voluntaryXchange

Just Wonderin’ … About Executive Pay

Do you know anyone who is worried about median pay of executives?

Kind of funny, that … the only thing anyone seems to be worried about is the executives at the top of the list.

That’s right … the outliers.

Do you know any other area of study where we focus on the outliers first?

I didn’t think so.

This makes me thing that all of our worry about high executive pay isn’t based on deep thinking, but is really just about envy.

N.B. This thought was motivated by a seminar given by Robert Pichler.

Technorati Tags: executive,pay,outliers,envy

Why the World Seems Like One Big Currency Crisis

It’s all about incentives:

In 1902, European nations responded to a Venezuelan government debt default with military force. German, Italian and British gunboats blockaded ports, seized customs houses and bombarded a Venezuelan fort. Venezuela caved, agreeing to restructure and pay its debts.

These days, when European leaders see Greece and Ireland on the brink of default, they don't send gunboats--they send money.

And that behavior encourages …

I hate to sound unenlightened, and it certainly isn’t nuanced in the 21st century way, but if defaulting countries could be invaded, and have their government officials put in jail where they can’t spend their Swiss banked money, a lot of this would go away.

Technorati Tags: currency,crisis,incentive

What Did You Learn In Business School?

Fascinating set of comments to a simple question posed at Econlog.

Here’s an excerpt from my favorite:

My situation was probably atypical. I was 5 years into a PHD program in political philosophy. Since I liked literature, I wrote long papers …

By the time I got to thesis time, I could not take it any more. …

Graduate school was everything I thought it would not be. …

So I walked across campus to the Business School, made an existential decision, and decided to change careers. I knew absolutely ZERO about business, including the cultural difference between academia and a business environment. …

… I learned there was a world where people actually made things … My entire personality changed from "know it all cynic" to trying to learn "how the world evolves" and advances. I learned technical things and big picture things. I woke up from a slumber.

…

Business School changed my life.

FWIW: I majored in economics in a militantly non-business arts and sciences college. I got my MA and Ph.D. there too. I didn’t set foot in a classroom in the School of Management there until my 2nd year of my Ph.D. program (and then it was an economics seminar). My first real experience with a B-school was my first job at The University of Alabama as a visiting assistant professor in the Culverhouse School. It was a shock, but I didn’t realize how big a shock until I left after 2 years and went back to an arts and letters college at The University of Utah. I agree with the commenter: business school changed my life.

Technorati Tags: what,learned,business,school

Systematic Unluckiness

I never cease to be amazed at people who tend to think that they’re repeatedly unlucky. It’s possible, but not likely.

We see this a lot from bureaucrats: repeated claims that their program didn’t work because of unlucky circumstances. When children make that excuse, we know better than to believe them.

But, in the private sector, we get the opposite problem. Since free exit is possible in many lines of business, it’s distinctly possible that those that are still in business were the luckier ones. Read between the lines and don’t believe all those claims of great decision-making when making your investments.

This post is sponsored. For a short term loan give www.jaguarpaydayloans.co.uk a try.

Technorati Tags: systematic,unluckiness,dilbert

Let Me Hear It for Me*

Google Scholar now lets you put together a personal page of your scholarly work. Here’s an image of my Google Scholar page:

Hat tip to Marginal Revolution.

* The title is drawn from Firesign Theatre’s Don’t Crush That Dwarf, Hand Me the Pliers. In middle-age, I’ve found that professional jealousy tends to keep many people from tooting the horn for others, so if I toot my own horn here at vX, at least I’ll try not to take it too seriously.

Technorati Tags: google,scholar,personal,page

Rate of Return On the Panama Canal

Rates of return on nebulous investments are at the heart of figuring out finance, new growth, and how we should reward entrepreneurs and patent-holders.

Tyler Cowen has read Noel Maurer and Carlos Yu’s The Big Ditch: How America Took, Built, Ran, and Ultimately Gave Away the Panama Canal.  He notes the authors estimate:

… Aa social rate of return of nine percent for the first two decades of the canal's existence and they do include the costs of defending it.

That return would be real, but it corresponds to nominal rates of 9% in the 20’s (much worse than stock) and 7% in the 30’s (much better than stocks).

I tend to doubt you could raise money these days for a physical project of this scale that would only return 9%.

Technorati Tags: rate,return,panama,canal,real,nominal

Obama, Our Narcissist CEO

Corporate CEO’s who are narcissistic have corporations whose performance is different.

And then there is Obama … who uses “I” more frequently than … well … just about any person you’ve ever heard. Despite early claims to the contrary, recent evidence is that he’s using the first person … every 14 seconds.

Should we be concerned about this? Here’s some of the stuff they use to measure narcissism:

… The prominence of the CEO's photograph in annual reports, the CEO's prominence in press releases, the CEO's use of first-person singular pronouns in interviews …

I think Obama would score highly on those measures. And what do they find?

… Show that narcissism in CEOs is positively related to strategic dynamism and grandiosity, as well as the number and size of acquisitions, and it engenders extreme and fluctuating organizational performance. The results suggest that narcissistic CEOs favor bold actions that attract attention, resulting in big wins or big losses, but that, in these industries, their firms' performance is generally no better or worse than firms with non-narcissistic CEOs. (from "It's All about Me: Narcissistic Chief Executive Officers and Their Effects on Company Strategy and Performance" by Chatterjee and Hambrick)

Our analyses show that …  narcissistic CEOs are much less responsive to recent objective performance than their less narcissistic peers; in contrast, highly narcissistic CEOs are especially bolstered by social praise. (from "Executive Personality, Capability Cues, and Risk Taking: How Narcissistic CEOs React to Their Successes and Stumbles" by Chatterjee and Hambrick)

Hmmm.

