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pp. 585609

A model of ops

Patrick Hummel

John Morgan

and

Phillip C. Stocken

A rm surveys a large number of consumers, some of whom sincerely report their tastes and

others of whom report strategically. It makes product decisions using the sample mean of survey

responses. When rms and consumers agree on the fraction of sincere consumers, information loss

is severe, and many products are ops as they poorly match consumer tastes. When beliefs differ,

however, equilibrium is in linear strategies, and information aggregates. Despite this, ops still

arise. A rm, however, can solve the ops problem by limiting the effect of strategic consumers.

Binary surveys offer one such solution.

1. Introduction

Many of todays most successful rms pride themselves on the practice of data-driven

decision making, the extensive use of statistical data to inform key management decisions.

1

One

of the most famous examples is Capital One, which ran a vast experimentation programconsisting

of hundreds of different offers to consumers to determine product offerings. In large part, this

practice is a response to the vast harvest of data made possible by the information technology

revolution. Managers can now access copious and detailed information about nearly every aspect

of the rm. Nowhere has this change been more profound than in new product introductions.

A century ago, introducing new products was a matter of intuition, experience, and gut feel.

Statistics were often viewed with disdain. The essence of this spirit is nicely captured in Henry

Fords famous quip that If I had asked my customers what they wanted, they would have said a

faster horse.

2

Perhaps not surprisingly, many product introductions turned out to be ops. Even

Dartmouth College; phillip.c.stocken@dartmouth.edu.

We are indebted to Ali Hortacsu (editor), David Laibson, Don Lehmann, Preston McAfee, Michael Schwarz, Joel Sobel,

Eric van den Steen, Miguel Villas-Boas, and the anonymous referee for helpful remarks, Dana Sisak for outstanding

assistance, and seminar participants at Harvard University for comments. The second author gratefully acknowledges the

nancial assistance of the National Science Foundation.

1

Brynjolfsson, Hitt, and Kim(2011) report that data-driven decision making rms enjoy 5%6%higher productivity

than rms that do not use data-driven decision making.

2

As quoted by Kelley and Littman (2005).

Copyright

C

2014, RAND. 585

586 / THE RAND JOURNAL OF ECONOMICS

as late as 1982, around 46% of commercialized products were deemed to be failures within one

year (Barczak, Grifn, and Kahn, 2009).

Fast forward to today. In a world of data-driven decision making, product design now

routinely incorporates a wealth of information, including large-scale surveys, focus groups, and

test markets. Yet despite all of this additional information, the extensive statistical training of

managers, and the ease and ubiquity of number crunching software like Excel, the percentage

of commercialized products judged to be failures has hardly budged, amounting to around 40%

of products in 2004 (see Barczak, Grifn, and Kahn, 2009).

Turning this ever-expanding mass of data into a usable form is a critical problem. Managers

must rely on summary statistics, such as the sample mean, because poring over the data line

by line is simply infeasible. Firms routinely correct survey data for selection bias, such as the

undersampling of cell phone users but rarely correct for strategic misrepresentation on the part

of respondents. At rst glance, this seems entirely appropriate. If some survey respondents

exaggerate their tastes toward more extreme positions, the effect is similar to measurement

errorthe noise of responses increases but, with a large enough sample, this is of no particular

consequence. Moreover, strategic respondents probably represent only a small fraction of the

population, further limiting their inuence.

In this article, we show that both arguments are fallacious: A rm relying on the sample

mean of a large survey when developing a product will make systematic errors, even when only a

small fraction of the populace is strategic and when the survey fully aggregates information. The

reason is that, though misrepresentation by strategic respondents washes out ex ante, it produces

a systematic effect at the interim stage once consumer tastes are realized. To see why, consider

a snack that can be, to varying degrees, sweet or savory. Ex ante, strategic consumers are as

likely to exaggerate toward savory as toward sweet. However, if the average consumers tastes

tilt in the savory direction (relative to the managers prior beliefs), then exaggerations will be

systematically biased in the savory direction. In ignoring strategic motives, the result will be

product ops despite vast amounts and rigorous use of data. This systematic bias also implies that

strategic respondents need not (and indeed will not) put forth extreme exaggerations to achieve

their objectives.

This is not to say that strategic misrepresentation is the only (or perhaps even the main)

driver of ops. Products fail for many reasons, including managerial hubris (the movie Ishtar),

ill-considered brand extensions (Bic disposable panties), or unwise cost-cutting (Pontiac Aztek).

3

Our broader point is that, even with limitless amounts of data, data-driven decision making can

come to grief by failing to account for the motives of those producing the data. The same point

applies to corporate prediction markets, sales forecasts based on reports by downstream clients,

or any other data where strategic motives play a role. It also applies outside of rm settings, such

as with politicians using polls to determine the appropriate policy or position to take on an issue.

The mechanism we describe illustrates why such carefully tested poll driven policies or positions

can still prove unpopular, particularly with hot-button issues like abortion or gun control where

strategic responses play a signicant role. The ops problem, our particular focus, illustrates this

issue starkly and in terms of a critical management decision.

In the model, a rm seeks to design an ideal productone that matches the tastes of a

representative consumer. Consumer tastes share a systematic component but are idiosyncratic

as well. The rm conducts an open-ended survey, which we model as a costless information

transmission game, to determine tastes. Although some (perhaps most) consumers simply report

their tastes honestly, others are strategic and tailor their reports to try to obtain a product that

matches their own tastes rather than those of the representative consumer. The results of the

survey are then summarized by the sample mean of responses. When rms and consumers share

common beliefs about the number of strategic consumers, strategic misrepresentation, even from

3

See Dederer (2006) and Maricano (2009) for further details.

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HUMMEL, MORGAN, AND STOCKEN / 587

a small fraction of respondents, is enough to destroy information aggregation in large surveys.

Indeed, product choice is unresponsive to the survey in the unique monotone equilibrium.

When priors differ, however, information aggregation is still possible and, when the com-

ponents of taste are normally distributed, equilibrium has a remarkably simple form: Strategic

consumers and rms use linear strategies that are uniquely determined. Even so, differing priors

can lead to perverse effects in how well the product matches consumer tastes. The match quality

depends on two ratios. The rst is the noise-signal ratiothe ratio of the variance of the idiosyn-

cratic to the systematic taste component. The second is the calibration-alignment ratiothe error

in the rms prior about the fraction of strategic consumers relative to the disagreement in priors

between rms and consumers. Survey performance declines in both ratios.

Although it is apparent that being poorly calibrated harms the rm, the model has more

subtle implications as well. In particular, a survey conducted by a well-calibrated rm will still

perform poorly if there is little disagreement between the rm and consumers. This is true even

in the limit as the rms priors become perfectly calibrated. Idiosyncratic noise rarely plays a role

in asymptotic statistics but, when survey respondents are strategic, adversely affects large-survey

performance as well.

The consequences of these distortions can be considerable. Under a wide range of parameter

values, a rm relying on the sample mean of a large survey would be better served by eschewing

surveys entirelyeven when survey costs are negligible.

Properly constructed surveys, however, can still be tremendously useful. The key to effective

survey design is to limit the scope for strategic consumers to inuence outcomes. Binary surveys,

such as Facebooks Like button, offer one such avenue. By simply asking consumers for the

direction in which their tastes differ relative to some status quo, misreporting incentives are

eliminated. A second way is to use the median of reported consumer tastes rather than the more

usual sample mean. Although both of these approaches have poor properties in small surveys

they sacrice information and do not necessarily produce sincere survey responsesthey are

extremely effective in large surveys, producing truthful reporting and optimal product choices.

Thus, the model provides some justication for the use of Likert-type scales or other simple

reporting devices rather than more involved and in-depth survey procedures or complicated

scoring rules.

The remainder of the article is as follows. Section 2 sketches the model, reviews the literature,

and describes our contribution. Section 3 establishes that, when all strategic players share the

same prior beliefs, information aggregation from a survey is impossible and information loss is

severe. Section 4 shows that, when we allow for the possibility of heterogeneous prior beliefs,

information aggregation is restored. Reporting strategies are simple and intuitive, consisting of

linear strategies, and in large surveys, there is a unique responsive linear equilibrium. Section 5

examines the performance of products designed using survey information. We offer conditions

under which these products are likely to be opsdespite information aggregation. Indeed, for

a wide range of parameter values, a rms products would be more successful were it to forego

market surveys altogether rather than conduct (and act upon) a large survey. This is the case even

if it does not cost the rm anything to conduct the survey. Section 6 shows how a rm can solve

the ops problem by gathering less information from consumers. Section 7 concludes. The proofs

to some propositions are contained in the Appendix.

2. Model

A rm is introducing a new product, and cost considerations limit it to a single offering.

