Air pollution has disproportionately hurt minority and low-income communities, leading to reduced life expectancy, research has found. Yet a lack of data has stymied efforts to quantify the problem—and its causes—nationwide.
A recent study, anchored by new satellite-based measures of air quality, found some encouraging news: The gap between Black and white Americans’ particulate exposure has declined over the past two decades, due largely to enforcement of the Clean Air Act in the country’s most polluted areas.
Berkeley Haas Assoc. Prof. Reed Walker, along with Princeton University Prof. Janet Currie and Economist John Voorheis of the U.S. Census Bureau, combined satellite measurements of local air quality with administrative data on 30 million household’s locations to examine how racial disparities in pollution exposure have evolved over the last 20 years. Their working paper was recently released by the National Bureau of Economic Research (NBER).
“The existing research on air pollution has been hampered by a sparse Environmental Protection Agency monitoring network, but satellite-based measurements of air quality have greatly expanded the ability of policymakers and researchers to fill in the huge gaps in exposure measurement throughout the U.S.,” said Walker, of the Business and Public Policy Group. “We’ve used this new data to come to show how the Clean Air Act has led to a narrowing of the gap in pollution exposure between Black and white communities.”
Walker said he believes this is the first paper “to explore the underlying causal drivers that contributed to the narrowing of this gap.” The researchers combined fine-grained measures of ambient air pollution levels of particulate matter for the entire United States. with more than 30 million individual survey responses from the U.S. Census and the American Community survey. They found that while African Americans were more likely to live in areas with higher pollution, relative improvements in air quality from 2000 to 2015 have narrowed this gap considerably.
This raised the question of whether the improvements seen over the last 20 years were because Black Americans moved to less-polluted neighborhoods, or whether neighborhoods with high percentages of Black Americans became cleaner.
The researchers estimated that only a small share of the reduction in the exposure gap was due to shifting population patterns, as Black Americans moved to less-polluted neighborhoods and white Americans moved to relatively dirtier ones, such as city centers. However, they estimated that these mobility patterns accounted for only 13% of the decrease in the Black-white exposure gap over the study period.
Instead, they found much stronger evidence for a second explanation—that the decline in the Black-white mortality gap was primarily the result of air quality improvements within areas with a higher share of Black residents. And the improved air quality in these areas correlated with the introduction of national ambient air quality standards for small particulates (PM2.5) in 2005, when the Environmental Protection Agency (EPA) began enforcing these new standards under the Clean Air Act.
Each year, the EPA targeted counties that were not in compliance with the pollution standards. Following enforcement actions, pollution levels declined by about 8% in non-compliant counties relative to those counties in compliance with the Clean Air Act, Reed and his co-authors found.
In fact, the researchers estimated that 60% of the overall decline in the Black-white pollution gap was due to the enforcement of Clean Air Act regulations in the most polluted areas.
“The Clean Air Act has disproportionately improved air quality in low-income and minority communities, and this is almost by design given how the Act was written over 50 years ago,” Walker said.
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.
Berkeley 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.
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
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.
The global trade in enslaved people is directly linked to distrust in Africa’s financial system.
Nearly two-thirds of Africa is “unbanked” and has no relationship with a financial institution—one of the highest rates in the world, according to the World Bank. The rapid rise of mobile money sent through smartphones is steadily boosting financial inclusion across the continent, but the lack of access to traditional banking accounts and loans is depriving millions of Africans of the ability to save and borrow money they could use to start a business or move to a neighborhood with better schools.
This poor access to financial services has a multiplier effect far beyond savings and lending, affecting everyday life including employment options, says Berkeley Haas Prof. Ross Levine. “How well the financial system operates can shape an individual’s overall socioeconomic horizon, even if that person never takes out a loan,” he says.
