Obama and Chicago economics

November 10, 2008 § Leave a comment

The WSJ ran a short but interesting piece this weekend which focused on how Obama is perceived among Chicago School economists given his background with the University of Chicago. The piece focuses on the thoughts of Richard Thaler, one of the leaders in the school of behavioral economics which has largely examined the efficient markets theorized by the old Chicago School crowd and identified scenarios in which actors systemically fail to make efficient decisions. This line of study is an interesting glimpse into human behavior and is very important in the context of efficient market arguments which all assume decision makers behave in efficient ways (e.g. a person will take $2 in exchange for $1). « Read the rest of this entry »

School’s out…time to crank!

June 11, 2007 § Leave a comment

After four years and ~5o exams, this past weekend I received my degrees from the University of Chicago Law School and the University of Chicago Graduate School of Business. It feels great to finally have the diplomas in hand, and I’m extremely excited to now be able to focus 100% of my time in directions that I choose. I highly recommend both schools to anyone seeking a rigorous graduate school experience. The value that these institutions place on ideas, debate and intellectual curiosity is truly unmatched.

CEO Hiring, Firing and Compensation in a Post-SOX Private Equity Boom

May 8, 2007 § 1 Comment

I had the opportunity to moderate a panel discussion this afternoon, hosted by my school’s JD/MBA association, entitled “CEO Hiring, Firing and Compensation in a Post-SOX Private Equity Boom.” The panelists were Professor Steven Kaplan (GSB), who testified to Congress about CEO compensation and HR 1257 in March of this year, Professor Douglas Baird (Law), the global authority in the academic world on bankruptcy and reorgs who has written on the importance of CEO hiring and firing vs. compensation structure, and Professor Todd Henderson (Law), who is delivering the annual Chicago’s Best Ideas lecture tomorrow and will argue that CEOs are actually underpaid in today’s marketplace.

The discussion was extremely interesting and focused on why CEO has reached the levels it has today, whether it is deserved, and whether it is societally beneficial for it to continue to increase. In short, Kaplan thinks in large part that CEO pay is not overinflated and bases much of his argumenton the fact that the market for top managerial talent has gotten more expensive thanks to hedge, private equity, and VC fund payouts. Henderson’s beliefs that CEOs of public companies are underpaid are in part based on the fact that SOX has increased CEO liability and scrutiny, and that their payscale has not adjusted accordingly. Baird generally believes that too much time is spent on compensation package structure and not enough on picking the right person to do the job.

We were limited to an hour and did 15 minutes of Q&A so we were really only to brush the surface of the issues. I was hoping to be able to hear their thoughts on the “upward spiral” theories (aka: the Lake Wobegon effect) of CEO compensation which posit that since all major CEO hires involve compensation consultants, and every company hiring wants their CEOs to be compensated in the top 1/4 or 1/3 among their peers, the comp packages are blindly increasing as every new hire raises the bar…I guess we’ll have to get to that next time.

Human Computation, Game Design, and Behavioral Economics

April 24, 2007 § 1 Comment

The philosophies generally associated with the University of Chicago usually orbit around free markets, rational actors, and economic efficiencies. These were generally borne out of the Friedman & Stigler cohort and the Chicago School of Economics which reached its peak during the mid-80’s still is a dominant force in economics, politics, and law today.

An interesting spin-off of the classic Chicago school of thinking here has been the Behavioral Finance movement piloted by Richard Thaler in the GSB and by Cass Sunstein in the School of Law. The behavioralists generally think that free markets are all well and good, but that people simply don’t always act in perfectly rational ways. They try to and categorize ways in which people generally deviate from rational behavior so that modeling and predictive techniques can be formed around how people DO act, as opposed to how they SHOULD act. One of the classic models that has emerged from this school of thinking is the Prospect Theory, which models the fact that humans are generally more adverse to losses than they are to gains, i.e., a normal person would feel more pain from loosing $100 than joy they would feel from gaining $100, while a perfectly rational actor would give the same slope coefficient to losses as they would to gains.

Another interesting model that has come from this school of thought is the impact the framing of a question or situation has on the response it generates. For example, people are likely to not be neutral between a 25% chance to win $50 and a 50% chance to win $25, even though the expected payouts are the same ($12.50). Similarly, studies have shown that people tend to anchor expectations to numbers they have recently heard or seen. Smart attorneys attempt to use this heuristic in their closing arguments by referencing numbers near where they would like the jury award to fall, e.g. a attorney who wants a hundred million dollar reward in a pharmaceutical trial would be smart to talk about the hundreds of millions of people who could have been potentially hurt by a drug, thus anchoring the jurors’ minds around numbers of that size.

