How Robinhood’s trading app spurs investors’ herding instincts: Q&A with Prof. Odean

The Robinhood app displayed on a phone
Photo by: STRF/STAR MAX/IPx 2021

Last year, when Berkeley Haas finance professor Terrance Odean was researching why users of the popular trading app Robinhood tended to “herd” into a small number of stocks, he never imagined a situation like what unfolded last week with GameStop.

“It was like a supernova of herding events,” he said. 

Shares in the moribund video-game retailer soared more than 400% over three days when a mob of investors—many congregating on the Reddit chat room WallStreetBets—coordinated to buy the stock en masse. It fell 44% the next day as Robinhood and other brokerage firms temporarily curbed new purchases of GameStop. Although trading has been restored, the stock has been mostly down but remains volatile. Tens of billions of dollars of market value have been created and erased.

Odean had been examining how Robinhood’s easy-to-use technology drives investor behavior and share prices. The Menlo Park company, founded in 2013, has built an enormous following, especially among young investors. It was “the first brokerage to offer commission-free trading on a convenient, simple, and engaging mobile app,” Odean wrote in a working paper he co-authored with three other finance professors. 

Making trading fun

The Robinhood app makes investing fun and—critics say—addictive. New members get a free share of stock after they scratch off the image of a lottery ticket, and when they reach certain milestones, digital confetti rains down on their screen. Robinhood users can begin trading as soon as they open an account.

“Half of Robinhood users are first-time investors, who are unlikely to have developed their own clear criteria for buying a stock,” the paper says. “The app prominently displays lists of stocks in an environment relatively free of complex information. For example … Robinhood only provides five charting indicators, while TD Ameritrade provides 489.”

The app focuses attention on Robinhood’s 100 “Most Popular stocks,” and a narrower “Top Mover” list that shows which 20 stocks, throughout the day, have the biggest positive or negative percentage changes.

Using Robintrack, a database of the most popular stocks among Robinhood users from May 2018 until August 2020, the researchers compared trading by its users to other retail investors. They also looked at trading in “attention-grabbing” stocks on three days when Robinhood system outages prevented its users from trading. 

They concluded that the simplicity of Robinhood’s app, combined with its users’ inexperience, made them more likely to herd, or pile into a smaller set of stocks, than other retail investors. 

Short sellers took note

They also looked at what happened to a stock’s price when it was subject to a herding event or “extreme herding” event, the latter being days when the number of Robinhood users who own a stock grew by 1,000 users and 50% from the previous day. These stocks posted abnormally large gains on the day of herding—averaging 14% for a regular herding event and 42% for an extreme herding event. The next day, however, returns turned “significantly negative” and were still down—5% and 9%, respectively—after 20 days.

“While some Robinhood users undoubtedly made money, in our analysis, a greater number of them lost money,” Odean said.

The team also documented a “marked increase in short selling for stocks involved in Robinhood herding events,” a sign that some investors have been exploiting these “predictably negative returns” by placing bets that Robinhood favorites will fall. The paper’s co-authors are  Brad Barber of UC Davis, Chris Schwarz of UC Irvine and Xing Huang of Washington University in St. Louis.

We asked Odean about Robinhood, GameStop and lessons to be learned from recent events.

Q: Did you ever dream there would be a herding event like GameStop?

A: It would be lovely to say I saw it coming, but no. What we are seeing with Robinhood is herding similar to what’s been documented in other situations, but previously the magnitudes have been much lower. We saw herding  in the 1970s and 1980s, when people on Monday would buy stocks mentioned Friday evening on Louis Rukeyser’s Wall Street Week, a public-television show. Now what you have is a lot more investors having their attention funneled into what is often a small set of illiquid stocks and buying at the same time.

What’s surprising about GameStop was the extent to which people were writing (primarily on the Reddit chatroom WallStreetBets) about how we will all consciously do the same thing at the same time and thus possibly affect market prices. That aspect of the GameStop fiasco is not in our paper. 

Is what you just described illegal?

I’m not an attorney but my understanding is, if two hedge funds started sending emails to each other saying if we both buy these stocks in large numbers on Tuesday, that will drive the price through the roof—that would probably be illegal. 

I’m not sure what will happen with GameStop, but it’s a lot harder to make a case against millions of people spending small amounts of money than against a small number of sophisticated investors doing this with a lot of money.

I’m not sure what will happen with GameStop, but it’s a lot harder to make a case against millions of people spending small amounts of money than against a small number of sophisticated investors doing this with a lot of money.

Has Robinhood made investing too simple?

It has changed people’s behavior by making it simple. Robinhood’s mission statement is to democratize investing for all. Jack Bogle (founder of Vanguard Group) did that years ago. You can buy a Vanguard index fund, pay $4 a year for every $10,000 you have invested and have a well diversified, long-term investment in the market and the U.S. economy. That’s democratization. What Robinhood has done is make it easy to trade.

How does Robinhood make money?

Hand over fist. They sell their customer’s orders to market makers. If you want to sell, the market makers buy from you, and vice versa. When market makers take the other side of a trade, they face asymmetric information risk—the risk that they are trading with someone who knows more than they do. Market makers seem to think that when they trade with someone from Robinhood, they are not taking that risk. They think, if I always take the opposite side of the trade from the side Robinhood is on, I will make so much money I can pay Robinhood. 

This is called “payment for order flow,” and it’s not new. Other retail brokerage firms also do it. 

(In December 2020, the Securities and Exchange Commission charged Robinhood with failing to properly disclose its payments for order flow to customers and failing to seek the best terms for their trades. Robinhood paid $65 million to settle the changes without admitting or denying guilt.)

Should regulators outlaw this practice?

It’s complicated. Without payment for order flow, there won’t be commission-free trading. My concern is that investors are only aware of costs that are direct and explicit. Most investors are aware of commissions, but not payment for order flow. If investors mistakenly believe that zero commissions means free trading, they are likely to trade more actively and more speculatively. I believe that we should get rid of payment for order flow, but one has to be careful about the unintended consequences of well-intended regulations.

What is the most important lesson to take away from this GameStop event?

Retail investors whose trades are highly correlated—through forums such as WallStreetBets or other means—have more market power than many people on Wall Street expected.

Retail investors whose trades are highly correlated—through forums such as WallStreetBets or other means—have more market power than many people on Wall Street expected.

Why did Robinhood temporarily halt new purchases in Gamestock, AMC and other stocks subject to extreme volatility?

Depository Trust and Clearing Corporation (the clearing house for Robinhood’s trades) required Robinhood to put up more capital to ensure that Robinhood would make good on the trades it placed for its clients. Brokerages are required to use their own money as collateral while they wait for trades to clear. Robinhood’s clearing house increased its capital requirement because of the surge in orders in GameStop and some other stocks and because these stocks became hugely volatile. Robinhood reopened trading after it raised $3.4 billion in additional capital.

Traders allegedly targeted companies like GameStop because a large percentage of their shares had been sold short by hedge funds and others. This means the short sellers borrowed GameStop shares and sold them, hoping to buy them back later at a lower price and pocket the difference. When GameStop shares skyrocketed, hedge funds suffered massive losses when they had to buy the shares at higher prices, which put even more upward pressure on GameStop shares. Some traders are portraying short sellers as the “bad guys” and Robinhood traders as “good guys.” Are there really any good guys and bad guys here?

Financial economists believe that short selling plays a useful role in markets by enabling investors with negative information or opinions about a stock to influence prices and thus keep prices from being set only by investors with optimistic views. Short sellers do, however, sometimes behave badly by promoting negative rumors about companies after they’ve established their short positions. I have not read that this was a major problem with GameStop. I would say that people who intentionally manipulate stock prices qualify as bad guys. And Jack Bogle—who tried to make investing less expensive and safer—was a good guy.

 

 

 

Prof. Adair Morse joins Biden administration as a treasury department deputy

Adair Morse, an associate professor of finance at the Haas School of Business, has been named to the Biden Administration’s treasury department as deputy assistant secretary of capital access in the Office of Domestic Finance.

The U.S. Department of the Treasury, led by Prof. Emeritus Janet Yellen, announced the appointment today.

Adair Morse (Photo by Genevieve Shiffrar)

“I’m thrilled to have the opportunity to serve in the Biden Administration and to join the team at treasury, serving the people of this great country,” said Morse, the Soloman P. Lee Chair in Business Ethics, who is taking a leave from the Haas Finance Group to commit to her new role.

“We will miss Adair at Haas, where she has conducted groundbreaking finance research and launched the Sustainable and Impact Finance (SAIF) initiative with (former Haas Dean) Laura Tyson to train many new leaders in the field,” said Dean Ann Harrison. “She has already made an impact in helping small businesses in California through her work on the California Rebuilding Fund. I have no doubt she will have an even greater impact on a national scale.”

The Office of Domestic Finance develops policies and guidance in the areas of financial institutions, regulation, capital markets, and federal debt finance. Its community and economic development division coordinates small business finance and development, housing policy, capital access, and issues related to underserved communities.

Morse, who holds a PhD in finance from the University of Michigan’s Ross School and two master’s degrees from Purdue University, joined Haas in 2012 from the University of Chicago’s Booth School of Business. Her research interests include equity issues in financial services and algorithms, small business survival, sustainable investing, discrimination and corruption, venture capital, and pension management. The unifying theme in her work, she has said, is “leveling economic playing fields.”

“Adair’s groundbreaking research has looked at important issues, like small business survival in the city of Oakland, consumer lending discrimation in fintech, and the pervasiveness of corporate fraud,” said Prof. Catherine Wolfram, associate dean for Academic Affairs and chair of the faculty. “As a pioneering, creative thinker in so many areas, she will have plenty of opportunity to bring her financial and social impact leadership to the table.”

As a pioneering, creative thinker in so many areas, she will have plenty of opportunity to bring her financial and social impact leadership to the table. —Prof. Catherine Wolfram, chair of the faculty

Morse has spent much of the pandemic using her finance expertise to try to help small businesses. Last spring, Morse and Tyson began working on a strategy to use public capital to attract private lenders to provide low-interest credit to help vulnerable small businesses get through the crisis. They first helped develop a program with the City of Berkeley, and then worked with others—including Yellen, who was then on Gov. Newsom’s Task Force on Jobs and Competitiveness—to implement an innovative public-private loan structure at the state level. Their work helped launch the California Rebuilding Fund, run by the Governors’ Office of Business and Economic Development (GO-Biz) and aimed at some of the state’s smallest businesses in under-resourced communities.

