Musings on books, technology, entrepreneurship, nonprofits and umm.. everything else …

Archive for August, 2012

Want to lend other people’s money?

Among the several fascinating results presented at Startuponomics last year, and possibly reiterated this year is one by Prof. Mike Norton at Harvard on how to buy happiness. The study found that “…participants who were randomly assigned to spend money on others experienced greater happiness than those assigned to spend money on themselves.”

This Labor Day weekend, there is a unique opportunity for you to do just that. I know in the recent past Microfinance and micro-lending in India has been rocked by allegations against SKS in its role in suicides of borrowers. At the same time, access to capital has made the lives of millions of people across the world better as proven by Grameen Bank and other pioneers in this field. What is key is the rate at which loans are made to the end beneficiary and how involved the lenders and the intermediaries are in terms of repayments in an effective manner.

The latest entrant into this in the recent past is Milaap. Started by three enthusiastic individuals in the summer of 2010, it is rapidly growing to become a force to reckon with in the lending space in India. Milaap lends in India and has an arm in Singapore for fundraising. This unique fundraiser gives you the opportunity to lend $25 of funds that Milaap has raised, to an individual seeking loans within the Milaap database. You can find more information about this on the Facebook page for the campaign.

Still not convinced? Take a look at Milaap’s YouTube page as well, with videos about how the loans work and profiles of some lives that were transformed through the contributions of individuals such as you.

So what are you waiting for? Sign up, use a few minutes of your upcoming three-day weekend to check out Milaap’s website and help transform lives!

You can  visit the campaign page here.


Training with the best …

When I was training for two marathons in 2007 with Team Asha, I did some of my training runs towards the end with two of the faster runners in the program – mentors who had several years of running under their belt. This would have not been notable, but for the fact that I was a novice trying to keep pace with them as they ran at a fast pace, effortlessly. Needless to say, it was an eye opener in terms of realizing how hard a 3 hour marathon could be to train for, unless you run regularly, and also how impossibly small  the ranks of the sub 2 hr 10 min marathoners are.

Why did I recall this last weekend? Term 5 started last weekend and I’m signed up to do two Finance classes this term – Investment Management and Capital Markets. Lets start with the easier one. Capital Markets with David Musto seems to be an interesting look at how companies raise debt from the capital markets. In the two sessions that we had, we got a quick look at bonds and repos, money market funds, SIVs, commercial paper, haircuts (not the literal ones), bank runs and a host of other interesting topics. We even learnt how to give tips for strips (umm, okay it was more like giving TIPS for STRIPS, but that sounds less exciting doesn’t it?). As a complete outsider, other than the brief look into specific markets through books like Liar’s Poker,  I’ve been blissfully ignorant of the deeper workings of these markets, and whether I grasp this course in its entirety or not, I think I will emerge knowing more at the end than I do right now.

Investment Management with Geczy was even more interesting. I have not met too many people in my life whose words-per-minute count exceeds mine. What is even more amazing that it is so high and at the same time the signal-to-noise ratio is way better as well – which makes it incredibly hard to stay tuned-in and internalize the words as they whiz past you into ether for ever. What can one say about Geczy other than that he’s an experience to be had, much like Bodnar? I don’t know if I will ever use the concepts from this course in a day-job, yet this is the most I’ve been excited about a class in Wharton so far. It promises to be a lot of work, as he reminded us repeatedly in the syllabus as well as in class, so I think this cohort will win the “top masochists among the masochists” award hands down for having survived the toughest course in possibly the toughest exec MBA program out there.

As we make our way through the electives and get exposed to new topics, it is becoming amply clear how little I know about so many different things and the wealth of talent that exists out there that excels in those topics I’m blissfully unaware of. To use the kupa-manduka analogy, this feels like small windows opening up on the sides of the well, revealing the vast, unexplored lands leading up to the horizon in that direction, bustling with people and activity that was unobserved and unknown so far.

On the fun side, we had a meeting to go over all our plans for Brazil as the travel date approaches quickly. A big kudos to the team that has been working hard putting this together. Despite Stephen’s successful attempt at scaring us out of our wits in terms of what we should and shouldn’t do, I think its going to be fun! We also had quite a few East Coasters visit us this session as we continue our process of flying to the other coast to take classes that we like, a flexibility that this program allows. Many of us are flying out East later in the term as well to take a market research course. This cross pollination helps us discover  classmates on the other side with similar interests and career goals as we jog along this road up the hill …

What happens to the arts when the economy collapses?

