Scrolling through my RSS Feed today and I came up with this little article via Freakonomics, The Cost of Friendship. The working paper examines the venture capital industry, how friendship plays a role in who we choose to work with and the costs/benefits of such choices. Economics is all about choices and this paper really highlights that fact! The most interesting finding, "The likelihood of success drops by 22% if co-investors attended the same undergraduate school."
The study makes use of various dummy variables (zeros and ones) such as gender, educational background, ethnicity (minorities) as well as other variables to determine success of investments called performance variables. They had a fairly large sample that included "3,510 venture capitalists that invested into 11,895 different portfolio companies from 1975 to 2003." I know there is a good story somewhere about the Research Assistants that sorted through it all.
The authors used "probit regressions to fit models with binary dependent variables." Oh probit! We don't learn too much about probit in ECON 321 or ECON 421 even. It seems like a valuable tool to have in our toolkit, especially in marketing research! However, you can take the initiative to learn it using ECON 422 and ECON 472. Perhaps now taking those courses won't seem so abstract and theoretical if you can read about an interesting application. If you are interested you can get the article FREE from our lovely university. Head on over to our library and Connect from Home to access the NBER Working Papers.
NBER WORKING PAPER SERIES
THE COST OF FRIENDSHIP
Paul Gompers
Vladimir Mukharlyamov
Yuhai Xuan
