On the Smooth Ambiguity Model: A Reply

We find that Epstein's (2010) Ellsberg‐style thought experiments pose, contrary to his claims, no paradox or difficulty for the smooth ambiguity model of decision making under uncertainty developed by Klibanoff, Marinacci, and Mukerji (2005). Not only are the thought experiments naturally handled by the smooth ambiguity model, but our reanalysis shows that they highlight some of its strengths compared to models such as the maxmin expected utility model (Gilboa and Schmeidler (1989)). In particular, these examples pose no challenge to the model's foundations—interpretation of the model as affording a separation of ambiguity and ambiguity attitude or the potential for calibrating ambiguity attitude in the model.     

A Smooth Model of Decision Making under Ambiguity

We propose and characterize a model of preferences over acts such that the decision maker prefers act f to act g if and only if 𝔼_μφ(𝔼_πu○f) 𝔼_μφ(𝔼_πu○g), where 𝔼 is the expectation operator, u is a von Neumann–Morgenstern utility function, φis an increasing transformation, and μis a subjective probability over the set Πof probability measures πthat the decision maker thinks are relevant given his subjective information. A key feature of our model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. We show that attitudes toward pure risk are characterized by the shape of u, as usual, while attitudes toward ambiguity are characterized by the shape of φ. Ambiguity itself is defined behaviorally and is shown to be characterized by properties of the subjective set of measures Π. One advantage of this model is that the well‐developed machinery for dealing with risk attitudes can be applied as well to ambiguity attitudes. The model is also distinct from many in the literature on ambiguity in that it allows smooth, rather than kinked, indifference curves. This leads to different behavior and improved tractability, while still sharing the main features (e.g., Ellsberg's paradox). The maxmin expected utility model (e.g., Gilboa and Schmeidler (1989)) with a given set of measures may be seen as a limiting case of our model with infinite ambiguity aversion. Two illustrative portfolio choice examples are offered.     

Promoting Seismic Retrofit Implementation Through “Nudge”: Using Warranty as a Driver

This article proposes a new type of warranty policy that applies the “nudge” concept developed by Thaler and Sunstein to encourage homeowners in Japan to implement seismic retrofitting. Homeowner adaptation to natural disasters through loss reduction measures is known to be inadequate. To encourage proactive risk management, the “nudge” approach capitalizes on how choice architecture can influence human decision‐making tendencies. For example, people tend to place more value on a warranty for consumer goods than on actuarial value. This article proposes a “warranty for seismic retrofitting” as a “nudge” policy that gives homeowners the incentive to adopt loss reduction measures. Under such a contract, the government guarantees all repair costs in the event of earthquake damage to the house if the homeowner implements seismic retrofitting. To estimate the degree to which a warranty will increase the perceived value of seismic retrofitting, we use field survey data from 1,200 homeowners. Our results show that a warranty increases the perceived value of seismic retrofitting by an average of 33%, and an approximate cost‐benefit analysis indicates that such a warranty can be more economically efficient than an ex ante subsidy. Furthermore, we address the failure of the standard expected utility model to explain homeowners’ decisions based on warranty evaluation, and explore the significant influence of ambiguity aversion on the efficacy of seismic retrofitting and nonanalytical factors such as feelings or trust.     

On “Black Swans” and “Perfect Storms”: Risk Analysis and Management When Statistics Are Not Enough

Two images, “black swans” and “perfect storms,” have struck the public's imagination and are used—at times indiscriminately—to describe the unthinkable or the extremely unlikely. These metaphors have been used as excuses to wait for an accident to happen before taking risk management measures, both in industry and government. These two images represent two distinct types of uncertainties (epistemic and aleatory). Existing statistics are often insufficient to support risk management because the sample may be too small and the system may have changed. Rationality as defined by the von Neumann axioms leads to a combination of both types of uncertainties into a single probability measure—Bayesian probability—and accounts only for risk aversion. Yet, the decisionmaker may also want to be ambiguity averse. This article presents an engineering risk analysis perspective on the problem, using all available information in support of proactive risk management decisions and considering both types of uncertainty. These measures involve monitoring of signals, precursors, and near‐misses, as well as reinforcement of the system and a thoughtful response strategy. It also involves careful examination of organizational factors such as the incentive system, which shape human performance and affect the risk of errors. In all cases, including rare events, risk quantification does not allow “prediction” of accidents and catastrophes. Instead, it is meant to support effective risk management rather than simply reacting to the latest events and headlines.     

