Economic models, high-priced consultants and ethical analysis

A colleague sent me a ProPublica article that explains how some “professors make more than a thousand bucks an hour peddling mega-mergers.” That’s a lot of money, even by consulting standards. MBA business consultants can charge between $200 and $600 an hour. Top partners in consulting firms might charge between $800 and $1200. A Wall Street Journal article in 2011 reported that top lawyers charged as much as $1000 an hour. But some economists are pulling in $1300 an hour as consultants.

To be fair, in a free market buyers and sellers should be able to negotiate for exchange prices. If someone is demanding $1300 an hour for their services and another is willing to pay it, then there is nothing objectionably wrong about the arrangement.

In this case the economic consultants are hired by firms that want to merge with or acquire other companies. The consultants are tasked with building a strong case, based on solid and objective economic principles and evidence, that the merger is in the interest of the industry, business, consumers and everyone else. What makes the article interesting is not that there are high priced economic consultants. It is that these consultants often get the antitrust analysis wrong. They build the arguments on speculation. They ignore or trivialize inconsistent or contradictory evidence. They use “junk science,” in the words of a Justice Department official quoted in the article.

A cynic might say that companies are paying the economists whatever price they will accept to argue whatever the company wants them to say, regardless of economics. Apologies to my lawyer friends, but isn’t this what lawyers do? So economists are on the same level as lawyers now?

Economics is a science. And economic models, when used appropriately, can provide a degree of objective assessment. The subjectivity comes in determining which economic models to use and what evidence to incorporate into the analysis. The ethical problem arises when the prospect of financial gain (in this case, a $1300 an hour contract) influences which models and what evidence to utilize. As noted by the authors, “The government’s reliance on economic models rests on the notion that they’re more scientific than human judgment. Yet merger economics has little objectivity. Like many areas of social science, it is dependent on assumptions, some explicit and some unseen and unexamined. That leaves room for economists to follow their preconceptions, and their wallets.”

The implication is that government regulators might be convinced a proposal is best for stakeholders (notice I didn’t use the word stockholders) when it is really only in the interest of the company seeking the merger–and comes at the expense of other stakeholders. In the case of a proposed merger between cell phone companies AT&T and T-Mobile, the economic consultant wanted to make this argument: “That even though prices would have risen for customers, the companies would have achieved large cost savings. The gain for AT&T shareholders … would have justified the merger, even if cell phone customers lost out.”

Let’s hear it for the economists.

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New issue of Agriculture and Human Values in print

The next issue of Agriculture and Human Values, volume 33, number 4, has just been published. The table of contents as well as links to papers (for those with access rights) is available here. This issue contains twelve regular papers, two discussion papers, the presidential address given at the 2016 meetings of the Agriculture, Food and Human Values Society, a special symposium, and several book reviews.

The regular papers are summarized as follows: Specht et al identify factors relating to the acceptance by stakeholders of farms in and on urban buildings in Germany. Cederlöf revisits the agroecology versus industrial agriculture debate through a study of low-carbon urban farming in Cuba. Warner studies the ability and willingness of smallholder farmers to adapt to climate change and trade policy changes in Costa Rica. Wairimu et al use a case study from northern Uganda to examine the interplay between humanitarian services and development policies. Jaffee and Howard analyze similarities and differences among four US fair trade certification programs. Schupp uses national, regional and census tract data to evaluate the location of farmers markets in the US. McIntyre et al expand Poppendieck’s Sweet Charity critique of contemporary food banks through a careful review of the literature. Carson et al conduct a study of vendors and patrons of farmers’ markets in order to determine how information exchanges affect consumer purchasing behavior. Robinson et al examine the ability of mobile food markets to address food security needs in a case study from Syracuse, New York. Tobin et al critically evaluate the ability of pro-poor value chains to enhance the food security of participants in their study of farmers in Peru. Gillespie et al examine the reasons U.S. farmers choose to raise goats for meat production. Berry et al assess the agrarian attitudes of Australians through an innovative quantifiable index.

The discussion consists of two papers. Mueller, et al provide a critique of a previously published paper examining the empirical relationship between greenhouse gas emissions and organic farming. McGee, the author of the original paper on greenhouse gas emissions, writes a response to the critique. The 2016 AFHVS presidential address, “Decoding diversity in the food system: Wheat and bread in North America,” is by Phil Howard (from Michigan State University). Lincoln Addison (from Memorial University) and Matthew Schnurr (from Dalhousie University) edit a special symposium of papers on the topic of labor, gender and sources of agrarian change.