The key decision is the type of product to introduce. Let y R denote a product type. One can

think of y as summarizing all aspects of the product: its technical specications, design features,

color, avor, etc. A product will be successful if it appeals to consumer tastes, which are unknown

to the rm. There is a continuum of potential consumers for the product. Each consumer i has

taste t

i

= +

i

where represents a systematic taste component and

i

an idiosyncratic taste

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588 / THE RAND JOURNAL OF ECONOMICS

component. The systematic component consists of a single draw from a normal distribution

with mean zero and variance

2

density f. The idiosyncratic component is drawn independently for each consumer from a normal

distribution with mean zero and variance

2

i

and not the

separate components and

i

. The distributions of the taste components are, however, commonly

known by the rm and the consumers. For these taste distributions, E [|t

i

] = at

i

, where

a

2

/

_

+

2

_

.

To determine the product to offer, a rm can conduct market research by asking consumers

about their tastes. This research is sufciently inexpensive that the rm can survey an arbitrarily

large number of consumers. Specically, the rm randomly selects n consumers from the popu-

lation and asks each of them to provide a costless report m

i

R. This research can be thought of

as a combination of market surveys, focus groups, taste tests, and so on. The information gleaned

from these reports is then summarized by M, the sample mean of the reports.

4

The rm makes

its decision based on this information.

In addition to differing in their tastes, consumers also differ in how they respond to the rm.

A strictly positive fraction of consumers are sincere. These consumers report their type honestly

when asked, that is, sincere consumer i reports m

i

= t

i

. The remaining consumers are strategic.

These consumers choose a report m

i

that maximizes their payoffs, recognizing the connection

between their response and the product the rm ultimately offers. Specically, suppose that

strategic consumers suffer quadratic losses in the difference between the product offered by the

rm and their tastes; that is, the payoffs for these consumers are

u = (y t

i

)

2

.

Notice that the individual report, m

i

, does not enter directly into payoffs; it only enters to the

extent it inuences y.

The rm, however, wants a product with broad appeal and suffers quadratic losses as well.

5

Formally, suppose that the rms payoff is

v = (y )

2

.

Of course, the rm does not know , nor is it known individually by any of the consumers.

If all consumers were sincere, the rm could determine with arbitrary precision through its

research. The rm, however, cannot commit to the product it will offer as a function of the

information received, M. Instead, the rm will select the project optimally given its posterior

beliefs about given M; that is, the rm will choose the product

y (M) = E [|M] .

Firms and consumers may differ in their beliefs about the number of consumers who are

sincere. Specically, when a rm surveys n consumers, the rm believes k

n

of these consumers

are sincere. In contrast, strategic consumers believe that h

n

consumers are sincere for the same

size survey. Thus, the rm and consumers potentially have heterogeneous prior beliefs about the

number of sincere consumers surveyed. As we mainly will be concerned with large surveys, it

is useful to dene = lim

n

k

n

/n and = lim

n

h

n

/n. We also allow for the possibility that

neither set of beliefs may be correct. Suppose further that the true number of sincere consumers

in a survey of size n is s

n

, and let = lim

n

s

n

/n > 0. Thus, and correspond to the limiting

4

Having the rm base its product choice on a summary statistics of the survey rather than the underlying microdata

greatly facilitates the analysis. It is also consistent with practice. Firms typically employ external research agencies to

conduct marketing research. Owing to privacy concerns, their analyses tend to be generic rather than tailored to the

rm (e.g., Deshpande and Zaltman, 1982, 1984; Moorman, Zaltman, and Deshpande, 1992). Further, the use of classical

statistics to analyze market survey data is ubiquitous (e.g., Sawyer and Peter, 1983; Lehmann, Gupta, and Steckel, 1998).

5

It is straightforward to identify conditions on demand where prot maximization is equivalent to minimizing a

quadratic loss function. See Alonso and Matouschek (2008) for details.

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HUMMEL, MORGAN, AND STOCKEN / 589

beliefs of the rm and consumers, respectively, though coincides with the true fraction of

sincere consumers in the limit.

6

The modelling choice where the rm and strategic consumers

may differ in their views about the fraction of sincere consumers, but where there is agreement

among the strategic consumers, represents a minimal departure from the common priors model.

It also aids in the mathematical tractability of the model while still highlighting the key economic

effects of differing priors.

7

We study weak perfect Bayesian equilibria of the model. In these equilibria, (i) the rm

and consumers use Bayes Rule wherever possible in forming beliefs, and (ii) messages sent by

strategic consumers and product choices made by the rm must be best responses given their

beliefs. This equilibrium concept is standard for cheap talk games, such as our setting.

Because much of the analysis concerns what happens in an equilibrium of a large survey,

it is useful to dene this precisely. An equilibrium of a survey of n consumers consists of a

reporting strategy

_

m

i,n

(t

i

)

_

n

i =1

and a product type strategy y

n

(M

n

). For strategic consumers and

the rm, these strategies comprise mutual best responses. Reporting strategies map tastes to

survey responses, whereas product type strategies map the sample mean of a size n survey to

product designs. Call this equilibrium

n

. When we study an equilibrium of a large survey, we

are interested in the properties of

= lim

n

n

for some convergent sequence

n

. Of particular

interest is whether an equilibrium of a large survey fully aggregates information, that is, if it

is possible to infer the state, , perfectly through the sample mean of a large survey. Formally,

we say that information aggregates in an equilibrium of a large survey if M plim

n

M

n

is a

deterministic function of that is an invertible mapping from M onto .

Unlike standard cheap talk models, in our setting there is no commonly known inherent

conict between senders and receivers of information. An individual consumers bias is not

known to the rm. Moreover, because has zero mean, then consumers and the rm agrees ex

ante on the ideal product. Subsequent disagreement arises from two sources. First, though each

consumer knows precisely his or her ideal product, the rm cares about the average consumer,

and thus, while in expectation preferences are aligned, for each taste realization, preferences

are misaligned. The second source of disagreement stems from differing prior beliefs about the

fraction of sincere consumers in the survey. This leads to differing views as to howthe rmshould

use the data from the survey in its product design. This source of disagreement is designed to

capture the differing experiences and views of the rm and strategic consumers about the veracity

of survey responses. As we shall see, this can produce situations where the survey fully aggregates

available information yet produces opsproducts whose characteristics are far from the tastes

of the average consumer.

Literature review. Our model of survey research contributes to the vast cheap talk literature

dating back to Crawford and Sobel (1982). In this literature, there are typically one or a fewexperts

providing information to a decision maker.

8

Tension in these models stems fromthe experts bias

the difference between the experts and decision-makers preferences as to the appropriate action.

9

Although this bias is mainly assumed to be common knowledge, a few papers study the case

where it is privately known (e.g., Morgan and Stocken, 2003; Li and Madar asz, 2008). Moreover,

the exact bias of the expert ( in our model) is unknown to all parties. Finally, on average, the

experts, which we term consumers in our model, are unbiased. Disagreement arises from the rm

6

In the limit of a large survey, our model is strategically equivalent to one in which a consumer is sincere with

probability , the rm believes a consumer is sincere with probability , the strategic consumers believe a consumer

is sincere with probability , and each consumers type is an independent and identically distributed draw from these

distributions.

7

Relaxing this assumption introduces a new factor in the rms inference problemthe rm can glean additional

information about through the interaction of a consumers beliefs and tastes as manifested in the sample mean. This

indirect effect substantially complicates the analysis without changing the main economic forces in the model.

8

See Farrell and Rabin (1996) for an excellent survey of this literature. Grossman and Helpman (2001) offer a

comprehensive perspective on costly and costless information transmission in political settings.

9

Gordon (2010) offers a general treatment for how sender bias translates into equilibrium actions.

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590 / THE RAND JOURNAL OF ECONOMICS

anchoring on its prior beliefs over rather than preference misalignment. In our model, none of

the consumers is an expert in the sense of knowing the state realization precisely; hence our

focus on the informational properties of large surveys.

This focus also places our work in the much older literature on information aggregation.

Dating back to Condorcet (1763; see Young, 1988), this literature mostly examines on the

performance of election mechanisms in aggregating preference information of voters.

10

The

main nding here is that elections perform extremely well in this regard (e.g., Feddersen and

Pesendorfer, 1997). Our model departs from this framework in several ways. First, the rm

chooses fromamong a continuumof possibilities rather than making a binary choice. Second, and

more importantly, the rmcannot commit to its choice ahead of time, unlike a voting rule. Instead,

it collects consumer taste information and then uses it optimally, given its beliefs. In that respect,

our model is closer to studies of polling (e.g., Meirowitz, 2005; Morgan and Stocken, 2008).

Conict in these models again arises from constituents privately known ideological bias rather

than anchoring on prior beliefs. These models highlight that, when the message space is binary,

information aggregation is possible but truth telling is not generally consistent with equilibrium.

By contrast, we show that, when the message space is unrestricted and priors are homogeneous,

information aggregation is not possible (Proposition 1). Consistent with the intuition from these

earlier models, however, we show how the rm can still benet from message space restrictions

(Proposition 7).

