RBW: Why did you decide to start publishing concise, online translations of faculty research?

KR: Former Rice Business Dean William Glick, like our current dean, Peter Rodriguez, believed that academic thought leadership must provide the foundation for the education provided at the business school. Personally, I felt that while my faculty colleagues were regularly making major discoveries or adding to the common body of knowledge in business in impressive ways, it was largely a well-kept secret. Obviously, our students experience the benefits of learning from such thought leaders firsthand when they take their courses. But outside of that, our stakeholders — students, alumni, corporate partners, friends, etc. — were largely in the dark about faculty research.

RBW: What do you think is most often misunderstood about business school research?

KR: The idea of what academic research in business entails is itself often misunderstood. Sometimes I joke with people who look surprised when I say I’m doing accounting research, ‘Are you wondering what we can research when debits always equal credits?’ In reality, the type of research academics do is like creating a landscape to be viewed from a satellite. You won’t necessarily see the minute details of the plants — that is, the details a business professional may need to address in the real world. Instead, you’ll get a map or framework that can help you navigate new opportunities and practical problems. I’d view Business Wisdom as a success if it means that anyone can immediately understand the research focus of one of my colleagues — and why it’s relevant for shaping their business practices.

RBW: What's the difference between a Rice Business Wisdom piece and a reference to a journal article in a mainstream media story?

KR: The news media tends to focus on news that can elicit an immediate emotion, response or action. If I tried to follow the advice from every piece of health research I see discussed in media, I would be restocking my kitchen every other day and starting a new exercise regimen. Most times, the type of research we do doesn’t fit the bill for immediate gratification, although there are exceptions. The recent Houston Chronicle article by my colleagues Erik Dane and James Weston, “Should I Stay or Should I Go?” (p. 10), is a case in point. Business Wisdom was created as a vehicle to transmit the timeless discoveries that my colleagues make, but it is well complemented by articles like this one, in which the relevance of the school’s thought leadership becomes readily apparent.

K. Ramesh is the Herbert S. Autrey Professor of Accounting at Jones Graduate School of Business at Rice University.

Based on research by Ajay Kalra and Wei Zhang

• Circumstances play a major role in consumer choice and satisfaction.
• Customers who book hotels far in advance are more likely to pick expensive hotels — and to be happy with them.
• Time and emotion color how consumers feel about their hotel accommodations.

An office worker gazes dreamily at their computer, looking for the perfect hotel for their vacation in Venice. For an instant, they hovers on a website offering simple but clean accommodations at a modest price. Then they scroll onward, hitting “submit” on a high-end destination with a spa, trendy restaurant and lavish linens. Why did they choose the sumptuous hotel instead of the economical one? And how will they feel about that choice at the end of their stay?

Researchers used to assume that shoppers balanced quality and price in order to make their choices. But there’s far more to it than that. Research shows that variables that may seem totally circumstantial play a powerful role both in consumer choice and in later satisfaction. If the daydreaming office worker had booked their room from home instead of work, for instance, they would have likely picked the cheaper option. And whether they went upscale or moderate, if they paid three months in advance instead of three weeks, they would have liked their hotel more.

Ajay Kalra, a professor at Rice Business, studied shoppers’ use of online travel sites to discern how they choose and rate hotels, and how circumstantial variables sway their decisions. Contrary to conventional wisdom, he found, outside factors such as distance traveled and the date that a hotel was booked affected both the quality of accommodation travelers chose and even their perception of the hotel after their stay. For instance, travelers heading to distant cities chose better hotels than those staycationing near home. Yet curiously, these long-distance travelers came away less happy with their lodgings than those who stayed nearby.

Time made a difference too. Customers who reserved early chose better hotels and rated them more highly than travelers who booked at the last minute. Even the hour of day mattered: Travelers who booked during the workday chose higher-quality hotels than those who booked during their time off. Yet those who booked from work rated hotels more harshly than those who chose from home.

What could be behind the impact of such seemingly irrelevant details? Working with Wei Zhang of the Ivy College of Business at Iowa State University, Kalra found that standard economic approaches offered little explanation. So the researchers turned instead to psychological theory. What they found suggests that managers should track circumstantial variables as well as more standard metrics in order to predict consumer choices.

The key to the unusual findings, Kalra and Zhang argue, is the power of the past. According to a model called construal-level theory, variables that seem completely random wield power because of the emotional impact of time. As events grow more distant, consumers see them in a more abstract way, sometimes through rose-colored glasses. In contrast, they tend to view recent events in a more detailed and specific way. Thus, variables that at first glance seem random can predict consumer selection and satisfaction with some accuracy.

