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Shopper a stops by the grocery store after work and buys three boxes of dried pasta. The next morning, Shopper B buys two cases of soda. How did the two shoppers decide what and how much to purchase? How did the store’s manager decide which products to stock in the first place? And what determined their prices?
“We know that people are not rational. So if they are not rational, how are they making decisions?” asks Kay-Yut Chen, a nationally renowned researcher who recently joined the UT Arlington faculty. He is part of the emerging field of behavioral and experimental economics, which tries to explain why people make the decisions they do in business and how we can predict those decisions. Such data-driven insights are increasingly valuable to businesses looking for ways to improve their bottom line.
In his book, Secrets of the Moneylab: How Understanding People Will Increase Your Profits, the information systems professor explores the invisible forces, such as the desire for fairness and power of reputation, that control the tide of business.
“My work is essentially discovering what makes people tick. The mind is the last scientific frontier, and I study its role in business,” Dr. Chen says. “The future of business is science, and we need to have a community of business executives well-versed in the field. The results could change the business world.”
To tackle these subjects, Chen and other behavioral economists employ a combination of experimental and field research. The former usually involves posing a question or problem to a controlled group, asking how each person would respond, and studying the results. Though this sort of research allows Chen to pinpoint certain behaviors, it doesn’t ensure that the responses are translatable to the real world.
So he also turns to field data, collecting information and analytics from businesses to capture what really happened in various scenarios. This work has benefited from the increased use of computational modeling in numerous disciplines. Often referred to as “big data,” it expedites research by allowing scientists to conduct thousands of simulated experiments by computer. This drives significant advances because it provides a way to mine and curate the vast amounts of electronic data now being collected and stored thanks to advances in technology.
Above Illustration: Businesses small and large are turning to analytics to make decisions and avoid risk.
Still, there are drawbacks to field research.
“In experimental research, the data is well-controlled, but you don’t know if it is valid outside the experiment,” Chen explains. “With field research, you can determine exactly what happened. But it is a challenge to account for all outside factors—like what a competitor is doing—because the subjects are not always being observed. Together, though, the two methods make a powerful combination.”
College of Business Dean Rachel Croson says Chen’s work is at the forefront of behavioral economics, as it seeks to reveal what people actually do rather than what economic theory says they should do.
“Dr. Chen’s research provides economic insights that help companies think about how they should structure their firms, conduct their production processes, and run their forecasting,” she says. “It can help businesses reduce loss, set pricing, allocate resources, and thrive financially, making it increasingly valuable to small and large businesses that are turning to analytics to make sound decisions and avoid risk.”
Kay-Yut Chen's work tries to discover why people make the choices they do.
Prior to joining UT Arlington, Chen spent 20 years working for research labs at Yahoo and Hewlett-Packard, providing the companies with key analytics to improve decision-making at all levels, from entry to executive. At HP, he established the first-ever experimental economics laboratory inside a corporation.
Chen was drawn to academia because he wanted to explore broader research interests and teach a new generation of business leaders, but he still collaborates with the two companies. In one ongoing project with Yahoo, he’s examining the behavior of advertisers and developing a model to predict how and where everyone from small mom-and-pop businesses to international companies will spend their limited dollars.
For another, he’s creating a framework to predict the efficiency and success rate of Yahoo’s sales representatives based on their current workloads. The model, which will roll out later this year, will help the company prioritize projects, juggle workloads, and make trade-offs to help sales representatives meet targets. While this framework is highly customized for Yahoo, the technology could have applications for other institutions.
At Hewlett-Packard, executives asked Chen to test the idea of rewarding retailers for being among the top three in sales of HP products. Initially, the idea sounded like a positive way to drum up healthy competition. But Chen’s experiments showed two faults with the plan: First, most participants, playing the role of retailers, saw they had little chance to win and quickly gave up. Second, the sure winners had no incentive to improve their numbers since they were likely to earn the bonus anyway.
This phenomenon—when the results of behavioral studies defy conventional wisdom—happens frequently. For example, many in business assume customers will appreciate having more choices. However, numerous studies have shown the opposite is true. When presented with too much variety, people become paralyzed and walk away without making a purchase.
“That sort of knowledge has huge implications for businesses as they create marketing and work on product development,” Chen says. “Having this sort of information at their fingertips allows them to run more efficiently and more effectively.”
Chen’s work spans numerous business disciplines, from operations management to marketing, making it particularly attractive to corporations that need a holistic perspective. His research has been featured in Nature, Entrepreneur, The Wall Street Journal, Scientific American, and other influential publications.
As Dr. Croson notes, his long career in industry and background in economics will be a boon for UT Arlington.
“Dr. Chen’s research has produced tangible results for his employers and generated millions of dollars for the companies he worked for,” she says. “The experience and viewpoint he brings will be extremely valuable for our students.”