We make two key behavioral departures fromstandard models. First, we introduce behavioral

types in the formof sincere consumers. When these types rst appeared in the cheap talk literature

(e.g., Sobel, 1985; Benabou and Laroque, 1992), their main role was to affect the dynamics of the

game. In particular, using intuition akin to Kreps and Wilson (1982) and Milgrom and Roberts

(1982), strategic types imitate behavioral types to gain an advantage in the dynamic game. Our

model is static, so such a role is absent. Instead, behavioral types smooth the posterior beliefs of

the rm following any message. This eliminates equilibria sustained by the freedom to specify

out of equilibrium beliefs (e.g., Krishna and Morgan, 2001) while allowing equilibrium reporting

strategies that are continuous in the consumers type. Continuous reporting strategies also have the

property that equilibriuminformation aggregation is nowpossible. Absent such types, equilibrium

reporting strategies and posterior beliefs are typically discontinuous.

More recent work has studied the role of behavioral types in static settings. One branch of

this literature explores the implications of (possibly) naive receivers on signaling (e.g., Ottaviani

and Squintani, 2006; Kartik, Ottaviani, and Squintani, 2007). Like our article, Kim and Pogach

(2009) study the implications of a possibly naive sender on information transmission. Other work

allows for naivete on the part of the sender and receiver (Chen, 2011). A fundamental difference

between these settings and the present article is that they study situations where there is only a

single sender, whereas our main concern is with information transmission when there are a large

number of senders.

Our second departure is to allow for the possibility that the rm and consumers have

heterogeneous priors over the fraction of behavioral types in the population. Although it has

long been recognized that players might hold differing prior beliefs and that this view is not

inconsistent with the assumption that players are rational (e.g., Harsanyi, 1968), the common

priors assumption is more or less standard. However, there has recently been renewed interest in

the effects of heterogeneous priors on player behavior (see Brunnermeier and Parker, 2005; Van

den Steen, 2010). Heterogeneous priors have been shown to rationalize a variety of apparently

irrational behaviors, including overcondence in choice of actions (Van den Steen, 2004), the

pop typical of rst-day trading following an initial public offering (Morris, 1996), the winners

curse arising in private value settings (Compte, 2002), and speculative bubbles in asset prices

10

The Condorcet Jury Theorem claims that if voters behave nonstrategically, then the majority in a dichotomous

election is more likely than a single individual to make a correct decision, and this likelihood increases as the size of the

group increases (see Young, 1988).

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HUMMEL, MORGAN, AND STOCKEN / 591

(Scheinkman and Xiong, 2003).

11

More recently, Van den Steen (2010) shows how relaxing the

common priors assumption creates benets to rm integration despite complete contracting.

In our model, heterogeneous priors likewise lead to a form of overcondencerms and

consumers simultaneously believe they are obtaining an ideal product (in expectation) even

though their preferences differ. Relaxing the common priors assumption in a cheap talk context

changes the informational properties of equilibrium starkly: Under common priors, information

loss is an inevitable consequence of equilibrium whereas with heterogeneous priors, it is not.

Kawamura (2011) independently shows that truth telling is not an equilibrium in a setting

in which a utilitarian planner uses a survey to recover private taste parameters from a nite

population with uncorrelated tastes, which consist of iid draws from a uniform distribution.

Several differences between the two articles are worth noting. First, in our setting, tastes are

correlated; and, indeed, discovering the underlying state is the heart of the decision-makers

problem. Second, we study asymptotic properties of surveys in a large population. Kawamuras

model, however, is uninteresting in large population settings as the particular realizations of tastes

are irrelevant to the decision-makers choice. Third, we obtain a much stronger result than the

absence of truth telling: the information-loss problem is extremely severe under common prior

beliefs about the distribution of types in the population (Proposition 3)a phenomenon that

does not occur in Kawamuras setting. Perhaps most importantly, unlike Kawamura we focus on

the case of heterogeneous priors and show that information does aggregate, though this is not

necessarily to the benet of the decision maker.

Finally, we contribute to the literature on survey research. Within economics, the literature

largely focuses on a monopolist conducting a survey to ascertain an uncertain demand curve

(see, e.g., Manning, 1979; Venezia, 1984). The focus is on the costs and benets of the survey

rather than the sincerity of survey respondents. Within marketing, this literature recognizes the

possibility that consumers might not answer sincerely when asked about issues they nd sensitive,

such as questions dealing with sex or health (see Fowler, 1993; Groves, 1989; Lehmann, Gupta,

and Steckel, 1998; Hartman, Doane, and Woo, 1991). Nevertheless, the literature mostly ignores

this possibility, analyzing data under the assumption that all consumers are sincere (e.g., Churchill

and Iacobucci, 2005; Lehmann, Gupta, and Steckel, 1998; Sawyer and Peter, 1983). In contrast, we

examine how the interaction between strategic rms and respondents impacts the informational

properties of surveys and the quality of subsequent decision making.

3. Homogeneous priors

Compared with standard cheap talk models, our model makes two behavioral departures.

First, we assume that a fraction of consumers are sincere and merely report their tastes honestly

when asked. Second, we assume that rms and strategic consumers may differ in their views

about the fraction of sincere consumers in the survey population. In this section, we admit only

the rst of these departures and explore the implications of the sincere consumers on the quality

of market research.

Straightforward intuition would suggest that, the larger the fraction of sincere consumers, the

greater the informational benet to the rm. Clearly, if all consumers were sincere, the rm could

infer the systematic taste component, , arbitrarily preciselythat is, information aggregates.

When none of the consumers are sincere, it cannot. Thus, one might surmise that the quality of

information increases with the fraction of sincere consumers. Indeed, this would be the case if the

behavior of strategic consumers remained xed; however, their behavior adjusts to the fraction

of sincere types in the population. We show that, even if the fraction of strategic consumers is

small, their inuence on information aggregation is large. Specically, when strategic consumers

are present, information loss is inevitableeven in large surveys. Formally,

11

See also Admati and Peiderer (2004) as well as Che and Kartik (2009) for applications of overcondence in

cheap talk settings.

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592 / THE RAND JOURNAL OF ECONOMICS

Proposition 1. Under homogeneous priors, there does not exist an equilibrium in which informa-

tion aggregates.

Proposition 1 reveals a key consequence of disagreement between strategic consumers and

the rm. Although, on average, strategic consumers share the same preferences as the rm,

individually, they do not. Thus, each strategic consumer sends a report so that, in expectation,

she gets her ideal product, t

i

. At the same time, the rm uses its research to design a product

that converges in probability to the tastes of the average consumer, . However, as Proposition 1

shows, these two objectives are mutually inconsistent when information aggregates. This intuition

takes no advantage of the particular structure of the taste realizations and, indeed, the normality

assumptions on the realized state and taste variables are not needed for Proposition 1 to hold.

What is required is that the rms response to any survey realization is well behaved (in the sense

that y (M) is differentiable in M) so that strategic consumers and the rm are at loggerheads in

terms of satisfying their objectives. For this, it sufces that at least one consumer is sincere and

the taste realizations for consumers have positive density over the real line.

Of course, the fact that information does not fully aggregate does not imply that informa-

tion loss is necessarily severe. For instance, in the Crawford and Sobel (1982) framework, the

misalignment of preferences between sender and receiver ensures that some information is lost,

but the loss becomes minimal as preferences become aligned. One might have a similar intuition

in our modelthe larger the fraction of sincere consumers, the smaller the information loss. To

the contrary, we show that, even in the limit as the fraction of sincere consumers goes to one,

information loss remains severe.

To formalize this idea, we study equilibria that are well behaved in the following sense:

Fix an equilibrium and let y () and M () denote the equilibrium product choice and sample

mean in state in the limit as the number of consumers surveyed goes to innity. We say that

an equilibrium is monotone if y () and M () are (weakly) monotone in . Monotone equilibria

capture the following idea: When the systematic component of tastes shifts upward, the rm

and the typical consumer prefer a higher product type to a lower one, and this is reected in

the equilibrium product type. Monotone equilibria capture this idea but are weakerif product

types were decreasing in , this relation, too, would satisfy monotonicity, but would make little

economic sense.

We rst show that a monotone equilibrium always exists. Specically,

Proposition 2. The following is a monotone equilibrium: Strategic consumers choose the message

m

i

= t

i

k

n

/(n k

n

)

and the product design is unresponsive to M; that is, for all M

y (M) = 0.

Proposition 2 is the survey analog to the familiar babbling equilibria that arise in costless

signaling games. In those games, all agents are assumed to be strategic; and, therefore, a babbling

strategy corresponds to sending messages that are independent of the senders type. Here, the

messages of strategic senders are correlated with their types; however, these messages are designed

to perfectly signal jam the informative messages of the sincere senders. Notice, in particular, that

the strategy of strategic respondents varies with the number of sincere consumers in the population.

