© 2013 Michelle Baddeley. Standard models in economics and finance usually assume that people are rational, self-interested maximisers, effectively co-ordinated via the invisible hand of the price mechanism. Whilst these approaches produce tractable, simple models, they cannot fully capture the uncertainties and instabilities that affect everyday choices in today’s complex world. Insights from the other social and behavioural sciences can help to fill the gap and behavioural economics is the subject which brings economics and finance together with psychology, neuroscience and sociology. Behavioural Economics and Finance introduces the reader to some of the key concepts and insights from this rich, inter-disciplinary approach to real-world decision-making.

type="main"> How do contracts deal with the exchange of tacit knowledge, which is difficult to observe, enforce, and verify? This study compares the sample characteristics of 505 license agreements between inventors and developers of biomedical inventions with theoretical prescriptions about contractual terms when the parties’ tacit knowledge is required to commercialize the inventions. The analysis reveals that (a) three- and four-part payments are common in licenses of biomedical inventions; (b) the importance of inventors’ tacit knowledge in development activities is directly related to the magnitude of royalty rates in the licenses; and (c) the importance of developers’ tacit knowledge in development is associated with minimum annual payments when the license includes measurable benchmarks to address the shelving of inventions, and to upfront payments in the absence of such benchmarks. Firms use a complex mix of upfront and state-contingent payments, broadly consistent with theoretical prescriptions, to cope with the incentive issues inherent in the exchange of tacit knowledge.

[Abstract]: Firms undertaking new product development are faced with an environment which is characterised by long lead times from basic research to industrial application, a commercialisation phase with short lead times and an increasingly accelerated rate of obsolescence under the global competition of the new product development process. While this is true for all firms, STBFs face further complications from the inherently higher risks associated with such firms. In examining how STBFs undertake their new product development (NPD), the relationship between corporate strategy, NPD process features and new product success factors specifically need to be considered. An additional consideration is the role that business incubators play in assisting tenant STBFs to undertake their new product development. As such, the theory of how new product development is undertaken by STBFs lies across several disciplines including corporate strategy theory, new product development theory, entrepreneurial theory, technology management theory, economic development theory and business incubator theory. Specifically, the research problem for this research is: what are the origins and nature of new product development processes within STBFs and how do they contribute to STBF success? In undertaking a review of the literature some insights were obtained to specifically explain how STBFs undertake their new product development, the relationship between NPD process activity and new product and firm success and the role of business incubators. As a result, a theoretical framework was developed which in turn, resulted in three research questions: RQ 1: What elements of NPD are adopted by STBFs when developing new products? RQ 2: How does the lack of adoption of the elements of NPD contribute to new product and firm failure in STBFs? RQ 3: How and in what ways do business incubators influence the performance of the elements of NPD adopted by STBFs? A three-stage qualitative research design within the realism paradigm was used for this research. It combined exploratory interviews with a case study methodology in order to build theory through induction. This was then followed up with a series of interviews to discover which firms had experienced product failure, had discontinued their NPD process and/or had suffered firm failure over the duration of the study. As a result, meaningful insights were able to be obtained into the relationships between the adoption of elements of NPD, new product failure and firm failure in the context of STBFs. The findings revealed that there were several aspects of the ways in which STBFs undertake their new product development activities which were not identified in the literature. In this respect, it was evident that unlike larger and established firms in which new product development activity is derived out of corporate strategy, STBFs undertake corporate strategy development as a component of new product development. It was also found that the corporate strategy – product development nexus was not linear but rather comprised a number of close inter-relationships between elements of corporate strategy, NPD process features and new product success factors requiring parallel activity. Furthermore, the majority of STBFs adopted only 15 of the 22 best practice elements of NPD proposed as part of the theoretical framework of new product development in STBFs. In addition, it was found that the STBFs that suffered failure over the course of the study adopted comparatively fewer elements of NPD than did their continuing STBF counterparts. Importantly, it was also found that business incubators provided only a modest positive influence on the performance of NPD activities by their tenant STBFs. Moreover, as STBFs are commonly single product centric, that is their overall new product development effort is focused on a single product or a narrow product line, the relationships between new product development effectiveness, new product success and firm success are closely aligned. More specifically, ineffective support for NPD activities can lead to a potential lack of effectiveness of business incubators in reducing the risk of failure of their tenant STBFs. This is despite the more general focus of business incubators in assisting tenant STBFs with corporate strategy development. The main contribution of this theory building research was the development of an empirically confirmed, theoretical and practical model for the development and management of new product development by start-up technology based firms.

