Thursday, July 23, 2015

Will Greeks invest? How Domestic Strife Influences Investment Decisions

Much has been written about the aftermath of the Greek crisis, but a key point raised in a recent Wall Street Journal article is the significant distrust of politicians and divides among people following the contentious politics around the referendum on the bail-out package that was offered Greece from the EU (but actually withdrawn before the vote date). Greeks on the left and far right don't trust EU, and many would like to leave the Euro. Greeks along the political spectrum believe their politicians cannot be trusted to govern competently.

Distrust and divisions matter because the Greek recovery will largely be determined by how much Greeks believe in their country. Currently, others do not. Even worse, many of the wealthiest Greeks have moved their money abroad and may well decide to keep them there until they see how the economy is doing. But an economic recovery requires someone to invest in business. Will the citizens of a nation with distrust and divisions invest?

A useful comparison for Greece might be Kenya, for two reasons. First, Greece is now a developing economy, and Kenya has been one for a while. Second, while the distrust and divisions in Greece are recent, Kenya has long been divided ethnically and politically, and distrust of the state runs deep. In recent research published in Administrative Science Quarterly, Chris Yenkey examined the spread of stock market investment in Kenya. Stock market investments are now wide-spread after the exchange in Nairobi opened, and it is spread nationwide but with some areas seeing more investment than others.

What drives investment under these conditions? Success. The strongest driver of investment by a Kenyan is how much profit others have had from their investments. That is not surprising, but there are many other results that are very interesting, and informative for Greece. First, divisions have strong effects. The investment results of others matter much more if they belong to the same ethnic group. People pay more attention to similar others, even if they are looking at objectively the same thing – stock market gains. Second, distrust matters. People living in towns with political leadership from a rival ethnic group paid less attention to the profits of those from different ethnic groups.

Equally important, the divisions can be bridged. In Kenya, people who lived in neighborhoods or worshiped in religions with a mix of ethnicity paid more attention to those who were different from themselves. People who saw much national (rather than ethnic-political) advertising were less likely to see only the gains of same-ethnicity others. Division and distrust are in the minds of people, and differences can be thought of as harmful division or helpful diversity.

The result is some old fashioned advice for Greece. Do whatever is necessary to bring the people together. Do whatever is needed to help them think of the nation rather than its politicians. The new part is that these actions are not just for reducing conflict and increasing confidence in life. They also help investment, and can be important for improving the economy.

Fidler, Stephen. 2015. Greeks, Economists Part Ways on Benefits of Eurozone. Wall Street Journal, 23/7/2015.

Sunday, July 5, 2015

Online Suggestion Boxes: Does Anyone Listen?

I think I am not the only one who has noticed how web sites are becoming pretty needy these days, using both pop-up ratings and suggestion boxes to try to get comments on the products and any other idea that the user may have. I first saw this (and was annoyed) when Amazon wanted ratings of my purchases and help fixing its suggested books, but many others use these functions. I just looked up one of the firms providing such tools and found that it has Barclaycard, Verizon, Telefonica, and Skype as its customers. And those are just the ones that are so famous that it posts their names on its web site.

I don't reply to such requests. I have other things to do, and think that firms should fix their problems without my help. I think many others also don't reply, either for the same reason or because they think that no one will take their suggestion seriously. But there are also people who do type ideas into these suggestion boxes, ranging from simple tips to longer proposals. So do the firms listen and adopt the ideas? Well, here is a potential problem. The more people give ideas, the harder it is to pay attention to them because there are simply so many ideas that the firm can't handle all. They have idea crowding.

Henning Piezunka and Linus Dahlander just published research in Academy of Management Journal on what happens when firms have  suggestion tools, and get idea crowding. Their work was built on a simple idea with some neat additions. The simple idea is that idea crowding means ideas are less likely to be used. Quality doesn't  help; idea crowding simply makes it harder to do anything. The first addition is that ideas also are less likely to be picked when they are distant from what the organization does or looks at. Again, quality doesn't help, anything distant is less likely to be picked even if it is great. But it is the second addition that really gets interesting. Idea crowding makes the effect of distance stronger. So when an idea is distant and there is idea crowding, the idea has to be truly exceptional to be used.

So far theory, but what about the evidence? Very simple: the research found that all the effects of crowding actually happen. And that has an interesting consequence for that really great idea you are about to type into the suggestion box. It will be used if it really is that great, but you do have to hope that the firm does not have idea crowding and that the idea is not distant. Type your idea and hope that others don’t do the same.

By the way, you can give me ideas by sending them to my email. Will I do what you say? Well, it depends on how good they are and how much idea crowding I have.