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November 2009

Peter Drucker's Month

Management pundit Peter Drucker - often called "the father of modern management" - would have turned 100 this month, which has led to a week-long celebration at the two schools that bear his name, a self-help book aiming to explain how "Peter Drucker's wisdom can inspire and transform your life", and of course countless articles in the media, from the Financial Times to The Economist to Harvard Business Review.

I have "The Essential Drucker" at home, although I'll admit I never made it past page 58 (I still have the bookmark in place), as I find Drucker's style a bit off-putting - his writing, at least in that book, is very terse with no example to back up the insights he gives; I am more used to business authors who illustrate their points with stories from the companies they have consulted for. But I do plan on giving the book another try in the near future.  

I particularly liked the Economist's column on Drucker, which points out that "[w]hen Drucker first turned his mind to the subject in the 1940s [the management-advice business] was a backwater." As a result, Drucker comes across as genuinely eager to help businesses improve. In addition, he remained in the profession for over 60 years, which gives him added credibility in a field that "has always been prey to fads and fraudsters."

My favorite quote in the article is: "Drucker liked to say that people used the word guru because the word charlatan was so hard to spell." Needless to say, Drucker did not view himself as a guru, although that is precisely what the Economist called him when he was featured in its, you guessed it, "management gurus" series (see "Management Guru: Peter Drucker", October 2008 - the article provides a great overview of Drucker's life and contributions, although unfortunately it is available only to subscribers). Additional Economist articles on or by Peter Drucker are listed on this page.

I also enjoyed reading HBR's spotlight on Drucker, in particular Rosabeth Moss Kanter's article ("What would Peter say?"), in which she summarizes Drucker's main themes as follows (I am excerpting her points - read the full article for the complete statements): (1) "Management should be a profession", (2) "Knowledge workers [an expression Drucker coined decades ago] cannot be controlled; they must be motivated", and (3) "Not-for-profit organizations are necessary ingredients in producing a good society."

For those of you who would like to read a full article by Peter Drucker, the Wall Street Journal recently reprinted Drucker's 1993 column entitled "Drucker on Management: A Turnaround Primer". You can find it here.


Physics GRE

I found an interesting post about the Physics GRE exam on the Cosmic Variance blog of Discover Magazine, written by someone on the committee that prepares the questions. (The GRE [Graduate Record Examination] is an exam that students applying to graduate school have to take, a bit like the GMAT for business school and the LSAT for law school. The schools most often require the General Test, but some departments also ask candidates to take a Subject Test in one of eight fields: Biochemistry/Cell/Molecular Biology, Biology, Chemistry, Computer Science, Literature in English, Mathematics, Physics and Psychology.)

The post is intended for physics undergraduates who study for the GRE, but the comments it generated also raise interesting questions on whether a multi-answer quiz can correctly assess a candidate's understanding of physics. For instance, the author writes: "My first piece of advice to students studying for this exam is to focus on reviewing the textbook from your freshman introductory physics course. In my years on the GRE committee, when I have needed to consult a text, it is that text at least 80% of the time. [...] I have found that only a small fraction of the items on the GRE are actually from upper-level topics". My first reaction was: isn't it a little sad to test applicants' abilities based on a course they took as freshmen? At the same time, if they don't get the basics, it's unlikely that they will make good researchers.

The post's author explains that students only have an average of 1.7 minute to do each problem and that the GRE penalizes random guessing by substracting 1/4 times the number of incorrect answers, to the number of correct answers. He argues that "the Physics GRE really does test knowledge about basic physics and the ability to analyze physical situations accurately." But he does not comment on the GRE's usefulness in evaluating doctoral candidates beyond the fact that "[his] own observation is that students below about the 30% level have a very hard time attaining a Ph.D., though this is by no means absolute." And if the GRE is 80% based on freshman physics, I can see why that would happen, and I would have quoted a threshold much higher than 30%. His other observation on the test's usefulness is that "[w]e do see a clear correlation between an incoming graduate student’s Physics GRE score and their score on the other dreaded exam in a physics student’s career, the Ph.D. written preliminary exam, which is a very different beast." I guess that is better than no correlation at all with any milestone in a doctoral student's career.