Prisoner’s Dilemma and presidential campaigns

I introduced my microeconomics class today to game theory. Doing so gave me an opportunity to explain why US presidential campaigns are filled with so much hateful and ugly rhetoric. Why can’t politicians be nicer, speak to the issues, and avoid the hurling of mud at their political opponents? Why do we see so many negative campaign adds? Game theory, particularly the Prisoner’s Dilemma, provides insight here. In a previous post I described briefly what the Prisoner’s Dilemma is.

pd-election

Consider this figure, which depicts the campaign strategies of Donald Trump (“Trump”) and Hillary Clinton (“Hillary”). Trump and Hillary can be nice or mean. If both are nice and avoid negative campaigning, they each split the Electoral College (EC) votes, with one getting a few more than the other for a win. The same outcome occurs if both play mean and nasty and spew hateful rhetoric at the other, but now the tone of the campaign is harsh and leaves a bitter taste in everyone’s mouth. With 270 EC votes needed to win, as of this writing Trump was declared the winner with 279 EC votes. Thus they split the EC with Trump getting a few more but doing so with a very negative campaign–an inferior outcome for everyone.

If Trump is nice and takes the high road but Hillary is mean, she will get most of the EC votes. Similarly, if Hillary takes the high road while Trump is mean, he will win most of the EC. In other words, negative campaigning works, which is why both have an incentive to campaign negatively. That is, both Trump and Hillary have a dominant strategy to sling mud. Regardless of whether Hillary is nice or mean, Trump is better off being mean and campaigning negatively–when Hillary is nice, for Trump getting most of the EC by being mean is better than getting about half by being nice, and when Hillary is mean, getting about half of the EC by being mean is better than getting only a few EC votes by being nice. Similarly, regardless of whether Trump is nice or mean, Hillary is better off being mean and campaigning negatively. This produces a classic Prisoner’s Dilemma outcome.

Most people will prefer that the candidates remain nice and civil during the campaign. For example, the Pew Research Center said this (here) about this year’s presidential campaign: “The presidential campaign is widely viewed as excessively negative and not focused on important issues. Just 27% of Americans say the campaign is “focused on important policy debates,” which is seven points lower than in December, before the primaries began.” Interestingly, a 2000 Gallup survey found that “negative campaigning [is] disliked by most Americans” and that most people felt that the presidential contest between Al Gore and George W. Bush “may be one of the most negative presidential elections in recent history.” Maybe every presidential contest is the worst one in history.

But since the game candidates play is a Prisoner’s Dilemma, the expected and actual outcome is one in which both are mean and nasty.

How do we resolve the Prisoner’s Dilemma in this case? Standard solutions that scholars have examined, such as repetition and institutional rules promoting cooperation and punishing defection, can’t apply or won’t work in political campaigns. The only seemingly viable option is for players of the Prisoner’s Dilemma to have high moral values so that they avoid the incentives to be mean to each other. If both players of this game are virtuous and possess high integrity, and each knows the other player is that way, then maybe we can see political campaigns and elections that are civil and informative.

It’s best to be far on the right side of the line, not close to it

I am reading Maureen O’Hara‘s book, Something for Nothing: Arbitrage and ethics on Wall Street. Professor O’Hara is a financial economist at Cornell University. In her book she explains how modern finance works and what led to many of the contemporary ethical scandals of Wall Street. I’ll probably have more to say about the book after I finish it, but I enjoyed this tidbit:

Some people want to stay as close to the legal line as possible, while remaining on the “right” side of that line. However, Professor O’Hara says, “laws reflect moral standards, and over time the laws change to reflect what is acceptable to society. … But that also highlights why a strategy of being exactly on the line of legality is a poor business practice; when the lines shift, you go from being a weasel to being a felon, even when you have done nothing differently.”

Adopting an ethical standard is a higher one than merely following the letter of the law. So being on the right side of the ethical line, even close to it, can keep you from falling into the “weasel” category. But adopting a strategy of staying close to the ethical line can cause problems. There are differing ethical perspectives, and these don’t always agree or even provide clear-cut answers. Therefore, if you really want to follow a strategy of ethical conduct, it is best to stay as far away from the ethical line as possible–if there really is such a thing as an ethical line anyway.

Commitment by default

The University of Missouri is set to announce soon that an administrator from the University of Connecticut will be named president of the University of Missouri system. The University of Missouri sought to hire a new system president with Tim Wolfe resigned as system president in late 2015. His resignation followed protests by students, faculty and alumni over his handling—or lack of handling—of events that underscore a problem of racial tensions on campus. As a faculty member at the University of Missouri, I hope the hiring of a new system president will commence a healing that is sorely needed within our community. I also hope that if he is indeed capable, the new system president will stick around for a while.

