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November 2008

Random Reading

Kiyoshi Ito, who gave his name to the famous Ito's lemma (used in stochastic processes, with applications in particular in finance), died earlier this month at the age of 93.

The Nanopolitan blog points out the "interesting" practices of an academic journal published by Elsevier, described in detail in the n-Category Cafe blog (here and here).

Elsewhere in the blogosphere, someone commented on the awfulness of a physics program made by the History channel, which apparently misled the public into thinking string theory and parallel universes have been experimentally verified, and emphasized the most sensational aspects of those theories. More comments here. I guess some kind of public exposure is better than nothing, though. After all, most string theorists hope their research will be validated at some point.

In terms of public exposure, few publications can beat The Economist, which is bravely continuing through its series of management ideas with the concept of game theory. I also enjoyed the profiles of Rosabeth Moss Kanter and Peter Drucker. The short article on economies of scale was also interesting.

Economies of scale are indeed a key component of the research Paul Krugman received the Nobel Prize for. The Economist article mentions: "In a 1991 article, he notes that night-time satellite photos of Europe reveal the distinctive contours of economic activity: bright lights cluster around metropolitan centres, shining particularly brightly around the triangle of Brussels, Amsterdam and Dortmund." Krugman's idea of new economic geography, which he describes in his blog, echoes some of the studies in Richard Florida's latest book, "Who's Your City?"

Finally, some cartoons from PhDcomics, this time about postdocs: part one, two and three. Another one pokes fun at professors - there's something for every taste.

Increase Price, Increase Demand

The December 2008 issue of Harvard Business Review has an interesting short communication by Jeffrey Stibel and Peter Delgrosso, "Discounts can be dangerous", in its section "Unconventional wisdom in a downturn." (You can read an extended version here.) It challenges the wisdom of reducing prices during tough economic times, explaining that "The price of something is often an important determinant of its perceived value, as Dan Ariely points out in Predictably Irrational. [...] If you discount prices purely to boost sales, buyers may begin to question that value." The short article gives the example of Abercrombie & Fitch, which lost significant market share when it lowered its prices during the 2000-2002 downturn; the blog version of the article even mentions that company executives "recently announced they were raising prices, in part to help realign their clothes with high-quality -- and their sales rose 5% as a result". 

If managers are really intent on discounting, the authors suggest that the right way to do it is to discount peripheral items rather than the core product, targeting gasoline or loan financing for car manufacturers rather than the car itself (ideas implemented by Chrysler and GM, respectively). This recommendation echoed quite nicely the comments made in another article of the same issue, "Reinventing your business model" by Mark Johnson, Clayton Christensen and Henning Kagermann, which attributes Apple's iPod success to the ease of downloading digital music: "This approach worked like Gillette's famous blades-and-razor model in reverse: Apple essentially gave away the "blades" (low-margin iTunes music) to lock in purchase of the "razor" (the high-margin iPod)." This strategy even has its own Wikipedia entry as "Freebie marketing", which Wikipedia defines as "the concept of either giving away a sellable item for nothing or charging an extremely low price in order to generate a continual market for another, generally disposable, item." (Also read "The Razor's Edge", an August 2001 article in the Industry Standard, and "Free! Why $0.00 is the future of business", a February 2008 article in Wired by The Long Tail author Chris Anderson.)

This also reminded me of the controversies roiling academia every year, when universities announce tuition increases for the upcoming academic year; there has been much pressure in recent years for them to use endowment funds to increase financial aid packages. Financial aid serves as a hidden discount on tuition costs (hidden because people do not know what others receive) while the official, hefty price tag is available on the Web for all to see. As a result, college is made more affordable to worthy candidates but the "brand cachet" is not decreased. More than anything else, though, this reminded me of a December 2006 article in the New York Times, "In Tuition Game, Popularity Rises with Price", by Jonathan Glater and Alan Finder. It mentioned that Ursinus College, a small liberal-arts institution in eastern Pennsylvania, voted in 2000 to "raise tuition and fees 17.6 percent, to $23,460 (and to include a laptop for every incoming student to help soften the blow)." The consequences? "Within four years the size of the freshman class had risen 35 percent, to 454 students. Applicants had apparently concluded that if the college cost more, it must be better." 

