Observable and Verifiable

Ronald Coase (1910-2013)

noreply@blogger.com (Anonymous) — Tue, 03 Sep 2013 02:17:00 +0000

One of the greatest economists in the 20th century passed away at the age of 102. His ideas of transaction costs and property rights revolutionized modern economics and altered the way economists thought about markets, firms, institutions, laws, governance, regulations and many more.

2013 is a bad year for new institutional economics, we already lost another great thinker, Armen Alchian, in February this year.

RIP, professor.

Bringing REAL Markets Inside the Firm

noreply@blogger.com (Anonymous) — Fri, 19 Jul 2013 06:03:00 +0000

Eddie Lampert, CEO of Sears has brought real markets inside one big firm. The results? Disastrous. As Bloomberg Businessweek put it, he really tried to replicate Oakland A's success story in Moneyball, but in fact, he was running his firm like a Hunger Game.

The Nerdy vs. The Powerful, says Colbert

noreply@blogger.com (Anonymous) — Thu, 25 Apr 2013 13:14:00 +0000

Three economists from the University of Massachusetts, Amherst recently published a paper, claiming they have found an uncommon spreadsheet coding error in a famous AER paper, 'Growth in a Time of Debt', coauthored by Harvard economists Carmen Reinhart and Kenneth Rogoff. This immediately went viral since the key finding in Reinhart and Rogoff's paper had already become some politicians' cannonball in order to fire pro-austerity plans across the US and the Europe. Specifically, R-R have found that, on average, a greater than 90% debt to GDP ratio would lead to a growth rate of -0.1%. But according to the critics, the authors haven't taken the averages right in their Excel spreadsheet, and the correct number should be 2.2% instead of -0.1%, which is far from stagnation. Later, R-R offered their responses, twice - first rebutting all the critiques but then admitting the coding error while rebutting the rest (here is a nice summary of the entire episode).

I bought most of their second response, yet I still think their Excel error was dumb. Besides, if it were 2.2% rather than the eye-dazzling -0.1%, I would doubt they could ever publish it in the first place. Although Reinhart and Rogoff referred to their JEP piece where they've shown similar results of negative correlations, I still believe what really caught the eyes of economists as well as politicians was the magnitude of that correlation, particularly when the debt-to-GDP ratio passes the 90% threshold.

Interestingly, adding new flavor to this debate is neither economists (see here and here) nor politicians but comedian host Stephen Colbert. He took on this debate yesterday and turned it into something hilarious, something epic. He brought onto the stage one of the critics from UMass, an econ grad student Thomas Herndon, and shouted at these "left-leaning academi-aholes", "nerds! I bet you found them [the errors] on a Friday night with your mom, while the rest of us were going up to The Point and drinking PBR!"

The Colbert Report
Get More: Colbert Report Full Episodes,Indecision Political Humor,Video Archive

Bless Sichuan, bless Ya'an!

noreply@blogger.com (Anonymous) — Sun, 21 Apr 2013 01:31:00 +0000

Yesterday around 8am local time, a devastating earthquake struck the city of Ya'an in western Sichuan province. At the time, I was still in bed at home in the city of Mianzhu, which is about 100 miles away from the epicenter. The tremor hit so violently that I rushed downstairs without second thought.

According to the public media, the magnitude and impact of this earthquake to Sichuan and China is second only to the Great Sichuan Earthquake (aka Wenchuan Earthquake) 5 years ago. Experts said that both quakes occurred along the same geological fault. So far, over 170 people lost their lives and more than 5,000 were injured. Let's bless everyone in Ya'an and Sichuan!

The World's First Modern Organization Chart

noreply@blogger.com (Anonymous) — Tue, 05 Mar 2013 09:34:00 +0000

Business historian Alfred Chandler Jr. (1918-2007) once wrote in one of his most influential works, The Visible Hand, about the momentous impact of managerial innovations, such as corporate accounting, mass production, and the organization chart. From there, he even identified the world's first modern organization chart and described its impacts in granular details.

