The economic analysis underlying corporate decision making: what economists do when confronted with business realities—and how they might improve

Business Economics, July, 2004 by Hugh Schwartz

Two more matters concerned me. First, is decision-making influenced by the complexity of the situation or by the number of different questions that are being considered during the same period of time? Second, how do economic analysts react when they become aware that a mistake has been made--either in their data or in the way in which they analyze the problems?

The respondents came primarily from the Eastern and Midwestern regions of the United States With nine of the twelve, the interviews were entirely by phone, most lasting 45 minutes to a little over an hour. Notes were taken and a tape recorder used. More than 90 sessions were held, varying for the most part from six to twelve per respondent. In the case of two of the three who were retirees, there were only two interviews--though these were supplemented with e-mails, several of which were more than ten pages long. All respondents were sent a two-page statement concerning the project at the outset and an overview of studies on decision-making (Schwartz, 1998), three months into the interviews. In addition, in May 2003, all were sent a preliminary report and were asked in subsequent interviews for their reactions to it.

Leaving the Microeconomic Analysis Largely to Non-economists

The first major conclusion is that even though the interviews have been held with those who worked for individual companies, the information and analysis most sought by their companies was macroeconomic rather than microeconomic, as was much of the training of the group. Related to this, one of the functions of half of the participants was to make broad presentations to industry groups and clients. Even at the micro level, the information and analysis emphasized was sector wide. The analysis of specific regulatory issues was frequently prepared by outside specialists (though often reviewed by the in-house economists, and when reviewed, sometimes modified). Only a few of the respondents were involved in the most micro decisions concerning individual products, pricing, incentives, and so forth; and all of those were officials with longevity in their companies. The economists reported that most of the truly microeconomic decisions were made by officials in marketing, finance, or production. These decisions frequently were not based on analytically determined estimates of cost curves or elasticities of demand. This was especially the case for services.

Many of the decision-makers in finance have a fair background in certain areas of economics, but those in marketing have less. For those in production, economics background is found primarily in recent graduates who have taken courses in engineering economics. Marketing, finance, and production officials err in a number of ways, it was claimed, sometimes notably in the way they treat even such matters as inflation. Only occasionally do they ask for feedback from economists. If they do not, a minority of the economists interviewed were inclined to offer feedback other than on an exceptional basis. That minority did pinpoint limitations to what was done (or proposed), and those observations sometimes led to changes in the way subsequent decisions were made. Examples include a lesser resort to "copycat" changes in sales incentives initiated by an industry leader, more attention to the use of economic criteria in search processes, and the advancement of proposals to have the compensation to managers influenced by the rate of return of their divisions. In somewhat more than half of the enterprises, the economists could only gauge in a general way if the analyses they prepared were being accepted and used, but in other firms the feedback was often clear.