Watch Your Head! Ceteris Paribus is Falling!

Topic: Decision MakingJudgement
Publication: Academy of Management
Article: Resolving the commitment versus flexibility tradeoff: The role of resource accumulation lags.
Blogger: Katie Bachman

Ceteris paribus—all else equal—is the economist’s favorite term. It covers all manner of sins because, as we know in psychology, nothing is ever equal or same or whatever. It is the assumption of no variance and it is the mark of an economics article, which is what I have to share with you today. When I first read the title of the article, “Resolving the Commitment Versus Flexibility Tradeoff…,” I was hoping for a spiffy little article on personality traits perhaps, or maybe managerial interventions. Instead, I read a paper on the economic principles of uncertainty and resource accumulation.

Don’t get me wrong, as a former economics major, I was thrilled, but as a person writing for a psychology blog, I was a bit put out.  I think the bottom line of the article applies to us psychologists anyway, so I will share what for you would be a very dull piece of research. Through empirical data from 1979-1995, the researchers found that in any investment situation, financial in this case, if there is a little bit of lag between investment and payoff, people will be more likely to invest.

However, if the lag time becomes too great, people pull back.  Interestingly, if there is greater uncertainty about future rewards, people are willing to put up with more of a lag than when payoff is
certain.  In all cases, this probability of investment/time-lag relationship is curved.  Perhaps we’re all gamblers at heart, but this article does a really nice job of explaining why people, particularly
those in capital-heavy fields, invest even when the outcome is unclear.  Ceteris paribus, people like a little risk in their lives.

Pacheco-de-Almeida, G., Henderson, J. E., & Cool, K. O. (2008). Resolving the commitment versus flexibility tradeoff: The role of resource accumulation lags. Academy of Management Journal, 51(3), 517-536.