Research Impact Report – October 2016

Knowledge is power in finance – but who do you trust?

Is your business throwing away the next big idea?

Empathetic marketers make more egocentric decisions

IB Research Impact October 2016

Contents 2

Welcome

4 Knowledge is power in finance – but who do you trust?

6 Managers are throwing away the best innovations 8 Do empathetic marketers make more egocentric decisions?

10 The data challenge: fundamental questions answered at Imperial 10

2017 annual Business School conference

11 Does competition between hospitals Improve quality of care?

Editor: Rachael Glasgow Sub-editor: Rebecca Firth Contributors: Jonathan Ashbury and Matthew Jenkin

I am pleased to introduce Imperial College Business School’s first IB Research Impact publication.

Professor Nelson Phillips Acting Dean, Imperial College Business School

Imperial College Business School focuses on research that has real-world impact, benefitting both business and society, and this publication introduces you to some of our recent work in the areas of marketing, finance, organisation behaviour, big data, and health.

Our departments of Finance, Innovation and Entrepreneurship, and Management produce academically excellent research that addresses key global challenges. Current research within these departments ranges from the rise of big data and its impact on business, to emerging financial technologies, generational changes in the workplace, business opportunities and threats in the face of climate change and innovations needed to address global health challenges.

We also collaborate with corporate and academic partners on many of our research initiatives, ensuring they have real-world application, and outcomes that will continue to deliver impact for many years to come.

Our aim is to inform policy and improve practise through pioneering research that drives global business and transforms society. It is this combination that we believe is the very essence of Intelligent Business.

I hope that this publication piques your interest in the variety of research undertaken at the School.

If you would like to find out more about any of the projects, or about partnering with us, please get in touch.

Imperial College Business School

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Knowledge is power in finance – but who do you trust?

Knowledge is power and when it comes to trading assets, the more information you have about an investment, the more likely you are to spend your money wisely. The problem is that not everyone is equally informed about the asset they are investing in. Understanding this knowledge gap can help make markets fairer, and this is what Dr Marcin Kacperczyk’s research is focusing on as he outlines below.

Professor Marcin Kacperczyk Professor of Finance Professor Kacperczyk’s research primarily investigates the impact of private information on financial markets. As a recent recipient of a European Research Council (ERC) grant, his future research will examine how information flow is related to market structure in order to understand the mechanisms that drive economic decisions.

Specifically, the project will use the contexts of illegal insider trading and household finance to lay out the micro foundations for informed trading in investment and corporate settings.

This research has been published in: In It Together: Why Less Inequality Benefits All (2015) OECD

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Research Report

It is clear that knowledge is an advantage in any market, even with the aspect of luck occasionally coming into play. The idea is that people who are more informed are able to pick better assets, or assets with a higher return. In addition, those who know that they are less informed are less likely to want to compete against players they know have more knowledge. Those weaker competitors are therefore more likely to drop out of the race entirely. This is particularly apparent when the product in question is highly complicated.

The more informed traders there are, the more expensive the asset becomes, and the more difficult it is for the less informed investor to hold it. It is therefore smaller investors with less money to spend on the resources to acquire the necessary information who are leaving markets that offer the highest returns. This, in turn makes the market less agile, assets more expensive and increases disparity between the players.

The question is, how do we identify the betterinformed people and what can we do with this information? How do these informed people trade, and what is the effect on the rest of the market? If we can identify them and learn their methods, this can help companies and banks to develop products, and governments to make improvements to regulations in order to make markets fairer.

One revelation thus far has been that innovation, the buzzword of the moment, isn’t always a good thing. New innovative products in financial markets are often more complicated, and can alienate less knowledgeable investors, further exacerbating the issue. Therefore, developing simpler products can be one way of encouraging wider participation in a market.

Identifying the players with better knowledge in an open market is a tough call – particularly when other factors come into play, such as luck or the fact that some people are just risk takers who use this to perform better. So, to take out some of these variables, we shifted our focus to an area with a clearer line of evidence, solely based on knowledge acquisition and usage; insider trading.