Normally, babbling equilibria hold little interest as there are more informative equilibria

provided that the divergence in incentives between the incentives of the sender and receiver is not

too great. Our next proposition shows that, for all parameter values under homogeneous priors,

there is a unique outcome of any monotone equilibrium: the product type is always unresponsive to

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HUMMEL, MORGAN, AND STOCKEN / 593

the results of the survey. Thus, not only is information aggregation impossible under homogeneous

priors, credible information transmission is impossible as well. Formally,

Proposition 3. In any monotone equilibrium, the rms product choice is unresponsive to the

survey; that is, y (M) = 0 for all M.

Proposition 3 is, essentially, an unravelling result. The impossibility of simultaneously

satisfying the objectives of the rm and strategic consumers leads to an arms race whereby

strategic consumers send ever more extreme messages which, in turn, leads the rm to ever more

discount the survey results. This process equilibrates only when the rm is totally unresponsive

to survey results.

Nonmonotone equilibria. Proposition 3 points out that, in any monotone equilibrium,

the product type is unresponsive to the results of the survey. A natural question is whether the

rm might do better with a nonmonotone equilibrium. First note that the restriction to monotone

equilibria is stronger than what is needed for the proof. In particular, as long as M and y are

monotone for sufciently large or small values of , the proof of Proposition 3 can be adapted

to show that the product design is unresponsive in any equilibrium. The key is that strategies

eventually become monotone and, for consumers with extreme tastes, the interval in which

strategies are monotone is the only payoff relevant circumstance.

12

The remaining case is where strategies are innitely oscillatory over the entire real line. We

cannot say what the informational properties of such strategies might be, but these strategies seem

sufciently counterintuitive as to be implausible. We investigated such strategies numerically and

were not able to derive any equilibrium with these properties. A full characterization of innitely

oscillatory strategies over the real line remains for future research.

4. Heterogeneous priors

The combination of sincere and strategic consumers in the common priors model proves to

be a volatile mixture leading to severe information loss. In this section, we show that by relaxing

the common priors assumption, information aggregation is restored. There exists an equilibrium

with a simple and intuitive form in which information aggregates: Reports and products are

chosen using linear strategiesstrategic consumers use a reporting strategy t

i

, where is a

parameter, whereas the rm selects the product using the strategy M, where, again, is a

parameter.

Although the modelling of homogeneous priors is straightforward, heterogeneous priors

requires more care. Following Scheinkman and Xiong (2003) and Van den Steen (2004, 2010),

we assume that the prior beliefs of the rm and strategic consumers are commonly known; that

is, the rm and strategic consumers agree to disagree. The main practical application of the

article occurs when the rm treats all responses as being sincere, that is, = 1. Here, the priors

of strategic consumers are irrelevant to the rms product choice for any given M. So long as

strategic consumers are aware that the data will be treated in this fashion, they need only concern

themselves with their own prior beliefs. That is, strategic consumers agree to disagree with the

rm whereas the rm simply discounts the possibility of strategic consumers altogether. This

seems sensible. After all, a strategic consumer clearly knows that some fraction of the population

is strategic, so < 1, whereas the rm disregards strategic distortion of survey responses, that is,

it implicitly holds the belief that = 1. This case corresponds to most practical applications of

survey data, where no statistical corrections are made to account for the possibility of strategic

consumers.

With this background in mind, consider the case where the product is responsive to the

reports of consumers, that is, where = 0 and nite. Recall that the rm chooses product y

12

The detailed calculations are available on request.

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such that

y (M) = E [|M] .

Given and , the rm believes that M converges in probability to +(1 ) . The rm

should then choose such that

( +(1 ) ) = ,

which yields

=

1

+(1 )

. (1)

Now consider strategic consumer i . She should choose m

i

such that

t

i

= E [y (M) |t

i

]

= E [M|t

i

] .

Given her beliefs about the populace of respondents, it follows that

t

i

=

h

n

E

_

t

j

|t

i

_

+(n h

n

1) E

_

t

j

|t

i

_

+m

i

n

,

for j = i . Then,

m

i

=

nt

i

h

n

E

_

t

j

|t

i

_

(n h

n

1) E

_

t

j

|t

i

_

.

Substituting in the strategic respondents strategy m

i

= t

i

and rewriting yields

t

i

n

=

t

i

h

n

n

E

_

t

j

|t

i

_

(n h

n

1)

n

E

_

t

j

|t

i

_

.

In a large survey, we then have

0 =

t

i

E

_

t

j

|t

i

_

(1 ) E

_

t

j

|t

i

_

.

Recall that E

_

t

j

|t

i

_

= E [|t

i

] = at

i

. Solving for , we have

=

_

1

a

_

1

(1 ) a

. (2)

Equilibrium then consists of simultaneously solving equations (1) and (2), which yields:

Proposition 4. Suppose that priors are heterogeneous, that is, = . Then the following comprises

the unique responsive linear equilibrium in a large survey:

m

i

= t

i

y = M,

where =

(a)

a(1)(1)

and =

(a(1)(1))

a()

.

Furthermore, information aggregates in this equilibrium: M converges in probability to the

invertible function () = ( +(1 ) ) .

In our model, the combination of normally distributed tastes and quadratic payoffs leads to

simple linear strategies.

13

While these conditions sufce to ensure the existence of a responsive,

linear equilibrium, they are not necessary. Two ingredients are essential for the result. First, a

13

This is not true of all cheap talk models with these features. For instance, in a version of our model where there

is only a single survey respondent, and this person is known to be strategic, there is no responsive linear equilibrium.

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rm must choose a product design to E [|M] and strategic consumers must try to induce a

product design equal to their tastes. Quadratic loss functions, as well as other specications of

preferences, produce marginal conditions where this is the case.

14

The second key ingredient is

that E [|t ] is of the form t , where (0, 1) is a xed coefcient. Although this holds under

normality, other distributions also have this property. Indeed, for any distribution of having

positive density over R, there exists a distribution of such that this condition is satised.

15

Information aggregates under heterogeneous priors because, when rms and consumers have

differing beliefs about the fraction of sincere consumers in the population, they can simultaneously

believe that their objectives are being met. In particular, given beliefs , the rm is choosing its

product to match its perception of the average type in the population, . At the same time,

given beliefs , strategic consumers respond to the survey condent that they will get their most

preferred product in expectation.

The strategies contained in Proposition 4 are not the only linear equilibrium. Indeed, the

strategies offered in Proposition 2 also comprises a linear equilibrium, and, because the proof

makes no use of the particular beliefs held by strategic respondents, the proof works under

heterogeneous priors as well. Because this equilibrium is unresponsive to the underlying state, we

discard it fromthe subsequent analysis. Obviously, ops can arise when the rmobtains no usable

information froma survey. The more interesting case is when it does receive (and act upon) usable

information.

To summarize, despite the apparent complexity of the model, equilibrium can be strikingly

simpleconsumers and the rm play linear strategies and information aggregates in a large sur-

vey. Moreover, the equilibrium is unique in the class of linear strategies (using the responsiveness

renement). This is in sharp contrast to standard models of strategic information transmission in

which information often does not aggregate, strategies are typically partitional, and equilibrium

multiplicity is commonly a problem. One might then be tempted to conclude that, with heteroge-

neous priors, a rms decision about whether to conduct a large survey or to forego surveying has

a clear answerin favor of the large survey. As we will show in the next section, the presence of

heterogeneous priors makes this determination less obvious than it rst appears.

5. Flops

In this section, we investigate the quality of product designs when a rm conducts a

large survey. Earlier we saw that information aggregated in a linear equilibrium, and thus, one

might have some measure of condence that large surveys would produce correct product

designs. Our main result of this section is to identify conditions where, instead of producing good

designs, acting on a large survey produces ops with high probability. Put differently, information

aggregation does not inoculate a rm from producing a design that is ill suited to the average

consumer.

We rst consider what would seem to be an obvious question: Should a rm undertake a

large survey in designing its product? Recall that when a rm designs based on a large survey, its

expected payoffs are

V = (M )

2

,

and because M converges in probability to ( +(1 ) ) , then, using the expressions for

and given in Proposition 4, it follows that for large n, the rms payoffs converge in probability

to

V =

_

( ) a +

( ) a

1

_

2

2

14

In particular, the Taylor rule, a commonly used objective function in macroeconomics, has this property.

15

Specically, when and are both drawn from the same distribution, it may be readily veried that E [|t ] = t /2

for all t.

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=

_

_

2

2

. (3)

Notice that the rms expected payoffs depend on a pair of ratios. We term the rst expression,

|( ) / ( )|, the calibration-alignment ratio. The numerator reects how well calibrated

the rms beliefs are about the fraction of strategic consumers in the population. The denominator

reects the alignment of priors between the rm and strategic consumers. We term the second

expression,

2

/

2

, the noise-signal ratio. It is the ratio of the variance in the idiosyncratic com-

ponent of consumers tastes compared to the variance of the systematic component. Equation (3)

reveals that, despite information aggregation, the product design does not converge to the tastes

of the average consumer, . Otherwise, this expression would be zero. Thus, unless there is no

variance in the idiosyncratic component of consumers tastes or the rms priors are perfectly

calibrated with the truth, the rms product designs meet the needs of the market only imperfectly.

