Big Ideas from Stanford GSB Faculty

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In the scenario known as the prisoners’ dilemma, two partners in crime who have been arrested must decide whether to keep quiet or betray the other. Classic game theory predicts that the rational move in this repeated game is to “fink” or “defect.” Yet a 1982 paper coauthored by economics professors David Kreps, Paul Milgrom, John Roberts, and Robert Wilson explains why players choose to cooperate when they have limited information about their counterpart’s motivation or strategy. Their findings were a breakthrough in game theory and understanding rational cooperation in real-life situations.

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In her 1997 paper “Dimensions of Brand Personality,” Jennifer Aaker, PhD ’95, the General Atlantic Professor, explored the idea that brands can have distinct personalities, much like people do. Her research identified and measured traits that make up a brand’s personality, including sincerity and sophistication. Her work provided a framework for understanding how consumers perceive brands and how brands can develop personalities consumers connect with.

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While studying Procter & Gamble’s supply chains, Hau Lee, the Thoma Professor of Operations, Information & Technology, Emeritus, observed that small changes in consumer demand could lead to volatile (and costly) swings in orders placed with suppliers. This “bullwhip effect” was described in a 1997 paper coauthored with Seungjin Whang, the Jagdeep and Roshni Singh Professor of Operations, Information & Technology, Emeritus. In 2004, it was named one of the 10 most influential papers in the history of the journal Management Science.

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With his 1962 book, Cost Accounting: A Managerial Emphasis, accounting professor Charles “Chuck” Horngren led the shift from cost accounting, with its focus on record-keeping, to management accounting, which could guide strategic decision-making. Now in its 17th edition, the book remains a core text in accounting courses. “The use of accounting data for decision-making purposes foreshadowed the informational approach that was to sweep accounting research,” said accounting professor William Beaver.

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Michael Hannan, the StrataCom Professor of Management and Professor of Sociology, Emeritus, helped launch the field of organizational ecology with an influential 1977 article. He and his coauthor challenged the idea that organizations are shaped by individual managers, instead suggesting that their diversity and survival are shaped by competition and selection processes like those by which organisms evolve.

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In 1989, David Baron, the David S. and Ann M. Barlow Professor of Political Economy and Strategy, Emeritus, coauthored the Baron-Ferejohn model, now considered an essential framework for understanding legislative bargaining and decision-making. Nobel Prize-winning economist Daron ­Acemoglu has described the paper as “classic.”

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For more than 30 years, Dynamic Asset Pricing Theory by Darrell Duffie, the Adams Distinguished Professor of Management and Professor of Finance, has been a must-read reference for students and researchers looking for an accessible guide to topics like arbitrage and martingales. The book and its related GSB course “were the first comprehensive treatments of dynamic asset pricing, including continuous-time models, which required new methodology,” said finance professor Peter DeMarzo.

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Among the many topics explored by Susan Athey, PhD ’95, the Economics of Technology Professor, is the underlying economic structure of auctions. In an influential 1990 paper, she looked at ways to make auctions more efficient and how top bidders could avoid the “winner’s curse” of overpaying. Professor Paul Milgrom, who shared a Nobel Prize for his work on auction theory, described her resulting work on timber auctions as “pathbreaking.”

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Which attribute of a product or service do consumers find most appealing? The answer can be discovered through ­conjoint analysis, a survey-based statistical method pioneered by V. “Seenu” Srinivasan, the Adams Distinguished Professor of Management, Emeritus, in 1978. Conjoint analysis is now widely used for designing and pricing products and predicting consumer behavior.

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In a series of papers starting in the mid-1990s, Mary E. Barth, the Joan E. ­Horngren ­Professor of Accounting, Emerita, made the case for fair value accounting, which reflects assets’ current market value and future earning potential, unlike historical cost reporting, which may obscure a company’s actual worth. As she explained to­ Stanford Business in 2019, “If you have to make a decision today, it seems intuitive to me that the best information is up-to-date information.”