When the information in question is ’private’ or not available to everyone, such as with illegal or insider trading, the market obviously becomes unfair, as in the same way outlined above, those who know they have less information are less likely to take part. The interesting question is how this affects the market differently when the presence of these illegal traders are not disclosed.

My colleague Emiliano Pagnotta and I have examined court cases regarding illegal trading in which sources of private information are directly disclosed, compared with those that are not, in order to examine this complex issue. How

do both decisions affect the market, and how do they affect the success of the companies holding the products?

Our initial research focused on how regulators can identify this activity – to discover if there are ways we could improve our detection technology, and somewhat controversially, we also explored whether illegal trading is indeed something that regulators should ban.

Could these informed traders actually benefit the economy? While there are obvious ethical questions around their activity, interestingly, having these people act on insider information can make markets more efficient. If they apply that information to prices for example, they can respond more quickly. This in turn makes the market as a whole move more swiftly as information which would have become available perhaps a week later is implemented in the market sooner – with benefits to other players as well.

However, most would agree that this is still not a fair scenario, and obviously not a legal one, as those who use illegal information are winning the most, even if there is some benefit to others.

Therefore the illegal traders need to be identified.

But what happens when this is made public?

We have found that once again, the less informed players are aware that they are at a disadvantage, lose trust and pull out of the market. The unfair playing field is clear and both increases the price of the asset and shrinks the market.

A knowledge gap can both benefit and damage a market, and accentuate the disparity between players. How then can understanding of this reality help policymakers? You wouldn’t organise a poker party where some players could see the cards of their competitors before they walked into the room. In much the same way, policymakers or regulators can’t organise a venue or exchange system where people are doomed to fail because there is someone who knows more than others.

It is not a fair game.

Therefore, we are developing tools and metrics for policy makers to use, for example, to identify when it is likely insider traders will enter the market. This serves two purposes. The first is that they will be able to detect and track these people more easily. Finally, because the insider is aware that policy makers or regulators are able to identify them, they will be less likely to do it in the first place. In some sense it can deter future insiders to enter the market.

On the whole, developing a better understanding of the role information plays in the global economy will help policy makers in the future make better decisions about regulations in financial markets to create a more level playing field for all investors.

Imperial College Business School

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Managers are throwing away the best innovations Dr Criscuolo discovers the key to ensuring a strong panel for assessing R&D cases, explaining the three factors to consider in order to avoid overlooking your company’s next big idea.

Dr Paola Criscuolo Deputy head, Department of Innovation and Entrepreneurship Dr Criscuolo’s research focuses on the transfer of knowledge across both individuals and firms, on open innovation and on the strategic use of patents. Her research has been published in international academic journals including the Academy of Management Journal, Organisation Science and Research Policy, and in practitioner journals such as California Management Review and MIT Sloan Management Review.

Paola teaches Innovation Management both at undergraduate and MSc level, and quantitative research methods at the PhD level.

This research has been published in the Academy of Management Journal: Paola Criscuolo, Linus Dahlander, Thorsten Grohsjean and Ammon Salter (2016) Evaluating Novelty: The Role Of Panels In The Selection Of R&D Projects. Academy of Management Journal: March 2016.

Innovation matters. Companies spend significant amounts on research and development (R&D), and academics conduct countless studies to help organisations increase the number and quality of the ideas they generate. Much less thought however, has been given to how organisations decide which of these ideas to back. In fact, the mechanics of selection often see the most innovative projects consigned to the bin. This is just one of the findings of a research project that looked at the evaluation of R&D projects at a large multi-national professional services firm.

The study, carried out alongside my co-authors Professor Linus Dahlander, Professor Thorsten Grohsjean and Professor Ammon Salter found that panels in charge of selecting these R&D proposals are most likely to fund projects with intermediate levels of ‘novelty’, i.e. the ones that were the most innovative or bold, or indeed the least, were less likely to get funded. It is often assumed that the selection process is neutral, with each idea judged purely on its merits but that doesn’t take social context into account, which often works against the more novel ideas.

