Negative Power Prices in Germany and a Cold Spell in Champaign

Greetings on this holiday weekend:

I thought you might be amused by the thought of negative energy prices.

In our house, and I'm guessing where you are too if you are still in Illinois, it's pretty cold , partly as a way to keep the fuel bill in the manageable range as the weather is, unfortunately, quite cold and partly because temperatures are way below average.  I would love it if energy prices were negative now, so I wouldn't feel so cold in the house.

Power Prices Go Negative in Germany, a Positive for Energy Users - The New York Times via kwout

I hope everyone is enjoying the holiday and that it warms up reasonably soon.

An interesting read on Christmas

This piece is written by a philosophy professor.  I thought it was a good read.  Our course definitely wasn't a philosophy class, but maybe there was a bit of philosophy in it.  So enjoy and Merry Christmas.

Waking Up to the Gift of ‘Aliveness’ - The New York Times via kwout

A post course quiz

This is one from Alexa.

Q:  How many software engineers does it take to screw in a light bulb?
A:  None.  It's a hardware problem.

The Dilemmas in Undergraduate Education

Please only have a look at this after you've finished for the semester.  It is still more about your education, broadly considered, but not about our specific course.  And this time it about something I wrote.

Five years ago, meaning when most of you were still in high school and I was in the middle of that semester where I had rotator cuff surgery, I wrote a very long post called Why does memorization persist as the primary way college students study to prepare for exams?  If you do read it, you'll get a sense of two things:

(1) My view of the overall issues with undergraduate education at the U of I and like universities elsewhere.  Note that this is not something I came up with on my own.  But my experience in teaching largely supports those findings, as does my experience when I was involved with moving the corporate finance course in the College of Business to a blended format, where we did extensive evaluation of the students during the pilot phase, as well as prior evaluation work in a large course setting.

(2) An indirect diagnosis of the learning issues that many of you face, in my judgment.  This would be the reason for you to read the piece, to take a reflective look at your own education and see how well the diagnosis lines up with your own experience.

If you think the diagnosis is even in the ballpark - correct in general but errant in some particulars - the issue for you individually is what correctives you might take from here on out to redirect your learning in a better way.   There is also the issue from our course perspective, which is why the market or individual institutions don't correct these issues.  (Hint: a big part of the issue is that learning is unlike widgets.  You can count widgets.  It is very hard to measure real learning.)

You might then be amused about the suggested remedies in the piece.  I am far less confident those are right, or that they could possibly be implemented.  Know that I write pieces like this to promote discussion on the matter, not to make a planning document for implementation.

Finally, let me tie this to teaching our class.  In part I do that to see if some alternative might matter, even a little.  But in the last couple of years I've found my energy level is not what it was earlier, so I can't implement all the things I'd like to try.  Perhaps some of you might eventually get involved in undergraduate education on the supply side and then the baton can pass to you in doing this.

Take Aways

This is more you might read over the break.  The first three are somewhat related to the course.  The last two are more in the vein of a post from a week ago with links to pieces about learning goals.   In all,  these are just some suggestions of interesting reads, none of which are very recent, that you might peruse over the break or next semester for your own entertainment and edification.

• Bolman and Deal Part 2 - the second half of the book, which we didn't cover at all, is worth a read in its own.   It takes the four frames developed in the first half and recasts them in a leadership setting.  You might enjoy that. 
• We did not talk at all about executive pay, which really is a big topic.  Since the subject matter gets more than a mention by last year's Nobel Prize Winner in Economics, Bengt Holmstrom, I thought this might be interesting for you to look at.  Note in the second half of the piece the issue on whether the compensation must depend only on verifiable performance.  We did talk about that in considering the principal-agent model.  
• This piece called Is Giving the Secret to Getting Ahead? is from a few years ago and is by Adam Grant, a psychologist at Wharton (the business school at U Penn).  The giving he talks about is more random acts of kindness than it is where a quid pro quo is expected.  You might try some of your own random acts of kindness over the break - with your friends or your family.   See how they react, particularly whether you surprise them with your kindness.  A positive reaction (as opposed to a gift in return) may encourage you to try it again. 
• This piece called The Bell Curve is one I really like.  It by Atul Gawande, a MacArthur Genius Award winner and a prolific author (plus he is a very well known M.D.).  It is about what determines excellence when excellence can be measured, in this case in the treatment of cystic fibrosis.  It might interest you to to see excellence cast this way, as it probably defies many of the stereotypes you have for it.  
• This one called The Expert Mind mind and should appeal to those students in the class who have a chess interest (I didn't poll this year's class on that) and other students as well.  It is about how experts differ from novices in their thinking and what it takes to become expert.  Chess is used as means to illustrate the more general issues.  

Last obnoxious post about the Yankees

It's only 56 days till pitchers and catchers have to report to spring training.  Happy holidays!

Discussion Group Next Spring - Last Reminder

Two students are firm for participating in the discussion group.  So we are on.  It would be good to have a couple more students.  If you are interested, please let me know.

--------

There will be a few more posts on the site before I call it quits.  I hope this doesn't impact any of you, but I got the first spam comment on the site yesterday, so I imposed the requirement that comments have to be moderated. 

About the Final Quiz and Course Grades

The Final Quiz has concluded, as I'm sure you all know. The third and fifth questions produced perfect scores, which is reassuring since they were on previous quizzes.  The second question, on the principal-agent model, had the lowest mean.  It framed the issues in a non-geometric way and some of you didn't translate it well.  In a nutshell, if you reduce the spread between wL and wH, you weaken incentives.  If you hold one payment fixed and vary the other payment, you impact both the spread and the mean.  If the mean payment goes down, then the outside option become preferred. 

If I were into testing you, all the questions would be written in this manner - to translate into a different way of considering the issue.  Being able to translate the economics shows understanding.  But, as I said earlier in the semester, this sort of testing makes sense for intermediate micro, but doesn't really make sense for our course, as what we studied isn't a prerequisite for anything else.

The Course Grades have been uploaded into Moodle.  I will get them into Banner either later this afternoon or tomorrow morning.

I used a more generous grade distribution than was announced in the syllabus, so I hope everyone is satisfied with what they received.  This is the distribution I actually used.

Obnoxious post about the Yankees #2

It is now likely that there will be one more of these after I upload course grades.  This one is from here.

Paper and Virtual Elevator Speech Grades Have Been Uploaded Into Moodle

Comments on the projects have also been uploaded.

Regarding the virtual elevator speeches - a few teams did a a full presentation, either by going longer or by having a lot of text per slide (or both).  This is what a lot of presenters do the first time through.  They don't understand the audience so they expect to have more time than they actually will.  Keeping it simple is the goal.

I mostly evaluated the elevator speeches on slide title and image selection.  Some presentations were glitzy, others more run of the mill.  That might matter to others.  It didn't matter to me.  No team did a perfect job on this, but some teams were a bit better than others.

Also, now that the discretionary grading part of the course is over, you should know that I was quite biased toward rewarding doing the work and much less concerned with how the work was done, given that the students appeared to be trying.  I wouldn't have said this before the project was due, and I might take down this particular post if I teach the class next year, but really all of this is intermediate product.  The effort part is what counts for learning. 

There was some variation in the points on the projects, but not a lot. Also, in our class you aren't in competition with the other teams.  This is not a tournament.  We're grading on an absolute scale.

