Mirjam van Praag new Research Fellow at the Centre for Economic Policy Research

Mirjam van Praag has been invited to become a Research Fellow in the Industrial Organization Programme of the Centre for Economic Policy Research.

The Centre for Economic Policy Research (CEPR) was founded in 1983 to enhance the quality of economic policy-making within Europe and beyond, by creating excellent, policy-relevant economic research, and disseminating it widely to policy influencers in the public and private sectors and civil society.

CEPR is based on a new model of organization, which we call a “thinknet”: a distributed network of economists, who are affiliated with but not employed by CEPR, collaborating through the Centre on a wide range of policy-related research projects and dissemination activities.

Research Fellows are appointed for four-year renewable periods, to maintain selectivity, competition, and a continuous infusion of new people and ideas. The Centre encourages its Research Fellows to be active participants in its work, not merely names on its academic masthead; submitting research for publication and presentation at public dissemination meetings, participating in workshops, seminars and conferences and proposing and directing projects administered by the Centre.

Vera Rocha IZA Research Affiliate

Vera Rocha has accepted a 2 year appointment as Research Affiliate at the Institute for the Study of Labor (IZA).

IZA, established in 1998, is a non-profit research center in labor economics supported by the Deutsche Post Foundation.

IZA is now widely recognized as a leading institute for labor market research. This success is based on a dynamic local team in Bonn, Germany, as well as the world’s largest network of labor economists who cooperate with us as research fellows and affiliates. IZA also maintains close ties with the renowned economics faculty at the University of Bonn as with many other universities and policy-oriented research centers around the world.

The affiliation will give Vera the opportunity to join the many research activities of the Institute.

http://www.iza.org/en/webcontent/personnel/photos/index_html?key=9991

Ivory Tower and Entrepreneurship

In order to answer the question ‘Are universities, often perceived as ivory towers, a right place for prospective entrepreneurs to learn and grow?,’ INO researchers Toke Reichstein and Jing Chen have made an analysis based on data from Statistics Denmark to find out how many university graduates actually become entrepreneurs.

You can read what they have found out in the article in the CBS Observer: http://cbsobserver.dk/ivory-tower-and-entrepreneurship-0

 

Should I Stay or Should I Go?

Prof. Toke Reichstein is the designated speaker at the spring 2016 “From PhD to ABC” event held at Copenhagen School of Entrepreneurship and  co-organized with the CBS Entrepreneurship BiS Platform. These events offers a forum in which researchers translate some of their research results into tangible information that can help students or others make better choices in business or in terms of personal career choices. These events foremost centers on entrepreneurship research.

Abstract: Entrepreneurs often face decisions that are both difficult and challenging. Two of the most major decisions regards A) whether to establish a new venture and B) whether to close down the newly started venture if things are not going as planned.

Recent research partly carried out at CBS sheds new light on these decisions. Virgilio Failla (LMU), Francesca Melillo (KU Leuven) and Toke Reichstein (CBS) have scrutinised Danish labor market data to understand when and why entrepreneurs start their own business and why they persist relatively long in the entrepreneurial career.

These findings have major implications for understanding the entrepreneurial choice and the survival of new businesses. And they give entrepreneurs some understanding of when to even consider becoming an entrepreneur and why they sometimes prolong their ventures even when they should close them down.

Date: 19 May 2016

Time:15:00-17:00

Place: CSE, Porcelænshaven 26, 2000, Frederiksberg, Denmark

Speaker: Prof. Toke Reichstein (INO, CBS)

Organizers: CBS Entrepreneurship BiS Platform and Copenhagen School of Entrepreneurship

Sign up: https://www.facebook.com/events/1558993641061040/

No more multitasking

Blog by Mirjam van Praag

Does this sound familiar? Cycling through town, listening to a nice tune on your iPhone. Carrying a bag of documents you read the night before, while glancing at a news programme on the television, and listening to your children. Your phone rings. You replace the music with the caller, who asks your opinion about a topical theme. The caller also reminds you that someone else is still waiting for a response to a question and that you need to confirm an appointment. You cycle on, open your mail to send the confirmation and see you have 24 unread emails. You have a quick look, dodging other cyclists and trams. Thoughts pop into your head: what shall we have for dinner, when do I go shopping? Or: how will I respond to that article? It’s what I normally do, switching between tasks, or multitasking. It makes you restless, but it seems that the constant stream of fresh stimuli is addictive. Perhaps it’s productive?

