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November 2016

100 Days at SMU

IMG_3943 Wednesday November 9 marked my 100th day at SMU and I wanted to write a blog post about it, but since it was also the day after the Presidential Election I obviously had other things on my mind besides writing this post. So here is, a little delayed, my perspective about SMU and Dallas.

The one thing you have to know about SMU and Dallas, especially if you're not from there, is that Dallas is the 2nd fastest growing metropolitan area in the country and SMU, in the words of someone local who did not graduate from SMU and does not work there, has the reputation in the Dallas-Fort Worth area that Stanford has in the country. It helps that so many alumni find work locally at one of the many companies headquartered nearby, such as American Airlines, Frito-Lay, AT&T, Exxon Mobil, FedEx Office, Neiman Marcus, Southwest Airlines, Lockheed Martin Aeronautics, Symantec, Atmos Energy, Samsung Telecommunications, and more. It is also refreshing to be able to place top students close to the university where they graduated and hopefully develop strong relationships with industry partners over the years. A healthy situation for a university is when it can train students to later enter the workforce nearby if they so choose and do impactful work commensurate with their talents.

People might wonder about the influence of the Methodist church on university affairs, but its influence is limited to this: half the members of the Board of Trustees must be Methodist and if SMU wants to sell land (the way it did for the George W. Bush Presidential Library) it needs the approval of the Methodist church. And that's it. One thing I particularly like, although I'm not sure if it's due to SMU's Methodist origins or not, is that the commitment to being a force for good in the world pervades everything SMU does. It's already clear in its slogan, "world changers shaped here" and is also emphasized in centers such as the Cary M. Maguire Center for Ethics and Public Responsibility and the Hart Center for Engineering Leadership. It feels good to work there. There is a sense of possibility in the air that is difficult to find elsewhere.

I like that SMU is on the top of its hill and cares a lot about research but is also committed to providing students with the best education - classrooms in my building are cutting-edge, all the classrooms are equipped with top-notch distance-ed capabilities with all lectures being videotaped - and has such a supportive and loyal alumni base it recently raised over $1 billion for its Centennial campaign. While SMU already enjoys a stellar reputation regionally, it also has ambitious ideas for innovative academic programs and far-ranging research, and the means to realize its ambitions. I have to admit I have a privileged perspective since I was nominated for the Emerging Leaders program this semester at SMU, which has allowed me and a small group of SMU faculty to meet with top administrators, including the President of the University and the President of the Board of Trustees, in meetings led by the Provost. Let me tell you, SMU has the right people at the helm. It has been inspiring to hear their vision for the university.

My department, Engineering Management, Information and Systems, is led by Sila Cetinkaya who was in the Industrial and Systems Engineering department at Texas A&M until about two years ago, and she has great ideas for the department too. Our graduate students have a great can-do attitude, even when they see my exams (and if you are a former student of mine you know what I mean.) I haven't taught undergrads yet but I have two undergraduate Research Assistants and have been highly impressed by their work ethics and analysis skills. It feels good to see everyone aligned behind SMU's mission, which is to "create, expand, and impart knowledge through teaching, research, and service, shaping world changers who contribute to their communities and excel in their professions in a global society. Among its faculty, students, and staff, the University will cultivate principled thought, develop intellectual skills, and promote an environment emphasizing individual dignity and worth. SMU affirms its historical commitment to academic freedom and open inquiry, to moral and ethical values, and to its United Methodist heritage." A lot of mission statements are full of platitudes, but based on my 100 days here, this one tells the truth. I got into academia to make a difference in the world, and SMU is the right place to do it at.

So far I've found the quality of life to be exceptional. SMU is located in a wealthy part of town with amazing dining options for someone who is health conscious like me (there are plenty of BBQ joints if you prefer). My commute door to door is less than 10 minutes. One of my favorite activities is to go to the SMU Meadows School of Performing Arts, which is one of the leading schools in the nation, for a free program during lunch time (dance, chamber music) or a concert or theater performance after work. I have also enjoyed the vibrant exchanges of the Tate Lecture Series, which have brought leading public figures such as Doris Kearns Goodwin, David Gergen and Tom Brokaw to campus. SMU has many innovation-related programs and activities, including the Deason Innovation Gym, the Master's in Engineering Entrepreneurship and its own TEDxSMU programs.

I can walk from home to the symphony, the opera and the museum, all of which are of first-rate quality. (The Dallas Symphony Orchestra music director Jaap van Zweden will become the New York Philharmonic music director in 2018.) The permanent collections of the Dallas Museum of Art are free, allowing everybody to enjoy them independently of their ability to afford a ticket, and the people the most fascinated by art I've ever seen were teens and families with young minority children, admiring the works of art one by one at the DMA on weekends. I am most in awe of the DMA's collections on the arts of India, Southeast Asia and the Himalayas, which are superb. The presence of these remarkable works of art in Dallas is mostly due to the extraordinary generosity of David T. Owsley. If you like Buddhist art, the Crow Collection of Asian Art next door to the DMA is worth a stop too. Or you can cross the street and head to the Nasher Sculpture Center, which hosts the collection of Raymond and Patsy Nasher. Nasher was responsible for founding the NorthPark Center, currently the second largest mall in Texas (and 5 min drive away from SMU).  NorthPark nearby doubles as an art gallery, with shoppers strolling past statues, paintings and photographs of renowned artists such as Bruce Weber. (If you don't know who Weber is - he has done amazing black-and-white photographs of public figures such as Georgia O'Keeffe.)

