2015-08-25 Econometric Modeling as a Strategic Weapon

Dr. Michael Sinkinson of the University of Pennsylvania (Wharton School)

Econometric Modeling as a Strategic Weapon

An Assistant Professor of Business Economics and Public Policy at the University of Pennsylvania, Michael Sinkinson specializes in Applied Microeconomics and Industrial Organization. He has researched market structure in the media, technology, and telecommunications industries, publishing work in leading journals like The American Economic Review. An outstanding teacher as well as research, Dr. Sinkinson was listed among the best 40 business school professors in the 2014 Poets & Quants rankings. Dr. Sinkinson received his Ph.D. in Business Economics from Harvard University.

1.   You have conducted several studies of the effects of printed newspapers on politics. Why does this field of inquiry interest you? To what other areas have you applied econometric analysis? What areas of U.S. government policy do you feel could benefit from more extensive and / or rigorous use of such analysis?

I find newspapers and the media really interesting because they cut across everything. Media is about information. With poor or biased information, no government, firm, or individual can make the right decision. For this reason, I find that media is central to everything. For example, some coauthors and I looked at the effect of media on politics. We looked at how newspapers compete, how they choose the types of viewpoints they represent in the market. We also looked at the impacts of newspapers on political outcomes. For example, we actually showed that when more newspapers are being read in a market, more people are actually participating in the political process. If you think democracy is a good system, that is a big deal. Right away, you see that the news media are important because of their informational value.  I think media is fascinating; it touches everything. That’s one area of interest where I have done research over time.

I’ve also looked at other areas. I would describe my research agenda as looking at areas of non-price competition in the fields of technology, media, and telecom. What I mean by non-price competition is that I kind of assume that firms get prices right:  the prices that clear the market. That is going to happen given a set of products. So then the relevant question is, “What is the set of products that go to market?” Taking the case of newspapers, they would think about the viewpoint they will represent. What are they going to choose as the characteristics of their paper?

In telecom, I conducted a study looking at exclusive contracts. Wireless companies sign exclusive contracts with different hand-set manufacturers. They choose to make products available only from certain carriers. This is a form of non-price competition. Prices will then be set in the market to rationalize that competition, but why do some manufacturers only use some carriers? For example, why did Apple not offer their hand set to other carriers? When Apple launched the iPhone in the U.S., it was available only from AT&T. This same situation applies in Japan, as well. Softbank was the exclusive provider for a long time there. This is another form of non-price competition.

A more recent project is on advertising, another important form of non-price competition. In the U.S., prescription drugs are advertised on television. Few countries allow this form of advertising, a very American phenomenon. This is a form of non-price competition:  companies compete against their rivals by making information available directly to consumers through TV ads. I wanted to understand the effect of this form of non-price competition, which is a great area in terms of policy analysis. We are finding that the ads generate a positive spillover, a positive externality in economic parlance: Consumers who see ads about drugs go to physicians to consult with their doctors about health problems. By doing so, they enjoy benefits that were not necessarily intended by the pharmaceutical company that ran the ads.

In regard to your question about what areas of policy would benefit from more economic analysis, I would say that this area of externalities is a big one. What I mean, specifically, is lots of things firms do create positive spillovers. Society should encourage companies to do this more. The area is a difficult one to quantify, but a great opportunity for the application of economic research to policy. For example, the U.S. government is currently debating whether or not to extend the research and development tax credit. For a long time, economists have argued that the credit should be made permanent because we feel that R&D has a positive spillover on society. This area has a tendency to become politicized quickly, but the area is one were economists can provide research on the right level of subsidies to generate desired spillovers.

2.   Can you give us an overview you of your research on pricing and entry incentives with exclusive contracts using data from smart phones? What motivated the research? To what extent can the results be applied to other industries? To other countries like Japan?

In 2007, when Apple launched the iPhone in the U.S., AT&T was the exclusive provider. I wanted an iPhone, but Verizon was my service provider. To get an iPhone, I had to switch carriers. Because AT&T had terrible service, I could not receive phone calls in my office. The quality was terrible, too. I began to think, “This makes no sense? A, Why would Apple make the iPhone available only through one carrier, and B, why would they choose a carrier that did not even provide a reliable signal?” My iPhone had become an expensive answering machine. It did nothing but collect messages. This frustration prompted me to reflect on the theory behind why Apple would sign an exclusive contract with AT&T, leading to a piece of research that shows something interesting. If all carriers offered hand-sets from all manufacturers, the only differentiation would be the service carriers offer. That would be good for consumers because you get perfect competition. If you have an exclusive contract, you can obviously charge a bit more; you are not competing against a bundle from another carrier with the same handset. Not only can I raise the price of an iPhone that is exclusive, but as a second-level effect, all other carriers can raise the prices on their handsets—even the Blackberries. The whole industry benefits. My research showed that this effect could be very large. I collected data from wireless carriers to show just how large.

Along the way, I made an additional discovery. I learned which provider would be willing to pay the most for exclusivity. Why did AT&T, and not Verizon, the largest carrier, pay more? When you work out the theory, you realize that the second-best or biggest in the industry can has a lot more to lose if the leading competitor lands the exclusive contract. In the U.S., Verizon has a very strong network. They were not going to lose much if they did not get the iPhone. Because AT&T had a weaker network, they would have been really hurt had Verizon offered the iPhone. For this reason, AT&T was willing to pay a lot.

Analogizing to Japan, NTT Docomo was the largest carrier. Softbank purchased Vodafone’s wireless network. In some sense, Softbank was the insurgent. If the iPhone had been exclusive to NTT, Softbank would have been in trouble. They would have had no way to compete. So Softbank was willing to pay a lot to have an exclusive iPhone contract. It gave them a way to differentiate their product from NTT. If you survey world markets, you realize that Apple used a similar strategy in just about all of them. In China, Apple launched with the second largest carrier, and in other countries too, they launched with the second-best rival because those companies were willing to pay the most.

I studied this effect in the context of telecom, but other economists are studying the effect in other industries. The same problem applies to video game systems. There, the problem is more complicated because you might purchase ten different games when you buy an X-Box. The ratio changes in this case. It is no longer one-to-one as in the case of handsets and wireless carriers. Researchers have looked at exclusive video games for different platforms. If you think about what Netflix, Hulu, and Amazon are doing right now with exclusive content, the idea is the same. Netflix is trying to differentiate itself from rivals by featuring exclusive content. This move really changes the dynamic of the market.

