Media Briefings

BETTER AS A BIG FISH IN A SMALL POND OR A SMALL FISH IN A BIG POND?

  • Published Date: June 2018

Competing with colleagues for a promotion is just one of the many contests at the heart of modern life – and according to new research, changing the way in which such competitions are organised can produce unexpected effects.

The study by John Morgan, Dana Sisak and Felix Várdy, published in the June 2018 issue of the Economic Journal, finds, for example, that bigger prizes or more meritocratic contests can lower the average ability of entrants. What’s more, the chances of success for people of very high ability are roughly the same whatever size contest they enter.

The researchers make use of the ‘ponds dilemma’ – whether it is better to be a big fish in a small pond, a small fish in a big pond or some other combination – to analyse what influences the choices that people make about which contests they should enter.

For example, a golfer struggling on the PGA tour may well consider his options on the Asian tour; a freshly qualified lawyer may have a choice between a ‘white shoe’ law firm in New York or a slightly less competitive and less lucrative firm in Philadelphia; and a biotech start-up may have to decide whether to focus on a risky blockbuster drug or on a less risky and less profitable extension of an existing patent.

The study focuses particularly on four dimensions in which contests may differ: the show-up fees; the number of prizes; the value of prizes; and the degree of meritocracy. They then use this to examine self-selection and contest entry, establishing that people of different abilities may base their respective competition choices on any one of these four factors.

Previous work on contests has often used a simple approach to selection, which assumes a fixed outside option. In this scenario, the new study shows that the probability of entering the contest is higher when the contestant is of higher ability. This is where big fish tend to choose the big pond (they compete) and small fish tend to choose the small pond (and bow out of the competition).

The researchers demonstrate that this simple approach is misleading when the alternative to participating in one contest is to choose another. They show that when choosing between contests, people weigh up the potential rewards against their chance of success.

The key observation of the new study is that for those of extreme ability (high or low), the chances of success (or lack of success) is roughly the same regardless of the size of the contest chosen. By contrast, for those with an average ability, success is much more likely in the small pond.

The authors’ analysis allows them to make some surprising predictions. It suggests that changing the rewards can produce unexpected selection effects, for example, higher show-up fees may reduce entry. They also show that bigger prizes or more meritocratic contests may lower the average ability of entrants.

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The Ponds Dilemma’ by John Morgan, Dana Sisak and Felix Várdy

John Morgan is at the University of California, Berkeley. Dana Sisak is at the Erasmus School of Economics, Rotterdam. Felix Vardy is at the International Monetary Fund.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh); John Morgan via email: morgan@haas.berkeley.edu; Dana Sisak via email: sisak@ese.eur.nl; or Felix Vardy via email: fvardy@gmail.com