Many scholars have looked at the myriad reasons for the lack of financial inclusion in Africa, ranging from poverty to the effects of colonialism. In the first study of its kind, forthcoming in The Economic Journal, Levine and two coauthors have pinpointed another important factor: The devastating impact of the global slave trade that gripped Africa most intensely from 1400 to 1900.
When Africans were captured from their villages and sold into lives of toil in faraway countries—often by other Africans who sold enslaved people to Europeans, Arabs, and Indians—the trust of those who remained in their neighbors and in institutions fundamentally broke down. The fact that this distrust could linger so long after slavery faded was a surprise to Levine. “I would have thought that institutions, social coherence, and trust would have had plenty of time to emerge once the slave trade ended,” he says.
To measure the connection between the African slave trade and trust in financial institutions, Levine and his colleagues analyzed data about the intensity of slave trading within 51 countries as well as within 186 ethnic groups. To isolate the effect of the slave trade, the researchers controlled for a number of factors that could have influenced the results, such as a country’s legal system and how long it has been independent, as well as individual-level factors such as education, income, and age of the population.
The study showed a strong, negative correlation between the intensity of a country’s historical exposure to the slave trade and the rate that households currently own or use an account or debit card at a bank or other formal financial institutions; save money at formal financial institutions; obtain short-term loans, credit cards, or mortgages from banks; and use the internet or mobile phones to make financial transactions. They also cross-checked the country-level results with results by ethnic group, finding that ethnicities with higher rates of enslavement also had higher rates of mistrust in the financial system.
To quantify the magnitude of the effect, the researchers examined a hypothetical scenario in which one group of countries that had a relatively higher intensity of slave trading (such as Sierra Leone, Malawi, Ethiopia, and Guinea) suddenly became much more like countries that had a relatively lower intensity of slave trading (countries such as Burundi, Zimbabwe, Niger, and South Africa). In that scenario, the probability that the average person would have saved at a bank, received a bank loan, or made a transaction with a mobile money account would have increased by 50%. In a continent with a low starting point for participation in the financial system, that represents an increase in financial inclusion of millions of Africans.
Wide variation in financial participation
Along with the high-level macroeconomic impacts, the study showed considerable variation across countries in the real world:
Credit card use in Mauritius and South Africa—where the slave trade was less intense—was greater than 16%, while it was below 0.5% in Madagascar, Sudan, and Ethiopia, where people were sold into slavery at relatively higher rates.
In Mauritius, where the slave trade was negligible, only 0.3% of the respondents indicated a lack of trust in banks.
More than 16% of those surveyed had received a loan in the last year in Botswana and Mauritius, which largely escaped the slave trade, while less than 2.5% of survey respondents received a loan in the last year in Guinea, which had a much more intense slave trade. However, loan rates did not match the intensity of slave trading in several other countries (Niger had far lower loan rates than Uganda, though slave trading rates were similar).
All this data shows something else beyond the numbers. “Factors that influence culture have a very long-run, enduring effect on communities,” says Levine. “Culture exerts a first-order impact on many of the economic outcomes that people care about.”
That insight offers some hard lessons for financial services businesses and policymakers, since trust is vital for finance to work, says Levine. Putting your money in a bank involves a certain trust that the legal system and the government are going to properly safeguard your money. Similarly, financial institutions must be able to trust that a loan recipient will pay them back. Without trust, the cost of enforcing every single contract would become overwhelming and reduce the overall availability of credit, and therefore limit economic growth and opportunity.
“Establishing trust is important for financial services companies everywhere, but it is much more difficult to create that trust in countries that had a more brutal experience with slavery.”
With 5% of the world’s population and 25% of its prisoners, the United States is the most punitive country in the world. Among developed countries, the disparities are even more striking: The U.S. relies on incarceration for 70% of criminal sanctions, while in Germany, it’s 6%.
Why is the U.S. system so harsh?