According to Chandler, the first modern organization chart is the New York and Erie Railroad pioneering plan created by it's manager Daniel McCallum and his associates. The purpose of the plan was to facilitate information flow from the bottom of the organization to its top in an age when the adoption of telegraph had largely increased the scale of the railroad as well as its managerial complexity. However, in none of Chandler's works had we actually seen what the chart looked like. In fact, as later revealed by Chandler in an HBR article published in 1988, "I have never seen a copy of McCallum's chart, but it was described in some detail by Henry Varnum Poor, editor from 1849 to 1861 of the American Railroad Journal. According to Poor, the chart resembled a tree. Its roots represented the president and the board of directors. Its branches were the five operating divisions and the passenger and freight departments. Its leaves indicated the various local ticket and freight agents, crews and foremen, and so on."

But the real curious question is, of course, what does the world's first modern organization chart look like? Caitlin Rosenthal, a postdoctoral fellow at the Harvard Business School finally found out (see below and enlarged here) - and as Chandler already told us, it's really not quite resemble the top-down, pyramid style chart we now see everyday, it's more like a tree and it's bottom-up.

The value of bosses

noreply@blogger.com (Anonymous) — Sat, 29 Dec 2012 05:17:00 +0000

A firm could be productive because its workers are highly productive, or it has a productive technology, or maybe because it has good bosses who are capable of enhancing the productivity of the workers. But how much could good bosses matter, really? It's hard to tell, since it's not easy to tease out one effect from another. But it's not impossible to tell either, as long as you have exact the right (and often large) data set to begin with. A recent study just did this, and they find out that good bosses could lead to about 10% increase in productivity for a given worker.

Here is the abstract:

Do supervisors enhance productivity? Arguably, the most important relationship in the firm is between worker and supervisor. The supervisor may hire, fire, assign work, instruct, motivate and reward workers. Models of incentives and productivity build at least some subset of these functions in explicitly, but because of lack of data, little work exists that demonstrates the importance of bosses and the channels through which their productivity enhancing effects operate. As more data become available, it is possible to examine the effects of people and practices on productivity. Using a company-based data set on the productivity of technology-based services workers, supervisor effects are estimated and found to be large. Three findings stand out. First, the choice of boss matters. There is substantial variation in boss quality as measured by the effect on worker productivity. Replacing a boss who is in the lower 10% of boss quality with one who is in the upper 10% of boss quality increases a team’s total output by about the same amount as would adding one worker to a nine member team. Using a normalization, this implies that the average boss is about 1.75 times as productive as the average worker. Second, boss’s primary activity is teaching skills that persist. Third, efficient assignment allocates the better bosses to the better workers because good bosses increase the productivity of high quality workers by more than that of low quality workers.

Source: Freakonomics Podcast.

Porter, Monitor Bankruptcy and the Consulting Profession

noreply@blogger.com (Anonymous) — Thu, 29 Nov 2012 13:31:00 +0000

Although Michael Porter, the strategy guru behind five forces and value chain analysis, may still be busy working on big issues like the rescue of the U.S economy, the fall of Monitor Group this month, the consultancy Porter co-founded back in the 1980s, is stirring up fierce discussions in the business world as well as in the blogsphere.

In the business world, some believed Monitor's bankruptcy has a lot to do with its working relationship to the former Libyan government and its supreme leader Muammar Qadhafi. Others went beyond this, and offered a variety of possible explanations to its demise, including ineffective strategic choice (itself may not believe in five forces etc.), inefficient internal operations, or even too much emphasis on innovation! Yet some took a more value-based view, arguing that it is its customers who are unwilling to buy what the company is selling eventually killed Monitor.