I need to proofread the quiz tomorrow when I'm fresh, to make sure there are no silly errors in it.  But I think we're good to go for that last bit of the class. 

All virtual elevator speeches can be viewed online

I made a folder of the screen capture videos.  You can watch those online by using the preview.  You can also download the video for your own team (or for other teams, for that matter) in case you want that.  Some are interesting, though no Academy Award will be given.

I have also written the final quiz.  I need to take a good long break now.  I will have the projects graded by this evening - 5 or 6 PM - with the results posted in Moodle.  Please note that the comments in Moodle will only pertain to the Virtual Elevator Speeches, since I've already commented extensively on the papers.  The points, however, apply to the entire project.

I am reviewing the Virtual Elevator Speeches now

Here are two observations - mundane, but this is how you think when you are in grading mode.

1.  Regarding musical selection - many, but not all, of the pieces selected are more my vintage (or earlier) than your vintage.  I wonder if this reflects a subtle form of moral hazard or some fear/concern that I wouldn't get your vintage stuff.  (That fear is rational.  Making reference to TV shows or movies I haven't seen might very well communicate to students your age, but not to me.)

2.  I forgot to give you instructions about the end of the slideshow.  In fact, many presentations end before the music ends, so there is an abrupt conclusion that the viewer can be expecting (at least if the viewer is familiar with the music).  The right way to do this is either to time the slides to coincide with the end of the music or to gently fade out the music before the slides end.  Nobody will be penalized for not doing this, since the error is mine.  But note that they are less interesting to showcase as is.

As a result of 2, I am lest concern about the videos I'm recording of the slide presentation, particularly when they end. I do a bit of snipping so there isn't a lot of dead video after the slideshow is over, but it is not elegant. 

Tone - in writing and with interacting in organizations

I want to make some observations taken from reading through your blog posts that might help you later in other interactions. 

Many of you are at or near graduation, have been on the job market or will be there soon.  In that situation it would seem you want to be professional and act accordingly.  The question is, what does acting professional mean? 

If I switched this from how you communicate to how you dress (not my comparative advantage but it is easier to make the point that way) then there are some businesses which prefer formal attire while other businesses have gravitated to business casual.  Formal attire conveys a certain solemn nature to the work.  Business casual conveys a more relaxed view. 

The same goes for the writing.  Formal writing (such as in the course projects) is more solemn.  Blogging, which is more informal and often represents early thinking on whatever the person is writing about, should convey a relaxed tone, especially if done well.  I want to note that both types of writing are serious and require real effort.  They are different, however, in that formal writing usually happens after the thinking is done - to write up the results - while informal writing is done while the thinking is ongoing - a work in progress, if you will. 

Many students in the class seemed quite "measured" in their writing of the blogs, as if they feared to make a mistake. Being measured conveys that you've thought about what you say, but it also seems that you are not relaxed in saying it. 

If you've gotten to know me at all over the semester, I like the combination of informal and thoughtful.  I think it is appealing to others when it is delivered well.  So we should ask, how do you get from where you are now to where you might be with this a few years out?

I may have told this story already in class, but in case not I will repeat it.  My first semester at the U of I, fall 1980, I taught intermediate economics and was petrified about having to do so.  It wasn't that I didn't know the economics.  I was competent that way.  What I didn't know was whether I could communicate about the economics in a way where the students would grasp it.  As it turned out, the fear I had was rational.  I didn't communicate with the students well at all and I bombed in teaching that course.

It's 37 years later and now the fear isn't there.  I hope for you it doesn't take that long to become relaxed when writing or speaking in front of an authority figure.  For that relaxation to happen, you need practice.  Some of that will be stressful, but the fact of the stress doesn't lessen the need for the practice. So know that you do get better at this over time and consider our course as place where you started down this path.

Obnoxious post about the Yankees #1

I don't know how many of these there ultimately will be.  But at least one more seems likely.

Regarding Giancarlo Stanton, stat cast plotted his hits this year on the Yankee Stadium map...73 dingers!!!

Grades Uploaded for Blog Posts and Comments

I have now just finished uploading grades into Moodle.  I think I was pretty generous with the points for those who did all the posts on time.  Not everyone did that, which is why the mean is lower than it otherwise would have been. 

My next task for the course is to write the final quiz.  I will get to the virtual elevator speeches after that.  A few of them have come in that I have yet to acknowledge.  I will do that later today.

Running slow on grading the blog posts

I did upload the comment matrix.  I should have the scores for both the blog posts and the comments done sometime tomorrow morning.  Sorry for the delay.  I made a clerical error in Excel that took a while to track down.

This one is by the same guy who said you rise to your level of incompetence.

Quote Details: Laurence J. Peter: An economist is an... - The Quotations Page via kwout

A few points I had wanted to make but forgot to/ran out of time

These are really for down the road and I know you are keyed into finals now.  But they are something for you to consider.

1.  Some students in their last post discussed how much time they put into doing the homework.  There is the issue of what doing the homework means.  I believe most students interpret it as getting the assignment done so it can be submitted.  A different interpretation (and the one I'd prefer) is to produce a reasonably deep understanding of the topic being addressed in the assignment.  The second interpretation requires greater time.  How much additional time depends on the particular topic and what the student already knows.  There is no fixed relationship between time put in and generating a deep understanding of the subject, though I'm sure you get better at doing it with practice.  Most students who reported their time input, which I believe they did honestly, had too little time on task to generate a deep understanding, unless the student is a really sharp cookie and knows a lot of this stuff already.

2. Though you had the option to write on something other than the prompt, mostly students didn't try that at all.  There is a question why you didn't.  My tentative answer is that you've been trained to be deferential to authority (me in this case) rather than to pursue your own curiosity.  Part of becoming an adult is about getting a better balance on this, where you drive your own learning more often. The first day of class we asked, who owns the human capital produced in our course?  The answer, of course, is that each of you own your own human capital.  As owners, you are the principals, and I am your agent. Yet you didn't really behave that way.  This also speaks to #1, because writing on your own topic and tying it to the course would require doing some homework, which would certainly take time.  But I wonder if there is a different explanation as well - risk aversion and the fear of failure.  Writing to the prompt is safer, no doubt.  But there is definitely more learning if you fail on occasion and then take lessons from that experience.  The course didn't do much on helping you learn to fail as part of the normal process where eventually you do succeed in mastering something significant.

3.  This one is about math models.  When I was an administrator I found I often would make a simple model of the situation we were dealing with, analyze that, and use it to communicate about the situation and to try to shed some light on the important issues.  This is a personal strength - I'm a pretty good analyst.  I really don't know if undergraduate majors in economics can be expected to do something similar when they've reached a reasonably high level administrative position.  However, I do believe that part of the reason for learning the models that we've considered is to see the implications that arise from the model, rather than just treat the model as a thing in itself.  We've established that none of you are going on to graduate school in economics.  So mastering any particular model probably won't have much value to you down the road.  But having facility with such models in general might be an important life skill and help you climb the ranks of management.  The ability to conceptualize is definitely important and the modeling helps with that.

Some links of things you should read after the semester - to consider future learning goals

A book review of Grit by Angela Duckworth.  There is the famous quote from Thomas Edison that genius is one percent inspiration and ninety nine percent perspiration.  Grit is the perspiration part.

