Tuesday, September 30, 2014

Decision Driven Data?

Blum, Goldfarb and Lederman have a nice commentary on the use of data driven decision making. We may hope that the collection and analysis of more data leads to more evidence based decision making. However, in many organizations, decision making is advocacy based in which subordinates petition their manager for permission to go ahead with their pet project. In this case, the subordinates have an incentive to cherry-pick the evidence and managers learn not to trust the evidence. If this is not addressed, the promise of "data analytics" is lost.

Blum, Goldfarb and Lederman suggest that the organizational relationships must change in order to make use of all this new data. Advocacy of previously held positions should be minimized. One way is to push decision making down the chain. The role of the manager may be to determine what to test, with the subordinates have decision rights, and responsibility, over how to respond to the test results.

Monday, September 29, 2014

Strong dollar is unwinding the "carry trade"

Investors make money by borrowing in dollars at low interest rates, selling dollars and buying the foreign currency to invest in high interest foreign debt (mainly government debt). 

But what happens when these investors expect that the gain they make by taking advantage of the interest rate differential falls below the loss they expect when they have to sell the foreign currency to buy dollars to pay back the loans?  

They get out before before the bubble bursts:
Several analysts sense danger. “The carry trade strategies are finally cracking,” said Luis Costa, currency strategist at Citi bank. “The market has been so flooded with liquidity and interest rates have been so low for so long but this is turning now.” 

...The headwinds eviscerating the carry trade are reinforced by a robust outlook for the US dollar that derives from three enduring trends: the US economy is recovering strength, boosting the greenback’s attractiveness; the US Federal Reserve is poised to end its programme of quantitative easing in October, tightening dollar liquidity; finally, the European Central Bank has begun a dovish phase of monetary policy, enhancing the dollar’s outlook relative to the euro.

I put this in the "bubble" category because it is the expectations that drive the changes.  

Thursday, September 25, 2014

How best to sell drugs

It used to be easy to sell drugs:  employ the most attractive sales people you could find--drug companies favored former cheerleaders with no experience in medicine--and take doctors to sports events or cater lunches for their offices.  

But things are changing.
Today, 42% of doctors practice as salaried employees of hospital systems, up from 24% in 2004, according to Cegedim Relationship Management, a marketing consultant.  As a result, the pharmaceutical industry is shifting its sales efforts from doctors to the institutions they work for.
Hospitals get better prices than drug stores because they have the ability to steer patients to drugs on a formulary:
The superior bargaining clout of hospitals and HMOs relative to drugstores is attributable to their use of formularies, which enable them to solicit bids from competing manufacturers for an all-or-nothing contract.  Drugstores, in contrast, typically stock their shelves with all competing brands of a drug, and cannot credibly threaten to withdraw their business from a manufacturer that fails to offer a discount.

Bottom line:  the alternatives to agreement determine the terms of agreement.  In this case, the ability of hospitals and HMO's to "steer" patients to particular drugs means that the alternative to agreement is much worse for the drug manufacturer.  This makes the drug manufacturer more eager to reach agreement, which results in better prices. 

REPOST: Dating Game

Friday, November 15, 2013

Dating Game

QUESTION: A man and a woman are trying to decide where to go on a date.  The woman prefers ballet, but the man prefers going to a football game.  There is some gain to going together, but each would rather go to their preferred activity alone, than together to their less preferred activity.  Diagram this game, and show how best to play.

 ANSWER:

                                                 Man
                                              Football             Ballet
                              Football   (1,4)                  (0,0)
Woman        
                                  Ballet   (2,2)                  (4,1)


The man does better by going to the football game, regardless what the woman does, and the woman does better by going to the ballet, regardless what the man does.  These are called "dominant strategies."  The equilibrium of the game is for each to go to their preferred activity.

Notice, however, that the two players could make themselves better off by cooperating.  Self interest is taking them to a place (2,2) with a lower group payoff than the cells on the main diagonal. 

There are two ways to change the game to increase group payouts.

1. Alternate.  If the couples take turns, their group payout goes up.

2. Have the player that receives the higher payoff, compensate the other player for going to their less preferred activity.

In this case, the man could give 1.5 units to the woman if they go to the football game, which would change the payoff in the upper left to (2.5, 2.5).  This would change the equilibrium of the game.

Alternatively, the woman could give 1.5 units to the man if they go to the ballet.  This is the premise of an off-color South Park episode.