One factor is workload. The more novel an idea is, the longer it can take to evaluate and that can be difficult for busy executives. Another factor is the diversity of knowledge on the panel. Senior managers cannot be experts in every domain, so they often have to evaluate projects in areas that they know little about. In addition, if they all share the same expertise, they will not be able to look at multiple facets of a proposed project.

A third factor is whether the selection panel and R&D project applicant work in the same office.

We found that selectors are less likely to back unusually novel ideas if they work in the same location as the applicant – perhaps because they want to avoid charges of nepotism, or because they don’t want the risk involved in the project to rebound close to home.

So what does this mean for innovation?

Organisations need to think about their selection process just as much as their ideas generation.

If they don’t, they could find themselves working against innovation rather than promoting it.

One recommendation, paradoxically, is to give selectors fewer projects to evaluate, so that they can give novel ideas the extra attention they need. One way to do this is to stockpile projects until a certain number is reached and then hold the selection meeting. Sometimes there’s a fixation with doing things quarterly, but then selectors can end up with too many projects to assess.

I would also advise organisations to consider the make-up of the selection panels. They need to involve the right people with the right diversity of experience, even if it means bringing in people external to the firm. This might seem unfeasible given the need for confidentiality in R&D, but I would point to the example of pharmaceuticals giant GlaxoSmith Kline, where external experts have recently been drafted in to evaluate plans for developing projects presented by competing R&D units. With the right non-disclosure agreements it can be done, and by introducing externals with the appropriate expertise to assess the R&D project – and people with no relationship to the applicants – ideas with greater novelty, and more value to the firm, are more likely to get backed.

Imperial College Business School

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Do empathetic marketers make more egocentric decisions?

Dr Johannes Hattula’s recent research investigates how marketers’ personal preferences could be affecting the success of marketing decisions, and how being able to recognise and overcome these biases, can create more effective campaigns.

It’s no surprise that business leaders frequently try to put themselves in their consumers’ shoes to second-guess consumer behaviour. However, some of my recent research suggests empathy is not the best policy after all.

Dr Johannes Hattula Assistant Professor of Marketing Dr Hattula’s research interests include managerial and consumer decision making. His main focus is on how people construct their own preferences and predict those of others as well as how new technological developments, such as touch versus click interfaces, affect people’s information processing.

This research was published in the Journal of Marketing Research: Johannes D. Hattula, Walter Herzog, Darren W. Dahl, and Sven Reinecke (2015) Managerial Empathy Facilitates Egocentric Predictions of Consumer Preferences. Journal of Marketing Research: April 2015, Vol. 52, No. 2, pp. 235-252.

There is a general assumption that when marketers are empathetic, when they take the perspective of consumers, they are less likely to be influenced by their own personal preferences and better able to make predictions about consumer choices. But is that really true?

This question is something our research set out to answer in a series of four experiments across different areas of managerial decision making, such as product development, pricing and communication management. Our team, which included researchers Professor Walter Herzog, Professor Darren Dahl, and Professor Sven Reinecke, first asked marketing managers to indicate their personal preferences towards a marketing stimulus, such as a product or an advertising campaign.

Half of the marketers were then asked to be empathetic, to describe a typical consumer and imagine that person’s thoughts and reactions towards the particular stimulus, whereas the other half did not receive such instruction. All were then asked to predict consumers’ desires towards the same stimulus. However, rather than reducing subjectivity, we were surprised to find that empathetic marketers were even more likely to project their own personal preferences onto their target consumers.

Why? Because marketers are consumers too; they also go to the shopping mall, the cinema and have a personal life and preferences. What we found is that when you tell them to take the perspective of a target consumer, they automatically activate their own consumer identity, so their own personal consumption preferences become more salient and that’s why we see this increase of projection.

But what if you provided them with objective information about consumer preferences? Surely that would reduce the level of the unconscious empathy bias? Not so; in two of the studies we provided the marketers with market research on the preferences of typical consumers in their markets. However, we found that the more empathetic they were, the less value marketers placed on market research and the more they neglected the evidence. The reason for this blindness to information is something I am keen to uncover in future studies.