Now suppose that the rm eschews surveys entirely. Lacking any additional information on

which to make its design decision, the rm opts for a design that matches its prior beliefs about

, that is, y = E [] = 0. In this case, for every realization of , such a rm suffers losses of

V

0

=

2

. (4)

Comparing equations (3) and (4), it may be readily seen that performing a large survey is superior

if and only if

< 1. (5)

Thus, we have established that:

Proposition 5. A rm benets from a large survey if and only if the magnitudes of the calibration-

alignment ratio and the noise-signal ratio are sufciently small. Formally, a large survey is better

than no survey if and only if equation (5) holds.

Proposition 5 reveals that, even when information aggregates in a survey, rm management

may be better off ignoring this information entirely and designing based on gut feel. This is more

likely to be the case for products that have a large idiosyncratic taste component or in settings

in which rms are relatively less sure about the fraction of strategic consumers. In technology

industries where the product is novel and difcult for consumers to envision ahead of time, one

might expect that the noise-signal ratio will be large. Likewise, for the design of intermediate

inputs in the supply chain, survey respondents will be other downstream businesses. In this case,

both the rm and the consumers probably share similar beliefs about the fraction of strategic

types in the population and hence the calibration-alignment ratio is likely to be high. In either

case, a rm might be better off not surveying at all.

When do product designs turn out to be ops? To examine this question, dene a product as

a op if it is more than z > 0 standard deviations away from the tastes of the average consumer,

. The probability that a design is a op following a large survey is then

Pr[op] = Pr[|M | > z

],

and, because M converges in probability to ( +(1 ) ) , it then follows (after some algebra)

that

Pr [op] = 2

_

z

_

, (6)

where () is a cumulative distribution function of a standard normal random variable. Notice

that the chance of a op again depends on the calibration-alignment ratio, the noise-signal ratio,

and z, the tolerance for missing the ideal product, .

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HUMMEL, MORGAN, AND STOCKEN / 597

FIGURE 1

PROBABILITY OF A FLOP AS A FUNCTION OF , THE PRODUCT OF THE CALIBRATION-ALIGNMENT

RATIO AND NOISE-SIGNAL RATIO

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

4 3 2 1 0

Probability

of

flop

Probability of a f lop

for a large survey

Probability of a f lop

without a survey

When the rm eschews surveys entirely, the probability of a op is simply

Pr [op] = 2(z) . (7)

The comparison between equations (6) and (7) is straightforward. Once again, a rm reduces

the chance of a op by conducting a large survey (relative to not surveying) if and only if

|( ) / ( )|

2

/

2

maximization. Thus, we have shown:

Proposition 6. Choosing whether to conduct a large survey so as to maximize the rms expected

payoff is equivalent to choosing whether to conduct a large survey to reduce the probability of a

op.

In other words, payoff maximization and op minimization lead to the same decision as to

when to conduct a large survey. Proposition 6 implies that, when the rm wishes to maximize

payoffs, it can delegate the product design decision to a product manager who might have very

different concernssay, avoiding a failed productand still achieve this objective.

We have emphasized the critical role played by the calibration-alignment and noise-signal

ratios in whether a design turns out to be a op. It is useful to dene to be the product of these

two ratios. Formally, = |( ) / ( )|

2

/

2

(i.e., a product is deemed a op if it falls outside of a one standard deviation band around ),

then we can compute the probability of a op as a function of . Figure 1 depicts this plot. The

gure highlights that, unless is very low, the chance of ops is substantial. Indeed, even when

is only 0.75, the majority of products are ops. At the point of indifference between surveying

or not, the chance of a op is about 62 percent. Surveying when is higher than this indifference

point further exacerbates the ops problem. The main point of the gure is that, unless tastes

are highly correlated (i.e.,

2

probability of producing a op is surprisingly high despite information aggregation.

Conventional wisdom suggests that large surveys are most important when tastes exhibit

large idiosyncratic variation (e.g., Lehmann, Gupta, and Steckel, 1998). Under the standard view,

the size of the survey helps to wash out this variation, thus revealing the systematic component

of tastes. Our results suggest the opposite conclusion. When idiosyncratic taste variation is large,

surveys perform poorly and ops are likely. Indeed, in the limit, as

2

, a op results almost

surely. The reason that idiosyncratic taste variation matters is that, because the rm gives little

weight to individual survey responses (relative to its prior beliefs), strategic respondents offer

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more extreme messages to shift the rms product design to their ideal. The result of this tension

is that, in the limit, strategic respondents effectively jam the signals of sincere respondents and

the rm becomes hypersensitive to small changes in M and responds accordingly. As the rm

is not perfectly calibrated, this hypersensitivity magnies the rms errors in design, inevitably

resulting in a op.

Our results also highlight the special role played by assuming priors are homogeneous.

Under this assumption, one comes to the pessimistic conclusion that surveys are never helpful.

When priors are not homogeneous, there is scope for information revelation in large surveys.

Moreover, the greater the disagreement in the priors of the rm and the strategic types, the

more scope there is for surveys to be helpful. One might be tempted to equate disagreement in

the sense of differences between and with misalignment of preferences. In most models of

strategic information transmission, such misalignment is harmful to information transmission

(e.g., Crawford and Sobel, 1982). Here, disagreement is helpful in that it reduces the incentives

for strategic types to distort and for rms to respond to these distortions. Indeed, our results show

that, all else equal, when disagreement is large, ops are unlikely.

Outsized role of strategic consumers. The ops problem is caused by distortions in the

reports of strategic consumers; that is, on their outsized role in determining survey results.

One might have the intuition that strategic consumers wield this inuence by choosing either

very large or very small survey responses, (i.e., large equilibrium values of ). Were this the

case, then one possible solution to the ops problem would be to constrain the space of reports

through upper and lower bounds. The next example shows that, even when strategic consumers

only modestly exaggerate their tastes, aggregate survey results can be sufciently distorted that

ops are a signicant problem; thus, capping the reporting space is not a panacea.

Example 1. Suppose = 1, = 3/4, = 7/10,

2

= 2, and

2

modestly, sending a report m = 3t . The chance of a product that falls outside of a one standard

deviation band around is 40.5% in a large survey, so ops are a signicant possibility.

The relatively poor calibration of the rm in Example 1 is obviously helpful in generating

the result. A more subtle intuition might be that, when the rm is well calibrated, extreme

exaggeration is required to produce ops. Our next example shows that exaggeration increases

only modestly and ops arise fairly frequently even when the rm is closely calibrated to the true

fraction of strategic consumers.

Example 2. Suppose = 1, = = 0.95,

2

= 5, and

2

m = 9t . The chance of a product that falls outside of a one standard deviation band around is

21.1% in a large survey.

Again, it is the miscalibration rather than the exaggeration by strategic consumers that is at

the heart of the ops problem. One might think that the problem essentially disappears when the

rm is arbitrarily well calibrated. Our next result shows that this is not the case. Recall that the

chance of a op depends on the calibration-alignment ratio rather than solely on the calibration

level itself. With this in mind, the next example shows that, even when nearly all consumers are

sincere, the chance of ops remains stubbornly high.

Example 3. Suppose = 1 and strategic consumers are well calibrated, that is, = < 1. In the

limit as all consumers become sincere, the probability of a op becomes

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lim

1

2

_

1

1

z

_

= 2

_

z

_

> 0,

and is independent of along the limiting path.

The key insight fromthis example is that the probability of a op depends on the noise-signal

ratio regardless of how well the rm is calibrated. Thus, the presence of even a small fraction of

strategic consumers fundamentally changes the quality of rm decisions compared to the case in

which these consumers are absent.

6. Avoiding ops

The inuence of strategic consumers stems, in part, from the fact that the rm is observing

only a summary statistic of the survey data, the sample mean, rather than the data itself. For

normally distributed tastes, the sample mean is a sufcient statistic when all consumers are

sincere, but not when there are strategic consumers. Typically, one needs to turn to scoring rules

or other exotic mechanisms to induce truthful revelation and thereby avoid ops. Here we show

that no such complexity is required.

Instead, a rm need only adjust its choice of summary statistics in interpreting the results of

survey data. Absent strategic respondents, there are many other summary statistics that the rm

might use to infer tastes and, indeed, in a large survey the rm ought to be indifferent among these

alternatives. In this section, we show that, in the presence of strategic respondents, the seemingly

innocuous choice of summary statistics has profound effects on incentives for truthful reporting

and hence on the informational properties of surveys. We consider two such statistics and show

how, merely through the judicious use of summary statistics, the rm can solve the ops problem.

Binary surveys. Suppose the rm continues to solicit open-ended responses to its survey

and consumers still offer costless messages in R; however, now the rm bases its designs only on

the statistic, the fraction of responses where m 0. In the limit, this is also a sufcient statistic

for the rmto deduce the state froma large sample of sincere consumers with normally distributed

tastes. Here we will show that the incentive properties of this statistic are vastly superior to using

the more familiar sample mean as the basis for decision making.