Many commenters touched upon the issue of the test's usefulness. Commenter #4 writes: "It is astonishing and borderline disturbing that, after four years of learning more and more about how to do physics, our academic futures are contingent on recall of material from a class that we were encouraged not to take." (The top students were apparently encouraged to take honor-level physics where they would focus on proofs and derivations instead of learning the formulas by rote.)

Commenter #5 also states: "[T]he emphasis on fast calculations in the physics GRE, especially with numbers, though a reasonable skill for a physicist to have, is not obviously more important in determining success than the ability to formulate a mathematical problem from a set of physical ideas. Nor is it even obviously related to the ability to solve a particularly knotty differential equation. Nor is it obviously related to the ability to design and execute a clever experiment." Also read Comments #6 and 7.

Here are some arguments in favor of the GRE: Commenter #9 points out that it is a lot more objective than GPA, which students can inflate by taking easy courses or by attending an university that sees a lot of grade inflation. (A 2001 Boston Globe story - Harvard's Quiet Secret: Rampant Grade Inflation, October 7, 2001 - reported that 91% of the students in the Harvard Class of 2001 graduated with some type of honors: cum laude, magna cum laude or summa cum laude, in contrast with 51% at Yale and 44% at Princeton. Also see this December 2001 article in the New York Times.)

The post's author, as Commenter #10, makes a similar argument, and points out that letters of recommendation vary wildly. I would add that creating a test which really allows students to demonstrate their understanding of physics would require a real person, as opposed to a computer, to grade the test, and raises issues of time and pay for these people. Commenter #61 points out that the Physics AP test "has both a multiple-choice section and a free-response problem section, and many, many more high school students take that test than take the physics GRE. So if the AP system manages to make it work on a much larger scale, I don’t see why we couldn’t do the same thing as well."

Judging the ability to do research, which should be the purpose of the admission committee, is an impossible task in most circumstances, since graduate research work differs so much from undergraduate coursework and even undergraduate research projects (although a willingness to learn about research as an undergraduate should be a huge plus). Even graduate students who do very well in their first-year or second-year courses sometimes turn out to be below-average researchers, when they no longer have well-defined questions to answer. There might not be enough qualified students applying to doctoral programs; if there were, departments would not need to put together admits' weekends to entice admitted students to enroll. It does say a lot about the perceived lack of importance of doctoral-level work that high school students take a higher-quality test, in the sense that it better lets them demonstrate their understanding of the material they have learned, than doctoral applicants.


"Hollowing Out The Middle"

I recently finished reading "Hollowing out the middle: The rural brain drain and what it means for America" by Patrick Carr and Maria Kefalas. It is a thin book (172 pages without counting the lengthy notes and references at the end) which raises as many questions as it answers, but it provides a fascinating glimpse into the life of small-town America by studying an Iowa town the authors lived in for several months in 2001, using funding provided by the MacArthur Foundation. (Carr and Kefalas are associate professors in sociology at Rutgers and St Joseph's University, respectively.)

The name of the town has been disguised to protect residents' privacy, as the authors say it is customary to do in their field; surprisingly, they have one slip-up toward the middle of the book, although this might simply be another fictitious name they had chosen for the town in an earlier version of the work, which was many years in the making. Suffice it to say that the town, which counts a little over 2,000 residents, is in the middle of nowhere - one hour away from the closest mall and eighty miles from the closest Starbucks. (It seems that many Iowa towns have fewer residents than "Ellis" - if you download the files about cities in the state of Iowa from this US Census Bureau page, and rank cities by increasing order of estimated population in 2006, you will notice there are almost 800 "incorporated places", to use the census bureau's terminology, out of about 950 with population less than 2,000. Only 10 have a population higher than 40,000.) All this to say "Ellis" is not an atypical town by far.

