When Theory Meets Practice: A Conversation with Mark Egan on Firm Behavior and Market Dynamics

Much of what economists understand about how firms think about market dynamics such as pricing, competition, entry, and investment comes from a combination of economic theory and empirical research. Although these frameworks provide valuable structure and evidence, theory does not always align with how markets actually operate, and published empirical work can lag behind real-time business practices. As a result, wholesale reliance on academic research may leave a gap between what the literature describes and how firms behave in current competitive environments.

Real-world insights from executives, industry experts, and others with direct market experience can help bridge that gap by providing context for how firms interpret and respond to competitive pressures. However, beyond public disclosures like earnings calls or regulatory filings, detailed information about how firms currently view competition, pricing, and strategy can be difficult to source.  

To explore how academic researchers think about the role of real-world insights in advancing an understanding of market dynamics and firm behavior, Vice President David Smith sat down with Mark Egan, former interest rate trader and Professor of Business Administration at Harvard Business School (HBS). In addition to conducting empirical research on competition, valuation, and decision making, Professor Egan regularly meets with corporate executives to inform his business school case writing and to better understand how firms operate in practice.

They discussed Professor Egan’s perspective on how insights from industry practitioners can complement academic research to explain how firms compete, set prices, value aspects of their business, and make strategic decisions. Professor Egan also shared how his research has evaluated – and at times challenged – conventional wisdom about the strategies employed by firms, consumers, and investors across industries.

How have your case-writing work and interactions with CEOs and CFOs shaped your understanding of how firms operate?

Mark Egan: Professor of Business Administration, Harvard Business School

My work writing business school cases for HBS has had a big impact on how I think about competition and valuation. Case writing gives me a chance to sit down with executives and industry leaders, often in the financial sector but also well beyond it. Over the years, I’ve met with the CEOs and CFOs of some of the largest banks and hedge funds, as well as senior executives in industries such as apparel, food and beverage, and energy. Hearing directly from these leaders adds a layer of practical insight that is hard to get from data alone.

These conversations have helped me understand how firms actually value their businesses internally, how they define their competitive landscape, and which companies they view as relevant valuation comps. For example, I recently met with the CEO of a retail company to discuss a successful merger. We talked about how the value of the deal was allocated among different shareholder groups and how the firm assessed the efficiencies generated by the merger. I then went back and taught those valuation principles to my M.B.A. students.

Have these experiences influenced your research?

Yes – often these interactions with industry leaders end up sparking research ideas. For instance, several banking executives have emphasized to me how much time they spend thinking about which aspects of pricing customers pay attention to and which they don’t. That perspective ultimately helped inspire my research on price-insensitive banking customers known as “sleepy depositors.” Despite having many competing banks to choose from, a large share of customers who keep deposits with their bank does not respond to changes in deposit rates. Even when better rates are available elsewhere, these customers often stick with their bank – hence the term “sleepy.” Our research supported the counterintuitive idea that the mere presence of many competitors in the market for deposits does not translate into a highly competitive environment for these customers. And this finding confirmed what I heard from banking executives, which is that they face less rate competition for existing depositors relative to other dimensions of competition.

Can you say a little more about the interplay between what you learn from executives and what you learn through your own research?

The “sleepy depositor” example really illustrates my general approach to advancing knowledge. I’m always looking for convergence between what I hear in real-world conversations with firm leaders and what I can document through empirical research. When those two sources of insight line up, we gain a much clearer sense of how firms and customers actually behave.  

At the same time, my conversations with executives are just that – conversations. They’re single data points, and what I learn about how one firm thinks about competition may not represent the broader industry. To build reliable knowledge about market behavior and judgment, we need to know whether these insights generalize across many companies and many decision makers. That’s where empirical research comes in. I can take ideas that emerge from my case-writing work and then test them with data to see whether the patterns hold more broadly. For example, when I worked on a bank trading desk, it was generally believed that some brokers were steering clients toward more expensive products that generated higher commissions even when cheaper, essentially identical alternatives were available. That hypothesis about how the market operated stayed with me, and I later confirmed it in my doctoral dissertation research.

Speaking of your time as a trader, it seems like something that distinguishes your work in the financial sector is that it’s informed by your experience working in the industry. Can you tell us a little more about that and about any other ideas that came from that experience?

David Smith: Vice President, Analysis Group

I started my career at Barclays Capital on the interest rate trading desk and later spent time at Bank of America working on a range of financial products. One thing that surprised me early on was just how many professional certifications existed in the industry. Many consumers are familiar with credentials like CPA [Certified Public Accountant] or CFA [Chartered Financial Analyst], but there are more than 250 others. You might assume that these certifications differentiate financial professionals with superior skill or stronger ethical standards. But because so many certification agencies were competing to attract financial advisors, I wondered whether the credentials actually signaled higher quality. That curiosity eventually led to a research project: My coauthors and I found that, contrary to what you might expect, many certifications are associated with higher rates of misconduct and tend to signal lower advisor quality. In other words, competition among certification agencies appears to have created a race to the bottom in terms of standards.

Has this finding – and your research on the systematic mistakes that investors may make when selecting financial products – led to any insights about how market participants could improve the quality of their financial decisions?

My research with my coauthors suggests that investors and consumers need to think critically about the sources of information that they rely on to make decisions. It’s well established in the behavioral finance literature that investors – like most decision makers – rely on heuristics, or mental shortcuts, especially when they lack time or expertise. Investors’ reliance on advisor certifications as a signal of advisor quality is an example of such a shortcut.

It is important for consumers to understand the incentives an advisor faces and how those incentives might shape the investment recommendations they provide. And similarly, when an advisor holds multiple certifications, it may be worth considering what each certification actually represents and whether it meaningfully reflects greater expertise or is serving another purpose. Stepping back to assess both the source of advice and the incentives behind it can help market participants make more deliberate and informed choices. ■