A new paper by Asst. Prof. Conrad Miller and Benjamin Feigenberg of the University of Illinois at Chicago reveals how diversity, often celebrated as one of America’s foundational assets, might also help explain the punitive nature of its criminal justice system. The paper also offers new insight on the system’s disparate impact on African Americans, who are incarcerated at six times the rate of whites and face longer sentences for similar crimes.
Punishment varies widely between counties
The researchers split their investigation into two steps, looking first at whether punishments differ between counties. They collected county-level data over several years on every criminal arrest in four states—Alabama, Texas, Virginia, and North Carolina. Did the arrest lead to charges? Did the charges lead to formal sentencing? Did the sentence involve jail or prison time? Even when controlling for factors like age, race, and criminal record, they found dramatic variation in how different counties punish the same crime.
“People arrested in the top 25% of counties that are most punitive are two- to four-times as likely to be sentenced to jail or prison than someone who has committed the same offense in one of the most lenient counties,” says Miller, a labor economist and research fellow at the National Bureau of Economic Research whose research focuses on hiring and discrimination. “There is this huge difference in outcomes, even in the same state, with the same laws on the books.”
Diverse counties more punitive
Next, the researchers investigated a potential explanation for this variation. Prior research shows more diverse locales tend to be relatively miserly with social benefits. The underlying theory suggests that people in racially homogenous places are more willing to pay taxes into social welfare because the beneficiaries are likely to look like them, to be a part of their “in-group.” Perhaps individual preferences around punishment reflect the same bias, they theorized, and punishment is lighter in counties where prospective defendants are likely to be of the same race.
This is precisely what they found. Arrests in jurisdictions that were predominantly white or predominantly black were least likely to result in a jail or prison sentence. The severity of punishments climbed as counties grew more diverse and peaked in jurisdictions roughly that were about 30% black. (Though Miller and Feigenberg looked primarily at black-white racial divides, they noted that some Texas counties with large Latino majorities were among the most lenient.)
Reflection of voter preferences
In theory, at least, this presents a simple fix. “Our results suggest that if all jurisdictions within these four states adopted the policies of the most homogenous jurisdictions, then overall confinement rates would decline by about 15%,” Miller says — a significant figure considering the four states they study comprise roughly 20% of all prisoners confined by states. But how, practically, to make this happen is complicated.
In Miller’s view, the fact that racially diverse counties tend to be most punitive is likely a reflection of voter preferences, for which there is no policy fix. County residents vote prosecutors and judges into office, and these office-holders, in turn, strive to represent the will of their constituents. In racially diverse counties, that means prosecutors push for harsher charges—felony rather than misdemeanor, for example—and judges impose stiffer sentences—prison rather than probation or community service.
No simple fix
These findings also complicate efforts to reduce racial disparities in the U.S. criminal justice system. It would seem that, at least within the states Miller studied, these disparities are in part a result of how populations are distributed. It is more common for large populations of whites to live in overwhelmingly white counties, thereby exposing criminal defendants to relatively lenient systems. Large populations of blacks, on the other hand, tend to live in more racially diverse areas, like Houston, which ends up exposing them to more severe sanctions. In this way, racially unequal punishment is embedded in the geographic spread of populations.
One potential solution, Miller says, is to loosen the bond between voters and prosecutors and judges. That local courts are so tied to local preferences is a peculiar feature of the U.S. criminal justice system, and one that could be changed. Other countries provide models. Still, Miller couldn’t avoid a bit of pessimism when dwelling on the practical takeaway of the work.
“Perhaps there is some kind of broad kumbaya story: If we all had the right interactions at the right point in our lives we wouldn’t think about ‘in groups’ and ‘out groups’ in this particular way,” he says. “But, given the overall results, it’s not clear what the narrow solution to this problem is.”
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.
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.
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.
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.
New Berkeley Haas research sheds light on the psychology of politically incorrect speech—and why it’s so effective
When Rep. Alexandria Ocasio-Cortez refers to immigrant detention centers as “concentration camps,” or President Trump calls immigrants “illegals,” they may take some heat for being politically incorrect. But using politically incorrect speech brings some benefits: It’s a powerful way to appear authentic.