Response to “Revisiting ISO 14000 Diffusion: A New ”Look“ at the Drivers of Certification”

In Corbett and Kirsch (2001), we used a simple regression in an exploratory investigation of drivers of global diffusion of ISO 14000 certification. We found that ISO 9000 certification levels, environmental treaties ratified, and exports as a proportion of GDP were the main significant variables, where the environmental measure may be moderated by GDP per capita. In his replication study, Vastag (2004, in this issue) analyzes the same data using more visual techniques, specifically regression trees, and finds support for the significance of ISO 9000 certification levels and environmental treaties ratified, but not for export‐propensity. Vastag raises a number of relevant methodological issues, to which we add some perspectives here.     

The global “war for talent”

In this paper we examine the “global war for talent,” the factors that impact it, and organizations' responses to it. Using a comprehensive search of more than 400 contemporary academic and business press articles, the paper reviews relevant research and reassesses the “talent war.” We posit that the dominant approaches to the “talent war” based on a scarcity state of mind and action, often characterized by a tactical and exclusive top talent or “star” focus, are being challenged by the emergence of a more evolutionary paradigm. This new paradigm adopts more strategic, innovative, cooperative and generative approaches which we describe as creative ‘talent solutions.’ The paper also highlights implications for future research, teaching and development in the field.     

TOWARD A “NEW ARCHITECTURE” FOR POM

The field of POM is steadily expanding its scope. This allows us to pursue interesting new fields of inquiry and makes us ever more relevant to the needs of practitioners. But it also increases the risk that over time our efforts will become fragmented and unfocused, causing us to slowly lose our sense of community and break up into separate camps. In this paper I ask, “What kind of new organizing framework, or ‘architecture,’ will allow us to maintain our sense of community as our interests diverge?” I describe the experience of one academic organization that faced a similar problem several years ago and how the situation was resolved. This experience leads us to propose a possible solution to Pom's emerging problem: engage with real operations managers and focus our efforts on helping them deal with the actual problems they are facing in today's complex and fast‐changing world.     

A NOTE ON “COMMON DUE WINDOW SCHEDULING”

Kramer and Lee recently addressed a common due window scheduling problem with earliness and tardiness penalties, where earliness and tardiness penalty factors are constant and the common window size is given. They showed that the problem is polynomial when the location of the due window is a decision variable. For the case where the location of the due window is given, the problem is also polynomial when the latest due date is greater than or equal to the makespan, and they proposed a pseudopolynomial dynamic programming algorithm to find an optimal schedule when the latest due date is less than the makespan. In this note we address the problem for the case where the location of the due window is given. Specifically, we show that the problem is polynomial if the window location is unrestricted, and present a more efficient dynamic program algorithm to optimally solve the problem if the window location is restricted. The concepts of unrestricted and restricted window locations are defined in this note.     

“Birds of a Feather” Fail Together: Exploring the Nature of Dependency in SME Defaults

This article studies the effects of incorporating the interdependence among London small business defaults into a risk analysis framework using the data just before the financial crisis. We propose an extension from standard scoring models to take into account the spatial dimensions and the demographic characteristics of small and medium‐sized enterprises (SMEs), such as legal form, industry sector, and number of employees. We estimate spatial probit models using different distance matrices based only on the spatial location or on an interaction between spatial locations and demographic characteristics. We find that the interdependence or contagion component defined on spatial and demographic characteristics is significant and that it improves the ability to predict defaults of non–start‐ups in London. Furthermore, including contagion effects among SMEs alters the parameter estimates of risk determinants. The approach can be extended to other risk analysis applications where spatial risk may incorporate correlation based on other aspects.     