To get a deeper understanding of these patterns, Kalra and Zhang used the lens of “consumption episodes,” breaking trips down into related purchases such as airfare, hotels and meals. The idea is that most vacation shoppers seek a peak experience, so they buy the highest quality product they can afford across all areas. Traveling far and then staying at a mediocre hotel could undermine the peak experience, so those traveling greater distances seek out higher quality lodging, food and the rest.

Exhaustion, stress, hunger or just a long day at work can affect decision-making. Research into a model called depletion theory shows that judges make a higher percentage of favorable decisions after snack breaks, and that people who are tired are more likely to splash out on pricey consumer items. This may explain, Kalra and Zhang suggest, why vacationers who book hotels from the office crave more luxurious accommodations than those who reserve from the comfort of their couches at home.

Timing and payment method can also affect customer choice. According to the theory of prospective accounting, the pain of paying is dulled when done far in advance, for example by credit card. Consumers who prepay for vacations experience a gulf between payment and consumption, so the vacation feels free. This could account for the high satisfaction rate among travelers who book hotels far in advance.

Teased from data and analyzed through social science, Kalra’s findings offer concrete guidance for sellers and consumers alike. Managers need to accept that some aspects of consumer rating satisfaction are completely out of their control — and they should make sure their superiors know this too. This is particularly important in companies that evaluate employee performance on customer satisfaction metrics.

Consumers, especially travelers, it turns out, have more control over their experience than they might imagine. It may be hard to predict the weather in Europe or the construction schedule outside your hotel room window, but book early enough to forget paying, and click “submit” from the living room with a cat curled nearby, and you just might treat yourself to a free upgrade.

Ajay Kalra is the Herbert S. Autrey Professor of Marketing at Jones Graduate School of Business at Rice University.

To learn more, please see: Zhang, W. & Kalra, A. (2014). A joint examination of quality choice and satisfaction: The impact of circumstantial variables. Journal of Marketing Research, 51(4), 448-462. .

Based on research by Gustavo  Grullon, Yelena Larkin and Roni Michaely

• In the last 15 years, consolidation of public firms and large corporations has concentrated product market share.
• These mergers, which lead to greater market power, yield hefty stock returns.
• While stockholders clearly benefit from this concentration of market share, it’s not clear if the reduced competition helps or hurts U.S. consumers.

Big business is evolving. During the second half of the 20th century, tariff cuts and deregulations drastically changed the industrial landscape of many markets. Between 1950 and 1999, these changes markedly lowered the concentration levels in most industries.

But in a recent paper, Rice Business professor Gustavo Grullon shows that since the beginning of the 21st century, this trend has reversed. The changes he documents are massive: three-quarters of U.S. industries have become more concentrated in the past 15 years, Grullon notes. Large companies are merging at record pace, continuing to strengthen their market share formidably.

Grullon’s research also shows that in the last two decades, the United States lost half of its publicly traded companies. But while there are fewer public firms now than in the early 1970s, their share of the U.S. real gross domestic product has actually grown.

What are the consequences of this trend? First, Grullon found, the firms in more concentrated markets outperform those in less concentrated markets. So an investment strategy that buys firms in industries with higher concentration levels, and shorts firms in industries with lower concentration levels, generates, on average, an abnormal return of about nine percent per year. This suggests that industry concentration probably weakened competition in the U.S., Grullon wrote.

At the same time, Grullon found, private firms did not replace the public firms that disappeared from the market. True, more private firms entered the economy. But their contribution to product market activity overall has actually been small.

These findings, Grullon wrote, suggest that “despite popular beliefs, competition could have been fading over time.” Profit margins have grown, but not necessarily because of greater productivity or efficiency. Instead, they’re the result of higher operating margins.

In other words, mergers deliver investors bigger profits, thanks to a potential increase in market power.

The question should prompt policymakers to look further into the repercussions of megamergers and the reduced competition that attends them, Grullon argued.

As industries consolidate into a few publicly traded companies, there’s no question that companies and stockholders reap the benefits. Individual consumers, however, are another matter, Grullon found. There’s still much to learn about how merger mania affects the people who keep the giants in business.

Gustavo Grullon is Jesse H. Jones Professor of Finance at the Jones Graduate School of Business at Rice University.

For more information please read: Grullon, G., Larkin, Y., and Michaely, R. (2019). Are U.S. Industries Becoming More Concentrated? Review of Finance, 23(4), 697–743.