3.   As I am sure you know, the Japanese Prime Minister Shinzo Abe has introduced major macroeconomic reforms under the rubric of Abenomics. Based on your expertise in microeconomics, can you make recommendations to specific industries like mobile telecom and consumer electronics for increasing their global competitiveness, thereby intensifying the effect of macroeconomic reforms already in place?

I need to caveat that international trade and macroeconomics are not my forte. The policy gave incentives to companies to modernize, to invest. I think this is a good thing. Realistically, with industries like consumer electronics and telecom, the market is global. In the end, the winners are going to be the most efficient, highest-quality producers. I think one of your other questions relates to protectionist policies, bailouts, and the like. Firms need to be competitive. Creating incentives to invest in equipment are effective in the long run, so I do think the policies will be good for firms. Firms need to be given the correct incentives to ensure that they will survive the shakeout and still be around in ten or twenty years.

4.   As internet technologies evolve and improve, more traditional newspaper and magazine publishing companies are having difficulties surviving. Even the Washington Post has been acquired by Amazon founder Jeff Bezos, as I am sure you know. What are your suggestions for helping print-media companies survive in the current era of technology-driven turbulence?

The reality is that these companies may not survive in their current form. Historically, printed media had geographic protections. In general, you were isolated in your own market. If you were a newspaper in Cleveland, Ohio, you were exposed to competition from other newspapers in the area. The first hint that the climate was changing was the cable news channels. All of  a sudden, the papers and television stations in Cleveland catering to local tastes had to compete with cable news channels broadcasting news from all over the country. Local viewers began switching to channels and stations that offered content better tailored to their interests.

The internet has taken this trend to the limit. Now, every view point is accessible. Regardless of your tastes or interests, you can find a blog or other information sources that cater to you. Catering to a local market is now difficult to do as a result. Different people in Cleveland want different content in their news. Blogs or other online media that cater to a particular taste are going to scoop up readers sharing that taste in all local markets. These media will cobble together a base, leavening most of the print media out in the cold. The few papers like The New York Times and Wall Street Journal that have become successful achieve this success by A, becoming national to solve the geography problem and B, offering very high quality. They are able to attract high-end readers willing to pay a premium for a high-quality product. This strategy is not useful for a local paper in Cleveland, Ohio.

If you look at what is happening right now, there are a few choices. Some papers are becoming online outlets. The Seattle Post-Intelligencer has shut down print operations to become an online news outlet. Sounds good, but they had to cut down their newsroom considerably, as well. When you do that, you become a fundamentally different publication, something that could be bad for consumers. Because journalists provide a public good, exposing scandals, for example, this progression is not necessarily a good one. But in terms of a business model, it is one of only a few choices. The old business model just does not work anymore. Going forward, a lot of traditional newspapers may not survive.

The only other option to going online is to become ultra-local, something the San Diego newspaper is trying to do. They are sending journalists into neighborhoods to report on everything. Ultra-local content is another strategy. The San Diego paper is trying it out, but I do not know if they are sure that it will work. We are definitely going to see new business models emerge because even ones from ten years ago are no longer viable.

5.   You once quipped, "If I weren't a B-school professor, I would be an entrepreneur." What attracts you to entrepreneurship? Have you done research in this field? What did you learn about entrepreneurship from your part-time work as a bartender during graduate school?

Let me start with your question about why I am attracted to entrepreneurship. What I like about it and academic work as a professor is the freedom to pursue your interests. For better and worse, you are your own boss. Like your failures, your successes are your own. I like that personal freedom and responsibility to pursue whatever I like to do. Academia is ideal for people like me. If I think a question is interesting, like why I can not get an iPhone from Verizon, I can explore the question, research it. This attribute that attracts me to academia also applies to entrepreneurship. In this sense, I think the two fields are actually related. In academia, you are an entrepreneur:  You have kind of your own brand, and you are judged by your own work. If you do not perform well, you will not be tenured. Academia is like being an entrepreneur with a bit more of a safety net. This similarity to academia is the reason why I think I would be drawn to entrepreneurship.

To answer your question about what I learned as a bartender, one, being on the front lines, I gained a lot of direct experiences with the problems and challenges of the business. It was a great way to understand the market and industry and an opportunity to learn how to solve problems. As I bartender, I saw all kinds of problems. Because owners and managers may not see them, you have to be the problem solver all of the time. If you really want to make money as an entrepreneur, you should find a problem that no one has solved, and solve it. This is one lesson I learned from being a bartender. I also learned that I did not want to be a bartender for the rest of my life. The experience motivated me to work hard to further my education so I did not have to be a bartender forever.

6.   Students have noted that you have never been asked a question that you have been unable to answer in considerable detail. How did you acquire this extensive knowledge at such a young age? What are your suggestions for young scholars and business professionals on dealing with information overload and increasing their retention of useful knowledge?

People who have a strong curiosity about the world tend to be drawn to academia and teaching. They love learning. For these people, it is a life-long pursuit. I am glad that students feel that I possess this curiosity, because it is an aspiration.

Retaining information is a challenge. I sometimes have difficulty getting work done due to information overload. I am constantly being bombarded with emails. For me, the answer was the decision to block off days. I do not hold meetings, I do not respond to emails on these days or check emails frequently, either. I just focus on my research. I go to a white board, and I focus. For some people, the act of putting down their phone seems unnatural. But I think that it is important to do so, especially if you want to solve difficult or complex problems. You cannot be distracted every five to ten minutes.

I am also a morning person. During the semester when I am teaching, I usually awake at 5:30 am. Because I teach my first class at 9 am, I have a few hours. Due to the early time, no one is emailing me or knocking on my door. No one is calling me, either. My office is quiet, allowing me to concentrate. I can ensure that my lectures are well prepared. These morning hours when no one is trying to contact me are the best time to work. I need time during the day and the week when I am not being bombarded to think and solve some problems.

7.   In the review written about you in Poets & Quants, where you are listed as one of the best 40 best business-school professors under 40, you explained that teaching has been a life-long interest. What aspects of teaching do you enjoy? What have you learned from your students? What aspects of teaching do you find tedious or displeasurable?

I enjoy interacting with highly engaged, intelligent students. At Wharton, I teach three classes a year to roughly 200 students. All sharp, they do not let me get away with anything. To really teach a topic, you must first master it completely. Hearkening back to your previous question about my detailed knowledge of a broad range of topics, I enjoy learning a subject in detail so that even when intelligent people challenge me, I know the answer. I know that I am right. And I can explain the answer perfectly. Mastering a topic at the level is a thrill for me. I love it. The students here hold me to task. They are paying customers who want a good product. They push me to know the topics I teach cold.

