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Global The free business magazine featuring articles from the world's most prestigious business schools.

Also including articles from: OXFORD, COLUMBIA & HARVARD

Global The free business magazine featuring articles from the world's most prestigious business schools. Quarterly: March, June, September, December. All articles are authorized reproductions

December 2013 h t t p : / /www. G l o b a l B u s M a g . c o m / Papegaaistraat 76, 9000 Gent Belgium

INSIDE this issue The Paradox of Indispensability


Turning Expectations Into Customer Satisfaction


Why you're working too hard


‘Small Box’ Retail: Passing Fad or ‘Eureka Moment’ for e-Commere?


Organizational Complexity: the Hidden Killer


Disciplined Disruption


Beware the discretionary choices of arbitrators


The Connected Consumer


The Paradox of Indispensability The logic that shapes the first half of your career can leave you trapped in the second half. Managers make predictable mistakes that, despite their technical expertise and stellar performance, can lead high-fliers to fail to rise to the top.

your performance ‘deserves’, it is probably that you haven’t effectively realised how much you need to adapt as you become more senior. In the first half of your career, the game is straightforward. You demonstrate your technical expertise, you work hard (often making sacrifices in other parts of your life) and you develop skills and competence that allow you to become a star performer. In some roles, such as trading, sales, consulting or professional roles such as law, indispensability can be cemented by having such strong external relationships that, if the company fired you, the clients or customers would follow. In such cases, job security is high — you have become ‘indispensable’. When times are tough, in particular, this is simple, Darwinian selfpreservation.

The curse of knowledge

Along with colleagues, I have been teaching about ‘executive derailment’ for many years. It consistently resonates with MBA students and managers alike. This is echoed in my work with senior managers both individually and in teams. There are some important themes that consistently emerge about the journey to the executive suite. Many, perhaps all, managers have to wrestle with a paradox that, unless effectively addressed, can mean that their brilliance fails to lead to the desired promotion. I have had many conversations with bitter managers berating the fact that poorer performing colleagues have advanced ahead of them. Is it because top management don’t realise what they have achieved? Is it that they aren’t grateful? Is it that other managers have been engaging in manipulative politicking? Sadly, it is often none of these. Top management usually has a pretty good idea what it takes to make it to the top. If you are not getting the promotions that

Such individuals rapidly move into managerial positions, where they have to overcome a universal challenge — the curse of knowledge. When you have developed a skill to a high level of expertise, it becomes automatic and, as neurology is increasingly clarifying, uses a different part of your brain. Moving into management means that you have to supervise people who don’t know how to do things that for you are obvious. At this point, you realise something important — people are a problem. They just don’t get it. Are they stupid? Are they intentionally trying to screw things up? What’s wrong with them? Anyone who has ever been driving behind a learner driver and has found themselves becoming frustrated and critical has experienced the curse of knowledge. The whole point about learner drivers is that they aren’t good drivers, so getting irritated by their incompetence is not a rational approach — you too were once a bad driver. Some managers have selective memory about their own learning curve. Helping other

people develop skills that have become automatic for us requires learning some basic management skills. These are relatively easy to learn and most managers are reasonably competent after a few years. So, you have demonstrated your expertise and your ability to supervise others. The team is performing to a very high level. You and the team are regularly heaped with praise from above. Things could not be going better. Given your sparkling track record, the future must surely be equally bright?

A paradox You subtly ask your boss about what the future holds for you. The boss doesn’t pick up on your hints. Eventually, you confront him or her about your career ambitions. Your boss couldn’t be more flattering: “You are fantastic: indispensable. Which is why you are the last person I would promote. You are far too important where you are.” So, what has gone wrong? And what can you do about it? To be an effective executive, you need a strong desire and ability to control. Consistently delivering high-quality output; exceeding expectations regularly; being an ‘overachiever’. Organisations rely on these types of managers to do the hard work required for value creation. But this focus on control leads to perhaps the most dangerous phrase I ever hear in organisations: “I don’t have time to delegate.” Delegation initially feels like losing control. It is probably going to be faster and lead to a better result to do things yourself. Delegating to someone who is less experienced takes up valuable time. They will probably have to come back to you for clarification or help. You may end up having to do it yourself anyway, picking

up the pieces. This instinct to control, however, can increasingly become a liability, rather than an asset. As you become more senior, the quantity of work that you are responsible for clearly increases and there is a limit to how much you can personally accomplish. The problem is that, if you are focusing on the tactical issues where you have expertise, you are implicitly avoiding the broader strategic issues that will allow you to develop yourself, your direct reports and the organisation. A phrase that is sometimes used to describe this is: “When you are fighting off the alligators, it’s hard to remember you were trying to drain the swamp.” Fighting alligators feels good — we are busy and can see the achievements we are heroically and often single-handedly creating. We feel in demand, productive. But the more senior we become, our success becomes less dependent on our personal ability to ‘do’ and more about our ability to ‘think’. Having the discipline to take time away from fighting the alligators to focus on the critical priorities necessary for strategic success is difficult, and increasingly so, for managers. An exercise I have often conducted with coaching clients is to ask them to define their top three priorities — the things that are absolutely critical to their success. We then go through their diary for the past three months to see how much of their time they are spending on their top priorities. With one CEO, we realised that he was spending around one per cent of his time on his top priority. Why? Too many alligators…

Two modern plagues And things are getting worse. Two plagues have swept through organisations — email and meetings. The rise of email has brought some very real benefits, but, in my research with managers, only around three per cent feel that they are effective

at managing emails. This is despite the fact that every manager knows there are some simple principles that can be used to improve our usage of email, such as setting aside specific times of the day when we deal with emails, rather than responding as soon as an email arrives in our inbox; and avoiding the dreaded ‘reply to all’ button. The other problem is inefficient and ineffective meetings. I have challenged managers over the years to invite me into their organisation to see if I could, using some standard facilitation skills, double the effectiveness and halve the duration of their meetings. Many managers respond that their meetings are terrible — they start late; the wrong people are present; the purpose of the meeting is unclear; people ramble and repeat points already made; no-one is clear what is being agreed; the minutes are not always captured and, certainly, people leave the meeting with a different sense of what is going to happen; and, as a result, little productive benefit is created. There is a piece of software that highlights this meeting inefficiency. It is a simple digital clock that you can display on a computer or smartphone, but this clock doesn’t tell you the time. Instead, you input the number of people attending the meeting and their average hourly cost to the organisation. Then, as the meeting begins, you press the ‘start’ button. All the software does it tell you how much money the meeting is costing the organisation. Such information inevitably leads to the often sobering question: “What return is the organisation getting based on its investment in this meeting?”

