research@hec - Issue #18 - (Page VI)

Strategic Experimentation Dinah Rosenberg Nicolas Vieille Observing Others to Determine Behavior Dinah Rosenberg and Nicolas Vieille illustrate their research with an example of two pharmaceutical companies investigating the effectiveness of two molecules. “Imagine that two competing laboratories are each working on a molecule, but the results of their research may be connected. How can observing the competitor’s behavior enable each lab to decide how to adjust its R&D investment strategy?” Rooted in game theory, the strategic experimentation models used by Rosenberg and Vieille are geared toward figuring out how to extract information that is important but costly to obtain, and how the existence of a strategic environment (one including several players) changes this optimal experimentation behavior. from if they were alone. research BIOGRAPHIES Dinah Rosenberg and Nicolas Vieille are HEC Paris professors in the Department of Economics and Decision Sciences Department. Rosenberg and Vieille both attended ENS and respectively hold PhDs in mathematics from the University of Paris 10-Nanterre and the University of Paris VI. HOW AVAILABLE INFORMATION INFLUENCES BEHAVIOR Rosenberg and Vieille explain, “In the case of a pharmaceutical company testing a molecule, if after a while research has not produced anything conclusive, those in charge will become pessimistic and are likely to stop investment in the given research. On the other hand, if research results are promising, they will continue to invest in the initiative.” How does such a choice to stop or continue in a specific direction affect a competing lab? There are two factors influence this matter. • Observability: The information released by the How does the information released by an economic player influence the behavior of those watching? Dinah Rosenberg and Nicolas Vieille have explored this question using a two-armed bandit model. They show that positive signals from the environment increase players’ confidence, causing them to behave differently hec THE NATURE OF EXPERIMENTATION Rosenberg and Vieille are interested in evaluating the impact of these two variables on players’ behavior. First, they tested different degrees of observability. Each player was initially able to observe the other’s behavior (i.e., see whether the other lab kept investing in a project or stopped doing so) as well as the ensuing outcome (whether investments paid off or not). Next, each player was able to observe the other’s behavior but was unable to observe the outcome. In this situation, when one player keeps playing (i.e. pursues research), the other does not know whether it is due to promising results, sheer stubbornness, or a desire to experiment influenced by the first company’s behavior. For each of the two scenarios, the researchers attributed positive and negative degrees of correlation. For the laboratories, working on similar molecules would generate a positive correlation, but working on competing molecules would translate as a negative correlation between the two firms. first company must be accessible and understandable (i.e., public communiqués by the lab on the results of its research) • Correlation: If the research being conducted by the two labs is unrelated, there is no reason for one lab to change its strategy due to the other’s findings. VI research@hec • December-January 2011

Table of Contents for the Digital Edition of research@hec - Issue #18

Cover & Contents
Anger in the Workplace Men vs.Women: Unequal in Ire?
Renewable Energies: What Is Holding Investors Back?
Strategic Experimentation: Observing Others to Determine Behavior
Lessons fromthe April 2010 Volcanic Ash Crisis

research@hec - Issue #18