When I told people I was moving to Dallas, a reaction I sometimes got was "I would never move to such a conservative city", including by people who have never been there. So far, no one has asked me where I went to church or what my political party was. Given the influx of people from all parts of the country, Dallas is a much more cosmopolitan place than many cities in, say, the Northeast. I also like how successful businesspeople have shown a commitment to philanthropy, whether by supporting Dallas institutions such as the Winspear Opera House or the Meyerson Symphony Hall, or by donating to SMU. For instance, the Lyle School of Engineering would not have the amazing resources it has today without the amazing generosity of Bobby Lyle. 

Since I've written so many good things about the university and the area, I'd be remiss if I didn't mention we're hiring, and although the deadline to apply was last Monday, the committee will continue to review applications until the position is filled. Here is the ad


On "Project Management Under Risk: Using the Real Options Approach to Evaluate Flexibility in R&D" by Huchzermeier and Loch (2001)

In an effort to better remember the papers I read, I'm starting a new section about my blog devoted to short summaries of papers I find interesting. It's called "Analytics Corner". 

Citation: Arnd Huchzermeier, Christoph H. Loch, (2001) Project Management Under Risk: Using the Real Options Approach to Evaluate Flexibility in R&D. Management Science 47(1):85-101. Link

Summary: The authors consider a situation where a manager developing a new product can either abandon, continue or improve the product during development. Theyanalyze the setting using dynamic programming, study the impact of five types of uncertainty on the real options value  and obtain results counterintuitive to prevailing knowledge in option pricing theory, due to the unique features of the R&D real options framework. This paper contributes to improved risk management in R&D projects.

Outline:

1. Introduction and Literature Overview 

2. Five types of operational uncertainty

Market payoff variability, (R&D) budget variability, performance variability, market requirement variability, schedule variability (project may finish ahead of or behind schedule.

3. The basic model

3.1 Contingent claims analysis

Motivation of the use of dynamic programming, justification of discounting at the risk-free rate.

3.2 A dynamic programming model of an R&D project

T discrete stages corresponding to regular design reviews, leading to market introduction. Market success is determined by product performance, modeled by a one-dimensional parameter i. Performance uncertainty is captured in the variability of a probability distribution, measured by higher variance given same mean. This causes product (expected final) performance to drift between review period. Hence the authors define transition probabilities from expected performance state i to expected performance stage j. 

Performance may unexpectedly improve with probability p or deteriorate with probability 1-p. Improvement or deterioration are spread equally over the next N states. For instance the probability of improvement is p/N for j=i+1/2, i+1, ..., i+N/2. The parameters N and p can be chosen to approximate a distribution using its first two moments. At each time period, the manager can decide to abandon, continue or improve the project. (The originality of the paper comes from having the possibility to improve.) Improvement results of a mean shift of the transition probabilities by 1 (the index of each state j is increased by 1, both for improvement and deterioration.)

Expected payoff if the product is launched in state i is given by m+F(i)*(M-m) where m is the smaller margin if the project misses the performance level and competes only on cost and M is the profit margin if the project exceeds this performance level, and F(i) is the probability that performance i exceeds the market requirement D. This payoff function of i is assumed convex-concave increasing. 

The authors then formulate the manager's problem as a dynamic programming problem, writing out Bellman's equations from T back to time 0, evaluating the value of three actions (abandon, continue and improve) at each time period. They characterize the optimal policy as follows, assuming the payoff function is convex-concave increasing: there exists three functions L_u(t)>=L_m(t) and L_d(t) such that it is optimal to abandon if i<=L_d(t), and if i>L_d(t): continue if i>L_u(t) or i<=L_m(t) and improve if L_m(t)<i<=L_u(t). This is presented visually in Figure 4.

4. Uncertainty and the Value of Flexibility

This section studies the impact of increasing the variance of certain key drivers, to see whether the intuition that higher uncertainty in project payoff increases the real option value extends to other types of uncertainty faced by R&D managers.

4.1 Market payoff variability

4.2 Budget variability

4.3 Performance variability

4.4 Market requirements variability

4.5 Schedule variability

5. Conclusion

Why I like this paper: I like the use of dynamic programming in a managerial context (this is one of the papers I gave to read to the doctoral students in my PhD course on nonlinear programming) and the visual nature of the optimal policy shown in Figure 4. 

Further Reading: Real options: Managerial flexibility and strategy in resource allocation by Lenos Trigeorgis (1996)


Disruptive innovation in higher ed

A good read from the archives: The Disruption Machine: What the gospel of innovation gets wrong by Jill Lepore in the June 23, 2014 issue of The New Yorker. This is part of The Annals of Innovation series. I'll give you a hint: Lepore doesn't think highly of Harvard Business School's Clayton Christensen. Christensen responded, as reported here, but the issue hasn't died down, as evidence for instance in the documentary Starving the Beast about the push to starve funding for public universities, which I reviewed here. I'll venture that Lepore's arguments would find even more of an audience if the article was published today, since the criticism she levels at Christensen's concept is echoed in interviews of other scholars in Starving the Beast.

