Such behaviour can damage markets, causing a lack of trust between buyers and sellers and, ultimately, a drop in quality of goods. New research shows the crucial significance of honest feedback in all types of markets and within organisations.
Everyday we provide information to others about our experiences, notes Ben Greiner, an economics lecturer from the Australian School of Business. Whether it's feedback about a film, a colleague, an airline or a meal consumed at a local restaurant, invariably the information provided is assumed to be true. The exchange of information between individuals and groups acts as a powerful deterrent for bad behaviour by businesses and individuals. "Businesses know that if they offend one customer then others will not come, so reputation helps to solve the 'lemon' problem," says Greiner. "But how people report something may also be influenced by strategic or social considerations, so the information you get might be biased." That was the problem on eBay.
With the aim of determining how trustworthy reputations are built, Greiner and his colleagues, Gary Bolton and Axel Ockenfels, ran a research project that examined the pattern of feedback behaviour by millions of eBay users. Their analysis was complemented by a series of laboratory experiments to test the effectiveness of different feedback rules.
In the eBay buyer-seller relationship, because the feedback can be immediately observed and there's a risk of retaliation, a strong incentive exists for the first person to deliver positive feedback, Greiner points out. "We observed that when positive feedback is given on eBay, the feedback returned was positive in 99.9% of cases. When negative feedback was provided, the reply was negative in more than 90% of cases. Because people knew there might be retaliation, they gave less negative feedback – or none at all. So 98% of feedback on eBay was positive, and that is not consistent with experience. We wanted to work out how to fix the problem."
Feedback is a major component of building reputation, Greiner says. And reputation is not just important for market players, it also defines the quality of markets. When buyers feel they are unable to reliably interpret reputations of sellers within a market, everybody suffers because the purveyors of high quality goods abandon that market altogether. They can no longer charge a premium for their products, so they pack up and leave. This causes an overall drop in the quality of goods, Greiner reports. "Allowing the 'good' sellers to build a reputation helps to solve these problems."
The significance of the relationship between reliable feedback and reputation-building is far reaching. For example, managers in organisations increasingly depend on performance feedback to evaluate staff. However, the need to distinguish between high performers and average staff may be hampered if the feedback mechanism encourages employees to pat each other on the back in the hope that their colleagues will return the favour. High performers will not be able to earn the recognition, and the income, that they deserve – and valuable staff will leave.
A 360 on Feedback
As part of performance management, many organisations use 360-degree feedback in which employees are rated by colleagues and supervisors. Often the process is open, which makes the feedback positive or neutral. In "blind" feedback systems where the source is not disclosed, warts-and-all honest feedback is more likely.
Lenorë Lambert, director of The Interview Group, a company specialising in employee feedback, has been involved in thousands of interviews with staff at various client organisations. The solution to sourcing reliable feedback is to be flexible and allow the person providing the feedback to define their required level of confidentiality, she says. Sometimes companies forget their objectives. "Ultimately, the goal is honest feedback and to gain access to as much detail as possible. To achieve that, you need to allow people to feel safe in giving the information," Lambert says.
Staff should be given the choice as to whether their feedback will be confidential, semi-confidential (open to specific people) or open to everyone, according to Lambert. Confidentiality is important to some people, but not to others – 75% of people don't request it, she notes. Typically, only 10% request absolute confidentiality, while 15% have some disclosure restrictions. "They may be happy for the HR person to see it, for instance, but not their direct manager." Sometimes managers get carried away with enforcing confidentiality, but those who don't care about it should be given the option to have their views openly acknowledged. In that way, an organisation can glean an extra level of insight about its people or, specifically, about the people providing the feedback.
Lambert's experience showing confidentiality is significant for honest feedback in only 10% of cases also holds relevance for the eBay example. Assuming that most sellers are honest, then 10% could be all that is needed to eliminate the bad seeds and keep market quality high, claims Greiner whose recommendation to eBay was to employ a mix of open and confidential feedback mechanisms.
"If we insisted on open disclosure, we would get watered-down and less-than-honest responses from 25% of people," Lambert says. "That's why offering a choice of levels of confidentiality is important. Companies get it wrong when they make it mandatory one way or the other – either you have to disclose or you're completely anonymous. Either way they're missing out on valuable information."
Finding the Balance
A sign of the success of an organisational feedback mechanism is the participation rate, says Jason White from human resources consulting firm, Hewitt Associates. When employees happily take part in an unenforced survey, it suggests a high level of comfort and the resulting data is likely to be useful.
"Having the right mix of questions is vital. For our business that means linking them to employee engagement, key initiatives in the business and other important aspects of the business culture," White says. "There should also be a combination of ratings-based questions and open feedback. The number of people who provide open feedback gives a sense as to how many really want to participate."
Respondents who are uncomfortable giving feedback tend to be fence-sitters who offer positive or neutral information, and the upshot is that the survey process may be a waste of time and effort. White suggests a number of variables can cause this to happen, including whether the respondent is introverted or extroverted. But often it simply comes down to a badly managed feedback process. "Unless confidentiality is offered, then there is always the risk that people will not give you the full story," White says. "The respondent will feel at risk, either from their personal relationships with people at work or from their manager's perception of them." If they feel unsafe then people stick to the middle ground. "They will say that everything is just okay."
White's argument aligns with Greiner's findings in the eBay case. While overwhelmingly positive feedback may create a feel-good environment within a market or a business, it is no help for building quality or to convincing customers – or staff – that a reputation has been earned in a credible fashion. "Feedback should be balanced and round rather than just positive," White says. "Balanced feedback creates a level of authenticity, not just a feeling that everybody is getting a pat on the back that they may – or may not – deserve."