I learn lots from my students. Hearing them talk about the problems they face in the real world, in their work environment, is useful, especially since the students are so diverse. Some have been in the military, others in industry—all sorts of industries. We have students who are or have been professional athletes. They are involved in all sorts of different activities. Listening to them apply economic principles to their experiences is fantastic. I often receive emails from students discussing these applications: “I saw a great soccer game showing what you explained about game theory. Here you go.” Their experiences benefit future classes because those experiences become examples I use in future classes. I view the whole educational process as a virtuous cycle:  I learn from the students who learn from me.

Because the students are from diverse backgrounds, teaching them is also challenging. Some students majored in economics as undergraduates. Others have never previously studied the subject. Yet I have to craft lectures that are interesting and engaging for students across this continuum. This requirement challenges me, and sometimes worries me, in part because students have different preferences. Some want only global examples whereas others prefer U.S. ones. Some students want heavy theory and mathematics; others would prefer none. Designing interesting, engaging lecturers balancing these different needs and preferences is challenging.

8.   Many scholars write books to share their research results and ideas with broader readership. Do you plan to pen a book in the not-too-distant future? If so, please tell us about it.

To be perfectly honest, I have a ten-year research agenda ahead of me that I need to complete first. At this point in my career, starting a book does not make any sense. I might also add that I would only write one if I had something I felt were important enough to write about, ideas that would have an impact on government and industries. I have seen people rush to write books, but I would only do so if I felt I could make a contribution, helping governments set better policies. Publishing a book is not high on my list of current priorities, but if you ask me again in ten years, I might respond differently.

9.   How would you evaluate behavioral economics? To what extent are you interested in incorporating psychological theories into your own research?

Behavioral economics has been popular for the last ten years or so, and there have been a variety of advances. I think behavioral economics is interesting as a field. The challenge lies in the lack of a model. We do not yet have a good model, a comprehensive theory of all the individual differences. The lack of a model makes it frustrating for me to work with behavioral economics from a research perspective. I often joke that this is the reason I like to study firms:  They tend to be more rational. For this reason, doing research on them is easier than on people.

However, behavioral economic issues are relevant for managers. My students often make comments like, “I may not be perfectly rational, so why would I make that choice?” However, I have only done about half a lecture on this still-young field for my students because I spend most of the time discussing the rational economic behavior of firms. I think behavioral economics is important, useful, and interesting, but it’s not my area. I am hoping that other sharp researchers develop a unified theory of behavior economics soon. It would become a great toolbox for future research. Currently, the conclusion of behavioral economics seems to be “we are not all rational.”

This is my recent Kindle book with colleague Dr. Yuzo Sugimoto. It presents real English dialogues introducing American culture with supplemental usage problems for standardized test preparation. 

2015-07-25 - Innovation necessitates experimentation!

  Rodrigo Canales Interview Transcript

Dr. Rodrigo Canales of Yale University

Innovation necessitates experimentation!

An associate professor of organizational behavior, Dr. Canales researches the role of institutions in entrepreneurship and economic development. Specifically, Rodrigo studies how individuals purposefully change complex organizations or systems. His research and teaching interests include microfinance, business ethics, leadership education, and the Mexican war on drugs. You will enjoy his interesting insights on these topics.

1.   You have done considerable research in the area of microfinance and other areas of social enterprise. What has attracted you to this relatively new field?

I’ll start by saying that microfinance is actually not really new. It’s been around since the 1970s. There’s been a considerable amount of research done in the field, but most of the research has been done from the economic side of things: trying to understand what kinds of contractual structures, what kind of incentives allow microfinance to be as effective as it has been through history. As an economic phenomenon, microfinance is not that new.

The reason why I became attracted to it is because even though there is a lot of work on the contractual structures of microfinance and the incentive structures, actually when you look around the world and see microfinance organizations, you see organizations that have very different contractual structures, very different sets of incentives both for the clients and for the loan officers. Nonetheless, the organizations all seem to be performing well.

To me, the fact that virtually all of the research had focused on contracts even though they did not seem to be explaining most of the variation out there in the world meant there was something that people were missing. Surprisingly for me, no one had looked at the organizational side of microfinance, or the organizational structure of microfinance. This is interesting because microfinance is a very labor-intensive phenomenon, a labor-intensive type of service. For this reason, the micro-dynamics of organizations in microfinance were bound to be interesting and complex. That’s what drew me to the field.

There’s that side, the fact that no one had looked at the organizational dynamics, and there is also the side that all over the world, microfinance is often hailed as an example of the type of social-enterprise model that will allow us to fight poverty through market mechanisms. I was a little skeptical about that notion, because I also saw very mixed results in terms of how much microfinance was truly having a social impact. For these two reasons, I was attracted to microfinance. I was trying to understand why some organizations were delivering a social impact.

The second driver was the desire to understand what organizational structures allow microfinance to operate well. As an organizational scholar, I was attracted by this question. Furthermore, as someone interested in the developing world, someone interested in figuring out better solutions to development problems, I was initially attracted to microfinance. This work eventually led to an interest in other forms of social enterprise. Studying microfinance, I began observing some of the tensions and contradictions that any social-enterprise model is bound to encounter.

2.   In your compelling, recent T.E.D. Talk, you employed economic principles to explain how Mexican drug cartels are actually sophisticated enterprises. What can we learn from your analysis about how to reduce drug consumption in the United States and elsewhere?

I would say two things. First, I am not only applying economic principles, but also broader social principles, to understand the institutional implications of the way we have structured the world drug market. Let me break my explanation down into the two parts.

What I argue in that T.E.D. Talk is that if you actually look at the core of the issue, what is really driving the dynamics of drug trade and drug violence in the world, you realize we are always attacking the phenomenon as a supply problem. We are always going after the criminals. Actually, the problem is that the market is a multi-billion dollar one. The U.S. market is gigantic; the demand for drugs here is enormous. If you look at the margins available to the people willing to take the risk to deliver the drugs, you reach the unavoidable conclusion that as long as that demand is present, there will always be someone willing to do whatever it takes to fulfill that demand.

It’s impossible to deny this fact if you look at the size of the market, the margins that market provides, and the resilience of the demand. Drug users are willing to absorb large changes in the quality and price of their product and continue using it, so it is a very attractive type of demand. The supply will find a way to that demand. For this reason, no matter how much we try to combat the supply, we are never going to be able to halt it. The demand will always be there.