Besides the discussion on Monitor and the gurus behind it, bloggers like the two Freakonomists went one step further. Through their radio channel, Steve Levitt and Stephen Dubner shared their personal views on the consulting profession at large. For the newest profession in the world, there is always skepticism (here and here) and at least somewhat equal forceful voice of defense (here and here). As to me, I always believe in the power of management - not because I am currently involved in it (don't confuse the outcome with the cause), but because of the fact that it is very difficult to explain sustainable competitive advantage* that some company possesses but others don't. Years of research has shown that one potential cause cannot tell the whole story - whether it is at the industry level, the corporate level, or the business unit level, or whether it is due to the structure, the functions or the processes, or whether there are any systematic relationships or it's just completely out of fluke. Many forces are at play. However, the managers of those firms with superior performance have got to get some things right - by choice or by accident, and how they got it right in the first place may exactly reflect the power of management. Just like the fall of Long Term Capital Management isn't the demise of modern finance or the financial industry, the fall of Monitor is also not the death knell of management or the consulting profession. Porter's (as well as many other management gurus') prescription is certainly not a cure-all, because there is always the unexplained, the unexpected or the uncertain. But for management scholars and practitioners, they need to push the current knowledge frontier forward so that the rest of us can learn more and act better.

* For those who doubt the notion of 'sustainable competitive advantage' in the first place, economists and strategy scholars have offered facts and evidence to show that there is such a thing.

A Century of Management, Graphed

noreply@blogger.com (Anonymous) — Tue, 13 Nov 2012 09:56:00 +0000

From the November issue of HBR.

Ghemawat: the world isn't flat

noreply@blogger.com (Anonymous) — Tue, 30 Oct 2012 09:01:00 +0000

Strategy guru Pankaj Ghemawat, a long time opponent of "borderless world" or "flat world" view, pulled out some new evidence at TED:
Some cool statistics:

Cross-border information flow (world ratio of foreign to total voice-calling minute): 2%*
Cross-border people flow (ratio of 1st generation immigrants to world population): 3%
Cross-border capital flow (ratio of FDI to total investments in the world): 10%
Cross-border goods/services flow (world exports to GDP ratio): ~20%

What's more interesting is that, when people are asked to give an estimate of all the above measures, they all tend to overestimate them -- by 3 or 4 times!!!

* adding internet traffic to the picture, the ratio of cross-border information flow could go up to 6-7%

Baldness is power?

noreply@blogger.com (Anonymous) — Thu, 11 Oct 2012 08:07:00 +0000

Where does power come from? Some believe it comes from the critical resources or the access to the resources one has effectively controlled. Others argue that power could originate from one's personalities or certain unique abilities or traits -- such as the ability to compliment or flatter. One recent study is surely pushing the latter explanation to an extreme -- in a rather amusing way -- because it argues that power could also come from baldness.

Albert Mannes of the University of Pennsylvania’s Wharton School (also bald by the way) conducted a series of tests in which the subjects were asked to report their perceptional differences on photos of the same men with and without hair. In all tests, the subjects reported finding the men with shaved heads as more dominant than their hirsute counterparts. More specifically, men with shaved heads are perceived to be more masculine, dominant and, in some cases, to have greater leadership potential.

So does this study suggest that if you want to get yourself promoted, you should go directly to a barber? Not necessarily. One potential catch of this study is that, although baldness may be perceived to be more masculine, dominant and better to lead, it may also relate to one's level of intelligence, IQ, say. More specifically, it might be the case that smarter men could have a higher chance to become bald, particularly after certain years of age. If that's the case, then one's power may come eventually from his inner ability, rather than others' perception on his appearances -- whether tall or short, fat or thin, bald or covered up with hair.

Source: WSJ.

An ongoing revolution in manufacturing

noreply@blogger.com (Anonymous) — Fri, 24 Aug 2012 01:29:00 +0000

3D printing may not only change the way we make ordinary products, like a hammer, a toy, or even a stradivarius, it may reshape the industry spectra entirely and completely alter the way how everything is produced, from "growing" human organs to "building" new homes. Below is one example:

Some thoughts on Toyota Production System

noreply@blogger.com (Anonymous) — Thu, 16 Aug 2012 15:14:00 +0000

In my last post, I mentioned my trip to Japan to learn the Toyota Production System, but I didn't offer any thoughts on it there. If you still have some interests, here is an article I recently wrote (in Chinese), titled "The Way Out of the Cargo Cult of the Toyota Production System", mainly targeted at Chinese companies. In this short article, I explained why there is a cargo-cult-style learning of TPS in Chinese firms and how to find a way out of it and even make it more suitable to these firms.