Whenever a president or leader of an organization is forced to resign, I often wonder why it came to that. Was the leader really that bad or incompetent? Why couldn’t the leader and other affected parties work things out? More generally, why is it, following a crisis within an organization, that there is an immediate call for resignation, effort to impeach, or organized effort to see that “heads roll” (figuratively speaking)? Why isn’t there first a concerted effort to work through difficulties and differences? It is as if the default reaction is “get rid of the leader” rather than “let’s see if we can work this out.”

I think there is a lesson here if we think about something analogous in marriage. When things go wrong in a marriage, the default reaction seems to be for the couple to split rather than to overcome and problem-solve. The principle of no fault divorce that is so common in society has now become divorce by default. In contrast, why isn’t commitment the default?

My wife and I have been married for more than 28 years. It has not always been easy. We have said things we should not have said and haven’t said things we should have said. We’ve taken each other for granted, been inconsiderate and otherwise acted like humans unfortunately often do. But one of the reasons our marriage has lasted so long is because we are committed to each other. For us, commitment is the default, not divorce. I know my wife will not bail on me when things get difficult, and she knows the same about me. When we married, we made a commitment to each other that we accepted as binding. My religion’s theology also tells me that our marriage will be binding forever–that is, in this life and in the next. Now that is a long-term commitment!

Because my wife and I are committed and because each of us knows the other is committed, we have learned to work things out and our marriage is better because of it. I can only imagine what my life would be like for me today if divorce were our default. I suspect I would be trying to figure out how to help my children manage a two household situation.

When commitment is the default, parties in a relationship—whether in marriage or within an organization—have a long-term perspective. They see the potential the partnership can become and thus are willing to work to make that vision happen. This requires a willingness to compromise as well as an ability to see things through another’s eyes. It requires mutual respect. It fosters not only an accurate recognition of our faults and the weaknesses of others but also a realization that people can and do change. Commitment by default does not mean that separation should never happen. Rather, it means giving the relationship and those within it a benefit of the doubt. Divorce or separation is a last resort and only when there is a strong and compelling reason that healing and improvement will not be possible or if a continuation of the relationship will be physically or emotionally harmful.

When divorce rather than commitment is the default, parties in a relationship tend to be short-sighted and selfish. They see things primarily through their own limited understanding and fail to appreciate the perspective, values and interests of others. They see the motes in the eyes of others without recognizing the beams in their own. They want others to change but they don’t want to change themselves. A call for separation does not produce solutions to difficult problems. It just forces them on to the next partners or leaders. Divorce by default does not mean that long-lasting relationships are not possible. Rather, it means parties will work things out only when they have good reason to, but determining what these reasons are is often difficult to assess, especially when emotions are strong and tempers flare.

I believe that commitment by default leads to stronger marriages and families than divorce by default. And strong families are essential for the well-being of society. I also believe that commitment by default will lead to stronger and more effective organizations. When leaders, followers and stakeholders are committed to each other, and when this knowledge is common and accepted by everyone within the organization, they will work to heal, solve and build. They will create solutions to problems rather than evade them.

We have problems at the University of Missouri. Thus, we need a leader who is committed to change and supportive of the university community. But we also need faculty, staff and students who are committed to their new president and slow to call for a resignation when times are difficult. Commitment by default is the best strategy for genuine improvement on our campus and in society at large.

Prisoner’s Dilemma in the classroom

The Prisoner’s Dilemma is a model that illustrates a conflict between the interests of individuals and the interests of those individuals as members of a collective or group. In most versions of the game, two or more persons can cooperate and receive a collective reward that is greater than the sum of individual rewards they could earn if they choose not to cooperate. The incentives of the game are such that the persons have an individual incentive not to cooperate, thus making them collectively worse off had they chosen to overlook their individual interests and instead think as a group. The game is famous in economics and other social sciences. Wikipedia has a lengthy discussion of the game, its refinements and implications here.

Even though the Prisoner’s Dilemma has been around for decades it is still a fun game to play with students. In my microeconomics class today I offered the following opportunity for the class to earn extra credit:

“You can earn extra credit by selecting the amount of extra credit points you want. However, if more than 4 of you select option B, then the entire class will receive 0 extra credit points.”

Option A was to earn 1 point extra credit.
Option B was to earn 4 points extra credit.

I use a web-based student response system so that students could register their choice on their cell phones and I would see the results immediately. Not surprisingly, of the 180 in class today, 10 chose option B, leading to no extra credit for the class. When I gave the class a chance to do it over again and even talk to each other, the number who chose option B increased to 17.

The incentives to choose option B are pretty strong here — getting 3 more extra credit points than one could get by cooperating with everyone else in the class and getting just 1 point. Even when I changed the payout structure so that option A gave 3 points and option B 4 points, there were 6 students who still chose option B, thus negating the extra credit opportunity for everyone.