Proposition 7. When the rmuses a statistic as the basis for its decisions, then truthful revelation

is an equilibrium in a large survey. The statistic solves the ops problem.

The proof is by construction. First, suppose that the rm acts as though all surveyed con-

sumers were truthful. Under this hypothesis, in a large survey, will converge in probability to

1

_

_

.

Hence, in equilibrium, the rms product will converge in a large survey to

y () =

1

(1 )

= .

It remains to show that strategic consumers can do no better than respond truthfully. We

provide an intuitive argument below and relegate the formal argument, which is more involved,

to the Appendix. A strategic individual faces a choice between reporting m 0 and m < 0. The

particular value of m in each region is irrelevant. Given taste t

i

, a strategic consumer expects

to take on the value at

i

; thus, in a large survey, when t

i

> 0, a strategic consumer expects that

the design will converge to at

i

< t

i

. As the equilibrium design is lower than her ideal design,

she strictly prefers to report m = t

i

rather than any value of m < 0 because reporting m < 0 will

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only lead to a design that is further from her ideal in expectation. Similarly, when t

i

< 0, the

equilibrium design is higher than her ideal design, so she strictly prefers to report m = t

i

rather

than any value of m 0 since reporting m 0 will only lead to a design that is further from her

ideal in expectation. Therefore, truth telling is incentive compatible for strategic consumers, and

the rms expectations about consumer reports are conrmed. Thus, we have identied a fully

revealing equilibrium, regardless of calibration, alignment, or the noise-signal ratio.

Proposition 7 points out the crucial connection between the data processing strategy of the

rm and incentives for the strategic consumers. The key to solving the ops problem is for the

rm to focus on the fraction of consumers sending positive messages. A simple way a rm might

gather this data is by using blunter survey instruments, such as Likert-type scales. In terms of

the model, were the rm to survey consumers using only a simple binary survey instrument, then

the equilibrium we constructed in Proposition 7 would remain valid and the rm could end up

making better decisions than if it used a more comprehensive or open-ended survey instrument.

In short, when some consumers are strategic, the rm can learn more by asking less in a large

survey.

Sample median. The binary survey instrument works by not allowing strategic individuals

to exaggerate their type, but at the cost of coarsening the information gleaned from surveys when

there are only a small number of respondents. A different way one might solve the exaggeration

problem is by trimming the summary statistic, so it is less sensitive to outliers. Utilizing the

median, rather than the sample mean, represents the most stringent trimming strategy available

to the rm. To analyze this problem, it is helpful to discretize the action spaces of the players and

allow the grid over the set of possible actions to become arbitrarily ne. Specically, suppose

that the action spaces of rms and consumers are constrained to a grid ranging from l to l. Let

g > 0 denote the neness of the grid. There are 2l/g +1 actions available. Thus, the set of actions

is given by m {l, l + g, l +2g, .. , 3g, 2g, g, 0, g, 2g, 3g, . . . l 2g, l g, l} and

similarly for y. Note that as g becomes arbitrarily small and l becomes arbitrarily large, the action

space becomes arbitrarily close to the action space in the continuum model.

Consider a survey consisting of an odd number of individuals (so the median is unambigu-

ously dened) where the rm bases its product choice on the median report.

16

We will show that

truth telling comprises an equilibrium in a large survey utilizing this technology. As the message

space and the type space no longer coincide, we need to dene truth telling. We will say that a

truthful response is one where the message that is closest to the consumers taste is selected. As

above, we will assume that sincere consumers are truthful and consider the incentives of strategic

consumers. A truth-telling equilibrium is an equilibrium where all consumers engage in truthful

strategies and the rmis choosing a product optimally under the assumption of truthful responses.

Proposition 8. For any grid with neness g and length 2l, when the rm selects its product on the

basis of the median report, truth telling is an equilibrium for a sufciently large survey.

Why does trimming using the median lead to truth telling? The report of a strategic type

is relevant only to the extent that it is the median report and thus, in determining whether to

distort a report, a strategic consumer conditions on that event. In a small survey, the rm will still

anchor on its prior beliefs, and therefore there is still some benet from limited exaggeration.

As the survey size increases, however, less weight is placed on the rms prior belief, and

therefore there is little incentive to distort conditional on being the median report. The discrete

action space ensures that there is a sufciently large survey whereby this slight misalignment of

preferences between the rm and the strategic consumer ceases to matter and reporting becomes

truthful.

16

The results also hold if there is an even number of respondents.

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Now one might conjecture that the same effect will also hold when the sample mean is

the summary statistic. The key difference is that, when the median statistic is used, strategic

consumers only affect the product choice conditional on being the median report, whereas when

the sample mean is used, their reports always have a small effect on the product choice. Thus,

under the median, strategic types have a small chance of having a large effect on the product

design, while with the sample mean, they have a large (probability one) chance of having a small

effect on the product design. In the former instance, truth telling is optimal, whereas in the latter

instance, it is not, because the product design does not necessarily coincide with the tastes of the

strategic consumer.

Because Proposition 8 holds for any grid with neness g and length 2l, it follows that, as we

let the length become arbitrarily long (i.e., l ) and the gaps become arbitrarily small (i.e.,

g 0), truth telling remains an equilibrium for large surveys along this sequence. Moreover, as

g 0 and l , the action space converges to the countably innite analog of the continuum

action model. While this is not a proof that truth telling or near truth telling is an equilibrium in

the continuum model, it is suggestive.

Finally, while Proposition 8 was derived under the assumption that the systematic and

idiosyncratic components of consumer tastes are normally distributed with known mean and

variance, the result also holds under more relaxed assumptions. In particular, so long as the

idiosyncratic taste component is symmetrically distributed around zero, then the systematic taste

component can be drawn from any distribution and truth telling will still hold. Thus, the rm

need only have minimal knowledge of the data generating process giving rise to consumer tastes

for ops to be avoided using this statistic. Moreover, note that truth telling is an equilibrium

for a sufciently large sample irrespective of the rms beliefs about the fraction of sincere and

strategic consumers, and in particular, irrespective of whether the rm is well calibrated.

Discussion. All of these solutions to the ops problemrely on two key ingredients. First, the

method used by the rm to analyze the survey data must be common knowledge; and second, the

rm must somehow commit to its information-processing strategy. There are various practical

means by which the rm might achieve both goals simultaneously. For instance, the use of

lightweight feedback devices such as the Like button on Facebook ensures that the rm will

have only binary data on which to make decisions and signals quite effectively to consumers that

only binary responses can be used in formulating product designs. Likert-type scales commonly

used in gathering survey data play a similar role.

To see what can go wrong when either of these ingredients is absent, consider a situation

where a rm gathers data from a limited sample and uses trimmed means, perhaps even the

median, in determining product designs. If strategic consumers fail to anticipate that only the

median will be used, they will have no incentive to tell the truth. Even if the rm somehow

conveys its intent to use the median as the sole statistic and consumers respond truthfully, the

rm will be sorely tempted to use all of the sample data to glean additional information about the

state. Strategic consumers can anticipate this and will no longer wish to answer truthfully. Thus,

the rm needs to somehow commit. In principle, one way of doing this would be to hire a third

party to conduct the survey, retain the raw data, and only report the relevant statistic to the rm.

The rm might still be tempted to ask the third party for the raw data, but mechanism design

solutions like nancial hostages (Aghion, Dewatripont, and Rey, 1994) can mitigate this concern.

If there is some friction, such as a hassle cost of transferring data or a small fee for the transfer,

then, provided the sample is sufciently large, the rm again will not be tempted because the

incremental gains from this information become arbitrarily small in a large survey. While formal

mechanism design solutions appear rare in practice, fee agreements for additional data requests

are quite common.

17

17

For example, surveys conducted by the large survey rm Knowledge Networks often contain these provisos.

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7. Conclusion

The science of market research has progressed rapidly since the time of the quintessential

op, the Ford Edsel (Carlson, 2007). Now, at relatively modest cost, rms can (and do) conduct

large surveys of consumers tastes. This data is critical to nal product offerings. Yet, despite

these gains, products that prove to be ops are commonplaceas any visit to a local movie theater

will attest.

When rms rely on the sample mean in making product design decisions, they expose

themselves to the risk that sophisticated consumers will answer survey questions strategically

rather than honestly. As a consequence, relying on the sample mean of an open-ended survey,

even when the sample size is large, by no means guarantees the avoidance of ops. The effects of

these strategic consumers on survey data depend crucially on the beliefs held by consumers and

rms about their prevalence. When beliefs are common, the presence of even a small fraction

of strategic respondents makes information aggregation impossible. In contrast, when beliefs

differ, large surveys can still aggregate information. Moreover, equilibrium reporting strategies

are simple and intuitivethere is a unique, responsive equilibrium where reporting strategies are

linear in tastes. The key intuition is that heterogeneous prior beliefs allow strategic consumers

and rms to simultaneously believe that their objectives are being met. That is, all parties believe

that the survey will produce their ideal product even though views as to what this product is

differ.

