Prospect Theory

Although, I had read about this theory some time back, it has suddenly captured my interest again. The Prospect Theory came out of the work of two psychologists - Kahneman and Tversky - to explain why people make decisions that conflict with the Expected Utility Theory. To put it in simpler terms, the theory tries to explain why people behave irrationally in the face of choices.

The expected utility hypothesis is the hypothesis that the utility of an agent facing uncertainty is calculated by considering utility in each possible state and constructing a weighted average. The weights are the agent's estimate of the probability of each state.

The crux of the prospect theory is this: We have an irrational tendency to be less willing to gamble with profits than with losses. This means selling quickly when we earn profits but not selling if we are running losses. [Tvede 1999]. This can be represented by a value function as shown on the right. As shown, losses hurt more than gains satisfy.

The key difference between the two theories is that the expected utility hypothesis describes how people should behave (prescriptive) when faced with choices, while the prospect theory aims to describe how people actually behave (descriptive).

Simple enough isn't it? But consider the implications:

• People hold on to stocks that have taken a beating hoping that they would go up some day
• People tend to sell off stocks sooner when they are going up - (leading to frequent stock market "corrections" as TV channels put it)
• People place a higher value on something they own, when compared to the same thing if they didn't own it. (People prefer certain gains)
• Your boss is more likely to approve your application for leave if it is in the form of a series of applications for 2 days each every 20 days over a 60 day period as opposed to a stretch of 6 days at a time.
  
• A person who owns an apartment will estimate its market rate (for rent) to be higher than what he would pay were he to take it on rent himself.
  

The prospect theory is all around you. Look out for it.

More about prospect theory.

The myth of a 9 to 5 job

As people go higher and higher up in an organizational hierarchy, they actually have lesser and lesser to do. In a company that sells a product or service, it is the frontline sales team that actually has a REAL 9 to 5 (or 9 to 9 in certain companies) job. This is because the time they spend on the job directly influences the business they get. Heads of business units and senior managers rarely actually go out to the market place and source business. This means that the time they spend on their jobs has no direct correlation with the success of their organizations. Most of their day is spent on man management, data analysis and decision making.

All of these activities do not consume much time. After all how much people management would you need when the year end bonus of your employee depends on his performance, apart from the threat of losing one’s job. Data analysis is also not a time consuming activity. It is after all the poor MIS guy who has to prepare and present the reports in an easily understandable format. Decision making may be time consuming, but certainly not a full day job!! And then there is this magical word called ‘delegation’. Its no wonder that business heads typically spend their days in ‘review meetings’ and ‘feedback sessions’.

With this being the case, companies must consider changing the ‘official’ working hours as you go higher and higher up, with the CEO being allowed to come and go whenever he pleases. I really fail to see the brouhaha over adhering to 9 to 5 regimens. It works well in a school (where you need to instill discipline, apart from the fact that you cant turn up for a 9 am class at 9:40 am) or in an army (where a herd like adherence to orders is the norm). I can’t see why it should be the same in companies, which I believe are constituted of free thinking and mature adults. Some tech companies seem to have realized this and it is not uncommon to see a few of them adopting a ‘flexible working hours’ scheme for their employees.

I think that the hangover from the manufacturing/ industrial era (when management wanted to be perceived as being equal to the workers) has permeated into white collar jobs too. However, in a white collar scenario, there is no fixed 9 to 6 activity (such as producing N widgets in X time) and hence I do not see why people are expected to sit around all day, or for that matter even turn up on days when all they have lined up is a couple of meetings!! Now that’s what I call, to use a manufacturing term, poor capacity utilization!

Team Management vs. Influencing

I have been thinking about this a bit, and have come to the conclusion that managerial roles can be classified into two broad cateogories:

• Team Management Roles: These are classical management roles where you have 'n' people below you. As a manager you achieve your goals through these 'n' individuals by appropriately motivating them to achieve their goals, which will cumulatively achieve yours.
• Influencing Roles: These are roles where you don't have people reporting to you, but instead your primary objective is to influence people around you to get things done. A typical such role is that of an internal consultant in a company.

