Evaluating Managerial Expectations

Managers play a crucial role in shaping firm performance. However, we know little about how managers perform on one of their key responsibilities: managing strategic decisions. The challenge of studying the quality of these decisions is that we often only observe the outcome associated with the chosen decision, not the counterfactual. We address this challenge using data from six recent studies that elicited predictions from expert managers about the direction and size of strategic interventions in domains such as hiring, workplace incentives, layoffs, marketing, and fundraising, and then estimated the causal effects of these interventions in large randomized controlled trials. We evaluate managerial expectations by comparing predicted to experimentally estimated intervention effects under a unified set of performance metrics. Our findings reveal that managers often struggle to accurately predict the causal effects of common strategic interventions. First, when comparing interventions, managers are only slightly better than chance at determining which intervention will have a greater impact. Second, their estimates of an intervention’s magnitude often deviate substantially from the true impact. Finally, despite low levels of average accuracy, some managers perform better than others, and better performing managers can be consistently identified using signals of revealed ability. These findings add to the body of research on the impact of managers on firms and demonstrate that organizational experimentation can reveal not only which interventions are effective but also who has knowledge of what works, which can be used to inform the allocation of decision-making authority within a firm