One of the most important contributions of the book is the characterization of residents into four groups:

  1. Achievers are A+ high school students who use college as a way to escape small-town life and don't come back, except to visit their family.
  2. Stayers don't go to college, and sometimes don't even graduate from high school. They quickly transition into adult life, get married and have children at a young age. They are enticed to work at the nearby factory by wages that their seventeen-year-old selves find quite high, but they fail to realize that there is almost no opportunity for advancement, i.e., they will make little more than that twenty years later. 
  3. Seekers either don't have the Achievers' grades or don't have the money to afford a college education, but want to discover the world (or at least the rest of the country) beyond their small town, and use military service to that effect.
  4. Returners are either High-Flyers ("twenty-somethings who return to small towns armed with college degrees and entrepreneurial ambitions"), or Boomerangs ("former enlisted men and women who move back to Iowa after leaving the armed forces and the mostly female graduates of community colleges").

The authors spend most of the book describing these four categories in detail, and end with their reflections on what can be done to save rural America. They point out the apparent contradiction of lavishing so many resources on Achiever-type students, who are bound to leave town, while neglecting Stayer-type students, who will make the bulk of the local workforce and therefore play a critical role in small towns' survival. (Small towns die, for instance, when there are no longer enough students to keep the school open.)

The authors comment on some of Richard Florida's theories (the Florida of The Rise of the Creative Class fame) and their applicability to rural America. In particular, they wonder "whether creative towns can be conjured in places that have been largely emptying out." In addition, "most creative-class counties are in metropolitan areas [...] most nonmetro creative counties are found in New England and in the Mountain West states such as Colorado, Wyoming, and Utah." It is "difficult to see how Heartland small towns will compete with areas in the West that have more abundant outdoor amenities such as mountains, hiking trails, and ski resorts." Another issue Carr and Kefalas mention is that some small towns may not have the high-speed Internet access the creative class has come to rely on, and which has become a necessity to compete in a global world. The authors' key recommendation is to revamp the rural educational system to better serve the non-college-bound student population, a recommendation they detail at some length.


Serious PhD Comics

PhD Comics usually makes me laugh, but the latest strips struck a darker note. They are apparently based on the author's real-life experience at the detention facility at Heathrow Airport. Please read for yourself: Part 1, Part 2 and Part 3. Thankfully, the story has a happy ending.

For a PhD Comic strip in the usual comic vein, I predict this recent addition ("Vacation relaxation?") will soon become a classic.


Fair Value Accounting

The November 2009 issue of Harvard Business Review has an insightful article by Robert Pozen on fair-value accounting, adapted from his book "Too big to save? How to fix the US financial system," which will be hitting the bookstores early next week. (Pozen chaired the SEC's Advisory Committee on Improvements to Financial Reporting, back in 2008.) For some background on the battle ranging between proponents of fair value and those supporting historical cost accounting, please refer to this old post of mine.

Pozen debunks many myths on both sides of the accounting debate. 

  1. It is a myth that historical cost accounting has no connection to current market value. If the "market value [of assets] is likely to remain materially below their historical cost for an extended period," then "the company must write the asset down to its current market value on its balance sheet - and record the resulting loss on its income statement."
  2. It is a myth that most assets of financial institutions are marked to market. All loans and securities are divided into three categories:
      • assets that are held - those are carried on the books at historical cost.
      • assets that are traded - those are marked to market.
      • assets available for sale - those are marked to market but "any unrealized gains or losses on them are reflected in a special account on a bank's income statement" called Other Comprehensive Income, and "do not reduce the bank's net income or its regulatory capital."
    A SEC study found that "the percentage of assets for which marking to market affected the bank's regulatory capital or income was just 22% in 2008 - far from a majority."
  3. It is a myth that assets must be valued at current market prices even if the market for them is illiquid. Here, Pozen discusses the Financial Accounting Standard 157 and the three levels it creates, depending on how liquid the asset is. He also quickly mentions the attitude of bankers, who complained loudly about the regulation, although it apparently did not force companies "to use prices from forced or distressed sales to value illiquid assets."

Pozen makes several recommendations: for instance, banks should publish the assumptions they use in their mark-to-market models and capital requirements should be unlinked from accounting (in the same way that assets available for sale are marked to market but unrealized losses, which appear on the bank's income statement, do not affect its regulatory capital); Pozen also advocates "new multidimensional approaches to financial reporting", in particular publishing two versions of the earnings-per-share figures, "one with the assets recorded at fair value and the other without."

The article is both highly informative and easy to read, even for people with a limited knowledge of accounting, and sheds valuable light on a controversial issue.