At Berkeley Haas, Morse also ran the Haas Impact Fund and Sustainable Investment Fund curriculum, managing two endowment funds with Haas students. The Sustainable Investment Fund is the first and largest student-led Socially Responsible Investing (SRI) fund within a leading business school.Until recently, Morse served on the Governance and Allocations Committee of the California Rebuilding Fund, as well as on the expert panel for the Norwegian sovereign wealth fund, advising on issues of sustainability and innovation.

Prof. David Teece Inducted into Thinkers50 Hall of Fame

Portrait: David TeeceDavid Teece was inducted into the Thinkers50 Hall of Fame today, joining management greats Peter Drucker, Clay Christenson, Michael Porter, and his long-time collaborator Ikujiro Nonaka, PhD 82. 

London-based Thinkers50 recognizes distinguished thinkers who have made outstanding contributions to the knowledge of management. Teece will be recognized during a virtual induction event on September 18, 2020.

Teece, the Thomas W. Tusher Professor in Global Business and Faculty Director of the Tusher Center for The Management of Intellectual Capital, focuses on how firms innovate in the global marketplace and how they need to be managed in order to survive in rapidly changing business contexts.

Teece is considered an authority on the theory of firm and strategic management. He coined the term “dynamic capabilities” to describe a business enterprise’s ability to mold assets to respond to changing technologies and markets. His research also spans the economics of technological change, knowledge management, technology transfer, antitrust economics, and innovation.

During the event, Teece described the golden thread throughout his work as a form of entrepreneurial thinking, a mindset of the need to embrace opportunity while being able to manage in a world of deep uncertainty in which you can’t plan the future. “You have to adapt to it and shape it,” he said. 

“There is a big school about adaptation and a big school about entrepreneurship, but no one had brought really these two sets of ideas together, and that’s what led to my concept of dynamic capabilities,” he added. Going forward he seeks to bring this thinking to public policy and international development.

In addition to his scholarly work, Teece is the co-founder of the Berkeley Research Group, a global strategic advisory and expert consulting firm with 40 offices and over 1000 employees worldwide. 

View BRG’s news release.

Students return to reimagined courses and major technology upgrades

A virtual classroom at Berkeley Haas
Lecturer Robert Strand, executive director of the Center for Responsible Business, demonstrates one of the four new Berkeley Haas virtual classrooms.

Berkeley Haas faculty spent the summer with a ticking clock and a lofty challenge: to pull apart their courses and rebuild them to give students as rich an experience as possible, during a maddeningly uncertain time.

“It’s an interesting challenge—how to take what’s different about this environment and improve teaching,” said Finance Prof. Terry Odean. “One of the big challenges for the fall semester is helping students feel like they are part of the class, part of the school, and part of a group of students.” 

It’s an interesting challenge—how to take what’s different about this environment and improve teaching. —Prof. Terry Odean

When students begin class this month, they’ll benefit from the hundreds of hours Odean and the rest of the Haas faculty have spent on redesigning their classes with a single goal in mind: creating a top-notch academic experience focused on maximizing student engagement. 

Working to match, and potentially improve upon, some aspects of the engagement level of a live, physical classroom online is no easy feat. It has involved hours of brainstorming, planning, workshop training, and major investments in a host of new technologies to reinvent instruction. It’s been all hands on deck: Dean Ann Harrison said she’s proud of the work the faculty, graduate student instructors, and the Haas Digital and Exec Ed Digital teams have done over spring and summer. “After watching last spring when our faculty and staff moved within 36 hours to online teaching when the coronavirus broke out, I believe there’s little that we can’t do virtually going forward,” Harrison said. “Their hard work has opened up so many other opportunities for the future of teaching at Haas.”

A different experience

“We’re very excited to debut what we’ve learned and implemented,” added Prof. Catherine Wolfram, associate dean for academic affairs & chair of the faculty, who is overseeing the transition with Prof. Jennifer Chatman, associate dean for learning strategies, and Jay Stowsky, senior assistant dean for instruction. “I think this will be many cuts above what students saw in the spring, and they’ll be pleasantly surprised,” Wolfram said.

While Berkeley’s fall semester officially begins on Aug. 24, students in the evening and weekend MBA program started their first classes last week. Andrew Celin, MBA 22, said he enjoyed his first class taught by Assoc. Prof. Jose Guajardo from one of the classrooms at Chou Hall upgraded for virtual teaching.

“The difference in learning experience was immediately evident, and I think it put everyone into the mindset that we were truly in class and not on a webinar call,” he said. “The camera was following Prof. Guajardo around the room as he moved and used different whiteboards. Having the option to simultaneously view a slide and see the professor at the whiteboard added tremendously to understanding and keeping students engaged after a full day’s work.”

Here are details of some of the innovations:

  • Launching virtual classrooms: The school has improved existing classrooms and invested in four new state-of-the-art “virtual classrooms” in conjunction with UC Berkeley Executive Education. Two of the classrooms will be used for executive education programs, and two by the MBA programs for core classes. The setup includes multiple cameras installed at various angles, allowing students to choose their view of the instructor; a digital whiteboard which instructors can use in person and students can write on remotely; and a curved wall of high-resolution monitors and directional speakers where the instructor can see and hear up to 84 students at once. Mike Rielly, CEO of Berkeley Executive Ed, said these virtual classrooms were designed to simulate a live classroom environment as closely as possible. Senior Lecturer Homa Bahrami of the Management of Organizations Group said the setup works well for her because she can easily use a whiteboard and move around while she teaches. “It creates intimacy,” she said. “I can walk up to students and engage with them.” In addition to the four new virtual classrooms, faculty can also host Zoom classes from Chou Hall classrooms that have undergone technical upgrades for virtual teaching. Instructors have access to automated cameras, high-speed internet, and all the traditional aspects of a classroom, and they can see students on newly installed large monitors. 
  • Creating small student groups to engage with professors: To increase engagement, small groups of students will have the opportunity to meet weekly with a faculty member for a one-hour check-in. Half the ladder faculty have already signed on to participate in this new Faculty-Student Engagement Series (FSES), which invites students to discuss anything from current events to the faculty member’s research to how students are coping with shelter-in-place, Chatman said. “The goal, in lieu of the fact that there won’t be in-person interactions between students and faculty, is to really get to know that faculty member,” Chatman said. Bill Pearce, the Haas chief marketing officer and a professional faculty member in the Marketing Group, scheduled more than 100 individual Zoom meetings with students between mid-March and May. Going forward, he said the Faculty-Student Engagement Series will be a valuable additional way to replace the time before or after class students often spent with faculty before the pandemic.
  • Investing in high-quality asynchronous content: Faculty have invested many hours in improving the production quality of the lectures they are recording (lighting, sound, and graphics), Chatman said. In the “flipped classroom” approach that is considered a best practice for online instruction, students are typically asked to watch lectures in advance and to be prepared to discuss the content, take quizzes, or move into breakout groups during class time. Odean, a veteran of online content creation, built a home studio, with special lighting and cameras, where he filmed the 50 videos he uses with his course. “It’s a lot of work, a shocking amount of work,” said Odean.
  • Applying learnings from workshops to online teaching: Over the summer, more than 120 faculty members, GSIs and staff took part in four different workshops offered by the Haas Digital team—ranging from beginner to advanced levels. Haas Digital Executive Director Sara Sieteski said her group’s goal was to help the faculty improve student engagement, no matter what their level of online expertise. Key to that success, she said, was getting them to think about a live session as if it were a radio program. “Every minute is scripted out,” she said. “Dead air kills a class just like dead air kills radio.” To that end, faculty members will be relying more than ever on their graduate student assistants (GSIs), who are key to making classes flow smoothly—reading student questions from the chat, making sure students are called on, and helping with online quizzes and polls.  
  • Zooming, with all the bells and whistles:  In Haas Digital workshops and at home, faculty have been learning how to use Zoom features more effectively to break up classroom time. “The one issue that I am concerned with going into the classes is what we are calling ‘Zoom fatigue,’ said Shruti Sethi, EWMBA 23, who starts classes Aug. 8. To combat fatigue, faculty will be adding more games and simulations, and more class time devoted to discussions rather than lectures, Chatman said. Veselina Dinova, a professional faculty member who teaches finance, said she’s using the breakout rooms more to allow students to get to know each other and discuss specific topics in a small group before opening up discussion with the whole class after the breakout session. She also uses breakout rooms for breaks that allow students to catch up personally. “The feedback has been overwhelmingly positive,” she said.  In addition, a new instructional designer, expected to join Haas Digital this month, will work with faculty to add more sophisticated data visualizations to MBA courses. The designer will use Jupyter notebooks, a web-based interactive platform created at UC Berkeley. Prof. Don Moore said he’s already reached out to Sieteski, asking about how he can work with the designer on simulations for his courses.
Assoc. Prof Panos Patatoukas teaching his Financial Information Analysis MBA class with two graduate student instructors in March
Assoc. Prof. Panos Patatoukas teaches his Financial Information Analysis class with help from two graduate student instructors in a Chou Hall classroom last March, just after the campus shut down to contain the spread of the coronavirus. The classrooms in Chou Hall, which opened in 2017, have been upgraded to improve virtual teaching. (Photo: Jessica Christian / San Francisco Chronicle / Polaris)

While the Haas School has made significant investments in new technology and training, virtual teaching at Haas isn’t new. Prof. Cameron Anderson pioneered an online version of his popular course Power & Politics in 2012. Since then, he has worked continuously to improve the online version—the latest version, created with Haas Digital, is now the most in-demand elective in the EWMBA program—and has shared his best practices with other faculty members. 

Anderson uses online discussion forums, which make up almost a third of the course. “It forces students to think through these issues really deeply in a way that doesn’t happen as often in my in-person class,” he said. “Because of that deeper, critical thinking, I still think my online students learn a bit more than my in-person students.”