What I find interesting here is not that there were some students who chose option B but that so many in the class chose option A. At least 90 percent of students were willing to forgo their individual interest of choosing option B in order to cooperate for the collective good.

In economics we teach that when people pursue their self-interest things will work out the best for everyone. But sometimes they don’t. Sometimes the pursuit of one’s interests can be damaging to others and the collective whole. Why does self-interest work in some cases but not in others? And when the incentives for collective action are not ideal, what can we do to encourage or promote more cooperative thinking and behavior?

Russell Crowe, in the movie A Beautiful Mind, played the mathematician John Nash who developed this idea. He explains the problem and solution nicely in this clip from the movie.

I asked my class these questions and got a lot of interesting responses. Because the student response system I use saves student responses, I can list some of them here:

“Anonymity is the problem”

“People only act in their self interest and don’t want to work as a whole for the better of everyone”

“so basically we need to be communists in order for this game to work”

“People are greedy”

“people think they deserve it more than others”

“Throw tomatos (sic) at the people who chose B”

“you do what you have to do”

“Take away the second option”

“build a wall make the people who picked B pay for it”

“this game don’t work cause we got more than 4 selfish people in class”

“Not as many laws and restrictions”

“Because people think that everyone else will pick A and that they will end up getting more when in reality they hurt everyone else”

“Need more communication and honesty”

“Sometimes selflessness is the answer”

“If people weren’t greedy then we would at least be able to get one point extra credit”

“All it takes is one bad egg to ruin it for everyone”

“punish those who answered B”

“Communicate with others to achieve extra credit”

“Put people who choose B in jail”

“freshmen think that 1 point if extra credit is actually going to influence their grade”

“do your work maybe you wouldn’t need to pick B”

Resolving the Prisoner’s Dilemma requires careful structuring of the way people interact and enforcement of the formal rules and informal norms we develop to promote cooperation. It also requires that people exercise self-restraint in the pursuit of their self-interest, since no rules or monitoring mechanisms are perfect. We wouldn’t (or shouldn’t) want to live in a society where such rules are perfectly enforceable. How to do this so as to protrct one’s freedom to choose makes for a fun discussion in class.

In the end I gave everyone in the class who chose option A in the last round of the game (in which 3 points were possible) the 3 points extra credit. I don’t know if the class learned much, but I hope they left feeling better about their teacher.

 

 

If you’re going to tell me “no”, then at least give me a reason

One of the responsibilities I have as editor of the academic journal Agriculture and Human Values is to invite scholars to evaluate papers submitted for publication. But soliciting reviewers is difficult. It takes time to identify potential reviewers and to extend the review invitation. In 2015, I made 900 invitations to scholars to review papers submitted to the journal. Two thirds of those who were invited agreed to review and most provided excellent reports, which helped me make the difficult decision of accepting or rejecting papers for publication. But one-third of invited reviewers declined to review. I use an online manuscript management system to send an email to reviewers asking them to accept or decline the review request. When an invited reviewer declines, the reviewer is asked to provide a reason. Almost half of those who declined gave no reason for their unwillingness or inability to review the paper.

This afternoon I sent a request to a scholar to review a paper for me. Within minutes the person decline but did not give me a reason. I get really annoyed when a scholar says “no” without giving me a reason. Give me a reason! I’ll take almost any excuse over nothing. For example, sometimes invited reviewers give trivial reasons, as in “I am too busy now.” I can accept that. That is better than offering no reason at all. Giving a reason shows respect. Not giving a reason is what masters do to servants, officers do to conscripted soldiers, and kings do to subjects.

In 1978, a Harvard University professor published the results of an interesting experiment in the Journal of Personality and Social Psychology. In the experiment, a person approached adults waiting in a line to make photocopies and asked, “Excuse me, I have 5 pages. May I use the Xerox machine?” Not surprisingly, the request to cut in front of others waiting to use the same machine was frequently declined – in this case, 40% of the time. When a meaningful reason was given for the request, as in “Excuse me, I have 5 pages. May I use the Xerox machine, because I’m in a rush?” the number of persons refusing the request to cut in line declined to only 6%; thus, most people let the person cut in line. Interestingly, when a trivial reason was given for the request, as in “Excuse me, I have 5 pages. May I use the Xerox machine, because I have to make copies?” the rate of refusal was almost identical to the case when a meaningful reason was given. This is interesting, because the reason given in the latter case was the same reason that others had for standing in the line. In other words, all that mattered for those waiting in line was that a reason be given for the request that created a burden for them – “even if the reason conveyed no information,” according to the study. Simply stated, people appreciate and will respond to a reason, even if it is a trivial one.

So, if you ask for my help, I’ll probably tell you “no”, but at least I’ll give you a reason.