Bad Decision Epidemic

There seems to be an epidemic of bad decisions recently.  No we are not talking about Jussie Smollett.  Wow, Jussie’s problems have really gotten worse since we started this post.  Individuals, not just Jussie but all of us, make lots of bad decisions.  Most of the time, like when we make a bad decision at the bridge table, the impact is limited unless partner goes postal.

Sidebar: Sometimes you escape the ramifications of bad decisions.  Thursday we made what we felt was an epic defense error causing our score to go from plus 50 to minus 140.  But under ordinal scoring it made no difference as there were no scores between those two outcomes so we got two out of three despite our error.  End Sidebar.

Epically bad business decisions are usually zero-sum games.  When Montgomery Ward (see Decline) anticipated the recession that never came after World War II, it was bad for them but good for Sears and JC Penny. Most really bad decisions come from government because the can enforce them because they have the means.

We are not saying we have collected all of the really bad decisions but we would look at The Donald’s state of emergency, NYC and Amazon, NY state and energy, and Marco Rubio and innovation.

The Donald paid homage to his immediate predecessor by declaring a state of emergency to build some fence on the southern boarder.  It is a terrible idea because it harks back to the previous administration and its tendency to make decisions with a phone and a pen rather than legislating.  As the NRO editors tell us it is bad but not all bad because:

He will also access other pots of money that don’t require a declaration of emergency, and here he may be on much firmer ground legally.

We hope he loses every legal challenge related to the state of emergency.  Otherwise, every president will use it.  Kamala will cause even more mischief.

Amazon has abandoned its plans to have a headquarters in NYC.  The Washington Examiner headline says this is a win for [the media darling (MD)] and a black eye for the NYC mayor and NY governor.  The Examiner has second thoughts about MD:

Then again, maybe “triumph” should come with an asterisk next to it. Gianaris and [MD] may have gotten their way, besting far more powerful political figures, but at the cost of the estimated 25,000 jobs that the Amazon deal was projected to bring to their part of the city.

Since NY and NYC tax folks and things in every way they can think of they are in need of folks with jobs and assets.  It was a bad idea to give lots of incentives to Amazon and an even worse idea to chase them away.  Holman at the WSJ thinks it will cause difficulties for the NY left.  It couldn’t happen to a nicer group. [Alert: satire]

NY has some strange energy policies.  The costs of these policies are coming home to roost.  Robert Bryce has a story at the WSJ that you should read several time to soak it all up.  NY state has banned fracking.  To help with the comparison, Pennsylvania has not.  NY has also blocked or delayed gas pipelines.  Here is Robert’s summary:

In 2008 New York drillers produced about 150 million cubic feet of natural gas a day—not enough to meet all the state’s needs, but still a substantial amount. That same year legislators in Albany passed a moratorium on hydraulic fracturing, the process used to wring oil and gas out of underground rock formations. In 2015 the Cuomo administration made the moratorium permanent. By 2018 New York’s gas production had declined so much that the Energy Information Administration quit publishing numbers on it.

In some areas of NY, Consolidated Edison is no longer accepting new customers.   How are things in PA?  Robert tells us:

At the end of 2018, Pennsylvania drillers were producing about 18 billion cubic feet of gas a day. That’s more gas than Canada now produces. [That is more than 100 times what NY was producing ten years ago]

By keeping its natural gas in the ground, New York has lost out on jobs and tax revenue. By 2015, some 106,000 people were directly employed by Pennsylvania’s oil and gas industry, making it a bigger employer than the state’s famous steel sector. This year Pennsylvania’s state government is expected to take in some $247 million in gas-related fees.

Beyond the fees there is lots of income and spending for PA to tax too.

At NRO Samuel Hammond tells us that Marco Rubio wants a national innovation strategy.  Marco is the chair of the Senate Small Business Committee.  Samuel summarizes a report from the committee that supports industrial policy:

“This report’s central conclusion is that the U.S. cannot escape or avoid decisions about industrial policy,” its authors write, after opening with an extended quotation from Alexander Hamilton’s “Report on Manufactures.”

The committee doesn’t get its conclusions exactly wrong but it is close:

But what makes the report interesting, particularly from a Republican-chaired committee, is its suggestion that America shouldn’t merely punish China for unfair trade practices, but also should pursue a national innovation strategy of similar ambition.

The WTO should punish China.  The federal government should stay out of the market and the punishing countries business. Please say it isn’t so Marco (and Samuel).  This is the Green New Deal for the GOP.  It is a really foolish idea that might have some electoral resonance.

Our summary is that the bad decisions by NYC and NY are less of a problem because folks can freely leave NYC and NY.  Of course, these decisions are worse on the poor because it is more difficult for them to relocate.  The good news is that the comparison between NY and PA help us avoid the Green New Deal.

