Ok, I realise I might have given the impression to be slightly sceptical about the mental abilities of top managers of late. But that’s a faulty impression, honest! I am merely trying to point out that they, too, are only human.
Or, let’s say, near human (just like business school professors and other suspected mutations of the human genome) because the following academic study yet again did not quench but just fuelled my scepticism.
My former colleague at the London Business School, Olav Sorenson (now at the University of Toronto), together with his colleague David Waguespack, examined distributors in the US film industry. Distributors have certain pre-conceived ideas about what films will be a success at the box office – for instance, the number of stars in the film, the actors’ prior successes, previous experience of the production team, etc.
When Sorenson and Waguespack analysed data on over 5000 movies, they discovered that these distributors seemed correct in their beliefs; films that corresponded to their prior beliefs indeed reaped more revenues at the box office.
Yet, then Sorenson and Waguespack did a clever thing; they also analysed the scarce resources that these distributors assigned to their films, such as budget, promotion efforts, number of screens on opening day, favourable timing in the year (e.g. around Christmas many more people go to the cinema). What they found was striking: The reason why those films that the executives had high hopes for beforehand indeed did become successes could 100 percent be explained by the fact that the distributors in their subsequent allocation of resources very significantly favoured them.
When Sorenson and Waguespack, in their statistical analysis, corrected for the fact that distributors assigned so much of their scarce resources to those films, it turned out that the executives’ assessments were completely wrong; those films usually did comparatively worse at the box office! The only reason why the films that they beforehand had thought would become successes indeed did reap “profits” is because they assigned more resources to them. Yet, they would have been better off assigning the scarce resources to the other movies. The executives’ prior beliefs were false; they just seemed correct afterwards due to their own, self-confirming actions.
Do such self-fulfilling prophecies only exist in silly Hollywood? My guess is not. Self-confirming dynamics are abound everywhere. Human beings develop prior beliefs about what will work and what won’t, and subsequently (unconsciously) work hard to make sure they’re right. And, really, top managers are often almost human.
It might be of interest (unless you’ve already seen it, as is likely) to have a look at the group-think in investing and how it drives the markets (and, to an extent, prevents effective arbitrage as the amount of capital an arbitrageur can come up with is less than sum of the group-think following investors).
Markets (financial, real estate, etc.) are often subject to self-fulfilling prophecies. Even the economy as a whole, to some extent, is. I am not a macro economist – and will stay on my turf – but I am inclined to say that Alan Greenspan had/has the easiest forecasting job in the world: if he says there will be a recession, people get nervous, start to withhold investments, etc. and… yes, there will be one!
This situation is similar to those covered by “Success to the Successful” system archetype.
The archetype describes the common practice of rewarding good performance with more resources in the expectation that performance will continue to improve.
In our case: distributors assign more resources based on previous performance (number of stars, experience of production team, actors’ prior successes) which leads to such films succeed.