Zur Shapira

Variable risk preferences and the focus of attention

Empirical investigations of decision making indicate that the level of individual or organizational risk taking is responsive to a risk takers changing fortune. Several nonstationary random-walk models of risk taking are developed to describe this phenomenon. The models portray a risk takers history as the cumulated realizations of a series of independent draws from a normal probability distribution of possible outcomes. This performance distribution is assumed to have an unchanging mean and a variance (risk) that changes

Experiencing the Improbable: Rare Events and Organizational Learning

Organizations that go through rare and unusual events, whether they are costly or beneficial, face the challenge of interpreting and learning from these experiences. Although research suggests that organizations respond to this challenge in a variety of ways, we lack a framework for comparing and analyzing how organizational learning is affected by rare events. This paper develops such a framework. We begin by first outlining two views of rare events. The first view defines rare events as probability estimates, usually calculated from the frequency of the event. The second view defines rare events as opportunities for unique sensemaking based on the enacted salience of specific features of the rare events. We next use these definitions to explore how rare events trigger learning, and then examine the kind of learning processes that are triggered by rare events. We conclude with a discussion of promising areas of research on learning from rare events.

Size and frequency of prizes as determinants of the demand for lotteries

Abstract Three variables were assumed to characterize lotteries: prizes, probability of winning, and the cost of a ticket. Two studies were conducted: The first study utilized data from the Israeli “Lotto” system for a period of 60 months. In the second study subjects indicated their preferences among different problem sets that consisted of hypothetical lotteries which were constructed so as to resemble real lotteries. The results of both studies indicate that the size of the first prize as well as the number of small prizes had the major effect on the demand for lotteries. The results are discussed in terms of classical utility theory and alternative theories that emphasize the role of attention to a few key aspects rather than moments of the distribution of outcomes.

Task choice and assigned goals as determinants of task motivation and performance

Abstract There are many studies showing that goal setting is a good motivational technique (E. A. Locke, K. N. Shaw, L. M. Sarri, & G. P. Latham, 1981 , Psychological Bulletin, 90, 125–152). However, there is no adequate theoretical explanation for the phenomenon (J. C. Naylor & D. R. Ilgen 1984 , Research in Organizational Behavior, 6, 95–140). The latter argued that goals affect performance by directing attention and mobilizing effort. In the present paper an expectancy theory formulation of intrinsically motivated behavior is presented. A major variable in the motivational process is the choice of task difficulty. It is hypothesized that goals can be detrimental to performance for intrinsically motivated subjects who choose their optimal level of task difficulty. On the other hand goals can facilitate performance for subjects who are not intrinsically motivated. Three experiments were run, in two of which subjects worked on a heuristic-type task and on a proofreading task in the third experiment. In all the experiments subjects chose the level of task difficulty and were then assigned a goal by the experimenter. The results provide support to the hypotheses. The discussion focuses on the importance of choice on the initiation of behavior and on the role of goals in the maintenance of behavior.

Experimental Tests of Self-Selection and Screening in Insurance Decisions

A major characteristic of insurance markets is information asymmetry that may lead to phenomena such as adverse selection and moral hazard. Another aspect of markets with asymmetric information is self-selection, which refers to the pattern of choices that individuals with different personal characteristics make when facing a menu of contracts or options. To combat problems of asymmetric information, insurance firms can use screening. That is, they can offer the clients a menu of choices and infer their characteristics from their choices.This article reports the results of several studies that examined the degree to which people behave according to the notions of self-selection and screening. Subjects played the role of either insurance buyers or sellers. The results of these studies provide partial support for the hypothesis that subjects use self-selection and screening in insurance markets. Our study also points at the importance of learning in experimental studies. In one-stage experiments where subjects did not get feedback, screening was not detected. When multistage experiments were conducted, and the subjects learned from experience and were also taught the relevant theories, their decisions were more aligned with screening.

Ambiguity and Risk Taking in Organizations

Kunreuther, Meszaros, and Hogarth (1993) argue that insurers are risk averse and ambiguity averse, and that they use cognitive reference points and constraints in making pricing decisions. They further claim that insurer ambiguity may be a factor that has a role in market failure at the industry level. Arguably, ambiguity may be an important aspect of decision behavior. In this article, research on managerial risk taking is reviewed with a focus on the relationship between ambiguity and risk taking. In particular, the effects of the organizational and institutional context are highlighted. It is argued that the political aspects of insurer decision behavior should be considered as well. Implications for further study and understanding of decision making are discussed.

