Friends of the Behavioral Economics Blog, this week we present the paper “Regional culture: the role of the invisible hand in shaping local family firms’ top management team”, by Yu, X.; Zhang, Y.; Cheng, X.; Li, H.; Chen, Y. and Zhou, W. (2022), in which authors carry out a study to know how clan culture and regional culture affects family businesses.

There are plenty of studies on family and non-family businesses, and the vast majority have focused on the differences between both when it comes to choosing candidates to fill top management positions. 

Compared to non-family businesses, family companies are more concerned with objectives such as maintaining family control, altruism within their group, improving the family’s reputation, among others. In other words, they tend to prioritize family interests. 

And by virtue of this, they can introduce people into the management team more easily than in non-family companies, even if they do not have enough talent for the management of the company. 

From the above, it is understood that the operation and management of family businesses and the maintenance and coordination of their internal relations depends not only on the rules and regulations of the company, but also on the local cultural concepts associated with the family

This is the idea to which studies on the differences between family and non-family firms have not paid enough attention: what is the impact of regional culture on family firms? Does this culture affect as an “invisible hand” that influences entrepreneurial behavior?

Specifically, this study focuses on the effect of the so-called “clan culture”. In Chinese businesses, clan culture embodies the salient characteristics of traditional Chinese culture. Therefore, exploring the influence of traditional values may be useful to understand the cultural basis of family business behavior and motivation. 

First, authors briefly review the existing literature in the field of clan culture and family firms. 

Previous studies suggest that family firms differ from non-family firms in that family companies have two organizational systems: business and family. And, therefore, family patterns are also one of the reference points of behavior and decision making.

Compared to non-family firms, family companies rely on both business logic and family logic to make operational and strategic decisions

All this should not surprise us, since, according to the psychology of the individual, we humans tend to show altruistic behaviors for the family members with whom we share genetics

A very positive point about family businesses is that people tend to participate much more actively in helping to achieve the family’s goals, as involvement in the management of the business is beneficial to the emotional satisfaction of family members in terms of belonging, security and identification. 

For family members, the company is not only a place of work but also a symbol of family status and glory. For this reason, it is believed that family members working for family businesses generally do not ask for high financial remuneration. 

On the other hand, if there is a high financial risk, family businesses with a weak clan culture may try to improve their financial situation rather than emphasizing the maintenance of family control. Conversely, under the influence of a strong clan culture, family executives tolerate risks and losses because they believe in the cohesion and unity of family members and maintain enthusiasm.

The worse the financial situation of a family business, the more prominent the family concept tends to be in the individual’s mind. 

To analyze all these ideas, authors conducted a study including data from 625 growing companies in China. 

The obtained data tell us that, in areas where the clan culture prevails, family members involved in the business are willing to accept lower remuneration. The reason for this phenomenon is that both the company and the worker understand that it is not only the economic returns that matter, but also the psychological ones.

The more the clan culture prevails, the lower the remuneration demanded by the family members.

In addition, it seems that when family firms have already obtained generous financial returns, they focus more on obtaining psychological returns, and when financial returns are not sufficient, they will weaken the pursuit of psychological benefits. 

Due to the complexity of the subject, authors explain that it is necessary to continue studying the behavior of family firms in different sociocultural contexts to better understand their functioning and dynamics.

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Friends of the Behavioral Economics Blog, this week we present the paper “Revealing differences in brand loyalty and brand engagement of single or no parented young adults”, by Morkunas, M. (2022), in which the author carries out an investigation to know whether adverse circumstances such as parental divorce or a context of orphanhood would affect the consumer behavior of adolescents and young adults.

Central and Eastern European countries are characterized by a high number of divorces. This is a circumstance that places children in an insecure social position, which is amplified by numerous factors, such as possible financial fragility, intolerance or bullying in schools. 

On the other hand, the number of children raised in single-parent families, or even by relatives, increased significantly in some countries in this part of Europe after joining the European Union. 

It has been shown that the prolonged absence of at least one parent has a significant impact on the socio-psychological development of the child at various levels. For example, the situation affects the maturation of their character, their cognitive abilities, and even the economic rationality of their actions.

However, although there are indications to think that people who have grown up in families with these circumstances may have different behaviors than people with typical situations, no substantial scientific efforts have been made to reveal the impact of orphanhood, single parenthood, or divorce on consumer behavior. Therefore, this article aims to help reduce that gap in the literature.