By William M. Arnold 

This article originally appeared in The Hill and is reprinted here with permission.

News this week of oil prices hovering near $60 a barrel simply reflects the intersection of supply and demand. Demand is gaining strength as the global economy strengthens — supported by oil prices that are about half of their 2014 peak.

OPEC countries, led by Saudi Arabia and other large producers like Russia, have been more decisive and effective in controlling production. This is not to say that every large producer has cut back; however, the net effect has strengthened prices — but not to the point of killing off rising demand.

In the background are five drivers that get less attention: the small and decreasing imbalance between supply and demand, levels of investment, the normal operational decrease in production, the short-cycle nature of production in the U.S. and the inventory of oil.

In a world market of about 93 million barrels of oil and liquid fuels per day, an excess of supply over demand of less than 2 percent was enough to tank oil prices in 2014, driving them all the way down to the high $20s before climbing slowly to today’s prices.

This reflects the commodity nature of oil, the price of which will gravitate to the cost for the producer who supplies the last barrel to balance the market. Higher-cost producers will be driven out over time, although this may not be linear.

In a $110-plus price world, almost any production anywhere in the world was profitable but adversely impacted demand. But much lower prices put high-cost producers at a great disadvantage. That impacts remote areas like the Arctic, lower-quality crudes like those produced in Canada’s oil sands and in Venezuela, regions with poor infrastructure and deepwater production around the world.

Commodity prices are volatile in both directions. An oversupply like we have seen in the last three years drives prices dramatically lower, but a shortfall could take prices back to the former high levels. Is that likely to happen?

Over the last three years, companies have shed staff and slashed billions of dollars from investments to discover and produce oil in the future. That doesn’t have much impact on supply in the short term, but over three to five years, it will crimp production and trend toward higher prices.

Oil fields outside of OPEC on average decline by about 5 percent each year. That takes more than 2 million barrels per day out of global production. Companies are constantly on a treadmill to replace those reserves. Without new investment, that puts upward pressure on prices.

The “shale revolution” upset the traditional view of energy economics, because much of it is short-cycle. Instead of investing for production that won’t come onstream for three to five years, as in the case of deepwater or Arctic sources, production in places like the Permian Basin of West Texas has become more like a manufacturing process that can be turned off or ratcheted up in a matter of weeks, depending on oil prices and the cost of production at a given site.

OPEC has never seen this kind of competition before and is only now coming to grips with it. Adding to the disruption in energy markets has been the unanticipated but dramatic cost reduction of producing oil in the shale play. Former generalizations about the cost of production may be obsolete.

Initially, that was the result of hard bargaining between operators and service companies, but over the last three years, operators have employed new technology and processes to drive down costs more sustainably.

What this means is that absent a surge in demand or a dramatic shortfall in supply, say from a crisis in Venezuela, prices are likely to cap at West Texas costs of production that cover invested capital, probably in the $55-$60 range.

The final driver is inventory of oil. This has been at record levels while production outstripped demand. That has moderated in recent months, but still represents a limit on traders’ expectations of future prices. Stored reserves represent potential new supply that can cap prices.

Bringing all these factors together suggest that while oil prices may be “lower for longer,” an equilibrium has settled in. Demand has grown in response to moderate prices. Whether this will continue is not a foregone conclusion, as OPEC struggles with dissent among its members and there is no shortage of political instability around the world.

Over time, competition from natural gas and renewables cloud oil’s price horizon.

William Arnold was a professor in the practice of energy management at the Jones Graduate School of Business at Rice University.

Based on research by Jing Zhou, Bilian Lin (Chinese University of Hong Kong) and Kenneth Law (Chinese University of Hong Kong)

Key findings:

• Past research warned against hiring overqualified workers.
• In fact, slightly-to-moderately overqualified workers are more likely to be valuable and to reimagine their duties in ways that advance their institutions.
• To capture this advantage, employers need to give workers a strong sense of connection with the company, and the flexibility to expand their vision of their jobs.

You’re a rocket scientist. You worked for NASA. You've won a Nobel Prize. Shouldn’t your qualifications give you an edge on a software developer job?

According to typical hiring practice, the answer is no. You might not even get an interview for a job sweeping the floor. That’s because, for years, research has warned that hiring applicants with too much experience or too many skills will saddle you with employees who don’t appreciate their jobs.

Now there’s good news for rocket scientists and others who happen to be overqualified for their work. According to a groundbreaking new study coauthored by Rice Business professor Jing Zhou, workers who are slightly to moderately overqualified are actually more likely to be active and creative contributors to their workplace. As a result, they’re more likely to be assets. The study adds to a new body of research about the advantages of an overqualified workforce.