“Favor actions that attract attention” like last month’s immigration ruling?

“Recent objective performance” like, say, our stubbornly high unemployment rate?

“Especially bolstered by social praise” like, say, the popularity of Obamacare with his supporters is more important than it’s overall low level of support?

“Performance is generally no better or worse”, like, say, Obama seems a lot like Bush III (other than the parade of people constantly shouting something like no-it’s-not la-la-la-la-la-la).

Motivated by this post at Newmark’s Door.

Technorati Tags: obama,narcissist,ceo

Bait and Switch: They Are Representing Your Borrowing for College As Being Presented Their Financial Aid; It Isn’t

Calling Elizabeth Warren!

College financial aid offices are sending out letters offering financial aid amounts that include debt the student and their parents will go out and contract on their own.

Lots of examples in this piece from Bloomberg entitled “Colleges Confusing Students with Letters Offering Aid That's Debt”

Last I checked, aid was aid, and debt was debt. Not it seems that your debt is their aid. 

Via Infectious Greed.

college,aid,debt

Increasing Economic Entropy

Hernando de Soto has made a career out researching the unclear legal systems that stifle growth in developing countries.

He claims that the ongoing financial crisis has occurred for much the same reason: we’ve allowed people with in interest in muddying the waters to make our financial facts murkier:

During the second half of the 19th century … creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account … Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded.

It’s an interesting thesis, but I’m not sure how to measure it or test it. But, de Soto is no crank, so it is worth adding to your mental toolkit.

Cross-posted from SUU Macroblog, which is required reading for my macroeconomics classes.

Technorati Tags: hernando.de,soto,economic,facts,information,destruction,entropy

Sell Your Delta Stock

It’s been a long time since I’ve heard of a management decision this dumb; Delta Airlines is buying an oil refinery from ConocoPhillips.* Some disagree, but I think it’s going to be in ManEc texts in a few years. This has all the hallmarks of management that worries too much about accounting and not enough about economics and finance.

First, the facts:

Delta claims it is doing this to save on fuel costs. Fair enough.

ConocoPhillips is selling the refinery because they can’t make money off of it. Their alternative was to shut it down.

The government is involved too: Delta is getting the refinery in a 10% off sale sponsored by the Feds.

There were no other bidders besides Delta.

First, a little finance (because so few people get the message on this one).

Conglomeration, the purchase of another firm outside your core competency, is not in the interest of investors. Diversification is the usual justification given, but investors can diversify more cheaply on their own. Delta is covering its butt, wisely, by using a different excuse. But, you should always be suspicious of this sort of move.

Also, Delta is worried about volatility of fuel prices. Except that there’s this thing called hedging: locking in prices to reduce volatility. I’m quite sure Delta does this. Everyone does. But people outside of finance tend to think this is either voodoo, or too difficult to understand. Here’s the thing: it works. It isn’t perfect, and it isn’t always cheap, but it does work. Delta has been doing it, and Delta is going to continue to do it. So, this is definitely not about prices, since Delta is already doing what everyone else is doing. It’s about trying to do better than everyone else. Fair enough.

Now, for the economics. Is there a plan here that is likely to do better than everyone else? I don’t think so.

First off, ConocoPhillips was going to shut the refinery down. Shutdown is a decision based on straightforward cost economics: you shut down if your revenue doesn’t cover your average variable costs. So, Delta either must have a plan to raise revenue or reduce variable costs.

But, variable costs in refining come mostly from crude oil prices. Delta’s announcements contain no information about how they are going to control those any better than an oil company would.

So, they must be planning on increasing revenue. Except that their announced plan is to reduce revenue. Yes, that’s right. Delta is worried about the high mark-ups on jet fuel, and the fact that jet fuel profits are supporting the rest of this refineries business. So, their plan is to reduce jet fuel profits, so that their main business can make more money, while killing their refinery business. Yeah … right.

This now gets into an area of ManEc called transfer pricing. this is how management should price a potentially profitable output from one division when it gets sold to a second division. Managers like to screw up their transfer pricing when they’re either: 1) a product of one division of the firm that really doesn’t care if they suck the blood out of other divisions, or 2) don’t have much experience in business.

So, it’s time to take many seconds to search out the bio of the CEO of Delta. It’s Richard H. Anderson, and his expertise in flying planes and refining oil is that … he’s a lawyer. Ah yes, someone who thinks that command and control trumps economics. Sorry Dick, I think we talk about that in 3000 level classes.

Anyway, back to transfer pricing. This really isn’t that hard. If the refinery can sell the jet fuel at a mark-up, this is because there’s firms willing to pay the mark-up. Selling at a mark-up is what every manager dreams of doing. So, the appropriate managerial response is to … keep selling at a mark-up. Even if it is within your own firm.

That sounds a bit like cannibalism, and maybe it should. But, it’s still good business sense: to not sell at a mark-up is to just avoid making the choices that make you profitable.

So, there you have it. Delta, for better or worse, has a business model that doesn’t work well. And their strategy in this case is to buy something that isn’t profitable to begin with, and reduce its profits, to better support the main division of the firm, which also isn’t profitable.

And the government thinks this is a good enough idea to throw money at.

Yikes.

* I do not have an investment position in any of the companies involved. Of course, we all have an investment position in our government, but those people don’t get that at all.

Technorati Tags: delta,conocophillips,refinery,transfer,pricing,mark-up,managerial