First Look

July 28, 2009

How much should you trust the sites you use for Internet shopping? Trust certification authorities such as TRUSTe and BBBOnline reward their member sites with a clearly visible seal of approval, suggesting concern for consumer privacy and safety, yet the best policy for shoppers remains caveat emptor, argues HBS professor Benjamin Edelman. His research using a new dataset on Web site safety urges caution rather than trust. "My analysis offers practical lessons for regulators, users, and trust authorities," Edelman concludes in "Adverse Selection in Online 'Trust' Certifications" [PDF]. "Regulators should not assume self-regulatory bodies will assess would-be members correctly, for self-regulation incentives diverge substantially from social optima. Users should also be wary of supposed certifications-questioning what certifications really mean and why sites boast of certification. Finally, trust authorities might rightly reconsider their practices-realizing that, in the long run, users will come to disbelieve certifications that are granted too easily." Business cases this week look at the innovative business model behind Moods of Norway, a fashion company, and at Pfizer's executive decision-making.
— Martha Lagace

Working Papers

None this week



Adverse Selection in Online 'Trust' Certifications


Widely used online "trust" authorities issue certifications without substantial verification of recipients' actual trustworthiness. This lax approach gives rise to adverse selection: the sites that seek and obtain trust certifications are actually less trustworthy than others. Using a new dataset on website safety, I demonstrate that sites certified by the best-known authority, TRUSTe, are more than twice as likely to be untrustworthy as uncertified sites. This difference remains statistically and economically significant when restricted to "complex" commercial sites. In contrast, competing certification system BBBOnline imposes somewhat stricter requirements and appears to provide a certification of positive, albeit limited, value.

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Cases & Course Materials

The Christmas Eve Closing

Harvard Business School Case 209-043

In 2002, two homeowners in Massachusetts are deciding whether to refinance their home less than two years after taking out an initial mortgage and a subsequent home equity line of credit.

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How Institutional Investors Think About Real Estate

Harvard Business School Note 209-152

Real estate is an increasingly important component in the portfolios of institutional investors. This note discusses the issues these investors must consider when investing in real estate from the legal forms of ownership, to separate or commingled funds, to property type and geography, to broad or focused managers, to leverage, to the timing of investment, and finally, to the compensation paid to both external managers and internal staff.

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Moods of Norway

Harvard Business School Case 609-106

Describes a young fashion company competing in a variety of unconventional ways, many "experience economy" related. Moods fronts their brand with the "boy band" images of its three founders and designs eccentric features into their clothes as a way of gaining mindshare among customers even though they cannot spend on marketing the way their competitors do. The case invites students to explore an unusual business model in both concept and execution.

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Pfizer: Letter from the Chairman

Harvard Business School Case 110-003

This case explores maximizing shareholder value as a goal in executive decision making. Over a period of nine years, three different Pfizer CEOs make critical decisions intended to increase shareholder value. But the results are disappointing. To allow students to examine these decisions, the case provides excerpts from four Chairman's letters to shareholders from Pfizer's annual reports, followed by a description of the circumstances behind each letter. In the 2000 annual report, then-CEO Bill Steere discusses Pfizer's rise to industry prominence with the acquisition of Warner-Lambert. In the 2003 report, new CEO Hank McKinnell discusses Pfizer's performance goals and its acquisition of Pharmacia, which gave it control of the anti-arthritis drug Celebrex. In the 2005 report, McKinnell discusses his decision to keep Celebrex on the market despite health risks. In the 2006 report, new CEO Jeff Kindler barely mentions McKinnell's (controversial) early retirement and describes efforts to reform the company. The case closes in February 2009, just after Pfizer announces plans to acquire competitor Wyeth. Since 2000, Pfizer's tremendous growth in assets through acquisitions has not translated into significant growth in net income or share price. In closing, students are asked what Kindler should write in the letter to shareholders to open Pfizer's 2008 annual report.

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The Rise of President Barack Hussein Obama

Harvard Business School Case 409-115

This case profiles President Barack Hussein Obama's rise to the presidency as an "improbable candidate." The case illustrates the ways in which he overcame criticism from those who questioned his credibility and his values, and skepticism from those who were unsure whether America was ready to elect its first African American President. It also explores how President Obama was able to gain support from the American people despite lagging behind Senator Hillary Clinton, the presumed Democratic frontrunner, throughout much of the pre-primary period.

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