WSB Research: Now You Know
Q: What are the risks of insuring reputation?
In the digital age, a company’s reputation can be ruined more quickly than ever before—which is a main driver for why some insurers now offer reputation risk insurance.
Joan Schmit, professor and American Family Insurance Distinguished Chair of Risk Management and Insurance at the Wisconsin School of Business, studied this new offering to understand its risks and benefits.
Companies may be faced with high premiums as the insurance industry sorts out how to measure and attach value to these key elements:
Measurement of reputation damage. Identifying how much a crisis event damaged a company’s reputation and directly led to losses can be tricky. If sales decline, how can you be sure that the reputation event was the cause?
Spillover effects and risk concentration. An entire industry might suffer losses due to reputational damage caused by the actions of just one company. In a situation like this, how does the insurer anticipate the outcome beforehand, and how can it limit its aggregate liability?
Moral hazard. If an organization knows that it will be compensated by an insurer for a damaged reputation, what incentive does it have to expend large amounts of resources to protect it?
Even with increasing exposure to cyber-related losses, the power of social media, and more public focus on social responsibility, many organizations may need to wait until the insurance industry resolves these questions.
Q: Can big firms buying houses be good for homeowners?
Since 2007, families or individuals might have competed with large private equity firms when making an offer on a single-family home throughout the United States.
Abdullah Yavas, professor and Robert E. Wangard Real Estate Chair at the Wisconsin School of Business, examined this trend and found that investors buy properties at a discount compared to individual buyers, and their presence in the market actually leads to a rise in home values.
Overall, investor buyers purchase at a discount of 9.5 percent compared to individuals buying one house during the same time period in the market. The study also revealed that a 10 percent increase in the number of houses purchased by investors in a census block is associated with a 0.20 percent increase in house prices in that market.
The discount for large investors is attributed to several factors, including the ability of those buyers to pay with cash. A cash sale presents less risk to the seller because there are no mortgage contingency clauses, and cash buyers don’t need loan approval, so deals are processed quickly. In both circumstances, a seller is more likely to accept a lower price from investor buyers than individual buyers. Large investors may also have better tools for targeting potential acquisition properties, superior negotiating skills, and experience with the closing process.
Despite the price disparity, the rise in home values benefits single-family homeowners in the neighborhood.
Q: Can our possessions shape our identity?
As consumers, we accumulate stuff all the time—gifts and hand-me-downs from family and friends, and rewards and sign-up gifts from marketers.
Liad Weiss, assistant professor of marketing at the Wisconsin School of Business, wanted to know whether there are unintended consequences for obtaining stuff. Can owning an object with certain qualities change the way we feel about ourselves?
Weiss and his co-authors tested this idea using a coffee mug. They handed out two 16-ounce black mugs; one was taller and the other shorter. Some people received the mug as a gift, and others were told they would receive a different mug as a gift. The mug owners and borrowers then reported how tall they felt.
The results? Giving people the mug led them to assess their traits in similarity to traits of the mug—owning the tall mug made them feel taller; owning the short mug made them feel shorter. Feeling taller increased overall physical self-esteem and vice versa (i.e., feeling shorter decreased physical self-esteem).
If you want to change the self-image of someone—a friend, loved one, or employee—buy them something that embodies the qualities they feel they lack. According to Weiss’s research, anything that you own—whether it’s a gift, a hand-me-down, or a purchase—affects how you perceive yourself.
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