Doing vs. thinking But managers don’t need lessons on what they can do to improve their email and meeting protocols. They already know. The challenge is that it is increasingly hard to do the things we know we should be doing. We are now always on. Some managers have yet to find the ‘off’

switch on their BlackBerrys (it does exist) and all managers struggle to take time away from doing things (fighting the alligators) to think. The 19th-century Austrian statesman, Prince von Metternich, apocryphally categorised military officers against two dimensions: how smart they were and how hard working. The stupid, lazy ones are easy to deal with — get them out. The stupid, hardworking officers are very useful, as long as you supervise them effectively. The smart, hardworking ones were also useful for relatively junior positions. But the ones he focused on were the smart, lazy officers — they know what needs to be done, but don’t want to do lots of work. So they find the short-cuts; they are creative. While this is not a formula that any modern organisation should use for selecting and promoting managers, it does raise an important challenge about the amount of unnecessary work carried out in organisations. A finance director client was frustrated about the amount of work required to produce the monthly management accounts summary for the board — a giant, 77-page report. At one particular board meeting, she asked whether all this information was really necessary, as this report was taking up a lot of her department’s resources for days every month. The universal response was that everything was critical. She was far from convinced, so the next month she put a couple of pages in nonsense Latin text and waited to hear how many people contacted her to complain that they were unable to do their job without this data. No-one called. She did the same thing the next month in a different part of the report. Again, no calls. When she confronted the board at the subsequent board meeting about what she had done, there was silence. The company now has a very efficient seven-page monthly report.

The underlying disease The disease is not email or meetings. It’s

something that has been called ‘hurry sickness’. Typical symptoms of this disease include:

thoughtful (and maybe even less hardworking) managers get the top jobs.

› If you are microwaving something for 30 seconds, you have to do something else while waiting for the microwave to go ‘ping’

A leap of faith

› You eat at your desk while also checking your emails, often on the phone at the same time › You get a buzz from just catching a plane or a train › You do something else while you drive (on the phone, listening to the radio, eating your breakfast) › You hate the time it takes to boot up your computer so much that you never turn it off › You do something else while brushing your teeth › You turn your smartphone on as soon as the plane lands, before you are meant to, and get frustrated by how long it takes to get a signal › You find yourself consistently getting frustrated while waiting in line or in traffic › You regularly interrupt the person with whom you are talking › You do something else on telephone conferences › You press the ‘door close’ button in elevators repeatedly › If you look at this list and see some familiar friends, you are probably sick. Some managers are so sick that they don’t see what is wrong with these behaviours. But ‘hurry sick’ managers find it almost impossible to stand back and think. In my research over the last 10 years with thousands of managers, this disease has affected around 95 per cent. The ‘anxious over-achiever’ is, however, useful in organisations. Indeed, this type is indispensable. But they become increasingly bitter when more

You are never promoted because you were good at your last job. Yet we instinctively assume, when we have been promoted, that our previous behaviours have been rewarded — a mechanism called positive reinforcement. There is always a leap of faith; a hope that the individual will be able to adapt to the different demands of the more senior role. This issue is getting more challenging as roles become more specialised and, therefore, promotions can often mean a radical change in the nature of the role. Nowhere is this more challenging that in law firms, where the efforts that associates make to get promoted to partner are intensely demanding over many years. Law firms have attempted to codify the competencies necessary to be made up to partner. But it is only when someone is made up to partner that it is possible to tell whether they are able to make this transition effectively — the role of a partner is different to that of an associate and not all partners take up their broader responsibilities successfully.

The way forward If indispensability is so constraining, that is the answer — dispensability? Clearly this has risks, particularly in a challenging economic climate. Yet this is exactly what is required. It takes a lot of confidence for a manager to go to his or her boss and say: “The team is working so well that they don’t need me any more — I am ready for my next challenge.” This confidence only comes from having identified, supported and developed a number of people who could easily step into your role when you move up. Many managers see themselves as solitary heroic figures. These individualists are easily identified — they don’t have any succession plans in place. At its worst, this

phenomenon leads to a narcissistic belief that they are the only competent person around. It takes a confident, self-aware manager to surround themselves with people who are frighteningly impressive.

Comatose Consider the following rather drastic hypothetical situation. You get food poisoning and slip into a coma — you have no communication with the organisation for three months. Would the organisation survive? Many managers like to believe that things would be much worse without them. But when managers, for whatever reason, disappear for prolonged periods of time, those around them typically step up and fill the void. So when you wake up from the coma and rush back to work, the attitude can be, “OK, crisis over — I’m back. Give me all your alligators.” When the response is that things are going well, in fact probably better than when the ‘heroic’ manager was in place, a wakeup call has been delivered. I have worked with organisations who believed that certain key individuals were indispensable. But when they left or were finally fired, within weeks they have been forgotten and things are going fine. Very few managers are truly indispensable. Charles de Gaulle once said: “The graveyards are full of indispensable men.” The desire to feel indispensable is compelling and dangerous. It paralyses organisations with unnecessary, thoughtless work and micromanaging, bottle-necking managers.

What do you think? The cure is delegation — breaking the cycle of dependency that limits both performance and motivation and helping employees become more self-reliant and responsible. Authority and

responsibility need to flow down the hierarchy, particularly as organisational structures become more complex in the age of the matrix organisation. Accountability needs to flow up the hierarchy. Some managers have the mind-set that this approach is abdicating control and responsibility. It is not. The responsibility for the tasks that you have delegated is still yours after you have delegated. One of the key challenges of effective delegation is the perceived loss of control. Managers need to learn that there is a spectrum of different degrees of authority that can be delegated. On one end of the spectrum, the manager says, ‘Look into this issue for me; gather the facts; I will decide what to do.’ At the other end, the manager says, ‘Do what you think is right; I don’t need any further communication about this’. Having the ‘antennae’ to know where along this spectrum is appropriate in any given situation is a skill managers have to learn. But the more you are able to involve people in defining what the solution should be and in implementing this solution, the more engaged they will be in carrying it out. Jeff Immelt, the Chairman and CEO of General Electric, said: “The four most important words in business are ‘what do you think?’ “Every employee wants the same thing from their boss. Someone who: › Believes in them and their potential › Defines a clear and challenging task › Locates this task within organisational context or purpose



Is available when needed for advice and coaching › Is supportive and ensures they have the ‘air cover’ and resources necessary to succeed › Provides feedback and appropriate rewards › Gives them space so that they can learn and


Turning Expectations Into Customer Satisfaction

If managers are going to avoid the paradox of indispensability, we have to stand back from our day-to-day tasks and think. We have to create an environment where others can grow and be held responsible. We have to fight our instincts to control. As Alfred P Sloan, the man who ran Hilke Plassmann, INSEAD Assistant Professor of General Motors from the Twenties to the Fifties Marketing, with Benjamin Kessler, Knowledge and created the largest and first truly modern Web Editor | September 18, 2013 corporation, dominating the auto industry for over 70 years, put it this way: “The most important thing I ever learned about management is that the work must be done by other men.” This is not just another management skill - it is the principal way you build a business. The article above is republished courtesy of London Business School

Expectations can determine the perception of your product. Setting that expectation and spreading it is the next step, but beware of trickery. Consumers are constantly told that the latest Nike running shoes or Mercedes-Benz can offer higher performance. Consumers believe it, they make a purchase and they even experience it. From sportswear to cars, expectations of a product or service can actually create a resulting experience. But how? Even the savviest and most jaded consumers rarely approach a new product with complete objectivity. A multitude of factors tell us what to expect, including price, packaging and the product’s ad campaign, among others. But just how powerful are these expectations in shaping customers’ thoughts about what they consume? And how do they influence future behaviour and sales? Pre-consumption

expectations about a product affect more than what we say, or even what we think, about that product. Our biases are reflected in our brain activity, affecting our perceptions of what we consume at a deeper and more direct level than psychologists can measure, says Hilke Plassmann, Assistant Professor of Marketing at INSEAD speaking about her recent paper How Expectancies Shape Consumption Experiences, co-authored by Tor D. Wager of the University of Colorado at Boulder.