Comment on “The Law of Large Demand for Information”

Say that one information structure is eventually Blackwell sufficient for another if, for every large enough n, an n‐sample from the first is Blackwell sufficient (Blackwell (1951, 1954)) for an n‐sample from the second. This note shows that eventual Blackwell sufficiency lies strictly between (one‐shot) Blackwell sufficiency and the ordering of information structures formulated by Moscarini and Smith (2002), and thus offers a new criterion for comparing experiments. A characterization of eventual Blackwell sufficiency in terms of the one‐shot experiments remains an open question.     

Lowest Cost May Not Lower Total Cost: Using “Spackling” to Smooth Mass‐Customized Production

Consider a manufacturer who mass customizes variants of a product in make‐to‐order fashion, and also produces standard variants as make‐to‐stock. A traditional manufacturing strategy would be to employ two separate manufacturing facilities: a flexible plant for mass‐customized items and an efficient plant for standard items. We contrast this traditional focus strategy with an alternative that better utilizes capacity by combining production of mass‐customized and standard items in one of two alternate spackling strategies: (1) a pure‐spackling strategy, where the manufacturer produces everything in a (single) flexible plant, first manufacturing custom products as demanded each period, and then filling in the production schedule with make‐to‐stock output of standard products; or (2) a layered‐spackling strategy, which uses an efficient plant to make a portion of its standard items and a separate flexible plant where it spackles. We identify the optimal production strategy considering the tradeoff between the cost premium for flexible (versus efficient) production capacity and the opportunity costs of idle capacity. Spackling amortizes fixed costs of capacity more effectively and thus can increase profits from mass customization vis‐à‐vis a focus strategy, even with higher cost production for the standard goods. We illustrate our framework with data from a messenger bag manufacturer.     

The folly of theorizing “A” but testing “B”: A selective level-of-analysis review of the field and a detailed Leader–Member Exchange illustration

Leadership research has recently begun to emphasize the importance of examining the level of analysis (e.g., individual, dyad, group, organization) at which phenomena are hypothesized to occur. Unfortunately, however, it is still not commonplace for theory to clearly specify, and for investigations to directly test, expected and rival level-of-analysis effects. This article first selectively reviews a cross-section of theories, models, and approaches in leadership, showing generally poor alignment between theory and the level of analysis actually used in its testing. A multiple levels of analysis investigation of the Leader–Member Exchange (LMX) model is next presented. This theory has as its foundation the dyadic relationship between a supervisor and his or her subordinates. Yet, less than 10% of published LMX studies have examined level of analysis—and none has employed dyadic analysis. Using within- and between-entities analysis (WABA) and two different samples, four LMX level-of-analysis representations are tested, which involve monosource data; three of these models are then tested using heterosource data. Overall, good support is found for the LMX approach at the within-groups and between-dyads levels. Implications for aligning theory with appropriate levels of analysis in future research are considered.     

A Note on “An Efficient Zero-One Formulation of the Multilevel Lot-Sizing Problem”

In a recent paper, McKnew, Saydam, and Coleman [3] presented a novel zero-one integer programming formulation of the multilevel dynamic, deterministic lot-sizing problem in assembly systems. They stated that “the relaxed linear programming solution to this formulation will always be integer’ [3, p. 280] since the constraint matrix is totally unimodular. In this note, we point out that the constraint matrix is not totally unimodular and therefore the authors’claim that a linear relaxation of the zero-one integer formulation always yields an integer solution is not true.     

