Joe Stiglitz on Trust (and abuse of trust)

This piece is interesting for several reasons, among them how many course themes show up in it.  It is regrettable in that much of this ends up being cast as left-right politics.  I suppose nowadays it is impossible to avoid national politics in representing the issues.

There was another piece in the paper today of interest (on the abuse of trust issues).  This one was about Affluenza, a word I hadn't heard before (and likewise for my spell checker).  I suspect that some fraction of you will become highly successful business-wise post graduation.  I hope that success doesn't erode your concern for others and that you can keep some sense of the positive value of gift exchange, even as you do well in your business careers.

And now for something completely different (not Monty Python).

This is amazing.

Grades Are Posted....

....both in Moodle and Banner.

Happy holidays!

Some Reading for After the Course Concludes

Here is a brief annotated list of things you might look at.  Only the last one is specifically economics.

1.  Finish reading B&D.  It is a good and interesting book.  The second half is on leadership, which we didn't mention at all.  Perhaps we should have spent more time on other parts of the book than what we did.  Particularly, the parts on politics and on the symbolic frame are interesting and perhaps things outside your current experience.

2.  Schon The Reflective Practitioner - I think of teaching as reflective practice.

3.  NAS How People Learn - The first few chapters are very useful, particularly the one on the expert-novice distinction and the next one on transfer.

4. Ericsson et. al.  The Role of Deliberate Practice - The issue of why some people plateau while others keep on learning has to do with deliberate practice, which means on an ongoing basis trying things that are a little bit out of reach but not totally impossible.  It takes a lot of determination to do that or it takes turning the activity into something fun so you persist at it.

5.  Herbert Simon's Nobel Lecture - While this essay was mentioned in the Syllabus at the outset, we didn't spend any time on it.  Now you may be ready to appreciate the ideas that are in it.

6.  Alchian and Demzetz on Economic Organization - This is the definitive piece on the firm as arising from team production and the need for a "residual claimant" to address the monitoring and incentive issues. This is a scholarly paper published in the American Economic Review, one of the very top journals.  But there is no math.  You might find the writing style a bit hard at first because they are writing for academics, not a general audience.

Comments on Final Exam Performance

This post signifies that the final exams have been graded.  It will take a while to upload grades, but it will be done by late afternoon.  Grades will be posted first in Moodle, then in Banner.

* * * * *

Transfer Pricing

Nobody talked about an alternative to transfer pricing - off the top funding.  Even in for profit companies certain departments, like HR (human resources) and IT (information technology) are typically funded off the top.  Off the top funding is preferred to transfer pricing when sizing the department is not a big concern.  Off the top funding encourages greater utilization of that department's services.   Transfer pricing is preferred to off the top funding when the sizing of activity is a critical aspect of firm operation.  If the upstream offering is from an undersized division, that can create costly bottlenecks for the firm.  Alternatively if the capacity the upstream division requires is very costly, having that capacity go idle frequently can significantly lower profits.  Transfer pricing is better than off the top funding at getting the size right.

Only a few people mentioned the possibility of an outside market and nobody really asked why there is this upstream division in the first place.  You may recall that earlier in the semester we talked about asset specificity and hold up.  This is typically why the firm is vertically integrated and why transfer pricing becomes an issue.  But there may be other possible suppliers in the market and the downstream division might consider outsourcing to them as an alternative to buying from the upstream division or in addition to that.  In this case the transfer price will be influenced by the market price.  In the textbook case where the market provides a perfect substitute to what the upstream division provides, then it is optimal for the transfer price to coincide with the market price.

There is a puzzle with regard to the following.  If divisional profits ultimately go to shareholders, why should the divisions care about how much profit they make?  The response to this is that divisional profits are utilized as part of the performance measure about how well division management is doing.  Another part of that performance measure might very well be overall company profit.  In other words, the upstream division will want the transfer price to be higher than where social surplus is maximized, but it may not want it to be as high as the monopoly price.  Most people ignored the possibility that the performance measure could be other than divisional profit only.

Last, only a few people mentioned the use of transfer prices as a means to avoid paying corporate profit taxes.  We didn't discuss this in class, but there was an Econ in the News post to the class site on Apple, in particular, exploiting transfer prices in this way.

Conflict

Answers were generally okay.  Many people associated the expression "my way or the highway" with Model 1.  That was fine.

I would have liked students to ask more about why the employee should have something of value to contribute.  The vast majority of the class simply assumed that the employees would have something to contribute.  Might it be that in some cases they don't?   Had students asked this question it would have better tied their response into things we studies earlier in the semester.  Two possible sources of contributions are:

• employees have information that the manager doesn't have, from interaction with clients, interaction with other employees, interaction with contractors, or from use of products or services that the manager hasn't used.  
• employees have expertise that the manager doesn't have. 

The first instance should bring up a recollection of whether decisions are made by the center (manager) or at the edge (employee).  Recall that we said economists generally favor decentralized decision making - make the decision where the information is.  It would have been good to bring that earlier discussion in.  Nobody did.

The problem with the earlier discussion is that it is either/or and many decisions are more complex than that, with multiple bits of information needing to be incorporated to make a good choice.  This is why the inquiry approach advocated in model 2 makes sense.  Inquiry is the way to address the complexity.  

The second instance regarding differences in expertise may be worse on morale, when the opinions of the employee are ignored.  In the first instance it is always possible that, unknown to the employee, the manager has other information that speaks to supporting what the manager has chosen.  When the issue is expertise, however, the poor judgment of the manager is clearly evident to the more expert employee.  There is no doubt then.  That is demoralizing.  

Nobody brought up the Casey Stengel line that I had us consider earlier in the semester:

The key to being a good manager is keeping the people who hate me away from those who are still undecided.

There are at least a couple of ways to interpret this and have the interpretation consistent with Argyris and Schon.   First, the people who hate me in that quote are the ball players who are being platooned and want more playing time.  They'll complain about that, but it is something the manager should ignore.  Put a different way, sometimes the employee will want what is good for the employee but not necessarily good for the organization.  Those suggestions should be ignored.  The process of the employee communicating the suggestion and the manager ignoring it creates conflict, but in this case it is also consistent with higher productivity.  Second, having people like each other may be secondary at work.  What matters is that they respect one another and put in their best effort as a consequence.  In the case of Casey Stengel as manager of the Yankees, the team won, spectacularly often.  The winning was sufficient to cause the players to respect the manager, even if the individual players didn't get as much playing time as they wanted.  Sometimes respect and likability go hand in hand.  Other times they don't.  It is respect that matters more for productivity.

Now for a sidebar on language use.  The word authority has at least two distinct meanings.  One is dictator.  The other is expert.  If a regime has a dictator, then it is referred to as authoritarian.  Nazi Germany had an authoritarian regime under Adolf Hitler.  If a person is known as an expert then his or her opinion is taken as authoritative, which means others should trust it willingly.  There is an expression, "according to Hoyle" which originally meant that the rules (of the card game) were correct and has come to mean that the procedure being followed in any endeavor is correct.  Hoyle was an expert on card games.  Likewise, Judith Martin (Miss Manners) is an expert on etiquette.  If you quote Miss Manners you are offering an authoritative view about the proper way to behave.

On this question several students wrote authoritative where they meant authoritarian.  I didn't punish anyone for doing that, but I thought you should know the difference.

Incentives

Students seemed to struggle with this question.  Many responses included incorrect assertions, among them:

• There is monitoring in the static principal-agent model (there isn't).
• Output is a deterministic function of effort in the static model so low effort produces low output and high effort produces high output.  (Actually, output is a random function of effort and high effort make high output more likely, but it is not certain.)
• The equilibrium in each model can be improved upon by government interference (that's only true in the Shapiro-Stiglitz model).
• Referring to the equilibrium of the Shapiro-Stiglitz model as an optimum.  (It is not optimal.)