An MRI/Wine Tasting Plassmann’s conclusions stem from a study she co-conducted in 2008 measuring neural responses to drinking wine. Participants were instructed to sample various wines through a straw from inside an MRI machine. The rub? The researchers deliberately misled participants about the prices of the wines, claiming one cost US$45 when it actually cost US$5 and presenting another as costing US$10 when it really retailed for US$90. “This allowed us to observe their brain activity while they were consuming the wine,” Plassmann told INSEAD Knowledge in an interview. “Are they rationalising after the fact that it should be better because it’s more expensive, or does it really change their taste processing? What we found is that it really changes the neural activity in an area called the medial orbitofrontal cortex, which is an area that encodes our experience of pleasure.” These results came as a surprise to some of Plassmann’s collaborators on the study. “Some of us were thinking, ‘Oh, it’s more like rationalisation; it’s more like a cognitive process.’ At this point it was an open question. We had competing hypotheses.” For Plassmann, the findings highlight the speed with which humans form lasting impressions that synthesise all types of data. “The bias kicks in at a very early stage,” she says. “It really changes

your taste perception, or your visual perception, or your pain perception. These are complex processes where you receive a lot of input, and such information that has nothing to do with the taste itself – they are so fast, and integrated more holistically into your experience that you can’t distinguish. You think it’s linked to the taste.”

Self-Fulfilling Prophecies Plassmann says there is evidence that by affecting brain activity, biases can sometimes bring about observable changes in people all by themselves. She cites a 2007 study by Harvard researchers in which female attendants at seven hotels were informed that their usual duties – walking, bending, pushing, lifting, and carrying – met the surgeon-general’s recommendations for an exercise regimen. Four weeks later, the researchers found improvements in blood pressure, body mass index, and other health indices among the informed group, relative to a group of attendants that had not been so informed. “Now that their work was classified as exercise, they found changes on those metrics,” Plassmann says. “This gets back to the idea that this really works as a placebo effect, it changes your control systems, your hunger control systems. It’s really biasing how your brain is encoding all these different processes.” In another study, co-authored by INSEAD Professor Ziv Carmon, people who consumed a discounted energy drink performed worse in mental tasks than those who paid full price for the same drink.

Great Expectations In addition to price, Plassmann says, almost anything about a product’s appearance can produce an expectation that may help determine how much we enjoy it, or whether we enjoy it at all. “For wine, the shape of the bottle, whether it is a screw cap or a natural cork… Also, something more subtle like the colour of the

wine, the redder it is, the more we think it’s enjoyable. These are simple rules that are taught in wine courses. We think it has to be this brilliant colour, but this is a chemical component that can be manipulated quite easily.” But not everyone is equally susceptible to these branding cues. Some neuroscientists think susceptibility to the placebo effect may be linked to the size of the region of the brain involved in processing rewards and punishments. Plassmann is also looking into other variables, including the role of the social environment (i.e. consuming alone versus consuming with others like your boss or your date) and the level of expertise about a product, for clues about how biases impact consumer experiences. In future experiments, she hopes to stretch credulity a little in an attempt to pinpoint where common sense kicks in. “If I give you wine and it’s actually vinegar, but I tell you it costs US$150, you still might not like it. But I’m looking into: What happens if I do this a little bit differently? Can I make it appealing to you even if it’s outside this acceptable range of tastes?”

Marketing Implications Plassmann says the studies she cites shed some light on how advertising and marketing operate. Firstly, they show that marketing actually does have an effect on how products impact consumer decision-making on a brain level. “This is just speculation based on psychological evidence published in the Journal of Advertising: When you consume an orange, you keep your experience value in memory… Next time you want to buy orange juice, you have to retrieve how much you liked different orange juice brands from your long-term memory. So you have some sort of remembered value. What advertising does is try to change your memory, and replace it with someone else’s memory. And depending on how long ago your experience was, it might actually work that way.”

But corporate cues may be less effective influencers than those closer to home. “Word of mouth would work better because it’s more credible to you,” she says. “In some sense, placebos are like word of mouth… a credible source [i.e. a doctor] tells you this is going to work.” She notes that placebos tend to be more consistently effective in the lab than experiments requiring participants to draw their own conclusions. Also, marketers’ power to shape expectations, and thus experiences, suffers if their message veers too far from the truth. “Marketers are interested in long-term relationships. Even if I trick you into buying something once, you’re not going to buy it again. Marketers do have to provide value, otherwise it doesn’t work and you don’t create expectations.” As an example of what not to do, Plassmann cites the smartphone BlackBerry Torch, which debuted in 2010 to disappointing sales despite what she calls a “super-aggressive comparative ad campaign boasting about its revolutionary quality.” The lesson for companies: Rein in marketing bluster, lest you suffer the fallout from a false expectation.

Hilke Plassmann is Assistant Professor of

Marketing at INSEAD. She is also part of the organising committee of the Consumer Neuroscience Symposium, a satellite symposium of the Annual Meeting of the Society for Neuroeconomics, taking place in Christopher K. Hsee explains how you're Lausanne, Switzerland on September 26th. compromising your happiness by overearning INSEAD’s Centre for Decision Making and Risk Analysis is a co-sponsor of the event. By Dave Nussbaum

Why you're working too hard

Read more at The article above is republished courtesy of INSEAD Knowledge

In 1930, John Maynard Keynes predicted that increases in productivity would allow people to work far fewer hours a century later. We have become much more productive—output per hour worked increased more than fourfold between 1950 and 2012, according to the Bureau of Labor Statistics. But the amount we work hasn’t fallen anywhere near as fast. In the United States, the average working year went from 1,963 hours in 1950 to 1,790 hours last year, a drop of less than 10%. This has prompted some people to wonder, is it time for people to work less? Psychologists are asking a related question: are people overearning, and compromising their happiness in the process? Research suggests the answer to that second question is yes. The pursuit of happiness is one of America’s guiding principles—Thomas Jefferson even put it into the US Declaration of Independence. The problem is that people are not always very good at predicting what will make them happy. That’s partly because we make choices that might seem good at the time, but don’t make us happier.

The issue provides plenty of fodder for psychological researchers. Christopher K. Hsee, Theodore O. Yntema Professor of Behavioral Science and Marketing at Chicago Booth, has spent two decades conducting research at the intersection of psychology, economics, and happiness as a leader in the emerging field of “hedonomics,” a term he coined in a 2008 article with Reid Hastie, Robert S. Hamada Professor of Behavioral Science at Chicago Booth, and Jingqiu Chen of Shanghai Jiao Tong University. “Whereas economics studies how to maximize wealth with limited resources, hedonomics studies how to maximize happiness with limited wealth,” the authors explain. Hedonomists see themselves as providing a complementary approach to a traditional economist’s view of the world, treating happiness almost as a double bottom line. The hedonomist’s goal is to understand why people make mistakes in predicting what will make them happy and to help rethink their choices.