Further Reading:
"When do Higher Prices Increase Demand? The Dual Role of Prices in Consumers' Value Judgments" by Manoj Thomas, Vicki Morwitz and Leonard Lodish, 2004 working paper.
"Do and Should Financial Aid Packages Affect Students' Choices?" by Christopher Avery and Caroline Hoxby, 2003 NBER working paper. (Click here for abstract.)

Nobel Prize Controversy

Who said life in academia was boring? The recent award of the Nobel Prize for medicine to two French researchers, Luc Montagnier and Francoise Barre-Sinoussi,  who discovered the HIV virus in the 1980s, but not to their American competitor Robert Gallo (although, following what The Economist describes as a "cobbled-together diplomatic agreement between America and France", Gallo "share[d] the credit for the discovery" for 25 years ago) has reignited a fierce controversy about the breakthrough. The Economist, a British publication, states: "That omission undoes what many regard as an injustice", i.e., the credit given to Gallo for the discovery, and "A lot of workers in the field think true credit belong overwhelmingly to Dr Montagnier and his team." The publication suggests the virus Gallo identified one year after the French team probably came, "as the result of accidental contamination of another sample, from Dr Montagnier's laboratory."

The controversy is related in somewhat more detail in this post of the blog, including the need for the American and French presidents to intervene in a dispute that had turned extremely bitter, Montagnier and the French government challenging the validity of Gallo's claims in 1991, and a change in the royalties agreement in 1994 to favor the French, "a concession that implied Montagnier did, indeed, have a greater, if not the full, role in the momentous discovery than Gallo did". The post's author, however, takes issue with the behavior of the Nobel Prize committee, which he/she does not find noble. (I guess the pun was too tempting to pass on.) Of course, now that the dust has settled over the original controversy, it is easy to be magnanimous, and upset at the snub to Gallo, especially when one is American. I don't find Gallo's behavior particularly noble, for reasons many other posts have detailed, and which I describe below.

Steven Salzberg explains in this blog post: "It was only much later [after the initial discovery] - in 1991 - that independent NIH scientists determined that Gallo had, in fact, grown the French strain of HIV, which he had obtained from Montagnier and which had contaminated some of his own samples." Salzberg also provides the following anecdote: "Both Gallo and Montagnier filed for patents on a blood test for the AIDS virus. This spawned a huge controversy, in part because Gallo applied first, and also because Gallo's claim excluded Montagnier. The Pasteur Institute (Montagnier's employer at the time) sued the U.S. government in 1985 in an effort to share in the patent royalties. After two years of fighting, the U.S. and France agreed to share royalties on the patents, and in March 1987 President Ronald Reagan and Prime Minister Jacques Chirac held a joint press conference to announce that Montagnier and Gallo had independently identified the AIDS virus." And then people seriously think Gallo should have been awarded the Nobel Prize?

The coverage has shown an interesting geographic bias, with quite a few American media outlets (such as the LA Times) quoting Montagnier as saying that "it is certain that he [Gallo] deserved this as much as us two." and, in the case of Forbes, going as far as saying that the choice of winners has "tarnished" the Nobel Prize. What did people expect Montagnier to say, exactly? "We're glad that the Nobel Prize committee has snubbed this jerk who tried to take all the credit for our discovery?" Of course he is going to be gracious in victory. He is not the one who used a strain from another laboratory and applied for the patent first excluding the other scientists. What would be the point of showing belligerence now that he has won? To their immense credit, MSNBC and Newsweek have resisted taking a stance over national lines. The MSNBC article describes Gallo as follows: "Gallo was, and is, a fiercely competitive man. In the opinion of many, he is also bombastic, condescending and often cruel." Newsweek even details the allegations of scientific misconduct against him following his discovery, which "were chronicled at length by John Crewdson in the Chicago Tribune and in his 2002 book 'Science Fictions'". The intense competition, and the possibility of making history, sometimes brings out the worst in people - and for each case that comes to light, how many insignificant ones are brushed aside?