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Professor Charles Bonini first described what would be known as Bonini’s ­Paradox in 1963. As he attempted to simulate a hypothetical company, he discovered a curious dilemma: As a model becomes more realistic, it becomes as difficult to understand as the actual systems it seeks to explain.

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James March “was a towering figure in the field of organizations, easily the most influential scholar of the second half of the 20th century,” said Walter W. Powell, professor of organizational behavior (by courtesy). March’s books, written between 1958 and 1963, are credited with opening a new field of study and introducing concepts such as bounded rationality, organizational slack, and satisficing — choosing satisfactory solutions rather than optimal ones.

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In 1995, Charles Jones, the STANCO 25 Professor of Economics, introduced a model that explains how a country’s long-term economic growth rate is mostly tied to factors besides government policies and R&D spending, particularly population growth. Building on the work of former GSB professor Paul Romer, the Jones model explains why large countries do not necessarily see more economic growth than smaller ones and why people are the key input to producing the new ideas that drive progress.

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Since it was first published in 2006, Corporate Finance has become a standard textbook for graduate and MBA students. In it, Jonathan Berk, the A.P. Giannini Professor of Finance, and Peter DeMarzo, the John G. McDonald Professor of Finance, build on the valuation framework of the Law of One Price — the idea that identical goods must sell for the same price in efficient markets.

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In his 1991 book Information and Legislative Organization, Keith Krehbiel, the Edward B. Rust Professor of Political Science, Emeritus, challenged longstanding assumptions about how the U.S. legislative system works. His empirical analysis and modeling showed that congressional committees aren’t just about logrolling and pork barrel deals, but actually draw on their members’ expertise to set public policy.

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“Tight” cultures value order and conformity. “Loose” cultures value openness and tolerance. Michele Gelfand, the John H. Scully Professor in Cross-Cultural Management and Professor of Organizational Behavior, has developed this concept in multiple papers and her 2018 book, Rule Makers, Rule ­Breakers. Her research shows that successful countries, companies, and leaders can pivot between tight and loose norms.

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In 2000, Joseph Piotroski, the Robert K. Jaedicke Professor of Accounting, introduced a nine-category metric to distinguish corporate “winners” and “losers” based on their financial statements. The Piotroski Scale has become a popular screening tool for investors seeking undervalued yet fundamentally strong stocks.

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When consumers are unsure of their options, they often pick the product in the middle of the range for attributes like price and quality. This “compromise effect” was identified by Itamar Simonson, the Sebastian S. Kresge Professor of Marketing, Emeritus, in a 1989 paper that documented people’s preference for the “middle alternative” when choosing everything from beer to cars.

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Finance professor Ezra Solomon’s 1963 The Theory of Financial Management was hailed as “a watershed.” Casting off the discipline’s previous descriptive focus, “Ezra helped move the field toward a more rigorous, theory-based foundation — a more mathematical expression,” recalled finance professor James Van Horne.

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After September 11, 2001, Lawrence Wein published a series of articles in Proceedings of the National Academy of Sciences that examined the risk of bioterror attacks and other domestic security concerns. His findings led the U.S. government to update its vaccine policies and upgrade its fingerprint scans for foreign visitors. Wein, the Jeffrey S. Skoll Professor of Management Science, received several awards from the Institute for Operations Research and the Management Sciences for this research.

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William Beaver’s 1968 study of investors’ reactions to corporate annual earnings announcements demonstrated the relevance of accounting information for investing, laying the foundation for further empirical capital market research.

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The resource dependence theory of organizations was introduced in The External Control of Organizations, a 1978 book coauthored by Jeffrey Pfeffer, PhD ’72, the Thomas D. Dee II Professor of Organizational Behavior. “This influential work was the first to recognize the power of the wider social-political environment as a force shaping organizational structure and behavior,” said Stanford sociologist W. Richard Scott.