In general, it is considered that the longer a person lives, the more he/she adjusts to the environment around him/her, and forms his/her habits according to the existing social norms and rules, showing a behavior of social conformity. Then, in order to better understand the effect of the lack of a parent during childhood on consumer behavior, the scope of the study focused on young adolescents, who have been exposed to this phenomenon of social conformity for some time.

It is important to know three concepts: brand engagement (BE), brand loyalty (BL), and brand evangelist, which could be understood as a person who feels devotion to the brand and communicates it to the world. 

In general, it is assumed that brand engagement (BE) is directly related to brand loyalty (BL), the latter being considered more complex. However, there are many experts who consider BE to be the more important of the two concepts. When studying brand satisfaction, it seems that identification with the brand through value congruence is one of the most important points that most affects BE and BL.

On the other hand, other experts consider that brand-based consumer interactions are also a highly relevant antecedent for these two concepts. 

BL is typically seen as one of the most important parts of brand evangelism, although other experts point to brand satisfaction and experience as the most relevant components. 

It is important to briefly understand these data to better interpret the results of the study, which can be viewed in detail in the original article. 

The data needed for the study were collected in two processes. First, a control group was recruited through an online questionnaire shared through social networks. On the other hand, data for the study group were obtained through social support divisions of five Lithuanian municipalities and other organizations in the area that provide social support to people with complicated social situations. 

In total, 341 people were surveyed for the control group and 224 for the study group. 

The results showed that there appeared to be statistically significant differences between the two groups. 

Adolescents who experienced a childhood in a single-parent family, in an orphaned situation or, in general, with the absence of one or both parents, are more prone to emotional connectivity with their favorite brands. This should lead to higher satisfaction or higher perceived quality of these brands, as high emotional connectivity is considered an indicator of both. 

On the other hand, although they show some emotional attachment to the brand, they are rarely inclined to spread their positive opinion about it, which is interesting, because if the person loves the brand, he or she is more willing to speak positively about it, even if only moderately. 

The author believes that these findings can be considered relevant not only for Central and Eastern Europe, but for all countries where labor migration is an important issue, with a considerable social, economic and cultural footprint and high divorce rates. Furthermore, he urges other experts to continue to study the subject in order to draw even more solid conclusions.

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Friends of the Behavioral Economics Blog, this week we present the paper “Top Ten Behavioral Biases in Project Management: an Overview”, by Flyvbjerg, B. (2021), in which the author explains a series of biases related to cognition, politics and power, that he considers fundamental to bear in mind in project management. 

Since the early work on biases by Tversky and Kahneman in the 1970s, the number of biases identified by behavioral scientists has skyrocketed in what has been called “a behavioral revolution” in economics, management, and the social and human sciences. 

In this article, the author gives a description of some behavioral biases that he considers particularly important in project planning and management, so if you are a project manager, you should pay attention! 

The biases chosen by the author are those that, from his point of view, are most likely to trip up project planners and managers, negatively impacting project outcomes if the biases are not identified in advance and addressed early. 

The author argues that behavioral biases are not limited to cognitive biases alone, but that “political biases” also come into play. 

For him, behavioral economics in its current form focuses too much on cognitive psychology: economic decisions are taken into account too much in psychological terms, the author believes that more attention should be paid to political, sociological and organizational perspectives. 

Political biases, therefore, would be those arising from power relations, particularly important for big decisions and projects. For decision making in hierarchical organizations, involving office politics, sales techniques, economic funds, etc., political biases would be very useful. 

Some of them are the illusion of control, the conservatism bias, the normality bias, the topicality bias, the neglect of probability, the cost-benefit fallacy… among many others. The author decides to focus on some of them, although here we will not be able to name all of them, if you want to know more, we recommend reading the original article. 

On the one hand, we have the optimism bias, which is cognitive, and refers to the tendency of people to be overly optimistic about the results of planned actions. 

In optimism clutches, people are not aware that they are being optimistic. They overestimate the benefits and underestimate the costs. They involuntarily misrepresent success scenarios and overlook the potential for mistakes. As a result, plans are unlikely to yield the expected benefits. 