While the findings are a blow to the perceived wisdom that marketers traditionally employ when using market research to predict consumer preferences, empathy is not necessarily a bad thing. It is important for marketers to be aware of this bias and how it can influence their behaviour and thoughts about consumers.

Indeed, when they were made aware of the self-referential tendencies that could be induced by empathetic behaviour, we found that they became more objective and less susceptible to their own projections as a result.

In the next steps, we will therefore try to further our understanding of the extent to which marketing managers are able to avoid the influence of their personal preferences when predicting consumers’ preferences.

From a practical point of view, group decisionmaking, where there are a variety of different views on the table, could play a part in reducing the impact of personal preferences.

Addressing and reducing the impact of marketing managers’ personal preferences will help to make campaigns more accurate, benefitting marketing budgets and consumer satisfaction alike. With billions being spent globally on marketing and associated analytics, this research gets to the heart of the marketer, and reduces the risk associated with the human factor in what is essentially, a very human profession.

Imperial College Business School

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The data challenge: fundamental questions answered at Imperial Not long ago, people saw the internet change how we communicate, learn and shop. Now, there is a revolution provided by the data created by our online activities. Gathering information from a user’s digital footprint and machine-to-machine communications allows us to see an in depth view of patterned human interaction and financial transactions.

For researchers, this information is giving a view of the economy and society far more detailed than any previously imagined. This holds the promise of fundamental breakthroughs in our ability to explain and anticipate opportunity and risk across markets, organisations, and social interactions. For example, research at the Business School looks at various facets of big data and its use: A group of researchers led by Dr Aija Leiponen, recently sought to investigate how Big Data will affect innovation, growth and well-being in the UK economy. Their research looks to uncover new economic and business models for valuing Big Data and the impacts this could have on business.

Initiatives such as the Data Spark project, run by Imperial Business Analytics by KPMG, sees academics and students work together to critically examine and assess our partner’s data to analyse and uncover insights and opportunities that may otherwise go unnoticed.

In addition to leveraging the information that lies in the huge volumes of data available to businesses, we are also finding that better ways of analysing data is the key to unlocking its profitability.

Imperial Business Analytics with KPMG aims to help solve some of the world’s most challenging data problems. The research is centred on areas that matter most to today’s business leaders to help executives achieve greater value from their data, and brings together some of the best data scientists and business leaders to focus on solving complex business challenges.

It is an exciting time for businesses that seek to unlock the power of data, and Imperial College Business School is at the forefront of this emerging field.

For more information on ways to work with Imperial Business Analytics with KPMG, please contact: Kate Heyworth, Centre Manager, T: +44 (0)20 7594 2639

2017 annual Business School conference ‘Mobilising Business, Acting on Future Health’ Two decades into the 21st century, the world’s health systems are facing unprecedented challenges – a perfect storm of escalating demand, a drive to contain public expenditure, and the need to deliver greater access to affordable healthcare in poor countries. Also looming are two big unknowns – the human and economic costs of climate change on our health, and a possible antibiotic resistance ‘time-bomb’.

So what can business do to respond to these global healthcare challenges? How can we maintain the incentives for innovation but at the same time curb healthcare cost inflation?

Where will the appropriate innovations for poorer countries emerge? The 2017 annual Imperial College Business School conference will bring together businesses and other key players from the health sector, as well as leading experts from Imperial College London to address these issues.

To find out more visit: imperial.ac.uk/business-school/mobilisingbusiness/acting-on-future-health

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Does competition between hospitals Improve quality of care?

A word from the Associate Dean of Faculty and Research, Professor Carol Propper.

Professor Carol Propper Associate Dean of Faculty and Research and Professor of Economics Professor Propper’s research interests focus on the impact of incentives on the quality of health care delivery and health system productivity and, more widely, on the design and consequences of incentives within the public sector and the boundary between the state and private markets. In 2010 Carol was awarded a CBE for her services to social science and in 2014 she was elected as a fellow of the British Academy.