There were a variety of other errors as well.  Perhaps more importantly, some people couldn't describe these situation in their own words.  They relied on the Excel homework (too much in my view) to characterize the equilibrium.

Looking at this performance, what I was asking was difficult for the class because you haven't practiced it before.  The key notion is to be able to translate the formal model into a narrative that you could use to explain the ideas to somebody outside the class.  It is an important skill to develop, in my class and in the rest of your study of economics as well. 

The Capture Theory In Action

It's also fair to say that the burden of evidence the courts require makes it difficult for a regulator to meet the standard.  So for the public, it is hard to tell whether capture has happened or not.

S.E.C. Tension as It Examined Mortgage Cases - NYTimes.com via kwout

Grades in Moodle have been updated

Here's the new stuff

Excel Homework

10 points for Excel HW #7 if that was submitted.   Then I added a column called Excel Bonus.  It has 30 points.  Every student got that.  The original plan was 10 homework assignments.  There were 100 points allocated to this in the syllabus.  So it was a way to bring that into balance.

Blog Posts

I tracked submissions for blog posts 9 and 10.  I also put in scores and comments for Blog posts second half.  The maximum possible score was 125.  I was pretty generous assigning points here, in my humble opinion.

Running Total

I added a column at the end to say how many cumulative points you've achieved to date.  The maximum possible, counting the 50 point bonus that everyone got, is 700.

What is not there

I didn't assign points yet for the comments you did.  There is a 50 point maximum on that.  I will assign those at the same time I grade the final.  Truthfully, this gives me a bit more of a fudge factor, based on the performance I see on the final exam.  This is worth 300 points at the max, so there are still 350 points to allocate.  Some incentive in the course is rear-loaded, by design.

Good luck with your other exams.

What I left out today

I rehearsed (in my head) for this class session quite a bit but as you could see when I had the senior moment before I could come up with "case studies," my mind wasn't fully there today.  So here are some things I had intended to say but didn't.

Developing a sense of taste - what is a good answer?

I only came up with using the Gift Exchange approach to organize the first half of today's session after flailing for two days with other approaches - each of which ended in me scolding you for not taking more responsibility for your own learning.  The problem is, scolding doesn't work.  It ends up more as venting than as effective communication.

Needing to have this sense of taste for a good answer is part of the take away I'd like you to have.  If you develop that feel for a good answer, then the next take away is to develop the habit of letting the sense of taste drive you in your learning and not stopping your inquiry prematurely, before you have an answer that pleases you.

Attendance

Since attendance was not required, those who were regulars gave a gift by being there.  That to me is less interesting than understanding your behavior about attending classes more broadly.  Are there some of you who regularly attend some classes but not others?  Or is your attendance pattern pretty similar across the classes you take?  I have no sense of this now and would welcome feedback on the matter.

Other possible means for gift exchange in class

One thing I think obvious for a course like ours is to tie course matter to things that are happening out in the real world that are related to what we are studying.  This is one reason why I have the Econ in the News and Misc. Tags.  If there were gift exchange on this, some of you might have commented on these posts.  My sense is that there was very little such commenting and I suspect most of these posts were ignored by the majority of the class.

In particular, given my emphasis on Gift Exchange, you might enjoy this piece, which links to a NY Times Magazine piece about Adam Grant, a Professor at Wharton.  The Times magazine article is called: Is Giving the Secret to Getting Ahead?  Sounds pretty relevant to me.

Math via discovery rather than lecture

I don't know if this would interest anyone, but I had thought to offer, for anyone who is interested, to release the Excel workbooks without having the sheets locked - after the due date, so for those interested they can see how the graphs are generated, how the questions get evaluated, etc.  In other words, a complete look under the hood.  Those who want to delve deeper into the models might learn more this way than through traditional means.  This is another one where I'd appreciate feedback, if you have any to give.

Total time spent on the class

I don't know whether this is common knowledge with you or not, but the seat-time model (how many hours per week a class meets) has an implicit model on out of class time - two hours out of class for every hour in class, that most faculty subscribe to.  Thus, overall, our class demands 9 hours per week.  That should be interpreted as an average over the semester, not an exact number each week.  Nonetheless, the research I'm aware on this nationally, evidence from the National Survey of Student Engagement, says that at most universities the ratio is more like one hour out of class for every in class hour, or even lower.  In other words, students have different expectations on the effort front than what faculty have.  Consequently, many faculty, and I'm in this category, think that most students don't put in enough time in their studies.   The system may have evolved in an unhealthy way, to accommodate the student expectation.   It makes students happy near term but produces less learning long term.  

Learning outside the course setting with friends or at work.  

We did a tiny bit of benchmarking with other courses today, but we didn't do any whatsoever about learning informally with your friends via experiences (going to hear live music, for example) or discussion that happens with some regularity (say about those experiences or about national politics or on any other topic that interests you).  Likewise we didn't discuss today any learning that may arise at a part time job you have, though that has been the subject of one or two blog posts this semester.

Because I had a lot of this informal learning as an undergrad, particularly in my junior and senior years at Cornell, I'd be quite happy regarding the total time issue in the previous bullet, if class time was less than the faculty norm because learning outside the course setting was happening with substantial frequency.

Having fun can be quite educational.  Alternatively it can be pure time dissipation with little to no learning happening (think of playing hearts or some other card game to the wee hours of the morning).  So what is of interest is the total picture, including all the learning activities and then consider our course within that.  This would speak as to whether requirements should be raised, lowered, or left where they are.

Thank you

It has been an interesting semester for me.   Unlike last year, I have enough energy this time to write a post like this after the class session.  I appreciate your indulgence in letting me discuss these extra matters.

The Final Exam is in our regular classroom

There is a different room posted, but that is for extra space only.

The Marx Brothers on Contract Negotiation

A partial list of non-economics works that informed the design of our course

• Seven Principles for Good Practice in Undergraduate Education (Chickering and Gamson)
• Learning by Teaching Donald Murray (Murray is the father of the idea known as writing to learn.) 
• What the Best College Teachers Do  Ken Bain  (There is another book by Bain that I haven't read yet called What the Best College Students Do).  
• The Reflective Practitioner Donald Schon
• Actual Minds, Possible Worlds Jerome Bruner
• How Undergraduate Education Became College Lite - and a Personal Apology by Murray Sperber in Declining by Degrees

Do you like creativity?

This is an interesting piece from Slate magazine.  I'd like to bring it in as part of our review on Tuesday.

Shapiro-Stiglitz Model

First - about the final

Different Format
Potential Questions.

Next about the discussion group.

Some background for why and a prominent topic we might want to discuss - reverse time management

Background - Do good students take on too many obligations?
From an economics perspective - there is focus on the extensive margin, more lines on the resume.  What about the intensive margin?
First Class Site with Blogging - 4 years ago
http://tiffanywc.blogspot.com/2009/11/do-i-change-my-ways.html#comment-form
Encouraging the Mind to Putter

Another issue related to the first - Do students have sufficient agency about their own learning.  In other words, if something interests the student does the student have the wherewithal to pursue the interest.  If not, why not?

Then, on the relevance of the our class to understand real world current events.  

Ed Lazear on Why There Is Mandatory Retirement  (There isn't any more.)
Relationship of wage profile to reservation wage profile (Implicit bonding?)
Defined benefit pensions
What about the employer moral hazard?