Another interesting bias is the uniqueness bias, which psychologists have identified as the tendency of individuals to see themselves as more unique than they really are, e.g., uniquely intelligent or attractive. 

This bias is particularly interesting in project management, because project planners and managers are systematically “primed” to see their projects as unique and different. This bias tends to prevent these managers from learning, because they think, precisely, that they have little to learn. And this, research has shown, leads managers to be affected by this bias performing worse than others. 

By seeing things from this perspective, planners focus on the specific circumstances and components of the project they are developing and look for evidence in their own experiences, to the detriment of the final project. 

This bias increases the underestimation of risk, leading to risk-taking that probably would not have been accepted if the actual probabilities had been known. 

There is also the planning fallacy, which the author classifies as a subcategory within the optimism bias, which arises from individuals producing plans and estimates that bear little resemblance to reality. It is the tendency of individuals to, on the one hand, underestimate the costs, schedules and risks of planned actions, and, on the other hand, overestimate the benefits and opportunities of actions, creating risks for projects. 

The author also mentions anchoring, which is the tendency to rely too much or “anchor” on one piece of information when making decisions. Anchoring feeds into other biases, such as availability bias and topicality bias, which induce people to anchor on the most readily available, easily accessible information, as well as the most recent information. This results in the underestimation of probabilities in general, and therefore of risks in particular. 

The author names other interesting biases, but we have made a small selection here. He also recommends further research on the subject, since biases affect human beings in all facets of their lives and, therefore, knowing about them is not only useful for business or interpersonal relationships, but also for oneself. 

If you want to know more about Behavioral Economics and how to apply it to human behavior, take a look to our Master of Science in Behavioral Economics, a 100% online program that you can take in Spanish or English, with special grants for readers of the Behavioral Economics Blog.

Friends of the Behavioral Economics Blog, this week we present the paper “How can biases affect entrepeneurial decision making? Toward a behavioral approach to unicorns”, by Abatecola, G.; Cristofaro, M.; Giannetti, F. and Kask, J. (2021), in which authors analyze what cognitive biases affect the decision-making process when it comes about unicorn companies.

How can cognitive biases influence the birth and evolution of entrepreneurial ventures?

Business research is increasingly focusing on analyzing decision-making in entrepreneurship. Commonly, these are decisions regarding opportunity recognition (discovering and recognizing potential opportunities), opportunity evaluation, and opportunity exploitation (it is said, for economic benefit).

Over time, it is a fact that business entrepreneurship decision making coincides with the survival, success or failure of the company.

Many experts have pointed out that entrepreneurs rely heavily on cognitive biases in their decision making. Biases would be the product of cognitive-emotional intertwining in decision making, and their appearance depends mainly on personal experience, the entrepreneur’s network of contacts and his/her capital.

However, the implications of many biases in business, how they interact, and the link to other factors are still unknown. In a nutshell, we still have a big puzzle in front of us.

This article aims to explain what entrepreneurial biases can appear when investors, company founders, and other important stakeholders make decisions that shape the birth and evolution of unicorn companies.

These are, simply put, startups whose very fast grow has provided them with a lot of capital. The aim would be to analyze what cognitive mechanisms impact their formation and growth.

Zhang and Cueto proposed in 2017 to advance in the study of biases in entrepreneurship. Specifically, consider that there were three types of bias to be aware of.

First, the “happy” biases. These tend to reduce the perception of risk and have both positive and negative effects on performance. They occur mainly due to the inexperience of the entrepreneurs, their young age, the environmental complexity, the risk of the contexts, etc.

Then the “incomplete attributes” biases appear. These lead people to pay attention to one attribute, even though there are others that are more relevant, tending to reduce the perception of risk. They occur mainly because of the network of contacts and the personal capital of entrepreneurs.

Lastly, “psychophysical” biases would appear. It refers to the variations in the human perception of certain attributes; however, it is a very little studied category.

Then, what would be the stages to study in the development of unicorn companies? Birth, transition and consolidation.

At birth, it is believed that “happy” biases would intervene. For example, when making a decision, people can recall the most vivid memories of a specific situation, this is called recall and is often intertwined with similarity (this would be an “incompleteness” bias). That is, there would be a tendency to evaluate more positively what is similar to oneself.

In the transition stage, decision makers often unconsciously seek only information that reinforces their emotionally charged point of view. That is, “happy” biases, while avoiding information that may contradict them.