I think both roles have their unique challenges, but I believe that the latter is just a little bit more difficult, because people easily understand hierarchies and reporting structures whereas they don't often want to take instructions from people at their own level. I cannot think of many roles that fall outside the above two categories. In fact, even team management is a form of inflencing and thus the first category may be a subset of the second. Are we to conclude that there is nothing else to management apart from influencing? If that is so, it is rather unfortunate that most b-schools (at least the Indian ones) don't have many courses on influencing.

Seating Arrangement and Social Interaction

Have you ever wondered why the seats in an airport waiting area are tightly bolted and arranged in a manner that they all face the same direction? Well, research suggests that there could be a very commercial reason for that.

Seating patterns are classified into two categories:
1. Sociopetal : An environmental condition (such as a seating arrangement) that promotes social interaction. Eg. A park bench, a circular arrangement of seats etc.

2.Sociofugal: An environmental condition (such as seating arrangement) that discourages interaction among group members. Eg. Rows in a classroom, waiting areas in hotels and airports.

Sommer feels that airport seating is deliberately designed in a sociofugal manner in order to drive people away from the waiting area into shops and cafes where they will spend their money. I think that the reason could be that designers of such seats want people to have their own space while waiting, without feeling compelled to engage in any form of social interaction. Even seats which are placed opposite to each other in airport waiting areas tend to be so far apart that you never feel compelled to interact or even acknowledge the person opposite you.

Some other interesting concepts related to the effect of seating arrangement on social interaction:

The Steinzoir Effect: The Steinzoir effect is the tendency for members of a group to speak immediately after the person who is sitting opposite them. This is possibly because we have an easier time observing people who are directly in our field of vision and hence their statements act as a stronger stimulus for us to respond, when compared to that of other members of a group. The next time you are in a group discussion that is being used as part of a selection process, consider sitting opposite the person who is most likely to dominate the group. If not anything else, it will ensure that you will speak enough during the course of the discussion!

The head of the table effect: This one is obvious. It is the tendency of people sitting at the head of a table to be naturally perceived as leading the group seated around the table. Even if you aren’t the leader type, merely positioning yourself at the head of the table will make group members perceive you to be the leader.

Leadership = Transformational Leadership

An interesting definition of leadership that I found:

Leadership is the lifting of a man's vision to higher sights, the raising of a man's performance to a higher standard, the building of a man's personality beyond its normal limitations. Source: Businesspundit.

OB theorists refer to this kind of leadership as 'Transformational Leadership'. The opposite of TL would be 'Transactional Leadership', which is basically a carrot and stick style of leading people.

The idea of lifting "man's vision to higher sights" also finds support in the Hindu philosophy of Karma Yoga, which basically says that self-realization can be achieved through selfless work i.e. one views oneself as being part of a cause that is greater than oneself.

I am thus inclined to believe that Hitler's followers must have been much happier than Henry Ford's employees.

Can blogging ever become mainstream?

I wonder if anyone has done a study on the profile of visitors that blogs typically attract. One suspects, that a large percentage of visitors are bloggers themselves. Blogs, I think, needs to take a leap ahead and become a medium that people visit the way they do Yahoo or even a Google.

The only way that can happen is by having more and more credible voices in the blogosphere, such as CEOs, world leaders, politicians, academicians etc. When celebrity blogging takes off, I can forsee a day when advertisers would pay a blogger to have them featured or 'plugged' on a blog page.

Another way in which blogs can become mainstream, is when there is a centralized rating agency. I know this goes against the very tenets of blogging, which is all about being a free-for-all medium of expression, but I would certainly like to spend time on a blog whose quality of content has been rated. Thus, there would be two types of blogs out there:

• Rated blogs: "Content here has been rated 5-stars! If you want a credible analysis of the situation in Israel, come here!"
• Free-for-all: "All views here are my own... take them seriously at your own peril. Sometimes, I will talk about my showering experience this morning."

Over time, rated blogs could become self-sustainable ventures and blogging may even become a profession that would be paid for by advertising. For this to happen, Google Ad Sense would need to find the next big thing after text ads, for text ads really dont seem to work much!

The third way, is for blogs to be used as a medium of conversation, rather than communication. The comments feature in blogs seem to have this potential, but I somehow find it to be rather cumbersome. A live chat with your readers would be more like it!

The day I see the first TV ad for a blog, will be the day I believe that blogs have truly arrived! And I do hope that that day comes soon.

[To a large extent, the views presented above are India-centric. Outside India, blogs are certainly much more "mainstream". ]