Efficiency says separation should occur when the marginal product equals the reservation wage.  But if the paid wage exceeds the reservation wage, the employer has incentive to separate when the marginal product equals the the paid wage.  If the employer did induce separation then, it would be cashing in.  Seeing that behavior would demoralize other employees.

This is one way to interpret what is going on with State of Illinois pensions now ---- but note that the real cashing in happened many years earlier when the state failed to actually make its share of the contribution to the fund and instead spent those funds on other things.

Discussion about monitoring as applied to our class and elsewhere. 

They're watching you at work
The article says that at Bloomberg every keystroke an employee makes is monitored.

In our class -
Box - sends me an email every time there is a download (but unless you are logged in it doesn't say who).  It also has features like the YouTube Dashboard.
YouTube Dashboard
Google Form (for Excel Homework) gives time stamp.   (What information is conveyed.

More active monitoring
In class by noting -

• Who is there
• Who participates in discussion
• Facial expressions of students (this one is very important)
• Who seems to be nodding off

This is monitoring that carries no explicit punishment or reward.  But it does communicate on commitment, comprehension, and overall whether the class is going well or not.  This monitoring is all part of what teaching a small class is about so it happens en passant while teaching.

Reading blog posts  - my comments/questions are intended as a type of coaching.  Doing this is labor intensive and clearly not required of instructors.  I do get a sense of how you are doing with this, so there is definitely a monitoring aspect.   If the coaching is at all effective, then it should improve your learning.

So a question is what is the output - a taught class?  or how much students learn in that class?

I don't monitor potential plagiarism with the blogging.  Why not?

Shapiro-Stiglitz model

In typical supply demand model - no rents for actors on the margin.   A surplus can be earned by actors on the infra-margin.

Question:  If rents are required for incentive and no actor has market power, how can the market equilibrium be consistent with addressing the moral hazard ?

Answer:  There must be rationing - In this model rationing means involuntary unemployment.

So this model has Keynesian features, but it generates that for non-Keynesian reasons.  (Keynes talks about failure in aggregate demand.  The Shapiro -tiglitz model talks about moral hazard in labor supply.)

Work through algebra of asset equations

Review homework on endogenizing the monitoring intensity and whey the equilibrium is not Surplus Maximizing.

Candidate Questions for the Final

I have decided NOT to distribute last year's exam.  When I did that for the midterms, it produced what I perceived to be memorization of the solution I offered up.  I'd much prefer you to generate your own solution and give it in your own words.  So I'm trying a different approach in an attempt to deter some of the memorization.

Of course, you can post questions (as comments to this post) and I will respond to them.  But I will do so without providing a full answer to the question that you can memorize in toto.

Also, you can schedule a meeting with me if you'd like.  I'm happy to discuss this or any other course issue with you.

There are six candidate questions below and three will be chosen from the six.  Two are new to you.
You haven't seen them before and are on the last portion of the course.  The other four you have seen either the question as posed or something similar.  These are questions on the content of Midterm 1 and Midterm 2 that didn't appear on those exams.

-----

The New Questions:

A.  This question concerns shirking and explicit incentives to prevent it, as well as the consequences on market equilibrium.  Compare and contrast the static principal-agent model with random output to the Shapiro-Stiglitz model.  Discuss the underlying assumptions, how incentives for putting forth effort are provided, and the consequence on equilibrium, from both the contractual perspective and the market perspective.  Also discuss for each model whether or not there is a role for government to play to improve market performance.

B.  This question concerns innovative practice in the the setting of the repeated Prisoner's Dilemma.  Employees with some responsibility allocated to them may be quite diligent in doing their established work, so shirking per se is not an issue at all, but they may be very reluctant to try out new approaches for fear of being blamed when an experiment along those lines blows up in their faces.  There are various possible solutions to this issue:
     (i) provide large rewards for experiments that succeed,
     (ii) pool experiments across several employees each with some responsibility so responsibility is shared,
    (iii) punish work groups if they don't show innovation over time.
     (iv) possibly other mechanisms that might occur to you.

Discuss the pros and cons of each of these and discuss how the organization might come to a particular approach in trying to encourage organization members to be innovative.

------
Candidate Questions from Midterm 1

C.  This question concerns transfer prices.  Provide a working definition for what a transfer price is.  In a for-profit organization how should ownership (shareholders) want the transfer price to be set?  Explain why others in the organization might want the transfer price to be set differently.  What transfer price would these others like to see?  When service quality is jointly set with the transfer price, what service quality would ownership like to see?  Explain why this is the case.  Others may want a different service quality level.  Explain how their preferred service quality level differs from what ownership wants.

D.  This question concerns economic efficiency concepts.  There is a partial equilibrium concept and a general equilibrium concept.  Describe each of these.  Do the two concepts always coincide?  If not, under what additional assumptions do they coincide.  Provide an argument for why we should expect efficient outcomes.  Economic efficiency has been critiqued on several grounds. Explain some of these criticisms and provide settings where the particular critique appears valid.

---------

Candidate Questions from Midterm 2

E. This question concerns procurement. Discus why in government agencies procurement is subject to  regulation. What is the regulation aimed at preventing? What does it try to accomplish? Explain why during the bidding process the lowest price bidder may not be selected, although the process is competitive. Discuss the various goals the agency conducting the procurement may have going into the process.

F. This question concerns conflict in organizations and, in particular, Model 1 and Model 2 of Schon and Argyris. Explain how a manager can without intending to do so cause the staff under him to be angry with his management approach. What is it that causes their anger? What are the consequences for the unit when the manager behaves this way? Explain the Schon and Argyris recommendation about how the manager might diffuse the tension. Why does their recommendation have a chance to be effective?

About the Final Exam

The final will be a different format than the midterms.  It will be an all essay test.  There will be no math-like problems as on the midterms.  The essay questions may cover topics we have math modeled, but they will ask for a discussion of the issues, not derivation of a bunch of equations.

As has been the practice, I will make the candidate questions known ahead of time.  There will be six candidate questions.  Three will be chosen.  You can count on one of those being on content covering the reputations and dynamic incentives, since you haven't been tested on that yet.  The other questions can come from material done earlier in the semester.

The Final is worth 300 points, yet I'm only having three essay questions, not six of them.  This is so I can grade the thing in a reasonable time frame.  So each essay will be worth 100 points.  This doesn't mean you have to write twice as much as you wrote on the midterms.  It does mean I will be a little sterner grading the essays on the final.

Something for next semester - a discussion group*

*For your edification and not for credit

If there is interest I would like to start a weekly discussion group in the spring on the general theme of taking the long view on your learning - things members of the group might try to have a greater take away from both the academic side and the intellectual part of the recreational side of undergraduate life.   It would also be a place for group members to drive the discussion, talk about issues they are having and have the group weigh in on how to think it through.  In some sense it is meant as a face to face alternative to the blogging you have done this semester.  

The past couple of years I have mentored an I-Promise student.  I don't have an I-Promise mentee this year, so for me the group would be an alternative.  We know each other a bit now from our class so we shouldn't need to spend much time breaking the ice.  The group would also be a bit of an experiment on whether outside of a course setting coaching qua thinking "it" through (whatever it is) can be effective for participants.  I've not done a discussion group with students like this before.  

In my ideal we'd block off 90 minutes once a week.  We might not go that long each week, but sometimes we would.  Size-wise I'd hope for 4 or 5 students. That's about the max where if everyone shows each can participate vigorously in the conversation.  Less would be okay but make the group more vulnerable to no shows.  If more are interested I'd want to accommodate that, but it would move the group closer to a classroom setting and then the participation issue would creep in.  

Since this is unofficial, scheduling could be a bear.  That's the main reason for posting about this now.  If you are interested, please indicate so via a comment to this post.  Also say whether your schedule for next semester is pretty firm or still up in the air.  It's no use to set a time until those who are interested have a good idea about their schedules.  

