Research and Education In Business Management

Observe. Hypothesize. Predict. Verify. Evaluate.

This is the "scientific method" which Caltech has employed to become the benchmark of scientific disciplines across the board. This is no less true of its newly-launched Business Economics and Management (BEM) option for undergraduates. By grounding students in scientific methods and principles, the BEM program provides them with the analytical tools necessary to operate successfully in the modern, volatile, business environment.

Because the business environment is at least as complex as the weather system or earth's mantel, macro-level predictions about whole economies, markets, or bureaucracies are as elusive as long-range weather and earthquake predictions. Thus, Caltech researchers focus on the micro-level aspects of the business environment, mostly using unique laboratory experimentation. Through the isolation of salient business principles in controlled conditions, researchers are better able to understand what is relevant, what is not, and why.

Empirical Method

Individuals participating in these experiments can be located almost anywhere, from the Social Sciences Laboratory in the basement of Caltech's Baxter Hall to positions around the globe through computers connected to the internet. Researchers design innovative communication and trading systems, offering participants choices and rewards according to well-defined schemes. The resulting decisions and their impact on the behavior of the system as a whole are then analyzed, leading to a more fundamental understanding of social interaction in general, and business processes in particular.

For instance, Colin Camerer has recently been studying the emergence of and incompatibilities between organization-specific language, by means of experiments where teams were asked to perform a number of complex tasks. Teams were rewarded depending on the speed and accuracy of solving the tasks. Team members could send a limited number of messages to each other. Teams were then re-arranged in specific ways, with the aim of understanding the changes in language that these re-arrangements induce. The value of this type of study is related to mergers.

It is through this kind of basic, experimental science that facts emerge, theories are revealed, and these in turn are improved through new experimentation. As a spin-off from the design of the necessary experimental tools, a quest for the best organizations ensues.

Current Research

Already, BEM research has confirmed theoretical economic propositions that were widely believed to be correct, but which had never been conclusively shown to be correct through the study of historical data from the field. Currently, an exciting new theory is being tested which focuses away from the equilibrium standard and towards a model of dynamics: price dynamics in competitive markets (Bossaerts, Ledyard, Plott, Zame) and evolution of strategies in strategic situations (Camerer, McKelvey, Palfrey). Other challenging questions being asked include: Are mechanisms vulnerable to cognitive biases/errors and how can we improve them (Camerer, Ledyard, Plott)? To what extent does language act as an efficiency tool and barrier to entry (Camerer)? When and how do communication networks lead to efficient allocations (Jackson)? From the practical point of view, the research leads to the discovery of flaws in existing business schemes such as Simon Wilkie's work on recovery repair strategies after major earthquakes ("Economic Policy in the Information Age," E&S 2001, No. 1).

Education

The BEM option distinguishes itself from other undergraduate business and MBA offerings by its commitment to interdisciplinary study. It covers much of a standard MBA core program but is taught in a Caltech manner - grounded first in principles that have received testing with controlled experiments. While the formal nature of the eight BEM courses provide a rigorous foundation in strategy, design (markets, organizations, networks), finance, accounting, and law in a free-market competitive situation, option requirements also draw from economics, mathematics, political science, psychology, social science, law, and engineering.

Students who complete this program leave well trained in the management of resources of all kinds, the management of risk, allotment of tasks, and the control of information flows. Rather than merely knowing a list of examples of interaction in the business environment, students will understand the principles behind the examples, and, most importantly, the principles that allow them to react to new situations not included in the examples, so that they can become effective managers well into the future.