It forces students to think through these issues really deeply in a way that doesn’t happen as often in my in-person class. —Prof. Cameron Anderson

There are also big benefits for students who are more reticent in traditional settings, he says. “In a normal classroom, 20% to 30% of the students do almost all the talking,” he said. “In the online class, everyone is chiming in, and I try hard to respond to as many as I can.”  

Even so, online teaching can never fully replace the in-person experience, which many students—and faculty—crave, Anderson said. The goal is to return to a hybrid approach that blends online lectures with small-group, in-person discussions as soon as state and local authorities approve. 

In the meantime,  Haas is “maximizing and taking advantage of things that we can do as a small school,” Wolfram said.

 

Nine new professors join Berkeley Haas faculty

This fall, Berkeley Haas welcomes a diverse and international group of nine new professors, including a record five women. The new faculty members include one full professor, two associate professors, and six new assistant professors, who are from Italy, Argentina, France, China, Canada, and California.

In addition to the new professors, seven new lecturers have joined the professional faculty to teach classes in various programs.

Associate Professor Matilde Bombardini, Business & Public Policy

Assoc. Prof. Matilde Bombardini
Assoc. Prof. Matilde Bombardini

Though Matilde Bombardini grew up in Imola, a city in Northern Italy, UC Berkeley has long had a special place in her life and career. It’s where she came as an undergraduate student on an exchange program in 1998-99. 

“I took a graduate course in the Economics Department that opened the door for me to pursue a PhD at MIT (Massachusetts Institute of Technology). Professor David Romer was one of my letter writers for PhD admission,” she said. Bombardini earned her PhD from MIT in 2005. 

Before coming to Berkeley, she was an associate professor at the University of British Columbia’s Vancouver School of Economics.

Bombardini is conducting ongoing research on the role of corporate charity as a channel for influencing regulation, and as a tool for political influence in general. She is also researching the role of politicians’ information in congressional voting on China’s Normal Trade Relationship with the U.S. 

In her free time, Bombardini likes to ski, sail, hike, and enjoy the outdoors. “I am eager to explore the Tahoe area ski slopes, and the good weather in the Bay Area will make it easier to go back to sailing.” She is a beginner electric guitar player and likes all rock music. 

Professor Francesco Trebbi, Business & Public Policy

Berkeley Haas Prof. Francesco Trebbi
Prof. Francesco Trebbi

As a child in Italy, Francesco Trebbi played basketball on a kids’ team with Kobe Bryant, whose father was a star in the city’s basketball team at the time. An athletic career did not prove as promising as his ventures in economics have been, however. “Our team lost even with Kobe on our side, so you can just imagine how bad of a basketball player I must be!” said Trebbi.

Instead, Trebbi attended Italy’s prestigious Bocconi University, earning a degree in political economy, before going on to receive his MA and PhD in economics from Harvard University.

Before joining Berkeley, he was the Canada Research Chair and professor of economics at the University of British Columbia Vancouver School of Economics, and an assistant professor of economics at the University of Chicago Booth School of Business.  

Trebbi’s academic research focuses on political economy and applied economics. He has studied the design of political institutions, elections, political behavior, campaign finance, lobbying, and financial regulation. He has also worked on the political economy of development, ethnic politics, and conflict. His primary teaching interests are in political economy, applied economics, and applied econometrics. Currently, he is working on new empirical approaches to the study of behavior of government officials, voters, and special interest groups. He also maintains an active research program on the political economy of non-democratic and low-income countries.

Trebbi also has an artistic streak. “I have only one modest talent outside of economics: I paint. Non-figuratively. Many economists I know have been inflicted with one canvas or two, which I think they keep in their homes and offices out of affection,” he said.

Associate Professor Ricardo Perez-Truglia, Economic Analysis and Policy

Assoc. Prof. Ricardo Perez-Truglia
Assoc. Prof. Ricardo Perez-Truglia

Ricardo Perez-Truglia grew up in the Ciudadela neighborhood near Buenos Aires, Argentina, moving to the U.S. for a PhD in economics from Harvard University. He joins Berkeley Haas from UCLA’s Anderson School of Management, where he was an assistant professor of economics for four years. 

As a behavioral economist, one of Perez-Truglia’s main research interests is how social image and social comparisons shape economic behavior: What do others think of you? Are you rich? Smart? Hard-working? The desire to shape these opinions is a powerful driver of human behavior, he said.

His research often involves collaborating with private and public institutions, sometimes using large datasets to study the effects of policies, or conducting large-scale field experiments with their clients or employees. He studies a range of topics such as transparency, tax collection, and macroeconomic expectations. “My research is intended to inform firms and policy makers in the developed and developing world, leading to practical applications,” he said.

Perez-Truglia says he would be happy to talk to students about economics and social science research as well as two more personal topics: “I’m familiar with the challenges associated with being an immigrant and a first-generation college graduate, so I’m happy to discuss them with any of the Berkeley students who are facing the same or similar challenges.” 

He’s also happy to talk about Latin America—and his favorite sport, fútbol or soccer. “I’d love to play soccer with the students if they want. I am a huge soccer fan—my favorite teams are River Plate (from Argentina), FC Barcelona (Spain) and obviously, I care the most about the Argentine national team.” 

Assistant Professor Sydnee Caldwell, Economic Analysis & Policy

Asst. Prof. Sydnee Caldwell
Asst. Prof. Sydnee Caldwell

Sydnee Caldwell, who grew up in Fallbrook, Calif., is coming “home” to Cal. She graduated from UC Berkeley with a double bachelor’s degree in applied mathematics and economics in 2008, before earning her PhD in economics from MIT in 2019. She joins Berkeley Haas after serving a year as a post-doctoral researcher at Microsoft Research New England. 

Caldwell’s research focuses on topics of labor and personnel economics, and she is currently interested in how firms find and recruit new employees. She has also conducted research on the gender-wage gap, recently examining how it plays out in the gig economy. In a paper forthcoming in American Economic Journal: Applied Economics, she looks at the differences between taxis and ridesharing services like Lyft and Uber from the driver’s perspective.

She says students should feel free to come to her with any questions they have about economics or data science, regardless of whether they are in her data and decisions class. “I am always interested in how companies and people use data to make decisions,” she says.

She’s also looking forward to hiking and skiing and spending more time outside now that she’s back in the Bay Area.

Assistant Professor Solène Delecourt, Management of Organizations

Asst. Prof. Solene Delecourt
Asst. Prof. Solene Delecourt

Solène Delecourt hails from Lille, a city at the northern tip of France. She earned her PhD in organizational behavior at the Stanford Graduate School of Business.

Delecourt’s research centers on inequality in business performance. She is passionate about using rigorous social scientific theories and methods to delve deeply into this phenomenon, particularly among entrepreneurs in emerging economies. Her research agenda focuses on what drives variation in profits across firms, and how to reduce inequality in business performance among entrepreneurs in different market settings—including India, Uganda, and the U.S. In the three papers that made up her dissertation, Delecourt used field experiments to understand how business characteristics, client search behavior, and peer-to-peer advice among entrepreneurs affect business success.

Delecourt wants students to feel free to come to her for discussions. “I would love to hear about their projects, especially as they relate to issues of gender inequality,” she said.

In her free time, she enjoys swimming and is excited for the numerous outdoor pools on campus. She also loves good bread and pastries and cannot wait to try out Fournée Bakery. 

Assistant Professor Douglas Guilbeault, Management of Organizations

Asst. Prof. Douglas Guilbeault
Asst. Prof. Douglas Guilbeault

Douglas Guilbeault is from Tecumseh, a small town in Southwestern Ontario, Canada. He received his PhD in 2020 from the Annenberg School for Communication at University of Pennsylvania.

Guilbeault studies how people build shared concepts as they communicate in daily life, specifically within social networks and organizations. “Big problems on my list to tackle are: bias reduction in crowdsourcing, cross-cultural concept translation, equitable content moderation over social media, and enhancing scientific discovery,” he said. 

Guilbeault is developing a computational theory of how categories emerge, grow, and evolve in social systems, as well as how categories shape social systems themselves.

Guilbeault looks forward to meeting his new colleagues. “I am most excited by the dynamic network of colleagues that I will get to exchange ideas with and learn from,” he said. “The Management of Organizations group at Haas is absolutely distinct in its integration of both macro and micro perspectives on organizations, and my work explores this interface.”

When he’s not conducting research or teaching, Guilbeault makes music and writes software that produces digital art. He also loves running, biking, hiking, and seeing live music.

Assistant Professor Xi Wu, Accounting

Asst. Prof. Xi Wu
Asst. Prof. Xi Wu

Xi Wu is originally from Beijing, China. She received her PhD in accounting from New York University’s Stern School of Business after studying mathematics and economics as an undergrad at Cornell University.

Wu’s research focuses on the intersection of securities regulation, corporate governance, and valuation. Her current research studies how regulations affect firms, how managers and creditors use information to address agency issues, and how to use newly-available data to value firms and cryptocurrencies. Her recent work shows that more heavily regulated companies fare significantly better during extreme economic downturns—including the coronavirus pandemic.

Since she is currently studying the valuation of cryptocurrencies and the market of initial coin offerings (ICOs), Wu says that being close to both the San Francisco Bay Area and the Silicon Valley is of huge value to her, and she is excited about the potential of connecting fintech research to the practical world. 

Wu enjoys hiking and skiing in her free time.

Assistant Professor Luyi Yang, Operations & Information Technology Management

Asst. Prof. Luyi YangLuyi Yang, a native of Shanghai, China, joins Haas from Johns Hopkins University, where he was an assistant professor at the Carey Business School for the past three years. He received his PhD from the University of Chicago Booth School of Management in 2017. 

Yang’s work is focused on developing  new theories for understanding emerging business models and policy initiatives in service operations. On the business front, he has studied innovative mechanisms for managing queues—which are often a key feature of service systems—such as line-sitting, mobile ordering, and referral priority programs. On the policy front, he has studied the welfare implications of expanding patient choice in elective surgeries, as well as the pricing and environmental implications of the right-to-repair legislation, which gives consumers the ability to repair and modify their own consumer electronic devices.