Anyways, what got me thinking about this whole subject was a reference to the Mechanical Turk on Guy Kawasaki’s blog. Now Guy was a little late to the Mechanical Turk party, as the comments to his post point out, but one thing I noticed in the comments were several references to the Mechanical Turk being a failure. I hadn’t given it much thought before I watched the video below. The classic Mechanical Turk task is paying users $0.005 to tag , or describe, a photo with text. Until a photo has been tagged, a computers currently have no way of telling if the picture is of a boy, a dog, or a airplane. There are some people that will tag photos for pennies, but it isn’t terribly rewarding and it’s not a great way to make any money. But, as you’ll hear in the video, if you frame the same task in the context of a game, you end up having to cut people’s playing time off after fifteen hours because they like it so much.

The video is long, but basically this guy Luis Von Ahn designed the ESP Game and Peekaboom which tagged more photos for free than the Mechanical Turk will ever even come close to seeing. Some recent posts on the Lightspeed Ventures blog have also piqued my interest about game design and its place in social networking and web applications in general. One of the posts is about Yelp harnessing game design to get users to do what they want them too (create listings, contribute reviews, etc.). I think LinkedIn has done a fabulous job of this as well. I still love making connections on LinkedIn but never once have I really gotten any real benefit from it…I just like watching my counter go up. Yahoo! Answers and Amazon’s Askeville are also great examples of game design getting people to do things. Every day on thee sites thousands of people answer questions posed by complete strangers to accrue millions of points that have no more value than a video game score. Nutty.

Edit: Thanks to Jeremy Liew at Lightspeed for the shout out about this post.

Sam Zell & the Tribune deal

April 3, 2007 § Leave a comment

Interesting post on Sam Zell‘s legal background and the recent Tribune deal announcement on the WSJ law blog. They quote some other WSJ article on Zell’s background that struck several chords with me personally and professionally:

When he was a student at the University of Michigan School of Law, Mr. Zell spent part of his time managing apartment buildings, so he had contacts in real estate. But he had every intention of carving out a career in law. After graduation, he joined [Yates Holleb and Michelson] in Chicago. The starting salary was $116 a week, but an ambitious young lawyer could supplement that by bringing new business to the firm.

“I spent my first week drafting a contract,” Mr. Zell recalls. “It was deadly.” That weekend, he got in touch with some of his real-estate contacts, and “the following Monday I brought in my first deal, an apartment project in Toledo, Ohio. The partners liked it so much they all invested.” Thanks to deals like that one, Mr. Zell earned $100,000 his first year out of law school — $93,000 in commissions and $7,000 in pay — more than any of the firm’s senior partners. Never again would he formally practice law.

Lichtman, Viacom & YouTube

March 27, 2007 § Leave a comment

Douglas Lichtman, IP legal guru and rising professorial star at the University of Chicago Law School, has joined the YouTube fray on the side of Viacom. His recent piece in the LA Times indicates that he is working for Viacom, although I am guessing he isn’t doing it pro bono. Lichtman is a high profile contract consultant for the Gerson Lehrman Group, and I’m sure he bills out at a pretty penny. He is also my patent law professor, and the first class meeting is tomorrow morning. Should be interesting…

Sunstein on Wikipedia

March 3, 2007 § Leave a comment

Last week, the Washington Post ran an interesting article by Cass Sunstein on Wikipedia. Sunstein is a tenured professor at my law school and is often referred to as the most cited living legal scholar, although I think Posner might have him beat. The article leads with a great stat:

In the past year, Wikipedia, the online encyclopedia that “anyone can edit,” has been cited four times as often as the Encyclopedia Britannica in judicial opinions, and the number is rapidly growing.

The article pulls much of its content from Sunstein’s most recent book Infotopia, which analyzes wikis, future markets, and crowd wisdom in a variety of arenas. I’m reading it and it’s great so far, although I think the article in The Post probably pulls the most salient points. I will put up a full review of the book when I have completed it. The most interesting thing I have gotten to so far is his statistical analysis of prediction markets and when they work and when they don’t. In short, they work nearly perfectly when the average respondent is more likely than not to be correct. As the number of respondents increases, the more accurate the market prediction will be, so long as each participant has on average more than a 50% chance of being correct. This is why prediction markets work for things like internal corporate polls about product releases but fail for stuff like Supreme Court nominations.

The beauty of the small size and intense focus of my law school is that Sunstein was one of my professors during my first quarter of my first year and I was lucky enough to have Epstein the following quarter as well. Both are brilliant and wonderfully quirky. Sunstein would always start each class with a 10 minute recap of what was discussed in the previous class and everyone would pound on their laptops to capture every word. Then he would launch into the new discussion for the day and the typing would quickly taper off, replaced by intense focus trying to follow him from point to point. He would cold call about five people every day and I bet 20% of the people called on in that class had any idea what was going on when they answered him. Definitely some of the hardest thinking I have ever done.

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