Why firms don’t experiment – they want to hire consultants!

Photo Credit: Marooned on Flickr, link:http://www.flickr.com/photos/marooned/235289077/Dan Ariely has a thought-provoking piece in the Harvard Business Review about firms that don’t want to experiment, and change. Based on his description and my experience I think that his assessment of the situation is accurate. Here’s a bit from the article:

This is a typical case, I’ve found. I’ve often tried to help companies do experiments, and usually I fail spectacularly. I remember one company that was having trouble getting its bonuses right. I suggested they do some experiments, or at least a survey. The HR staff said no, it was a miserable time in the company. Everyone was unhappy, and management didn’t want to add to the trouble by messing with people’s bonuses merely for the sake of learning. But the employees are already unhappy, I thought, and the experiments would have provided evidence for how to make them less so in the years to come. How is that a bad idea?

Experimentation and consulting are substitute goods, in terms of providing firms with useful information about how they can grow. However, getting advice from consultants is high status, whereas experiments are low status (like Steven Levitt, who became popular by running experiments that other economists thought were below them). It’s important to note that we should expect consultants to recommend less experimentation than actually makes sense, because experimentation is a substitute of advice-giving.

It’s well known that experimentation and change are necessary if a firm is going to prosper in the long run. In From Poverty to Prosperity Arnold Kling and Nick Schulz make the eye-opening observation that only one firm that was in the Dow Jones in the 1930’s is still there today, and that firm’s product is now completely different. As firms grow, entrenched divisions hold more sway and change becomes less popular.

At the same time, it may be hard for shareholders or board members to measure the amount of experimentation that goes on within a firm, on things like price points or marketing strategies. Furthermore, it’s pretty clear that individuals have an incentive to minimize the amount of experimentation that goes on.

Ariely’s guess is that the tradeoff between short-term costs and losses and long term gains, and the false sense of security provided by experts, are the reasons why firms don’t experiment as often as they should. I would add that in a firm where data is not king, managers believe that experimentation can undermine other workers’ confidence in their ability level. Sure, the firm might lose out in the long run, but they will maintain their status by hanging on to the status quo.

Ariely’s frustration is one that I often share. I always want to try out new things; the upside’s high and the downside is fairly limited (you can always end a new initiative if it doesn’t pan out). Unfortunately this isn’t really met with enthusiasm by many people I’ve worked with, so I resort to experimenting in my personal life, or getting really good at something even if it’ll never get implemented.

Liked what you read? I am available for hire.

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