Zhou’s findings have widespread implications. Worldwide, almost half of the people who work for a living report that they are overqualified for their jobs. That means Zhou’s research, conducted with Bilian Lin and Kenneth Law of the Chinese University of Hong Kong, applies to a vast segment of the labor market.

To reach its conclusions, Zhou’s team launched two separate studies in China. The first looked at six different schools with a total of 327 teachers and 85 supervisors. The second analyzed an electronic equipment factory with 297 technicians. Both studies revealed a strong link between perceived slight and moderate overqualification and the frequency of “task crafting,” that is, expanding the parameters of the work in more innovative and productive ways.

In the school study, teachers who were slightly to moderately overqualified set up new online networks with students and parents. They also rearranged classrooms in ways that made students more engaged and productive. Meanwhile, in the factory, workers took tests to gauge their abilities in complex tasks designing a ship. The ones who were slightly to moderately overqualified built more complex versions that reflected their superior competencies.

The key to both sets of workers’ superiority was their impulse to “job craft.” Every worker leaves a personal imprint: meeting the bare minimum of criteria, pushing to exceed expectations, innovating or imagining new or more useful ways of getting the job done. Expert “job crafters” turn this impulse into an art. Some redraw their task boundaries or change the number of tasks they take on. Others reconfigure their work materials or redefine their jobs altogether. Still others rearrange their work spaces and reimagine their work procedures in ways that can catapult their productivity upward.

For overqualified workers, Zhou’s team found, task crafting is a psychological coping mechanism — a welcome one. Workers want to show their superiors the true level of their skills. Doing so fortifies their self-esteem and intensifies their bonds with the company they work for. Far from being dissatisfied, these overqualified workers are more productive, keen to help their organizations and interested in finding ways to be proud of their work.

So how did the outlook on such workers go from shadowy to brilliant? Past research, it turns out, focused rigidly on the fit between worker experience and a task. It didn’t consider the nuanced human motivations that go into working, nor the full range of creativity or flexibility possible in getting a job done.

Thus, older studies cautioned that overqualified workers are likely to feel deprived and resentful. Zhou’s research shows the opposite: a statistical correlation between worker overqualification and high job performance.

Organizations do need to do their part for this alchemy to work. Above all, Zhou writes, it’s crucial to build a strong bond between worker and institution. This is because workers who identify strongly with their workplace feel more confident that their job-crafting efforts will be well received; those who don’t feel this strong bond often feel mistreated and give up the project of crafting their work.

Similarly, companies also need to grant workers flexibility to expand the scope or improve the process of their jobs. The outcome can be the evolution of the entire business in unexpected and often creative ways.

Not all super-qualified workers will be inspired to re-craft their tasks. When the gulf between skills and task is extreme, Zhou writes, workers are bored and job crafting loses its juice as an incentive. For more moderately overqualified employees, however, their expertise should rocket their CVs to the top of the stack. For seasoned workers, the evidence shows, a job is not just a job. It’s an adventure in finding ways to be excellent.

Lin, B., Law, K. S., & Zhou, J. (2017). “Why is underemployment related to creativity and OCB? A task-crafting explanation of the curvilinear moderated relations.” Academy of Management Journal, 60(1): 156-177. https://journals.aom.org/doi/10.5465/amj.2014.0470. 

Based on research by Michelle "Mikki" Hebl, Laura Barron, Cody Bren Cox and Abigail R. Corrington

• Laws banning discrimination against gay, lesbian and bisexual individuals work.
• The laws reduce discrimination not only by setting consequences for discrimination, but also by reaffirming shared social values.
• Anti-discrimination laws and policies lessen the stigma of homosexuality at work and beyond.

Opponents of laws banning discrimination based on sexual orientation often question whether these laws are effective.

The short answer: they are. Not only do targeted laws reduce employment discrimination against gay, lesbian and bisexual workers, they actually boost acceptance of gay, lesbian and bisexual job applicants.

That’s according to recent findings by Rice Business professor Michelle Hebl and colleagues Laura Barron of the U.S. Air Force, Cody Bren Cox of the Department of Psychology at Texas A&M-San Antonio and Abigail R. Corrington, a psychology professor at Rice.

In their study, the researchers note that politicians have often justified opposition to anti-discrimination laws by questioning whether they really accomplish what proponents say they will.