While the strategy discipline has made significant strides in measurement practices since its inception, questions persist regarding the use of different terminology and nonconvergent measures to represent a single construct within our field (see, for example, Cording et al., 2010; Hitt et al., 2004; McKinley, 2007; Suddaby, 2010). In this essay, we emphasize the importance of rectifying these practices to facilitate the cross-disciplinary conversation and systematic building of understanding that has long been a goal of strategy research (Cannella and Paetzold, 1994; Meyer, 1991; Nag et al., 2007). We focus on the utilization of consistent terminology and convergent measurement for three reasons. First, employing different terminology and nonconvergent measurement inhibits the accumulation of knowledge and understanding regarding a phenomenon (McClelland et al., 2010; Oxley et al., 2010; Singh et al., 2003; Suddaby, 2010). What should be a building process to better understanding of a phenomenon can become a hodge-podge of terms and measures that hinders this process. Second, as we detail in our essay, despite the well-recognized perils to knowledge accumulation associated with these practices, they occur in many domains of strategy research. Third, if the field is to continue to build understanding in a cross-disciplinary and systematic fashion, these issues are particularly salient: it is essential that we refer to constructs in a way that fosters conversations across disciplinary and domain boundaries and develop measures that converge on the constructs that we are discussing so that the understanding developed is valid. 445239 SOQ10210.1177/1476127012445239Hill et al.Strategic Organization 2012

While research on strategic renewal is burgeoning, little attention has been paid to the role of renewal in contexts marked by environmental scarcity. Drawing on the population ecology and strategic choice literatures, this paper theoretically explores firms' renewal journeys under distinct environmental scarcity situations, and discusses how managerial perceptions and interpretations shape their strategic renewal behaviors. The resulting conceptual framework refines prior co-evolutionary perspectives of strategic renewal by showing that the nature of firms' renewal activities varies with the type of environmental scarcity they face. Further, we argue that varying CEO perceptions and interpretations can cause firms within the same industry context to adopt entirely different renewal journeys. Our theoretical framework responds to prior calls for more rigorous theory-building regarding strategic renewal by integrating the population ecology and strategic choice perspectives.

Whenever intrepid researchers venture into new terrain, they find that they require knowledge outside of their formal training. This paper reviews bodies of knowledge for operations management (OM) researchers interested in the new area of Behavioral Operations. We highlight theoretical constructs and empirical phenomena from cognitive psychology, social psychology, group dynamics, and system dynamics. We also provide a guide for where to go to learn more about each body of knowledge. Our overall goal is to lower the startup costs for new researchers in Behavioral Operations.

When making decisions, people sometimes deviate from normative standards. While such deviations may appear to be alarmingly common, examining individual differences may reveal a more nuanced picture. Specifically, the personality factor of need for cognition (i.e., the extent to which people engage in and enjoy effortful cognitive activities; Cacioppo & Petty, 1982) may moderate decision makers’ susceptibility to bias, as could personality factors associated with being a leader. As part of a large-scale assessment of high-level leaders, participants completed a battery of decision-making competence and personality scales. Leaders who scored higher on need for cognition performed better on two of four components of a decision-making competence measure: framing and honoring sunk costs. In addition, the leader sample performed better than published controls. Thus, both individual differences in need for cognition and leadership experience moderate susceptibility to decision biases. Implications for broader theories of individual differences and bias are discussed.

