CEOs are better at cooperation

HJ Holm, Professor of Economics at Lund University

In economic experiments, CEOs are found to be more cooperative and less prone to inefficient strategic economic behavior compared to others. They also earn more money from their decisions even though individually they are not more rational. This is shown by the economist HJ Holm and colleagues, who have used economic games to study the strategic decision-making of CEOs. The results are summarized in a new SNS-report.

sns-research-brief-no-61-business-leaders-and-strategic-decisions-english-summary.pdf 84.1 KB PDF

Economic experiments have deepened the understanding of economic decision making. CEOs are an especially important group to study given their role in the economy. Their daily decisions affect employees, owners, competitors, suppliers, the public sector and the political sphere. Despite the assumption that firms and CEOs are rational actors there has been surprisingly little research on their behavior in strategic games.

– It is quite common to use students in economic experiments; it is much more difficult to get CEOs to partake since they are usually quite busy. To some extent this probably explains the lack of research focusing on strategic decision making of CEOs, says HJ Holm, Professor of Economics at Lund University.

The report is based on a study conducted in China. A unique data set was collected, documenting the decisions for more than 200 CEOs and an equally large control group. All CEOs were recruited from competitive privately owned firms, which are similar to private firms in other market economies. Three classical economic games were studied: the Prisoner’s Dilemma, Chicken and Battle of the Sexes. All games emulate strategic choice or coordination situations. For example, the Prisoner’s Dilemma, which illustrates the tragedy of the commons, mirrors the framework for climate negotiations. In other words, when collective action is needed to solve a problem, and even though society would benefit from cooperation, there is always a temptation for the individual player to deviate.

The results show that CEOs cooperate more than the control group and that they are less aggressive in their strategies. They also expect more cooperation from others and, therefore, on average, they earn more money in the experiments. Finally, the CEOs were not more rational in their strategy choices compared to the control group.

– The stereotypical view of a CEO is usually strategic, egocentric and calculating. However, this is not what we find in the study. If anything, we find evidence of the opposite. If the CEO’s attitude toward cooperation is reflected in his or her everyday decisions this is probably positive for the economy in terms of efficiency, says Holm.