Fake states of emergency and industrial policy at the federal level are much more worrisome than the foibles of NY politics.  NY has instructed us on what not to do at the federal level.  When we do foolish things at the federal level folks and organizations have a much more difficult time leaving or adapting.




Good Advice Depends On Circumstances

John Taylor has a fun column about opportunity cost, curriculum, and Tiger Woods.  As it happens Tiger was one of John’s students during freshman year at Stanford.  John says about Tiger:

With Tiger Woods just winning the Tour Championship, I have a wonderful example today of opportunity costs. Tiger took my course in 1996. He was the best economics student: As I have often said, he learned opportunity costs so well that he left Stanford and joined the pro tour.

As John says, it is about the choices people make when faced with scarcity.  The stock answer to, “I am a good student.  Should I stay in school or follow my dream?” is stay in school.  But the back story matters.  If you have the proven skills of Tiger Woods

In 1995, he successfully defended his U.S. Amateur title at the Newport Country Club in Rhode Island[46] and was voted Pac-10 Player of the Year, NCAA First Team All-American, and Stanford’s Male Freshman of the Year (an award that encompasses all sports)

Then leaving school in 1996 looks to be the right choice before the fact and obvious after the fact.  Here are two of our experiences about advice and opportunity cost.  A student comes to our office and says she has a local offer that she likes because it requires less hours but she wants as much money as her classmates that will be working in bigger cities and working more hours.  Our answer is that that is the trade-off she wants.  She should jump at it.

Another student comes to our office and asks for a couple of days off.  We ask why.  Our expectations were a wedding or a senior vacation.  Instead we hear that he has been invited to the NFL combine.  We said yes and he went to the Combine and played in the NFL for several years.

Trade-offs matter.  Tiger and the other folks are in the best position to make their own decisions.  Those of us that give advice for a living should always recognize that the stock answer isn’t always the best.  We need to find out about the individual when giving advice.  Exceptional golfing skills, a need to stay local, or ability to make the NFL all change the typical answer.  Then, sometimes, we wander beyond the economics to all that other stuff.


Evaluating Colleges

Yesterday we wrote about the joys of capitalism.  Today we try to address the challenges of evaluating colleges. It is absolutely true individuals in the corporate world and the college world behave inconsistently with the goals of their organization. The advantage of capitalism is that the need to show a profit reduces such behavior.

David Leonhardt at the NYT has declared there is a new dropout crisis.  The old dropout crisis was in high school and the new dropout crisis is in college:

It’s a good news/bad news story. About a decade ago, the number of college dropouts exceeded the number of K-12 dropouts, and the two have continued to move in opposite directions since then. And if you focus only on high-school dropouts — excluding people, many of whom are immigrants, who dropped out earlier and never reached high school — there are now about twice as many college dropouts as high-school dropouts.

We are not sure that it is bad news but it is news.  There are at least two reasons not to worry about it.  First, it might suggest rational behavior from one or both of the parties involved.  Second, there is the measurement and incentive problem.

Let’s start with rational behavior.  Students could be leaving college because of the bad behavior of colleges.  For example, progressive ascendancy in many classrooms and essentially all dorms might be driving students away.  It could come from good behavior on the part of colleges by enforcing standards.  We doubt David thinks that college is infinitely scalable but this quote suggests it:

The worst part of the college-dropout problem is the cost to students. The returns on a college degree are very large, in terms of money, health and happiness. And a growing share of college dropouts come from low- and middle-income families, which means that colleges’ low graduation rates are stifling upward mobility.

We are a big fan of college but it is not for everyone and especially at 18 years old.  Our first faculty position was at an open-enrollment school.  The faculty believed that open-enrollment means open exits too.  Some folks are ready later like the student that failed or dropped our introductory accounting course seven [that is not a typo] times before passing it and graduating as an accounting major.  We know there are all kinds of interesting stories but we think the most likely explanation for increased dropout rates is rational behavior.

Frederick M. Hess and Cody Christiensen at NRO are all over the incentive problem.  We would say the problem is that colleges are trying to serve multiple masters and so the incentives are hard to follow.  Fred and Cody start with the facts:

Policymakers have sought to answer the challenge [public subsidies wasted on college-goers who never graduate], with most states adopting performance-based funding policies. Currently, 32 states allocate a portion of their higher-education funding based on educational outcomes. Ohio, for instance, allocates more than half of its funding to colleges based on how many students earn degrees. Other common metrics including retention and job-placement rates.

