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July 2007

Practitioners vs Academics, Part II

When it comes to explaining economics to the general public, nothing beats Basic Economics by Thomas Sowell. This being said, here comes a funny example of how mathematical models sometimes fail to work in practice, from the much thinner Undercover Economist (pages 154-155 of the paperback edition): in 1990, New Zealand auctioned off radio spectrum using a method recommended by academics called the Vickrey auction, where the highest bidder wins but only pays the second-highest bid. In theory nobody finds out what the highest bid was, but in New Zealand this was disclosed, and because of the failure to entice a sufficient number of serious bidders (i.e., bidders willing to bet lots of money), "a bidder who had offered NZ$100,000 for a license only had to pay NZ$6." There are plenty of research papers at http://scholar.google.com referring to this embarrassing incident; it has been argued that the mistake was not to set a minimum price for the bid. My favorite sentence is: "The theorists knew that, on average, Vickrey auctions make just as much money as other auctions because, by not demanding payment of the highest bid, they encourage all bidders to offer more." On average! On average! That in my opinion is the single greatest difficulty in applying academic work to industry: academics love averages (expected revenue, expected cost, etc) while practitioners only have one chance to get it right. As a result they should not accept any formula coming from a risk-neutral framework - when they have to justify using averages theorists invoke the "law of large numbers" in a situation where the decision-maker will repeat his decision many times, which clearly wasn't the case in New Zealand. (Call me old-fashioned but when something is sold, it is sold!) And yet practitioners let themselves be impressed  by academics' pretty formulas without understanding the underlying assumptions... Managers and politicians should become more math-savvy, if only to be able to question the numbers they are presented. Otherwise they run the risk of covering themselves with ridicule, as happened with the New Zealand government.


Congestion Pricing

Congestion pricing has been much in the news recently because of New York's efforts to implement the scheme, both at the state level and the city level. The Undercover Economist (a decent book - not terribly difficult, with a first half much more interesting than the second one, and the second one isn't bad but between Freakonomics and The World is Flat competition is fierce in the globalization category) contains an interesting discussion on the topic; in particular it states on p.86-87 of the paperback edition: "It's worth thinking about what the ideal system would look like for the externalities surrounding driving. Any driver making a trip [...] would be charged for the pollution if he drove in a densely populated area. [...] Drivers would face additional charges for trips in congested areas at congested times. [...] It is easy to imagine each car having a little computer linked to a global positioning system to track congestion. [...] A display on the dashboard would flash up the rate at which the charge was being incurred." Alright, let's imagine my taking Route 412/Third Street to Lehigh University in Bethlehem and hearing, using the Undercover Economist's words, "Your trip is currently costing nine cents a minute", and then turning into Fourth Street when I face a traffic jam just to hear "...thirteen cents a minute!" and then trying to return to Third Street - how many accidents is this real-time information going to create? How many people would start driving on the shoulder on the highway to get away from real-time congestion pricing faster? Drivers can't bring themselves not to experiment when a GPS-turned-banker voice reminds them of their money being spent about every second. I wonder if anyone has ever studied users' behavior if people drove a cab and had to pay the fare at the end. That would be interesting to watch, especially in New York City.

Sometimes congestion pricing has unexpected effects - I remember in the late 1990s, the toll to use the A1 highway coming from the north into Paris would suddenly become more expensive on Sunday evenings to discourage motorists to come back from their weekend in the countryside during heavy-traffic hours; if you check this website and know French and click on "modulation du trafic sur l'A1" you will learn that if you go through the end toll booth between 2.30pm and 4.30pm or 8.30pm and 11.30pm, your toll will be reduced by 25%. Now let's assume you have a powerful car, it's 4.25pm and you are not too far from the toll booth - what do you do?... I haven't been in Paris in a while but let me tell you that in the 1990s sports cars just raced to make it to the toll booth in time. (What about me? I didn't care. I was in college, the toll was paid on my mother's credit card using the equivalent of the E-Z pass system and I never thought about trying to save my mom a couple of francs. Being a selfish college student has its advantages - and anyway I wasn't driving a sports car!) So I guess an unintended benefit of the congestion pricing in Manhattan, where Mayor Bloomberg hopes to "charge[e] a new congestion fee to drivers who come into parts of Manhattan during peak hours during weekdays" (see the NY Times article here), would be to increase the number of citations issued for speeding into Manhattan around 5.55am (the fee is supposed to be in effect from 6am to 6pm during weekdays, although one could argue that 11am or 2.30pm aren't exactly peak congestion times - it would also be interesting to observe drivers' behavior as they reach Manhattan at 5.55pm: do they try to drive very slowly, pull over and wait five minutes? wouldn't that create congestion?). More money to the city, one way or another...


