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Rice University research finds that investors and executives are more likely to help out those from their alma mater

According to research done by a Rice University professor, businessmen and women are more likely to help out colleagues who attended the same university. Pexels

Friends help each other out, right? Imagine young men or women racing down a New England playing field, effortlessly passing a lacrosse ball on their way to the goal. Now imagine some of those old friends as CEOs of large firms, and others as managers of mutual funds. Do they still have each other's backs?

That was the question Rice Business Professor Alexander W. Butler explored in a recent paper. What he found makes perfect sense given human nature, and raises serious questions about the dynamics of the financial market.

Yes, Butler and his coauthor, Umit G. Gurun of the University of Texas at Dallas, found, CEOs of publicly traded corporations and mutual fund managers from the same schools do appear to help each other out. It may be conscious or unconscious: they do what friends do the world over. But the effect on the market can be profound.

To trace the role of social connections in the world of corporate and finance, Butler and Gurun studied how mutual fund managers vote when shareholders proposed limiting executive pay. They cross-referenced these data with information about the educational background of the firms' executives and of the mutual fund managers who took part in the votes.

When voting fund managers and an executive went to the same schools, Butler found, those halcyon days at A&M or Wharton clearly corresponded to fewer votes to limit executive pay.

Now, this may reflect all kinds of things. Shared school ties could mean fund managers have more relevant information about a firm's CEO and his or her value. The shared culture and vocabulary of a school environment might ease information flow between a CEO and managers. But there is also another possibility: Perhaps the value a mutual fund manager places on a CEO's firm has nothing to do with the company's actual value. The manager may simply support him because he's a school friend.

CEOs weren't the only ones to benefit from old-school ties. Well-connected investors prospered too. When a fund manager shared a school background with a given CEO, Butler found, the fund outperformed funds whose managers weren't part of the network. For investors as well as CEOs, in other words, school ties with decision makers at mutual funds raised the chances of a winning outcome.

So a shared school or social background leads to well-paid CEOs, successful fund managers and happy investors. What's not to celebrate?

Plenty, it turns out.

The better trading outcomes of well-connected mutual fund managers have implications far beyond one happy set of shareholders. The Securities and Exchange Commission protects a level playing field because it's in the public interest for the U.S. financial markets to be liquid.

Consumers buy and sell stocks more easily when they are confident that a product's price is reasonably close to its actual value. When one party seems to know more about a stock – perhaps through friendship with the CEO – other investors may lose confidence that they can assess the value of stocks as accurately. When too many consumers distrust the market, liquidity drops. Fewer people buy and sell.

Think how much it easier it is to buy a used car with public resources such as Carfax, or pre-owned car certifications. In the past, a buyer had to wonder what a car seller knew but wasn't saying – or else try to buy a car from someone she already knew and trusted.

Almost everyone has a friend. Almost everyone has experienced the memories, common lingo, and wordless sense of goodwill that come from sharing a common history. Butler and Gurun's study of corporate and financial markets, however, shows how these natural instincts can disadvantage players outside the alumni circle. Shareholders may have less power to limit CEO pay. And consumers may end up less confident about the value of stocks, shaking trust in the financial markets overall. Surely, that's not what friends are for.

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This article originally appeared on Rice Business Wisdom.

Alexander W. Butler is a professor of finance at Jones Graduate School of Business at Rice University.

How do people make sense of the epiphanies when they experience them? Pexels

It might be just the right word from your boss. It might be a phone call with a trusted friend. Or it might be waking up one morning and just knowing. There's no way to predict what will spark an epiphany that changes the way you see the world. But their power can be so far-reaching, they often leave us wondering where on earth that brilliant idea came from — and how we can find more.

Studying the mental processes behind epiphanies is especially hard because these flashes of insight are usually linked with unconscious mental processing and incubation, often during time periods when one may not seem to be thinking about a problem at all. In this way, epiphanies seem to arrive effortlessly.

So how do people make sense of the epiphanies when they experience them? In a set of unprecedented studies, Rice Business professor Erik Dane set out to find answers, first examining people who'd experienced general epiphanies, then analyzing a set of accounts of work- and career-related epiphanies themselves.

The research

In his first study, Dane surveyed more than 500 randomly selected people to ask them about their experiences with epiphanies, which he defined as a sudden and abrupt insight and/or change in perspective that transforms the individual.

Subjects who said they'd experienced epiphanies reported what they'd been doing beforehand, the feelings and insight associated with the epiphany and how they thought they'd changed afterward. Interestingly, though this survey wasn't limited to career- or work-related epiphanies, 20 percent of the responses related directly to these topics.

In the second study, Dane interviewed 22 professionals, asking them about distinct work- or career-related epiphanies, most of which resolved a nagging problem. After analyzing the transcripts of these interviews, Dane developed a set of theoretical categories describing the varieties of reactions an epiphany might spark.

People generally perceive and analyze their epiphanies in similar ways, Dane found. He categorized these into four dimensions: a person's emotional reaction to the experience of the epiphany, the question of how the epiphany arose, the circumstances that preceded the insight and a person's observations about how ready they were to experience change through an epiphany.

The findings

The typical first reaction to an epiphany, Dane says, is a sudden and emotionally charged release from a problem or tension. We've all been there: a stressful work situation that seems to offer no way out, followed by a dazzling solution that appears from the clouds. It's that suddenness that leads to the second typical reaction: a sense of astonishment due to the nonconscious nature of the insight's arrival. Feeling dumbfounded for a prolonged time isn't useful, though, so we usually start examining the factors surrounding the epiphany, including our own readiness to change.

What does this imply for workplace? After all, not every problem can or even ought to be solved by epiphany. At the same time, Dane notes, epiphanies can provide critical impetus to move forward.

Interestingly, his findings hint that one can increase the chances of having an epiphany. Though further research is required, Dane concludes that epiphanies most commonly arrive when people are open to the prospect of experiencing a major change. When something is mentally constraining us, on the other hand, eureka moments keep their distance.

The conclusion

As a worker, Dane suggests, you can open space for epiphanies by being actively aware of your surroundings. Look closely at your workplace, your constellation of coworkers and your place within the system. Perceived mindfully, these details may set the stage for problem-solving in a less focused moment.

If you're a mentor or a supervisor hoping to spark epiphanies in your work team, try applying this principle at work: Rather than laying out specific targets and attacking them head-on, aim for an environment that allows for mindful engagement, one that includes the problems that feature in your long-term goals and resonate with your workers' concerns and interests. Cultivating this environment and granting workers time and space to wander through it may lead, like a divining rod, to fresh sources of wisdom.

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This article originally appeared on Rice Business Wisdom.

Erik Dane is a distinguished associate professor of management (organizational behavior) at Jones Graduate School of Business at Rice University.