Research from Cambridge Judge Business School: From a lack of crowd wisdom to less-than-useful communication

In the first of a series, Charles Goldsmith, head of media relations at Cambridge Judge Business School, summarises some of its recent research.

No “crowd wisdom’ in project decision-making

There’s an assumption that diversity in companies is a good thing, and few would argue with that.

There’s also an assumption that diversity on the panels that make key organisational decisions such as project selection is also a good thing, because those diverse views will “average out” to arrive at the best possible decision. Yet that latter assumption is faulty, according to a study by two Cambridge Judge faculty members.

Such “wisdom of the crowds” doesn’t always pan out because diversity on decision-making boards leads to “systematic biases” toward certain types of errors, says the study in the journal Manufacturing and Service Operations Management.

So how does diversity lead to bias – which may sound counterintuitive?

The research found that “diversity” on project-selection committees reflects panel members’ different perspectives on a proposal’s market value (based on “preference diversity”) rather than a project’s likelihood of success (based on “interpretive diversity”) – and such preference diversity can translate into rejection of projects that would have succeeded, and vice-versa.

The Cambridge Judge authors, University Lecturer Nektarios Oraiopoulos and Professor Stelios Kavadias, say the findings are particularly relevant to sectors such as pharmaceuticals given that drug companies often face key decisions at critical moments on whether to go ahead or abort many risky and novel projects.

Communication doesn’t equal information

Who can forget (for better or worse) the catchy Cliff Richard Song from 1979, in which he laments how “it’s so funny how we don’t talk anymore”.

Yet words can be cheap in business: communication doesn’t always translate into useful information or induce people to follow directions, says a study by Cambridge Judge University Lecturer Jeremy Hutchison-Krupat published in the journal Management Science.

For example, if a direct report feels the message from a superior would be the same regardless of the superior’s knowledge, the message risks coming across as less-than-credible corporate rhetoric that’s often ignored.

Other communication that is ineffective includes details that embellish action that would already be expected: urging people to “work 20 per cent harder” doesn’t add much to simply “work harder”.

Sometimes, as the Tremeloes harmoniously proved in their 1967 classic song, “Silence is Golden.”

Alternative finance regulation on the rise

Online alternative finance such as crowdfunding and peer-to-peer lending is still largely unregulated around the world, but that will change fast over upcoming years.

A survey of 111 jurisdictions by the World Bank and the Cambridge Centre for Alternative Finance at Cambridge Judge found that about 68 per cent of jurisdictions will regulate equity crowdfunding by mid-2021, compared to 39 per cent currently, while regulation of peer-to-peer lending and initial coin offerings will also rise.

Many jurisdictions that adopt new regulations will “benchmark” their rules against those already in place in the UK and United States.

The survey found that regulators see plenty of advantages in online alternative finance if properly controlled, including improved access to financing by smaller enterprises and greater competition in financial services for consumers.

Keynes the option pricer

The accurate pricing of options is usually traced to a model developed in the 1970s that was recognised by the Nobel Prize in Economics.

Yet five decades previously, famed Cambridge economist John Maynard Keynes demonstrated a pretty keen feel for this in his trades of copper and tin options, says a study by two Cambridge Judge academics.

The study suggests that Keynes was able to “intuit” fair value and adjust option prices to the market environment. So his trades were at prices close to the theoretical values suggested by the model developed a half-century earlier.

The research is based on hand-collected actual prices paid to London Metal Exchange dealers by Keynes from 1921 to 1931, which were then judged for fairness based on the much-later model.

The study in Economic History Journal is co-authored by Reader David Chambers and Research Associate Rasheed Saleuddin of Cambridge Judge.

What drives ‘non-equity’ law firm partnerships?

There has been a recent shift in law firms toward “non-equity” or salaried partnerships in which new partners don’t share in the firm’s profits. A new study takes a look at the factors driving this.

Contrary to expectations, compensation disparity between the best- and worst-paid equity partners has not driven this trend in top UK law firms. But gender diversity has been a big factor, perhaps because diversity prompts organisations to adopt new practices that reflect different backgrounds.

The study is forthcoming in the journal Research in the Sociology of Organizations. Its co-authors include Cambridge Judge University Senior Lecturers Thomas Roulet and Lionel Paolella.

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