Governance in Organizations: A Cognitive Perspective

Governance in organizations according to traditionalagency theory is based on the premise that managersand employees do not have identical goals. As aconsequence, employees need to be monitored andcontrolled. If legal contracts are not sufficient forproper control, incentive contracts should be used. This paper argues that incentive contracts are notsufficient to solve governance issues in organizationsdue to problems in measurability and enforceability ofpresumed contract violations. Such problems arecomplicated by asymmetries in power, perspectives andaspirations between managers and employees. Acognitive argument is advanced suggesting that timeconstraints and bounded rationality render the idea ofmonitoring relatively ineffective. Governance ideasthat focus on communication flow and informationsharing are described. The role that other cognitiveelements such as memory play in a more comprehensiveand interdisciplinary framework for understandinggovernance relations is discussed.

Exclusive vs. independent agents: a separating equilibrium approach

Abstract We provide a separating equilibrium explanation for the existence of the independent insurance agent system despite the potentially higher costs of this system compared to those of the exclusive agents system (or direct underwriting). A model is developed assuming asymmetric information between insurers and insureds; the former do not know the riskiness of the latter. We also assume that the claims service provided by the independent agent system to its clients is superior to that offered by direct underwriting system, that is, insureds using the independent agent system are more likely to receive reimbursement of their claims. Competition compels the insurers to provide within their own system the best contract to the insured. It is shown that in equilibrium the safer insureds choose direct underwriting, whereas the riskier ones choose independent agents. The predictions of the model agree with previous research demonstrating that the independent agent system is costlier than direct underwriting. The present model suggests that this does not result from inefficiency but rather from self-selection. The empirical implication of this analysis is that, ceteris paribus, the incidence of claims made by clients of the independent agents system is higher than that of clients of direct underwriting. Implications for the coexistence of different distribution systems due to unbundling of services in other industries such as brokerage houses and the health care industry are discussed.

Trade-offs in a Tempest: Stakeholder Influence on Hurricane Evacuation Decisions

Stakeholders often control vital resources for decision makers, and this can lead decision makers to take stakeholder opinions into account when making important decisions. This process can be complicated by a number of factors. First, many important decisions involve risk and uncertainty. When the outcome is uncertain, how does a decision maker take the views of stakeholders into account? Second, many decision makers are accountable to multiple different stakeholder groups with different preferences. How do these heterogeneous stakeholder groups affect the process of decision making? More generally, do these stakeholder considerations lead to decisions that are not socially optimal?We explore these and related questions by focusing on a specific type of high-stakes decision making in a context featuring significant risk and heterogeneous stakeholders—the decision to evacuate a community during the threat of a hurricane hitting land. There is research on weather forecasting techniques and individual evacuation behavior; however, there is no research on the behavior of local officials in making hurricane evacuation decisions. These decisions provide an excellent context for an exploration into the specific processes by which stakeholder considerations may affect the process of decision making.This study offers a simple model of the process underlying evacuation decision making. The model focuses on how the evacuation threshold is set based on the anticipated costs of Type I versus Type II errors. We then use the model—supplemented with rich qualitative and quantitative data—to offer a series of propositions about the conditions under which nonsocially optimal evacuation decisions may be made. This paper contributes to the literature on decision making by offering a simple model that integrates decision making and stakeholder considerations and by offering specific and novel propositions about this integration.

Performance Sampling and Bimodal Duration Dependence

Performance sampling models of duration dependence in employee turnover and firm exit predict that hazard rates will initially be low, gradually rise to a maximum, and then fall. Some empirical duration distributions have bimodal hazard rates, however. In this paper, we present a generalization of the performance sampling model that can account for such deviations from unimodality. While the standard model of performance sampling assumes that the mean and the standard deviation of performance are constant over time, we allow them to change in time, to reflect the fact that tasks may change over time. We derive the hazard rate implied by this more general model and show that it can be bimodal. Using data on turnover in law firms, we show that the hazard rate predicted by these models fit data better than existing models.