Author: Brittney Wheeler

Everyday life comes with its own set of inconveniences: traffic jams, endless lines at the grocery store and extended customer service hold times with annoying background music playing. Wouldn’t it be nice to avoid those situations?

New research from Olin Business School at Washington University in St. Louis offers insight into how people and businesses can anticipate and avoid common inconveniences even when coordination of resources, such as time and space, is not possible. It’s simpler than one might think.

In some instances, people can improve their coordination with others in simple ways. An inconvenience such as being stuck in rush-hour traffic can cause someone to start leaving work earlier. 

On the other hand, other inconveniences may be avoided based on direction from an expert. A travel agent, for instance, can predict the best times to travel to a specific location, based on access to information from past travel seasons. 

In both scenarios, people are more likely to avoid frustrating situations by anticipating the behavior of others.

A new study co-authored by Elanor Williams, associate professor of marketing at Olin Business School, highlights the concept of “perspective taking,” or taking into account the motivations or thought processes of other people. The study, “Perspective Neglect: Inadequate Perspective Taking Limits Coordination,” was published recently in Judgment and Decision Making.

“In our studies, we ask people to think about why somebody else might do something because we think that would help them see where they share those motivations,” Williams said. “Where there might be issues of crowding or long wait times from there being too many people doing the same thing at the same time, you might be able to zig when everybody else zags.”

“Where there might be issues of crowding or long wait times from there being too many people doing the same thing at the same time, you might be able to zig when everybody else zags.”

Elanor Williams

In the same way that people inadvertently make similar decisions, they may also be able to make different decisions that benefit themselves. This approach is especially necessary in the current time of COVID-19 when social distancing is safer than being stuck in a crowd.

To explore this concept, Williams and her collaborators conducted six experiments.

The experiments asked the participants to consider perspective taking in various scenarios, including playing a video game, visiting a campus bookstore, streaming a Netflix show and enjoying a holiday. The research findings revealed that when participants were reminded to perspective take, coordination of resources (such as time and space) improved.

The research findings suggests that often, people need to be prompted to look outside of themselves and think about why others are motivated to make certain decisions.

Helping businesses predict future behavior 

From a marketing standpoint, businesses can use this approach to think through the best strategies for coordinating efforts with employees and consumers. Tapping into the motivations and perspectives of consumers can help businesses predict future behavior. 

For example, a well-coordinated social media campaign based on peak engagement times will have a greater reach than one that is implemented at random. While this may seem like common sense, Williams said that failing to anticipate consumers’ needs is a common mistake made by businesses big and small.

The same concept can be applied when dealing with consumers. Businesses often have to account for unexpected crowds and long wait times. An employer would benefit from knowing when to have a full staff available to accommodate crowds and prevent employee stress and burnout.

“The idea that people do not think quite as much as they could or maybe should about the reasons why other people do the things they do is a rich vein of research that obviously impacts everybody,” Williams said. “You might benefit from just giving a little more thought to why others do what they do.”

The researchers advise that perspective taking may not be effective or necessary in every situation. In a scenario where people’s motivations are obvious and clear, the extra step might not do much to improve coordination.

“We realized that a lot of what seemed like coincidences are actually explainable because people end up sharing the same reasons for doing whatever it is that you coincidentally did,” Williams said. “So when you show up at the same restaurant, or call each other out of the blue, it’s often similar reasons that led you to that shared behavior in the first place.”

When finding out life-changing news, whether good or bad, some people prefer to receive information as soon as possible. Others wish to receive and process bits of information over time or wait until the last minute to hear the news. Economists have tended to ignore consumers’ attitudes toward how information is disclosed.

A team including a Washington University in St. Louis economist lays the theoretical foundations that allow economists to take into account consumers’ preferences over how and when information is disclosed. The researchers, including two from Princeton University, created a model in which people react better when the news is revealed in the manner they are most comfortable.

Paulo Natenzon

The consumers that populate standard economic models only care about the likelihood of each outcome when making choices. “In practice, however, people exhibit strong preferences over the way in which information is revealed, even when the probabilities of each outcome remain fixed,” said Paulo Natenzon, assistant professor of economics at Olin Business School at Washington University.

Natenzon partnered with Faruk Gul and Wolfgang Pesendorfer, both professors of economics at Princeton, in a new study in the journal Econometrica, titled “Random Evolving Lotteries and Intrinsic Preference for Information.”

“In our paper, we model agents’ preferences over random evolving lotteries (RELs), which describe, in probabilistic terms, how the beliefs of the agent change over time as the agent gathers more information about the likelihood of each outcome,” Natenzon said.

The researchers provide a new framework to analyze how people prefer to receive news in instances of possible risk, such as a health condition or a hoped-for promotion. “In organizations, leaving workers in the dark with too little feedback can be bad for morale. But overwhelming them with too much feedback too often can be just as bad,” Natenzon said. “Our work provides an analytic toolkit to precisely quantify the tradeoffs involved and find the sweet spot.”

The study addresses the difference between information-seeking and information-aversion behaviors. Some people are naturally bent to prefer surprise while others may be apprehensive when it comes to receiving news. Their model also can help explain the puzzling “ostrich effect,” which describes the tendency people have to become information seeking after learning good news, but information adverse when learning bad news.

“Many people bury their heads in the sand after receiving some bad news. The behavioral literature has shown that people’s preferences over information disclosure can be nuanced,” Natenzon said.

Natenzon believes that a study such as this one can help future research to try to map predictable patterns as a starting point in further exploration of potential attitudes toward receiving information.In the real world, people are more complex than what a model can predict on its own.

“This is a very active area of research, and having the right theoretical framework to guide our thinking about these issues can be the key to advance our understanding. The theoretical results we obtained in this study have allowed us to formulate new questions about information demand, and we are starting to test them experimentally in the lab, which is incredibly exciting.”

This work was supported by National Science Foundation grant SES-1426252.

Although brick-and-mortar companies like GameStop and AMC Theaters have given investors reason to count them out of stock market success, a huge surge via a “short squeeze” was both predicted and expected in recent research by an expert at Olin.

In fact, he and his co-authors noticed the everyday investor talk behind GameStop percolating online in 2020.

“The probability of short squeeze, we document, has been a signal and potential predictor of a big return for a while — as we show in the paper — but has exploded this year, and these chat rooms provide a forum to discuss it and even coordinate,” said Ilias Filippou, visiting assistant professor of finance at Olin Business School.

“The retail investors in GameStop coordinated to provoke a ‘short squeeze:’ Their coordinate purchases made some hedge funds and institutions in short positions in the stock buy it back, which triggered a further increase in price and forced additional investors with short positions to buy it back, creating a loop that led to a huge run up in prices.”

In other words, it is a risky business the researchers equated to gambling and lotteries.

In a paper titled “Short Squeeze Uncertainty and Skewness,” Filippou and co-authors from Boston University and Instituto Tecnológico Autónomo de Mexico explored the similarities between short squeezes and lotteries. The concept of investors essentially betting on the success or failure of such stock is not new, but the researchers wrote how investors “are willing to pay a premium for the upside potential of these lottery-like securities.”

“Our paper shows that measures related to the probability of a short squeeze have been used over the years as an indicator for some market participants to invest in a particular company. Furthermore, at least part of those investments are highly speculative or ‘gambling-like.’ That is, investors know that the investment is very risky and, therefore, there is a good chance they will lose money,” Filippou said.

“However, there is the potential of a large payoff, and that is the reason why these investors are willing to take their chances. In addition, many of these investors favor options, which are even riskier than the stocks, but offer a potentially higher payoff — further evidence of the ‘gambling-like’ nature of the investment.”