A paper on Getting Unstuck, and various strategies for doing that.  The part of this I found most interesting is where the student talked about writing a bunch of silly programs that weren't assigned but did get the student familiar with the issues that would be confronted in doing the assigned program.

A very long letter I wrote to Carol Dweck.  This letter has quite a lot about my philosophy of education and details where I have issues with Duckworth and Dweck.

A website on Abraham Maslow.  I really liked the discussion that begins with the section on self-actualization, along with the list of features that a self-actualizer exhibits.  It seems like a very good list to aspire to.

Bah, Humbug. Scrooge was an economist!

When gift exchange goes awry.  For your amusement only.  I thought you'd find the title of this piece interesting.  There is an economics paper  published in the American Economic Review (the top journal in the U.S.) back in 1993 that got all of this started.  You can find the paper here.

The Economics of Wasteful Spending: The Deadweight Loss of Christmas | PBS NewsHour via kwout

A little humor and.....

.... if you've never seen it before an essential part of anyone's education about American culture.

What will Santa bring you for Christmas? Perhaps your final grades.

I thought this memo was humorous, in a bizarre sort of way.  If you are in any high enrollment classes, note that they can get grades in after Christmas - and might very well do that.

Fall 2017 Grade Entry DEADLINE: Dec 28th at 2:00pm via kwout

This has absolutely nothing to do with our class...

... but it does have me intrigued.

The Yankees have traded for Giancarlo Stanton,  The trade is not yet official.  Stanton has a no-trade clause in his contract with the Marlins, so he has to approve the trade (though he has indicated he would).  And there is a physical that needs to be passed by all players involved in the deal. 

Nevertheless, the following factoid has captured my attention.

Number of home runs hit by the Yankees in 2017.......241.
Number of home runs hit by Stanton in 2017...............59.

I will be following Yankees baseball even more closely next year.

Grade Book Updated in Moodle

I just did a grade book update - 3 entries in the Excel Quiz category and 1 entry in Blog Posts category.

Note that there were actually only 9 Excel homeworks for the entire course, so I made an entry called Freebie, where everyone got 10 points.  The other two entries are Principal-Agent Model and Shapiro-Stiglitz Model.

I also uploaded an entry for the Triangle Principal-Agent blog post.  I have not yet done one for the last blog post, because some students are still getting those in.  For those of you have yet to do the last post, please do so soon.

Capturing Virtual Elevator Speeches

A useful screen capture application is SnagIt, which is what I've been using recently to make videos.  While free applications that come bundled with your computer (Quicktime on the Mac) can do screen capture video, SnagIt captures the system audio, and as far as I know that is unusual.  Most other apps don't capture system audio.  (For our projects, the background music is system audio.)  SnagIt is not an editing application. For that it is mediocre. But for capture, it is quite good, imho.

So, if you want me to capture your virtual elevator speech as a video, just ask.  I can readily do that and then deliver the video file back to you. What other use you might have for it (posting it to a video site, like YouTube) I don't need to know.  And if you want this capability yourself, you can buy it from the Webstore, slightly below market in price.  (Note that link is for Mac users.  PC users will have to search a little more at the Webstore for the app.

More on Being Treated Well On the Job

I want to give some different examples of work, what needs to get done, and stuff you want to avoid in considering being well treated on the job.   This should give you a better sense of things and consider issues that didn't get conveyed with that little diagram of  a hierarchy I drew in class today

Relationship with Business Office/HR Department  

This is incredibly important once you are in middle to upper management.  Let me give one example about capital budgeting and then one example about hiring/promotion. They are taken from my time working at the campus IT organization, which started more than 15 years ago.  So things may be a little different now, but the general issues remain.

Every organization buys stuff - various equipment and office supplies, for example.  When I had the group that ran the smart classrooms on campus report to me, a good chunk of their expenditure was on equipment.  For example, the lcd projectors that are in the classroom need replacement periodically.  If memory serves, they were on a 5-year replacement cycle then.  If one fifth of the projectors were replaced each year, that would be easy budget-wise.  You'd have an item in the budget for projector replacement and the spending would be pretty much the same from one year to the next.  However, there are model changes with projectors and from that point of view it is more efficient to support fewer models.  In the extreme, all the projectors would be replaced at the same time, once every five years.  Then only one model would be supported.

The question is how to budget for that, given that each unit has an annual budget but the units can't carry over funds from one year to the next.  To make this work some unit, either the Business Office itself or the boss of the entire organization, must be able to serve as a bank, to keep a store of funds, to disperse those for large capital expenditures, and to replenish the store of funds by taking it out of the budgets of the other units.  There are basically two approaches.  Either my classroom unit would save some of its budget each year so that after 5 years it would have accumulated enough to purchase the next round of projectors, or the purchase money is loaned to the classroom division, which then pays off the loan over the next five years.  Being well treated means either model is accommodated, with perhaps some one time injection of funds from the top to get this cycle functional.

I should also add here, given our discussion in class today, that internal banking of the sort I just described comes at a zero interest rate.  At least, that was true when I was involved with it.

Now the HR example, really two examples.  Campus HR is primarily concerned that the hiring processes are fair and non-discriminatory.  But much hiring happens internally.  A student employee shows his/her worth (much like in an internship).  After graduation, the unit would like to hire the former student as a permanent employee.   Is it fair to hire the student without doing a search that is open to any candidate?  Honestly, I don't know the answer to that question.  But I do know that it is the efficient thing to do.  Identifying a good person is like finding a diamond in a coal mine.  (Not infrequently, you end up hiring somebody only to regret that sometime later.)  Once you've found a good person, you have no motivation to do an open search.  If the HR office can get you a search waiver, that really helps.  It is not always possible, but it it is good to know that they try.   A similar situation exists for an ongoing employee whom you'd like to promote.  Is a search necessary then?   Job duties will change somewhat.  How drastic a change is needed to justify the search?

After the fact, it actually might be better for the person to have won in an open search process, rather than to simply be promoted, because then the search will have validated the person's credentials.  But during the process, it might be nerve racking, and as with the student case, if you are quite certain ahead of time that your current employee is the one who will win the search, then it seems like a big time waste.

Support staff

The biggest single perq I had when I was doing campus IT was having a secretary, Mary.  She was a gem and made my work life bearable. Here are a few reasons why

• No voicemail.  Callers had to go through Mary. Once you have purchasing power in an organization, vendors want a chunk of your time.  It may be that the supply of such vendors is not perfectly elastic, but it sure seemed that way to me.  Mainly I didn't want to talk with them, especially the ones I had not done any prior business with.  Saying no is not easy for me.  Having a human screen is much better than having unanswered messages in your voicemail.  A similar issue exits with people who want some of your time on campus for business that you otherwise don't see as relevant.  (Meaning you haven't been informed about it before through the normal chain of connections, committees, or known contacts.)  Having a secretary who screens calls that shouldn't get through while knowing which should is a huge perq.
• Scheduling.  This is the biggest thing on campus that secretaries do, and I suspect this is likewise true in the private sector.  People in upper management have very busy schedules.  They go from one meeting to the next.  If they are needed at a certain meeting, and that is true for a few of them from different units, finding a common time is quite difficult  It is quite inefficient for somebody in upper management to do their own scheduling, though it is quite common to do that for people lower in the hierarchy.  
• Dealing with details, such as tracking incoming purchase.  Business accounting systems can be arcane.  While I talked about purchase orders in class today, there is also a need to track purchases to make sure they've been received and to see when those funds actually get spent in the accounting system.  While the official software is there, almost every unit I knew at the time had its own Excel spreadsheets that were constructed for this purpose, customized to unit function.  Keeping those up to date is critical.  This stuff isn't rocket science, but it is detail that does need to be done without errors.
• Keeping the tone in the office professional and pleasant.  The person who answers the phone is also the person who greets walk-in traffic.  Much of that is with other staff.  Everyone needs to find the environment welcoming and friendly. 

