Archive for November 1st, 2018

Hunting for a Hot Job in High Tech? Try ‘Digitization Economist’

November 1, 2018

HBSWK reports that Amazon has hired more than 150 PhD economists in last 5 years.

Under chief economist Pat Bajari, Amazon has hired more than 150 PhD economists in five years. He’s also cornered the market on what might be called “rookie economists” just out of school. That crowns Amazon the largest employer of tech economists—with more working full-time than even the largest academic economics department. Amazon is far from alone in this trend.

Some 50 tech companies “have been snapping up economists at a remarkable scale,” says Michael Luca, the Lee J. Styslinger III Associate Professor of Business Administration at Harvard Business School. “All of the big Bay Area tech companies have teams of economists, and lots of the smaller companies are starting to hire handfuls of them.” The list includes Google, Microsoft, Airbnb, Uber, Facebook, and numerous smaller companies.

Tech companies are turning to sharp economic minds to provide their unique lens on business problems like advertising auctions and market design. The accelerating phenomenon has given rise to a new field within economics called the economics of digitization. Research from the field is quickly finding its way into practice, directly through the work of PhD economists, and in the classroom, as HBS and other business schools add more tech-germane courses to their MBA offerings.

What do econs do there?

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Trust and ethics in finance and why Friedman’s quote on “…business should only make profits” is misrepresented

November 1, 2018

Andrew Bailey, chief executive of Financial Conduct Authority in this speech speaks about lack of trust and ethics in finance. He reviews the experience since 1930s when the idea of making money at all costs was not there. This has changed overtime:

I want to illustrate this trend of declining trust by spending a little time on the history of senior executive remuneration in the US.

My starting point is the period from the end of the Second World War until at least the early 1970s. What is striking is the absence of emphasis on pay for performance, and the rejection of excessive executive remuneration. At the time, there was a broad cultural aversion to high pay. Fear of moral outrage kept executive salaries in check, pointing to a social norm. This social norm may have held, at least in the US, until the mid 1980s. 

In essence, the system that operated from the Great Depression until the 1980s relied on the legacy of the 1930s and an almost unstated code in society that the remuneration of senior executives should not increase beyond a quite limited multiple of average pay on the basis that to breach this relationship would be viewed as ostentatious and breaking a norm that acted as a glue in society more broadly. I would go further and argue that this formed the basis of trust, with an expectation of future behaviour and a common value or ethic.

Things changed from around the early 1980s. You can label it the ‘Greed is Good’ era if you can remember the first Wall Street film with Michael Douglas. It is also often labelled as the era in which so-called agency theory came to prominence, in which corporate governance was used to change the policies under which a manager (agent) operates, and thereby emphasise the interests of the owner (principal). This led to a rapid increase in senior executive pay as the limits of the previous social norm were replaced by an approach which used remuneration to incentivise performance.

He says Friedman’s quote was an intellectual shift but people have just picked parts of the quote:

One of the intellectual origins of this shift away from the traditional post-Depression approach came in September 1970, in an article written in the New York Times by Milton Friedman. It went under the title: ‘The Social Responsibility of Business is to Increase its Profits’. Here is a key quote:

‘In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom’.

Friedman started by setting out the essence of agency theory. Some people who know the piece tend to stop there. But let’s go on, because the interesting part for me is when he wrote that the responsibility to make as much money as possible should conform with the basic rules of society, as embodied in the law, and ‘in ethical custom’. Here to my mind we have the essence of the issue around trust and ethics.

Hmm..

I mean similarly few ideas are stretched and misrepresented: Adam Smith’s invisible hand, Keynes as a crusader for more government….

How and when will the next financial crisis happen? – 26 experts weigh in

November 1, 2018

Humbling to be in the list.


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