Reference no: EM132464148

Risk Taking by Ad Agencies

A study was conducted by Douglas C. West to examine under what conditions, if any, advertising agencies take more risk. The primary statistical technique used to analyse the data in the study was the chi-square test of independence. Although several studies previously examined risk on the part of advertisers, little research addresses the willingness of advertising agencies to take risks on behalf of their clients. West theorized that people are more apt to take risks when the outcome affects someone else's livelihood and income rather than their own; consequently, advertising agencies might be more willing to take risks than advertisers. In addition, he theorized that advertising agencies might be more willing to take risks with smaller clients rather than large clients and that newer agencies might tend to be more willing to take risks than older agencies. The study involved 64 account directors and/or heads of creative departments of advertising agencies selected from a standard directory. Respondents were presented with two advertising options under a plan to launch a new product. Plan A was a standard one with an average rate of return (risk averse), and Plan B was an uncertain one in which there is a 50% chance of getting a lower rate of return than the client's worst forecast and a 50% chance of getting a better rate of return than the client's highest forecast (risk seeking). Using a chisquare test of independence, the percentages of respondents selecting each plan were compared to percentages produced in a similar study with advertisers. The result was that the proportions of agency respondents that were risk averse/risk seeking were not significantly different from the proportions of advertisers that were risk averse/risk seeking (x 2 = 3.165, p = .076). Agencies and advertisers were also compared on four degrees of risk in light of the risk taken with their most recent client. The result showed no significant difference between agencies and advertisers on the amount of risk taken with their most recent client (x 2 = 3.165, p = .076, a = .05). Thus, on two questions, there was no difference in the risk taking between agencies and advertisers. Are there circumstances under which an advertising agency might be more willing to take risks? Respondents were asked to what degree they were willing to take risks if the client is their smallest client versus if the client is their largest client. A 4 2 contingency table was constructed with four degrees of risk and the two client sizes. Analysis of these data produced a significant chi-square of 9.819 (p = .021) showing that agencies tended to be more risk taking with smaller clients than with large clients. The effect of agency age on participant selection of Plan A versus Plan B was analyzed using a 2 2 contingency table. Agencies were separated into two age categories (3-19 years versus 20-135 years) with Plan A and Plan B as the risk options. Using a chi-square test of independence, it was determined that a significantly higher proportion of the younger agencies were more risk seeking than older agencies ( 2 = 6.75, p = .01). In this study, the chi-square test of independence allowed for categorical comparisons between agencies and advertisers, between small clients and large clients, and between young and old agencies. In many other studies, chi-square categorical statistics can be used to study business phenomena.

What are the processes and findings used in the study of the article. Suggest a possible study that could be done at your current or past job that could use a similar methodology and analysis.