That argument allows lawmakers a face-saving out: Instead of claiming discrimination towards gays and lesbians does not exist, or that its existence is okay, they can simply question the logic of passing laws that may not do anything.

But these laws do work, Hebl and her colleagues found. In fact, their power is twofold: they work because they show that discrimination is illegal and, just as importantly, because they show that repercussion for it is certain and serious.

In addition, the researchers found, anti-discrimination laws carry symbolic value. They establish a societal norm, alerting the community that mistreating gay, lesbian and bisexual people isn’t accepted.

Regardless of whether the laws are vigorously enforced, the scholars write, their existence educates people about what their conduct should be.

In one study, human resource managers were asked to judge various applicants’ chances of getting a job. In states that lacked anti-discrimination statutes, the managers deemed applicants identified as likely gay or lesbian (because they listed scholarships from gay groups) less hirable than their straight counterparts. In states with anti-discrimination laws, by contrast, the managers showed no difference in how they viewed gay and straight applicants.

Of course, to find out whether these laws work, it is necessary to determine if discrimination against gay, lesbian and bisexual employees exists. Hebl and her team cite several studies that demonstrate the existence of such bias, both subtle and formal. One of those studies found that when job applicants in certain states listed membership in gay or lesbian organizations, they were less likely to be invited for interviews than those who didn’t.

Another study demonstrated that gay men in areas with no sexual orientation anti-discrimination laws generally earn less than their straight counterparts.

Other research shows that gay and lesbian employees who work in areas with legal protections are more likely to be open about their sexuality than those in areas with no legal protections. These workers are also more likely to report having gay coworkers and supervisors and to work for organizations with gay-friendly policies.

While the research by Hebl and her colleagues reveals that anti-discrimination laws work, it also reveals that they do so only when the public is well aware of them. Thus, the success of these laws may hinge on how effective public information campaigns and media coverage are. Success also hinges on whether these laws are enforced.

Both awareness and enforcement of these policies are a sound investment, the researchers note. That’s because gay, lesbian and bisexual employees who feel welcome in a workplace tend to perform better. In fact, Hebl and her team argue, businesses in states and cities without anti-discrimination laws should establish their own such policies. Doing so does more than discourage employees from discriminating against gay, lesbian and bisexual coworkers, it also counteracts the notion that homosexuality is abnormal, instead presenting it as just another sexual orientation.

An added benefit: because of its focus on effectiveness, the American workplace is a powerful driver of cultural norms. Companies that prioritize human capital — and punish discrimination — will have a greater range of job applicants, more motivated staff and more creative work environments. They also stand a good chance that the community they serve will follow their lead.

Michelle "Mikki" Hebl is a Martha and Henry Malcolm Lovett Chair of Psychology at Rice University and a Professor of Management at the Jones Graduate School of Business.

To learn more, please see: Hebl, M., Barron, L., Cox, C. B., & Corrington, A. R. (2016). The efficacy of sexual orientation anti-discrimination legislation. Equality, Diversity and Inclusion: An International Journal, 35(7/8), 449-466.

Rice MBA ranked among top 10 in US

The Master of Business Administration program at Rice University’s Jones Graduate School of Business is ranked No. 10 in Bloomberg Businessweek’s new analysis of the best full-time MBA programs in the nation. This marks the second year in a row that the school is ranked among the top 10.

“What students want from a business school are the classes, professors and networks that help lead to a career that they will find gratifying,” said Jones School Dean Peter Rodriguez. “This top ranking reflects our commitment to students, the excellent work of our faculty and staff and the support of our stakeholders here in Houston and across the country.”

The rankings include 85 schools. To create the ranking, Bloomberg Businessweek surveyed recruiters and the programs’ alumni and students. It also looked at graduates’ success in finding jobs with high starting salaries. Each university was given an overall score out of 100, taking into consideration an employer survey rank (counting for 35 percent of the overall score), alumni survey rank (counting for 30 percent), student survey rank (15 percent), salary rank (10 percent) and job-placement rank (10 percent).

The Rice MBA full-time program provides students with a comprehensive MBA learning experience that combines specialized coursework and real-world experience to improve and amplify their strategy, leadership and critical decision-making credentials. The program features innovative classes, expert faculty and a diverse group of candidates who often become colleagues for a lifetime.

Rice Business is consistently recognized by several rankings publications for its programs, including the Rice MBA, Rice MBA for Executives and Rice MBA for Professionals. The school is internationally known for the research and thought leadership of its faculty. For more information on Rice MBA programs, visit http://business.rice.edu

To view the complete Bloomberg Businessweek rankings and methodology information, visit www.bloomberg.com/graphics/2017-best-business-schools.