Saturday, September 20, 2014

REPOST: why are so many donated kidneys discarded?

Thursday, September 20, 2012


Why are so many donated kidneys discarded?

In the past, we have blogged about our inefficient kidney matching system:  almost 100,000 people are waiting for kidneys, only about 20,000 receive kidneys.

Now we learn that physicians throw away about 2000 usable kidneys.  One of the reasons is the government's performance evaluation metric:  If the number of failures exceeds expected levels by 50 percent, transplant programs are put on watch list, and then decertified if they dont improve.  This incentive encourages physicians to reject all but the best organs for transplant:
“When you’re looking at organs on the margins, if you’ve had a couple of bad outcomes recently you say, ‘Well, why should I do this?’ ” said Dr. Lloyd E. Ratner, direct of renal and pancreatic transplantation at NewYork-Presbyterian/Columbia hospital. “You can always find a reason to turn organs down. It’s this whole cascade that winds up with people being denied care or with reduced access to care.” 
After the University of Toledo was cited, a transplant surgeon cut back to about 60 transplants a year from 100, becoming far choosier about the organs and recipients he accepted. 
The one-year transplant survival rate rose to 96 percent from 88 percent, but Dr. Rees still bristles at the trade-off. “Which serves America better?” he asked. “A program doing 100 kidneys and 88 percent of them are working, or a program that does 60 kidneys and 59 of them are working? It’s rationing health care under the guise of quality, and it’s a tragedy that we are throwing away perfectly good organs.”
Someone, please, let these people use a market. 

Thursday, September 18, 2014

Why are wages decreasing and employment increasing in Great Britain?

The simplest explanation is tat supply is increasing:  as supply increases output increases real prices fall and output increases.

The Financial Times shows the data and puts forward several explanations:  (1) welfare reforms are pushing people off the dole and into the labor force; (2) older workers are choosing to retire at a later age.  Both explanations would imply an increase in supply.

Tuesday, September 16, 2014

Should you travel to India for your Hepatitis C cure?

Gilead, the company who invented Solvadi, a pill that cures hepatitis C, has just announced its global price discrimination scheme.

In the US, a twelve week regimen of the $1000 pills costs $84,000, while in India a the same treatment costs only $1800.

The price difference could pay for a pretty nice 3 month vacation to India.

What is the number one business book on iTunes today?

Vanderbilt and Owen's own Brendan Moynihan's "What I learned losing a million dollars."

Listen to his podcast on the Tim Ferris show.
“One of the rare noncharlatanic books in finance.”
– Nassim Nicholas Taleb, author of The Black Swan and Antifragile
“There is more to be learned from Jim Paul’s true story of failure than from a stack of books promising to reveal the secret formula for success…this compact volume is filled with a wealth of trading wisdom and insights.”
– Jack Schwager, author of Hedge Fund Market Wizards
The newest book in The Tim Ferriss Book Club (all five books here) is a fast read entitled What I Learned Losing a Million Dollars. It packs a wallop.

Is RG III a sunk cost?

No, but the draft picks the Redskins paid for him are.  The  NY Times has more:

The moment the owner Daniel Snyder signed off on trading those draft picks to the St. Louis Rams to get Griffin, those picks were gone forever. Poof! Never coming back. 
From that point, the strictly logical approach would have been for coaches and management to treat Griffin like any other rookie who had great potential but a lot of work to do to live up to it. That doesn’t mean that they should have plopped him on the bench every time he made an errant throw. Of course he needed (and, apparently, still needs) to learn the pro-level game, and it’s worth sacrificing wins today if you are getting a more skilled player for the longer run. No one argues that the 1998 Indianapolis Colts should have parked Peyton Manning on the bench amid his 3-13 rookie season. 
But there are plenty of indications that rather than treat Griffin like another promising but unfinished player, both fans and, at times, the team’s coaches seem to view him through the prism of what was paid to get him.

Strategy is simple...become a monopolist

WSJ has an essay from the head of PayPal who reminds us that capturing value is more important than creating value:

...U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google,GOOGL -0.56% which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry's profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined.

Airline competition is so intense that firms capture only 1% of the value that they create.  Google has far less competition and is able to capture 20% of the value that they create.  20% of their smaller pie is worth way more than 1% of the airlines' larger pie.

MAXIM:  Creating value is only the first step.  You also have to figure out how to capture it.