If you start from that premise, everything we are doing to stop the supply becomes absurd. You are not going to be able to eradicate the supply. Furthermore, you start realizing not only that it is absurd to go after the supply, but also that by doing so, we are only making matters worse. Why? Because if you are going after drug traders, you are obviously going to catch some. But the more you do this, the more you create an evolutionary dynamic ensuring that the only people who can survive as providers to this market for drugs are the most ruthless, aggressive, and sophisticated, the most strategically complex organizations, ones that can survive in a world in which they are being chased.

In fact, it is our approach of going after supply that has created these increasingly violent organizations. We have created an environment where only the most ruthless and sophisticated enterprises can survive. There is no doubt they are going to strive to survive because there is this massive market that we are not doing anything about. In going after a symptom we don’t like, namely, the drug dealers whom we don’t like, we ignore the root cause for their existence, and we are making things much worse. The situation is like creating antibiotic-resistant bacteria. By using antibiotics for the wrong illnesses at the wrong times, you end up creating super-resistant bacteria. This is part of the problem.

Applying economic demand principles and examining the incentives and the structure of the market created by that demand, we realize we are making things worse. Because we have created an environment where the organizations have to be very sophisticated in order to survive, they do not just have well-designed strategies for serving the market in terms of their distribution and transportation networks. They’ve also developed pretty sophisticated strategies to legitimize themselves, to institutionalize themselves within both the Mexican and international landscape. They’ve developed sophisticated public-relations and media campaigns seeking to institutionalize what they do within the Mexican market. In the process, they have managed to weaken the institutional position of the state in very important ways. Not only are we failing to weaken these organizations, we are actually weakening the state, the tool we were trying to use to fight them. This situation is caused by our misguided approach to the problem, which stems from our failure to understand the root cause of the problem.

If you ask me what we are supposed to learn from this situation, number one, our solution is just not going to work. It is going to make things worse. Therefore, number two, we have to change the entire narrative around what this problem is about. I am not certain what the solutions would be. I’m not a proponent of legalization, but I do not oppose it, either. What I am proposing is that we need to accept that going after the supply is not only ridiculous, but also counterproductive. Therefore, we need to have a more honest debate about what it is that we can and should do to address this problem. This debate must begin with our acceptance of the enormous demand and our inability to curb it. We need to start from there. At that point, we might decide we should legalize everything, but find ways of limiting people’s consumption. We should stop thinking, “Let’s just put all the drug dealers in jail.” That is not going to happen.

We tend to experience drug violence as something happening separate from us: There are these criminals fighting each other in Mexico. I just want people to realize that if you either are a consumer or friends with a consumer, or you tolerate that consumption, if you are not doing anything to change policy, you are part of the problem. You are making it worse. One of the goals of my T.E.D. Talk was to generate some awareness that we need to become much more active in changing the policy. By we, I mean everyone because we are all responsible.

3.    Reading your vita, I was struck by the title of your 2010 Working Paper “From Buddha to the Boardroom: Leadership Education and the Four Pillars of Courageous Leadership Type.” What is that paper about? Where did you conceive of the idea of relating Buddhism to management education?

The title is a play on words on two or three different levels. The framework that we introduce in the paper was developed through a series of transformative leadership workshops that we designed for the Dalai Lama Center for Ethics and Transformative Values at MIT. I am a member of the Center’s Steering Committee. One of the goals of the Center is to design and provide executive education programs that are aimed at bringing tools and frameworks to help leaders be more ethical, more value driven in their decisions.

Another goal of the Center is to bring ethics-based / values-based training to professional schools: MBA students, medical students, lawyers, police officers, etc. We had been experimenting, and we ended up designing executive workshops about ethics- and values-based leadership. The paper discusses the four pillars we aim to introduce through our workshops. Regarding the question about the title “from Buddah to the Board room”, the workshops use some of the tools from Buddhism although the workshops are completely secular and non-religious in both content and presentation.

The founder and director of the Dalai Lama Center is actually a Buddhist monk who has also received very significant training in the West, and I’m a Buddhism practitioner, so a lot of the workshop content came from Buddhist practices, including some of the exercises we use for introspection and exercises to help participants become more aware of their emotional state, as well as exercises to help them become more aware of their connections to the people around them and those intended to help participants develop more humility so they are able to ask for help.

The other way in which the title is a play on words is that one of the most interesting things we found out throughout these workshops is we got some very powerful results from combining populations of Buddhist monks, with, for example, MBA students. When we conducted these workshops across populations, we found very interesting complementarities between the strengths and weaknesses of Buddhist monks versus the strengths and weaknesses of MBA students in the U.S. We found that the strengths and weaknesses were almost perfectly complementary. Whereas the Buddhist monks are incredibly humble and introspective, able to achieve amazing insights, they struggle a lot with making their thoughts practical. They struggle with the question, “How can I transform these insights into something I can do today?” The monks struggle to structure activities that would allow them to exercise their insights and leadership.

The MBAs have exactly the opposite problem. They are all about taking action, structuring activities, doing things. But they have a really difficult time connecting internally and truly reaching deep insights about themselves. MBAs have been trained to overlook a lot, so they have a hard time making the connection. When you bring these two populations together, they can help each other in very interesting ways. The workshops were a wonderful experience and another origin of the title of the paper. We are weaving Buddhist practices into worships with these two populations and getting some interesting results in the process. 

4.   In an August 2012 interview, you noted that existing organizations are naturally resistant to innovations, which involve change. Like organizations, some countries, notably Japan, resist change, especially dynamic, dramatic change. Japanese people and organizations typically favor low-risk maintenance of the status quo over the pursuit of high-risk opportunities. For this reason, Japan continues to suffer from the effects of the lost “two decades,” characterized by prolonged recession despite some recent improvements following the introduction of Abenomics. What would be your suggestions for helping the Japanese government, Japanese enterprises, and the people to become more innovative about improving the economy and their nation’s overall competitiveness in global markets?  

My course on organizations consists of thirteen sessions where we cover a broad array of topics. One of the sessions is on experimentation and failure. When I teach that session, I always tell me students, “I am aware that you may remember only one of the thirteen sessions of this course. Though I prepare all of the sessions carefully, I am aware that you are going to forget most of them. If I am lucky, you will remember one. If you only remember one, I want you to remember this session on the importance of experimentation and failure.” If you truly internalize how important they are in driving innovation, then you can kind of figure out everything else around innovation. You will be able to develop organizational structures that will help you be more experimental. You will be able to figure out the type of organizational culture you need to cultivate to make failure more acceptable.