Reputations: Personal and Organizational

Before getting into the topic of the day -

Excel Homework on Shapiro-Stiglitz Efficiency Wage Model is due Wednesday evening.
One caveat on shirking - don't take it too literally.  It makes the most sense for physical labor where the work is painful or for repetitive work that is "mind numbing".  It makes less sense as a defining characteristic of "knowledge work." Professionals typically don't shirk.  The moral hazard issue there is not that professionals do no work at all, but rather that they want to define the work that they do, while their manager has other ideas.  The "alignment problem" is where moral hazard in knowledge work is likely to manifest.  Shirking per se is not the big deal issue.  We have modeled it as if it is.

The last blog post is due Friday.   In addition to the prompt, I think it useful to consider that post from something we discussed the first week of the semester - it is your human capital.  Has the course given you some new ideas about how to extend your human capital and better maintain the human capital you already have.  In particular on the blogging, do you think you are now capable of writing your own prompt and in offering comments/critique the way I've done during the semester.  Could you apply that to other courses you will take in the future and/or to paid work you will do after you graduate?

Personal Reputations - An Example: Professor Arvan when he was a student

Found with artifacts from cleaning out my parents' condo.
The Generation Gap

An alternative view from several years earlier.
Page from High School Yearbook about It's Academic

email response from Mr. Conrad.

From: Steve Conrad [mailto:srconrad@aol.com]
Sent: Monday, January 05, 2009 12:43 PM
To: Arvan, Lanny
Subject: Hi from Manhasset
Sent: Monday, January 05, 2009 12:43 PM

Hi Lanny, 

Of curse (that WAS a typo, but I think I shall leave it there) I remember that game of TWIXT. My nature is to play games to win, so your win was not with my assistance. You just plain old beat me. You actually caught my business Web site (Math Leagues and Math League Press) just as we are preparing to sell it. We began offering math contests to schools around the country in 1975. Were it not for that, I do not know how I would have sent my sons to the schools they attended (Harvard and Princeton). They are identical twins, as you must recall, and they are both mathematicians, it so happens. Brian, a math professor at Stanford, and Keith, who teaches math at the University of Connecticut, were surrounded by math as they were growing up, so . . . :) 

You must remember James Kraft, right? One of my sons was giving a math talk to a group of mathematicians once and James Kraft walked up to him after the talk and said "I was in your father's algebra class when he was called to leave because you were born."
Brings tears of joy to my eyes. I too recall that very well. 

I had lunch with Robin Block over 4 years ago. After retirement, I returned to playing bridge. I had dropped out of college and was going to be a professional card player when I decided to return and lead a normal life. Anyway, after retirement, I returned to bridge, and my wife and I had lunch with Robin when I was playing in the North American Bridge Ch ampionships when they were held in New York City in the summer of 2004. These days, I am tournament chairman for Long Island, and I spend almost half a year each year teaching bridge on cruise ships (I teach only when the ship is at sea -- when it is in port, I go ashore with the passengers). 

So I see you are in academia. What was your academic field? College administration? :) 

Steve

Conclusion:  Since personal reputations are held by others about that person, that reputation might very well vary by the holder, who brings his or her own memories into it.


Organizational Reputations - An Example: The U of I

Professor Arvan's first encounter with the U of I when he was in High School

New Yorker's view about everything west of the Hudson.

1.  What movie is this from and what does it represent?

From Wikipedia

HAL became operational on 12 January 1997 at the HAL Laboratories in Urbana, Illinois

2.  From a Saturday course on Fortran.
Illiac

3.  A few years later when at Cornell - a friend of a housemate was going to the U of I for grad school to study?    

......... computer science.

Conclusion:  The U of I has a reputation for being good with computers.  This was the reputation Professor Arvan had of the place before he came to the midwest.

Some years later after arriving on campus

Morrow Plots
Undergrad Library built underground
Department of Ag Econ
Morrill Acts

Conclusion:  The U of I has a reputation for being the Land Grant College for the State of Illinois.

Other views of the U of I

What is the movie?

Scene from later in the movie:

Now a view from the world of sports.

Question:  Which if any of the above are part of the U of I's brand?


More generally - What part of the organization is responsible for the organization's brand?  the organization's reputation?

Does it matter for our course that the Web site is not in the illinois.edu domain and lacks I-mark?

Branding for cereal aimed at kids.

What about cashing in on the reputation?

Example - student backpacks.   (Good brands?  Brands to avoid?)

Different example - student laptops?  (Same questions.)

The economics of reputation and cashing in

Experience goods versus inspection goods.  (Nelson)  There is no seller moral hazard with inspection goods.  There is with experience goods.  What encourages seller to produce good quality?

Klein and Leffler - Quality Assuring Price

The economics of reputation from an Industrial Organization perspective

Branding can:
1.  Encourage customers to be loyal.
2.  "Steal" customers from a rival.
3.  Bring new customers into the market.

Competition between firms in an industry is muted  if most of the customers are loyal and there are not a lot of new customers to compete over.  Conversely competition between firms is fierce if there is a lot of business stealing and there are many new customers entering the market.

There can be a tension between having too much competition in an industry and maintaining a quality assuring price.

Student Blog Posts on Organizational Reputation

For the most part the posts focused on a few sectors of industry.

1.  Sporting Goods (Nike, Addidas)
2.  Financial Services - Big Banks (Chase), Local Banks, Credit Card Companies (Discover),  Investment Services (Merrill Lynch).
3.  Technology Companies - Facebook, Google, Apple  - from perspective as consumer, also as potential employer
4.  Misc - Amazon as virtual Walmart, A Conglomerate for Auto Parts.

Let's first ask whether the reputation that was described is shared by other holders of the reputation.  Or do they see things differently?  How do you know?

Next consider these from the IO perspective, then the moral hazard perspective.

Then let's ask whether merger or takeover of a company impacts its brand and its reputations.

Monitoring Nowadays

The longish piece on data analytics in the workplace is interesting but to me it's also frightening.  I thought it makes for a good counterpart to our discussion of monitoring in the Shapiro-Stiglitz model.

Cashing it in a little closer to home

For those who were there today I appreciate your commitment and effort.  You may not know this unless you have an older sibling who also went to the U of I, but we used to have classes scheduled during the week of Thanksgiving - through and including Wednesday of that week.  Of course, attendance would drop.  If you were teaching on Mon - Wed - Fri, as we used to do things, attendance on Monday would be lower than normal and attendance on Wednesday would be quite low indeed.  So they changed the Academic Calendar to give the full week off.  Today's attendance gives some evidence that there is an "endgame problem" even now, an example of what happens in repeated Prisoner's Dilemma with a known last period.  All I can add is that I'm glad our class doesn't meet on Friday.

Now that we have the model of repeated Prisoner's Dilemma to describe both what the cooperative solution looks like as well as what the solution looks like when everyone cheats, I thought you might be interested in considering college education from that perspective.

The following quote is taken from the piece cited below.  It is about something called The Disengagement Compact.  It is not uplifting to read about.  But ask yourself whether it is descriptive of some (perhaps many) of the courses you've taken.

What We’re Learning About Student Engagement from NSSE: Benchmarks for Effective Educational Practices. By: Kuh, George D.. Change , March/April 2003, Vol. 35 Issue 2, p24-32, 9p;

And this brings us to the unseemly bargain, what I call the "disengagement
compact": "I'll leave you alone if you leave me alone." That is, I won't make
you work too hard (read a lot, write a lot) so that I won't have to grade as
many papers or explain why you are not performing well. The existence of this
bargain is suggested by the fact that at a relatively low level of effort, many
students get decent grades--B's and sometimes better. There seems to be a
breakdown of shared responsibility for learning--on the part of faculty members
who allow students to get by with far less than maximal effort, and on the part
of students who are not taking full advantage of the resources institutions
provide.