"The controversy is over," the MSNBC reporter declared. "The French discovered the viruses that cause AIDS." It took twenty-five years to settle that score.

Advanced Placement Tests

A Washington Post columnist is wondering today whether "AP students are forced to accept less", following a comment by an AP teacher on the Web version of his previous column. The lengthy comment by the reader is reproduced in its entirety, and raises many valid points on the ultimate goal of AP classes, which - as it turns out - conflict with the columnist's view that "even low-income students who have not performed well in school can learn in a college-level high school course, like Advanced Placement or International Baccalaureate, if given extra time and encouragement." The reader wonders, maybe in not so many words, whether making the poor students a bit less mediocre should really be the purpose of an AP class, while the good students are not getting challenged as much as they could and miss out on an opportunity to become excellent. Which option should he choose?

That teacher drew the jeers of what he calls the "warm-fuzzy" crowd, who suggested he should spend extra time tutoring the struggling kids outside the classroom. I am not completely sure whether this is realistic, as the kids he refers to had years of poor teaching under their belt - not something you can address in a few hours of tutoring on the side while you follow the original lesson plan in the classroom. I guess a possible solution would have been to put the students through a rigorous and intense first weeks, so that the students who were not prepared would have realized the inadequacy of their training early on and picked another course more appropriate to their level. In a sense, by refusing to tell students they might be better off elsewhere, the reader was also guilty of the "warm-fuzzy" syndrome he sneers at. The ill-prepared students who ended up failing the AP test cannot have enjoyed the experience. While their understanding of English literature might have improved, maybe they could have achieved this in some other way, without the stigma of failing the AP test.

Another reader, this time a student (also quoted at length in today's column), enthuses about AP tests as a way to avoid paying for these courses in college. (He has enough AP credit to finish college one semester early.) As an academic advisor for the first-year students at Lehigh, I see a lot of freshmen who have placed out of Calculus 1 but struggle with Calculus 2, and end up having to take Calculus 1 again. Other students recognize that Calc 1 cannot be taught in high school with the same rigor as in college, and take the course again, using their past preparation to get a good grade and ease into college life. AP courses represent, however, an appealing way to fulfill breadth requirements in college - engineering students can study history or English in high school and use the credits toward the 23 credits they need to take in humanities and social sciences to graduate - but often do more harm than good when they are applied to the disciplines related to the student's major, such as math and science for engineering students. When so many freshmen realize they were not adequately prepared for calculus in high school, either their teachers were not competent or they diluted the material.

But - even if some AP courses end up being worthless as college preparation - enrolling in those classes does show that students are motivated and eager for challenging coursework. They might not help the kids once they arrive on campus as wide-eyed freshmen, but they certainly provide a boost to get them there.

Revenue Management: Models, Newspapers, Finance, Football

A couple of worthwhile reads:

Business Modelling (The Economist, November 10, 2008). This week's management idea in the online version of The Economist is "the use of computer models to simulate different business activities and to assist in decision-making processes [which] is almost as old as IBM itself." The article's author equates modelling with the opportunity to try various options, which is simply a fancy way to say the computer will look for the optimal solution, as is clear from the optimal-location example it provides.

But in the next paragraph, a quote by KPMG consultants (rightly) suggests that what truly matters is to test the consequences of that strategy, and likens business modelling to a flight simulator that helps train airline pilots. You'll notice that the word 'simulate' appeared twice in the first two paragraphs of the article. How many businessmen actually remember to run their strategy through various scenarios, instead of trusting the data inputted in the computer as exact predictions of what is going to happen, remains open to debate. (See an old post of mine on scenario planning.) Some of the "common uses of business modelling" mentioned in the article are glaringly obvious ("Financial planning, with the help of spreadsheets. This quantifies the impact of a business decision on the balance sheet and the income statement"), but the last bullet point mentions Monte-Carlo simulations ("Putting in random data to measure the impact of uncertainty on the outcome of a project.") Hopefully more and more managers will apply this nugget of wisdom.

