Understanding cost

aje on January 12, 2020

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:

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


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:

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.

Max U

aje on January 12, 2020

Case:
Group activity: Complete the Max U quiz.

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

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

Incentives matter

aje on January 6, 2020

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

Course map

aje on January 3, 2020

This is a list of ~80 minute sessions that I regularly teach across various general management programmes. The links provide access to lecture slides, cases, classroom activities, and additional resources that I make available to students once they’ve taken the class. If you are an instructor you can contact me directly for board plans and further advice. 

As a professional educator one of my main concerns with the prevalence of digital content is the impact it has on a student’s ability to gather, synthesize, and critically engage with content. I try to ensure that all of my live sessions are unique and generate content that requires attention and consideration. For this reason I strongly encourage students to take notes, and debrief with group members, instead of relying on the provision of solutions, punchlines, or board plans at some future date. Part of my responsibility as an instructor is to ensure that you do not finish the course missing any important information. But your responsibility as a student is to be in charge of absorbing what happens in the classroom.

Each session contains learning objectives as well as an assessment of cutting edge theory (c); a focus on diversity (d); and spotlight on sustainability (s). Note that Marginal Revolution University have a series on women economists.

Microeconomics I

  1. Incentives matter (s)
  2. Value creation (c) (d) (s)
  3. Max U (d)
  4. Understanding cost (d)
  5. Cost curves (c)
  6. Economies of scale (s)
  7. Market equilibrium (d)
  8. Market applications
  9. Auctions (c) (d) (s)
  10. Markets in everything (d)
  11. Price discrimination (c) (d)

Microeconomics II

  1. Competition and the market process
  2. CC Simulation (s)
  3. Platforms (c) (s)
  4. Game theory
  5. Oligopoly
  6. Adverse selection (c) (d) (s)
  7. Signalling (d)
  8. Capital theory (s)
  9. Internal markets
  10. Prediction markets
  11. Corporate entrepreneurship (d)
  12. Market-Based Management (R)

Macroeconomics I

  1. Evolution of money (c)
  2. Central banks and digital transformation (c)
  3. Public finance  (d)
  4. Monetary policy (c) (d) (s)
  5. Fiscal policy (d)
  6. Macro Policy Workshop (d)
  7. International economics/ Josko Joras
  8. Wiggle room (c)
  9. Dynamic AD-AS

 

Macroeconomics II

  1. International Trade (d)
  2. Banking crises (c)
  3. Currency crises
  4. Debt crises (d)
  5. Foreign Investment (d)
  6. Behavioural economics
  7. Prosperity (d)
  8. Growth (c) (d) (s)
  9. Sustainability (s)
  10. Inequality (c) (d)
  11. Stagnation
  12. Progress (c) (d)
  13. Competitiveness

An Introduction to Game Theory

aje on February 23, 2015

Game Theory provides a clear and engaging way to study strategic interaction and constitutes a critical foundation for corporate leaders. This module covers the basic terminology and foundational concepts that form the scientific basis for game theory, and then applies them to a range of social and management issues. 

This page provides a basic understanding of what Game Theory (“the science of strategy”) is, and how it can be utilised in management situations. In addition to providing my own course material, I have also attempted to tie into some of the amazing resources that already exist.

Lecture handout: Game Theory*

Activity: Game Theory Worksheet and Obedient Prisoners
  • Other good activities to accompany the Game Theory lecture include: Oligopoly Game 42 and “Cheating for a £20”.
  • I like to follow the lecture on Game Theory with an interactive session on Oligopoly.
  • Here is my attempt to introduce some Game Theory into the classroom.
  • Further reading: “Platform Business for Everything”, in Fisman, R., and Sullivan, T., The Inner Lives of Markets, John Murray Learning, p124-126
  • Further reading: “Game Theory: A Beautiful Mind” Chapter 2 of Rubenstein, A.,  Economic Fables
  • More resources: Axelrod’s Tournament, and RadioLab’s episode on Tit for Tat with forgiveness

Here is a video on finding a Nash equilibrium:

Additional readings

Here are some recommendations, depending on your level of interest and time constraints:

But the Game Theorist’s “bible” is “Thinking Strategically” by Dixit, A., and Nalebuff, B (Norton, 1993). This is the one book you need to read, re-read, and master.

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Finally, it is great fun to apply Game Theory to popular culture. See Michael Statsny’s discussion of game theory in movies, and a collection of popular cultural references. Here are some of my favourite discussion questions:

I also like these two classic clips from Goldenballs:

Learning Objectives:

  • Become familiar with the key terms used by game theorists and recognise the seminal examples
  • Think in game theoretic terms
  • Apply game theory insights to real world management issues