Wednesday, April 20, 2016

Aspiration Levels and Preference for Skewness in Choice Under Risk

CORICELLI Giorgio, DIECIDUE Enrico, ZAFFUTO Francesco D.
Read the working paper
INSEAD Working Paper 2016/28/DSC

This paper describes an experiment designed to study the effect of aspiration levels on individual choices under risk.
We observe preferences for prospects that offer various probabilities of achieving aspiration levels; the resulting choice patterns characterize a heuristic for reducing the complexity of risky decisions. In cases where aspiration levels are not predictive, choices can be explained by preferences for positive skewness. Our results confirm the efficacy of a two-pronged approach that includes both compensatory and simplifying strategies for choosing among risky prospects. Of the former strategies, cumulative prospect theory best fits our experimental data.

Tuesday, April 19, 2016

Value Creation 2.0 – A Framework for Measuring Value Creation in Private Equity

ZEISBERGER Claudia, WHITE Bowen, PRAHL Michael
Read the working paper
INSEAD Working Paper 2016/27/EFE/DSC

This report focuses on the question of value creation in private equity and presents a framework to clearly identify the sources of return and operational value creation by the GPs in PE investment.
The framework - IVC 2.0 - deconstructs value creation across various financial and operational drivers and isolates value created through capital structure re-engineering, industry operating performance, and company-specific Alpha.

Monday, April 18, 2016

The Greed Syndrome

Read the working paper
INSEAD Working Paper 2016/26/EFE

Starting with a case study, this article explores the topic of greed. Greed is looked at from various angles, highlighting the mixed emotions it evokes. Although hailed as a motor of economic growth and human progress, at the same time--especially when it is uncontrolled--greed is a major cause of economic crises (as recent history has amply demonstrated). Attention is given to the personal implications of greed. Unfettered greed is compared to an addiction, like drugs, sex, food or gambling. Furthermore, as greed encourages people to only focus on what’s important to them—at the expense of social conventions and values--it can be associated with dysfunctional patterns such as megalomania, callousness, arrogance, and unethical and immoral behavior. Greed may even lead to criminal activities that harm others.

From an evolutionary point of view, greed can be seen as an extension of the survival instinct. Like animals, Homo sapiens is concerned with securing enough resources to overcome difficult times. Although greed may have a neurological basis (referring to the “high” that greedy people experience in their monomaniacal pursuit of wealth), from a psychodynamic perspective its origins are often found in faulty parenting. Traumatic beginnings at the developmental stage, such as the untimely death of a parent, parental discord, divorce or other difficult experiences, can all contribute to the genesis of greed. 

Alternatively, its origins may be found in parental neglect.In other cases, caregivers have the financial resources to provide for the developing infant but use the giving of “things” as a substitute for care and nurturing. In these dysfunctional forms of caregiving, the child is left feeling that he or she is not good enough--that something is missing. To compensate for this psychological void, some children (and later as adults) become fixated with the acquisition game, seeking comfort by constantly obtaining more. Acquiring wealth offers a way to eliminate feelings of insecurity and of keeping score; it becomes the only thing worth living for. But despite their pursuit of wealth, there is never going to be enough. Acquiring more becomes an end in itself.

From the point of view of personality structure, when observing greedy people we often see a cocktail of different character types: a sprinkling of the antisocial personality and the narcissist, with some obsessive-compulsive elements thrown in for good measure. In addition, this article offers advice on how to recognize the signs that we are dealing with greedy people, as well as various suggestions on how to help them overcome their compulsion.

Friday, April 15, 2016

Philanthropic Campaigns and Customer Behavior: Field Experiments in an Online Taxi Booking Company

SINGH Jasjit, TENG Nina, NETESSINE Serguei
Read the working paper
INSEAD Working Paper 2016/25/STR/TOM revised version of 2016/20/STR/TOM

Companies commonly use philanthropic campaigns to attract and retain customers. Such campaigns often take the form of charity-linked promotions, where a company donates money to a cause when a customer makes a purchase. However, customer-related effects of such promotions remain under-studied, an issue this study investigates using field experiments in an online taxi booking company.
Customers were randomly assigned to receive either a charity-linked or discount-based promotion. Take-up rates for charity-linked promotions were smaller than for discount-based promotions, and also less sensitive to the monetary amount. This is consistent with customer decisions being driven by a “warm glow” of giving and not just their extent of social impact. Although promotion take-up did represent new bookings rather than substitution of non-promotional bookings, there is little evidence of an increase in subsequent purchase frequency. This result raises questions regarding the common practice of online platforms devoting significant investor funds for short-term promotions.