Bias in the Media Industry (The Economist, October 20, 2008). Two commonly-held assumptions about the media clash with each other: (1) publishers dictate the newspaper's or TV station's view, (2) "readers and viewers value accuracy," in The Economist's words. Economists at the University of Chicago's business school have tested empirically whether competition pushes newspapers to focus on their core readers and "cater to the biases of [separate] segments of the reading public," as had been discussed in an influential 2005 paper by Harvard economists.

The most recent tests suggest the following. "Newspapers tended, on average, to locate themselves neither to the right nor to the left of the level of slant that [the study's authors] reckon would maximise their profits. And for good commercial reasons: their model showed that even a minor deviation from this “ideal” level of slant would hurt profits through a sizeable loss of circulation." Did I just read 'maximise their profits'?  (And the optimal solution is non-robust at best.) Just as interesting is the fact that newspaper editors appear to do this without realizing it, aware at some subconscious level of when the coverage tilts too far to one side. So much for the strength of one's convictions.

Squeezy Money (The Economist, October 20, 2008). I liked that article because it illustrates the dangers of short-selling and provides hard numbers for a brilliantly executed strategy by Porsche executives. Porsche is thought to have made between 6 and 12 billion dollars last month by buying shares of its subsidiary Volkswagen over the years, driving the share price above the sustainable level that had been estimated by analysts.

Of course financial companies then short-sold the stock (i.e., bet it would its share price would fall, so they sold shares that they did not own, with the idea that when the time would come for them to really provide the shares, they would be able to buy them at a cheaper price), until Porsche announced that "it owned nearly 43% of VW's shares outright and had derivative contracts on nearly 32% more. That meant it had tied up almost all of the freely available shares." Faced with that crunch in supply, hedge funds hurried to buy shares at any price. But this might end up being a Pyrrhic victory for Porsche, as it has alienated many of these funds in the process. 

Mathematical Mind Makes Quantum Leap (The Washington Post, November 10, 2008). No, the reporter didn't write about a scientist; instead, he profiled the new assistant coach for the Redskins. "His friends and family say that Chris Meidt views the world through a filter colored by a knack for mathematics. That aptitude played into his choice to pursue a career as a football coach. After all, the game is played on a grid. What would be more appropriate for a spreadsheet junkie who uses terms such as "allocating resources" even when the topic of conversation is breaking down the 11 players that constitute an opposing defense?"

In the next paragraph, the journalist even quotes the coach as using the word 'correlate', as in: "It all correlates to numbers. It correlates to time and space and location." I couldn't help but wonder if the journalist would have edited out these same sentences as too obscure if a researcher or academic had pronounced them. When a football coach uses the word 'correlate', then suddenly that makes it mainstream, which is a good thing. (We need more math terms accepted as everyday language.) As much as we - operations researchers, quants, applied mathematicians - would like to attract more youngsters to our field, and sometimes spend considerable amounts of time in outreach efforts, there is nothing like the example of a math-y football coach to make revenue management look cool.

Online-Only Strategies for the Media Industry

I wrote a while back about changes in some of the most prominent newspapers in the industry, motivated by clashes between editors and publishers about strategy in an Internet-driven world. I wrote in July: "What I find shocking is that neither Zell nor Murdoch, despite a well-publicized business acumen, seems ready to accept that the age of the newspaper is coming to an end. People are given the choice between carrying a bulky wad of paper that leaves ink on their hands or browse the Internet and only bother with the stories that interest them; the decision should be quickly made. While I do believe there is still a role for paper weeklies [...], the whole concept of buying a newspaper in print rather than browsing it online makes absolutely no sense to me." A number of publications appear to have reached the same conclusions.

Two days ago, US News and World Report announced it would focus on an online-only edition, except for its famous college rankings. The Associated Press wire states "The memo [announcing the decision to employees] did not mention specific plans for the print edition, which has already gone this year from a weekly to a biweekly format, but The Washington Post reported on Wednesday that US News would now only publish once a month. The Post added that the monthly print edition would also be entirely devoted to consumer guides and not news." (The International Herald Tribune echoes the same observations.) Driving the decision were the facts that US News has long been losing advertising revenue to online media, and that its strategic position has always been weak, as the perennial Number 3 behind Time and Newsweek. Throwing the towel makes perfect sense at this point.