When less is better People often feel one way when they make a purchase, or any kind of decision, but forget that they are likely to feel differently later—what psychologists call “projection bias.” The tattoo a woman wants at age 17 may be less thrilling at age 50. The two-pound bag of pork rinds a man buys when shopping on an empty stomach may seem less appetizing a few hours later. (For more on projection bias, read this article on why it's a mistake to buy a hot ride on a hot day.) The mistake here is that shoppers focus on how they feel at the moment of purchase, and neglect how they will feel when it comes to consuming their purchases. Because people focus on how they feel at the moment of purchase, they can think that more is better, only to find out later that this may not be the case. Say you’re in an electronics store choosing between two flat-screen televisions. You opt for the more expensive model that offers

better definition, which is noticeable when you compare the two televisions side by side. According to Hsee, you would probably be better off buying the cheaper and lower-definition model. That’s because once you get the television home, away from the higher-definition model, you won’t be able to detect the missing pixels—and you’ll have more money left in your pocket. In fact, even when people think more is better at the moment of purchase, sometimes their experience later is actually worse. Hsee finds in a study that people are willing to pay more for an overfilled cup with less ice cream in it than an under-filled one with more when they judge the two servings separately, but not when they judge them together. Imagine you’re at the beach with your family and you go off to buy everyone an ice cream. Presented with the two options, you buy the under-filled cup because it has more ice cream. But think about it from your kids’ perspective: they only see the ice cream serving that you bring them, either an overflowing one or an under-filled one. For your kids, the overfilled cup is likely to make them happier, even though it contains less ice cream. Hsee’s study shows that people, when presented with just one ice cream rather than offered a choice, are willing to pay more for the overfilled cup with less ice cream in it. This suggests that people easily make the assumption that more is better when, on closer examination, that’s not necessarily true. Hsee extends this line of inquiry, ultimately into the workplace.

Testing the theory Are people working too much? A psychological researcher trying to determine the answer would first need to ask, how would we even know? If someone works a lot, she may have perfectly good reasons. Perhaps she wants to save enough money to retire comfortably, to have a cash cushion for emergencies, or to have money to

pass on to heirs. To answer the question, Hsee and his colleagues tried to strip away all complicating factors in order to study the underlying psychology. Doing this is “an advantage rather than a defect or compromise,” says Hsee. His rationale is that if you remove the reasons people have to earn more money and yet still find that they overearn, “that shows the overearning is real.” To find out, Hsee and colleagues Jiao Zhang of the University of Miami, Cindy F. Cai of Shanghai Jiao Tong University, and Shirley Zhang, a Booth PhD student, designed experiments they describe in their published paper as a “highly simplified yet well-controlled miniature experimental paradigm for exploring the issue.” They say the contrived features in the experiments are “crucial for us to control for normative reasons for overearning effects and test for pure overearning tendencies.” The researchers first ran an experiment in which they studied how participants accumulated chocolates. They broke it into two phases: an earning phase and a consumption phase. In the former, each participant sat at a computer and listened to pleasant piano music from the Final Fantasy X video game. While listening to the music, people had the option to simulate work by pressing a button that interrupted the music with a brief, unpleasant noise similar to the sound of wood being sawed. Surely work is more enjoyable than the sound of wood being sawed? Many people like their work, but those people are a minority of the global workforce, says Hsee. From farmers in India and construction workers in China to investment bankers and lawyers in London and New York, many people do not enjoy their jobs but continue to work in order to earn more. “I think [the unpleasant sound] is representative of a lot of work that people don’t particularly enjoy,” says Hsee. “If anything, I think actual work could be more painful.”

The more times a participant pressed the button, the more chocolates she earned. The researchers used the rewards to define “high earners” and “low earners.” High earners were told to press the noise button 20 times to earn a chocolate. The less lucky low earners had to press the button 120 times to earn a chocolate. In the consumption phase, each participant got to enjoy the chocolates she had earned. However, participants had been told before the experiment began that they were not permitted to take any leftovers with them when the experiment was over, which eliminated a reason to earn more than they could eat. Participants had no need for a cushion in case of an emergency, no ability to pass their earnings on to others, and no reason to say that “working” was enjoyable. In the earning phase, participants consistently pressed and repressed the button to simulate work. This tendency was particularly pronounced among high earners, who only had to press the noise button 20 times to earn a chocolate. They earned 10.7 chocolates on average, but ate just 4.3 of them, letting the rest go to waste. People who had to press the noise button 120 times for a single chocolate did not show the same pattern of overearning; they earned 2.5 chocolates on average. Even though high earners were six times more productive than low earners, high earners did not recognize that they could afford to relax and earn a little less. Hsee says this indicates mindless accumulation. Participants focused too much on their immediate context, listening to noises in order to earn chocolates. They thought little about the experience of actually enjoying the fruits—or in this case chocolates—of their labor. People focused on the immediate question of whether or not to press a button and failed to think about how much chocolate they wanted. They mindlessly pressed the button until they got tired of it rather than deciding they wanted to earn, say, five chocolates, earning that many, and then relaxing. As a result, they wound up pressing the

button more than necessary to earn the number of chocolates they ultimately ate.

Think first, then work Would a simple reminder inspiring people to think about how many chocolates they actually want have reduced their tendency to mindlessly accumulate chocolates? To find out, the researchers performed a second study, which they began by first asking half of the participants to think about how many rewards they wanted to earn. The researchers introduced another twist into the experimental paradigm: this time, participants had to consume all the rewards they earned. As the researchers couldn’t ethically force-feed chocolates to participants, they instead had participants earn jokes that appeared on a computer screen. The researchers required participants to “consume” all the jokes they earned within a three-minute window. Because the jokes appeared automatically, this meant that if a participant earned too many jokes, they would appear and be replaced by a new joke very quickly. The optimal number of jokes for participants to earn averaged out to 6.6. If a participant earned that many jokes, she had time to read each and enjoy a good chuckle. If she earned more, however, each joke would scroll by so quickly that she wouldn’t have the time to read, process, and chuckle. The prompt had the desired effect. Participants who launched into the study unprompted earned 11.3 jokes, far more than they were able to enjoy. But participants who first thought about how many jokes they wanted earned an average of 6.9 jokes, just over the ideal amount. More importantly, those participants, when asked at the end of the study about their level of happiness, reported being significantly happier than those who had made no predictions. When people paid just a little more attention to how much they

thought they would want in the future, rather than focusing only on the immediate decision about whether or not to work, they worked less and became happier.

From lab to reality Hsee notes that the current research is based only on simple laboratory experiments, but it provides initial evidence that people overearn without obvious reasons. The results illustrate a behavioral tendency to mindlessly accumulate goods, and it may reveal itself in more complex situations such as the workplace. Even when people in a lab are productive enough to be able to afford to stop working for chocolates, they continue accumulating them. Similarly, he says that the study’s findings suggest that even when people can afford to stop working for money, they may continue accumulating money without pausing to consider whether they really want it. Hsee’s lab experiments may be contrived, but nevertheless test a hypothesis, which could be further tested in field experiments. Hsee hopes that people qualified to run field studies will take up the question of overearning. Field studies will be muddied by complicating factors and can’t offer the clean conclusions that a lab experiment can, but they will reflect reality. “We’re not claiming our result directly applies to real life, but we suggest it’s a possibility,” says Hsee. While the lab results highlight an overearning tendency, they also suggest an antidote, Hsee says. If you get the opportunity to do extra work and earn some more money, for example, think about whether or not it’s worth working those extra hours. The additional work could be enjoyable, or it could advance your career, but make the decision consciously. The research can’t tell you whether or not you should work less, but it does suggest that if you take the time to ask the question of yourself, you’ll be able to come up with a good answer.