Given the tumultuous decade since the new millenium, several federal and state programs have been mercilessly slashed to reduce deficits and keep the “core” programs of the government running. When public schools themselves have faced huge cuts in budget, it is not surprising that the arts and culture would face even harder times. Museums, galleries, libraries, concert halls – across the country all of them face budgetary shortfalls, unless already supported by generous endowments.

Which is why it came as a pleasant surprise that the Detroit Institute of Arts actually got voters in three Michigan counties to approve a millage tax specifically meant for the museum. This was not imposed top-down or mandated, but put on the ballot and approved after a majority of voters supported it. That makes it two counties to have done it this month. And there is one more planning to do it in November, which may not pass if the votes go the way the online poll goes.

This might still not meet the approval of folks who think that these should not be taxes but donations, or other forms of voluntary contribution towards the arts. Which is where an online poll across all counties might differ in outcome from a local ballot initiative where local voters get to decide. For example, the public libraries are an amazing resource for parents to find books, CDs and other media for their children. If they need support and had a ballot initiative, chances are that many parents would vote in favor. We are already witnessing a trend where in school districts with budgetary shortfalls, parents are fundraising to meet the difference to keep the schools well funded. While this highlights a broken tax system with funds going towards initiatives that may not be best investments for the country in the long run, these initiatives do give some pause to show how people are taking action to make a difference.

In this context, pay it forward mechanisms might also work. If each person was given free access to a museum and told that the person ahead of them had already paid for their ticket, it might actually make them donate more than they might have done if they were just asked to make a voluntary donation. People like Prof. Leif Nelson at Haas School of Business, have done some really interesting work that suggests that pay it forward or pay what you want schemes might work better than a fixed ticket price schemes under certain scenarios.

The arts and sciences have survived through centuries of varying patronage, so lets hope that despite these hiccups, they continue to receive our support, even as we support the livelihoods of those for whom survival might be a more immediate concern than the arts. There is a place for basic needs to be met for many, and at the same time, elevating the minds of future generations by exposing them to things that are beyond the mundane and the literal.

How much should a CEO earn?

This is a hot button topic for sure, in today’s floundering economic conditions. Opinions are all across the spectrum between regulation and “free market” economics. What are the nuances between these two extremes?

At the “free market” side of the argument, we’re told what we’ve heard for years – it is not wise to put restrictions on this. The market decides what they should make. Their roles are challenging. The Board of Directors has a compensation committee anyway to regulate this. Shareholders can vote and express their opinion if they are not happy. Others offer similar pay so a company has to do this to retain top talent at the top. The list goes on. What we have seen recently is that the distance between these statements, and reality, has been slowly increasing.

Let’s start with the Board and compensation committees. Scandals like that of Aubrey McClendon at Chesapeake Energy might seem very extreme, but a cursory search online for similar news articles will reveal several similar stories. The underlying issue is that when the Board is filled with friends of the CEO or friends of friends of the CEO, it is hard to do an arm’s length evaluation of pay for several of the reasons outlined in my earlier post on board of directors. At the same time, given the massive overlap between people serving on many similar corporate boards, “fair comparison” between companies is harder to do as well. Compensation consultants are hired at some firms, but even these are not arm’s length transactions in many cases.

Then there is the myth of shareholder freedom to express their opinions. Given how corporation-friendly Delaware laws are, resulting in over 60% of incorporations happening there, it is very hard for shareholders to get any rulings in favor, despite the reality. They can file derivative suits and enter into lengthy and expensive litigation, but their ask of replacing a CEO or questioning conflicts in the Board are incredibly hard to get granted in Delaware courts. For example, take the case of one unique exception, thanks to the perseverance of the founder of Friendly restaurant who refused to take no for an answer.  Not all stories have endings like this where clearly unfair behavior is accounted for and actions taken. Zweig and Gillespie’s book referenced in an earlier post talks at length about several examples.