I will add to this that in my observation many students seem to feel they've been tasked to memorize the instructor's lectures and to more or less confirm that expectation many instructors write exams that reward such memorization.  So this is how the Disengagement Compact may play out - a feigning of learning with little of substance actually happening.  To the extent it is widespread, it suggests massive cashing it in.

I don't want to end on a downer right before the holiday, so let me try to tie learning in a different way to being successful on the job.  The meta skill that all good students should acquire is the ability to satisfy their own curiosity to a substantial degree.  Different students might come up with alternative ways to do this.  The more extroverted might do it by networking with people and feel comfortable going to the right source who can then steer them to the information and answers the student is looking for.  The more introverted might do it via their own self-initiated investigation. Both approaches have merit and probably people need to learn how to do it both ways.

In class on Tuesday, we talked about an intern or a new employee taking the initiative and going beyond the work that was assigned.  I brought up that there is an issue about how to identify appropriate work - work that the worker has the competence to do well and work that the company will value when it has been completed.  So there is a puzzle in the identification and its exactly that sort of puzzle that should make the intern curios.  The meta skill described in the previous paragraph fits this situation to a tee.  It is not something that is acquired overnight.  There should be a lot of practice with it.  College is a good time for that.

Have a wonderful holiday and I'll see you back in class on Tuesday December 3rd.

The Last Excel Homework on the Shapiro-Stiglitz Model Is Now Available

You can find it here.  Apart from the economics, one wrinkle in it is the use of Comments (little red triangles in the upper right corner of some cells).  To access the comment simply mouse over the cell with the red triangle without clicking on it.

This homework is due Wednesday December 4.  If you have questions on it please post as a comment to this post.

Something cutsie and fun

It occurred to me after class that I didn't spend time on how one might create a bonding experience for others.  Managers sometimes need to to this for their staff, so it is an important thing to consider and think through.

This is one example I was involved in.  It is a seven minute video done in summer 2007 for the Educause Learning Technology Leadership Program, which that year was held in Madison Wisconsin.

Here is a little setup of what is in the video.  Heather Stewart of NYU and I were leading a session (there were 50 attendees from campuses around the country) on "presenting data."  I had not been involved the previous year with the LTL program, but Heather was and did a similar session then.  It didn't go well so she wanted to try something new. We discussed what that might be over several months.  Finally in one call we each shared our experiences of presenting in front of the Provost and how frustrating that was.  So we hit on an idea of a video to show such a presentation - one full of mistakes.  The ideas was to get the audience to enjoy the video for itself and then after to deconstruct it, find the errors, and have the audience offer up better ways to go about things.

In the video, Heather plays the learning technologist who will be making the presentation.  She is very good and "emotes" well.  I play her boss - the Campus CIO.  I'm something of a jerk in this movie and kind of throw her under the bus rather than prepare her properly for the presentation.

There are two others in the video.  The Provost is played by Perry Hanson, who was then the CIO at Brandeis (he has since retired).  He calls himself James Dean in the movie.  He ad-libbed that.  The other is Kathy Christoph who plays the Provost's budget officer (CFO).  Kathy was the head of Academic Technology at UW-Madison at the time and hosted the program.  (She too is retired now).

The conference started on a Monday afternoon and there was a banquet that evening.  We shot the video after the banquet to use in a session on Tuesday - so there is a just-in-time aspect to it and it is certainly a low budget thing.  Heather and I let Kathy know about it a week or two ahead of time because we needed Kathy to provide logistics support to make it work.  We only told Perry about it, however, at lunch on Monday just before the Institute started.  He was delighted to help and went with the flow.

There is a little bit of hiss in the video but otherwise it plays reasonably well on my PC using Windows Media Player.  I just tried out the link and it works that way.  If you right click on the link and launch the application requested it should play.

mms://winstreamer.doit.wisc.edu/ltde/provost512K_Stream.wmv

This is the link to the Mac version.  I don't know if it is live or not, but you can give it a try. 

rtsp://qtstreamer.doit.wisc.edu/ltde/provost512K_Stream.mov

The audience really liked the video (perhaps because it is so campy) and the session went really well.  Indeed, even though Heather ended her participation in the LTL program after that year, they continued to use the video for the next two years, where Malcom Brown and I lead the session.  Malcolm was fine doing that even though he didn't appear in the video.  It worked pretty well in those later sessions too.

One last comment - I know nothing about video production.  But it was my idea to draw the clock on the white board and make that part of the movie.  

Enjoy.

Grades Have Been Uploaded in Moodle

I uploaded the Midterm 2 grades into Moodle as well as for Excel Homeworks 5 and 6.  There is also a histogram of the exam scores in Moodle.

I have no yet updated the blog post tracking.  I started to poop out doing the clerical work and better to not make errors.  So I will do it tomorrow before class.

Also, I haven't decided about another bonus.  I will leave that for another day.

There ultimately will be only one more Excel homework and two more blog posts.  That will give us 10 blog posts, which was my goal at the outset, but I originally planned for 10 Excel homeworks.  So we are clearly falling short of that and some grade adjustment needs to be made for that to get my scale to work properly.

I will return the exams tomorrow in class and we will briefly review the text before getting into our discussion about reputations.

Reminder - Blog Post Due Tomorrow

Here is the prompt:

The topic is personal reputations and their role in influencing behavior. Describe some domain where you have a strong reputation with others (it could be with friends, it could be with your family, it could be at some place you worked, etc). Then discuss how your reputation developed. Consider what you do to keep your reputation intact or enhance it further. Finally, reflect on whether there are occasions where you'd like to stray from the behavior suggested by your reputation and what you do on those occasions. Have you ever "cashed it in" by which I mean you abandon your reputation altogether in favor of some immediate gain?

Sorry about the technology snafus today

Below is the graph from the Excel embedded in the PowerPoint.  It has the IC constraint explicit.  It is  the dashed upward sloping curve in black that is to the left of the main diagonal.  To satisfy the constraint you have to be on that curve or to the left of it.

Note that the IC constraint goes right through the cross point of the two indifference curves.   That means you don't really need all three curves to determine the optimal contract that induces high effort.  You only need the high effort indifference curve and one of the other two curves to determine the solution.

Add caption

Link to Test from Last Year and Candidate Essay Questions for Exam

Last year's midterm 2.

Candidate Questions

A.  This question concerns procurement.  Discus why in government agencies procurement is subject to  regulation.  What is the regulation aimed at preventing?  What does it try to accomplish?  Explain why during the bidding process the lowest price bidder may not be selected, although the process is competitive.  Discuss the various goals the agency conducting the procurement may have going into the process.

B.  This question concerns conflict in organizations and, in particular, Model 1 and Model 2 of Schon and Argyris.  Explain how a manager can without intending to do so cause the staff under him to be angry with his management approach.  What is it that causes their anger?  What are the consequences for the unit when the manager behaves this way?  Explain the Schon and Argyris recommendation about how the manager might diffuse the tension.  Why does their recommendation have a chance to be effective?

C.  This question concerns an agent who while performing the same function serves two different principals.  What are some examples where this situation emerges?  What problems are created that don't exist in the case where there is a single principal?  Explain what "capture" means and how it arises in this context.  What might be done to discourage capture?