Let me switch to tech support.  I don't know if it is a big deal at most jobs.  It was a biggie for me, both for when I would make on campus presentations that would have to go without a hitch and for my home computer network, where I paid people privately for the work, since it was out of scope for campus work, but where the people were happy to provide such service for me.  Having friendly tech guys you can trust makes life so much easier.

Discretionary Funds

Even in a starting position, your professional development is important.  There may be some conferences or other events you should attend.  You shouldn't have to pay the registration fees or travel costs for these out of your own pocket, provided you can convince your manager that it is related to your work.  Likewise, sometimes you need to host business associates for a meal.  Again that shouldn't be your nickel, if it is work related.  Then there may be training materials to purchase or equipment to buy that is related to your professional development.  Having a reasonable budget for such items makes life much more bearable.  If you have to pay for this stuff yourself, maybe you should do that, but it will give you the feeling that you are not well treated.

Social Life and Work

This one is trickier to talk about along at least two dimensions.  One is where you live and how close to work that is.  The other is whether you are single or not.  So it can be either good or bad to have your social life revolve around the people you work with, or for there to be an expectation to that effect.  I don't want to describe the right answer other than to say that you feel well treated when you are comfortable with balance along this dimension.  So...

• If you feel lonely, both at work and away from work, that cuts against being well treated.
• If you have family obligations that you really want to participate in but it seems work is blocking you from doing that, it cuts against being well treated. 
• If you have friends at work but they are not close friends so you are not comfortable opening up to them, and you have nobody else (a mentor, for example) who is knowledgeable enough about the situation, but distanced enough so you wouldn't feel compromised about opening up to that person, then that cuts against being well treated.  More generally, you need to talk about work (sometimes it's venting, but not always) with somebody you like and trust.  There will be stress.  This is a way to relieve stress and manage it.  If you have that release valve, it is a really good thing. 

One More Observation

Rome wasn't built in a day.  Patience is a virtue.  If you have a sense of what you want at work you can diligently build to that, even if it isn't all there at the outset.  A first job that you have after graduation may be just that.  These things will come with time if you are good and productive at what you do. 

Some Misconception

It occurred to me after class that some of you are operating under the assumption that the attendance tracking which I have been doing matters for your grade.  It did when we were doing those surveys for which you could get bonus points.  But we stopped doing that.  I have continued to track attendance because I'm curious with how it correlates to measured class performance - the points you ultimately earn.  I will do an analysis of that at the end of the semester. 

I was impressed with how well the class did today on the in class quiz.  Next year, I'll have to make those questions harder.

Today's Quiz

This one is not a joke.

Which word has three double letters in a row?
bookkeeper (or bookkeeping)

This one is a favorite of my sister.

In Russia before the revolution everyone was penniless, except the Tsar.  Why is that?
He was Nicholas.

Finally, here we will prove a theorem.  The theorem is that all horses have an infinite number of legs.  To prove this theorem we will take as a lemma that all horses are of the same color.  A lemma is a smaller result used to prove a larger result.

Proof:  Take your average horse.  It has two hind legs and forelegs.  Together that makes six legs.  Six is an even number, but it is an odd number of legs for a horse.  The only other number that is both even and odd is infinity, so a horse has an infinite number of legs. 

You may say that you can find a horse that doesn't have an infinite number of legs.  But by the lemma -
that must be a horse of a different color!

Another Video on the Shapiro and Stiglitz Model

This one is about social efficiency in their model.  Here it is:

Reminder: A totally optional discussion group

If you are interested, please indicate that either by commenting on this post or by sending me an email.

For your convenience, the previous post about the discussion group is reproduced below.

* * * * *

I normally make this announcement at the start of December, but this year we seem to have a large number of students who will graduate after this semester.  I wanted those students to be aware of this possibility, in case you do stick around town for the spring.  You would be more than welcome to be part of the group, although you would no longer be enrolled at the U of I.

The last few years I have invited students to join me in the spring for a weekly discussion group on the topic of how they might get more out of their learning.  Four years ago, I didn't get enough nibbles.  Three years ago I had three takers.  We met each Friday afternoon throughout the spring semester.  It was an interesting experience, unusual for both the students and for me.  Two years ago I had two takers initially, but one soon dropped.  The other person was extremely shy and it was kind of odd to have conversations with him.  We went for a while but didn't meet quite as regularly. Likewise, last year I had one student in the spring and it was more mentoring than discussion group.  I have another student this fall, where again it is more mentoring.  The mentoring thing is okay, but for students with an eye on the job market, I'm probably not the right person to mentor that.  I think the discussion group approach would be more interesting, but it does take a few students to make a group.

This year I'd like to do something similar but on a different topic.  I maintain a reading list on leadership and learning.  We might start with a few pieces from there to help us find a rhythm.  After that, I'd hope that students would offer up their own pieces for us to discuss.

When the group seemed to work well we went for somewhere between 90 minutes and two hours and met in BIF.  That much of what we did I'd like to keep.  Based on that experience the ideal number of students is at least 3 and probably no more than 5.  If we can get that this time around we'll be a go.

Why people don't engage more in experimental consumption.

This piece is interesting - both because it ties into what we were saying in class today - name brands want repeat customers and get them if people don't experiment with the knock-off brands that are really just as good - and because it says something about a certain type of risk aversion.

I will note here that when I was your age (or a year or two older in graduate school) I did experiment eating spicy food.  Then, there was good Thai places in Chicago that were inexpensive, so a grad student could go out and have an interesting meal.  I would never eat that stuff today, my body can no longer handle spicy stuff.  So in that dimension I am much more risk averse than I once was.

In other dimensions, I believe, I still like to experiment.  The quiz of the day that we've been doing the last couple of weeks gives an experimental approach of sorts. I suspect you won't see something like that in your other classes. I wonder if participating in it will encourage you to do a bit more experimental consumption on your own - and not just in the food you consume, but in the activities you undertake.

Submissions for today's quiz.....And the winner is...

1.  From L - When is a door not a door?

2.  From E - Imagine you are in a dark room.  How do you get out?

This next one is not an official submission since it is from my brother and he got a prize recently so he doesn't need bonus points from me.  But, sequentially, it came in the middle of the pack.  And quality-wise it fits.

There are 10 types of people in the world, those who understand binary and those who do not.

3.  From A - How do you make 30 cents out of two coins, if one of the coins isn't a nickel?

4.  From R - Why is a sandbox so expensive at Whole Foods?
It's sold as gluten-free pancake mix. 

And from Professor Arvan - no joke but a serious question.
What does the word copacetic mean?

Principal not Principle/Submissions for In Class Quiz

As many students have confounded the two words in the most recent blog posts, I thought I'd belabor  the meaning.  There are many possible definitions of principal.  For us, definition 6 is the most relevant one.

a person who takes a leading part in any activity, as a play; chief actor or doer.