Nagoya, Toyota Production System, and Kaizen

noreply@blogger.com (Anonymous) — Thu, 16 Aug 2012 14:39:00 +0000

I had a trip last month to Nagoya, Japan to get trained in Toyota Production System and its various tools and ramifications. Those lectures were, of course, useful and sometimes inspirational. I was even awed by the smart designs of some parts of Toyota's manufacturing system, like the use of various Kanban cards to coordinate material flows as well as to replenish supplies.

Eventually, I found that these methods and designs are not at all come about at once. Instead, most of them are the results of a methodology that Toyota called "Kaizen", which literally means continuous improvement. Even so, I still found that it's often hard to sustain such efforts to make improvements on some preexisting things over and over again. BUT, as I discovered this (see the pic below), I said to myself, "well, maybe there is nothing on this planet that the Japanese can't make improvements on..."

Interesting formula...and graph

noreply@blogger.com (Anonymous) — Tue, 08 May 2012 01:29:00 +0000

Have you seen a mathematical formula, when graphed in two dimensions, can exactly reproduce the formula itself visually? Here is one:

where denotes the floor function and mod is the modulo operation.

When proper parameters are chosen for x and y, which at the same time satisfy this inequality, the resulting graph will look like this:

which, as you can see, looks exactly the same as the original formula. Interesting, huh?

See more here. HT: Feng Dong.

Two books on power & prosperity

noreply@blogger.com (Anonymous) — Sun, 06 May 2012 16:13:00 +0000

One is Why Nations Fail by Daron Acemoglu and James Robinson. In this book, the authors explain why some nations are rich and prosper and others poor and remain so. In contrast to contemporary theories made popular by journalists or economists, their explanation is that, it's neither geography or cultural factors, nor the policy makers' ignorance about what's best for the society as a whole that determine the wealth of nations. Instead, it's the nation's economic and political institutions that matter (in the authors' terms, "inclusive" vs. "extractive" institutions). The authors make the book extremely readable and engaging by using lots of compelling examples and putting together hundreds of years of historical accounts in a coherent and logical manner. Read a couple of book reviews here, here and here, or listen to one of the authors discussing it here.

The other is Private Empire: ExxonMobil and American Power by Steve Coll. Unlike Acemoglu and Robinson's take on power and prosperity from the why perspective and at the national level, Coll's book reveals how power and prosperity can emerge and co-evolve via the private empire building process. Watch the author discussing the book here.

Spousal researchers: newcomer

noreply@blogger.com (Anonymous) — Mon, 19 Mar 2012 01:37:00 +0000

Here is a list of spousal researchers in economics, management and related disciplines. Now the list should add two more prominent figures: Esther Duflo and Abhijit Banerjee.

From the FT:

What about her husband? Is he American? I ask. There is a pregnant pause. “It is Abhijit,” she exclaims. “He is not my husband but he is the father of the child. And he doesn’t speak French, so I don’t think he would like to go to France.”

This takes me by surprise. They have been colleagues since her arrival at MIT – he was one of her PhD supervisors before she became a professor. In 2003 they founded (and still co-head) the Abdul Latif Jameel Poverty Action Lab (J-Pal), the MIT centre where anti-poverty initiatives are studied. They have lived together for 18 months.

Aside from the child, their joint work also includes this amazing book.

HT: Feng Dong.

Are you Pinterested (aka getting old)?

noreply@blogger.com (Anonymous) — Thu, 01 Mar 2012 03:54:00 +0000

According to this, Pinterest should be THE social site for adults, since over 70% of the users are between the age of 25 to 54. Indeed, I felt its power today by uploading my firstever "pin" (the pic is from the internet), which brought me 9 likes and 14 repins almost instantaneously. But the sad thing is, this also means that I am truly getting old now, or at least my taste is...

p.s. I got really excited when Pinterest's pinbot sent me emails notifying how many people likes my pin and repins it, but it won't take long to find this really annoying (yet another sign that I am getting old...)