Works cited

Christopher K. Hsee, “Less is better: When lowvalue options are valued more highly than highvalue options,” Journal of Behavioral Decision Making, 1998.

‘Small Box’ Retail: Passing Fad or Christopher K. Hsee, Reid Hastie, and Jingqiu ‘Eureka Moment’ for eChen, “Hedonomics: Bridging decision research with happiness research,” Perspectives on Commerce? Psychological Science, 2008. Christopher K. Hsee, Jiao Zhang, Cindy F. Cai, and Shirley Zhang, “Overearning,” Psychological Science, 2013. The article above is republished courtesy of fall-2013/why-working-toohard?cat=business&src=Magazine Now that consumers can shop online for goods and services at any time of the day or night, the next challenge is how to navigate through the bewildering array of product choices available in almost any category. A recent phenomenon called ‘discovery commerce’ is trying to help. Using subscription services, companies are offering a unique and personalized buying experience: Sign up with us, and once a month a thoughtful surprise will land on your doorstep. It could be a box full of cosmetics, snacks, blouses or shoes. Variations on the format are rolling off the line. For $20 a month, NatureBox promises healthy, minimally processed snacks — cranberry almond bites, vegetable chips and whole-wheat figgy bars. Stork Stack, for $27.99, will send a box of items for baby “selected with love by our team of Moms.” JewelMint flashes monthly choices from “a versatile collection inspired by the runway, vintage jewelry and on-trend celebrity style.” Discovery commerce ignites an emotional charge

that’s key to the experience. “Why do people buy?” asks Wharton marketing professor Barbara E. Kahn, director of Wharton’s Jay H. Baker Retailing Center. “They have a need or a want …. But the subscription model introduces you to a new fun treasure hunt for things.” For others, it is more practical. Parents and others are busy and not necessarily equipped to research everything out there. So why not let someone else sort through new products and customize choices for you?

products that I love and use until they are gone.”

“We’re selling a solution,” says Katrina Lake, founder and CEO of Stitch Fix, a San Franciscobased service that, for a $20 monthly “styling fee,” sends five hand-picked garments and accessories to try on. Any number can be bought or sent back, but customers get a 25% discount if they keep all five. “There is so much choice — how do you even begin to navigate it all, how can any one person be an expert in everything? As the Internet becomes an endless catalog, how do you help people find things?”

For her, the surprise element is important. “I love coming home every month [and finding] a package waiting for me. I love getting letters, and I don’t get letters from people anymore because of email.”

Some consumers clearly relish the help. “I am obsessed with Birchbox,” says Emily Cheramie Walz, a young mother and nonprofit consultant from Elkins Park, Pa. Birchbox is the discovery platform that managed one of the neatest tricks in retail: divorcing from each other the long-married words in the phrase “free sample.” For $10 a month, a box of lip gloss, shampoo, face cream and the like is tailor-assembled according to a profile developed through a questionnaire. “It’s marketing that women actually pay for,” read a headline in PandoDaily, the Silicon Valley web publication that covers start-ups. “As the Internet becomes an endless catalog, how do you help people find things?” –Katrina Lake “I don’t have the time or interest to invest in beauty products for myself, and I am not all trendy, but I love getting it,” says Walz. “Every month it comes, and all the products are individually wrapped and perfectly presented. Out of every box, there are always one or two

The manufacturers whose products Birchbox packages consider the platform a way to whet appetites so customers take the next step and buy more. Birchbox says that more than half of its subscribers have purchased a full-sized item from its site. But Walz has a different calculation in mind: “I would never go out and spend $100 on a full-sized product, so I get everything I need by spending $100 over the course of a year.”

Wharton marketing professor Peter Fader, codirector of the Wharton Customer Analytics Initiative, recognizes the emotional element, but as far as discovery commerce being a true innovation, he puts himself down as a skeptic. A good deal of the interest around discovery right now, he says, is simply because some people are, well, just discovering it. “Yes, it is tapping into a whole psychic question of the discovery, the surprise, the delight — all that stuff is true, but it is being over-hyped. I remember way, way, way, way back in the 1990s, the first time I ever got an email from a company, from Borders or something, I said, ‘Wow, they sent me an email!’ People look back now on that and think how naïve we were. I’m not going to write it off it completely. There will be a set of people as well as services that are extremely wellsuited to it, but I don’t think it will ever achieve market domination.” It is, however, a market some consider worth dominating — which is to say, still small but promising. E-commerce in 2012 accounted for 5.2% of total retail spending in the U.S., up from 4.7% in 2011, according to the U.S. Commerce Department. Sales totaled $225.5 billion in 2012, up 15.8% from $194.7 billion in 2011.

To Fader, there is something about discovery commerce that rings a bell. “I was thinking of the Avon Lady — a person who comes to your door with a set of items just for you. [That's] a model that worked for a long time. Sometimes it was a really, really good sales person who would be able to match and shape your preferences. But all too often, they convinced you to buy whatever junk they were pushing that month.”

asks Seattle retail consultant Sally McKenzie. “Is it through new categories? Moving to more traditional non-subscription methods of selling? I think the code has yet to be cracked, but there are some sharp companies making a go of it.”

There is an even earlier analog to the Birchboxes and GlossyBoxes of today. An educational program called Things of Science used essentially the same model, shipping science kits to homes and science clubs across America to satisfy young appetites for adventures in optical illusions, fossils, aerodynamics and crystals. A non-profit venture, it had a good run — from 1940 into the 1980s.

You can’t rely on your first hit to sustain a true, long-term business, says Eurie Kim, a principal at Forerunner Ventures, an early Birchbox investor. “Subscription may always be a feature some companies offer, because it makes sense in relation to the product they are selling or the demographic they are catering to. But in the end, it’s all about developing authentic relationships with customers and creating a brand that they connect with — ideally [one] that they want to be a part of beyond … the individual products. Without this more elevated bar, customers will tire quickly of the same proposition and find another company that will satisfy their needs more holistically.”

Gaining Momentum The size of the current crop of discovery platforms is hard to measure, but the format, several years old, appears to be gaining momentum. ShoeDazzle was founded in 2009, enlisting television personality Kim Kardashian as its “chief fashion stylist.” It has racked up several rounds of capital funding worth tens of millions of dollars and undergone many reinventions. Birchbox’s 2012 revenues were just under $40 million, up from $5.5 million the year earlier, according to Crain’s. NatureBox co-founder Ken Chen declined to be specific about sales or profits, although he says that the number of boxes shipped this year is expected to grow 20-fold, to one million from 50,000. “Since raising a couple of rounds of capital, the brand has really taken off,” he notes, adding that the average subscriber stays a little more than a year. Some say that after the initial novelty wears off, discovery platforms will need to evolve. “How do they continue to bring customer value after that sixth or seventh box of new stuff arrives?”

“How do they continue to bring customer value after that sixth or seventh box of new stuff arrives?” –Sally MacKenzie

Chen sees potential ways of growing the business, including diversifying into different kinds of products. “But we are focusing on snacks now. It’s a $64 billion industry. The goal is to become a household brand in America.” The success and visibility of Birchbox, according to Wharton marketing professor David Bell, has inspired other companies to get into the act. The format, though, has the greatest promise in certain specific product categories.

