Author: aje

Case: La Marmotte, January 2012 Instructions: Complete Exhibit A and provide suggestions for the two key decisions Use this form as a structured assignment Spreadsheet.xlsx Note: parts of this case rely on finding derivatives. Here is a background note: Differentiation, January 2013

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Lecture handout: Cost curves*

Textbook Reading: Chapter 2 (Intro, Section 2.1 and 2.2, pp. 39-54)

La Marmotte was published by Sage in 2019. La Marmotte is a fictitious restaurant but based on a real business in Montalbert. You can see whether the skiing is good right now with this webcam.

Here is a video explaining the concept of the planning horizon:

A key part of this session is grasping the power of this tweet by Sam Altman:

My favourite example of the importance of having an intuitive understanding of the shape of average costs curves is this one:

• Mr Morita, October 2010

Learning Objectives: Sunk cost fallacy, short term shut down condition, profit maximisation, deriving a supply curve. Cutting edge theory: La Marmotte was published in 2019!

Lecture handout: Understanding cost*

Textbook Reading: Chapter 2 (Intro and Section 2.4, pp. 39-34 and 59-63)

The aim of this session is to understand the economic concept of opportunity cost.

Group activity: Malhotra, Deepak, 2005, “Hamilton Real Estate: BUYER”, Harvard Business School Case No. 9-905-052 (£) Malhotra, Deepak, 2005, “Hamilton Real Estate: SELLER”, Harvard Business School Case No. 9-905-053 (£)

In Patrick McKenzie’s infamous blog post on salary negotiation, he says: “Every handbook on negotiation and every blog post will tell you not to give a number first.  This advice is almost always right. ”

I recommend the following Lex Fridman interview with FBI hostage negotiator Chris Voss. Voss talks about the three “voices” of negotiation, which are:

• Assertive (loud and clear commands, direct and honest but recipients can feel attacked and not engage well)
• Accommodative (smiling, optimistic, hopeful – relationship building)
• Analyst (likes decision trees, systematic thinking, fact driven, and quite introspective. They recognise that accommodators often get better deals than assertives)

He also makes clear that lying is usually a bad idea, for the following reasons:

1. If the other side are a better liar than you they’ll notice straight away
2. It could be a trap to see if you’re willing to lie
3. It’s likely that the other side will find out it was a lie, and then they will treat you much worse

I believe that the case discussion demonstrates our inherent reluctance to lie. However:

2 of the bestselling Holocaust memoir authors of the golden age of misery memoirs were both fakes, and they actually met each other at a conference and claimed to remember each other from the time. neither had ever been to Nazi-occupied Europe

— Ed West (@edwest) September 11, 2020

Here is a more recent example of obtaining copyright for the use of a photograph:

William Greenbladt, a photojournalist, who took this photo of the McCloskey’s pointing guns at protestors sent them a $1500 bill because they lifted the photo and used it as a Christmas card. pic.twitter.com/EpdRSp19Hx

— Michael Cali (@cali_photo) November 5, 2020

In the debrief it’s important to realise when someone is being evasive. A good example of this is in the U.S. version of The Office, where Andy has to repeat the same question to Angela 3 times before he gets to the truth. (Season 5, Episode 12, from 9:22 – 10:13).

Recommended article:

• “The Origins of EVA”, by Jeffrey Steele, Chicago Booth Magazine, Summer 1998

Recommended cases:

• Desai, M.A., and Ferri, 2006, “Understanding Economic Value Added”, Harvard Business School Case No. 9-206-016
• Desai, M.A., Egawa, M., and Wang, Y., 2004, “Continuing the transformation of Asahi glass: Implementing EVA”, Harvard Business School Case No. 9-205-030

Here’s a good post on the downsides of using EBITDA as a measure of profitability:

https://twitter.com/SecretCFO/status/1565027764813561862

Activity: Applying EVA

Finally, The Economist reports that at the start of 2023 the e-commerce firm Shopify deleted 12,000 recurring meetings from their employees shared calendars, and asked managers to think seriously about whether they should be reinstated. The results:

“The company reports a rise in productivity as a result of the cull.”

