Focusing on risks or rewards? How rankings affect reputation-based choices

In many sectors, independent rankings play a crucial role in clients’ and applicants’ decisions when selecting an organization. For investors deciding where to allocate capital or MBA candidates applying to a university, rankings combined with various performance indicators are key drivers of selection and final decisions. 

Previous research suggests that decision-makers use status (i.e., position in rankings) as an initial screening tool, reserving reputation (i.e. performance indicator)-based comparisons for a second stage. Reputation comprises multiple dimensions that can play a distinct role in an assessment. 

A recent study reveals that rank influences how decision-makers weigh different dimensions of reputation, particularly in terms of focusing on upside opportunities (i.e. rewards) or mitigating downside risks. 

High-status organizations can focus on highlighting opportunities, while lower-status ones should emphasize they are safe choices

This research, conducted by Esade's Associate Professor François Collet, along with Olga Bruyaka (West Virginia University), Alex Makarevich (California State University East Bay), Lucie Baudoin (Excelia Business School), and Ralf Wilden (Macquarie Business School, Macquarie University), was published in Strategic Organization earlier this year. 

Their findings have significant implications for how organizations should emphasize different dimensions of their reputation contingent on their rankings. High-status organizations can focus on highlighting opportunities, while lower-status organizations should focus on emphasizing that they are safe choices with little downside risks. 

The decision-making process 

The researchers examined the two-stage process of decision-making, where status (i.e., rankings) is used in the first stage as a selection tool, and reputation-based comparisons occur in the second stage. They show that this second stage is contingent on the organization’s status level. 

The hypothesis and empirical evidence were thoroughly tested using a sample of 411,530 MBA applicants. Although the study focuses on MBA programs, the authors note that the results are applicable to various contexts, including job applications and choosing partners for economic transactions or non-commercial associations. 

First, the study finds that, consistent with previous research, at the very top of a ranking, reputation-based evaluations (e.g., salary outcomes or employment rates) hold less relevance, as rank alone dominates decision-making. However, below the top tier, reputation becomes more significant, and an organization’s rank influences which reputational indicators decision-makers prioritize. 

This finding introduces a more complex interaction between status and reputation than previously assumed models suggested. 

Understanding status and reputation 

In both business theory and the study’s context, the distinction between status and reputation is important. Status refers to a socially constructed value hierarchy that ranks organizations. Reputation, however, is multi-dimensional and based on past observable behavior or performance. 

A dimension of reputation can be associated with upside opportunities such as financial success (e.g., margins for venture capital firms or salary levels of MBA graduates) or downside risks like solvency or reliability (e.g., employment rates after graduate for MBA). 

Below the very top of the status hierarchy, an organization may raise concerns about downside risks

A high-status organization may be so prestigious that decision-makers disregard reputational risks. The authors offer the example from past research showing how a bank manager commenting that when a high-status investment bank invites them to collaborate, "we almost don’t have to do any diligence; you just say yes." 

Conversely, below the very top of the status hierarchy, an organization may raise concerns about downside risks, and decision-makers might face greater accountability for their choices if they make the decision to collaborate. 

Boundaries and future directions 

While the researchers believe their findings broadly apply across various business contexts, they acknowledge certain limitations.  

The authors point out that the study focuses on tie-seeking rather than tie-formation. Tie-seeking is the first stage of building a relationship and involves fewer resources. However, tie-formation requires a deeper commitment and greater investment by decision-makers. The researchers suggest that future research could explore the final choice decision to form a tie (e.g., forming an alliance or making the final decision to join a specific graduate program). 

Despite these caveats, the researchers conclude that decision-makers are sensitive to different types of reputation signals contingent on the rank of the organization they evaluate. Their study highlights the importance of understanding the dimensions of reputation and how their relevance varies based on the rank of the organization being evaluated.