Wine, Cheese and Shaving Cream “The characteristics are, first, something regularly needed for consumption, like contact lenses or shaving cream,” says Bell. “Second, it could be a product base in which there is variety to it and it is ‘giftable’. I gave Citrus Lane [care packages for parents] to some people who recently had kids. The third category is for

people who want to learn something, like wine or cheese, that’s hard to navigate. That’s more of the sample model — sort of, ‘Help me curate my tastes.’” “The idea of paying a company to help me discover products that will likely appeal to me is very attractive,” adds McKenzie. “At the same time, bringing this kind of discovery shopping to the web gives manufacturers and retailers an amazing opportunity to capture and use valuable customer data and insights that make the discovery experience highly enjoyable for the shopper and allow the retailers and manufacturers to develop better products in a more efficient manner than traditional offline methods.” The successful model is also built on a high degree of trust — making sure that the customer feels he or she is being sent products truly customized to tastes and interests, and providing access to human contact when needed. Several online reviewers vent about occasional frustrations when customers attempt cancellation but the subscription service “auto-renews” credit card billing. “No matter how much we capitalize the B and D in big data, most of the factors going into your next decision about what to buy are going to come from some random factor.” –Peter Fader Stitch Fix’s Lake says that the platform unravels mysteries for both the business and customer. Having items at home allows the customer to try on a prospective garment with already-owned ones to see how they might complement each other. Through repeated points of contact with the customer, Stitch Fix gathers information about taste, size, what has worked and what has not. “We borrowed a lot from Pandora [personalized Internet radio] in terms of algorithms and how that works behind the scenes,” she says. For example, “does this fit on somebody with large

hips, or [is it] for someone who loves classic clothes?” Fader doubts that this kind of knowledge is ultimately discoverable. “This is going to sound really strange, but there is a metaphor to the human genome project. There’s this belief that once we get into people’s DNA, we are going to know everything there is to know about them. It has not worked out that way. There are so many contextual factors [that] it’s really hard to know what any one human being is about. “No matter how much we capitalize the B and D in big data, most of the factors going into your next decision about what to buy are going to come from some random factor, maybe something that occurs to you on the street or your kid tells you,” Fader adds. “Detecting a eureka moment is very different from trying to create a eureka moment.” "Republished with permission from Knowledge@Wharton (, the online research and business analysis journal of the Wharton School of the University of Pennsylvania."

ORGANIZATIONAL COMPLEXITY: THE HIDDEN KILLER Four steps to reduce complexity By IMD Professor Michael Wade November 2013 There’s no questioning the fact that companies today are faced with growing complexity. Environmental, political, and competitive changes conspire to create a challenging and complex operating environment. In response to these ever evolving pressures, companies often try to mirror external complexity in their internal environments. For example, they may respond to more sophisticated customer demands by creating tailored products and services. They may address the need for cost cutting and innovation by building matrix organizational structures. They may attempt to add new processes to address evolving market needs. In isolation, each of these responses makes sense, but in combination, they can significantly affect organizational performance. Take BMW for example. At the end of 2012, the automotive giant announced new record figures for sales volume and revenues, up a whopping 12% over 2011, as well as the best operating profit in the company's history. Yet, despite these positive results, shares in the company were lower than they were at the beginning of the year. How can you explain BMW’s strong top-line growth in a tough market, combined with a lower stock price? The answer lies in the fact that revenues grew significantly more than profits. In

fact, profits were flat on the year, and post-tax return on sales actually dropped. BMW attributed the flat profits to an increase in personnel, higher innovation costs, and intense competition. While technically true, there is a more subtle culprit, one that underlies all these factors: higher complexity. More people, more R&D, and more products equal more complexity, which leads to higher costs, which, in turn, bring down profitability. In the current business environment, there are several common causes of complexity: a proliferation of products and/or services, inconsistent and overlapping processes, misaligned incentives, byzantine organizational structures, and poorly articulated strategies, often in some form of combination. In the case of BMW, the company increased its product line steadily over the past decade. As new models such as the 1 series, 6 series, and various subbrands such as the GT and X models were added, complexity inevitably started to rise. More people were needed to design, manufacture, support, and sell all those new models and costs rose as a consequence. How should organizations deal with complexity? The answer depends on the type of complexity being considered. Some complexity provides competitive differentiation; this is good complexity and should be optimized. Most complexity, however, does not add value and needs to be reduced or eliminated. There are four common complexity culprits, and they can be reduced by following these steps.

Step 1 Establish a clear strategic direction. Nothing stimulates complexity more than an unclear or inconsistent strategy. Vodafone U.K. was unprofitable in the mid-2000s, despite strong topline growth. A new CEO radically simplified the strategic process, allowing each of the top 100 managers to maintain a list of no more than 5 strategic goals for each quarter, all of which had

to be aligned with corporate priorities. These goals were completely transparent to the organization’s management team. As a result of an extensive simplification program, Vodafone UK has become highly profitable in one of the world’s most competitive telecommunications markets.

Step 2 Rationalize product and service lines. In most cases, the Pareto principle applies – no more than one quarter of products or services account for more than 100% of profits. Seen another way, three quarters of products or services actually destroy value. Firms could increase profits just by ceasing to offer products or services that do not add value. Compare RIM and Apple’s approaches to mobile phones. Apple has typically sold 2 generations of phones in 2 colours with 2 quantities of memory. By contrast, RIM has launched 37 versions of its Blackberry line since 2008, each with a variety of configurations. The company, in a statement, said it did not know how many models were currently on the market. Certainly, there may be strategic reasons to maintain a few promising, but as yet unprofitable lines of business. However, we maintain that firms should be impatient for profits, even from the highest potential opportunities. Interestingly, Apple has recently added to its offerings, with the iPhone 5C and iPad mini, with a corresponding increase in complexity.

Step 3 Streamline your processes - a major source of complexity. Processes are often inefficient, nonstandard, or duplicated across departments. Process simplification and standardization programs can go a long way towards reducing complexity. Nestlé went through a multi-year process of process rationalization in order to reduce value chain complexity. Nestlé’s process was sometimes painful, and often deeply unpopular, but the results have been dramatic.

Top managers now have a transparent global view of production and sales on a continuous basis. A key challenge is to balance the desire for central control with the need for local flexibility. Most processes can be standardized, while a few should be allowed to vary based on local conditions. A clear process governance framework is needed to facilitate the necessary change.