Yang is excited to experience the innovative culture of Haas. He said students should come talk to him about their startup ideas and new business models. “Over the years I have engaged many startups in my research and teaching. If you have an innovative idea to start a new business, we should talk!” Yang said. In his free time, he likes travelling and hiking.Assistant Professor Biwen Zhang, Accounting

Asst. Prof. Biwen Zhang
Asst. Prof. Biwen Zhang

Biwen Zhang is from Nanchang, the capital and largest city of Jiangxi Province, China. She completed her PhD in accounting in 2020 from Simon Business School at the University of Rochester.

Her main research interests are in the areas of financial intermediaries and corporate governance. Specifically, her current research revolves around the economic implications of conflicts of interest faced by capital market participants.

In her free time, Zhang likes to play table tennis and badminton.

New Professional Faculty

New lecturers this fall include Ahmed Badruzzaman, Deborah Krackeler, Don Hanna, and Sachita Saxena, who will each teach a course in the Undergraduate Program; James Zuberi, who will teach a course in the Executive MBA Program; and Temina Madon, who will teach in the Full-time MBA Program. Sasha Radovich will join in the spring to teach a class in the Undergraduate Program.

A mission to make business school cases more diverse

EGAL leaders
L-R: EGAL Research Assistant Diana Chavez-Varela, BA 19 (political economy); Associate Director Genevieve Smith, and Program Director Jennifer Wells. Photo: Jim Block

As a student in the MBA for executives program, Adam Rosenzweig found that most of the cases used to teach real-world business problems in his classes often featured the same sort of leader: a white male.

“Our experience was definitely that case protagonists were overwhelmingly not diverse,” said Rosenzweig, EMBA 19, now a Haas lecturer teaching Introduction to the Case Method in both the EMBA and Full-time MBA programs.

Feedback from MBA students like Rosenzweig—who co-wrote a case with a female protagonist last year with senior Lecturer Drew Isaacs—and faculty members inspired the Center for Equity, Gender and Leadership (EGAL) to dig into the problem. That digging led to a catalog of diverse business cases called the EGAL Case Compendium. The compendium, a spreadsheet shared with the Berkeley Haas faculty this month, includes 215 cases with diverse protagonists and 215 cases specific to Diversity, Equity, and Inclusion (DEI) topics.

“A general lack of diversity”

The project, led by Genevieve Smith, associate director of EGAL, was partly funded by a $5,000 Haas Culture grant that the center’s Program Director Jennifer Wells applied for last year.

Smith argues that the limited range of protagonists in typical business cases is a longstanding problem that leaves students with gaps in understanding the connection between classroom learning and future workplace environments.

“This lack of diversity perpetuates a status quo in which traditional business leaders are primarily both male and white,” she said. “We see this as a big problem in business schools globally, and if we’re going to address the gaps around diversity in business, we need to address it in business schools.”

It’s a problem that impacts all business schools who use published cases, Smith said. Harvard Business School publishes the vast majority—some 19,000 cases—which represent roughly 80% of the cases used in business schools globally. Just over 1% of those Harvard Business Review cases include an African-American/Black person as a protagonist, and 9% include a female protagonist, the team estimates based on its analysis.

“That the majority of cases taught in business schools center on white men in 2020 is unacceptable,” said Kellie McElhaney, founding director of EGAL and a Haas faculty member. “If we hope to educate students who are equity fluent leaders, it will require a sweeping effort on the part of business schools and their faculties to make changes.”

That the majority of cases taught in business schools center on white men in 2020 is unacceptable.

Including people of different races, ethnicities, genders, ability, sexual orientation, and religions will help on multiple fronts—from increasing awareness of different life experiences, to fostering sensitivity among students, to helping with recruitment of students who “need to see themselves represented as leaders,” Smith said.

Cases that perpetuate stereotypes

To build the Case Compendium, EGAL hired research assistant Diana Chavez-Varela, BA 19, (now a summer legal investigator at Berkeley Law’s Human Rights Center), who began by searching existing cases under many keywords related to diversity, cataloguing the cases by author, topic, discipline, target segment, identities of focus, and industry sector.

EGAL's report on DEI in business cases
An executive summary of EGAL’s research on the state of DEI in business school cases.

She also flagged discriminatory language against any group, noting a few standout cases that perpetuate stereotypes including “Director’s Dilemma: Balancing Between Quality and Diversity,” a headline that infers that companies that hire for diversity sacrifice quality. Another case study summary: “How do you manage talented people who are different from the typical corporate profile — like women, Blacks, Asians, Hispanics, and others?” presents white men as “typical” and other people as “atypical.”

Most of the non-white-male protagonists that Chavez-Varela found in the 215 cases were women (84%)—primarily white females working in the human resources management or organizational behavior areas. Cases with female protagonists also largely touched on topics like culture and workforce representation, but failed to address other issues such as labor rights, government policies, workplace harassment, or challenges for dual-career couples.

The researchers, who also wrote a report based on their findings, found that more than half of the cases that centered on topics related to DEI in the business world focused on advancing DEI among entry- and mid-level employees, with just 15% focused on more-senior leaders. And among DEI cases, the most common focus was advancing women in the workplace—with fewer focused on race, ethnicity, or other identities.

“There is much room to grow in terms of new DEI case studies,” Smith said. In particular, the EGAL team is interested in supporting the faculty and writing new cases with protagonists representing intersectional identities and in industries/disciplines outside of HR and organizational management, and on DEI-related topics that are relevant to core courses.

There is much room to grow in terms of new DEI case studies.

Prof. Catherine Wolfram, associate dean for academic affairs & chair of the faculty, who shared the EGAL Case Compendium with the faculty, said she’s receiving positive feedback so far.

“There have definitely been discussions about addressing diversity topics in the classroom in faculty meetings and we’ve had people describe the issues that have come up around the lack of diversity and the topics that students want to talk about,” Wolfram said.

What makes a good case?

While the Haas curriculum isn’t as case-driven as many other business schools, such as Harvard Business School, faculty members still consider cases integral to teaching.

Some of those cases are homegrown, written by Haas faculty and published as the Berkeley Haas Case Series (BHCS).

Five Berkeley Haas cases included in EGAL’s Case Compendium include—Promoting a Culture of Equity in the #MeToo Era: Moving Beyond Responding to Gender-Related Workplace Issues to Tackling Root Causes (written by McElhaney and Smith); Zendesk: Building Female Leaders Through Mentorship (co-written by McElhaney); Eliminating the Gender Pay Gap: Gap Inc. Leads the Way (written by McElhaney and Genevieve Smith); The Berkeley-Haas School of Business: Codifying, Embedding, and Sustaining Culture (written by Prof. Jennifer Chatman with former Dean Rich Lyons); and People Operations at Mozilla Corporation: Scaling a Peer-to-Peer Global Community (written by Senior Lecturer Homa Bahrami).

Prof. Jennifer Chatman, who teaches organizational behavior, writes some of her own cases.

Chatman, an expert on culture who teaches organizational behavior, said EGAL is helping to raise awareness of the diversity problem in business school cases by both cataloguing and providing an easily searchable clearing house. Chatman, who writes a case every four or five years, has long been a leader in featuring diverse protagonists, such as leaders at Genentech and Walmart.

Yet she acknowledged the challenges with overhauling business school curricula, adding that many professors try to avoid switching cases too frequently due to the difficulty in finding well-aligned cases. “The case needs to be timely, relevant, and it needs to be about an organization or industry that students will find interesting,” she said. “A good case is also easy to read, not too long, and will preferably include video—and the professor should be able to extend the story by easily adding material related to, but not included in, the case. So the list is long!”

“No magical solution”

Assoc. Prof. Dana Carney, who researches racial bias, power, and nonverbal behavior, says she’s always on the hunt for new cases that are relevant to her courses. She agrees that cases with diverse protagonists—particularly race/ethnicity— are hard to find.

Carney currently uses five cases, two with a total of 4 female protagonists, one with predominantly male protagonists (although ethnic/racial identities are ambiguous), one with no protagonist, and two more with ambiguous race/ethnicity and names that could be either female or male because only last names are used.

“I’m always looking, always thinking of cases I could and should write, always trying to be inclusive and evolve,” Carney said.

For example, Carney, along with Economics Prof. Paul Gertler, developed a negotiation case with Ugandan protagonists to be used in Uganda. But the case is so culturally bound to the Ugandan context it wouldn’t be usable in a U.S.-based undergraduate or MBA business context, she said. The bottom line? “We need more cases,” she said.

While there’s no magical solution to the case dilemma, Prof. Don Moore came up with one idea that might help: a spreadsheet Berkeley Haas faculty are using to list cases taught in their own core classes. Faculty interested in finding a diverse case may now cross-check on the EGAL list to see if there’s a match between a case that’s included on both lists, he said.

(Read EGAL’s full report, The State of Diversity, Equity & Inclusion in Business School Case Studies, here, or the executive summary here.)

 

Black Voices: Berkeley Haas community shares perspectives on racism and the fight for social justice

In response to the violence against Black and African-American people and the wave of protests and unrest across the country, we’re sharing some of the perspectives of our Black students, staff, faculty, and alumni.

Clockwise from left: Marco Lindsey, associate director at DEI at Haas; Erika Walker, assistant dean of the undergraduate program; Dan Kihanya, MBA 96, Elisse Douglass, MBA 16;  Ace Patterson, MBA 16; and Bree Jenkins, MBA 19.

BLM collage

View all their posts here.

Nobel laureate Oliver Williamson, pioneer of organizational economics, dies at 87

Prof. Oliver Williamson
Prof. Oliver Williamson

Oliver Williamson, a UC Berkeley and Haas School of Business professor for nearly three decades whose elegant framework for analyzing the structure of organizations won him a Nobel Prize in Economic Sciences, passed away on May 21, 2020 in Oakland, Calif. at the age of 87. His death followed a period of failing health.

“Williamson’s work permanently changed how economists view organizations,” said Prof. Rich Lyons, who was dean of the Haas School when Williamson won the Nobel and is now UC Berkeley’s Chief Innovation and Entrepreneurship Officer. “Yet for all of his intellectual creativity, I most often think of Olly as a person who lifts others. The ripple effects that he has had on his field through his students and colleagues could well be as large as the enormous impact his own work had.”