What does organisational economic research tell us about the effectiveness of multitasking? Over the past few decades, a number of well-received articles have been published by researchers, including Holmstrom and Milgrom (1991). Impressively, most of these studies date from before the smartphone (and even internet and email). Unfortunately, multitasking in those studies is associated with a different issue, namely measuring the payment of variable rewards for employee performance.

Many employees perform tasks that cannot be measured or where individual contributions to value creation go unobserved. Take for instance researchers who must combine teaching and research tasks, but whose performance is measured mostly based on their research. This is easier, but means their teaching tasks go unnoticed. Or, recently in the news, researchers whose careers depend on the so-called publication credits indicator, but who can score with two different types of effort: the ‘cheap’ and unwanted manner (making up data) or the ‘expensive’ and wanted manner (collecting data). These studies about multitasking demonstrate the challenges of performance rewards in a multidimensional world. Having to give account based on measurements that do not reflect all of a task’s dimensions will often, even if unintentionally, lead to behaviour that will effectively increase measurement scores, but not the value to the organisation. What gets measured gets done’ but which tasks are used to achieve this, and which ones are ignored, is of secondary interest. It explains why performance stimuli in performance contracts are often not as pronounced as principal-agent models in a one-dimensional world would predict.

In the (organisation) economy, I believe there´s been only one (!) study, a very recent one, about the productivity of modern-day multitasking. Buser and Peter (2012) invited students to do word games and sudokus in the lab. The students were paid based on their performance. They were divided randomly into three study groups. The first group (‘single’) was asked to do one task first, and then the other, of twelve minutes or so each. Students in the second group (‘multi’) were asked to switch tasks every four minutes or so. Handy if you’re stuck, but a nuisance if you’re on a roll. The third group (‘choice’) was asked to switch between the two tasks at random.

The result? Multitasking is not productive! The ‘choice’ group showed that people switch between tasks more than is necessarily productive. And that’s exactly what I experience: switching looking for stimuli. The Amsterdam researchers also distinguished between men and women. It’s a well-known assumption that the latter group is much better at multitasking. But that didn’t appear to be the case at all: men and women both did equally well. Of course, this is just one experiment and it is therefore difficult to draw general conclusions. Psychologist have done more studies into multitasking. The results are the same and seem to have some general validity: multitasking is productive for neither men nor women (Borst et al., 2010; Mäntylä, 2013).

We could use more research by economists in this little explored field. The social relevance is clear due to the possibly large influence on individual (labour) productivity and the organisation of work processes. And my new year’s resolution: no more multitasking for me!

Literature
Borst, J., N. Taatgen en H. van Rijn (2010) The problem state: a cognitive bottleneck in multitasking. Journal of Experimental Psychology, 36(2), 363–382.
Buser, T. en N. Peter (2012) Multitasking. Experimental Economics, 15(4), 641–655.
Holmstrom, P. en B. Milgrom (1991) Multitask principal-agent analyses: linear contracts, asset ownership and job design. Journal of Law, Economics and Organization, 7(1), 24–52.
Mäntylä, T. (2013) Gender differences in multitasking reflect spatial ability. Psychological Science, to be published.

 

Consumer trust and correlation neglect

Blog by Mirjam van Praag

People’s beliefs play an important role in making economic decisions. Beliefs are based on acquiring, recognizing and interpreting information. But information can also lead to incorrect beliefs. Behavioral economy studies have looked at a range of biases that underlie beliefs. People mostly form their beliefs based on different signals, nowadays readily available on digital media. Because signals are often taken from just a few sources, while the correlation between the signals is ignored, unrealistic beliefs may form that lead to non-optimal decisions (Enke and Zimmermann, 2012).

Take consumer trust. Consumer trust reflects how households feel about the general economic climate and their own financial situation. Dutch consumers have access to all sort of information about the economic climate, including media reports on relevant economic quantity statistics, survey outcomes, advice reports, and opinions of, and discussions between economists, politicians and others in the media. Editors of opinion pages and interviewers on television love to host speakers who use one-liners (preferably) to interpret the news such that it hides the fact that there are but few proven certainties in economic research. So it isn’t easy for consumers to form realistic beliefs when signals are drowning in noise. But as long as people don´t systematically make over or underestimations, ‘everything’s fine’.