Reconsidering the Effect of Market Experience on the “Endowment Effect”

Simple exchange experiments have revealed that participants trade their endowment less frequently than standard demand theory would predict. List (2003a) found that the most experienced dealers acting in a well functioning market are not subject to this exchange asymmetry, suggesting that a significant amount of market experience is required to overcome it. To understand this market‐experience effect, we introduce a distinction between two types of uncertainty—choice uncertainty and trade uncertainty—both of which could lead to exchange asymmetry. We conjecture that trade uncertainty is most important for exchange asymmetry. To test this conjecture, we design an experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that “forcing” subjects to give away their endowment in a series of exchanges eliminates exchange asymmetry in a subsequent test. We discuss why markets might not provide sufficient incentives for learning to overcome exchange asymmetry.     

The influence of “country of origin” on multinational corporation global strategy: A conceptual framework

This article examines the proposition that MNCs from a particular country are likely to exhibit profile similarities that are distinct from those of MNCs emanating from another country due to differences in home country factors. We call this “country of origin effect” (COE). A generalized framework is presented briefly explaining the nature of relationships among various COE elements that influence MNC strategy. A number of research propositions are offered that postulate the presumed effect of COE elements on MNC strategy and competitive behavior. Finally, suggestions are made as to the implications of this avenue of enquiry for further research as well as guide for management action.     

Revisiting ISO 14000 Diffusion: A New “Look” at the Drivers of Certification

This replication study of the drivers of ISO 14000 certifications extends the work of Corbett and Kirsch (2001) and provides a different and simpler predictive model of the factors contributing to the growth of ISO 14000 certifications. The main finding is that at national level ISO 14000 certification densities can be explained by two factors: the installed base of ISO 9000 certificates and the number of environmental treaties signed and ratified. The first factor, considering the common elements of the two standards, points to conditions of infrastructural convenience, while the second highlights the importance of political‐economic considerations. The study uses a new set of tools (graphical displays, distribution‐free computer intensive methods) that are better suited for exploratory research when discontinuities and existence of subgroups in the data set may make findings from a linear regression suspect.     

Comments on “Convergence Properties of the Likelihood of Computed Dynamic Models”

We show by counterexample that Proposition 2 in Fernández‐Villaverde, Rubio‐Ramírez, and Santos (Econometrica (2006), 74, 93–119) is false. We also show that even if their Proposition 2 were corrected, it would be irrelevant for parameter estimates. As a more constructive contribution, we consider the effects of approximation error on parameter estimation, and conclude that second order approximation errors in the policy function have at most second order effects on parameter estimates.     

Context,Cultural Bias,and Health Risk Perception: The “Everyday” Nature of Pesticide Policy Preferences in London,Calgary, and Halifax

Risk perception and the cultural theory of risk have often been contrasted in relation to risk‐related policy making; however, the local context in which risks are experienced, an important component of everyday decision making, remains understudied. What is unclear is the extent to which localized community beliefs and behaviors depend on larger belief systems about risk (i.e., worldviews). This article reports on a study designed to understand the relative importance of health risk perceptions (threat of harm); risk‐related worldviews (cultural biases); and the experiences of local context (situated risk) for predicting risk‐related policy preferences regarding cosmetic pesticides. Responses to a random telephone questionnaire are used to compare residents’ risk perceptions, cultural biases, and pesticide bylaw preferences in Calgary (Alberta), Halifax (Nova Scotia), and London (Ontario), Canada. Logistic regression shows that the most important determinants of pesticide bylaw preference are risk perception, lack of benefit, and pesticide “abstinence.” Though perception of health risk is the best single predictor of differences in bylaw preferences, social factors such as gender and situated risk factors like conflict over chemical pesticides, are also important. Though cultural biases are not important predictors of pesticide bylaw preference, as in other studies, they are significant predictors of health risk perception. Pesticide bylaw preference is therefore more than just a health risk perception or worldview issue; it is also about how health risk becomes situated—contextually—in the experiences of residents’ everyday lives.