Two reads on US manufacturing

noreply@blogger.com (Anonymous) — Mon, 27 Feb 2012 09:45:00 +0000

For years, conventional wisdom has maintained that US manufacturing industry is on a permanent decline, so some people are arguing, for various reasons, that US government should intervene by either subsidizing the sector or offering tax benefits. Two recent articles I read this weekend offered some new perspectives on American manufacturing.

1. Christina Romer of Berkeley argued that, even if the US manufacturing sector is on the decline, there is little reason that the government should offer the manufacturers a "special treatment".
2. Hal Sirkin of BCG, a consultancy, is bullish, rather than bearish, on the future of American manufacturing.

China 2030: How to get there?

noreply@blogger.com (Anonymous) — Mon, 27 Feb 2012 09:17:00 +0000

World Bank Group President Robert Zoellick visits Beijing today to launch a report on China's strategic directions in the next two decades.

The report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, a collaborative work between the World Bank and the Development Research Center (DRC) of the State Council, recommends steps to deal with the risks facing China over the next 20 years, including the risk of a hard landing in the short term, as well as challenges posed by an ageing and shrinking workforce, rising inequality, environmental stresses, and external imbalances.

Six strategic directions for China’s future are laid out specifically:

Completing the transition to a market economy;
Accelerating the pace of open innovation;
Going “green” to transform environmental stresses into green growth as a driver for development;
Expanding opportunities and services such as health, education and access to jobs for all people;
Modernizing and strengthening its domestic fiscal system;
Seeking mutually beneficial relations with the world by connecting China’s structural reforms to the changing international economy.

Some steps are hard to push further, such as the reform and restructure of state-owned enterprises (SOEs) and banks, since such steps could face fierce resistance from bureaucrats who manage or supervise these enterprises. It's not about "what" to do but "how" to get things done. When it comes to "how", it's not easy to find common ground for all parties to resolve some of the most contentious issues - like personnel arrangements. For instance, surrounding the topic of state enterprise reform, neither the World Bank nor DRC has proposed privatization of state enterprises because they both know it's politically infeasible, instead, they argue that SOEs should be overseen by asset management firms and even lay out some specific steps to do so. But, the proposal is still bitterly criticized by the current SOE regulatory agency, the State-owned Assets Supervision and Administrative Commission. Contentious issues were still debated until the last hour of the release of the report.

Visualize US exports to China, 2002-2011

noreply@blogger.com (Anonymous) — Wed, 22 Feb 2012 09:54:00 +0000

The US exported 103.88 billion dollars worth of goods to China in 2011. On top of that list is neither civilian aircrafts, engines and parts, nor semiconductors, as it once was in the early 2000s, but...soybeans (also see here for some recent implications). Indeed, in terms of dollar value, soybeans have been the top US exports to China since 2008, and peaked in 2010 at $10.8 billion. In 2011, the amount slipped a little bit to $10.5 billion, but still took over 10% of the entire worth of exports to China. The next in line under the "Foods, feeds, and beverages" category is Fish and Shellfish, but it only contributed $1.2 billion. Civilian aircrafts, engines and parts came in 2nd overall with a total of $6.5 billion. Cars, semiconductors, and copper ranked 3rd to 5th, respectively. In aggregation, the top 10 exports totaled $49.15 billion, nearly half of the entire worth of exports. Here is an interactive chart that gives you better visualization of the data:

But what about the export pattern for product categories rather than for specific goods? How about their pattern over time? Does each category's relative position change a lot both in dollar terms and percentage-wise or does it remain stable? Not hard to tell if you use the interactive chart below:

A look back at Facebook

noreply@blogger.com (Anonymous) — Sun, 12 Feb 2012 13:56:00 +0000

A 3-minute video clip tells us all.

Overoptimistic company disclosures increase litigation risks

noreply@blogger.com (Anonymous) — Fri, 10 Feb 2012 01:34:00 +0000

Firms always choose rosy terms in their disclosure to please the shareholders or at least make them believe that the company is right on track, but could that optimitism go too far? A recent paper from The Accounting Review (here - subscription needed or here - working paper version) found evidence that firms that use unusually optimistic language in their disclosures to shareholders are more likely to be sued than similarly performing peer companies. Specifically, overly positive statements in earnings announcements - whether in press releases, conference calls, media interviews, or meetings with investors - are most often cited in plaintiffs’ complaints.