Researchers at UC Berkeley’s Haas School of Business found that adding even a single politically incorrect word or phrase in place of a politically correct one—”illegal” versus “undocumented” immigrants, for example—makes people view a speaker as more authentic and less likely to be swayed by others.
“The cost of political incorrectness is that the speaker seems less warm, but they also appear less strategic and more ‘real,’” says Asst. Prof. Juliana Schroeder, co-author of the paper, which includes nine experiments with almost 5,000 people and is forthcoming in The Journal of Personality and Social Psychology. “The result may be that people may feel less hesitant in following politically incorrect leaders because they appear more committed to their beliefs.”
Cuts across party lines
Although politically correct speech is more often defended by liberals and derided by conservatives, the researchers also found there’s nothing inherently partisan about the concept. In fact, conservatives are just as likely to be offended by politically incorrect speech when it’s used to describe groups they care about, such as evangelicals or poor whites.
“Political incorrectness is frequently applied toward groups that liberals tend to feel more sympathy towards, such as immigrants or LGBTQ individuals, so liberals tend to view it negatively and conservatives tend to think it’s authentic,” says Berkeley Haas PhD candidate Michael Rosenblum, the lead author of the paper (the third co-author is Francesca Gino of Harvard Business School). “But we found that the opposite can be true when such language is applied to groups that conservatives feel sympathy for—like using words such as ‘bible thumper’ or ‘redneck’.”
The researchers asked participants of all ideological backgrounds how they would define political correctness. The definition that emerged was “using language or behavior to seem sensitive to others’ feelings, especially those others who seem disadvantaged.” In order to study the phenomenon across the political spectrum, they focused on politically incorrect labels, such as “illegal immigrants,” rather than political opinions, such as “illegal immigrants are destroying America.”
That allowed them to gauge people’s reactions when just a single word or phrase was changed in otherwise identical statements. They found that most people, whether they identified as moderate liberals or conservatives, viewed politically incorrect statements as more authentic. They also thought they could better predict politically incorrect speakers’ other opinions, believing in their conviction.
The illusion of being easily influenced
In one field experiment, the researchers found that using politically correct language gives the illusion that the speaker can be more easily influenced. They asked 500 pre-screened pairs of people to have an online debate on a topic they disagreed on: funding for historically black churches. (The topic was selected because it had a roughly 50/50 split for and against in a pilot survey; no significant difference in support and opposition across political ideology; and involved both a racial minority and religious beliefs.) Before the conversation, one partner was instructed to either use politically correct or incorrect language in making their points.
Afterwards, people believed they had better persuaded the politically correct partners than the politically incorrect partners. Their partners, however, reported being equally persuaded, whether they were using PC or politically incorrect language. “There was a perception that PC speakers were more persuadable, though in reality they weren’t,” Rosenblum said.
Although President Trump’s wildly politically incorrect statements seem to make him more popular in certain circles, copycat politicians should take heed. The researchers found that politically incorrect statements make a person appear significantly colder, and because they appear more convinced of their beliefs, they may also appear less willing to engage in crucial political dialogue.
In an analysis of hundreds of basketball half-time speeches, Berkeley Haas Professor Emeritus Barry Staw and colleagues found that anger goes farther than inspiration.
It’s a staple of every sports movie: The team is down at the half, and the coach gives an inspirational locker room speech—think Gene Hackman in Hoosiers, Billy Bob Thornton in Friday Night Lights—leading the team to come roaring back to victory. But do pep talks really work?
In a new paper published in the Journal of Applied Psychology, Berkeley Haas Prof. Emeritus Barry Staw and two colleagues, Katherine DeCelles and Peter de Goey, test that question where it counts: the basketball court. Their analysis of hundreds of half-time speeches and final scores from high school and college games found that coaches do better when they shelve the happy talk and bring down the hammer.
