring junior members into the occupation.

Why the differences? Keep in mind that these occupations are working together in a pragmatic way to solve organizational problems. The main class of problem has to do with time. Any organization dealing with occupations with well-established hierarchies is dealing with historical time and must not deviate too far from how things were done before, when interdependence was less. So they make the documentation system work in ways that maintain history and handle interdependence. Any organization dealing with unfolding events is dealing with the event clock and must not slow down direct interaction among whatever combination of occupations has the capability to deal with the current emergency; even as the occupations have widely differing formal authority, scarcity, and pay, they interact as equals. Organizations operate to deal with time.

Bechky, Beth A. and Daisy Chung. 2017. Latitude or Latent Control? How Occupational Embeddedness and Control Shape Emergent Coordination. Administrative Science Quarterly, forthcoming