Step 4 Align personal incentives with organizational goals. A major source of complexity comes from people acting in their own interest to maximize personal gains. This self-promoting behaviour adds huge amounts of hidden complexity. A common example is incentives for growth. Many organizations reward increases in revenue, but as we can see from the BMW example, higher revenues do not always translate into higher profits. In fact the opposite is often the case. New products need to be designed, produced, stored, shipped, maintained, serviced, and so on. Elevated complexity is a chronic and endemic problem in today’s organizations. Like high blood pressure or elevated cholesterol, it may be hidden from view, but still dangerous. To maintain a healthy company, it’s important to have a clear direction. You should rationalize your product and service lines as well as streamline your processes. And, aligning personal incentives with organization goals is key. Together, these four steps will help to ensure a long (and less complex) life expectancy for your organization. Michael Wade is professor of innovation and strategic information management at IMD. He is Program Director of Orchestrating Winning Performance and teaches in IMD's Breakthrough Program for Senior Executives. The article above is republished courtesy of

Disciplined Disruption The Art and Science of Meaningful Innovation Luke Williams assumed his role as executive director of the Berkley Center for Entrepreneurship and Innovation in September 2012. Also clinical associate professor of marketing and innovation, he is a fellow at frog design and a leading consultant and speaker on disruptive innovation. He is the author of Disrupt: Think the Unthinkable to Spark Transformation in Your Business (FT Press, 2010). Williams shared his thoughts on successful innovation and how to teach it. You encourage people to think outside the box in order to make new connections that could lead to disruptive (and successful) products. How is your way more effective than the old-school technique of brainstorming? The brainstorming method relies on participants saying anything that comes to mind, in response to a loosely defined focus, with the hope that something might just prove useful. That sounds reasonable. The problem is that the most easily conceived ideas are the most familiar ones. As a result, more often than not, the first ideas out of people’s mouths are stale clichés – and the fundamental sin of any disruptive idea is to be a cliché. To break away from clichéd thinking, you need to develop a habit of looking for alternative ideas instead of immediately accepting the most obvious approaches. Inspiration for breakthrough ideas often happens in the periphery, in analogous but not necessarily traditionally competitive categories. Disruptive thinking is about paying attention to what’s not obvious and thinking about what usually gets ignored. How do you encourage people to make those peripheral connections? It’s always a good tactic to look for examples of how a challenge has been addressed in products or services outside of your business. The goal is

to look closely at the unconnected example and determine how you could apply the entire idea, or part of it, to your needs. Take the Nintendo Wii’s handheld controller, which integrates the player’s movements directly into the video game. The inspiration for the motion controller wasn’t other video consoles, but a completely unrelated source: the accelerometer chip regulating your car’s airbag. Airbags respond to sudden changes in movement caused by accidents. Nintendo wondered if it could combine the accelerometer used by airbags with a handheld controller for video games. In other words, if you swung the controller like a tennis racket, could a “virtual you” on the screen swing as well? Is there a difference between disruptive and innovative? There is. You could argue that, today, there’s actually too much innovation going on. By clinging to the “innovate or die” mantra, businesses have made it extremely difficult for customers to distinguish between meaningful change and superficial novelty. With an excess of similar offerings all claiming to be “innovative,” it’s nearly impossible for businesses to get their products noticed and command a premium for them, because people are usually most comfortable with what’s most familiar – and the product, service, or business model they’ve experienced most often is the one that seems intuitively right. I’ve watched too many clients spend huge amounts of money and resources trying to gain an edge by making incremental changes to their existing products in the name of innovation. It’s a big mistake, because they find themselves on an ever-narrower path. Eventually, they reach the path’s end, and by then their customers have forsaken them for a new offering nobody saw coming. Incremental innovation is important for sustaining a business, but companies simply cannot afford to wait until they’re backed into a corner to take disruptive risks. Why do so many companies fail at continuing to

be innovative? “Innovation strategy” processes can be paralyzing, often because companies require consensus at every step. The well-meaning intention is to ensure that the idea is aligned with strategy, allow the team to create buy-in, and give senior executives a variety of options. Usually this innovation process starts off well, but, inevitably, companies lose momentum and motivation – especially highly successful organizations. They get so mired in the complex details they forget about “creative destruction” – the need to fundamentally question their biggest achievements. Instead of stimulating innovation, they end up stifling it. Is disruptive thinking generally or necessarily the province of start-up companies? Leading disruptive change in an industry is what start-ups and small-scale enterprises excel at. But it can be learned and applied just as effectively by large organizations and industry incumbents – in fact, by anyone willing to challenge the status quo. The goal for any organization – whatever size – should be to generate a steady stream of ideas that alter the trajectory of a business and revive stagnant markets or reinvent the competitive dynamics of an industry. Disruptive thinking is the business equivalent of a cookbook that provides the framework and motivation to discover and execute bold new recipes. What’s the greatest challenge people face when introducing disruptive ideas, and how do you deal with it? The greatest challenge is selling your disruptive solution to the people within the organization or external stakeholders who control the purse strings. This is not easy. Innovators and entrepreneurs should understand that most people don’t adopt a disruptive idea because it’s disruptive, but because they believe in the value it delivers. You may have the best idea, but if you can’t persuade people why it matters, it’s not

going anywhere. In my experience, most people completely waste their opening moments – the most important ones in the presentation – by going broad instead of deep. A good pitch always starts by creating empathy (“Why should I care?”), continues by building tension (“I’m curious to see where this is going”), and finishes by turning your audience into believers (“Hey, this is great. How do we implement it?”). Can disruptive thinking be taught? How? The good news is that schools around the world are already teaching disruptive thinking. The bad news is that, instead of being taught in MBA programs, this new thinking style is taught in design schools. The problem is that design and business logic exist in parallel universes and rarely come in contact. As a result, both disciplines suffer. Business schools teach how to analyze but not how to create compelling emotional connections, while design schools teach how to come up with those connections but not how to ensure they’re commercially viable. Either one by itself is nice, but to thrive in today’s business climate, you’ve got to have both. We need to find a way to fuse the analytical rigor that has been the centerpiece of business competition for the last decade with the fluid, intuitive process of design. Tell us about the new curriculum you’ve introduced at Stern. The curriculum is focused on helping students develop ways of thinking very different from those they would learn in a typical MBA environment. “Innovation and Design,” a 12week course, is a fast, agile approach to collaborative innovation that maintains the right level of tension between fluid intuition and logical rigor, and is intended for people with no previous background or training in – or even exposure to – innovation and design. With such a diverse group, we had to make the process accessible to everyone. No esoteric jargon or complex charts. Also, no brainstorming with

water pistols, beanbags, and other supposedly creativity-stimulating methods. By the end of the course, they’ve learned the simple-yetthorough process of disruptive thinking to solve real-world problems and create business opportunities. What’s your vision for the Berkley Center for Entrepreneurship and Innovation? The Berkley Center has always existed as a catalyst for new venture creation. But in our fast-changing world, when business certainties are no longer certain, the ability to imagine things as they never were and act like an entrepreneur is an essential part of every student’s skill set – regardless of whether they aspire to build a start-up or lead a Fortune 100 company. In this way, my high-level vision for the Berkley Center is that it represent a mindset – a rebellious instinct to discard business clichés and remake the market landscape. An eagerness to target situations where the competition is complacent and the customer has been consistently overlooked or underserved. The Berkley Center will initiate students into a way of thinking that passionately believes it is possible to change an entire industry, turn it on its head, and make sure it will never be the same again. The article above is republished courtesy of

