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Keynes Fund

 

Project Summary

Dr. Julia Shvets and Dr. David Huffman - Understanding differences in performance of managers (JHLX)

We analyse data on managers in a large chain of food and drink stores in order to shed light on some fundamental questions about human behaviour. In this firm, managers face a high-powered tournament incentive scheme, which provides a rich research opportunity.  Somewhat uniquely, we are able to combine observational data on managerial performance at the firm with the data on characteristics and behaviours of these managers we collected through laboratory experiments with them.

Research Output

Persistent Overconfidence and Biased Memory: Evidence from Managers. Huffman, Raymond and Shvets (2017)

Abstract: This paper provides evidence of persistent overconfidence among managers in a firm, who face a high-powered competitive incentive scheme, and have very detailed feedback as well as substantial experience. We measure overconfidence relative to the benchmark of a Bayesian model of belief formation, which makes predictions based on efficient use of managers' histories of past outcomes. We can reject that manager predictions are consistent with the model with a high level of confidence. We turn next to investigating a potential underlying mechanism, posited by models of motivated beliefs: biased memory (Benabou and Tirole, 2003). We elicit manager recall of recent past performance, and find that managers who performed poorly tend to be inaccurate, and have errors that are asymmetric, in the direction of recalling better than actual performance. We then show empirically that these biased memories of the past help explain overconfident predictions for the future. This provides some of the first field evidence of the role of biased memory in sustaining persistent overconfidence.

Incentives and rank concerns in managerial tournaments. Shvets (2017)

Abstract: Many firms use relative performance pay in which they rank employees. In such a setting, an employee's actions may not only be shaped by incentives but also by concerns about their rank. In this paper, we study incentive and rank effects faced by store managers in a large firm where bonus is determined through a high powered tournament. We study managers' response to performance feedback, using the rules of the tournament to separate the impact of incentives from that of rank. On the margin, we find that managers ignore incentives, but respond to rank. Their response suggests desire to catch up: when managers get a bad rank on either profit or service, they respond by improving performance. Furthermore, we show that managers achieve these improvements by making corresponding changes to labour variables, their main levers of control.

Research Activities

Podcast "How to Change Your Mind" (Episode 379)

"How to change your mind?" is the question posed to several scientists in this recent Freakonomics broadcast. Among them is Julia Shvets, discussing her research on overconfidence, done jointly with David Huffman and Collin Raymond and funded by the Keynes Fund.

Link to podcast: http://freakonomics.com/podcast/change-your-mind/