From Wikipedia: The Bobo doll experiment was conducted by Albert Bandura in 1961 and studied patterns of behaviour associated with aggression. Additional studies of this type were conducted by Bandura in 1963 and 1965. A Bobo doll is an inflatable toy that is approximately the same size as a prepubescent child. This experiment is important to psychology because it was a precedent that sparked many more studies about the effects of viewing violence on children. For details, click here. For another post about Albert Bandura’s research, see “The Need for a Situationist Morality.”
Some positions within an organization wield unusual impact over the entity’s success. The decision makers who hire these critical performers face a daunting task: to distinguish among closely comparable finalists in a context where small differences in talent can produce enormous outcome divergences. I apply research from psychology and behavioral law and economics to argue that decision makers demonstrate unwarranted confidence in their ability to distinguish among nearly identical candidates. The illusion of validity, representativeness bias, insensitivity to predictability, and the fundamental attribution error all impede decision makers’ ability to make these fine distinctions. Once they have made a selection, cognitive dissonance induces inappropriate confidence in the outcome’s validity and promotes excessive compensation. Involving a group in the decision may worsen these effects by imbuing outcomes with the false veneer of market legitimacy through social cascades and by discouraging contrary views throug hexcessive consensus or groupthink.
I examine two types of critical performers with these insights: professional baseball players (where individual contributions to the enterprise can be measured directly) and public company CEOs (where they cannot). I conclude that in both contexts, these phenomena produce inefficient selection and compensation outcomes. While the relative absence of externalities argues against mandatory regulation in baseball, I propose changes in private ordering that should improve efficiency. In the corporate context, I argue that regulation is called for and propose a combination of mandatory compensation caps linked to firm size and a reverse auction among CEO finalists to determine the successful candidate.