Williamson, the Edgar F. Kaiser Professor Emeritus of Business at Haas and Professor Emeritus of Economics and Law at UC Berkeley, received the most prestigious prize in economics in 2009 for his insights into what’s known as the “make or buy” decision. This is the process by which businesses choose whether to outsource a process, service, or manufacturing function or to perform the work in-house.

Williamson’s path-breaking contributions to economics were deep and boundary-spanning. They included seminal work that laid the foundation for the now-burgeoning fields of organizational and institutional economics. Traditional economic approaches of the early 1970s did not allow for analysis of governance within organizations. By showing that economics could illuminate the costs and tradeoffs that parties make in transactions, Williamson’s work brought governance and the management of relationships into economic theory.

His multidisciplinary approach to analyzing organizational structures was unconventional in economics at the time—he described it as a melding of soft social science with abstract economic theory. He looked not only at formal firm structure but at culture and social norms. Prof. Ernesto Dal Bó, the Phillips Girgich Professor of Business, called Williamson’s work “a fountain of vocation-shaping epiphanies.”

“After reading his work, we could no longer think of markets, organizations, and legal or political institutions in the same way. And so we didn’t,” Dal Bó said. “His insights are now part of the common sense of social scientists.”

Williamson’s theories gave rise to a new wave of empirical literature that tested his method of analysis in a wide range of industries, and shaped fields as diverse as public policy, law, strategy, and sociology. His “transaction cost” approach has since shed light on thinking about the design of joint ventures, long-term contracts, and bureaucracy more generally. His influence can be seen around the world, from electricity deregulation in California to investment in Eastern Europe to human resource management in the technology industry.

A simple analysis with broad reach

Oliver Eaton Williamson—known as “Olly” to his friends, colleagues, and students—was born in Superior, Wisconsin on September 27, 1932. The son of two teachers, he formed lifelong friendships with his Superior Central High School Class of 1950 classmates, holding four reunions per decade and annual poker weekends. He received his B.S. in management from the Massachusetts Institute of Technology in 1955, an MBA from Stanford University in 1960 and a PhD from Carnegie Mellon University in 1963.

Williamson began his teaching career at Berkeley, where he was an assistant professor of economics in the undergraduate program. In 1965, he moved to the University of Pennsylvania, where he taught and held various leadership roles until he joined the faculty at Yale University in 1983.

Prof. Oliver WilliamsonBerkeley Haas Prof. Emeritus Pablo Spiller said that when Williamson recruited him to the economics department at Penn 40 years ago, “I didn’t realize that he was also recruiting me to his view of economics. The latter was done in subtle and not so subtle ways: his penetrating questions at seminars, written comments on papers, remarks in conversations, or over dinner,” he said. “While naturally a shy person, Olly was not shy to help a colleague see the light.”

In 1988, Berkeley lured Williamson back by appealing to his interdisciplinary interests and offering him appointments in not only business and economics but also the law. While at Berkeley, Williamson created a world-renowned PhD workshop known today as the Williamson Seminar on Institutional Analysis. He retired from teaching in 2004.

Williamson’s work on new ways of analyzing markets and business enterprises evolved from a paper written in 1937 by Ronald Coase, also a Nobel laureate. Building on Coase’s work, Williamson studied economic organization through the lens of transaction costs, exploring how different attributes of transactions were better suited to different types of organizations. It helped explain why some companies grow, creating management structures controlling different areas, while others remain independent.

“I originally thought of ‘make-or-buy’ as a stand-alone problem,” Williamson once said. “But now I think of it as being an exemplar. If you understand make-or-buy, which is a simple case, you can understand more complex cases.” These include joint ventures, labor contracts, antitrust, and industry privatization. Hundreds of economists and policymakers have since applied his framework to situations other than outsourcing, including the boundaries between public and private sector activity.

Path-breaking books

Williamson’s contributions to economics were widely recognized through awards, fellowships, and no fewer than 11 honorary doctorates from universities worldwide. Two of Williamson’s five books, Markets and Hierarchies: Analysis and Antitrust Implications (1975) and The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (1985) are said to be among the most cited in the social sciences.

The Nobel Prize, which Williamson shared with political scientist Elinor Ostrom of Indiana University, marked the apogee of his career. The award—the second Nobel Prize for a Haas economist—came at the height of the global economic crisis. Many observers speculated that Williamson was selected for his work’s application to the financial meltdown and financial regulation. Those close to Williamson, however, said the honor was long overdue.

Prof. David Teece, the Thomas W. Tusher Professor in Global Business, predicted a Nobel for Williamson when he read a draft manuscript of Markets and Hierarchies as a University of Pennsylvania PhD student in 1974.

“I returned to his office three days later and reported, ‘This is a great book. Why has it taken me four years at Penn to discover a framework that addresses deep questions about the business firm and its organization?’” recalls Teece, noting that before Williamson, the economic frameworks and models to understand the business enterprise were “quite frankly pathetic.”

Teece went on to publish collection of essays in honor of Williamson’s book Markets and Hierarchies, entitled Firms, Markets and Hierarchies: The Transaction Cost Economics Perspective, with Glenn R. Carroll in 1999.

Prof. Steve Tadelis, the Sarin Chair in Leadership and Strategy, said Williamson’s work had heavily influenced him as a graduate student and assistant professor at Stanford. They had met and developed a collegial friendship by the time Tadelis joined Berkeley Haas in 2005, eventually authoring two papers together.

“Olly’s relentless drive for uncovering deep insights has always been an inspiration for me,” Tadelis said. “I will deeply miss his intellectual enthusiasm and friendly disposition, and at the same time I feel a deep gratitude for having him be a friend and mentor.

In recognizing Williamson and his work, the Royal Swedish Academy of Sciences singled out “his analysis of economic governance, especially the boundaries of the firm.”

In an interview upon learning he had won the prize, Williamson said. “All feasible forms of organization are flawed. We need to understand the trade-offs that are going on, the factors that are responsible for using one form of governance rather than another, the strengths and weaknesses that are associated with each of them.”

A passion for Berkeley

Prof. Oliver Williamson with his Nobel coin.Throughout his life, Williamson displayed an uncommon humility even as his celebrity in economic circles grew. Just hours after his Nobel Prize was announced, Williamson was modest about his selection, calling it “undeserved” during a congratulatory toast with hundreds of Haas faculty, staff, and students.

“I would describe myself,” he told the packed room, “as a conscientious teacher who had a lot of students who were tolerant and went on to do good work.”

Williamson was also passionate about Berkeley, calling it a “glorious place” whose commitment to excellence generates “extraordinary energy.” He donated a large portion of his Nobel Prize to Berkeley Haas to create a new endowed faculty chair in the economics of organization. (The Oliver E. and Dolores W. Williamson Chair of the Economics of Organizations is now held by Prof. John Morgan.)

The Haas School also established its highest faculty honor, the Williamson Award, in his name. Williamson was known for embodying the school’s Defining Leadership Principles—Question the Status Quo, Confidence Without Attitude, Students Always and Beyond Yourself.

“I can still hear a piece of advice he gave me when I first became dean that served me on many occasions: ‘When in doubt, decide on the merits,’ Lyons said. “With his own doctoral students, if they expressed doubt in themselves when taking the next step, he would tell them ‘I wouldn’t have suggested you try to do this if I didn’t have confidence that you could.’”

Williamson is survived by his five children and five grandchildren: son Scott (Susanna Krentz), daughter Tamara (Don Mohr), daughter Karen (Robert Indergand), son Oliver Jr. (Anna Suszanowicz), and son Dean (Mihoko Matsue); and grandchildren Kimberly and Kristin Indergand, Claire and Peter Williamson, and Erin Mohr. He was equally proud of his niece, Katherine Frisbie, and nephew, Steven Frisbie (Jennifer). He was predeceased by his wife of 55 years, Dolores Celini Williamson, in 2012.

A family memorial service will be held at a later time. Those wishing to remember Williamson may do so by making a donation to the Northern California and Northern Nevada Alzheimer’s Association.

Downloadable photos of Oliver Williamson are available here: https://haas.canto.com/v/oliverwilliamson

The Society for Institutional and Organizational Economics, which Williamson co-founded, will be posting a series of short essays honoring his contributions and life: https://www.sioe.org/news/passing-oliver-williamson.

 

 

 

Speed counts on coronavirus economic rescue, says Prof. James Wilcox

Closed due to coronavirus
Photo: Gwengoat for Getty Images

*Updated March 16

Former Fed Economist and Prof. James Wilcox is a longtime observer of federal fiscal policy, monetary policy, and the economy. A professor of finance and economic analysis and policy, Wilcox served as a senior economist on the President’s Council of Economic Advisors from 1990 to 1991, as an economist with the Federal Reserve from 1991 to 1992, and as chief economist for the Office of the Comptroller of the Currency from 1999 to 2001. His research focuses on small business lending, banking, and consumer spending.

Wilcox shared his perspective on the week’s stock market whiplash as well as what the Fed and the government can do to cushion the widening economic crisis caused by the coronavirus pandemic.  

Prof. James Wilcox
Prof. James Wilcox

President Trump on Friday declared a national emergency that will free up $50 billion in aid, and stocks mostly bounced back from Thursday’s crash. Will the national emergency status help economically?

The emergency declaration allows for some helpful actions right away. Much more will need to be done. The declaration was also valuable if it signals that the Administration will be doing much more than it has so far. We have a serious problem. It calls for large, rapid responses. 

The Administration can help by using fiscal policies now. Speed counts. The old saying that ‘a stitch in time saves nine’ holds for financial markets, businesses, and households if they have their operations or cash flows disrupted. Getting more help sooner to those who are more impacted can avoid more pain for them and can avoid taxpayers’ paying more to help more later. 

The sooner the government acts, the better—and the cheaper—it will be for all of us.

The House passed a coronavirus emergency relief bill Friday night that includes two weeks of paid sick leave for some workers and up to three months of paid family and medical leave, $1 billion in grants to states to help pay unemployment insurance, and some food assistance. The Senate will take it up this week. What kind of policies do you think are most needed right now?