The aforementioned research was published in the American Economic Journal: Martin Gaynor & Rodrigo Moreno-Serra & Carol Propper (2013) Death by Market Power: Reform, Competition, and Patient Outcomes in the National Health Service. American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 134-66.

Competition is not a word usually associated with hospitals, as it is popular understanding that a hospital’s focus should be on the quality of service not the performance of peer institutions.

Whilst competition in hospitals remains a highly contentious issue, research undertaken by my colleagues and I shows that competition could in fact help to improve the quality of care.

Our paper, ‘Death by Market Power: Reform, Competition, and Patient Outcomes in the National Health Service’, discusses our finding that competition between hospitals has been shown to bring benefits, and in some cases lack of competition can have serious consequences for patients and productivity in the healthcare industry.

The role of incentives for public sector organisations is important in many economies where the public sector runs infrastructure, be that healthcare, transport or utilities. Healthcare is an important part of all developed economies, accounting for somewhere between 1 in 10 and 1 in 5 of all employment, and the public sector typically plays a large role in either funding and or delivery of services. Thus policies directed to improve outcomes in public financing or delivery of this care can have a major effect on economic performance.

The business side of health provision and global challenges associated with it will be the focus of the Business School’s 2017 annual conference.

The research looks back to 2006 when the UK government introduced a policy to promote competition between hospitals. This process provided patients with a choice of location for hospital care and provided information on the quality and timeliness of care provided.

Using this policy it was possible to estimate the impact of the introduction of competition not only on clinical outcomes but also productivity and expenditure.

My current work intends to bring about a step change in our understanding of the operation of market forces in health care markets and to advance our understanding of the economics of health care production. Greater use of market mechanisms in health care is a key component of health care delivery reforms in many countries, so this project will consider the conditions under which a greater use of market mechanisms will be beneficial for the users and payers of health care services.

Imperial College Business School

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Imperial College Business School inspires the best minds to become future business leaders. As part of Imperial College London, a global leader in science and technology, we drive business advantage through the fusion of business and technology and an entrepreneurial mindset.

We combine innovative thinking and insight with new technology to develop practical solutions to real world issues, benefiting business and improving society.

We value cross disciplinary, impactful research, and working across the faculties of Imperial College, with corporate partners and policy-makers, we aim to solve the big global challenges facing our world today.

Within our three research departments, Innovation & Entrepreneurship, Finance and Management, our Research Centres work to unite research and practice to enhance the impact of our work.

Contact Information: Imperial College Business School Imperial College London South Kensington Campus London SW7 2AZ United Kingdom T: +44 (0)20 7589 5111 F: +44 (0)20 7823 7685 W: imperial.ac.uk/business-school @ImperialBiz linkedin.com/company/imperial-college-business-school facebook.com/imperialbusiness instagram.com/imperialbiz/ For a complete view of research at the Business School please visit: imperial.ac.uk/business-school/research/ Read our research blog: imperial.ac.uk/business-school/ intelligence/research-blog/

Our Research Centres: Brevan Howard Centre for Financial Analysis Imperial Business Analytics with KPMG Centre for Global Finance and Technology Centre for Hedge Funds Research Centre for Management Buy-Out Research Enterprise Research Centre Energy Business Research Lab Digital City Exchange Gandhi Centre for Inclusive Innovation Health Economics, Policy and Management Risk Management Lab We work with corporate partners in various ways, from bespoke research projects addressing a specific organisational need, to custom and open executive education programmes, and providing employer relations services to companies looking to hire our post-graduate students.

If you are interested in learning about ways that you can partner with us, please contact: Julian Sikondari Corporate Partnerships Manager j.sikondari@imperial.ac.uk T: +44 (0) 20 7594 5940

Disclaimer: While all reasonable efforts have been made to ensure that the information in this publication is correct, matters covered by this publication are subject to change. Published October 2016. Š Imperial College Business School Designed by opx.co.uk Š Imperial College Business School