Based on research by G. Anthony Gorry (1941-2018) and Robert A. Westbrook

Information technology is reshaping relationships between companies and customers, bringing benefits to both. But unfettered use of this technology can erode customer care. For a company to care for clients effectively, both its managers and front line employees must listen empathetically to what they have to say. Unfortunately, a rash of "innovations" aimed primarily at reducing costs has made many companies opaque to their customers who are, as a consequence, inadequately served and increasingly frustrated.

A number of innovative companies have shown, however, that technology need not sour relations between businesses and those they serve. Indeed, it can enrich them if senior managers take the following steps. They need to affirm an empathetic involvement with customers; understand how current systems mediate interactions with customers; deploy technologies that help customers tell their stories; and, finally, enable workers and managers alike to hear and respond to these stories. When these steps enable employees to step “into the customers' shoes," their companies can genuinely claim, "We care for you."

A company’s claim to care for its customers ultimately rests on an empathetic connection with them. It is innate in each of us to respond to the joys and sorrows of others, to feel what they feel. Our empathetic responses are strongest in the presence of others where we can see how they act and hear what they say. Thus face-to-face interactions with customers are invariably more vivid and powerful than the abstractions of quantitative marketing and sales analyses.

Now, however, social networks coupled with our own highly developed imaginations, can place us in the situations of others who are not physically present.

Technology has played a central role in this ability, reshaping customer relationship management with intelligent call routing, interactive voice response, Internet protocol telephony, self-service web portals, and multi-channel integration. It has also given companies better knowledge of who their customers are and how they were acquired.

These deployments profoundly affect front line employees who deal directly with customers, answering questions, resolving problems, and generally supporting them. The attitudes and actions of these employees directly determine the nature of the company’s care for its customers. With appropriate technology and systems, businesses can make it easier for these workers to render not only sufficient but exemplary customer service as well.

One example: access to extensive real-time customer information enables service agents at USAA and American Express to respond almost instantly to customer inquiries and requests for assistance. Indeed, without properly functioning technology, it would be difficult for a large business to care even minimally for its customers.

In the best of circumstances, technology designed to support front line employees promotes not only the company's interest, but the interests of customers as well. It facilitates convenient access to information about products and services, expedited procurement, easier shipping and billing inquiries and faster reporting of emerging problems. FedEx customers, for instance, can dispatch and follow the course of shipments through the Internet. Amazon customers are able to buy a wide variety of products in an easily, quickly and enjoyably from their own homes or businesses.

The challenge is that in their quest for efficiency, companies too often deploy technology solely as a replacement for front-line personnel, and thereby diminish the role of empathy in customer care. Then uncaring robots or humans rigidly constrained in their responses are deaf to customer concerns and complaints.

Luckily, not all businesses have filled their front line ranks with robots. Many offer less rigidly structured portals where customers seeking a sympathetic hearing have the option of speaking with humans. Used properly, technology can enhance customer experience. Companies such as USAA and American Express have earned their reputations for outstanding customer service with integrated systems that make extensive knowledge about customers readily available to front line personnel. An agent who can pick up the thread of a previous conversation is better able to imagine the customer's situation, more likely to respond empathetically, and more likely to help.

But such companies seem exceptions. In too many others, economic reasons alone have driven increased reliance on technology in customer relations, causing even well intentioned companies to drift away from those for whom they profess to care so much.

Then, too, customer narratives, elicited by empathetic employees on the front line, can suggest ways a company can improve its performance. The story of IBM is a case in point. When Lou Gerstner took the company’s reins 1993, the company had lost its way. Many in the financial community doubted it could recover. But Gerstner sent each of his top 50 managers to meet with five large customers, not to sell any product but to listen closely to their suggestions and concerns. Gerstner opened every staff meeting with one question: “What are you learning from customers?” This dedication to a culture of listening and empathy is credited with turning the company around.

Good customer care, in other words, is not a luxury. Research shows that when customers feel a company cares, they value its products and services more highly. Greater customer satisfaction means deeper customer loyalty, which translates directly into higher repurchasing and more convincing recommendations to others. Just a 1% gain in customer satisfaction, the researchers point out, has been shown to boost net operating cash flows by an average of $1.01 per $1,000 in company assets. For the larger U.S. firms, that translates to an average gain of $55 million in future cash inflows.