Regarding the consolidation stage, the choice of decision makers is reinforced over time due to positive and circular feedback. This would increasingly lead them to discard information that does not reinforce this mechanism, which could cause a decision block.

Consequently, within consolidation, investors and founders can focus on continuing growth strategies. That is, both founders and investors tend to reinforce each other and escalate in commitment, legitimizing the unicorn company.

Authors consider that understanding the main cognitive mechanisms is the key to properly interpret the decision-making process in companies in general and unicorns in particular. Therefore, they hope that what is proposed in the article contributes to a better understanding of how these multimillion-dollar companies operate.

If you want to know more about Behavioral Economics and how to apply it to human behavior, take a look to our Certificate in Behavioral Economics, a formative program, in English or Spanish, 100% online and certified by Heritage University (USA). Now, with discounts for members of this club.

Friends of the Behavioral Economics Club, this week we present the paper “Mediating the impact of power on supplier satisfaction: Do buyer status and relational conflict matter” by Vos, F. G. S.; Van der Lelij, R.; Schiele, H. and Praas, N. H. J. (2021) in which authors explore the concepts of power, status and relational conflict from the behavioral economics’ point of view.

Over the past few decades, companies have increasingly focused on dedicating efforts in order to obtain and maintain access to capable and effective providers. This trend has been promoted by three main factors.

First, many companies assign more responsibilities to providers to increase their focus on developing the core skills of the company.

Second, the supply markets have been consolidated and the number of suppliers has decreased, consequently reducing the availability of alternatives.

And finally, companies are increasingly redirecting their efforts to internal renovations, changing their traditional strategies to more innovative ones, including suppliers in their renewal plan in order to adapt themselves to the new industry.

As a result, the oligopolistic structures of the supply market have evolved more than ever in recent years.

Within them, suppliers help companies to obtain competitive advantages, so they need to compete with each other to get access to the best suppliers and, therefore, the best resources.

Supplier satisfaction has been identified as the main determinant of this selection process: the supplier decides who becomes his favorite customer.

If an organization becomes the favorite costumer of one provider, it would get the best benefits, such as priority access to new technologies, greater delivery reliability, economic benefits, and so on.

Therefore, achieving supplier satisfaction should be considered a strategic asset for companies.

One of the essential factors influencing supplier satisfaction is power.

The most studied forms of power are coercive power and reward power, also known as mediated powers. Coercive power refers to the ability of one to penalize the other, and rewarding power refers to the ability of one to provide benefits to the other, benefits that go beyond their usual exchange.

And what influences power? Authors propose organizational status and conflict. For example, an increase in the status of a high-powered party would cause a reduction in relational conflict. Lowering the status would increase this conflict.

Authors of the article decided to carry out this research to review the different studies on power, status, and relational conflict, and to evaluate their effects on the satisfaction of providers considering behavioral economics.

They hypothesize that the buyer’s coercive power has a negative impact on satisfaction and the buyer’s reward power should have a positive impact.

The quantitative data for this study was collected in collaboration with the purchasing department of a public university and private organizations in the Netherlands.

These subjects were chosen since universities, banks, and private organizations have a diverse set of providers and are generally considered high-status entities, which makes possible the objective of the study, that is to identify possible effects on this element.

The research questionnaire was sent twice by email to the account managers of the supplier companies, with a total of 67 suppliers.

The findings indicate that the status of the buyer has a strong and very significant influence on the satisfaction of the suppliers and, therefore, also on the relationship between both, increasing or decreasing the level of conflict.

In fact, the buyer’s status should have twice the influence that other factors have. A high status would not only promote the satisfaction of the provider with respect to that client, but also, as hypothesized by the authors, it would reduce the relational conflict between both.

The results also show that the coercive and rewarding powers of a buyer have no significant direct effect on supplier satisfaction. However, coercive power has a direct influence on creating conflicts between both parties, degrading the status of the one who exercises it.

These results have implications for theories of power and conflict. In particular, what the authors consider most important is what has been mentioned with respect to coercive power.

As a conclusion, authors point out that, with their findings, it can be indicated that the relational conflict and its negative effects on supplier satisfaction can be influenced by the buyer’s status.

As in all investigations, there are limitations. One of them is that the study considers the power of the buyer, but the power of the supplier is neglected.