Beware the discretionary choices of arbitrators by Gus Van Harten* Investment treaty arbitration has unfolded rapidly in recent years. Some observations arising from analyses of arbitrator awards are highlighted below.[1] They support broad conclusions that: • arbitrators reviewed a wide range of legislative, executive and judicial decisions but typically did not exercise judicial restraint in various ways associated with domestic and international courts; • arbitrators typically adopted expansive approaches to their authority and to investor entitlements to compensation, especially where the claimant had the nationality of a major Western capital-exporting state; and • decision-making power was highly concentrated among arbitrators, suggesting a need for closer scrutiny of how the most active individual arbitrators have expanded the meaning of investment treaties and corresponding principles of state liability. First, in virtually all of the 162 cases coded on the issue, arbitrators reviewed an executive measure and, in 37% and 44% of cases respectively, the dispute involved a domestic legislative or judicial decision. In at least half of the cases, arbitrators reviewed measures that appeared general in application – i.e. they affected actors other than the claimant – as opposed to measures that targeted the claimant specifically. Yet there was little evidence that arbitrators demonstrated restraint in ways commonly adopted by domestic and international courts.[2] For example, there was little or no evidence of restraint

due to the relative capacity of an executive agency, the role of a contractually agreed forum, or a treaty-based waiting period or fork-in-theroad.[3] Likewise, tribunals often reviewed domestic laws but there was no evidence of restraint at a general level due to the relative accountability of a legislature. Indeed, arbitrators were found to have invoked concepts associated with judicial restraint, such as balancing and proportionality, more often when expanding than when limiting their authority. Second, the field has apparently offered arbitrators a fertile environment for creative lawyering alongside expansive approaches to their authority. This was evident in the coding of jurisdictional and substantive issues that involved, for example, the multiplication of corporate nationality as a possible gaming strategy by claimants, the definition of what qualifies as a protected investment, the risk of parallel proceedings, and the meaning of substantive standards, including, most notably, indirect expropriation and fair and equitable treatment.[4] The tendency toward claimantfriendly expansive interpretations increased significantly where the claimant was from the US, UK, France, or Germany.[5] Third, power was highly concentrated among arbitrators. For example, from a review of arbitrator resolutions of contested legal issues, it emerged that – of 247 individuals appointed as arbitrators – the 24 most active individuals executed about half of the issue resolutions and tended much more heavily toward approaches that expanded their authority. Other researchers have reported findings that 12 arbitrators were present on 60% of 263 ICSID tribunals and that 15 arbitrators were present on 55% of 247 investment treaty tribunals.[6] These observations are descriptive, approximate, and subject to important limitations outlined elsewhere.[7] They are presented here to give a sense of how investment treaty arbitration

appears to have evolved due to the discretionary choices of arbitrators. In policy terms, the observations indicate a need for closer scrutiny by a range of actors – such as national associations of legislators or judges – of how arbitrators exercise their power and about whether their performance accords with considerations of public accountability, judicial restraint and basic even-handedness. In the meantime, states facing a reasonable prospect of investor claims, or seeking protection for nonWestern investors, should systematically assess their anticipated exposure or protection and consider their options to avoid downside risks. “Gus Van Harten, ‘Beware the discretionary choices of arbitrators,’ Columbia FDI Perspectives, No. 110, December 9, 2013. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (” A copy should kindly be sent to the Vale Columbia Center at *Gus Van Harten ( is an associate professor at Osgoode Hall Law School of York University in Toronto. The author is grateful to George A. Bermann, Juan Carlos Boué and Kyla Tienhaara for their helpful peer reviews. The views expressed by the author of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.

[1]The observations arise from keyword-based searches and analyses of publicly available awards and other materials in known investment treaty cases. An outline of the methodology is provided in the author’s forthcoming book, Sovereign Choices and Sovereign Constraints: Judicial Restraint in Investment Treaty Arbitration (Oxford: OUP, 2013).

[2]The exceptions were a minority of cases, especially under NAFTA, in which the arbitrators signaled general restraint due to the residual role of domestic courts or in the specific interpretation of some substantive standards. By Yaniv Dover assistant professor of business administration Published Oct 11, 2013 [3]For example, it was found that tribunals allowed investor claims to proceed in 14 of 19 Yaniv Dover says a product's early sales data may cases where the claimant had not waited the required period before bringing the treaty claim and in 15 of 17 cases where the claim was subject to a fork-in-the-road clause that appeared not to have been satisfied by the claimant.

The Connected Consumer

[4]Gus Van Harten, “Arbitrator behaviour in asymmetrical adjudication: An empirical study of investment treaty arbitration,” 50 Osgoode Hall Law Journal 211 (2012). [5]Ibid. reveal how consumers influence the buying decisions of others. Picture a tired hiker stopping to rest beneath a tree on a windy day. Before she sits down, she looks up to see if there are any loose branches the breeze is likely to dislodge. Just by studying the way a branch moves in the wind, she may observe how strongly connected to the tree it is and the likelihood that a gust of wind may cause it to fall on her head. The hiker’s story is an expression of a famed proof in statistical physics called “The Fluctuation-Dissipation Theorem.” This theory says that under some conditions, there is a direct connection between [7]Supra notes 1 and 4. seemingly unimportant “noise” in a system and the system’s inherent structural properties. By For further information please contact: Vale watching the seemingly unimportant motion of Columbia Center on Sustainable International the branches, the hiker may be able to make a Investment, Shawn Lim, determination about the health and strength of the or trunk high above her. Physicists can use this theory to deduce the properties of a liquid by The article above is republished courtesy of observing the random “noisy” motion of micro particles immersed in it. This same idea may also be able to help forecast a product’s sales. Myself and colleagues Jacob Goldenberg from IDC Herzelia and Danny Shapira of Ben Gurion University, both in Israel, have hypothesized that [6]Jose A.F. Costa, “Comparing WTO panelists and ICSID arbitrators: The creation of international legal fields,” 1(4) Oñati Socio-Legal Series 11 (2011); Pia Eberhardt and Cecilia Olivet, Profiting from injustice: How law firms, arbitrators and financiers are fuelling an investment arbitration boom (Brussels/Amsterdam: Corporate Europe Observatory and the Transnational Institute, 2012), p. 38, available at d/profitingfrominjustice.pdf.

the way some sales data fluctuate over time are directly related to a major structure through which products spread: social networks. How products spread through social networks is something marketers have almost no information about. Companies may have the names of some of their customers and occasionally information about what other products they like to buy. But they lack data on how their customers’ purchases affect the buying behavior of others they know. This sort of research is particularly useful to managers just after a product launch, when there is only very limited sales data available. During that delicate time, when some managerial decisions may prove critical to the fate of a product, uncertainty prevails amidst the drip-drop of small-numbers, early-stage sales. We’ve conjectured that this seemingly irrelevant early-stage “noise” can be used to tell us something about the fundamental properties of the social networks through which the new product is spreading. This matters because the social networks through which successful products spread may be fundamentally different than the social networks through which failed products spread. Take athletic shoes, for example. One teenager may pressure his parents to buy a new pair of shoes because the two best players on his soccer team also have them. Another may get them because his grandmother received an ad for them in her Sunday newspaper just before his birthday. If companies know their early sales are traveling through networks like the first, rather than the second, they can quickly devote marketing resources to a product that’s likely to be a hit. My colleagues and I expect that we can tell the difference between the two phenomena simply by observing mathematical patterns in sales. The statistical pattern of sales of a product that spreads through advertising and promotions to a wide audience should look different than those that move quickly through a tightly-knit group of people like a soccer team. Like the hiker who can’t see how strongly a branch is attached to a tree but can conjecture something about it from how it moves in the wind, we should be able to learn something about a product’s movement through a social network without ever observing who the shoe customers are or which soccer team they play for. These patterns in early sales data carry the footprint of the products’ influence network—and thus clues to its fate. See more at: The article above is republished courtesy of

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