Practitioners vs academics

For this post I am just going to list some of my favorite examples of real life not behaving the way academics had planned with their pretty models and assumptions (also see this post):

  • in June 2007, Honda announced that it would discontinue its Accord Hybrid model after only three years of commercialization and cited management's failure to anticipate the importance of gas mileage, as opposed to horsepower, for hybrid-buying motorists as the main reason for the car's weak sales.
  • According to the New York Times, "Nintendo's Wii [video game] is hard to find in stores because the company miscalculated demand."
  • Dell's global market share fell by 8.7% to 13.9% in 2006 while Hewlett-Packard's rose by 23.9% to 17.4%, because Dell anticipated neither the move of US customers from desktops to notebooks, nor the flagging sales of business computers as companies evaluated Microsoft Vista.

Supply chain management under uncertainty still has some progress to make!


Unnecessary Noise Prohibited

When I was in New York City last weekend I saw a sign on the Upper East Side along Fifth Avenue (in the 60th-70th street blocks, I believe in the early 60ies) that made me laugh: "Unnecessary noise prohibited." Now, I am just curious, how exactly does the police enforce that? Red lights are easy to check, speed can be measured, but how do you decide what is unnecessary noise in NY and which street corner gets to put up the sign? The city might as well hang a sign saying "Be nice" - it would have about the same (non-)effect.

[Updated 7/24/07] In the "odd street signs" category, Bethlehem's very own "Entering traffic calming zone" to signal speed humps should also win a medal.


The Globalization of Education

In 1998, MIT and Singapore launched the Singapore-MIT Alliance (SMA), where the University of Singapore provided MIT professors with significant amounts of money, no strings attached, in exchange for the training of some of its students through specially designed programs - I remember being a Teaching Assistant for one of those courses, which was held at 8am in a technology classroom so that it was 8pm in Singapore - as opposed to the middle of the night - and students over there would follow the lectures on a screen. Back then this was the cutting edge of global education, and it might still be. (Disclosure: my PhD advisor at MIT received funding from Singapore, which I believe he used to, among other things, fund my own research.)

These days we hear again a lot about the globalization of education through the creation of partnerships between American and foreign universities to educate foreign students (see for instance this New York Times article dated March 26, 2007 about Carnegie Mellon University in India). At a time where the US high school student population is booming and the competition to get into the top colleges is about to become fiercer than ever (an old post of mine discusses this trend), I'd be curious to see how long it takes to the parents of rejected US applicants to sue universities for diverting resources to educating foreign students rather than their own offspring. I am not saying their claim would be valid - after all, Singapore gave MIT a lot of money during the first five years of the Singapore-MIT alliance, which was used to fund MIT students like me and for which I am grateful (all good things have an end: when the alliance was renewed in 2004 Singapore required more bang for its buck, ending the practice of awarding a degree from the institution in Singapore with a certificate attesting participation in SMA and preferring instead for the students in Singapore to receive a dual degree from MIT and from either NTU (Nanyang Technological University) or NUS (National University of Singapore) - a shrewd move from Singapore). But when does the desire of a university to maintain its global standing, with the commitment to cutting-edge research and to the corresponding funds it requires, get in the way of educating students in its home country? Should a global university feel indebted to such undergraduate students or is the concept of home country becoming obsolete? What will a judge say to rejected MIT hopefuls who announce: "I love global education; I am very willing to move to a foreign country to receive a degree with MIT's name on it and I am better than the students MIT has accepted in that program"? Maybe the era of global education will bring with it the reign of the global lawyer prosecuting global discrimination cases...