Review of Tuesday's class session

It is unusual for me to do this so here is a brief explanation why.  The content of Tuesday's class is fair game for the essay part of the next midterm.  Some of it, both the triangle principal-agent and the stuff about procurement, you won't find in either textbook.  So for those who missed you need to get some exposure to that stuff.

I am doing this from recall of our class discussion.  That may be imperfect.  If you read this and were in class yesterday and you find something important is omitted below, please make a comment to this post that includes those ideas.  Also note that the order of things as I present them may not completely jive with the order in class yesterday.  Such are the pitfalls in doing this entirely from memory.

* * * * *

The Triangle Principal-Agent Problem

I took this by borrowing from the economics of regulation, where there is something called the capture theory.   This theory was posed by Chicago School economists as a different critique of regulation.  It said that regulation can be ineffective, even if it is desirable, because the regulator can become captured by the industry it is supposed to regulate.  As an example, I suggested that perhaps Congress has been captured by Wall Street.

The example was meant to illustrate that capture happens mainly by means of bribes.  In the case of Congress this would be via substantial campaign contribution or other perqs given by industry to members of Congress.  We also discussed the "revolving door" problem where regulators get offered plush jobs by the industry after they step down from government,  though we also noted that in some cases such hiring is efficient because the person has expertise that is otherwise scarce.

We then qualified the circumstances where the triangle problem arises.  These cases don't fit all the criteria needed to generate the triangle problem.

(1)  There is an employee who has a boss and the boss has a boss, so the employee is indirectly under the boss's boss and may sometimes take orders from the person two rungs above.  In this case it is possible that the orders from on high conflict with the orders from directly above.  The example we gave is where a TA may say some things that contradict what the instructor has said.  Who is the student to follow?  This is not a triangle problem because it can be resolved by realignment happening between the instructor and the TA.

(2)  There can be triangles but in non-work situations.  Love triangles make for good fiction.  Triangles within a family where the parents disagree about what the child should do are a more relevant example.  The triangle is real enough but we wouldn't consider this a situation with a principal and an agent.

(3) An employee tends to a customer's needs, which is just what the employer wants the employee to be doing.  There is no conflict here so no triangle problem.

The triangle emerges when the employee tends to the customer's needs in a way that goes beyond what the employer wants.  In this case we might say the employee is captured by the customer.  Whether capture happens or not, the employee is tugged in different directions, one suggested by the employer, the other suggested by the customer.  I said this feeling of being tugged in different directions is the reality in many work situations, even if the setup is not exactly as it is here.  The reason this is worth discussing is because it is so typical in many lines of work.

We then discussed how capture might happen in this case since it typically won't happen via bribes. We gave three different possibilities:

(a) the employee becomes empathetic for the customer's plight and provides help for the customer as it is the decent thing to do, even if it is not the profit maximizing thing to do.

(b) the employee gets bullied by the customer and rather than cause a to-do acquiesces to the customer's demand because that is the path of least resistance.

(c) the employee gets enjoyment (think of it as a consumption benefit) from serving the client.  So doing this sort of work is for the experience itself.  It is capture when the employer doesn't see how the benefit from that experience can be internalized for the organization.

Procurement

I gave a little setup where the RFP for a major piece of software, perhaps costing several million dollars and still kind of new to the marketplace, had just concluded.  The winning bidder had been determined.  This company was not the market leader and was chosen in large part because it was thought the company would be more attentive to the customer than the market leader would.

I said that one of the big issues was to determine where the preferences of the buyer and seller were aligned and where they were in conflict.  The procurement process would encourage the aligned part to work well and for the non-aligned part there needed to be other mitigation by the buyer to make things work okay.

We started off with the question of whether you (thinking as the buyer) want a long term contract or a short term contract, noting that you are risk averse and are trying to use the process as a way to reduce risk.

One student responded that you want a short term contract because if the product proves a lemon then you can go with another seller after that.  This is certainly true in a retail setting, but it is not the right way to think about a major procurement.  Once you buy from a company there is substantial lock-in, meaning the costs at the back end, getting staff trained on the software, and having the thing up and running are quite large, so you don't want to incur that again.  Further, even if there are problems with the software, users adjust to it.  That is costly for them.  They don't want to have to go through the adjustment process again. So the procurement is a commitment to that particular product, at least for a while.  The question is then are there other things that can be done to reduce risk given that you are committed to the product.

A long term contract, even one that allows for some price increases in the maintenance portion (this allows the buyer to get upgrades in the software) and the service portion (this allows the buyer to get help when there are problems) offers the benefit that out year expenditure on the software can be predicted.  Knowing what you will spend up front is a big way to reduce risk.

We then discussed whether you want to get bargain basement prices or if you're willing to pay more.  I argued that what you want to avoid, if you can, is the company going out of business or it getting taken over by the market leader.  Either of those outcomes will likely mean that your software will reach end of life and those dreaded switching costs will have to be incurred.  At bargain basement prices the company is not making money, so going bankrupt is a possibility.  I didn't say this in class, but at too high a price, the company starts to look like a cash cow and that encourages a takeover possibility.  So what you want is some middle ground.

I then made a brief departure and talked about a management practice called "No Surprises" which means if you have bad news get it out when you learn about it; don't wait till the last moment when it will get out on its own.  The reason for this is that users will have time to adjust to the news.  Users will not be happy at first and as the messenger you might bear the brunt of their ire.  But they will get over it.  Getting the bad news out early is a way to maintain trust.

In Higher Ed and in good government, you might expect No Surprises to be the norm.  (The bad example set by the cover up after the Watergate break in giving all the justification that is needed.)   In the business world, perhaps not.  We talked about the case where the vendor (the winner of the RFP) has software that is buggy, perhaps in a way that the client won't discover for some time yet.  The vendor wants to use the client as a referral for potential customers who are considering buying the product.  If it is known that the software is buggy, that might curtail such sales.  So the vendor has some incentive to hold back that information, even if the client would benefit having it for the client's planning.

We discussed what mitigation a client might take to deal with this concealment of information.  Somebody suggested talking with other vendors.  That may have some benefit, but is likely not to tell you what is really going on with the software.  The competitors won't have detailed knowledge of those issues.  We then discussed the possibilities of forming a buyer consortium for the purpose of sharing information about use experience.  I didn't say this in class, but if the use experience suggests a common complaint, then the group as a whole can act in concert and bring the complaint together.  There is more power with the group than with each buyer acting individually.  If the vendor is to put significant resources into resolving the problem, it is more likely to happen this way.

We concluded this part by discussing that the product will evolve over time and determining what the buyer's preferences are in regard to that.  We said that the buyer wants to influence product development in a way where the buyer benefits most.  That means that the when the buyer prioritizes feature changes it wants the vendor to seriously consider those preferences.  We said that while not all changes can necessarily be done in one product development cycle, the vendor actually wants the buyer (and like minded other buyers) to participate in the product development so the product evolution is in accord with what buyers want to see.  This helps to make the clientele loyal and enhance customer satisfaction.  So it is win-win for the seller to involve the buyer deeply into product development.

B&D Chapters 7 and 13 - how to really motivate employees to produce at their utmost

I started this part out with a priming exercise.  I asked students about activities they enjoyed.  I reminded the class that earlier in the semester somebody said they liked to cook.  Many students concurred.  I also said that one student had mentioned enjoying going to avant-garde films at the Art Theater.  A few other students indicated a similar preference.

Then students suggested other activities they enjoyed.  A partial list includes tennis, working out, reading, and driving cars fast (at a raceway).

I then asked whether these activities commanded their full concentration.  There was some agreement that reading a good book and watching an avant-garde film can be completely absorbing.