The University of Wisconsin System has an accountability dashboard that reports a wide variety of data including retention and graduation rates by campus.  What UW schools have the highest retention and graduation rates?  Those with the highest admission standards.  We are not surprised when Fred and Cody report that:

Last month, a new meta-analysis conducted by scholars at the University of Oklahoma and the University of Wisconsin found that performance-based funding has not actually yielded gains in graduation rates or other metrics. The authors observe that researchers have not had success linking “performance-based funding policies to increased college completion rates,” note that analyses “consistently show primarily null findings,” and conclude that “performance-based funding has no effect on completion, on average.”

Fred and Cody go on to discuss the need to overhaul reporting systems.  That is exactly the problem.  Reporting systems at the university system level almost never change.  Creating performance based funding was the work of at least a decade.  Try to refine it regularly is an extraordinary challenge.  University systems in the USA are the envy of the world.  We think it is because of student choice but even we are not certain.  We know capitalism works because of consumer choice.  We are not confident that a top down solution is going to help public colleges.



Heretic Alert

Paul Embery is a self-described socialist writing at Unherd.  We always worry about self-descriptions like I’m a life-long XXX that can stand the current  XXX elected official.  Paul describes socialism as the traditional left so his idea of tradition left is much more left than our description.  Here is what he says about the family and the spineless politicians that won’t support families:

What is so difficult or revolutionary about making the simple argument that, as the evidence conclusively demonstrates, children are generally better-served by being brought up by both biological parents, and that it should be the job of government to use every available lever available to encourage this outcome?

This is not to decry lone parents, many of whom undoubtedly do a grand job. It is merely to recognise that we should encourage as best we can the model that is proven to work most effectively.

We agree entirely but he might ask James Danforth Quayle how standing up to such folks works.  We think that trying it now would create an even bigger firestorm.  We agree with Paul that politicians are often spineless but they would need titanium reenforced ones to follow his suggestion.

The good news is that Paul is a socialist that listens to data.  We hope that means he won’t be a socialist for long.

Student Decision Making

We previously discussed Barbara Oakley’s article in the WSJ about attracting students to STEM.  Her discussion ties into our expertise as we spent 40 years teaching and during that time advising was one of our specialities as a faculty member, internship advisor, and department chair.  There is another paragraph that deserves discussion.

Even when a professor isn’t working to recruit Sara to the social sciences or humanities, she might be recruiting herself. Grades mean something; if Sara’s working hard to get a C in calculus, but she earns an A in English with less effort, she’s going to experience a powerful pull toward the humanities.

There are three assertions here.  The first one is that grades are less inflated in math than English.  We agree.  Part of that is because so large a percentage of math student contact hours are requirements for other programs. It might not be true at every university but it has been true where we have been.  We often hear requiring a math course as a way to increase student quality.  It was a big discussion point in our college when we considered eliminating the calculus requirement.

The second point is that students suffer from what accountants and others call functional fixation.   In this case, students don’t know that an A in English is easy to obtain [it isn’t easy for us] and a C in calculus might be a better accomplishment.  We are not convinced.  Students are generally well informed about the relative difficulty of courses.

Sidebar: Finance for accounting majors was often an exception.  The core finance course is fairly difficult for the average student in the business school.  Students hear in the dorm that finance is a bear.  And it often is for the average student.  But accounting majors have different background and interest from the average student.  Thus, they usually do quite well in finance.  End Sidebar

The third implication (and it is tied to the second) is that students like easy courses and especially easy courses with easy grades.  We have heard this often in discussions about student evaluation of instruction or SEI.  We think that interactions overwhelm the main effects here.  Of course, there are all kinds of students.  Some are lazy, some are crazy, and other we can’t understand but we think we understand the tendancies.  Most students want the easy course that will fill the science requirement because they want to focus elsewhere.  Most students are willing to work hard in courses they see as useful to them.  Most major courses are seen as useful.  SEI scores are rarely highly correlated with grades or level of work.  Students don’t like courses they perceive as unfair or faculty members they see a playing favorites.

We are going to change Barbara’s example a little.  We have observed many students that have preferred a hard B in accounting to an easier A in other disciplines in the business school.  When we were chair the accounting faculty give the lowest grades in the college but the accounting students got the highest grades in the college.  We are not sure if it is still true but it provides evidence that students are not turned off by hard work.

Women, STEM, And Accounting

Barbara Oakley in the WSJ asks:

Why do relatively few women work in science, technology, engineering and mathematics?

She is responding to an article by Stuart Reges (here) that she summarizes as:

University of Washington lecturer Stuart Reges —in a provocative essay, “Why Women Don’t Code”—suggests that women’s verbal and analytical skills lead to career choices outside STEM. Mr. Reges’s critics say he is making women feel inferior by implying they aren’t interested in tech. I’m a female engineering professor with decades of experience as well as a background in the humanities and social sciences, so perhaps I can lend some perspective to the controversy.

