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Why Firms Should Conduct Randomized Controlled Trials

By experimenting, firms can fully understand a new policy’s causal effect and its consequences

Maria Guadalupe
Mon, 06/18/2018 - 12:02
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Making mistakes and learning from them is par for the course for companies. But years of bad decisions could lead to the downfall of conglomerates.

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In the case of General Electric, a major engine of America’s economy for more than a century, the firm shook investor confidence when it announced last year that it would have to slash its stock dividend in half—only the second time it had to cut its dividend since the Great Depression.

By the end of last year, General Electric had shed more than $100 billion in market value since November 2016, undone by a long history of overpriced acquisitions, opaque accounting, and its overly complex business model.

For firms to make the right decisions, it would be useful for them to become long-term laboratories that conduct experiments—such as randomized controlled trials (RCTs)—in collaboration with academic researchers, says Guido Friebel, an economist and professor of human resources at Goethe University in Frankfurt. 

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