Therefore, authors point out that future studies should investigate how different power dynamics, both on one side and the other, would influence the relationship between providers and organizations.

If you want to know more about Behavioral Economics and how to apply it to human behavior, take a look to our Certificate in Behavioral Economics, a formative program, in English or Spanish, 100% online and certified by Heritage University (USA). Now, with discounts for members of this club.

Friends of the Behavioral Economics Club, this week we present the paper “Small business response to regulation: incorporating a behavioral perspective” by Shapiro, S. and Borie-Holtz, D. (2020), in which authors study, from the behavioral economics’ point of view, what is the opinion of the small businesses regarding the government’s regulations in the United States context.

We already know that behavioral economics can be applied to any area of our lives.

Because of this discipline’s rising, we see more and more analysis each time according to its perspective, public policy issues included.

Therefore, studies have been carried out around the world at different levels of government to find out how to incorporate the concept and theories of behavioral economics into political decisions.

Nevertheless, there is a crucial group for whom not enough resources have been allocated. We refer to those who must comply, personally, with the regulations of public policies: small businesses, but also schools or hospitals, among others.

An important point is the arguments authors use to show us how important it is to study how companies perceive government regulations.

Former, these insights can affect the decision about whether to comply with regulations or not. And if regulations are not followed, the overall target benefits will not be achieved.

Latter, perceptions about regulations are important because they reflect people’s opinions about government in general. Why? Because for those who oversee small businesses, these regulations are the main contact with public administrations.

Due to the lack of research of this area from behavioral economics, authors explore in this work how the perception of the different regulations proposed by the government affect the attitudes towards them that these small businesses have.

In addition, authors wanted to shed light in this context to improve how these companies react to regulations, so that they are more effective, and the polarization that characterizes how they are perceived is reduced.

In order to do this, an online survey was carried out with a total of 322 small business owners as participants, and those who wanted were also interviewed in person to collect more specific data.

Before compiling all the information obtained from the study, authors considered several ideas as possible.

For instance, they believed that business owners consider paperwork requirements an arduous task, and a disproportionate burden due to the number of reports and records that must be kept up to date.

Authors considered that these pejorative connotations could be due to negative experiences in the past. Even listening to acquaintances or friends that have passed through them can affect.

After conducting the surveys and interviews, interesting results were obtained.

Indeed, small businesses owners are concerned with keeping records up to date and completing the necessary paperwork for government regulations. In both surveys and interviews it was a recurring topic. Half of the participants reported dedicating more than one hour a week to this matter.

One of the reasons this seems so arduous for them is because, while doing it, they remember the frustrations associated. Moreover, exists the wagon effect. This means the opinion of those close to you is very important, and if they report having suffered negative experiences, you will remember this data very easily.

The wagon effect is also seen in the effects of opinions found on the internet. There, people can say if they agree or disagree with something they are interested in. They can complain about different matters if they are angry, too.

There is also the idea of anchoring. That is to say, we are prone to collect little data before creating a judgement and, besides, we remember a dramatic incident more easily than hundreds of routine events, due to the impression it causes to us.

Among other biases mentioned, the self-service bias appears. This would be the tendency to attribute positive behaviors and actions to oneself while blaming other people for factors that lead to failure.

How do we relate this to the small business matter? When this kind of business fails, the owner can attribute the failure to certain causes, usually external. Due to regulations and negative opinions towards them, it is very possible that blame is projected onto the public administration.

The conclusion is that a vicious circle is produced, in which bad experiences with regulation are reinforced by anti-regulatory gossip on the internet and among acquaintances. All this shapes how future experiences are perceived.

A limitation of this study is that it was carried out with small companies, in which the owner is the one that deals with this type of procedures. This is not the same in larger businesses, so research regarding this should be carried out.

With so much money invested in regulatory costs and benefits, this area is very important for future studies.

In a nutshell, authors consider that, a better understanding of why small businesses react to regulation in the way they do, could improve relations between them and government authorities, creating a very positive environment that must begin to be seen as necessary.

If you want to know more about Behavioral Economics and how to apply it to human behavior, take a look to our Certificate in Behavioral Economics, a formative program, in English or Spanish, 100% online and certified by Heritage University (USA). Now, with discounts for members of this club.

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