People rely on emotions and moral standards, such as the consideration of fairness, in their financial decisions. This makes them less rational than classical economic models tend to assume. One of Professor Sander Onderstal’s research topics is the behaviour of companies with the aim of adding elements to the classical theory that account for systematic deviations from it. One of his favourite propositions is that ‘managers are “humans”, too’.
On 12 September this year, during his inaugural lecture, Sander Onderstal can’t resist the temptation to show his audience, mostly economists, business experts and managers, that they are less rational than they might think. A few experiments in which the audience responds to an issue via an app on their mobile phones confirm time after time that Onderstal is right.
In one case presented to the audience, one person receives ten euros, the other nothing. It is up to the person who receives the money to decide how much he will give to the other person and how much he will keep. Both people get nothing in the event that the other person has to reject the amount offered because it is below a pre-determined minimum. ‘What is the minimum amount needed for you to accept the offer?’ Onderstal asks his audience.
Most people in the hall fill in an amount of around five euros. ‘This is a choice based on the idea of what is fair’, explains Onderstal. ‘A selfish person would accept any bid over one euro as that would deliver the highest expected return.’
‘The general public is quite cynical over the performance of managers. In the public’s view, they earn too much money, think only of their own interests and make many mistakes.'
Onderstal has been Professor of Economics at the Amsterdam Business School (ABS) since August 2018, with a focus on game theory. It is the same field in which, much earlier, he obtained his PhD in Tilburg. After a brief period at the Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau) and an appointment as assistant professor at the economics faculty of the University of Amsterdam (UvA), one of his main focuses will now be experimental research into the irrational behaviour of managers.
This places Onderstal in the school of behavioural economists such as Cass Sunstein, Richard Thaler and Daniel Kahneman. They dissociate themselves from classical economic theory, which is based on the principle that all economic actors are perfectly rational and maximise their profits. Behavioural economists believe that most people do not fit this stereotypical ‘econ’ image. In their models, the ‘econ’ is replaced by the ‘human’, a person whose economic behaviour is, among other things, the result of cognitive limitations and driven by moral considerations such as the equal distribution of wealth.
‘The aim of behavioural economics is not so much to overturn standard theory’, explains Onderstal. ‘Of course, classical economists know that man is not completely rational, but they describe the deviating outcomes that result from this as “noise”. Behavioural economists aim to refine the classical theory by looking at where man exhibits systematic non-irrational behaviour. Their efforts have resulted in more reliable models, with greater predictive power.’
One of Onderstal’s current research topics is the behaviour of managers. ‘The general public is quite cynical over the performance of managers. In the public’s view, they earn too much money, think only of their own interests and make many mistakes. However, it is a fact that managers usually perform useful tasks. This concerns very down-to-earth matters such as keeping a good administration, finding efficient ways to organise the production process and setting up targeted marketing.
Onderstal points to evidence resulting from research into the consequences of the Marshall Plan, the support the United States provided to Europe after the Second World War. One particular element of this support was the training of Italian managers of family businesses in the United States. These managers were randomly selected. ‘In retrospect, this can be seen as an experiment. Research shows that up to as much as fifteen years later, the companies with managers who had received training were doing much better than other Italian family businesses.’
‘Apparently, the skills of managers do not come naturally’
In Onderstal’s view, this is yet another confirmation of the importance of management training. ‘Apparently, the skills of managers do not come naturally’, says Onderstal. ‘All these things are now taught at university, including here at the ABS, with subjects such as finance, accounting, business administration and marketing. These are usually relatively practical subjects, although much progress has been made, as in the case of marketing. This subject is nowadays firmly based on a scientific and experimental approach.’
In his studies on managers’ work practices, Onderstal refrains from assuming that managers are ‘econs’ and examines how this affects the standard theory. In order to measure the degree of social responsibility among managers, he set up an experiment with UvA professor Maarten Pieter Schinkel and others. The question was if cartels always result in the marketing of products that are harming consumers.
‘This question was inspired by agreements made between Albert Heijn and Jumbo to stop selling cut-price chicken’, explains Onderstal. ‘However, the regulator put a stop to this. We wondered whether the regulator should not implement competition law with more leniency when companies agree on high product standards.’
The participants in the experiment were presented with the choice of selling green or grey products, with the grey products yielding a higher revenue but also causing damage to third parties. The experiment was carried out in one situation where participants were free to make mutual agreements and one situation in which cartels were prohibited. We asked ourselves whether the regulatory body should be more lenient in the application of competition law in situations where businesses make agreements to sell better products.’
The study showed that in the situation where cartels were permitted, about as many managers opted for grey products as for green products. ‘A polarisation took place, with a symmetrical choice for one or the other product. On balance, therefore, allowing this type of agreements did not lead to any welfare gains. It also emerged that the more managers attached importance to the damage caused to third parties by grey products, the more they opted for green products. ‘In the standard model, a manager would opt for his own benefit, whereas it now appears that managers are “humans”, too.’
More information? Email: A.M.Onderstal@uva.nl