Because I knew that one of the students was a pilot, I asked whether piloting an airplane was completely absorbing.  He responded that it was like driving a car.  I then I said that driving is completely absorbing when you take driver's ed, because you are still learning how to control the car and that takes concentration.  When you have mastered that, mostly driving becomes an autonomous process, meaning that your mind can be elsewhere and the driving takes care of itself.  You do have to monitor more closely when the roads are slick or when there has been an accident that you need to navigate around.

I asked: for these enjoyable activities would students just do them on their own or did they need some encouragement to do them?   One student mentioned that for working out sometimes it is hard to initiate.  Afterwards he is happy to have done that, but even with knowing that ahead of time, sometimes he wouldn't go to work out.

I responded that much of this is about habit formation.  If you have a routine to do things then you will initiate with them because you have developed the habit to do so.  If you don't yet have the habit formed and must choose to do the activity or not, sometimes initiation is difficult.

At this point I specifically mentioned immersion into the activity.  Somebody then responded that video games are an activity that produces total immersion.  We discussed video games for a bit after that.

Then I said we were ready to discuss Bolman and Deal.  I wrote three words on the board: motivation, intrinsic, and extrinsic.  Intrinsic motivation comes from inside the person.  Bolman and Deal argue that an employee is much more productive when the employee has intrinsic motivation for doing the work.  Extrinsic motivation comes from outside the person.  Economic incentives are a kind of extrinsic motivation.  Put a different way, the issue is whether it is the work itself that is important to the person or if it is what the person earns that is of primary importance.  In some sense, this is like the essay question from the first midterm.  Bolman and Deal come down very much for the third alternative - provide intrinsic motivation for the the employee via giving the employee a kind of ownership in the organization. Chapters 7 and 13 can then be seen as how to's for getting that done.

I said there are really two different things to be done to encourage intrinsic motivation.  One is to get rid of distractions that impede being able to concentrate on the work.  The other is to empower the worker to take ownership.

I then gave a personal view - my own powers of concentration have diminished with age.  A big source of distraction are the aches and pains I have, primarily from arthritis.  I asked the class to come up with other types of distraction that exist at work.

One student said that social networking a la Facebook can be a distraction and there could be a rule at work that employees can't access such sites with their computers.  I responded that B&D would be against this approach.  Rules of this sort are treating employees like children.  B&D say that itself is a distraction and it is better to not have such rules and leave these things to the discretion of the employees.

Another student suggest that conflict in the workplace can be a distraction.  I agreed but tried to clarify this a bit.  Conflict of a personal nature really should be nipped in the bud and is to be avoided.  Conflict about how to get the work should be done is healthy and to be encouraged.  Such disagreements can lead to a better understanding of what the work is about and produce a new synthesis on how people should approach their jobs.

We then talked about pay.  I asked when pay can be a distraction.  Students agreed that happens when people feel they are underpaid.  In fact, B&D argue that pay should be generous to avoid this issue.  I argued that it is a little bit harder than this.  An employee who is part of a highly successful project that become visible to various competitors might very well find job offers coming in because these rival companies will want to see a similar sort of project happen at their own firm.  At this point what had been very generous pay no longer is.  So some reconsideration of what the employee earns must happen if the employee is not to go elsewhere. Until that concludes the employee may again feel underpaid.  The issue happens periodically.  In between pay is out of the employee's mind and the employee can concentrate on the work.  When pay becomes prominent you can think of that as a way for the employer to re-initiate the employee into the work.

We turned to how to empower employees.  B&D argue for democracy in the workplace.  This implies a flat org structure rather than hierarchy.  It also means that employees can on their own change how work gets done, with an eye to making the organization more productive.  A student pointed out that this can lead to coordination issues, when all employees are so empowered.  Indeed it can.  I responded that there are trade-offs here.  But B&D argue that most American companies err on the side of top-down approaches.  They may give lip service to allowing employees to contribute their ideas, but in practice don't encourage it.  Note the parallel in this B&D argument with them also saying (in Chapter 8) that Argyris and Schon's Model 1 proliferates among upper level executives.  A democratic workplace really demands Model 2 to be in place.

We then talked about executive pay and executive function in this context.  B&D argue that very high multiples of executive pay to pay for the lowest paid employee are inconsistent with a democratic approach to the workplace. They say that such multiples are as high as 400 for some American companies.  They recommend much lower multiples, say no more than 10.  They also recommend that the executives be treated just like every other employee - no executive dining room, required to make a new pot of coffee when they've had the last cup from the previous pot, fly coach instead of first class, etc.  In other words, in a democratic workplace executives don't take some of their compensation in the form of job perqs.

I gave a different sort of argument for keeping multiples reasonably low.  Employees want to know that the executives are in it for the long term and are not trying to take as much as they can out of the company in the near term with the intent to gut the company (lead it to bankruptcy or to a takeover of some sort).  If everyone is in it for the long haul then employees are willing to contribute their part, but otherwise not.

We concluded with a brief discussion of the symbolic approach and the ideas in chapter 13.   To get the class into the right mindset, I asked whether any of them had been in stage productions while in high school.  The aura that happens in such a production is what B&D have in mind in chapter 13.  I asked about whether students had some disagreement in the rehearsals leading up to the production.   Students responded there were some.  But they were able to get past these, because people were willing to surrender themselves to the larger goal - making the production a success.

We then talked a bit about friendships forming in such a setting.  And then that partly to blow off steam and partly because that is what you do with friends, joking around happens and other type of play becomes part and parcel of doing the work.  B&D stress certain rituals become a way to encourage making the group really tight.  They also say that the group will come up with a language just meant for members to describe the group activities.  In other words, it is not just work.  The experience needs to be amplified to make it like a club that people want to join.  Clubs have rites of passage.  They exist to make make club members closer to one another and to respect each other more.

That concludes the review.  If you have questions or comments about it please post them here.

Because attendance was low in class today...

I'm posting an announcement I made there.  This regards our upcoming exam to be held a week from Thursday.

On Thursday morning before class I will post
(1)  Last year's midterm 2 and
(2) Three candidate essay questions.  One of those will be on this year's midterm.

Our review session is a week from today.

Also, as a quick summary of what we covered today we discussed:
(a)  The blog posts and the underlying issues with the triangle principal-agent problem.
(b)  More about procurement.
(c)  B&D chapter 7 and 13 on how to really motivate employees to be highly productive.

I view this stuff as the most fun part of the course.  I'm sorry that many of you missed.  I may write up a long post  to highlight the points we discussed.  I don't really want to encourage people to miss class, but some of this may be on the exam, so you should be prepared for that.

The Economics of Halloween

This is from last year, but still interesting on how the demand for candy compares with Valentine's Day or Easter.

Principal-Agent Excel Homework

The homework is now available.  It is due the evening of November 6.  We will go over it in class the next day.

If you have questions about this homework you can post them as comments to this post.

If you find typos, please let me know about them.  I proofed it once, but I usually take longer to make these.  In this case, I wanted to make it available too you.

And if you finds errors, I'm sure I would have heard from you anyway, without the reminder.

Don't read this until you finish the homework on bargaining.

It gives the background under which that assignment was written.

Lanny on Learning Technology: The Diffeq From Hell via kwout

This was after the rotator cuff repair, but before the infection had manifest.  I was on pretty good pain killers.  I don't think it impaired my thinking.  The most notable effect for me on my mental state was when dreaming.  But perhaps the drugs impacted my judgment in ways that were harder for me to detect.  I am more lyrical in this post that I typically am and there was a lot of narrative in that Excel workbook, more so than the prior homework.  

I'm pleased to say that I'm off the drugs now and just use over the counter stuff, even if that means the writing is a bit less colorful. 