We want to get the most immediate help to those facing the most pressing pains. If supplies and demands contract as much as now seems likely, there will be real cash crunches for some big and small businesses, for higher-income households and lower-income households. Some businesses will have serious shortages of customers, and perhaps of materials and parts as well. Some households will have their hours or jobs cut. They may face serious cash, or liquidity, shortfalls—they may become “ill-liquid.” Policies should be adopted now that will be ready and able to provide financial triage. When illiquidity turns into insolvency, it causes many more problems. The sooner they can get help, the less they will need—’a stitch in time.’ 

One policy that could greatly help is government loan guarantees. The law passed about two weeks ago authorizes about $50 billion more SBA-guaranteed loans to small businesses harmed by the virus crisis. And some much larger companies may warrant help too. Most visibly being hammered by the corona crisis are airlines, hotels, and, of course, cruise companies. They won’t be the only ones. This emergency may well call for a program akin to a Large Business Administration that can quickly provide funds for large businesses. 

These policies can be really valuable to businesses and households. They can also benefit the nation. Nonetheless, they do impose costs and risks on taxpayers. Hard-headed, helpful policies need not be give-aways like tax breaks. For example, a payroll tax cut—which has been discussed—is aimed at entirely the wrong group of people. To be paying payroll taxes you need to be working. It is the businesses that are hurt by this crisis and cannot afford to keep employees that we should aim at. We want to help the workers who have lost hours or jobs, and the businesses that are in danger of going under. 

 Policies funded by taxpayers can be more like investments. In the 2008 financial crisis, taxpayers got too little in return for the enormous costs and risks their government took on their behalf. 

It’s not inevitable, but a recession now appears pretty likely for the U.S. economy.

Last week you commented that “darkening clouds have now come over the economy.” Is a recession inevitable at this point?

It’s not inevitable, but a recession now appears pretty likely for the U.S. economy. The more nations that impose widespread restrictions like lockdowns, the more likely that we have a global recession.

With appropriate policies, a recession in the U.S. could be shorter and shallower than usual. A lot depends on how the virus situation is handled and proceeds. At this point, forecasting the economy requires a guess about how effectively medical tests get distributed and used, how well our medical system can handle the volume of patients requiring some or a lot of care, and so on. I really don’t know much about the severity or probabilities of the various virus scenarios. Even forecasting what policies will get enacted is problematic.

But, anyone’s forecast for the economy will have to change if we keep getting surprises, good or bad, about the policies and management of the corona crisis. The larger and the sooner our fiscal response, the less likely that we have a recession this year or next. The early performance on health and economic policies has not been good, but they both show signs of improving.

Why do you say a recession could be shallower and shorter this time (with that big if)?

It is our good luck that the virus arrived here when our economy is on very solid footing. There have been few serious excesses, imbalances, or problems. Growth has been steady and unemployment low. We haven’t had a recession in over a decade. If the economy were ever going to withstand a shock, this is one of the better times. The job market has been very strong. Households’ finances have improved greatly. Housing has been strong. The same applies to businesses. After-tax profits have been very strong for a very long time. Even state and local government budgets have been in good shape lately. And, the financial system is really solid. Unlike the 2008 financial crisis, when problems erupted in—and were made worse by—financial institutions, this time around, the financial sector is in very solid shape. It’s strong enough to cushion some of the jolt to households and businesses. In the previous crisis, instead of being shock absorbers, financial institutions did the shocking. 

Unlike the 2008 financial crisis, when problems erupted in—and were made worse by—financial institutions, this time around, the financial sector is in very solid shape.

Yet last week, stocks were crashing, and bond yields weren’t rising as they usually do. That led some to say the system is more fragile than it appears. What was going on?

The size and suddenness of the recent stock market declines built up some frictions in financial markets, especially in credit markets. That’s why the Federal Reserve was right to pledge an essentially unlimited availability of cash for financial markets to borrow. The Fed has also jumped in to buy lots of longer-term Treasurys when it appeared that even those bonds were suffering from illiquidity. These two operations have both lubricated the frictions in credit markets and signaled that it’s ready to act quickly and decisively if need be. The result is that borrowing rates will be lower than if the Fed had not acted.

The Fed is expected to drop interest rates to zero. How much will interest rate cuts help stem the crisis?

*Update: The Fed cut interest rates to near zero in an emergency move Sunday.

The Fed cut interest rates by half a percent just a short time ago. And, now there is a very good chance that it will just cut short-term rates to zero. Every little bit helps. And longer-term rates are now much lower than they were over the past year. Mortgage rates are down by a full percentage point. And that has already touched off a refinancing boom that will leave homeowners with more to spend elsewhere. The lower rates may also draw in more home buyers, too. 

The Fed has done what it should do, which is lubricate and reassure financial markets, and the rest of us. But there are real limits to what it can do. In this situation, lower interest rates will not be the solution for workers who lose hours or jobs, or for businesses that lose customers. Making funds available to those who are cash-strapped will be. Whether assistance comes via paid sick leave, unemployment checks, government-guaranteed loans, or some other form is the province of fiscal policy. The sooner the government acts, the better—and the cheaper—it will be for all of us.

 

Prof. Laura Tyson to lead governor’s new economic council

Prof. Laura Tyson, Photo: Karl Nielsen
Prof. Laura Tyson (Photo: Karl Nielsen)

Influential economist Laura D’Andrea Tyson, who served as dean of Berkeley Haas and as a presidential advisor, has been named by Gov. Gavin Newsom to co-chair his new Council of Economic Advisors.

The 13-member panel, announced on Friday, will advise the governor and state finance director on wide-ranging economic issues “and deepen relationships between the administration and academic researchers to keep California moving toward an economy that is inclusive, resilient, and sustainable.”

Tyson will co-chair the council with Fernando Lozano, an economics professor at Pomona College. 

 “I look forward to working with this expert group of advisors to support Gov. Newsom’s goal of fostering inclusive, sustainable, long-term economic growth for all of California,” Tyson said. “As the world’s 5th largest economy and the nation’s leader in innovation and new business formation, California is in a strong position to tackle major economic challenges—including adapting to climate change, creating good job opportunities throughout the state, and reducing homelessness.”

Two other UC Berkeley professors were also appointed: Maurice Obstfeld, the Class of 1958 Professor of Economics who served on President Barack Obama’s Council of Economic Advisers from 2014 to 2015 and as chief economist at the International Monetary Fund from 2015 to 2018, and economics and public policy Prof. Hilary Hoynes, the Haas Distinguished Chair in Economic Disparities and co-director of the Berkeley Opportunity Lab. Lieutenant Governor Eleni Kounalakis, MBA 92, will also serve on the panel.

Gov. Gavin Newsom
Gov. Gavin Newsom (Wikimedia Commons)

“For California to continue thriving, we need our economy to work for everyone in every corner of the state,” Newsom said in a statement. “Our state is experiencing its longest economic expansion, with record-low unemployment—3.9 percent—increases in personal income, and billions in investments, but this expansion has unevenly benefited people across the state. We need to invest for the future, adapt to a changing climate and keep our budget balanced. This Council will keep its pulse on what’s happening in our economy while making policy recommendations to prepare us for what’s to come.”

 An expert on trade, competitiveness, and the future of work, Tyson is a distinguished professor of the graduate school and faculty director of the Institute for Business & Social Impact, which she launched in 2013. She also chairs the board of trustees at UC Berkeley’s Blum Center for Developing Economies, which aims to develop solutions to global poverty. She served as Berkeley Haas interim dean from July to December 2018, and as dean from 1998 to 2001. She led London Business School as dean from 2002 to 2006.

Under the Clinton administration, Tyson served as Chair of the President’s Council of Economic Advisers from 1993 to 1995 and as Director of the White House National Economic Council from 1995 to 1996. She was the first woman to hold those positions.

Much of Tyson’s recent research focuses on the effects of automation on the future of work. She has also devoted considerable policy attention to the links between women’s rights and national economic performance.

The new council will meet with and advise Gov. Newsom upon request. The group will be guided by the Department of Finance’s Chief Economist Irena Asmundson.

 

 

 

 

What are stable coins? Cryptocurrency Q&A with Rich Lyons

Cryptocurrency - stable coin illustration

 

Cryptocurrencies are not investments for the faint of heart. As anyone who has followed the Bitcoin saga knows, the rollercoaster price movements of these digital assets are only for those with strong stomachs (or who want to conceal their transactions). In recent years, however, a new form of cryptocurrency has emerged with the promise of much less volatility. So-called stable coins, such as Tether, the stable coin market leader, are pegged one-to-one to the U.S. dollar or other asset, in theory making them safer.

Berkeley Haas News spoke to Rich Lyons, professor of finance and economics who served as Haas dean from 2008 to 2018 and is now UC Berkeley’s first chief innovation and entrepreneurship officer, about this new wrinkle in cryptocurrencies. Lyons, an expert in currency exchange rates who holds the William & Janet Cronk Chair in Innovative Leadership, recently co-authored a paper with Ganesh Viswanath-Natraj of England’s Warwick Business School examining what keeps stable coins stable.

Among their conclusions: Stable coins could open the door to the wider crypto world without the wild price swings of free-floating cryptocurrencies like Bitcoin. Even so, as Lyons stresses, stable coins are not necessarily the safe havens they are advertised to be.

If you look at a price chart of Bitcoin over the past few years, it looks like a trek through the Himalayas, with enormous peaks and valleys. Why are cryptocurrencies so much more volatile than traditional currencies?

We can answer that question by thinking about the dollar-euro exchange rate, which is more volatile than people originally thought it would be. The issue is that the euro’s fundamental value is a difficult thing to pin down, leaving a lot of room for speculation. Instability like that gets magnified in the world of cryptocurrency. At the end of the day, the Bitcoin-dollar exchange rate is just another exchange rate, and a lot of those same speculative dynamics are there.

But why are Bitcoin’s price movements so much greater than those of traditional currencies?