Learning Objectives: Opportunity cost reasoning, basic principles of negotiation. Focus on diversity: The Hamilton Real Estate case is used as the first session on the Harvard MBA course on negotiation. It was written by Deepak Malhotra who has a recent book called ‘Negotiating the Impossible‘. You can follow him on Twitter @Prof_Malhotra.

Case: Maximilian Untergrundbahn, January 2018 Instructions: Complete the assignment questions

Group activity: Complete the Max U quiz.

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If you’re unsure about the basic rules of differentiation, see this handout:

• Differentiation, January 2013

If you’re unsure about using the Lagrangian method, here’s a video overview:

Another good example is here:

Learning Objectives: Analyse alternative indifference curves. Solve a Lagrangian maximisation Focus on diversity: Joan’s utility function is named after the famous economist Joan Robinson

Lecture handout: Incentives matter*

Case: Incentive Design, January 2023 // or complete this form

Activity: Soviet Planning, June 2022

Textbook Reading: Chapter 1 (Intro and Section 1.1; pp. 5-16)

Incentives are what economists define as the relationship between the benefits (the value we expect to gain) and the costs (the value we expect to give up) of a decision.

In this lecture we saw how conventional wisdom believes that seatbelts make you safer. But economic wisdom asks how they affect the benefits and costs of being in an accident. The lecture content on seatbelts comes from a great book called “Risk“, by UCL’s John Adams. Risk compensation is a well known concept in international relations – in September 2023 Jake Sullivan, national security advisor to Joe Biden, proposed adding all 5 members of the UN Security Council to the existing nuclear hotline system. As The Economist reported, however, the response was discouraging:

“If you wear a seatbelt in a car, you’re going to be incentivised to driver faster and more crazy, and then you’ll have a crash. So, in a way, better not to have the seat belt.”

An interesting argument against mandatory car seats for children is that by making it harder to fit three or more children into a car, it reduces fertility rates and this outweighs the safety benefits (i.e. we lose more children through a lower birth rate than are saved through better protection in an accident). According to this study, seat belts saved the lives of 57 children in 2017, but reduced the birth rate by 8,000! For more, see “On Car Seats as Contraception” (and if you do want 3 young children you can do what my sister did and buy a Ford S Max). 

Regarding bicycle helmets, here is the New York Times article claiming that “Bicycle Helmets Put You At Risk”. In terms of academic studies, there is some interesting evidence. Schmidt et al (2019) find that wearing helmets reduces the cognitive control of riders, and reduces risk sensitivity. Hoye et al (2020) found that the cyclists under their observation in Denmark who wore helmets did not demonstrate signs of riskier behaviour than those who didn’t, but acknowledged that this may be because their risk compensation is inhibited by the fact that people who wear helmets are more likely to be safety conscious than those who don’t. Indeed given that helmet wearers are systematically more likely to be risk averse, evidence of no difference in actual risk taking may be considered evidence for risk compensation! Finally, the issue is serious and I have no intention of contradicting the claim that if you happen to be in an accident, it is good to have been wearing a helmet. Indeed Olivier and Creighton (2017) looked at 40 studies to conclude that for people who are involved in an accident, helmet use reduced the likelihood of serious and fatal head injuries. I am grateful to an ESCP GMP student for sending me these studies.

Activity: Here is short quiz on the effect of taxation

Here is a video of a Cuban receiving his first paycheck after moving to America.

The lecture also looked at how coordination might take place without centralised control. This clip of San Francisco in 1906 demonstrates a spontaneous order:

And here’s a video on the concept of “shared space”, and what happens when traffic lights are removed:

This is a great photo essay about “continuous sidewalks” and here’s a video about their usage in the Netherlands:

Learning Objectives: Understand and apply the “Economic Way of Thinking”. Spotlight on sustainability: A discussion of cycling safety