Alexander L. Brown

To Review or Not to Review? Limited Strategic Thinking at the Movie Box Office

Film studios occasionally withhold movies from critics before their release. These cold openings provide a natural setting to apply laboratory-developed models of limited strategic thinking to the field. In a set of 1,303 widely released movies, cold opening is correlated with a 10-30 percent increase in domestic box-office revenue, and a pattern of fan disappointment, consistent with the hypothesis that some moviegoers do not infer low quality from cold opening. While selection and endogeneity may play a role in these regressions, the full pattern of results is consistent with level-k and cognitive hierarchy behavioral-game-theoretic models. (JEL D12, D82, L82, M37)

Estimating Structural Models of Equilibrium and Cognitive Hierarchy Thinking in the Field: The Case of Withheld Movie Critic Reviews

Film studios occasionally withhold movies from critics before their release. Because the unreviewed movies tend to be below average in quality, this practice provides a useful setting in which to test models of limited strategic thinking: Do moviegoers seem to realize that no review is a sign of low quality? A companion paper showed that in a set of all widely released movies in 2000--2009, cold opening produces a significant 20%--30% increase in domestic box office revenue, which is consistent with moviegoers overestimating quality of unreviewed movies perhaps due to limited strategic thinking. This paper reviews those findings and provides two models to analyze this data: an equilibrium model and a behavioral cognitive hierarchy model that allows for differing levels of strategic thinking between moviegoers and movie studios. The behavioral model fits the data better, because moviegoer parameters are relatively close to those observed in experimental subjects. These results suggests that limited strategic thinking rather than equilibrium reasoning may be a better explanation for naive moviegoer behavior. This paper was accepted by Brad Barber, behavioral economics.

Do Individuals Have Preferences Used in Macro-Finance Models? An Experimental Investigation

Recent financial studies often assume that agents have Epstein--Zin preferences---preferences that require agents to care about when uncertainty is resolved. Under this “recursive-preference” framework, the preference for uncertainty resolution is entirely determined by an agents preferences for risk and intertemporal substitution. To test the implications of this model, this paper presents an experiment designed to elicit subject preferences on risk, time, intertemporal substitution, and uncertainty resolution. Results reveal that most subjects prefer early resolution of uncertainty and have relative risk aversion greater than the reciprocal of the elasticity of intertemporal substitution, consistent with the predictions by recursive preferences. Subjects are classified in a finite mixture model by their risk, time, and intertemporal-substitution parameters. Regression results show that types predicted by the Epstein--Zin model to prefer early resolution choose early resolution with 20%--50% higher probability.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1794 This paper was accepted by Brad Barber, finance.

Small Victories: Creating Intrinsic Motivation in Task Completion and Debt Repayment

Tasks such as the elimination of all debts when faced with the immediate option to spend can be unpleasant but not conceptually difficult. Dividing these tasks into smaller parts and completing the parts from smallest size to largest size can help people realize quick motivational gains that increase their likelihood of completing the task. The authors more broadly define this idea as “small victories” and discuss, model, and empirically examine two related behavioral theories that might explain it. A laboratory experiment tests this prediction and provides data for model calibration. Consistent with the idea of small victories, when a task is broken down into parts of unequal size, participants perform faster when the parts are arranged in ascending order (i.e., from smallest to largest) rather than descending order (i.e., from largest to smallest). The calibrated model is consistent with the directional predictions of each theory. However, when participants are given choice over orderings, they choose the ascending ordering least often. The authors conclude with a discussion of the efficacy of this method in stylized debt-repayment scenarios.

The costs and benefits of symmetry in common-ownership allocation problems

In experimental partnership dissolution problems with complete information, the divide-and-choose mechanism is significantly superior to the winners-bid auction. The performance of divide-and-choose is mainly affected by reciprocity issues and not by bounded rationality. The performance of the winners-bid auction is significantly affected by bounded rationality. Contrary to theoretical predictions divide-and-choose exhibits no first-mover bias.

The Effects of Relative Size, Profitability, and Growth on Corporate Capital Allocations:

Resource allocation in firms is often done in relative terms. Allocations to each project or, in the case of multibusiness firms, business segments are not made independently but through comparisons among the options. In that context, it becomes particularly important to identify the organizational factors that might influence those processes, as well as the mechanisms that create that influence. In this article, we investigate one of those potential factors—the size of a business segment relative to the rest of the organization—and two possible accounts. One is a naive tendency to spread out allocations evenly over the firm’s segments that would cause managers to relatively ignore differences in size and favor smaller segments over larger ones, holding other variables constant. The second is a tendency to direct larger allocation to the segments with the most political power and clout within the organization, which would normally favor larger segments, as those generally possess more influence. We investigate these competing hypotheses in a cross-section of firms to conclude that both mechanisms are partially at play. We find that both the smallest and the largest of segments are favored in the capital allocation process. Moreover, we find that the segment’s growth and profitability as well as corporate management ownership of the company moderate those effects.