When facing uncertainty, adaptive behavioral strategies demand that the brain performs probabilistic computations. In this probabilistic framework, the notion of certainty and confidence would appear to be closely related, so much so that it is tempting to conclude that these two concepts are one and the same. We argue that there are computational reasons to distinguish between these two concepts. Specifically, we propose that confidence should be defined as the probability that a decision or a proposition, overt or covert, is correct given the evidence, a critical quantity in complex sequential decisions. We suggest that the term certainty should be reserved to refer to the encoding of all other probability distributions over sensory and cognitive variables. We also discuss strategies for studying the neural codes for confidence and certainty and argue that clear definitions of neural codes are essential to understanding the relative contributions of various cortical areas to decision making.

When explaining others' behaviors, achievements, and failures, it is common for people to attribute too much influence to disposition and too little influence to structural and situational factors. We examine whether this tendency leads even experienced professionals to make systematic mistakes in their selection decisions, favoring alumni from academic institutions with high grade distributions and employees from forgiving business environments. We find that candidates benefiting from favorable situations are more likely to be admitted and promoted than their equivalently skilled peers. The results suggest that decision-makers take high nominal performance as evidence of high ability and do not discount it by the ease with which it was achieved. These results clarify our understanding of the correspondence bias using evidence from both archival studies and experiments with experienced professionals. We discuss implications for both admissions and personnel selection practices.

When I interact with colleagues and friends who are venturing into experimental economics, either as they prepare for their own experiment, or aim for a critical view of experiments run by others, I often hear the question: " What is a good experiment? " My first reaction is to answer my empirically minded colleagues " Well, let me ask you: What is a good regression? " Clearly a good experiment (or regression) is one that allows testing for the main effect while controlling for other plausible alternatives. This helps ensure that the original hypothesis is reached for the right reasons and the initial theory is not wrongly confirmed. However, there is an aspect of experimental design that is probably closer connected to theory than empirical work: As designers, we are responsible for the environment in which the data are generated. As such a good experimental design also needs to fulfill requirements one may impose on good theory papers: The environment should be such that it is easy to see what drives the result, and as simple as possible to make the point. The design has to provide a good environment for studying the questions at hand. Furthermore, ideally, the design (just like good theory) should be such that it seems plausible that the results could serve as prediction for behavior in other environments. The design of experiments has some interplay with empirical methods as a good experimental design foreshadows how the data to be generated can be analyzed. As such, good design can often reduce the need for fancy econometrics, or, at times, allow econometrics to be more powerful. It also often implies that the experimental design has to take a stand on what it means to accept or reject an initial theory or hypothesis. When deciding about a design, there are basically no fixed rules. The one exception probably being that economic experiments which use deception are really frowned upon, hard to

We used functional MRI (fMRI) to investigate human mental processes in a competitive interactive setting—the “beauty contest” game. This game is well-suited for investigating whether and how a player's mental processing incorporates the thinking process of others in strategic reasoning. We apply a cognitive hierarchy model to classify subject's choices in the experimental game according to the degree of strategic reasoning so that we can identify the neural substrates of different levels of strategizing. According to this model, high-level reasoners expect the others to behave strategically, whereas low-level reasoners choose based on the expectation that others will choose randomly. The data show that high-level reasoning and a measure of strategic IQ (related to winning in the game) correlate with the neural activity in the medial prefrontal cortex, demonstrating its crucial role in successful mentalizing. This supports a cognitive hierarchy model of human brain and behavior.

We use a stock-market game and predictions of examination marks to examine differences between overconfidence and biased self-attribution (BSA) of British and Asian students. Although different overconfidence measures show little correlation, Asians are consistently more overconfident than the British. All are equally prone to BSA.

We use a laboratory experiment to study how perceptions of skill inuence teamwork. Our design is based on Gervais and Goldstein (2007) theory of teams. Team output is increasing in skill and in eort, skill and eort are complements, and workers’ eorts choices are complements. An overcondent

We use a laboratory experiment to study how perceptions of skill influence teamwork. Our design is based on Gervais and Goldstein (2007) theory of teams. Team output is increasing in skill and in effort, skill and effort are complements, and workers' effort choices are complements. An overconfident agent thinks that his skill is higher than it actually is. We find that the presence of overconfi-dent workers in teams is beneficial for firms since it raises effort provision and team output. We also find that overconfidence leads to a Pareto improvement in workers' payoffs. In contrast, underconfidence is detrimental to firms as well as workers.