Video about Principal-Agent model and associated Powerpoint

This is the video I mentioned in class.  I made a slight goof in the recording, so there is more black on the sides than there should be.  If you watch it full screen and on a computer it shouldn't matter.  On a phone, it might be too small.  This is much more detail than I provided in class last week.  It covers the algebra of the two state model and that is done in some depth.  On the last slide there is an embedded spreadsheet that gives the graphical approach to the same model.  It might be too much for you.  The Excel homework (which I hope to post tomorrow) does the graphical approach in a step by step manner.

pptx file

This time there is no pdf file.

If you have questions about the video or the PowerPoint, please post those as comments to this post.

Robert Schiller on his Nobel Prize and his disagreements with Eugene Fama

This year's Nobel offers a sense that economics has different and sometimes conflicting approaches within the same sub-field.  Some might find that disturbing, but it is actually pretty common in a scientific field where many research questions remain yet unanswered.

Sharing Nobel Honors, and Agreeing to Disagree - NYTimes.com via kwout

Class Session Next Tuesday - Content and a little party

For next Tuesday, please read B&D chapter 8 ahead of time.  You will enjoy it because it will seem pretty realistic to you and is also quite informative about a real workplace issue - conflict and how to navigate it.

The PowerPoint for the session is available as is the associated PDF.

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This is entirely unrelated to the course.  I came into some inheritance this afternoon, so I am in the mood to celebrate.  I thought we'd have a little party during the class session - I will bring some treats for everyone to partake in.  Not that we really need this right before Halloween, but it's appropriate to share the good cheer.

The Excel Homework on Bargaining

You can put questions about the homework as comments to this post.  Note that there is extensive discussion in this homework that precedes the login part.  Also note that while the math of the complete information part is not that hard, the math of the incomplete information part is much more difficult.  So what I expect you to get out of the incomplete information part is to see the results, but not to be able to derive them.  Of course, if you are mathematically inclined, go for it.

One other word about interpreting the model as it pertains to realistic bargaining situations you are apt to encounter in the near future, such as bargaining with a potential future employer about salary.  With the latter there is a market.  Yhe bargaining happens because you as a job candidate are not a perfect substitute for somebody else who might fill the position and the job you are bargaining about is not a perfect substitute for other possible jobs you might take.  There is no bargaining in the perfect substitutes case.  The market entirely determines the price in that case.  The bargaining happens in the imperfect substitutes case, which leaves wiggle room for some negotiation.

You can interpret the model as focusing on only the wiggle room.  Alternatively, it is about the buying and selling of a one-off thing, like a piece of art work.

Figuring It Out / Demonstrating Personal Commitment to the Class

I sensed a good deal of skepticism in class today about my message that students should embrace a "figure it out" approach.  A reasonable counter argument is might be as follows.  We're not planning to go to econ grad school.  Why should we learn these models from Milgrom and Roberts as extended by Arvan?  We'll never use those models after this class.

For the most part, that is true.  However, figuring it out is a meta skill that has many uses completely outside of economics.  Consider the following, from a blog post I wrote about a year ago (not related to this course).

Then I recalled one of my favorite lines from George Orwell: 

          To see what is in front of one's nose needs a constant struggle. 

This is the first sentence of the closing paragraph in an essay about people's intellectual schizophrenia, particularly in regard to political life.  By this Orwell is talking about maintaining truth in a proposition that we should know is false simply by reviewing other things we already know to be true. This essay is a very good read and serves as a rather frightening warning about all the stupidity the collective mind seemingly can lock onto.  If you juxtapose Orwell with Kahneman, you come to the inescapable conclusion that what you don't see may very well include things that you did see before but are now buried in memory.  It's not just the potentially knowable things that we've not yet experienced that matter.  It's also those things we know but don't immediately come to mind.  (Why don't those things come to mind?)

Now let me bring that down to issues that we've discussed in our class.  We've talked about trust relationships since day one.  For example on that first day we talked about why in your apartment you do housework you might not like to do much and why your roommates do likewise (and not shirk).  More recently we talked about Akerlof's Gift Exchange model and today we briefly discussed that Haidt piece on whether the kids would share the marbles.  

What we haven't yet discussed much at all, but there is no time like the present to get started thinking about it, is that not everyone is trustworthy.  Some people are predatory in that they take advantage of other people being too trusting.  Bernard Madoff is a very well know such predator.  It therefore becomes a crucial life skill to determine whom you should trust.  What the Orwell piece says is that while it isn't easy to do this, sometimes you can determine somebody is trying to scam you, by putting together what the person is saying now with other information you know.

On Madoff, in particular, read this particular Wikipedia entry on Harry Markopolos, who figured it out quite early on but wasn't listened to by the SEC.  This paragraph is telling on how he figured it out.

In his interview with Steve Kroft of 60 Minutes, Markopolos said the biggest warning he'd noticed during his initial 1999 analysis of Madoff was that he reported losing months only four percent of the time. To Markopolos' mind, no one could possibly be that good given the volatility of the markets. "As we know, markets go up and down, and his only went up," he said. Markopolos noted that during his tenure at Rampart, he traded with some of the biggest derivatives companies in the world, and none of them dealt with Madoff because they didn't think his numbers were real. He admitted that he had some financial incentive to eliminate Madoff, as the two competed against each other from 2000 to 2004. However, he said, he felt compelled to pursue it because "when someone's competing on your playing field, who's a dirty player, you want him tossed off the field." He assailed the SEC once again for ignoring his warnings, saying that the only reason Madoff was caught was because he ultimately collapsed under the weight of his own lies.

What Markopolos did requires the ability to make inference from the data.  (Freakonomics is a book that talks about that skill a lot - if you read it, recall how Levitt detected whether instructors were cheating on behalf of their students.)   It also requires substantial critical thinking/problem solving/deductive reasoning.  Our class should help you prepare for that second part.  I'm less sure that the statistics classes you take help with the first part, but that you must have some Sherlock Holmes type skill in assessing what is going on is crucial if you are to make headway on the issue of assessing whether somebody is trustworthy.  It is not something that a Gladwell "thin slice" analysis (from Blink) is good for.

Finally on this point, there is the following issue.  If figuring it out is hard to do, will you persist at it?    The life skill I discussed above comes from extensive practice.  I don't want to fool anyone by suggesting you'll get all the practice you need in our class.  You won't.  It's just a place to start.  The answer on the persistence front is that this is more about habit formation than it is about deliberate choice.  If you develop a routine for doing it, you will do it.  If it remains an option to exercise or not, you probably won't.  But a funny thing happens in the developing of the habit.  After a while it becomes enjoyable.  It's not just a compulsion to do the routine.  It's a reward to make sense of something that is puzzling, so having the challenge placed in front of you is something you start to welcome.

Not that this sort of delight will come from slugging through the algebra of the econ models we do, but sometimes it helps to know what sort of pot of gold you'll find if you follow the rainbow.

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I said in class today that students would do okay grade-wise in class, even if their exam scores are middling, as long as they do the other out of class work that is required and do so in a serious and timely way.  This means the blog posts come in when they are due and they show you've thought about the prompt, the comments on other student posts happen with enough time so the student can respond before we discuss the posts in class, and the Excel homework is also completed before the deadline.

If you do those things I will know you are trying.  Then I will complete my part of the bargain.  The commenting on your teammates blog posts, in particular, is the sort of thing that is like Haidt's sharing of the marbles example.  It is something that improves the learning of your fellow students and in that way makes the class better for me too.

If you don't do those things, I will be much less empathetic to your situation.  This, too, is in accord with what Haidt reports in that piece.

And I can say, purely as a matter of logistics, that tracking late submissions is a pain.  I'd rather put my efforts elsewhere.