One of the associated issues that has come up over the years is the pay ratio. Prof. James Cotton at Texas Southern had come up with this a few decades ago as a measure of “fairness” within a company. Currently section 953(b) of the Dodd-Frank Act also aims to introduce reporting requirements on this pay ratio for a company, defined as the ratio of the CEO pay to the median pay within the company for all employees excluding the CEO. SEC is currently facing bitter opposition to implement this, for several reasons.

If reading this far has made you worried about over-regulation, you are not alone. I’m not suggesting that a one-size-fits-all pay ratio metric is the answer. As critics of this piece of legislation state, this ratio will vary widely based on the type of industry. It also varies based on how you define the metric and different industries and their lobby firms might have vested interests in defining this differently. The bottom line though is that disclosing  this ratio would be a step in the right direction. I don’t think you can legislate away the problem, but disclosure requirement seems to be a fair ask. If a company can justify the premium that they have compared to the market, and their investors are happy, then more power to them. 

Another angle here is around the whole issue of human capital as an asset for a corporation and how you can attribute some value to them. This has been attempted by a few firms in the recent past, notably Infosys. Attempting to do this exercise within corporations gives them a perspective of seeing employees not just as cost centers, but as assets with replacement costs and opportunity costs. Of course one cannot measure employee happiness or satisfaction very easily and add that as a metric, but a lot of work has been done on this front as well – more about that in some future post.

In summary, blind legislation and requiring ceilings on a federally regulated pay ratio may not be the right answer. Empowering board of directors to be truly independent and evaluate compensation at arm’s length is definitely a start. Publishing these statistics is a good faith action towards transparency and will be perceived as such by shareholders. What do you think?

Dan Ariely, at Public Works, on how the public works

Startuponomics 2.0 started off with a bang at Public Works in San Francisco today. The fan following for the event definitely has increased since last year. We were IDed, there was wine and pretty cool music after the event, so it felt less like a talk and more like an evening spent clubbing and engaging in stimulating conversation.

Dan himself was always the entertainer – profound insights presented as pithy jokes and anecdotes. He went through a quick summary of his recent work that was published recently. I had blogged about this earlier. At a high level, he identified three issues that caused systemic dishonesty – conflicts of interest, fuzzy rules and our tendency to rationalize. He gave anecdotes on how each of these could be improved. There was also an interesting Q&A session where people asked him questions related to this topic and he responded with further quotes from studies that were done on those topics.

Couple of interesting (or disturbing) anecdotes that he mentioned was that on a head-to-head comparison on cheating on a test that they did in a pub in DC that congressional staffers frequented and one in NY that Wall Street bankers frequented,  they found that the bankers cheated twice as much as the politicians. Dan had the wit to explain this away to some extent by saying that these were junior politicians and so there was “room for growth” :).  He also told us that the amount of cheating was pretty uniform across countries based on their experiments in different countries. The example presented of suggesting to IRS that folks sign at the top and the end of their tax return forms was illuminating – the first to reinforce honesty and the second to verify accuracy. Apparently the IRS said that it would be too confusing to the consumer, which given their forms is highly ironic indeed :).

It was also interesting to see that there were at least half-a-dozen to a dozen alums from the 1.0 cohort at the venue. I met Miriam, Helen and Molly from that class and also saw Adam and Lauri but didn’t get to chat. Big shout out to the original cohort that was there this evening! Look forward to see some of you on Sunday as well. Kudos to Kristen and her team of volunteers for putting together this amazing start to Startuponomics 2.0!

Is poker a game of skill or chance?

Ask any of the ardent fans of poker and they will tell you how it is a game of skill, not just chance. There is luck involved in the hand that you get dealt, but what you do with it involves a good deal of skill and talent. Clueless folks like me might just see luck in there, but it takes a few turns at the game to understand the skills needed to play it well, I’m told.

So if you were to run a poker den as a business, could you get in trouble for illegally running a gambling racket?  This was the question posed to Federal Judge Jack Weinstein in the Eastern District Court of New York. The state brought in their expert witnesses to convict the accused claiming that this is gambling and there are strict laws around it. In a landmark verdict running into 120 pages, the judge ruled that poker was a game of skill not just of chance. You can read the full verdict here. “Game play in poker is influenced by both the cards dealt (determined by chance) and the decisions made by players (determined by skill). While players’ actions are influenced by chance events, their decisions are based on skill. Player’s decisions, in turn, affect game play, both in the hand being played and in subsequent hands.”