All of these decisions must be based on a deep acceptance of the importance of experimentation and failure in driving innovation. The reason is that innovation involves doing something that has not been done before. That means that you do not get to choose whether you are going to fail. No one has previously done what you are trying, so you will fail. The relevant question is how you are going to fail. Are you going to fail in a way that is small and controlled, in a way that teaches you something fundamental that, helps you move forward, to make nimble progress? Or are you going to fail in a massive way that completely impedes your ability to make progress? Given that the only choice is about how you fail rather than whether you will fail when you are dealing with innovation, the implication is that you want to set up as many small, inexpensive experiments as possible so you can figure out what works and what doesn’t.

I don’t know Japan that well, but I have many Japanese students. I also have many Asian students and have taught a lot in Asia. In the culture and history of many countries, especially Japan, I do find that society is very status-based. Hierarchy plays a prominent role in the social system. I also find that the cost of failure is very high. People make a huge deal when someone fails. Powerful shame accompanies mistakes. If you combine these two elements, you create a perfect environment for ensuring people are unwilling to innovate. Innovation usually comes from people lower in the status hierarchy who are closer to the market or the user, more familiar with the problems out there in the world. High-status people are generally far removed from the “real world,” so they tend not to have access to the insights that allow people to generate innovation or address problems. Innovation also requires experimentation and failure. If you have a system where hierarchy and high status are core values and where any type of failure is considered horrible and regarded with tremendous shame, you have the conditions for a perfect storm against innovation.

What I would promote in Japan is empowerment. I would empower people over status so they can be more experimental. I would also tweak the culture around the interpretation of failure. Is the organization interpreting failure to mean “We have failed,” or “Well, we haven’t succeeded yet, but the failure has taught us some important lessons. Let’s incorporate them into the next iteration of our experiment”?

In organizations where failure is not tolerated, people go out of their way to make sure everything is perfect. Innovation is not going to happen because we do not know what we are doing when innovating. In the end, the failures are bigger, and that reinforces the culture of failure because every failure is massive and has deep implications. As a result, people try to avoid failure even more, try to come up with more perfect solutions. This is not going to work, but is going to lead to even more massive failures, resulting in a self-reinforcing system.

What you want to do is reel things back, help people be much more experimental. You also want to change the culture around how everyone experiences the failures. I am not a proponent of celebrating failure. But I do think the culture needs to value failure. We should learn from failure and share the lessons from it. We should frame failure as a critical step in achieving a solution.

5.   You cite IBM as an example of a company that tackled an innovation problem creatively. Do you think Google, Apple, Amazon and Facebook eventually will face innovation problems like IBM given they seem to already have introduced the inner-competition and cross-hierarchical teams you suggest for facilitating innovation? What other measure could these organizations take to maintain innovation at current high levels?

That’s a very interesting question. The short answer is we don’t know.

IBM almost died. It nearly suffered the same fate as the Polaroids and Kodaks of this world. But the CEO, board, and management team began to understand the problem at some point, and they were willing to get rid of everything dragging IMB down. That is extremely difficult to do because all of these things were providing a lot of revenue for the company. It’s not as if these parts were generating losses for IBM. At some point, the parts were core businesses, and they were still generating a lot of revenue for the firm. The management team realized that precisely because these parts were revenue generators, it would be impossible to retain them and transform IBM’s business model in the way required to perform in the changing world that constituted their new operating environment. The firm was willing to cut these things down and get rid of them, something extremely difficult to do.

Dick Foster, a colleague of mine here, and I have a lot of conversations about innovation. We both agree that the challenge for successful, established organizations is balancing several factors required to remain innovative and survive. Number one, the companies have to maintain operational excellence. They have to continue doing whatever provides the revenue today with excellence. As companies’ core source of revenue, these activities are going to draw a lot of energy and resources. But operating with excellence is not the only thing you need to do. You also need to generate options. You need to invest not only in providing incremental innovation to current operations, but also in generating a new portfolio of options for the future, the final value of many of which you will not be able to predict. That is the second imperative. The third is maintaining financial control of your organization. You have to be operating with excellence, generating options, and maintaining financial control all at once.

Amazon is a company that worries me a little because they are not operating under financial control even though they have structured an interesting, operationally excellent company. They are constantly losing money. The stock market has given Amazon a free pass so far, but when the market begins to tighten, something the market has signaled might be coming, that could generate a difficult moment for Amazon because they are not operating in a financially sound way.

A fourth requirement for organizations is the willingness to get rid of things and trade them. Pursuits that were once a core business but have limited potential to remain dynamic and nimble probably should be abandoned. You want to sell these things while they are still valuable. Doing this requires a lot of discipline. 3M is an organization that is very interesting in this respect. They’re always trading and closing companies and divisions not growing at expected rates, and they are always opening new divisions. These activities are part of their discipline. Apple is noteworthy in this respect, as well. They have no qualms about shutting down a product or business line that is no longer dynamic. Even if doing so ruffles customers, Apple will still discontinue a product. Google has also been relatively disciplined in terms of shutting down business lines that are not doing well.

I worry about Facebook. Namely, I am concerned that they have tied their identity to a particular service and product too tightly. Organizations that define their identity around a product put themselves in a fragile position. As their product proceeds through the life cycle the way all products do, the product is going to lose its ability to generate revenue. Companies that have defined their identities around a particular product are going to have great difficulty adapting as the environment changes. If your identity is built around providing solutions and services to clients, you will be much more willing to divest and trade products as the market changes. You see Apple doing this easily. I am not sure that Facebook has truly taken that approach. I see some signs that they are trying to, but I think that their identity is tied to their original product, Facebook, also the name of the company. As Facebook the product begins to cycle out of the market, I believe the company is going to experience some problems.

2015-06-26 What makes big data big is not its volume but its impact on decision making!

Harikesh Nair

What makes big data big is not its volume but its impact on decision making!

This month, I feature an interview with Dr. Harikesh Nair, Professor of Marketing, Graduate School of Business, Stanford University. Specializing in marketing analytics, Dr. Nair blends applied economic theory and econometric tools with marketing data to better understand consumer behavior and to improve the strategic marketing decisions of firms.His research is a must read for anyone interested in big data and marketing through social media 

1.      Last year you delivered a short talk entitled “Building Better Employee Incentives with Big Data.” Can you summarize the highlights of that talk? How would you define Big Data?

I think the “bigness” of data should not be defined by the amount or the quantity of data or the speed at which it can be collected, but by its ability to make big impacts on decision-making and outcomes when utilized properly. For me, big data means the fact that information and analytics can be combined in new ways with domain knowledge that managers already had, to make large impacts on the organization. That is what I consider big data.