The great companies also innovate with their customer service. Consider Apple’s groundbreaking “Genius Bar,” where customers meet with support personnel — the “geniuses” — to get face-to-face technical help. The booming demand for the geniuses’ time reflects customers’ desire to talk to Apple directly, to tell their stories to an empathetic listener, and to get their problems resolved in real time.

In recent years, the Genius Bar has been translated to cyberspace. Companies like IBM, Nortel, and Cisco are implementing elaborate virtual environments where customers can meet employees “face to face” and express themselves as they would in person. In the coming years, the Rice researchers expect countless new customers will join these virtual communities. The technologies that companies employ to serve the customer need to evolve too, because companies need to do more than only care about their customers. Above all else, they need to be able to treat customers as promised.

Tony Gorry was the Friedkin Professor Emeritus of Management at the Jones Graduate School of Business at Rice University.

Robert A. Westbrook is the William Alexander Kirkland Professor of Business in the Jesse H. Jones Graduate School of Business of Rice University.

To learn more, please read: Gorry, G. A. & Westbrook, R. A. (2011). Once more, with feeling: Empathy and technology in customer care. Business Horizons, 54(2), 125-134.

By James P. Weston and Erik Dane

Flooding in your home can be as psychologically traumatic as the death of a loved one or grave illness. Unfortunately, it’s also a demanding time when important financial decisions need to be made. Should you buy flood insurance? Should you stay and rebuild, renovate, or sell and move away? These are especially tough decisions because we are all prone to biased thought patterns, even without the added stress of a disaster. Fortunately, there are ways we can become aware of and overcome these patterns.

Rebuilding in a flood zone is risky, so it’s natural to consider whether and when Houston will flood again. Although we can’t predict when another catastrophe will happen, it’s important not to assume that because we flooded recently, flooding will happen again soon. Research shows that when people are planning for the future, they give too much weight to recent events. Sales of insurance policies soar after floods, but homeowners tend to cancel the policies after a year or two if their houses don’t flood again.

Considering these common reactions, try not to over-insure — but don’t be lulled into a false sense of safety, either. Houston has seen three “one-in-500-year” floods over the past three years. There’s a one-in-125-million chance of that happening, so the term “one-in-500-year” is clearly inaccurate. But if you’re not on the flood plain, and your house flooded for the first time in, say, 50 years, it might not be that far off.

We also tend to overestimate risks to our personal safety, but this danger is far more imagined than real. During a storm, if you don’t live where ocean surge is a risk, and you stay off the roads, it’s very unlikely that you’ll suffer critical injuries. Research shows that the more clearly we envision a life-threatening event, the more we believe it can occur. Hurricanes evoke threatening images, which may lead us to overestimate the personal risks that storms pose.

So how should we make level-headed decisions about what to do with a flooded house? Every house and homeowner is unique, but some general principles apply. It may help to consider all your options as a monthly expenditure, like a car payment. How much would you pay per month to avoid the risk of a flood? Are you anxious about flooding, or do you take it in stride? These factors can guide your decision.

One approach is to simply live in a house that floods frequently, but pay a large insurance premium and the costs of repair. The upside to this is lower mortgage payments and property taxes. The downside is the emotional toll of repeated flooding. For some, this might be too much to bear, but others seem to shrug it off. Many coastal residents repair staunchly after every hurricane, and are drywall magicians.

Raising the foundation can also be an option. Let’s say it would cost $100,000 to raise your foundation. If you borrowed $100,000 at 5 percent interest for 30 years, it would cost about $500 per month. This might be worth your while. Now, if you could move a mile away to a neighborhood that doesn’t flood for an extra $300 monthly mortgage payment, is it really worth it to keep your present house, with a raised foundation? You might think you would spend anything not to leave you neighborhood, or school, but comparing the monthly costs puts things in perspective. For example, could you tear down and rebuild on the same property with those same funds?

It might seem like these questions could be solved easily enough with a formula that could spit out a tidy answer. It’s not that simple — many of the factors in play are psychological and emotional. But to help you arrive at these decisions, the costs can be at least roughly monetized. You might not want to leave your neighborhood, but is it worth an extra $400 a month to stay? Thinking about decisions in this way can help us surmount biased patterns of thinking. One main takeaway from behavioral economics is that if we become aware of our cognitive biases, we can often mitigate their effects and make better decisions in times of uncertainty.

James Weston is the Harmon Whittington Professor of Finance at the Jones Graduate School of Business at Rice University

Erik Dane is a former professor and was the Jones School Distinguished Associate Professor of Management (organizational behavior) at the Jones Graduate School of Business at Rice University

By Utpal Dholakia

This article originally appeared in Psychology Today. 