Even when information aggregates, ops remain a distinct possibility. We show that the

chance of a op depends on two ratios: the noise-signal ratio, which measures the relative amount

of idiosyncratic taste variation among consumers, and the calibration-alignment ratio, which

measures the accuracy of the rms views about the fraction of strategic consumers relative to

the degree to which priors are aligned. Absent strategic consumers, the noise-signal ratio would

have no bearing on the quality of a large survey in that idiosyncratic taste variation washes

out of the analysis. With sophisticated consumers, a higher noise-signal ratio leads to larger

errors in the rms assessment of the tastes of the average consumer and, as a consequence, more

opseven in the limit. The calibration-alignment ratio reveals that rms are better served when

their beliefs as to the fraction of strategic consumers are well calibrated with the true fraction and

worse off when consumers share the rms beliefs. Because the chance of a op depends on the

calibration-alignment ratio, ops still arise even as a rm becomes well calibrated. When these

ratios are large and the rm uses the sample mean of the survey responses to make a decision,

a rm is better off eschewing surveys entirely rather than relying on large surveys. This is true

even if surveys are costless to conduct.

Our results highlight the hazards of using open-ended surveys and standard summary mea-

sures, such as the sample mean, to determine product choices. This is not to say that surveys

cannot play an important role in product design provided they are well designed. We offer two

simple variations in survey design that solve the ops problem. Offering a binary survey where

individuals can only report the direction of their tastes relative to the status quo completely elim-

inates the incentives for misrepresentation. Alternatively, extreme trimming of outliers through

the use of the median report can also align incentives in a large survey. Both designs capture

enough information so that the rm can make optimal product choices. By asking for or using

less information in its survey, the rm ends up obtaining more and better information. Thus, our

model suggests an incentive rationale for the widespread use of Likert-type scales and trimming

in survey design.

More broadly, though many rms embrace surveys as a central input in their decision

making (e.g., Deshpande and Zaltman, 1982; 1984), this article highlights the importance of

careful survey design and analysis of the data. Sometimes survey designers worry about choosing

questions to extract as much information as possible without worrying too much about incentives

to misrepresent. Likewise, statistical techniques for analyzing survey data often fail to correct for

strategic misrepresentation. However, consumers are not mere passive data points nor draws from

C

RAND 2014.

HUMMEL, MORGAN, AND STOCKEN / 603

some unbiased urn. They have their own preferences, their own agendas, and will pursue these if

given the opportunity. Seemingly well-meaning but naive procedures can easily give rise to ops

whereas procedures that seem less effective at extracting information, in fact, can be powerful

tools for making correct decisions.

We have couched our results in terms of surveys rms conduct to guide their product

offerings, but our model is also relevant to political decision making. Polling data increasingly

guides the formulation of policy. If anything, the problem of strategic survey respondents is

even more pronounced when one is dealing with emotionally charged issues such as abortion,

immigration, and the environment. Our results offer a cautionary tale for policy makers seeking

to govern or design policies merely to reect the will of the people as measured by survey

data. Product ops are unfortunate, but policy ops can have far graver consequencesnot just

to individual politicians, but to society at large.

Appendix

The following lemma proves useful in establishing Propositions 1 and 3.

Lemma 1. In any equilibrium, y (M) is differentiable and therefore nite for all M.

Proof. To establish the result, rst, x a value M for the realized sample mean. Dene X (M) =

_

(m

1

, m

2

, . . . , m

n

) :

1

n

m

i

= M

_

. Suppose, without loss of generality, that i = 1 is a sincere consumer. Then it is

obvious that X (M) +(n, 0, . . . , 0) X (M +) for all , where X (M +) is analogously dened.

Claim. For all , X (M +) = X (M) +(n, 0, . . . , 0) .

To establish the claim, suppose, without loss of generality, that i = k, k +1, . . . , n are strategic consumers for

some value k and x their reports at m

i

. Call this vector m

k

. Now dene a set

X (M| m

k

) =

_

(m

1

, m

2

, . . . , m

k1

) :

1

n

_

k1

i =1

m

i

+ m

k

I

T

_

= M

_

=

_

(m

1

, m

2

, . . . , m

k1

) :

k1

i =1

m

i

= nM m

k

I

T

_

,

where I

T

denotes the transpose of the unit vector of size n (k 1). Similarly, dene

X (M +| m

k

) =

_

(m

1

, m

2

, . . . , m

k1

) :

k1

i =1

m

i

= n (M +) m

k

I

T

_

.

To establish the claim, consider an arbitrary element of the set X (M +| m

k

). A generic element of this set satises

k1

i =1

m

i

= n (M +) m

k

I

T

,

or, equivalently,

m

1

+

k1

i =2

m

i

= n (M +) m

k

I

T

m

1

n +

k1

i =2

m

i

= nM m

k

I

T

.

However, the right-hand side of this expression denes a generic element of X (M| m

k

). Thus, we have shown that for

every m

X (M +| m

k

), there exists an element in the set X (M| m

k

) such that adding n to m

1

yields m

. Because this

holds for all m

k

, the claim then follows.

Next, we will show that y (M) is differentiable and nite. Recall that

y (M) = E [|M] ,

where

E [|M] =

_

mX(M)

( m|) f () d

_

mX(M)

( m|) f () d

,

C

RAND 2014.

604 / THE RAND JOURNAL OF ECONOMICS

where m is a generic 1 n vector of messages in X (M) and is the likelihood of the realization of messages m given .

Similarly, when the realized sample mean is M +, we obtain

y (M +) = E [|M +]

=

_

mX(M+)

( m|) f () d

_

mX(M+)

( m|) f () d

.

Now, using the fact that X (M +) = X (M) +(n, 0, . . . , 0), we can equivalently express this as

E [|M +] =

_

mX(M)

( m +(n, 0, . . . , 0) |) f () d

_

mX(M)

( m +(n, 0, . . . , 0) |) f () d

.

In addition, because the likelihood function, , is differentiable in its arguments, it then follows that E [|M +] (and

hence, y (M +)) is differentiable and nite. Q.E.D.

Proof of Proposition 1. First, note that information does not aggregate for a survey of nite size since, even if all reporting

were truthful, the survey information would not reveal the state. It remains to show that there does not exist an equilibrium

for a large survey in which information aggregates.

Suppose by means of contradiction that there exists a convergent sequence of equilibria

n

such that lim

n

n

=

where information aggregates. Assume, without loss of generality, that consumer i = 1 is a strategic consumer. Her

expected payoff from reporting a message m

1

is given by

E

_

(y (M) t

1

)

2

|t

1

_

.

Therefore, for nite n, the consumer sends a message m

1

satisfying

max

m

1

_

y

_

m

1

+

n

i =2

m

i

n

_

t

1

_

2

d H

_

n

i =2

m

i

|t

1

_

,

where H

_

n

i =2

m

i

|t

1

_

is the cumulative distribution function of the sum of the other consumers messages conditional

on t

1

. Differentiating with respect to m

1

and using the rst-order condition yields

_

_

y

_

m

1

+

n

i =2

m

i

n

_

t

1

_

y

_

m

1

+

n

i =2

m

i

n

_

d H

_

n

i =2

m

i

|t

1

_

= 0,

for the equilibrium m

1

. By Lemma 1, we know that the derivative y

aggregation implies that plim

n

n

i =1

m

i

/nis an invertible function M(). Optimality on the part of the rm implies

that y (M ()) = in the limit of an arbitrarily large survey.

Thus, taking limits as n , the rst-order condition converges to

_

( t

1

) y

(M ()) f (|t

1

) d = 0, (A1)

where f (|t ) is the probability density function corresponding to the posterior beliefs of a consumer with type t . A

necessary condition for equation (A1) to hold is that

_

x

( t

1

) y

(M ()) f (|t

1

) d

exists and is nite for all x. Thus, we may rewrite equation (A1) as

_

t

1

( t

1

) y

(M ()) f (|t

1

) d +

_

t

1

( t

1

) y

(M ()) f (|t

1

) d = 0,

where both expressions are nite.

Case 1: Suppose that y

L

, the left-hand side of equation (A1)

converges to:

lim

t

1

_

t

1

( t

1

) y

(M ()) f (|t

1

) d + lim

t

1

_

t

1

( t

1

) y

(M ()) f (|t

1

) d

= lim

t

1

_

t

1

( t

1

) y

(M ()) f (|t

1

) d

< 0,

C

RAND 2014.

HUMMEL, MORGAN, AND STOCKEN / 605

where the rst equality follows from the fact that, since

_

t

1

( t

1

) y

(M ()) f (|t

1

) d exists and is nite for all t

1

,

observe lim

t

1

t

1

( t

1

) y

(M ()) f (|t

1

) d = 0. The inequality follows from the fact that < t

1

for all values of

the integrand and y

(M ()) > 0.