A lot of companies have made large investments in collecting data on how the companies interact with customers. We refer to that as CRM, or customer relationship management systems. We now can track a lot about customers—what the touch points are, what the customer did. That has generated a revolution in how consumer interactions with companies are analyzed. What I was discussing in the video was a similar revolution occurring within the firm. Specifically, in much the same was as customer interactions with the firm can now be modeled, we can think about how employees behave, how they interact with one another within the organization, and model employee behavior in a granular way. All of that can be tracked. We can conceive of the firm as an internal market. I think that is a huge change that will occur in the near future: the notion of big data will enter within a firm, an organization.

The fact of the matter is that right now, we really do not have a good understanding of what makes an employee good. We really do not have a systematic understanding of why some employees are good while others are not and what drives productivity. For instance, consider whether teams make employees more productive. Some employees may not perform well when working in isolation, but exceed expectations when grouped together into a team. Who should we group together? Similar or dissimilar people? What works better? We really don’t know. The advantage of the new scenario is we can now track who works with whom, how they interact with each other, and see whether productivity was higher or lower under different team configurations. Also interesting is the fact that all of that information can be combined with traditional HR data on who received a high salary, who was given a bonus, who received a commission. And you can match these data with actions employees took. Then you can ask questions like, “If you give this person so much commission, will you increase his productivity this much?” In other words, we can now quantitatively assess the value of a commission.

2.      In what other areas do you feel Big Data can be particularly useful in improving corporate performance? How can managers and staff systematically collect and analyze such data?

One analogy offered by a colleague is that big data is a natural resource like oil. Oil in its original form is not useful. It first has to be extracted and stored. Then, it has to be cleaned. Ultimately, it must be refined in a way making it useful for consumption in a vehicle or jet engine. Data are similar. The first step is data collection. But simply collecting and storing large quantities of data somewhere is not useful. The data need to be systematically cleaned and rendered in a form suitable for answering a business question. And finally - and I think this is the really big gap for an organization - data in and of itself does not “speak” or “tell a story”. It has no value until it is combined with some business and domain knowledge and interpreted correctly. The design of the right experiment or the right question to ask, and when to use a database to broach it, and when not to in order to avoid so called “analysis paralysis,” are all managerial questions.

So, I think the mere collection of data is not going to change much. It’s when the data are used by intelligent individuals who understand how to use analytics in combination with domain knowledge that it’s going to be powerful. I think the most important thing for companies is to try and find those kinds of individuals. This is not easy - the human-capital scarcity is very real. There are good statisticians who may not know the business context. There are people who are trained and credentialed in particular aspects of business but who don’t have the training to think quantitatively, or do not know how to think in a data-oriented manner. You need to find people who can do both. Just one of the two pieces is typically insufficient. Corporations need to focus their attention on this human-capital dimension.

Massive computing innovations are taking place in the collection, cleansing, and visualization of data. Great software is available for these tasks. But this data will not affect the business unless a line manager uses this information to make a decision. I think the collection, cleaning, and visualization aspects are easier to solve than this problem—that is, understanding how this data can be used to drive the business forward. For this, firms need to train existing managers, hire new people, and empower them to make decisions as well. Universities have a role to play in proactively providing more and better training, graduating more people with the requisite skills. The effort will have to be collective. Presently, there is an acute talent shortage.

3.      Not too long ago, you conducted a Big Data study of Facebook messages investigating the effect of social media content on customer engagement. Can you summarize that study for us, highlighting key findings? To what extent do you think they generalize to countries like Japan?

The purpose of the study was to learn about the role of advertising content in the context of social media. To understand the background on the study, lets ask: when a company spends a lot of money on advertising, what should consumers infer? If the product were of low quality, but many people purchased the item as a result of high advertising, the firm would be adversely affected. Thus, the fact that the company is advertising heavily signals to consumers the product is high quality. Punchline - the presence of heavy advertising by a company suggests to consumers that the product is high quality. Knowing this, only really good firms would advertise. Really bad firms would not, thereby validating consumer thinking. This is the so-called signaling model of advertising in a nutshell.

This model is unsatisfactory. It implies you do not necessarily have to advertise heavily in order to get the advertising’s benefits. You simply need to spend some money to signal that you are a good firm to consumers. Yet we see that many companies spend significant resources in hiring ad-agencies and creative directors and others to design compelling advertising messages; that ad-creative firms have a lot of clients and are making money. Some ads center on lifestyle features, others state prices. Some ads describe how good you will feel if you use the product. Yet others simply furnish objective information. All suggests that the ad-creative matters. Also, many people have tried out Pepsi and Coke and know how they taste – they don’t need to see ads to know whether Coke or Pepsi “work for them”. But we see that both companies continue to spend huge sums advertising. This is clearly not simply about signaling. A limitation of the canonical model therefore is its failure to assign a compelling role to the content of the ads. This paper asks how the content of the advertising matters.

We worked with a company to collect a lot of posts that firms are publishing on Facebook. Then, we used Amazon’s Mechanical Turk (a crowdsourced labor platform) in combination with a natural language-processing algorithm to create variables reflecting attributes of the content of the posts. Eg, does the content mention prices? A sale? The brand? Do the posts contain emotional content? Is this content emotionally positive or negative? Our key finding was that information about prices and availability, what we called search attributes, were not effective in generating engagement, which we defined as “Likes” and comments on facebook. Emotional content, in contrast, generate a lot of engagement. From this relatively large-scale study of over one-hundred thousand posts on Facebook, we concluded that emotional content is extremely important for generating engagement. In addition, though search attributes like prices alone do not seem to generate engagement, coupled with emotion, they have a positive effect on engagement. This main finding of the paper underscores the importance of emotional or social content for generating interaction. Information provision alone does not seem to work.

4.      How do you think social networks in specific and the internet in general have changed marketing? What three changes do you feel are most significant? How well have companies adapted overall? What can they do to better adapt?

Social networks have changed marketing in a huge way. Their primary influence has been to create a spillover effect that amplifies the importance of marketing messages. In the pre-social days, I could target a message to the user, exerting an effect on that person. The message might affect other users, but we had no way of knowing. Now, we can target a message at an influential user. Not only will he or she potentially be affected by that message, but that user might share the message with others because of the social nature of the message. Individuals connected to this targeted individual are also affected by the message, which they, in turn, will share with their friends. Thus, social networks increase the efficacy of the impact of messages. Further, much of this is measurable.

