Exploiting Others' Errors

I attended a Yale School of Management research workshop by a visiting professor this week. Through a carefully designed experiment, the authors of the paper had found that people make systematic errors in deciding which products they want, depending on how the information is presented to them. Such errors can be exploited by companies who can design their advertisements and other messages using the knowledge of the pattern of errors. The paper did not, and was not intended to, address two other questions: (1) Is it in the interest of the firms to exploit this knowledge; and (2) If the answer to the first question is yes, should they do so? To address the first question, one can choose a variety of perspectives on what we mean by “interest of the firm.” A broad perspective that includes various stakeholders (e.g., shareholders, employees, as well as customers) would suggest that selling an extra toaster to customers who, in absence of manipulation of information presented to them, would not have bought one, is likely to be a wealth transfer from customers to shareholders, employees and other suppliers of factors of production in its first order of magnitude. In the second order of magnitude, there could be negative (e.g., unused appliances gathering dust in the attic) or positive (e.g., higher direct or indirect employment) effects. Under this perspective, desirability of using the errors of cognition in marketing becomes a complex problem of macroeconomic social welfare analysis. Under a narrower—maximizing the shareholder value—perspective on “interest of the firm,” the firm may be able to increase its profits by manipulating the manner in which it presents information to its potential customers. However, there is considerable literature in management and marketing to suggest that such gains from taking advantage of customer errors are likely to be short-lived, and in the longer run, may well redound to hurt the profitability of the firm. Such tactics and manipulation may divert the attention of the management from products that it genuinely believes best serve the interests of its customers. Moreover, to the extent, the manipulative tactics become known over time, customers may no longer trust the firm, and even turn hostile. The second question—should the firm choose its actions to exploit any tendencies of its customers to err if it serves its interest, however defined—is more difficult to address. It involves the nature of social contract between firm and society. Taking advantage of others’ errors is not illegal, and probably cannot be made illegal without serious problems of definition and enforcement. Should the corporation feel free to engage in an activity if it is not illegal? If the answer is yes, are we willing to live with the consequences? If the answer is no, how do we define and enforce the boundaries of such behavior? Is this something we leave for social mores and norms? A related question concerns management scholarship. As social scientists, to what extent should scholars think about how their findings might be used in the world of business? Can we foresee their use and consequences of this research? We take credit for our work—new, interesting, important. Are we also responsible for it? A few years ago when a colleague and I introduced at the School of Management a course on financial fraud, we struggled with the problem of teaching the variety, risks, investigation, and mitigation of fraud without also teaching how to commit fraud and minimizing the risk of getting caught. I wonder if investigation and instruction on human susceptibility to errors of cognition may also present some of the same dilemma for management faculty. Finally, what is the role of management school in business and society? Are our research and teaching value-free, or do they convey—explicitly or implicitly—dominance of some values over others, and relationships among private and public good. Can and should we link our values to our curriculum and research programs? If so, how?