The big issue is that the fundamental value of Bitcoin is even more nebulous than that of the euro. We can at least start to think about the fundamentals of the dollar-euro exchange rate, like the growth rate in Europe versus the U.S. With a cryptocurrency like Bitcoin, the fundamental picture is much harder to pin down. You have the same speculative dynamics as in a regular currency market, but with much fuzzier fundamentals.

Cryptocurrency illustration

What exactly are cryptocurrencies?

Over the past five-to-ten years, what some people are calling the digital asset economy has emerged. The digital asset economy lies outside the traditional banking system and is generally housed on a blockchain, which is a secure, decentralized electronic ledger used to record transactions. The digital asset economy includes cryptocurrencies like Bitcoin and so-called initial coin offerings. These assets serve multiple purposes. For example, I could issue 100 tokens, and by buying one, you could own one one-hundredth of a work of art. We can break up lumpy assets and give people ownership of small slices. In addition, this digital asset economy gives people in countries that might not be able to hold assets because of capital controls or other restrictions access to more of the world’s assets.

What’s the purpose of stable coins?

Because this digital asset economy is largely outside the traditional banking system, the issuers and traders of these assets aren’t like regulated financial institutions. They don’t have “know-your-customer” rules or anti-money-laundering regulations. At first, this digital asset economy lacked a store of value, that is, assets with relatively low volatility that people could hold knowing the value wouldn’t change drastically. Because Tether and other stable coins are pegged to traditional currencies, they have become stores of value in that alternative financial world that otherwise lacks a store of value.

Prof. Rich Lyons
Prof. Rich Lyons (Photo Copyright Noah Berger)

Haven’t stable coins been controversial?

Yes. For example, there was a question of whether the issuers of Tether were manipulating the price of Bitcoin. Part of the reason that scenario is possible is that Tether is used as the medium of exchange in over 50% of Bitcoin transactions. When people are buying and selling bitcoins, more often than not they are trading tether for bitcoins. One reason is that when you go from dollars to bitcoins, you are also going from inside to outside the banking system. That has high transaction costs. Tether is already outside the banking system, which makes it a much cheaper and more frictionless way to go in and out of Bitcoin.

Most people see the cryptocurrency world as pretty wild and woolly. Are stable coins as safe as claimed?

Tether is pegged to the dollar at one-to-one, and its price has generally traded within 1% of one-to-one. But about a year-and-a-half ago, there was some concern in the market that Tether was not backed one-to-one with assets; i.e., if there was a mass redemption of Tether, the collateral would not be sufficient to cover the full amount. This concern led the price to fall as low as 95 cents to the dollar. There was an audit, which was not 100% transparent, but it did restore confidence in the marketplace.

What kinds of questions should we be asking about stable coins?

Stable coins come in a number of different flavors. Some purport to be 100% backed by redeemable collateral that’s in escrow, collateral that can’t be captured and run away with. But part of the question, even with Tether, is whether it really is 100% collateralized. And is all that collateral really liquid? If you have to sell in fire-sale conditions, even a “100% collateralized” asset may not turn out genuinely to be 100% collateralized.

What are the long-term prospects for stable coins and cryptocurrencies generally?

There will be a lot of shakeout. The stable coins that have the greatest market confidence concerning the legitimacy and liquidity of their collateral will win out. Meanwhile, if you think about the literally thousands of initial coin offerings, all the tokens, all the cryptocurrencies—90% of them will be valueless in 10 years, in my judgment.

In a shakeout scenario, do stable coins have an advantage?

Most stable coins have collateral. So, if a stable coin fails, it won’t be a complete cataclysm. Whatever collateral is left after liquidation costs will go to the holders. But, when you talk about cryptocurrencies that don’t have any collateral—the Bitcoins and ICOs that don’t have any fundamental value backing them—when those go away, their value goes to zero. I’m not predicting that Bitcoin will necessarily go to zero, but certainly there are a lot of assets in the digital economy that will go to zero over the next 10 years. At the same time, you’re seeing assets in the digital economy that are getting 10 times the valuation they had two years ago. You’ve just got to be in the right place. And it’s anybody’s guess what the right place looks like.

How are cryptocurrencies in general and stable coins in particular evolving?

This idea of inside the banking system versus outside the banking system—that’s a pretty bright line right now. But when central banks move into the digital asset world, the line won’t be as clear. A well-functioning stable coin adds a lot of value, and all of the big central banks are doing a lot of research on cryptocurrencies. Many of them are saying they will launch a digital currency in the next five years. My prediction is in 10 years we will have three or four important stable-coin digital currencies, based in blockchain, and issued by central banks. They will live more in the traditional regulated banking system. That will fill in the continuum.

You and Ganesh Viswanath-Natraj just released a paper titled “What Keeps Stable Coins Stable?” What questions were you looking at?

We wanted to look at how tightly the price of Tether was pegged to the dollar. What we found was somewhat surprising. Tether trades at both a discount and a premium to the dollar. You might think a stable coin would trade like the Argentine peso in the early 2000s, when the peso was pegged to the dollar. But people didn’t have full confidence that the Argentine central bank would support the peso, so the peso consistently traded at a discount, sometimes substantially so.

What might explain Tether trading at a premium to the dollar?

There is this vehicle currency demand that can cause Tether to trade at a premium. If I as an investor can get into Bitcoin by either using dollars or Tether, but it is expensive to get into Bitcoin using dollars because transaction costs are higher, than I’d much rather buy bitcoin using Tether because it gives me a near costless option for getting into Bitcoin whenever I want. That “vehicle-currency demand” for Tether is what pushes its price above one US dollar.

 

Year in review: Top Berkeley Haas stories of 2019

It was a big year at Berkeley Haas. We welcomed the school’s first new dean in more than a decade, continued our run in the top 10 in all rankings, and launched several new boundary-spanning programs. Our faculty broke new ground and were honored with numerous awards, and we also mourned the loss of several luminaries. The school was also recognized for its stellar sustainability efforts at our new building.

Going into the 2020, our culture—truly at the heart of Haas—will continue to take center stage. Here are a dozen of our highlights from 2019.

1. New year, new dean

Dean Ann Harrison
Dean Ann Harrison | Copyright Noah Berger 2018

On January 1, former Wharton economics professor Ann Harrison “came home” to Berkeley to serve as the 15th dean of Haas. Harrison was a double major in history and economics at UC Berkeley before going on to earn a PhD in economics from Princeton. She also served as a professor of UC Berkeley’s Department of Agricultural and Resource Economics from 2001 to 2011, and was the former director of development policy at the World Bank.

2. Fresh insights and groundbreaking research

Illustration of a satellite orbiting the earth

From the first-ever analysis of how hedge funds use satellite images to beat Wall Street, to a finding that information acts on the brain’s dopamine receptors in the same way as snacks, drugs, and money, to new insights from social network experts on how the opioid use spreads in families, Haas faculty questioned the status quo with their creative and groundbreaking research. They also made an impact: Ginnie Mae adopted a proposal based on Haas professors’ research for better risk management of non-bank lenders, and U.S. senators Elizabeth Warren and Doug Jones launched an investigation into evidence uncovered by three faculty that that online lending algorithms have created widespread lending discrimination.

3. Shedding light on PG&E blackouts

Professors Catherine Wolfram and Severin Borenstein

Haas experts were in high demand to make sense of this fall’s unprecedented power shutoffs. Energy economists Severin Borenstein and Catherine Wolfram of the Energy Institute at Haas fielded a stream of questions from journalists after Pacific Gas & Electric determined it could not guarantee the safety of its lines and shut down power to hundreds of thousands of people, including the entire UC Berkeley campus.

4. Mourning the loss of faculty luminaries

Prof. Mark Rubinstein in his home library / Photo by Jim Block
Prof. Mark Rubinstein in his home library | Photo by Jim Block

Mark Rubinstein (above), a finance professor emeritus whose work had a profound impact on Wall Street by forever changing how financial assets are created and priced, died at 74. Raymond Miles, a former Berkeley Haas dean and professor emeritus whose leadership had a deep and lasting impact on the Haas campus and community, passed away at 86. Leo Helzel, MBA 68, LLM 70, an honored faculty member who guided the school’s first forays into entrepreneurship and was a dedicated and generous supporter of Haas for decades, died at 101. Rob Chandra, BS 88, a professional faculty member since 2013, taught courses on entrepreneurship and venture capital to both undergraduate and MBA students. He passed away in October at age 53.

5. STEM designation for MBA programs

Photo of students in Chou Hall at Haas

Berkeley Haas is among the first business schools to receive a STEM (Science, Technology, Engineering, and Math) designation for its MBA programs. The designation makes all international graduates eligible to apply for an additional 24-month visa extension during post-MBA employment. All current international students studying on F-1 visas will be eligible to apply for the extension while they are in their first year of work authorization after graduating from the MBA program. “We anticipate that this will lead to expanded opportunities for our international graduates who pursue jobs incorporating business analytics, modeling, forecasting, and other skills developed through our program,” said Peter Johnson, assistant dean of the FTMBA program and admissions.

6. Record rankings

Students at work during week zero
Photo by Jim Block

All Haas programs continued their run in the top 10 in all major rankings, with the full-time MBA program moving up to #6 in the U.S. in the U.S. News & World Report ranking—its highest ever. The FTMBA program was also ranked #6 in the U.S. by The Economist (#7 worldwide) and #8 in the U.S. by Bloomberg BusinessweekU.S. News ranked the Berkeley Haas Evening & Weekend MBA Program #2, the Undergraduate Program #3, and the Berkeley MBA for Executives Program #7.  The Master of Financial Engineering Program was ranked #1 by The Financial Engineer, and #2 by QuantNet.

7. Chou Hall’s green trifecta

Photo of the front of Chou Hall

Our newest building officially became the greenest academic space in the U.S., receiving a WELL Certification recognizing its “strong commitment to supporting human health, well-being, and comfort;” a TRUE Zero Waste Certification at the highest possible level for diverting at least 90% of its waste from landfills; and LEED Platinum Certification for its architectural design, construction, and energy efficiency.