We test the hypothesis that increasing individuals’ perceived control over the release and access of private information—even information that allows them to be personally identified––will increase their willingness to disclose sensitive information. If their willingness to divulge increases sufficiently, such an increase in control can, paradoxically, end up leaving them more vulnerable. Our findings highlight how, if people respond in a sufficiently offsetting fashion, technologies designed to protect them can end up exacerbating the risks they face.

We survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers' biases and nonstandard preferences on their decisions. We review relevant psychology, economic theory and predictions, empirical challenges, empirical evidence, new directions such as behavioral signaling, and open questions.

We study two-armed Levy bandits in continuous-time, which have one safe arm that yields a constant payoff s, and one risky arm that can be either of type High or Low; both types yield stochastic payoffs generated by a Levy process. The expectation of the Levy process when the arm is High is greater than s, and lower than s if the arm is Low. The decision maker (DM) has to choose, at any given time t, the fraction of resource to be allocated to each arm over the time interval [t,t+dt). We show that under proper conditions on the Levy processes, there is a unique optimal strategy, which is a cut-off strategy, and we provide an explicit formula for the cut-off and the optimal payoff, as a function of the data of the problem. We also examine the case where the DM has incorrect prior over the type of the risky arm, and we calculate the expected payoff gained by a DM who plays the optimal strategy that corresponds to the incorrect prior. In addition, we study two applications of the results: (a) we show how to price information in two-armed Levy bandit problem, and (b) we investigate who fares better in two-armed bandit problems: an optimist who assigns to High a probability higher than the true probability, or a pessimist who assigns to High a probability lower than the true probability.

We study the risk-taking behavior of stock analysts under varying market conditions. We examine how the risk analysts take by providing bold forecasts that deviate from consensus depends on the degree of uncertainty in the environment as well as the analysts’ skill level. We provide evidence that low-skill analysts become significantly bolder, hence taking more risk, and significantly less accurate when market uncertainty increases. These findings are consistent with previous experimental results that show that skill levels moderate differential attitudes towards uncertainty. We further provide evidence that the difference in an analyst’s boldness between times of low and high uncertainty is a signal of the analyst’s skill that predicts future forecasting accuracy over and above standard skill measures such as past forecasting accuracy.

We study the Downs-Thomson paradox, a situation where an additional road capacitycan cause an overall increase in transport generalized cost and therefore a decrease in welfarefor transport users. To this end, we build an experiment based on a double market-entrygame (DMEG) where users have to choose between road and public transit after that the op-erator has choosen public transit capacity. The optimal strategy for operator is to minimizecapacity, and the equilibrium for users depend on the endogeneous public transit capacitycompared to exogeneous road capacity. The most important result is that we observe theDowns-Thomson paradox empirically in the laboratory: An increase in road capacity causesshift from road to rail and, at the end, increases total travel costs. But the contrary isnot true: A decrease in road capacity does not cause lower total travel costs, which is incontradiction with our theoretical model. Results also show that the capacity chosen byoperator di¤ers from Nash prediction, levels being signi cantly higher than those predictedby our model. Moreover, users coordinate remarkably well on Nash equilibrium entry ratewhile capacity has been chosen by operator.

We study strategic interaction between agents who distill the complex world around them into simpler situations. Assuming agents share the same cognitive frame, we show how the frame affects equilibrium outcomes. In one-shot and repeated interactions, the frame causes agents to be either better or worse off than if they could perceive the environment in full detail: it creates a fog of cooperation or a fog of conflict. In repeated interaction, the frame is as important as agentsO patience in determining the set of equilibria: for a fixed discount factor, when all agents coordinate on what they perceive as the best equilibrium, there remain significant performance differences across dyads with different frames. Finally, we analyze some tensions between incremental versus radical changes in the cognitive frame.