On a side note about admissions-related litigation, I sometimes wonder why, with all the talk about underrepresented minorities that have come to mean anyone except white males (which makes me a member of a minority) and the need to have more diversified student bodies, the US states do not  throw more of a fuss to see themselves represented at top universities in a ratio similar to their weight in the US census. After all, I hear almost constantly about comparisons between the percentage of women in engineering and in the general population almost constantly. For instance, students from Alabama make 0.68% of the MIT undergraduate student body (I have removed the US students with a foreign address from the totals; with those the percentage would become 0.66%) but 1.54% of the population; why don't white boys from Alabama complain about being underrepresented compared to white boys from Massachusetts (2.15% of the population and 9.49% of MIT's "US with address in the US" undergraduate student body); shouldn't diversity in Massachusetts be interpreted as admitting more white boys from Alabama? That debate would be interesting to watch.

My wider point here is that the globalization of education raises important issues on what should be the norm in terms of student body, whether there should be a norm and whether enforcing that norm should be part of the university's mission. And I do mean this as an open-ended question; my parents would not have had the education they had in France if they had not taken advantage of what was called "parallel ways" to promote diversity in higher education and I welcome ways to give disadvantaged people a chance when they have shown their determination to beat the odds. It does seem to me, though, that US universities are failing at preparing the American public for this change in their mission, and by creating alliances abroad without attempting to explain them at home (especially to the parents of high school seniors) risk building significant resentment in their home country.


Numbers, or the average at Goldman Sachs and MIT

One of my favorite examples of how the media manipulates (or is manipulated by) numbers is the recurrent Goldman Sachs bonus story, where we learn about the average six-digit figure (last year, $623,000) that has been awarded to Goldman Sachs employees, and as newspapers like to point out: that includes janitors and secretaries. Just imagine the envious looks the Goldman Sachs janitors are getting when they walk home, and the scoffs when they try to explain that they got a miserly $10, or something of that order - "come on, the newspaper said $623,000!" Average returns distort the picture so easily because any one return can dramatically skew that number. Just think about a firm with 10 employees, each receiving a $1 bonus. Then the average is of course $1 too. But if 9 of the 10 receive $1 and the 10th one receives $1 million, then the average becomes $100,000.90 - and the 9 unlucky employees would certainly cringe if they saw headlines such as "the employees received an average bonus of $100,000" because 90% of the said employees brought exactly one extra dollar home. The mathematical idea behind all this is that mean does not really capture the trend in distributions that are heavy on one side (tail), because the heavy tail shifts the value of the mean towards it. For such skewed distributions, the median (number such as 50% of the values are below it or equal to it, and 50% are above) gives a more accurate picture of what people can expect. In my example, the median would be $1. But of course that would not make for such eye-popping headlines.

Another one of my favorite examples is the "90% of people surveyed think they are above average" (something I heard a lot about when I was at MIT), which is supposed to be greeted with snickers because, the saying goes, you cannot have 90% of people above average! You can only have 50%! Ah, those self-infatuated MIT kids!... Uh, no. You just need one person with very low self-esteem that gives himself an intellectual value of -10 while the other nine more optimistically give themselves a 10. The average will then be 8, and you will have 90% of students above average... There is something to be said for educating everyone (and yes, that includes Goldman Sachs's janitors and secretaries) on math basics such as the mean and the median, not because they need it in their work - most of them don't - but because they need it to read the papers and avoid being manipulated by populist headlines.


Innovation and the arts

Last month Dana Gioia, poet and chairman of the National Endowment for the Arts, gave the Commencement address at Stanford. There was a bit of controversy surrounding that choice because some Stanford students appeared to feel Gioia was "unworthy" (read: not famous enough, not wealthy enough) of giving them any advice on their big day. You can read about it in the Stanford student newspaper here (with nuggets such as "I chose to apply to Stanford after watching Condoleezza Rice's Stanford Commencement speech on television in 2002 [...] Why do we deserve anything less than former students" - Note to Ms Reiss: I certainly hope for your sake that your future accomplishments will come anywhere close to Gioia's, unless you are looking forward to being covered with ridicule), here and here. It will be interesting to see how many members of the Stanford Class of 2007 achieve as much as Gioia in their lifetime, but of course the ones who felt they deserved better will probably blame that Commencement speech for their subsequent failures.