She thinks there is a missing parameter, professor influence.  Barbara says:

Professors have profound influence over students’ career choices. I’m sometimes flabbergasted at the level of bias and antagonism toward STEM from professors outside scientific fields. I’ve heard it all: STEM is only for those who enjoy “rote” work. Engineering is not creative. There’s only one right answer. You’ll live your life in a cubicle. It’s dehumanizing. You’ll never talk to anyone. And, of course, it’s sexist. All this from professors whose only substantive experience with STEM is a forced march through a single statistics course in college, if that.

Barbara is absolutely right but also incomplete.  We were convinced in our first university-wide committee that faculty in the other colleges resented the business college.  If that wasn’t enough, later one dean suggested that if we came into the building that housed his college that a bullet-proof vest was in order.  We suspect that Barbara is just being kind.

Barbara is right that professors influence students against majors.  As department chair we have brought two departmental colleagues on the carpet for negative comments about majors other than accounting.   She forgets, however, that faculty influence students towards majors.  Students often change their majors in college and faculty have a big influence on those changes.

Sidebar: There is also cultural influences.  Everybody is cheering on women in STEM.  We don’t really need to list all those movies and books do we?  On the other hand, from Rick Moranis in Ghostbusters to Elementary (Our Time Is Up), accountants are always presented in a negative light.  End Sidebar.

Barbara has identified a real issue but not completed the picture.  Professors influence and often recruit students.  Some of them use negative messages while other use positive ones.  What she has missed is opportunity.  Opportunity is part of the explanation why women are now a majority of accountants in the United States, Canada, and Europe.  This is an enormous change over our 40 years teaching accounting that has not happened as completely in STEM.  Why did women surmount the barriers in accounting but not as much in STEM?  Part of the reason is because of university rules accounting faculty got more opportunity to spread the word while STEM got less.

Essentially all universities have requirements at the university level, college level, and department level.  We will call university level requirements general education (GE) and department level the major even though there are minors too.  Most GE programs include science and math but but those requirements are often so broad that students don’t get exposed to those fields or take courses that would not count towards those fields.  In our 40 years of advising students we doubt any of our advisees ever took physics.  Early in our career we advised taking chemistry because in our opinion it and accounting take the same skills.  Our success rate approximated zero and eventually we did not persist.  Students take calculus for social science (no trig), science for non-scientists, and other less technical courses to fill those requirements.  On the other hand, almost every student takes English composition, literature, and a diversity course.  STEM faculty don’t get the opportunities to recruit students that humanities faculty get.  They should accept part of the responsibility because of their course offerings in GE.

Accounting faculty get the opportunity to influence because of college requirement that all students in the business school take two accounting courses. In addition, there are major requirements that have a smaller impact.  For example, departments have chemistry and business or language and business.  These required accounting courses are generally taken in the freshmen and sophomore years so accounting professors get an early opportunity to influence students towards a major in accounting and the courses count towards their degree.  We know from our surveys that faculty are a big influence on students deciding to major in accounting.

We are not ready to conclude that the personal impact of accounting faculty is more important than the cultural sway of STEM yet.  What is clear is that professors have a big impact on majors and it is one of the reasons that women have prospered in accounting over the past half century.  We recommend free speech to Barbara.  Faculty need the opportunity to make their case with students.

Medical Pricing

Steve Cohen’s article on hip replacement prices in the WSJ struck a chord for several reasons.  We had a family member just get a new hip.  Transparent prices are critical to have effective markets.  Medical prices have always seemed very odd, especially for procedures that are pretty standard.

We often talk about expertise here and we plead guilty to lack of expertise on medical pricing.  Part of this post is to remind ourselves to find out more.

We want to discuss the oddity of medical prices.  In Steve’s article he says that he had both hips replaced and

[T]he hospital had charged $175,000 for my right hip and $180,000 for the left. The insurance company had paid discounted rates of $75,000 and $77,000.

The physicians and other professionals involved in these surgeries have amazing skills but the procedures are pretty standard with a variety of specialists making sure that the surgeon can be efficient.  We saw it in person for eye surgery and we were impressed by the capitalism at work in all the specialization.  Because of part of the specialization was to administer drugs we don’t remember all of the details but we were queued up like planes on a runway and rolled down to operating room for take-off.

The point is they need a full queue to maximize profits with all these specialists.  How does it benefit them to announce a price that is more than double the actual price?  We are sure that there is a reason for the difference but we don’t know what it is.  Our assumption is that essentially all of these procedures are covered, in large part, by insurance.  Perhaps it is a faulty assumption.  When we went in for our procedure we met with the financial person who looked at our insurance and said we don’t need to talk about prices other than this small blue bag you need to bring (we are not making this up).  It cost us a few bucks.  Perhaps the high list price is actually used but our priors are that there is a bureaucratic explanation.  We are open to suggestions and plan to look ourselves.