Social networks have also changed the power equation between consumers and firms. In the past, if you had a terrible experience at a restaurant or on a plane flight, you could write to the CEO, but then no one else will know of your experience. Or you can tell a few of your friends at home. Now, you can post your experience in Facebook for viewing by a vast circle of friends, some of whom will respond indicating they have had a similar experience. They may repost your experience and tweet it, too. Then, their friends will read about your experience. It may be included as part of a thread in a trending story in Twitter, in which case millions of people may eventually learn about your experience. In this way, social networks have increased the power of the consumers. They now have the ability to explain their viewpoint to a large number of people, a form of influence once enjoyed only by firms with the resources to advertise. That gives consumers more of a voice.

What can firms do to adapt? I think measurement is particularly important. Tracking technology has improved. Advertising channels and social-media options have proliferated. You can advertise on Twitter, post ads on Facebook. You can select from Facebook social ads to ad feeds. Paid content and social content are also options as well as Youtube. Measurement technology in the digital world is advanced compared to the offline world. A large number of firms now sell sophisticated measurement products. The problem, I believe, is on the people side. Human capital in marketing organizations is currently inadequate to effectively leverage all of these tools. People do not know how to use them. They are overwhelmed by the volume of data flowing in and by the proliferation of available options. The first step firms can take is to improve their in-house measurement capability and hire people who understand these tools. Firms can demand better measurement from agencies providing data to them as well.

5.      Google coined the neologism ZMOT—Zero Moment of Truth. In contrast to the classic First Moment of Truth, the five to seven seconds a consumer sees the product on the supermarket shelf, deciding whether or not to purchase it, Google believes consumers now decide before they go based on online research. To what extent do you agree with this Googly notion? To the extent that you agree, what do you think the implications of ZMOT are for company marketing departments? How will they have to alter their marketing strategies?

As an academic, I hesitate to give uni-causal explanations for multi-causal phenomena. Shopping behavior - where and how we choose to buy - is a complex process. It involves obvious considerations related to price, convenience, and mental associations to other brands as well as word of mouth and advertising. I am reluctant to buy into the First Moment of Truth or ZMOT notions for this reason. I do think both concepts apply, but I do not think either applies completely to the exclusion of other considerations.

Compared to the past, the sheer magnitude of information and the ability to access it on the go with a smart phone have changed behavior significantly. Many consumers are no longer influenced by conventional lifestyle advertising or simple branding. If you think about what a well-known brand is in the first place, it is a cue that the product is very good. It comes with the promise that the quality is good. It tells you that you will not be cheated. If I am time constrained or cannot find information related to a purchase, I will trust the well-known brand. Purchasing a well-known brand is lower risk in this case.

Because information is now easy to find and access, this impact is reduced. In some sense, information in lifestyle advertising and information in branding are substitutes. As information becomes easier to access, we will access information from our networks. In that sense, I agree with the Google folks. Lots of decisions are not driven by cues that you see in the stores, but by information about products that consumers have researched.

Two strategies will be important in adapting to this new reality. One is to think deeply about the marginal value of time for people. Time-constrained people may not find reading lots of information and checking prices an optimal course of action. The information-acquisition cost is too high for them. Other individuals may not be all that hungry for information in certain contexts. In other contexts, they might actively search it out. For this reason, it is important for companies to target the content and timing of their messages appropriately. The mass marketing approach has changed to one of a heterogeneity of approaches targeting to consumers for whom the brand matters.

Given that consumers are more active in seeking and using information, the second strategy is for companies to play a role in providing that information. Good companies now need to provide a page explaining what makes them a good company. Simply stating you are a good company is no longer effective. You now have to explain why. Companies can create their own web and product-information pages. Companies need to be in the channels where consumers acquire information. Many consumers type key words in the Google search engine. Companies need to be there. This is the second way companies can respond to the proliferation of information and the reduced transaction cost of acquiring it. 

2015-05-24 Pragmatic Professor Uri Gneezy takes behavioral economic principles from the laboratory to industry

Uri Gneezy Interview

October 6, 2014, 9:30 am (JST)

Epstein/Atkinson Endowed Chair in Behavioral Economics, Professor of Economics & Strategy

Rady School of Management, UC San Diego

Professor Gneezy applies behavioral economics principles to solve real-world problems. He has studied the effects of incentive-based interventions to encourage good habits and reduce bad ones, Pay-What-You-Want pricing, and the detrimental consequences of small and large incentives. In addition to traditional laboratory and field studies, Dr. Gneezy works with companies, conducting behavioral economics-based experiments to achieve traditional performance goals in non-traditional ways. Before joining the Rady School, Gneezy was a faculty member at the University of Chicago, Technion and Haifa. Gneezy received his Ph.D. from the Center for Economic Research in Tilburg. His recent book  The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life published by PublicAffairs in 2013 has received critical acclaim. 

1.   Your research spans several topics including when and how incentives work, deception, gender differences in competitiveness, and behavioral pricing. Can you give us an overview of this research and its major findings?

The theme that connects the different research topics is what motivates people. If you consider incentives, for example, we take a look at when incentives have a negative effect on people’s behavior, when they have a positive effect, and when they have no effect. In a large percentage of cases, incentives have no effect. Companies offer all kinds of incentives to people, but they do not change their behavior. Offering such incentives, companies spend a lot of money for nothing!

Moving to the topic of deception, we can think of what makes people lie. Incentives do not have to be money. Power can be an incentive. I am interested in how incentives affect the decision to lie. Many of us experience what I call lie aversion. We would prefer not to lie if we could reach the same, desired outcome without lying. Yet we find that many people lie. For this reason, I think that understanding the incentives driving this behavior is important.

Similarly, my research on gender all centers on the impact of incentives. I look specifically at how men’s and women’s reactions to incentives differ. In our research on competitive incentives, we learned that women respond less than men. Thus, even the gender studies we are conducting center to a large degree on incentives.

Follow-up question:  How did you initially become interested in the issue of incentives?

From a very young age, I have always wondered why people do what they do. What are their hidden behavioral motives? Even before starting to study economics, I was interested in understanding what motivates people. I simply found this topic interesting. Sometimes this interest becomes annoying:  When I go to the doctor, I will wonder what is motivating him to tell me to do something. I have become obsessed with the question of incentives, but I also find them fun.

2.   Vernon Smith used experiments to explore the formation of bubbles, and Daniel Kahneman to develop Prospect Theory. How does your research relate to that of these scholars, who brought the application of behavioral economics into the mainstream by winning the Nobel Prize?