In two elegant experiments, Enke and Zimmermann show that if signals are correlated, ‘everything’s not fine’. And signals are correlated, that’s for certain. News is often taken from the same press release. To some extent, different predictions are based on the same data sources. News is repeated at different times and by different stations. Opinion leaders will copy others, sometimes simply because an editor tells them to, even on subjects in which they have no experience. And the list goes on. The first experiment proves that individuals find it difficult to allow for correlations between signals when taking decisions. They ignore the correlation, be it in whole or in part, even if they know there is one, and treat signals as if they are (as good as) autonomous, as the illustrations above show. The authors claim this is due to the fact that people find it difficult to carry out the necessary calculations when dealing with correlated information. This explanation is supported by data: people with poorer cognitive skills tend to neglect correlations more often. The authors also show that correlation neglect becomes worse and leads to even less optimal decisions if people are entirely or partially unaware of the correlation.

The second experiment proves that individual decisions taken based on information not interpreted correctly due to correlation neglect also affect the aggregated outcome in a market situation. Correlation neglect leads to systematic and pronounced overreactions. It causes both good and bad news to affect individual decisions more, reinforcing bubbles and recessions, both becoming bigger than they should be based purely on the facts. So what about consumer confidence? It has hit rock bottom, in keeping with today’s economic situation. Unemployment is on the rise, the housing market is in lock-down, property prices are falling, the financial markets can only facilitate investments to a limited extent, and the pension and healthcare situation is a major cause for concern.

If people are insecure about their jobs, income, pensions, and affordable healthcare, consumer trust plummets. If consumer trust is low, domestic spending falls, and this becomes a vicious circle. Could correlation neglect (and ignorance about it) cause this to be worse than justified by the facts? The answer is yes, if media and opinion leaders actually play such a big role in shaping beliefs. This is illustrated by the outcome of a recent survey (February, 2013) in Centerpanel (http://www.centerdata.nl/)  among more than 2000 households. What do we see?

Only 32 percent of respondents say that they predominantly base their concerns about the economy on actual causes related to their own situation. The majority bases their concerns on their feelings about the general economic situation. The survey also shows that these feelings are fed to a large degree by facts and data in the media and by discussions of and interpretations by economists, opinion makers, politicians and leading entrepreneurs. In short, these facts, opinions, and discussion in the media have a huge impact on consumer trust.

In other words, correlation neglect could cause consumer trust to drop more than warranted by the current recession. In a booming economy it works the other way around. Is this something we can influence?

I think we can, but it isn’t easy. It is something opinion makers and the media must take into account. They need to indicate more precisely which sources were used, and how news items correlate. We could also consider being a little more positive than the facts justify. At least in times of recession. This applies to opinion leaders in particular, who in so doing should help counteract the negative bias due to correlation neglect.

Reference: Enke, B. en F. Zimmermann (2012) Correlation neglect in belief formation. Work document of the University of Bonn.

Entrepreneurship: a gift to all

Blog by Mirjam van Praag

Not many researchers go through the trouble of systematically listing studies carried out on a particular topic. And that means they miss seeing the bigger picture. Considering its impact, it was remarkable that no-one had ever systematically listed the costs of, and income generated by, entrepreneurship for our economy.

Until now, that is. According to an overview produced by Amsterdam Center for Entrepreneurship, entrepreneurs are a force to be reckoned with. They are big creators of employment, both directly and indirectly. Businesses set up by entrepreneurs contribute tremendously to employment growth, even if many go belly-up early on. But the overall net effect is positive, particularly in the somewhat longer term. This is not only because young companies grow faster than established companies, but also because of the indirect long-term effect: new businesses create a competitive climate which forces established businesses to either become more efficient or to leave the market. This also creates jobs.

While entrepreneurs boost labour productivity and economic growth in general, the actual gross national product, or the scale of the economy, is largely determined by established companies. That means both are needed for a healthy economic climate. The same applies to innovation, which is equally supported by entrepreneurs and established businesses. Established businesses can offer economies of scale when it comes to innovation, both as regards the production of innovative products, and their services. But if entrepreneurs come up with innovations, they do this more efficiently. Moreover, their innovations are generally more successful. Entrepreneurs also contribute greatly to the marketing of innovations, selling relatively more innovative products.

While these data are important to economists, they are not the be all and end all. What really matters is how people in general benefit. And what do we find?

