Correlation vs Causation

If you are still not convinced that Causation implies Correlation but Correlation does not mean Causation take a look at these graphs:

Should MBAs learn how to code?

YES. This article explains the benefits and costs faced by mba students that took a programming course while doing an MBA at Harvard. The comments are good as they list more benefits and costs to add to the equation. I would personally add this one to the list of benefits: "respect from your kids." Every kid in elementary school has some coding know-how and will ask you for help at some point. So being ready to help debugging their programs is as important as being ready to help with any other homework. But the idea applies more generally to the new generation. The now kids will see you in the future as an outdated person. The same way we see people that still need a secretary to read their emails and book appointments. And that's not good...  Here's a good place to start learning about coding.

Overconfidence in the classroom

After taking the midterm exam I asked Com 295 students (sections 103 and 104) what grade they were expecting. Here's the histogram for each section:

And these are the actual midterm grades :

So it seems that overconfidence also applies in the classroom. Alternative hypothesis: graders are too tough.

Behavioral Economics

Many students are interested in learning about behavioral economics. An easy way to describe this new and trendy field of economics is to say that it studies how individuals make choices with a special emphasis on the situations where these choices are different from what a traditional economist would have expected or predicted (assumptions about preferences underlying the Utility function, rationality, etc.).

In Comm295 we cover some of the basic behavioral results related to repeated games (lecture #16) and choice under uncertainty (lecture #18).

Agency conflicts and IPO valuation

Twitter has filed for an IPO and investors are now searching for information that can help them value the company accurately (remember Facebook's IPO disaster?). This article argues that they should focus on more than just the financial statements. And it makes sense. We know (chapter 7 in the Textbook) that companies in which ownership and control are separated (i.e., owners are not managing the firm) incentive schemes are needed to align the management team's goal with that of shareholders. By the way, shareholders always want to maximize long-term profits.

Gaming the system

The government in the US (DOT) creates airlines' on-time arrival rankings based only on the fraction of their flights that arrive 15 or more minutes late. This kind of threshold rule is common in other industries (restaurant hygiene grades,  hospital report cards, green building standards, students test scores)  generates incentives for firms to game the system by putting relatively more effort to lower delays in those flights that are expected to be around 15 min late so they fall below 15min. The way firms usually do it is by tying employees's rewards to improvements in the ranking.

From a new paper by Silke Forbes, Mara Lederman and Trevor Tombe:

"We find little evidence of gaming by airlines that have no incentive programs in place or by
airlines that have implemented incentive programs with targets that are unrealistically hard to achieve.  On the other hand, we find strong evidence of “gaming” by airlines that have incentive programs with a target level of performance that can realistically be achieved."

What's more striking is that the technology used to report delays to the DOT differed among airlines: some used automatic system (computer reports to the DOT) and some had a manual system (employee fills delay form and sends it to the DOT). Yes, you are guessing right. The gaming was coming mainly from the airlines using manual systems. Look at the following 2 figures taken from the paper:


The spikes at 0 and 14 reflect that the gaming is coming from cheating more than increasing effort. And guess what, Southwest, the company that was promoting their awesome on-time arrivals rankings in the 90s and early 00s used manual reporting! There are many HBS case studies that show Southwest as a leading case on how internal organization and bundle of activities can be used to create competitive advantages. Competitors never succeeded at imitating SW's business model (e.g. TED). Maybe it was just one decision that made the whole difference: manual reporting!

Btw, Southwest now uses automatic reporting... And is not doing so well on the rankings.

Behavioral Economics

My thesis supervisor is a game theorist and has some things to say about the new and popular field in Economics. I highly recommend the book (free here) though I have not read it yet. But I did read the research that led to it and saw him present some of the results. You can view a short clip on youtube though it may bee too technical.

Price competition in the food truck rmarket

This podcast illustrates a couple of managerial economic concepts (min 10 to 12):

- The street food vendors market in NYC used to be composed mainly by hot-dog carts. That's the simplest and natural product choice for early entrants to the market. The sellers all look alike hence, to soften price competition,  choose to locate their carts in spread out locations [classical Hotelling model].

- As the market develops new entrants choose different production technologies (food trucks) and varieties (korean bbq, cupcakes, dumplings). This can be the consequence of a change in consumers tastes [greater taste for variety], an outward shift in the demand, or both. A demand shift means that there's room for more sellers, but since most locations are taken by hot-dog carts, the only way to differentiate (again, to avoid price competition) is through food variety.

- Last, the emergence of peace and the informal code of conduct is a clear example of how cooperative behavior arises from repeated interaction where the "static game" resembles the prisoner's dilemma.