The newspaper Christian Science Monitor is also repositioning itself in a similar fashion. An article on its own website explains: "In 2009, the Monitor will become the first nationally circulated newspaper to replace its daily print edition with its website; the 100 year-old news organization will also offer subscribers weekly print and daily e-mail editions." This suggests that the Monitor will not move to an advertising-only business model, and will still count on subscribers to provide a modest amount of revenue instead of offering its content for free. It is not clear, however, whether people will be willing to pay for daily email and weekly print editions if non-subscribers can access the entire Web edition without paying.

Elsewhere on the Web, an Economist article discusses the repercussions of the investment by a Mexican businessman into the New York Times ("It says a lot about the mood in American business today that an investment by a Mexican tycoon in the New York Times is widely regarded as good news"), and the editor of Money Magazine is reported in a New York Times article to be stepping down as part of a reorganization in the companies owned by Time, Inc. ("Last week, Time Inc., the largest magazine publisher in the world, announced a reorganization that will include cutting 6 percent of its work force, with deeper paring at some publications. [...] Magazines have run into rocky times, with several closing recently, and others, including U.S. News & World Report and Condé Nast Portfolio, moving to less frequent publication.") Portfolio was launched in Spring 2007 amid much fanfare, and will see its number of issues a year cut back from 12 to 10, with layoffs that could amount to 20% of its workforce, according to this article by Reuters. Because the magazine is barely 18 months old, this does not bode well of its future.

These developments suggest that well-respected publications that are not at the very top of their field are beginning to leave the print side of the business in order to refocus on online strategies. We should see more of that in the coming years. It will be interesting to study the number of online visitors on each website - this should allow analysts to quantify, for instance, how many people come to a website because they have caught an interesting headline in the print edition on their way to work but didn't want to spend money on the magazine. When a newspaper is only online, people have to remember to make the effort of clicking on that link (after browsing the sites of New York Times, the Washington Post, The Economist, NPR, all the blogs saved in bookmarks, and so on). I am curious to see how second-tier online publications will ensure they remain at the forefront of the public's consciousness. It would be ironic if they had to pay for advertisements in the remaining print magazines to remind the world they exist.

Bethlehem and the Creative Class

I've just finished reading "The Rise of the Creative Class," an excellent and fascinating book by Richard Florida, which describes the rise of a class whose economic function is to think of new ideas, and as such includes obvious creative types such as artists and musicians, but also scientists and engineers. According to Florida's calculations, this "Creative Class", as he calls it, now represents 30% of the U.S. workforce.

I was delighted to see my area - the Lehigh Valley - mentioned as a potential Creative Center. (It appears under the name of Allentown, Pennsylvania, the main city in the Valley, although both Allentown and close-by Easton are crime-laden; the Lehigh Valley owes its national standing and prestige to my city of Bethlehem, which was selected by Money Magazine in 2006 as one of the 100 best small cities to live in.)

The first mention is neutral enough, on p.245 of the paperback edition: "Creativity is not limited to established high-tech and cultural centers. Regions like [...] Allentown, Pennsylvania, do quite well on the Creativity Index." Then, on p.291: "The presence of a major research university is a huge advantage in the Creative Economy. [...] Many of the places that score high on my Creativity Index are home to major research universities. This includes large Creative Centers [...] and classic college towns [...] but it also includes smaller regions that are not typically thought of as leading high-tech or innovative centers, such as [...] Allentown, Pennsylvania - the region once lamented as the center of industrial decline in the famous Billy Joel song, but where universities like Lehigh and Lafayette have now positioned it for success in the Creative Age." (Lehigh is actually in Bethlehem and Lafayette in Easton.)

Sadly, the creativity rankings have been revised for the paperback edition (the book was originally published in 2002 and used data compiled in 1999 and 2000; the first paperback edition was issued in 2004), and Allentown saw its national rank in the Creativity Index drop from 39 to 74 (see p.357), lower than places like Wichita, Kansas and Birmingham, Alabama, but higher than Knoxville, Tennessee and Omaha, Nebraska. (And don't tell me those places are easy to beat. While obviously they pale in comparison to Boston or Raleigh-Durham, Knoxville is home to the main campus of the University of Tennessee and close to the Oak Ridge National Laboratory, while Omaha is a well-known financial center, home to Warren Buffett's Berkshire Hathaway, and - according to Wikipedia - was identified by Newsweek in 2001 as one of the Top 10 high-tech havens.)