Entrepreneurs make their employees happier than non-entrepreneurs. The wages may be lower, and there may be fewer employment benefits, but people working for entrepreneurs are happier with their work than employees in established companies. Moreover, entrepreneurs are the happiest with their own work, even happier than employees. Again, this is remarkable as they tend to earn less and their income varies. Also, they work harder. Still, studies have shown that both in Europe and in the United States entrepreneurs take more pleasure from their work. This is because, on the whole, they are happier people: job satisfaction is greatest for people who decide to become entrepreneurs, compared with someone who decides to work for a company, or switch jobs.

The joy of entrepreneurship seems to be explained by the actual content of the work and the perception of being independent. But studies show that this doesn’t explain everything. Maybe entrepreneurs are simply happier because they make a significant contribution to the economy as a whole.

 

 

Blog post on Social Entrepreneurship

Under the heading Social Entrepreneurship Mirjam van Praag gives her view on the contribution of Social Entrepreneurship to the mainstream Entrepreneurship area. It is becoming more and more common to see new ventures that challenge the traditional ways of markets and profit, and who wants to help the solve the societal challenges of our time.

People have always had strong, but shifting, opinions about entrepreneurs and their role in our economy and society. The shift I now see developing is an interesting one to follow. It has to do with social entrepreneurship.

For centuries, entrepreneurs were held in low esteem. No wonder: general opinion was based on Aristoteles’ notion of society´s economy as a ‘zero sum game’. Value creation went unrecognised. One person´s profit was necessarily another person´s loss. Making a profit, which is part and parcel of entrepreneurship, was regarded as theft. This image changed around 1800 when J.B. Say explicitly rejected the rather silly notion of a zero-sum economy. Since then, the contribution of entrepreneurs to both positive and negative value creation has grown.

But what is value creation? What boosts welfare? Again, this changes over time. Today´s citizens and consumers have different priorities to past and future generations. We are fortunate that our most basic needs are met. What has become important is self-realisation and the creation of a sustained and pleasant living environment. Job opportunities for people with a disability, banning harsh labour from the production chain of chocolate or coffee for instance, or reducing energy consumption by using new light sources or cars are typical examples of today´s unfulfilled needs, as are clean air, or creating a fulfilling life as we age. And the list goes on. Negative and positive external effects of production and consumption have become more important in the valuation of products and services of entrepreneurs.

Changes in demand require changes in supply. Moreover, the need to contribute to a better society reflects not only consumption preferences, but the preferences of entrepreneurs also. More and more entrepreneurs demonstrate a strong intrinsic motivation to incorporate into their business targets value creation and destruction associated with externalities. Many of today´s and tomorrow´s entrepreneurs will offer new goods and services. They may offer their entrepreneurial skills to support the government in managing its sheer unmanageable care responsibilities, which has our collective preference. They may halt production to promote an economy with room for swapping and sharing. They may offer alternatives to meat to help reduce animal misery and the burden on the global food chain.

These are the ‘social entrepreneurs’. Social entrepreneurs are a growing group of entrepreneurs who regard solving a social problem as their first priority. Social enterprises fit seamlessly into the trend of increasing awareness among entrepreneurs and their effect on society. We see this reflected in corporate social responsibility and the emergence of the circular economy, for instance. But views on the matter vary, and it may very well have to do with the name; after all, if social entrepreneurship exists, does asocial entrepreneurship also have a place in society? The believers say that social entrepreneurs will save the Netherlands. But sceptics claim that social enterprises are no different from other enterprises and that we shouldn’t pay them too much attention. It´s difficult to categorise social enterprises. The term does not cover all organisations that solve social problems. And because they are not a distinct group, it is difficult to collect data on what exactly social entrepreneurs contribute. Then again, perhaps categorising them isn’t so important.

Are social entrepreneurs the vanguard of a new movement in entrepreneurship that takes on a different role in society, namely solving tough social issues? For one, it’s a movement that is greatly valued, also by other entrepreneurs. Thousands of visitors to this year´s Week of the Entrepreneur event in the Netherlands were asked to name the best Dutch entrepreneur. The award of “Best Entrepreneur” went to Jaap Korteweg of Vegetarische Slager (vegetarian butcher). This entrepreneur wants to change the food chain by making meat redundant. Another entrepreneur in the top ten, selected by a cross-section of thousands of entrepreneurs, was a platform for lending and borrowing goods. Entrepreneurs who make money solving tough social problems are also appreciated by other entrepreneurs. Do social entrepreneurs form the vanguard of a movement of new large-scale entrepreneurship? I hope so. I, for one, will be following them.