Vernon Smith and Kahneman and Tversky are the fathers of the field. They started their research in the field when it was not popular. They were the pioneers. Vernon Smith concentrated primarily on auctions. He called experiments the wind tunnel. If you want to know how people will behave, you run these experiments. I do not typically run market or auction experiments of this type. But Vernon Smith set the rules that we are using in the field today. For example, he indicated that we cannot deceive people in our research even though deception is regularly used in psychology. We pay people for performing tasks. In other words, we are looking at the real choices made by people.

Kahneman and Tversky were both psychologists. As such, they brought a different perspective to economic problems. They did not come with a theory, then use a wind-tunnel type experiment to determine when or how it works. Their work was more about the psychology of decision making. Many of their findings are about the psychology of behavior. Some of the findings related to mistakes people make. They were trying to find a more descriptive theory of decision making under conditions of risk.

My work is different in the sense that it is based on the work of these three pioneers, among many others. In addition, I am looking at phenomena of importance in the real world. Most of my research these days is with companies. If a charity wants to raise more money, what are the behavioral or psychological elements that can be incorporated into the way the charity requests contributions to raise effectiveness? If a company wants more people to follow it on its website, what kind of incentives could be used? As mentioned, not all incentives are created equal. For this reason, if you understand the psychology of incentives, you can actually use them more effectively.

One major difference between what Smith, Kahneman, and Tversky did and what I do is that I work with the companies to understand the way they or their customers are behaving. Being closer to the real-world phenomenon in this way is not necessarily better, but this is the stage in which I believe we presently are in behavioral economics. Kahneman and Tversky devised the concept of framing and showed how it is important. In a lab experiment, we can easily show that framing a problem in one was as opposed to another causes people to think about it differently. In my research, I am trying to take this concept to companies, determining whether they can benefit by framing choices differently.

3.   How has the field of behavioral economics evolved since 2002, when Kahneman and Smith were awarded the Nobel Prize? Where do you think the field is heading in the next ten to twenty years? Who are the young scholars you feel will lead the field’s development?

To a great extent, we have left the lab. We have gone out into the field, where we are trying to test our hypotheses in a more natural environment. That is not to say that I do not use lab experiments. I am still doing them, but I use them as one tool. Going out into the real world is something important that we are doing. For example, one application we are looking at is in the area of development in Africa. I believe the area will be interesting.

In twenty years, I hope that behavioral economics will no longer be distinguished from “mainstream economics.” Behavioral economics is about people. If you talk to people other than economists, these people do not even seem to understand the need for behavioral economics as a distinct field. How could economics be non behavioral? Our being behavioral economists means that others are non-behavioral economists. Confusing, isn’t it?

In the future, I hope that textbooks will not have a separate chapter about behavioral economics. Rather, I hope that every chapter will feature the basic model rooted in the simplifying assumptions of economics, followed by (behavioral-based) explanations of what happens when these assumptions are not valid: “Here is what you expect when A,B, or C occurs because people’s behavior is more complex than suggested by the simplifying models economics uses.”

We do not currently have enough young people with creative ideas. We need more people in the behavioral economics field. There are a few good people in the field, but no superstars come to mind.

4.  Can you give us an overview of your recent best seller The Why Axis, summarizing the highlights?

I am happy my book is popular in Japan, too. The book looks at how people actually behave, trying to bring insight from models, theories, and experiments. We take these insights to the real world to test how they actually work. Behavioral economics is one topic, field experiments, the other. We are testing the theory, not simply making assumptions. The advantage of field experiments is that they permit understanding of the causality.

If you have a company change the price of a product they sell over the internet, you will observe the effect. You can really isolate the effect, noting that one group of people viewed a particular item at one price and another group at the other price. Using such data, you can construct the demand function. You can really test what happens when you make changes based on your behavioral theories. To be clear, the book is about behavior economics and field experiences: trying to both understand people’s behavior and test it rather than making assumptions about it.

We wrote the book because we wanted to take the message to companies about the importance of testing ideas rather than trusting their intuition about those ideas. When companies create incentives, the frequently rely on their intuition. These companies could benefit from field experiments. They could both become more efficient and save money, too.

5.  In addition to conducting academic research, you consult with companies to help them apply              behavioral economic principles in their businesses. Can you tell us about your consulting                    practices, citing some concrete examples of projects and the results they have produced?

We worked with a large insurance company that wanted employees to receive flu vaccinations and take other tests. As an incentive, the company gave employees $10 for each test, spending $100 million dollars on the program. We conducted a field experiment to assess this incentive. In one condition, we paid employees $10 per vaccination or other activity up to 5 activities. In another condition, we told them they had to complete five activities to receive a payment. Looking at the data, we realized that some of the money the company was spending was what we call “money for nothing.” Many of the employees would have received the vaccinations even if they had not been paid for doing so. Of course, these employees are happy to accept the money, but it is not the reason they are receiving the shots. In this case, we helped the company to achieve the same goals for only $50 million dollars, saving them half of what they had been spending.

6.  Earning your bachelors in Israel, then your Ph.D. at Tilburg University in the Netherlands, you 

     were educated entirely outside the United States. How does the training you received at the latter 

     differ from that offered by U.S institutions? What are the similarities?

Like many other life events, my studying for a Ph.D. in the Netherlands was a coincidence to answer your first question. I did my bachelors degree in Tel Aviv because I had grown up there. After graduating, I moved to the Netherlands with my wife, who had accepted a job there. We were not following some grand master plan we had carefully designed.

To answer your second question, studying in the Netherlands had a significant effect on my life. At American universities, there is one way and one voice about how to do research. Outside the U.S, in Europe, Asia, and other places, thought about economic problems is more pluralistic. I think the average quality of training in the United States is higher than in other places. European universities have fewer highly skilled researchers but the variance in perspective is good. Different ways of thinking are good. Scholars who have not been trained in traditional economic thinking can more easily be creative. I am fortunate not to have attended an American in university in this respect. If I had, I would have received more rigorous training, but would also have left a bit brainwashed. I would have more difficulty trying to do a different type of research.

After I completed my Ph.D., I returned to Israel, where I was a university faculty member for four years. I decided to develop my career in the United States for two reasons. First, in the area of economics, America is still the center of gravity. A scholar can more easily launch a career there than elsewhere though developing a career in Europe has also become easier. Hong Kong, Japan, Singapore and China, are developing, too, but the United States is still at the center. I came to America because I wanted to enter the Big League. The second motivation was purely economic. The salary in Israel was not adequate to enjoy the lifestyle I desired.