I did very much enjoy the transcript of the address, which focuses on "the fact that we live in a culture that barely acknowledges and rarely celebrates the arts or artists." Most intriguing in my opinion is that both the humanities and engineering emphasize the importance of innovation and resilience, but while our culture celebrates the entrepreneurship of start-up founders, the determination of musicians or writers attracts neither attention nor respect. I am not even referring to the oblivion-bound musicians and writers  you hear about once at your local Barnes & Noble, but to established geniuses such as Beethoven who pulverized the musical conventions of his time. Wouldn't schoolchildren and college students alike benefit from, for instance, learning about Beethoven's struggles and his progression from classicist (Symphony No 1) to revolutionary (Symphony No 9), at a time where the media makes it seem that superstars reach fame overnight and achieve success without strain? Couldn't the arts teach us a thing or two about innovation?


Driven to distraction

In an article dated July 1, 2007, the New York Times describes manufacturers' goals to bring live TV to those gigantic entertainment centers American SUVs have become - because the kids find cartoons' re-runs boring. The catch-eye headline? "Tuning in '24' while heading down the highway." Curiously, the article makes no mention of the strain on dad's attention if his children are watching his favorite TV series with the sound blaring and an enticing TV monitor dangling from the roof. I remember when I first arrived in the US eight years ago I was very surprised by the cup holder in the cars - what do you mean, people take their drinks with them when they drive? In Germany, there is no speed limit on the highway. While that might seem dangerous, Germans are raised with the awareness that cars can kill - when they drive, they don't do anything else (no Starbucks sipping, no newspaper reading, no cereal eating) and remain completely focused on the road. Americans are taught multi-tasking, and yet they end up working many more hours on average than Europeans; maybe the multi-tasking isn't doing them any good after all. Sugar-coating a long drive with live TV for bored kids won't get anyone home any faster if Dad, keeping an eye on the New England Patriots or the New York Yankees, sends the entertainment center on wheels into the ditch.


Revamped MBA programs

This Fall entering MBA students at Stanford will enroll in a revamped program that customizes the curriculum to each individual's needs and goals. When I read the description of the changes on Stanford's website, I liked the idea of adding an advising relationship - it is no secret that developing strong relationships with their professors helps undergraduates make the most out of college, so one would think that would also prove beneficial to MBA students, who have even more diverse backgrounds than, say, juniors majoring in history. In a way the program reminded me of an accelerated college education: core curriculum first (similar to first-year core courses for freshmen), use of small-size seminars, choice of courses later (similar to picking a major), capstone seminar (the Stanford MBA equivalent to a senior project). One question that popped into my head was: is such customization appropriate for MBA students who are just two jobs away from college? The median length of work experience at Stanford is 4 years (meaning that 50% of the MBA students have worked 4 years or less) and the range is 0-11 years. Can 26-year-olds take the full benefit of a highly personalized program? Customized MBAs were initially developed to fit the needs of the employers who sent their managers through executive MBA programs; can they also benefit young professionals in their late 20s who might be using the MBA as a way of moving away from their current career path without knowing exactly what they are looking for? Stanford's new curriculum might end up changing not just the courses students take but the class profile if admissions officers select students most likely to benefit from the customized approach - students with a bit longer industry experience.

Since this is a post about revamped MBA programs, I will also mention the new MBA at Yale ("New Graduation Skills," The Economist, May 10, 2007), which has introduced modules on "different themes, such as the customer, the employee, the investor, competitors, business and society, and innovation" to replace traditional courses on what The Economist calls "functional subjects such as marketing, strategy, accounting and so forth". Now, I wish Yale all the best, but am I the only one who, reading this, is reminded of the whole language reading method? Didn't that experiment end in disaster? Only time will tell whether Yale MBA students can handle such changes better than first-graders.