You can also read a good summary of the verdict here.  This will in all likelihood be reconsidered at a higher court, but for now poker fans can indeed rejoice. If upheld this could have serious ramifications in law in terms of online poker, hosting poker online across international borders and a host of other issues. I can already see the online gaming sites salivating over the possibilities.

Steven Levitt of Freakonomics fame has also done some work on this, and you can find that paper on the NBER site.If you cannot access the full paper there, you can also find it at Levitt’s website here. Notably, this was in response to the “Black Friday” indictments by the Justice Department in 2011 against a few online poker sites, accusing them of illegal gambling. Nate Silver of Five Thirty Eight fame has a detailed post about this on his New York Times blog. For those that have not reached plea bargains on this case, the recent ruling by judge Weinstein will provide new ammunition to continue their fight.


What is your board of directors thinking?

Of late we have seen several articles in the media bemoaning the toothlessness of corporate governance in the US, in the wake of the Wall Street excesses of recent past. A book that I found that analyzed the excesses of the past decade pretty well and offered a lot of good suggestions is “Money for Nothing” by John Gillespie and David Zweig. Written with flair, and an understanding of how deep-rooted the issues are, the book is a great read for anyone who wishes to understand the financial markets collapse from a corporate governance lens.

This was the topic of one of the papers I submitted for Prof. Werbach’s ethics class, focused on JP Morgan and their recent ethical transgressions. The rest of the post highlights one of the sections from that paper, specifically focused around behavioral economics issues that impact how a corporate board of directors get influenced by behavioral principles and how that impacts judgments made in the board room. This is also a shout out to Dan Ariely and Startuponomics. It has been a year since the first conference and we have the second one coming up this weekend. This is also a quick snapshot of several topics from behavioral economics as highlighted by Zweig and Gillespie, and Ariely.

Several studies such as those by Dan Ariely show that the more removed we are as humans from real dollars, the higher the proclivity is to cheat. This means that in the financial world with exotic derivatives and other financial instruments, the likelihood of cheating would be far more than say at the cashier’s desk at the bank. Part of good management and governance at a firm such as an investment bank would involve being cognizant of these quirks in human behavior and having processes that safeguard the firm and its shareholders from extreme risk-taking behavior from different business units.

Several suggestions abound in behavioral economics literature in reminding people about ethical behavior in the best possible ways with least intrusion. Some of the more successful ones include having honor code like agreements that employees are reminded of periodically or having disparate groups of people working together on a particular project. The compensation committee within the board would be well served to look into executive compensation and manager incentive structure through these lenses and take appropriate action.

From the work of Dr. Kahneman on prospect theory, we could infer how boards should watch out for loss aversion and optimism bias, which could lead them to blindly support CEO decisions to pour money into failing projects or be overly optimistic about an enormous price tag presented for an acquisition. The Monte Carlo fallacy makes them believe that prior experience might change the present outcome of results (like the third acquisition working out better despite two spectacular failures), or face fundamental attribution error problems where they might give undue credit to the management for a good year.

Even when being watchful for how behavioral psychology might influence them, board members might still fall prey to issues such as self-serving bias which makes them ascribe failures to the environment than to the choices that they or the management made, confirmation bias that makes them interpret facts to suit their pre-conceived notion of a situation and the endowment effect that makes them value decisions or investments that they made more than what it is actually worth. As Prof. Irving Janis showed in his groundbreaking work on groupthink and group polarization boards tend to gravitate towards consensus, and at the same time marginalize independent thinkers whose opinions might sway from the “norm”. Prof. James Westphal’s work on board behavior clearly illustrate this tendency towards homogeneity and consensus and silent assent as well.

Zweig and Gillespie outline a host of great suggestions that the government and regulatory agencies should look into to fix some of these problems, including having a pool of independent directors that are setup by the government and sit on different boards, and a budget for a director training program to train directors in the complexities of several aspects of their fiduciary duty, specifically around compensation, risk and audit.
For a conscientious board member, there is no easy solution to this other than self-awareness on the part of the board member to make himself cognizant of these behavioral influencers and be wary of undue influence by any of these behavioral psychology traps. If you are a “behavioral economics” aware CEO, you could use these to your advantage in the board room as well ;), so attend the conference this weekend and learn more!