Does Economics Training Hinder Managers’ Ability?

8 July 2009 at 2:43 am Benito Arruñada

| Benito Arruñada |

In a new paper with Xosé H. Vázquez we explore the consequences of using different behavioral assumptions in training managers on their future performance. We argue that training with an emphasis on the standard assumptions used in economics (rationality and self-interest) leads future managers to rely excessively on rational and explicit safeguarding, crowding out instinctive contractual heuristics and signaling a “bad” type to potential partners. In contrast, the behavioral assumptions used in management theories, because of their diverse, implicit, and even contradictory nature, do not conflict with the innate set of cooperative tools and may provide a good training ground for such tools.

We present tentative confirmatory evidence by examining how the weight given to behavioral assumptions in the core courses of the top 100 business schools influences the average salaries of their MBA graduates. Controlling for the average quality of their students and some other school characteristics, we find that average salaries are significantly higher at those schools whose core MBA courses contain a higher proportion of management courses as opposed to courses based on economics or technical disciplines.

Analytical education based on rationality and self-interest is not necessarily wrong. But blind emphasis on conscious, “rationalistic” safeguarding may be as damaging as full reliance on gut feelings for establishing one’s relationships. The point is that although calculative safeguarding may play an important role in specific transactions, economic agents need to consider its tricky interaction with automatic contractual heuristics. Thus, whereas economics may offer a good education for certain impersonal tasks, it may be harmful for individuals playing a leadership role.

MBA programs with a higher proportion of courses using management theories produce better-paid managers not because of the quality of these theories but because their courses present a less dogmatic and more descriptive approach to the contractual process. This helps future managers identify different relational frameworks, encouraging a contingent — and more successful — approach to economic and social exchanges. Management theories, which not only handle concepts related to rationalistic opportunism but also involve others like trust, intrinsic motivation, ethical values or, more generally, emotions, do not interfere with the adaptive nature of our contractual heuristics. They present a diverse and sometimes even contradictory nature of human behavior.

Our results have implications for contract theory, changing the nature of the contracting problem. If there were a single type of human being prone to moral hazard or opportunism, the recipe would consist of designing incentive alignment mechanisms. However, if there are actually several human types or, if individuals are actually programmed to respond differently depending on the particular situation and partners they face, then the main challenge in contracting is not necessarily to protect parties against opportunism but to discriminate potential partners and contracting situations in order to display a different relational strategy in each transaction.

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Entry filed under: Education, Former Guest Bloggers, Management Theory.