In my last post, I wrote about the downsides of eating $19 avocado toast. The post stemmed from the rather critical comments made by the Australian real-estate millionaire millennial Tim Gurner about his fellow peers. The gist of his comments was that because millennials today eat $19 avocado toast, drink $4 coffees, and travel to Europe every year, they are not able to save enough money to put a down payment on a house. His conclusion was that millennials are spending money in an undisciplined way.

Gurner's quote generated a lot of debate in social and traditional media, both supporting and protesting such a view of undisciplined spending. Specifically, whether you agreed with Tim Gurner's views or not depended on whether you thought paying $19 for avocado toast constituted undisciplined spending behavior.

In this post, I want to define the concept of undisciplined spending carefully. This will make it easier for us to judge whether spending $19 for avocado toast or $4 for a coffee is undisciplined spending. Careful definition is warranted because concepts like undisciplined spending tend to be interpreted in different ways by different people.

The four properties of undisciplined spending

The Oxford English dictionary defines "undisciplined" as "uncontrolled in behavior and manner." For spending specifically, when we explore what this really means, it boils down to four properties of spending behavior.

1. Overspending relative to income.

Any discussion of financial concepts has to account for the fact that different people make and have different amounts of money. As a result, overspending, like many other financial behaviors, is not an absolute concept. It depends on how much money you make. If you make a lot, your threshold to reach overspending will be much higher. If you don't make much, you will reach the threshold very quickly. In essence, overspending occurs when the individual's spending is disproportionately high relative to his or her income.

Considering the $19 avocado toast purchase through this "relative spending" lens, it is a perfectly reasonable expense for someone who has a high income. But for the average millennial who makes $35,000 per year, it will count as overspending for just one meal (beverage not included). The price of the toast is too high to pay for what millennials make.

2. Spending without a proper plan or budget.

A second property that classifies spending as undisciplined is when the consumer doesn't keep track of how much money they have to spend, or how much they are spending at the moment. When a particular expenditure is budgeted for in advance, it can be high relative to the individual's income and still be part of a disciplined approach to personal finances.

For example, the typical American spends around 12.5% of their income on food. This means that someone earning $35,000 would be able to budget approximately $365 for food every month, or about $4 per meal (assuming three meals per day). Again, within this budget, $19 for just for one plate of food is high, and therefore seems like an undisciplined act. (The only exception is if the individual has been eating ramen at home for a few meals to save up for an avocado toast splurge).

3. Paying a price that is far outside a product's range of reasonable prices.

Consumers have a range of reasonable prices for what a product is supposed to cost. For example, my range of reasonable prices for lunch is $2 (for a food truck taco) to $15 (for a sit-down lunch in a nice restaurant). Similarly, my range of reasonable prices for a sandwich is $3 to $8. And so on. When a product is priced below this range, it will be judged as cheap. It will be deemed as expensive if it is above the range. But if a product is far above the range of reasonable prices, it is seen as exorbitant and spending on it is seen as extravagant.

This is the case with avocado toast that costs $19. Most of us can buy an avocado for one or two dollars (or even less; in Houston, you can buy two jumbo avocados for a dollar at the moment). In this context, spending $19 for bread and avocado that would cost a small, small fraction to make at home, or even purchase in a cheaper restaurant, simply appears unwise.

In some sense, this property of buying an exorbitantly priced product is the most prominent and visible property of undisciplined spending. Even high income levels are not immune. For example, when it was reported that high-income-earning mega-celebrities Kanye West and Kim Kardashian spend $500 to rent and watch new-release movies in their home theater, it generated widespread mockery.

4. Showing a repeated pattern of these three behaviors.

Each of the three behaviors, performed once in a blue moon by themselves, would still raise questions about whether the person's spending is really undisciplined. Like this coffee enthusiast who bought a $47 mug of coffee from Starbucks, I am sure we can all think of times when we spent money foolishly or made really bad spending decisions.

However, it is when the three behaviors, either individually or together, are performed repeatedly, and when they form a pattern or even a habit that we have a discipline issue. That is when the person's spending is truly undisciplined and it usually leads to adverse consequences for the individual.

There you have it: A road-map for what constitutes undisciplined spending. Undisciplined spending is a repeated, even habitual pattern of three negative spending behaviors: (1) overspending relative to one's income, (2) spending without prior planning or budgeting, and (3) paying far more for a product than is reasonable.

Utpal Dholakia is the George R. Brown Professor of Marketing at Jones Graduate School of Business at Rice University.