I wonder where the Allentown area would stand if Richard Florida were to update his rankings again. The region has enormous possibilities, and Lehigh's reputation has grown significantly in the last few years, due to unrelenting efforts in hiring new faculty, relatively recent emphasis on cutting-edge research in addition to teaching, and novel initiatives such as the Global Citizenship program.

Furthermore, some local politicians seem to be eagerly doing many of the things that Florida explains in his book they should do if they are to make the Lehigh Valley appealing to the Creative Class, which is the only way for a region to remain competitive in the 21st century. This unusual degree of enlightenment for local officials might be explained by the young age of Bethlehem's mayor, John Callahan (who is in his mid-thirties and is a graduate from Harvard's Executive Program on Leadership in the 21st Century at the Kennedy School of Government).

Cultural events on the first Friday of each month and yearly events such as Musikfest and the Celtic Festival are a welcome addition, in line with Florida's recommendations (see for instance p,182-3, where Florida describes the "street-level culture" that the Creative Class is drawn to - "You may not paint, write or play music, yet if you are at an art-show opening or in a nightspot where you can mingle and talk with artists and aficionados, you might be more creatively stimulated than if you merely walked into a museum or concert hall"); unfortunately, there isn't nearly enough to do the rest of the time, as pointed out by the few of my undergraduate students who try to find something to do around here without a car.

It will be interesting to see how things move forward, and how Lehigh University negotiates its complicated relationship with the town and its lifelong residents. At times, it seems that the locals around here view the influx of new residents as a nuisance, although the real issue is not that wealthy transplants from New Jersey and New York buy themselves McMansions (nickname isn't mine) in the Valley and commute to work in New York, but that there aren't more small, creative companies moving to Bethlehem. Artsy events can attract creative people in their leisure time, but those people need jobs the rest of the week.

When it comes to employment in the Valley, it seems that some of the politicians have shifted from viewing the area as a bastion of the working class (with Bethlehem Steel, now defunct, and Mack Trucks, moving out of the Valley) to pinning their hopes on what Richard Florida calls the Service Class, i.e., the tourism-driven economy and the people it employs, for instance those who will be paid minimum wages at the casino being built on the former site of Bethlehem Steel. (Las Vegas scores 95th on the creativity index, up from its previous ranking of 117th.)

The emphasis on tourism as a viable economy driver for the Valley is also apparent in the obsession regarding all things Christmas-related. And the Christmas market is really very nice, but that doesn't bring well-paying jobs. This can also be said of Musikfest - the festival has become geared toward tourists, attracting crowds by booking famous performers rather than local artists. It is following the same path as Detroit's Electronic Music Festival, which elicits the following quote by one of Florida's interviewees (p.228): "This year, they... start to drop Detroit artists in favor of more well-known national acts. So more people come, but the event is losing much of the uniqueness/authenticity that makes people want to come to this event from around the world."

Bethlehem has reached a critical junction in its history. It might stay mired in the past, hoping to attract another big manufacturing company and jumping on the tourism bandwagon. But hopefully it will instead take advantage of its many assets to emerge as a creative center in its own right, out of the shadow of New York and Philadelphia.

Election Night

Several undergraduate students of mine showed up late to class this morning, or did not show up at all, because they went to vote and faced long times in line due to record turn-out. (As I've mentioned before, I can't vote, because I'm not an American. So I got to stay in my office and prepare my lectures while history was passing me by. Lucky me.) The previous presidential election happened during my first semester at Lehigh and I still remember how completely apathetic the students seemed. This stood in stark contrast with the scene today, with "Remember to Vote!" and "Vote 4 Obama!" written in chalk all over Campus Square, and my students taking the time to head for the poll stations. No matter which candidate they decided to support, I am so proud of them for voting!