Case 2: Suppose that y

(M ()) < 0 almost everywhere. An analogous argument establishes that equation (A1) cannot

hold.

Therefore, we may conclude that for t

1

sufciently large (small), a strategic consumers rst-order condition cannot

be satised and hence information aggregation is impossible. Q.E.D.

Proof of Proposition 2. Because the rms product does not vary with M, the strategic respondents strategy is consistent

with equilibrium play. It remains to show that there is no protable deviation for the rm. Suppose, without loss of

generality, that the rm believes that consumers i = 1, 2, . . . , k are sincere while the remainder are strategic; in this

proof, the subscript n on the variable k has been dropped to streamline the exposition. Given the rms beliefs,

M =

t

1

+ +t

k

n

+

(t

k+1

+ + t

n

)

n

can be written as

M =

k

n

+

1

+ +

k

n

+

(n k)

n

+

(

k+1

+ +

n

)

n

,

Using the fact that = k/ (n k) yields

M =

1

+ +

k

n

+

(

k+1

+ +

n

)

n

.

Taking expectations yields

E [|M] = E [] = 0.

Thus, y = 0 is optimal. Notice that the result is independent of the beliefs of strategic consumers, and, therefore, applies

regardless of whether the rm and the strategic consumers have homogeneous or heterogeneous priors as to the fraction

of strategic consumers in the population. Q.E.D.

Proof of Proposition 3. Suppose, to the contrary, that y (M ()) = 0 for a positive measure of values of . Consider the

strategic consumers limiting rst-order condition, which can be written as

_

(E [|M ()] t

1

) y

(M ()) f (|t

1

) d = 0,

where, by Lemma 1, we know that y

(M ()) is nite. Recall that there exists a xed value a E [|t ] /t , and x b such

that b (a, 1). We then may rewrite the rst-order condition as

_

bt

1

(E [|M ()] t

1

) y

(M ()) f (|t

1

) d +

_

bt

1

(E [|M ()] t

1

) y

(M ()) f (|t

1

) d = 0.

Now, taking limits as t

1

yields

lim

t

1

_

bt

1

(E [|M ()] t

1

) y

(M ()) f (|t

1

) d

+ lim

t

1

_

bt

1

(E [|M ()] t

1

) y

(M ()) f (|t

1

) d

= lim

t

1

_

bt

1

(E [|M ()] t

1

) y

(M ()) f (|t

1

) d.

The equality follows from the fact that, since the integrand is everywhere bounded, the second term becomes negligible

in the limit.

Now, recall that, for all bt

1

, E [|M ()] E [| bt

1

]. Furthermore, for t

1

sufciently large, E [| bt

1

] <

t

1

. Together, these inequalities imply that, for sufciently large t

1

, E [|M ()] < t

1

for all bt

1

.

Case 1: Suppose that y

(M()) 0. Then

lim

t

1

_

bt

1

(E [|M ()] t

1

) y

(M ()) f (|t

1

) d 0,

since the integrand is everywhere nonpositive. Thus, the rst-order condition can only be satised when y

(M()) = 0.

C

RAND 2014.

606 / THE RAND JOURNAL OF ECONOMICS

Case 2: Suppose that y

(M()) 0. An analogous argument shows that the rst-order condition can only hold when

y

(M()) = 0.

Therefore, in any equilibrium, y

it follows that y(M()) = 0, that is, the product design is unresponsive to the survey results. Q.E.D.

Proof of Proposition 7. Recall that f (|t ) is dened to be the probability density function corresponding to the posterior

beliefs of a consumer with type t ; these beliefs are normally distributed with mean at and variance a

2

. Under the

putative truth-telling equilibrium, the consumer believes that the product design converges to . Suppose that t < 0. If

the consumer changes her message from m < 0 to m 0, this will change the mean product design by some positive

amount. The difference in consumers payoff from reporting truthfully compared to a deviation where m > 0 is

u (t, m < 0) u (t, m > 0) =

_

( t )

2

f (|t ) d

_

( +q (, n) t )

2

f (|t ) d,

where q(, n) denotes the change in the product design as a consequence of a consumer changing her message. Below,

we will show that this expression is positive; that is, the consumer does not benet from a deviation.

We rst show that for large n,

q (, n) =

_,

where is the cumulative distribution function of a standard normal random variable and

this, note that when a consumer changes her message and reports m 0, the fraction of positive messages changes from

to +1/n, where is the fraction of positive messages reported when all consumers are truthful. When all consumers

are truthful in equilibrium, the rmchooses a project that equals y =

1

(). In contrast, when a consumer changes her

message and reports m 0, the rm chooses a project equal to y

1

( +1/n). Thus, when a consumer changes

her message, it changes the product by an amount equal to

1

( +1/n)

1

()

_

. For large n, the change in the

rms product converges to

q (, n) =

n

d

d

_

1

()

_

=

(

1

())

=

_.

It now follows that the change in the consumers utility is given by

_

_

( t )

2

+( +q (, n) t )

2

_

f (|t ) d

=

_

_

q (, n)

2

+2q (, n) ( t )

_

f (|t ) d

=

_

_

_

_

_

_

_

_

2

+

2

( t )

n

_

_

_

1

2

_

a

2

exp

_

( at )

2

2a

2

_

d

=

_

_

_

_

_

n

_

1

2

exp

_

1

2

_

_

2

__

_

_

_

_

2

1

2

_

a

2

exp

_

( at )

2

2a

2

_

d (A2)

+

_

( t )

n

_

1

2

exp

_

1

2

_

_

2

__

1

2

_

a

2

exp

_

( at )

2

2a

2

_

d,

where the second equality follows after substituting in for q and the third equality follows from expanding the expression.

Consider each term separately. Observe that the rst term in (A2 ) can be written as

_

_

_

_

_

_

_

_

_

n

_

1

2

exp

_

1

2

_

_

2

__

_

_

_

_

2

1

2

_

a

2

exp

_

( at )

2

2a

2

_

_

_

_

_

d

C

RAND 2014.

HUMMEL, MORGAN, AND STOCKEN / 607

=

_

2

_

n

2

a

exp

_

1

_

1

1

2a

_

2

+

t

1

2

a

t

2

_

_

d,

which, for all t < 0, converges to innity when a > 1/2 because (1 1/ (2a)) > 0 and is positive when a 1/2.

Observe that the second term in (A2) can be written as

_

( t )

n

_

1

2

exp

_

1

2

_

_

2

__

1

2

_

a

2

exp

_

( at )

2

2a

2

_

d

=

_

2

n

t

a

exp

_

2

a ( at )

2

2a

2

_

d

=

2

n

a

exp

_

t

2

a

2

2 (1 a)

2

__

( t ) exp

_

(1 a)

_

at

1a

_

2

2a

2

_

d

=

2

2

n

_

2

1 a

exp

_

t

2

a

2

2 (1 a)

2

__

( t )

2

_

a

2

1a

exp

_

(1 a)

_

at

1a

_

2

2a

2

_

d

= t

2

2

n

_

2

1 a

exp

_

t

2

a

2

2 (1 a)

2

__

a

1 a

1

_

.

Thus, the expression

_

( t )

n

_

1

2

exp

_

1

2

_

_

2

__

1

2

_

a

2

exp

_

( at )

2

2a

2

_

d

is nite when a > 1/2, is zero when a = 1/2, and is positive when a < 1/2 for all t < 0.

Combining the two terms, we observe that the sum of the terms converges to innity when a > 1/2 and is positive

when a 1/2. This indicates that regardless of whether a > 1/2 or a 1/2, a consumer with t < 0 will not choose to

deviate and send a positive message. Analogous arguments apply when t > 0. Q.E.D.

Proof of Proposition 8. We show that for any g and l, there is some sufciently large n such that it is an equilibrium for

the rm to choose a product equal to the median of the sample reports, and for the strategic consumers to send a message

equal to the point on the grid closest to their type. First note that if the strategic consumers always send a message equal

to the point on the grid closest to their type, then in the limit as the number of survey responses becomes arbitrarily large,

the probability the median of the sample reports equals the point on the grid that is closest to becomes arbitrarily close

to 1, and the best response for the rm is to choose a product that is equal to the median of the sample reports. Also note

that if the rm always chooses a product equal to the median of the sample reports, then the best response for the strategic

consumers is to send a message equal to the point on the grid closest to their type, m

by instead sending a message m

+ j g for some positive integer j (assuming such a deviation is feasible), this change

would only change the sample median in cases in which this median was in [m

, m

deviation could only lead to a greater median than before. As the rm is choosing a product equal to the sample median,

this would lead to a product that is further from the strategic consumers taste than before. This would not be a protable

deviation. Similar reasoning shows that a strategic consumer cannot protably deviate by sending a message smaller than

m

. Thus, it is a best response for a strategic consumer to send a message equal to the point on the grid that is closest to

her type. Q.E.D.

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