In contrast, principle has really only one meaning, though they give three ways for providing that meaning.  A principle is an underlying rule or tenet.  In our class you have been exposed to the Efficiency principle, given in M&R.

It would be good to keep these straight in the future.

* * * * *

There are now two submissions for the in class quiz on Tuesday.  Get your submission in, to make it a real contest.

Quite an interesting piece about gender bias and venture capitalism.

I thought this Op-Ed relevant to the class because one team wrote their paper on venture capitalism.  So while we haven't discussed it in class, it is something students should be aware of.  The author has quite strong credentials to write this piece:

"I have seen it up close in the two worlds I know best: Wall Street, where I was chief executive of Smith Barney and of Merrill Lynch Wealth Management, and in Silicon Valley, where I’ve raised money to run my start-up, Ellevest."

What she describes is a kind of market failure based on gender bias.  Hmmm.

The Cost of Devaluing Women - The New York Times via kwout

Points on the Second Quiz - Update

It looks like I was able to change the scale to 50 points (what it should have been) with a simple adjustment.  I did that a few minutes ago.  So now the grade book is correct. 

Points on the Quiz

I am not sure how this happened, but it looks like the second quiz is giving 100 points maximum, when it should be 50 points maximum.  Given our discussion in class about how students react to changing the means on exams, this is very unfortunate.  However, the Syllabus clearly says that the first and second quiz are each worth 5% of the grade.  So out of 1000 points they each should give 50 points. 

After the quiz is over I will adjust the scores so that you get the intended amount of points based on the questions you have answered correctly.  I'm sorry for this error.  Unfortunately, it is the type of bonehead play I am prone to make.

Professor Arvan

A tournament for students in the class (for fun)

For next Tuesday's quiz to start class, I would like to offer a student generated quiz (joke).  The winner, chosen by me, will get 5 Bonus points for the course and the privilege of having their question showcased for the class.  Please make your submission by email.

Time permitting, the other submissions will also be shown and we might have a mock election of which one the class prefers.  (I'm quite willing to believe the class will select a different submission as the most preferred.  Your tastes and mine likely don't agree on much.)

Excel Homework Due 12/6 at 11 PM

This is the last Excel Homework and it is on the Shapiro-Stiglitz model.

This homework is on extensions of the basic Shapiro and Stiglitz model, with a particular focus on making the monitoring intensity a choice variable.

You should watch the video presentation of the basic model first.   This is a full lecture on the math of the model.  It takes about a half hour.  (If you want the PowerPoint file, a link to it is in the description of the video.)

The actual Shapiro and Stiglitz paper. 
The video that derives the equations in the paper.

Today's Quiz

There was the Bigger family with members Mr. Bigger, Mrs. Bigger, and baby Bigger.

Q:  Who was bigger?

A:  Baby Bigger, because he was a little Bigger. 

This book is the source and was used for variety of other jokes over my childhood that I imposed (with some frequency) on my friends. 

And this is the inscription from my dad.

Finally, this is the page with all the jokes about the Bigger family.

This shouldn't affect us, because we don't have class on Wednesday, but.....

---

From: Martin-Roy, Tera Nichole
Sent: Wednesday, November 29, 2017 4:50 PM
Subject: Primary Heat Outage - DKH West Side Only - 12/6/17

Good Evening,

On Wednesday, December 6^th from 8am-4pm the Primary Heating Water will be turned off and drained from the west side of DKH only. They will repair a heating issue, refill the system, and remove the air. The high for Wednesday, December 6^th is 34°F (which could change by then, for better or worse). If you need to spend significant time on the west side of the building that day, plan accordingly.

If you’ve had issues with the valve on your hot water heat register, please let me know as soon as possible. If a repair is needed, it could be handled on 12/6 preventing another heat outage.

Stay warm at heart,

Tera Martin-Roy

Department of Economics

University of Illinois at Urbana-Champaign

214 David Kinley Hall, MC-707

1407 W. Gregory Dr.

Urbana, IL 61801

Ph: 217-300-3684

F: 217-244-6678

www.economics.illinois.edu

Schedule for Final Quiz

Our final exam is scheduled for 8 AM to 11 AM on Monday, December 18th.  I plan to do an online quiz instead, in similar manner to the other quizzes.  That is, it will be given in Moodle.  I have posted this in the class calendar to start at 11 AM on Sunday December 17th and close on December 18th at noon.  This gives you a full day when to take it and part of the time overlaps the scheduled time of the final. 

I hope, very much, that this does not create a conflict for anyone.  If it does, however, note that I will not give a conflict exam earlier than this.  If you need to take a conflict, it will have to be after the 18th.  In this case, you should notify my asap so I can make arrangements.

Plagiarism and Moral Hazard

Nobody responded to this in class today about my question of whether you intended to go do graduate school in economics, but consider this (very low probability) scenario where every student in the class raised their hands, either earnestly or because they misrepresented their preferences in a way that they thought would advantage them.  How would I have reacted in that case?  (Note that to get into graduate school you need letters of recommendation from your professors.)  This would have created some moral hazard for me!

Here are the links to the papers I showed about plagiarism.  This essay by Jonathan Lethem is really a great read, so I encourage you to have a go at it after the semester is over.  It will get you to reconsider your own beliefs about what "original thinking" means and how much of a debt we have to contributions that have come before our own.  Also, it might help you understand that one joy I have as a professor is when some former student plagiarizes me, and then lets me know about it.

And here is the piece of mine called Do we plagiarize inadvertently?  The thought behind the piece is that we (professors, librarians, campus administrators) read students the riot act about academic integrity, but don't attend to the practical education or how to deal with citation (or lack thereof).  I do think as a good citizen you should make some efforts to cite properly, even in informal communication, but before too long there are diminishing returns, so there is no doubt we are less careful about citation in informal communication.

There is one topic I had wanted to discuss in class today but forgot to do so.  This is about citing works that you haven't read, or have read but didn't understand.  What is the right thing to do in this case?  What is the common practice?

On a team writing effort where there is some comparative advantage among the authors, it is my view that as long as one member of the team has read the work, and it is that person who authors the text where the work is cited, that is sufficient.  Other team members can trust their teammate on this one.  (This usually works, although you can imagine the pitfalls that are possible.)   In a solo writing effort, if you cite a work that you haven't read, and you do so incorrectly, you run the risk of discrediting your own piece.  If you recall our little discussion today about detection, you might very well get away with it.  But then again, you might not.  If the purpose for the citation is to show that you've done your homework, then do your homework.  That is the simple message.

However, I will confess to, for example, taking a concept I know already, finding the Wikipedia page on the concept or some other generalist source, and then linking to it without reading the whole page thoroughly.  Sometimes Wikipedia has errors in it, so this practice is not without risk.  However, it is mostly benign.  I do it to show I'm not making the concept up, that I learned it ahead of time.

Regarding works that you don't understand, there are some famous works (Keynes' General Theory comes to mind) that are very difficult and hardly anybody understands them, but they were seminal in a line of thinking that followed.  Those works should be cited, with reverence.   Otherwise, it is quite a risky think to cite a paper you don't understand that others do understand, unless you are asking help from them to explain it to you.

Today's Quiz

Found here also here.