8. Welcoming David Porter, our first Chief DEI officer

Berkley Haas Chief DEI Officer David Porter

“My first priority is making sure that the students, particularly students of color, have the best experience possible,” said Porter, who previously served as CEO of media nonprofit Walter Kaitz Foundation, director of graduate programs at the Howard University School of Business, and as an assistant professor and faculty director at UCLA’s Anderson School.

9. Unveiling a new sustainable and impact finance program (SAIF)

MBA students who managed the Haas Sustainably Investment Fund
MBA students who have managed the Sustainable Investment Fund at Haas. Photo: Jim Block

The Sustainable and Impact Finance program aims to better position students to work in sustainable and impact finance as public fund managers or private equity investors, or in the startup world. It’s focused on three sectors: sustainable investment, impact investment, and impact entrepreneurship. Assoc. Prof. Adair Morse developed the new program with Prof. Laura Tyson, faculty director for the Institute for Business and Social Impact (IBSI).

10. Building campus connections with cross-disciplinary programs

Haas joined forces with the College of Engineering to launch the concurrent MBA/MEng dual degree program. The new program, enrolling for fall 2020, allows students with undergraduate technical training to earn both a Master of Business Administration and a Master of Engineering degree in just two years. The new undergrad Biology+Business dual major is designed to prepare students for careers in healthcare, biotech, and drug discovery research. It’s a joint venture between the Department of Molecular & Cell Biology and Haas.

11. A host of honors for faculty

Top row: Chesbrough, Mowery, Wallace. Middle: Dal Bó, Schroeder, Morse. Bottom: Konchitchki, Patatoukas, Finan.

Assoc. Prof. Yaniv Konchitchki and Assoc. Prof. Panos Patatoukas received the 2019 Notable Contributions to Accounting Literature Award from the American Accounting Association. Prof. Emeritus David Mowery received the 2019 Irwin Outstanding Educator Award from the Academy of Management’s Strategic Management Division. Adj. Prof. Henry Chesbrough received the Leadership in Technology Management Award from the Portland International Center for Management of Engineering and Technology (PICMET). Prof. Nancy Wallace was honored by campus with a prestigious faculty service award. Miguel Villas-Boas was awarded the 2019 INFORMS Society for Marketing Science Fellow Award, which is the organization’s highest award recognizing cumulative scholarship and long-term contributions to the marketing field. Prof. Ernesto Dal Bó and Prof. Frederico Finan received the 2019 Williamson Award at the 2019 Society for Institutional and Organizational Economics (SIOE) conference. Assoc. Prof. Juliana Schroeder was recognized as a “Best 40 Under 40” professor by Poets & Quants. Cheit Awards for Excellence in Teaching went to professors Adair Morse, Ross Levine, Yaniv Konchitchki, and Hoai-Luu Nguyen, along with lecturers Janet Brady, Eric Reiner, and Veselina Dinova.

12. Going deeper on culture

We continued to embed our Defining Leadership Principles (DLPs)—Question the Status Quo, Confidence Without Attitude, Students Always, and Beyond Yourself—throughout the school. In January, the Berkeley Haas Cultural Initiative launched with a  pioneering conference where executives from Facebook, Netflix, Zappos, Pixar Animation Studios, Deloitte, and other “culture aware” companies mingled with top academics from around the world. Separately, Haas supporters donated over $200,000 to distribute as grants for efforts aimed at keeping our DLPs strong. After reviewing 29 proposals from students, faculty, and staff, grant reviewers funded six projects and initiatives.

In ambitious new book, Henry Chesbrough shows how to get results from open innovation

Adj. Prof. Henry ChesbroughWhen Adj. Prof. Henry Chesbrough, PhD 97, was researching open innovation in the pharmaceutical industry, he found one pharma that had 7,000 scientists working on tens of thousands of compounds. But the company only licensed out less than one a year, shelving the others.

Although some of those shelved compounds may have succeeded in the marketplace, companies may fear they’ll look bad if a product they passed on thrives externally—a phenomenon he calls “Fear of Looking Foolish” or FOLF. “Our interview subjects admitted to us that FOLF was a major constraint to overcoming this,” Chesbrough writes.

It’s been 16 years since the publication of Chesbrough’s Open Innovation launched a new paradigm for bringing new technologies to market, spurring companies to embrace the power of collaborative business models.

Open Innovation Results book coverChesbrough is back to close the loop with his most ambitious work to date. Open Innovation Results: Going Beyond the Hype and Getting Down to Business (Nov. 2019, Oxford University Press) offers a clear-eyed view of the challenges that limit organizations’ ability to create and profit from innovation and practical tools for overcoming those challenges.

The book also provides a roadmap to restore productivity and economic growth for society as a whole—in the U.S. and globally.

David Teece, the Thomas W. Tusher Professor in Global Business, says Open Innovation Results breaks new ground. “It links open innovation not only to enterprise performance but to national economic growth as well,” he says. “There are important insights into the difference between ‘open’ and ‘free’ innovation, along with insightful characterizations of China’s use of open innovation practices and policies.”

Open innovation centers on the idea that companies stand more to gain from making use of external ideas and sharing their own innovations through licensing, sales, partnerships, and spinoffs than from trying to do it all themselves. A famous example: IBM’s development of the PC.

“We wanted to do something small and fast…so it was critical to IBM’s success that we partnered with Intel and Microsoft and created the PC industry together,” said Jim Spohrer, Director of Cognitive OpenTech at IBM and a member of the Berkeley Innovation Forum, a group created by Chesbrough to help corporate managers involved in innovation.

Has the promise of innovation been overhyped?

Chesbrough opens the book with an “exponential paradox” that’s at the heart of our current global economic situation: While new technologies are emerging faster and faster—some say exponentially—economic productivity is slowing. Has the promise of innovation been overhyped?

The real problem, Chesbrough argues, is that promoters of innovation too often chase after “bright and shiny objects,” focusing on the initial stage of development and neglecting the rest of the process. Innovation results depend on what you finish, not on what you start, he says.

“In order to advance prosperity, we must not only create new technologies, but we must also disseminate them broadly and absorb them, which means having the knowledge and skills to put them to work in our business,” Chesbrough says. “Only then do we really see the social benefit of these new technologies, and only then will these measures of economic productivity catch up again.”

Chesbrough shapes these three facets of innovation—generation, dissemination, and absorption—into a new paradigm for managing R&D and bringing new technologies to market. Rooted in two decades of extensive field research, the book is packed with real examples of successes and failures from companies such as Procter & Gamble, IBM, Intel, General Electric, Bayer, and Huawei.

Carlos Moedas, the European Union’s Commissioner for Research, Science, and Innovation, says the book’s complex concepts are easily relatable. “[It’s] a must-read for politicians, policy-makers, and business leaders who want to make a difference by designing the right policies that drive not only the generation of new ideas, but…their broad dissemination and adoption by society,” he says.

About Henry Chesbrough

Henry Chesbrough is widely known as “the father of open innovation”. He has built an international reputation for his insights into the innovation process. The author of six books (translated into 12 languages) and numerous articles, he has received 70,000 citations to his work on Google Scholar. He has appointments at both UC Berkeley’s Haas School of Business and at Esade Business School in Barcelona.

Prof. Chesbrough founded and organizes two external groups of companies that each meet twice a year to discuss challenges in managing innovation: the Berkeley Innovation Forum (32 member companies) and the European Innovation Forum (20 member companies). He has taught at the Haas School of Business for the past 14 years, at Esade Business School for the past 7 years, and taught previously at Harvard Business School for 6 years. He also serves as the Faculty Director of the Garwood Center for Corporate Innovation at Berkeley Haas.

Open Innovation Results is available for pre-order on Amazon.

6th World Open Innovation Conference to focus on societal and business challenges

World Open Innnovation Conference 2019 logoHow societal challenges can provide organizations with unexpected growth opportunities will be the theme as innovation leaders gather for the sixth annual World Open Innovation Conference in Rome Dec. 12-13.

Organized by the Garwood Center for Corporate Innovation, the conference, with an expected attendance of more than 200, will for the first time be held at Rome’s Libera Università Internazionale degli Studi Sociali Guido Carli, or LUISS for short. With the theme “Opening Up for Managing Business and Societal Challenges,” the event will include presentations on topics ranging from conceptualizing an open innovation ecosystem to implementing new ideas.

“Useful knowledge has spread so far so fast that no single organization can or should try to do everything on its own,” says Adj. Prof. Henry Chesbrough, conference chair and author of the new book Open Innovation Results: Going Beyond the Hype and Getting Down to Business (available Nov. 28). “The pace of growth in ideas is accelerating, making it even more imperative to open up to participate effectively in these flows of knowledge,” he says.

Francesco Starace, chief executive of Italian energy company Enel Group, will discuss developments in green and renewable energy as the keynote speaker. Other speakers include University of Toronto Professor Anita McGahan and University of Surrey Professor Annabelle Gawer, as well as other leaders in the energy and technology industries.

Conference activities include presentations of 60 papers, 15 posters, and five industry challenges, in which companies test open innovation’s impacts on real-world problems. A panel of a group of energy firms will discuss the companies’ combined activities and resources to invest in energy-related startup firms.

Chesbrough in the early 2000’s coined the term “open innovation,” which centers on the idea that organizations should open themselves to knowledge flows. Companies that pursue open innovation don’t rely on only their own internal expertise, but buy or license technology and business processes from others. This approach speeds up product cycles, spreads risks and rewards with others, and increases product differentiation, Chesbrough says. At the same time, companies that license or sell inventions that they’re not using can generate additional revenue, spread out fixed costs, and validate ideas and technologies that could have been overlooked, he adds.

Chesbrough’s early research concentrated on the technology sector’s pursuit of open innovation. Since then, other industries, including the automotive, chemical, consumer products, and financial services industries have followed. Similarly, some governments and nonprofits have also benefited from open innovation, finding ideas from collaborative partnerships and crowdsourcing to benefit health-care systems and city planning.

“No one organization has a monopoly on great ideas,” says Chesbrough.

In his new book, Chesbrough examines some of the challenges companies face in seeking innovation from others, including cultural resistance to pursuing ideas invented elsewhere and ingrained businesses practices that discourage collaboration. The book also links innovation at companies to national economic growth. All conference attendees will receive a copy of the book.