Of pride and prejudice: agent learning under sticky and persistent stereotype

Georg D Blind,Stefania Lottanti Von Mandach

doi:10.1007/s11403-020-00307-0

Georg D Blind, Stefania Lottanti Von Mandach

Open Access

https://doi.org/10.1007/s11403-020-00307-0

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Abstract

Stereotypes matter for economic interaction if counterparty utility is informed by factors other than price. Stereotyped agents may engage in efforts to counter stereotype by adapting to in-group standards. We present a model informing the optimal extent of these efforts depending on an agent’s (a) share of total transactions between out- and in-group agents; and (b) share of repeated transaction pairings with in-group counterparties. Low values of (a) suppress the effect of adaptation efforts on the stereotype itself (persistence). In turn, low values of (b) mean that out-group agents cannot dissociate from stereotype (stickiness). Significantly, the model implies that the optimum level of effort may require adaptation beyond in-group standards, and that such over-adaptation attains maximum likelihood in cases where stereotype is sticky and persistent at the same time. We test our model with data on private equity buyout investments conducted in Japan between 1998 and 2015 by domestic Japanese and Anglo-Saxon funds. We document that the latter not only adapt, but eventually over-adapt. In addition, we show that their efforts are effective in reducing a premium initially asked by domestic counterparties.

Highlights

Stereotypes refer to the association of out-group agents with collective judgments both negative and positive relative to a reference group and are understood as an effort to compensate for incomplete information (Kahnemann and Tversky 1973)
For testing Hypothesis 1 pertaining to premiums asked from Anglo-Saxon funds, we use OLS to estimate a possible differential versus the base category of domestic keiretsu funds
Our model shows how stereotypes form an incentive to adaptation efforts, if counterparty reputation is an argument in the utility function of domestic agents

Summary

Introduction

Stereotypes refer to the association of out-group agents with collective judgments both negative and positive relative to a reference group and are understood as an effort to compensate for incomplete information (Kahnemann and Tversky 1973). Attributes frequently subjected to stereotype include gender (e.g., on performance evaluation in Howlett et al 2015, and on risk attitudes in Grossman and Lugovskyy 2011) and ethnicity or nationality. The latter associate products and services with particular attributes (Kaynak and Kara 2002; Kotler and Gertner 2002; Chattalas et al 2008; Herz and Diamantopoulus 2013, Zhang 2015). Agents crossing cultural boundaries for interaction with other communities face what Akerlof has labeled “a loss of reputation for disobedience of the custom” (Akerlof 1980) Turning his reasoning around, a gain of reputation may represent the motivating force behind assimilation efforts of visitors to a foreign community.

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