Q: What do you know when you see three elephants walking down the street wearing pink sweatshirts?

A: They're all on the same team.

Some Ideas for the Virtual Elevator Speech

I made a template Presentation for you to download and review.  It can be played in slideshow mode and then plays automatically, with background music.  The slides are meant as instructions on how to make your presentation.   So that covers the layout part.

Content-wise, the big deal is image selection.  Some thinking should go into what sort of image best represents the idea you want to communicate.  I expect that to be the bulk of the work, with there also some effort put into your slide titles to tie into the images and establish connections with your paper. The images should be taken from the Internet, but don't use one which has a copyright notice on it.  Otherwise, everything is fair game, though do note we are a G-Rated class and your content should fit that requirement.

As to the music, it is best for it to be purely instrumental, no vocals.  This way the music complements the content on the slides and doesn't compete with it.  One possible source of such music is to find Karaoke versions of popular songs.  Here popular means for students, not for me.  Remember, other students in the class are your primary audience.  If you find such music on YouTube, there are many converters out there to make an mp3 (audio) file from the video.  I've used this one with good success.

You need to put in timings/transitions for the slides.  This requires a bit of arithmetic like this - if you have 20 slides and you want the presentation to run for 2 minutes then that is 10 slides per minute or 6 seconds per slide.  You don't need to have it completely uniform that way, but it is certainly easier.  Slides with a lot of text (you won't have many of these) should have some more time to allow the viewer to read what is on the slide.

Finally, the music should autoplay.  There are some tools for doing that.

If you need help with this I can certainly provide that, but my hope is that at least one team member will have these skills and this sort of things is something that each of you should learn, if you don't already know how to do it.

Where I am on the Second Drafts/Moving on to the last phase of the project

So far I have received submissions from 7 teams.  I have read and returned 5 of them and I am done for today.  If I didn't get to yours yet, I apologize.  Something else came up today and that took a chunk of time.  I will get it back to you tomorrow.  If your team hasn't yet submitted the second draft, you better get it to me tomorrow, early afternoon by the latest.  Otherwise, your team will be put in jeopardy for not doing the work. 

Many teams didn't do the references correctly.  While I try to be causal about many matters, references in papers are something that academics take seriously.  In the body of the paper, the reference should read Last Name of Author(s) (year of publication).  Then at the end of the paper there should be a references list with a full citation of the paper.  You ultimate submission of the your paper has to have the references done correctly. 

In addition, I marked up papers, as my way to read through them again seriously.  I want to note that I enjoyed the cover letters and really it is the best thing I did about the project - requiring them.  One thing I hope you get from my class is that thinking is conversation.  The cover letters are conversation with your thinking in response to mine.  I wish I could do more assignments like that. 

However, I didn't mark them up.  From the point of view of production, the cover letters are intermediate product.  The next version of the paper that you will submit is closer to final product.

Once I receive those and verify the references are done okay, I will post your papers to a folder in Moodle, so if you are interested you can see the papers of other teams.  Having your paper posted in Moodle means your team is cleared to do the last phase of the project, the virtual elevator speech.

Happy Thanksgiving/About the Projects

I want to wish everyone in the class a happy Thanksgiving.  I hope the break has been good and relaxing for you.

---------

At present 4 teams have submitted their second drafts and cover letters.  I will start looking at this stff on Friday, and I'd like to be done no later than Sunday afternoon, so be advised that was a soft deadline will become increasingly hard over the next few days.

You might be amused by one of my rhymes on this point, written early last Saturday, when only one submission had come in.

Lanny Arvan on Twitter: "Soft deadlines aren't Hard deadlines are Know which one applies Or it's close, but no cigar. #InNeedOfAnOnlineDogToEatTheVirtualHomework" via kwout

A little puzzle about gift exchange and pay for performance from our class

Sometimes there are natural experiments done that produce data and then let economists (and other social scientists) try to explain the findings with some plausible theoretical explanation.  In our class we have had such a natural experiment. 

Early on there were class session evaluations that students would receive 5 points for completing.  There were closed ended questions that were required and an optional paragraph question for comments, meaning students didn't have to comment to receive the 5 points.  Yet many students did, in fact, post a comment, some with high frequency.  In the language of the class, those comments were gifts (to me). You would know better than I would about the motivation for writing such a comment. 

Since we ended the class session evaluations, students have had the option of posting a comment on the Feedback Tab at the class site.  This is one click away from the homepage.  So, regarding effort, I would interpret that as pretty minimal.  It would seem that if you were inclined to give a gift in the form of a comment, you'd still be doing that.  Yet nobody has submitted such a comment.  It's as if by going from session evaluations to this other method, I shut down the comment pipeline. 

That observation offers a puzzle.  You might explain things by outside factors, such as where we are in the semester.  (The number of people completing the class session evaluations had been declining.)  Another possibility, however, is that you have to initiate the activity before you get into gift giving mode and the 5 points bonus as incentive was needed to get you to initiate.   This is one where students reflecting on their own motivation might shed some light on what explains things.  You know what drives you better than I do.

If the need to initiate offers the better explanation, then you might take this finding and ask what it tells a manager.  How often must the manager provide some carrot for employees so they reinitiate?  Also, what carrots make sense here?  We talked about employees on a salary not bearing income risk.  Are there other carrots that might be used if such an employee seems stuck in rut and needs to resume working at a high level?

Further thoughts on today's class session

I wanted to note something more general about the first part of the session.  We had fun. And I believe students learned something.  My ideal is to have "educative play" where participants grow from the experience and enjoy it at the same time.  This is distinct from "dissipative play" where there is fun but no personal growth.  You almost surely need some of that too, to recharge your batteries, but the thought is that if you can combine work and play then life is good.   For a few minutes today, I thought we achieved that. 

A couple of other points about schmoozing I should have made.  It is a generalist skill.  If you are a good schmoozer you should be able to do that with lots of quite different people.  Thus, it benefits from good generalist reading,   I made a suggestion to do this a while back (it is in the last section of this post) where I said it would help you climb the ranks of management.  It will also definitely help you in schmoozing.  It is especially good if you can relate the discussion to some reading and stay in context the whole time.  Talking with people is one way to stay informed.  Reading good an interest stuff is another.  You really should be doing both. 

The other point is about how instrumental the class seemed at first on why to engage in the schmoozing.  I hope it will be obvious to you that if you are overtly instrumental about that or any other behavior, then you will not appear genuine.  In other words, being instrumental can block your ability to listen.  So, I believe, the primary reasons to schmooze is because it is enjoyable.  The connections you make as a consequence should be considered byproduct only.  If you reverse the order of priority, you won't get as much out of doing it. 

---------------

I forgot something not class related, but that I wanted to announce to the class.  Bur first here is an economic theory of predictions.  If you are going to make a prediction, it is better for it to be outrageous.  In the rare even that you are proven right, you'll be considered a genius, with outstanding insight.  In the complementary event where you are proven wrong, you hope that people will quickly forget bout your prediction and, after all, life is a random walk, so it can't be forecast.

Now with that as background, I'm predicting that Carlos Beltran will be the next manager of the New York Yankees.  ESPN says this is a long shot. 

You heard it here first.