The authors found that in 91 percent of the earnings announcements that were analyzed, the portion quoted by plaintiffs was much more optimistic than the non-quoted portion, which, according to the authors, is the first concrete evidence for the intuition that plaintiffs target optimistic language when bringing actions against [a] firm. Since every firm is likely to make some optimistic statements, the authors have to further determine whether unusually optimistic tones lead to a higher risk of litigation, controlling for industry, size and performance-related effects. They did the comparison and found that sued firms used substantially more optimistic language in their announcements. They also found that, more specifically, a change of just one standard deviation in the “optimism score” given to each earnings announcement translated into a 75.9 percent increase in the likelihood of being sued.

HT: strategy+business.

Self deceit, self conceit in Chinese SOEs

noreply@blogger.com (Anonymous) — Thu, 29 Dec 2011 02:59:00 +0000

For the first time in my professional career, I attended a Chinese state-owned public company's annual meeting last week. During that meeting, the chief executive briefed the audience (the senior management team and highest-ranked divisional managers across the country and overseas) on the overall performance of the company in the past year, described its challenges as well as opportunities ahead, and laid out its specific goals and targets for the coming year.

It's not surprising to hear both praises and criticism from the speech, but upon hearing one of the praises, I couldn't help myself drifting a bit far away because I really found that praise a little over the top and even somewhat disturbing. It went like this, "...our financing department has made marvelous achievement in the past year, having successfully secured large loans from major banks during the time of an extreme credit tightening". Interesting, huh? Is this really a marvelous achievement?! Or is it just something they are born with, something they are entitled to, or something they can easily do but others can't? Everyone knows that major SOEs in China could easily get cheap credit from big banks which, by the way, are also state owned. Sometimes the banks are even begging them to borrow money from them!

I know there could be some variation among SOEs themselves too in terms of the capacity to get cheap loans - scale, region, industry - all those things matter, but comparing to millions of small and medium sized firms in the private sector, that label, SOE, alone is like a golden pass to seemingly endless funding. Now this unfair ability somehow became a "marvelous achievement"?!

It's safe to say that this kind of image burnishing is not merely confined to this particular company. I certainly didn't see this as an achievement of Chinese SOEs at all, what I see from this specific case is management delusion, self deceit, self conceit, and maybe most important of all, a need to change.

11 Groundbreaking Inventions of 2011

noreply@blogger.com (Anonymous) — Sat, 24 Dec 2011 01:29:00 +0000

See the list from BusinessInsider. Siri, Kinect 2, and the Medical Mirror have made onto this list.

Paper on China's institution

noreply@blogger.com (Anonymous) — Fri, 23 Dec 2011 03:49:00 +0000

The University of Hong Kong professor Xu Chenggang has written a paper about the fundamental institutions of China's economic reform and development. This over-70-page article provides one of the latest and most comprehensive analysis of the institutional account for China's miraculous economic development in the past three decades. He argued that it is China's regionally decentralized authoritarian system - a combination of political centralization and economic regional decentralization - that can explain the "China puzzle", i.e., why a seemingly ill-suited institution could achieve such spectacular growth and poverty reduction. In addition, he pointed out that grave social problems are also determined by this governance structure.

Here is the abstract:

China's economic reforms have resulted in spectacular growth and poverty reduction. However, China's institutions look ill-suited to achieve such a result, and they indeed suffer from serious shortcomings. To solve the "China puzzle," this paper analyzes China's institution—a regionally decentralized authoritarian system. The central government has control over personnel, whereas subnational governments run the bulk of the economy; and they initiate, negotiate, implement, divert, and resist reforms, policies, rules, and laws. China's reform trajectories have been shaped by regional decentralization. Spectacular performance on the one hand and grave problems on the other hand are all determined by this governance structure.

Full text can be found here (log in needed) and here.