The reason why disruptive innovation is so popular, I think, is that everyone - or at least everyone who reads articles or books on innovation - wants to view himself as a David bringing down Goliath through the power of his own ideas. It is aligned with the American myth of the self-made hero and, yes, the cult of entertainment in action movies. Small changes just aren't as exciting, as University of Virginia President Teresa Sullivan discovered for herself when she was briefly ousted by the board of visitors for failing to embrace disruptive change. But universities have always been more akin to ocean steamers rather than speedboats. Just the process of approving new courses takes several months because it has to go through multiple committees in order to make sure the students' educational needs will be well served.

To be more like speedboats they would have to implement knowledge delivery models with much shorter lead times from intake to graduation - maybe even one-semester-long programs, or even an emphasis on a piecemeal approach based on courses rather than entire degree programs. But it is likely that the unbundling of degree delivery would also result in drops in related degree programs, leading to lower revenues. It is also worth asking whether people who have only taken one course at a school should benefit from its alumni network or will show enough loyalty to donate to the school later on.

In industry, you can prototype and iterate fast. In academia, you have real people rather than products to focus on, and you are trying to establish a lifelong relationship to help support operations through donations, while keeping your competitive advantage. You want to generate ever-growing enthusiasm for your school and build momentum for always more applications of always more qualified applicants, but you are also looking at a time horizon extending far beyond graduation because a few of those new admits will become multi-million-dollars donors decades from now. I think, if disruptive innovation has a future in academia, that would not be in the industry sense of a newcomer grabbing market share from an incumbent from behind, after years catering to a segment of no interest to the incumbent, but it would be in transforming knowledge delivery through an increased emphasis in continuing education.

Today continuing education is the most obvious revenue-generating stream for most universities, which charge thousands of dollars for a few days on campus, and sometimes it seems that the benefits are a bit one-sided, with universities getting a lot of money and attendees a piece of paper stating they have attended a few days of lecture. It's a bit like the hefty registration fee for a TED conference, which attendees pay to say they have been there. The talks can be interesting, but you pay for the prestige of going rather than the content. (The videos end up online anyway.) Instead of being a pure cash cow taking advantage of people's insecurities and eagerness, continuing education has to be of much better quality for it to be the next disruption in higher ed. But someone will do it and when it does it will be transformative.


Other Good Reads

  • Why bad science persists: Incentive malus from the September 24, 2016 issue of The Economist. The subtitle, "Poor scientific methods may be hereditary" is misleading, because there's nothing hereditary about it, except perhaps that poor methods are passed on to generation after generation of students trained in the same lab. The article explains: "the way to end the proliferation of bad science is... for universities and funding agencies to stop rewarding researchers who publish copiously over those who publish fewer but perhaps higher-quality papers," although it is "easier said than done". (There is also the issue that you don't know which papers are higher-quality until other teams have replicated them, or failed to.) 
  • The long march abroad: China's brightest and wealthiest are leaving the country in droves from the July 9, 2016 issue of The Economist. Here is the paragraph that caught my attention: "Of the 4m Chinese who have left to study abroad since 1978, half have not returned, according to the education ministry... In some fields the brain drain is extreme: almost all of China's best science students go abroad for their PhDs and 85% of Chinese science and engineering graduates with American PhDs had not returned home five years after leaving, a study by the National Science Foundation found this year." (On the other hand, since H1B visas can last for at most six years unless a green card petition has been filed, maybe they return home not long after that.)
  • The Affordable Care Act: Encumbered Exchange from the September 10, 2016 issue of The Economist. The article explains that Obamacare has led to a decrease in the percentage of Americans without health insurance and highlights the new premium redistribution mechanisms. "Premiums now vary only with age, smoking habits, family size and where customers live" rather than "medical history, occupation and most other factors that correlate with health spending." Also, "the old can be charged at most three times as much as the young." This has led to an increase in premiums for the healthy and the young, and while poorer customers, who receive subsidies, may not have noticed, those who are healthy and not poor enough to receive subsidies have seen an increase in what they pay for health insurance. Health payers have failed to predict the new enrollees' poor health and the predicted withdrawal of small-employer plans - where those employers would have sent their employees to the public exchanges for coverage - did not happen. Also, more people than expected have continued to buy plans directly from insurers. It is worrisome to hear that in 2014 over two thirds had a loss from the exchanges, with profit margins now of about -10%. The average planned premium increase for 2017 is said to be around 25%, according to the article. The article does an excellent job describing the threat to the exchanges of insurers leaving them. But while it advocates "nudg[ing] Americans away from employer-provided health insurance" so that the flawed public exchanges could survive, by eliminating the tax-exemption for employer-provided healthcare benefits, this sounds like a solution that would unite every taxpayer with such insurance in strong opposition.