-----------------

The Sherry Turkle piece I briefly showed is called Stop Googling.  Let's Talk.  You should definitely read it.  Soon after it appeared I had a little email thread with her about it.  Since she responded to my query I was emboldened to send today's rhyme qua lesson plat to her.  At least she acknowledged receipt.  That is below.

----------------

From: Sherry Turkle [sturkle@media.mit.edu]
Sent: Thursday, November 16, 2017 10:04 AM
To: Arvan, Lanny
Subject: Re: I thought you might enjoy this.

Thank you!

S

On Nov 16, 2017, at 9:57 AM, Arvan, Lanny <larvan@illinois.edu> wrote:

Teaching students to schmooze
Over coffee rather than booze
And to enjoy the doing
Even if misconstruing
Good face to face conversation is news.
#ItTurnsOutTalkIsntCheap

Found here:  https://twitter.com/larvan3/status/931120054854352897

For Our Discussion on Learning to Be a Leader

This posts is pretty short and I believe students will find it interesting.  There is a link to a column by Sherry Turkle a little later in the piece.  That is a must read.

Lanny on Learning: Soft Skills Revisited via kwout

Second Quiz in Moodle - Date Set

We agreed in class today that the second quiz should be on Thursday Nov. 30, starting right after class, and going through Friday December 1, with it closing at 5 PM.  The format might be a tad different than the last time, but not too much.  After it is created and after Thanksgiving break, I'll let you know. 

I also committed to the Final Quiz to be online in Moodle on and around when our Final Exam is scheduled in the timetable.  (Somebody in class said that was December 18 but I haven't verified that yet.)  So, if Econ 490 is your last exam, you can leave town before the final and do it from home. 

We should all be thankful for online technology.

Excel Homework Due 11/29 at 11 PM

Please watch this video first.  It gives the algebra of the principal-agent model and will make you comfortable with the notation and the basic ideas.

Then do the Excel homework, which does the same analysis but this time with a graphical approach.

------

This is the simplest possible model of the principal-agent, with low or high effort and low or high output.  I am going to describe possible extensions of the model for you to consider (and which we might discuss in class) but which we won't model.

The first is to make output a continuous variable.  This, it turns out isn't conceptually that much harder, as long as higher output makes it more likely that the agent chose high effort.  In that case, the reward scheme should also rise with output.  In many real world reward schemes, the scheme is linear.  For example, it entails a base pay and then some percentage share of the output.  A lot of sales people work under schemes of this sort.  Linearity is hard to explain from the model, but it is easy to understand in that it can be readily communicated.  More complex schemes would be harder to articulate and to understand.

The second is to make effort a continuous variable, with higher effort making higher output more likely.  This too is not that hard to conceptualize, but then you lose the notion of shirking in the model, unless you establish a cutoff effort level below which the agent is said to shirk.

Further extensions make both output and effort multi-dimensional.  This is definitely harder to consider theoretically, but it is far more realistic, especially for knowledge work.  As I have said in class before, professional knowledge workers typically don't shirk (play solitaire on their computers all day or do Facebook, though they might do it as a diversion from time to time to refresh themselves).  Such employees have a strong sense of autonomy.  The issue for the manager is to align what these workers are doing with organizational objectives.  Monitoring happens to achieve alignment, not to prevent shirking.

The last extension I will mention is considering what happens when output has a large random component to it so it is not a very informative signal.  A little bit of randomness doesn't change the story much.  A lot of randomness does.  (The agent is risk averse and if you make a risk averse individual absorb a lot of risk, you need to pay a substantial risk premium to compensate for that.)  So instead, one looks for other solutions and then not rely on rewards for high output.

Precise Measurement and Measurement Error

Economics Jokes via kwout

I'm Back from Michigan and Catching Up

If you'd like to see what I attended, take a look here.  In some sense it was like a return to being an undergraduate.  I sat through a full lecture where more than 90% of the presentation was over my head!  But when it is your brother who is giving the lecture it has interests for other reasons.  I didn't check my phone once during the entire thing.

I've done a quick scan of YouTube, where I see the video meant as a substitute for yesterday's class has gotten some hits (the data about minutes watched hasn't been processed yet) and I saw in Moodle that 16 students completed the softball quiz associated with the video.  We'll discuss this a bit tomorrow as we try to catch up. 

I want to note here the two additional obligations before the Thanksgiving break.  There is a blog post due tomorrow on conflict.  In some sense this post is on the opposite end of the spectrum for the one for last week.  By contrasting the two I believe there will be more meaning for you in each case.    Then, of course, second drafts of your project papers are due a week from Friday. 

A linkage between altruism and intrinsic motivation

In the Excel Homework due after the Thanksgiving break, we will take on the principal-agent model, which you can think of as giving a basis for performance based pay.  Some type of work, notably jobs in sales, typically entail performance based pay.  So we need to understand why that is. 

Yet the latest blog post you wrote on teamwork and gift exchange included reacting to a piece on altruism  The column by David Brooks argued that altruistic motives are inhibited when economic incentives are present.  The lesson from Brooks' piece is that when altruism is important for organization productivity (as in the gift exchange model, the Okun implicit contracts view, or the Akerlof and Kranton view where identity is important) then economic incentives need to move to the background.  It is my view that you can't eliminate economic incentives entirely and shouldn't try.  But performance based pay moves economic incentives front and center so the incentives are always present.  Type A personalities may want such an environment.  The B personalities prefer something that is more low key.  Yet the research which Brooks reports on argues that either type of personality will be less altruistic in the presence of performance pay. 

There is a different reason to depart from performance based pay that is intellectual in nature and is particular to knowledge work.  This other view is articulated by Daniel Pink in this RSA Animiate video and focuses on psychological explanations for productivity.  There can be performance anxiety or, if you prefer, writer's block.  If this persists, evidently it lowers productivity. High performance is achieved when intrinsic motivation is strong and the individual becomes so involved in the work as to entirely lose a sense of self.  Making extrinsic rewards overt then moves the individual's focus away from the intrinsic motivation and thereby lessons productivity.  Better to have the economic rewards provided up front, so that one can put them out of mind when the real work commences. 

I have critiqued this video on how it represents the economics.  You can't put the economic incentives away forever after a single, up-front contracting process.  There will be subsequent re-contracting to enlist the employee again in the future, especially after word about the previous work has gotten out and the employee's reputation has been enhanced as a consequence. Yet I concur with its representation of the importance of intrinsic motivation. So my view is that the manager tries to achieve a balance between the two types of motivation.  You might consider time broken up into episodes.  Each episode begins with extrinsic rewards to enlist participation.  After that the work begins and the rewards fade into the background.  Then intrinsic motivation takes over for a time.  As the episode reaches conclusion the extrinsic motivation returns and the next episode begins. 

This system is by no means perfect.  (The economic rewards can reappear too early and interfere with intrinsic motivation when the work is not yet completed.  Alternative, the manager might pretend the work is not yet done so as not to make an appropriate upward adjustment in the employee's pay, creating hard feelings in the process and inadvertently encouraging turnover.)  But it is better, in my view, than the alternative where rewards for performance are omnipresent.  An environment with strong pay for performance incentives is likely to inhibit both altruism and intrinsic motivation. 

Blog Posts/Reminder - No Class Tomorrow/Steve Blass Disease

I am now caught up in commenting on the posts from this past week.  I'm sorry that it took longer than usual.  It was hard to find the time to do this while I'm in Michigan.

* * * * *

There is no class tomorrow as I will be driving back from Michigan during scheduled class time.  Here is the information about what you should do instead.

* * * * *

On the drive up, while I tried to listen to classical music on my phone, my wife was listening to some podcasts from This American Life that played on the car's audio system.  I couldn't avoid hearing that too and some of it I paid attention to.  This segment on Steve Blass Disease is interesting, in itself and also applied to our class.  The issue of whether a top performer suddenly can no longer perform well at all, and if there is an explanation it has nothing to do with physical well being nor with shirking, makes one wonder whether it goes beyond sports.  In golf it is called the yips.  I am not sure whether performance anxiety properly captures the idea because many people do overcome performance anxiety.  We are talking about a situation that is so debilitating that it is not overcome.

Act One: Aces Are Wild

Please Get Your Blog Posts In Today

We are leaving for Michigan in a few minutes.  I won't look at posts any more today, but I will tomorrow morning (whenever I get up, East Coast time.)

And for those of you who need this information, Daylight Savings ends tonight.  You get an extra hour.  I wonder what you'll do with it.  

What's the answer?

I have a friend who was a few years ahead of me as an assistant professor at Illinois.  His area of specialization is energy economics.  (Think big oil.)  He left Illinois to go to the University of Houston.  He subsequently went to SMU and is a chaired professor there.  We stay in touch, primarily via a mutual colleague.  Recently the topic is baseball.  He is quite an Astros fan now.  He wrote:

"The Yanks look like they could be the Astros/Cubs of 2018. Quick quiz: if the two teams are evenly matched, which is more likely, a 6 or 7 game series?'

What is the answer to this question?

Further thoughts on the economics of insurance

Because the Affordable Care Act has become such a political football, I shied away from discussing it in class yesterday, even though it would be a way to bring in current events into what we are studying.  But I will talk about healthcare some in this post and try to do so in as dispassionate a way as I can.

First, however, we should consider that labor contracts have an insurance aspect to them, particularly when employees are on salary or when they work at an hourly wage for a pre-specified number of hours per week.   Abstracting from inflation risk and the possibility of losing the job entirely, the income of such workers is predictable and therefore is safe.  Productivity (and here we don't just mean the physical output but also want to include the demand for the product being produced) is likely to be risky.  If employees have fixed income contracts then it is the employer who bears the productivity risk.  There is some argument that employees should share in that risk, to increase their sense of ownership in the firm.  But on straight risk aversion grounds, it is reasonable to assume that the employer is less risk averse than the employees.  Indeed, one real reason to have large corporations with shares of stock that are publicly traded is that owners diversify their holdings in many such firms, which greatly reduces the idiosyncratic firm risk in their portfolio (though systematic market risk remains).  If you treat shareholders as achieving good diversification and/or the company is largely held by a rich person who can achieve diverse holdings and/or self-insure, then flat payments to employees makes sense.  The implicit contracts view of the labor market then would suggest that in exchange for the firm absorbing the productivity risk the employees reward the firm with loyalty, which is valuable, especially in tight labor markets.

Starting with this as a basis, the role of bonus payments to employees, as well as compensating employees with stock rather than with wages, now fairly common practices, requires some explanation.  Bonuses themselves are of multiple types.  One sort of bonus is awarded to each employee when the firm itself does well.  Another type of bonus is awarded to a particular employee when that employee has performed well.  In each of the cases, the employees are absorbing some of the productivity risk.  The question is why.  One possible explanation is that the employer can't diversify nearly as well as was assumed in the previous paragraph.  Another is that these forms of compensation are there for incentive reasons to motivate the employee (this is the most commonly held explanation).  A third reason might be to reflect market power in the labor market by the employer.

Let's consider one other aspect of this, which is how wages and salaries change over time.  If there is a jobladder, then normally employees are paid more as they climb the ladder.  Within rank, payments may go up over time to reflect some return to seniority and/or to serve as implicit cost of living adjustments.  Employees do bear some of the risk in climbing the job ladder, particularly of the sort where the next rung is already jammed with people so the firm doesn't promote an otherwise deserving person until the next rung clears out some. This is a form of coordination problem that does induce income risk.  A complete safety play for employees doesn't exist; even having tenure at a university is not a completely safe situation income-wise.

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I want to turn to the economics of healthcare - just a little bit - so you can relate the theory we did to some real world issues.

First, let me observe that much healthcare is routine and predictable.  For example, I am at the age where my primary care physician wants to see me on a regular basis (every six months or so).  There is no moral hazard in this sort of thing, yet there is a co-pay with each visit.  The question is why.  (Or put another way, why isn't the co-pay instead bundled into the premium?)   The answer, I believe, is that there is some advantage to the provider in keeping premiums down when it bids for the state contract.  Higher premiums make the bid appear less attractive.  (Incidentally, this same reason offers some explanation for why much government procurement ends up in cost-overruns.)  But the provider still must recover its costs, so user fees for visits emerge as one way to do that.  My HMO calls that user fee a co-pay.  When it is evident that there is no moral hazard, the co-pay should be zero, according to the theory.  But once the provider has a way to charge co-pays in other circumstances where it does make sense,  then co-pays can be employed for this other purpose as well.

Second, in our very simple model of insurance the loss was L.  For automobile accidents, the adjuster can determine L quite precisely.  For a serious health problem, however, determining L can be much harder and interpretation of the evidence can vary (which is why sometimes patients will get a second opinion).  Thus, coverage is often not based on determining L.  Rather it is based on the treatment that the doctor prescribes or the procedures that the doctor performed on the patient.  This sort of relationship between coverage and treatment is sometimes referred to as fee for service.  Doctors have some incentive to act opportunistically in this respect to collect more in fees.  The moral hazard in this case plays out with the doctor decisions biased towards more treatment than good defensive medicine would indicate.

This issue is coupled with the matter of doctor liability in the event of malpractice.  While the insurance company might object to procedures that don't seem necessary, the patient will never do so if there is no adverse consequence from the procedure.  Patients are much more likely to object if after the fact the outcome is poor for them and if some procedure that had not been performed might have made the outcome better.  This is the general circumstance behind getting sued for malpractice.  Getting sued is costly, even when there was no malpractice.  So to avoid that contingency, there is an incentive to over prescribe treatments.  These factors contribute to the high cost of health care.

Another factor that influences health care costs, much less commented on, is how much doctors communicate with one another when treating a very ill patient.  Given our current focus on teamwork, you can think of a high level of communication among the doctors as a well functioning team.  All too often, however, specialists act in an uncoordinated way.  That can really pile on the costs and make the treatment worse.  This piece, well worth the read, illustrates these matters nicely.

I will not comment at all about prescription drug prices other than to note that I believe the main issue is market power.

So I will close on something else, which is depressing to consider but necessary, if we are to get a hold on keeping healthcare costs manageable.  This is about expenditure on healthcare during the last year of life.  On this I want to separate out care for a child or a teenager with a horrible disease from care for an elderly person. I will consider only the latter.  The data show very high expenditure to prolong life just a little bit.  The issues are fundamentally ethical.  Economics doesn't seem to help here in explaining what is going on.   I have lived through this in the case of each of my parents.  It is a very emotional thing and the emotions get tied up with the economic decisions.  Based on my experience I can say there are no right answers here, just lots of unsatisfactory alternatives.