In fact, the researchers found a significant relationship between how negative a coach was at half-time and how well the team played in the second half: The more negativity, the more the team outscored the opposition. “That was even true if the team was already ahead at halftime,” Staw says. “Rather than saying, ‘You’re doing great, keep it up,’ it’s better to say, ‘I don’t care if you’re up by 10 points, you can play better than this.’”
This is not the first time Staw has studied basketball. In previous research, he found that NBA coaches were more apt to use expensive draft picks in games—regardless of how well they played—just because they’d paid more for them. Sports, he says, can provide a clear and objective playing field on which to examine behaviors that might not be evident elsewhere.
“In business, there are so many external events and economic factors that it is hard to figure out what is causing organizational performance,” Staw says. “For example, one cannot easily study certain things like the effect of CEO emotions, unless you could convince CEOs to let researchers tape their boardroom talks and office interactions—and even then it would be difficult to figure out whether there are effects on organizational performance.” In basketball, on the other hand, the outcomes are easier to interpret and more definite: the score of your team vs. the opposition.
Analyzing coaches’ emotional expression
The researchers gathered the information for their study by contacting more than 50 coaches for high-school and college basketball teams in Northern California, asking if they could record their half-time locker room talks. Sometimes getting agreement took some doing. “Coaches regard the locker room as their inner sanctum—so it was kind of an achievement just to get the tapes,” he says. One coach dropped out halfway through the study, out of superstition: “The coach complained that every time we taped the game, they lost,” Staw said.
In the end, Staw and his colleagues were left with speeches for 304 games played by 23 teams. They trained coders to rate each halftime talk on the extent that coaches expressed various emotions, ranging from positive (pleased, excited, relaxed, inspired) to negative (disgusted, angry, frustrated, afraid).
Negative speeches can be motivating—up to a point
The results showed two basic effects of coaches’ emotional expression at halftime. First, there was a strong and clear relationship between negative half-time speeches and higher scores in the second half. That is, expressing negative emotion at halftime helped teams perform better in the second half. However, at the most intense end of negative expression, the researchers found somewhat of a reversal of the effect. “We’re talking Bobby Knight–level, when you’re throwing chairs,” Staw says, a reference to the notoriously volatile former Indiana University coach. That is, extremely negative expressions of emotion can impede performance.
The researchers also conducted a controlled laboratory experiment, in which they played selected pep talks for participants, and asked them how motivated or unmotivated they felt after hearing them. Again, Staw, DeCelles, and de Goey found that negative speeches could have a motivating effect, but that the effects of such negativity turned downward rather quickly. In other words, the results showed a more traditional bell curve, where motivation dropped off when the coaches became too angry or too negative.
Not a “license to be a jerk”
Staw notes that in the psychology of leadership, the trend has been to emphasize the idea of “positive affect” driving people to greater performance. A smaller strand of research, however, has surmised that at least in the short term, negative emotion might actually push people to greater effort.
Staw and his colleagues conclude that negative emotion can be underrated as a motivational tool. By expressing anger or dissatisfaction, a leader signals to followers that their performance is not at the level where it should be, potentially driving them to greater effort. “We sometimes strip content from emotion, treating it as simply positive or negative expression, but emotion often has a message carried along with it that causes people to listen and pay attention, as leaders try to correct or redirect behavior,” Staw says.
In a business context, Staw, DeCelles, and de Goey caution against applying the findings too liberally—prolonged negative feedback can lead to demoralized employees. However, in some short-term instances, getting a boost in performance is critical, and the situation may parallel the do-or-die moment at half-time in a basketball game, where expressing anger and disappointment can lead a team to renewed effort and improved results.
“Our results do not give leaders a license to be a jerk,” Staw says, “but when you have a very important project or a merger that needs to get done over the weekend, negative emotions can be a very useful arrow to have in your quiver to drive greater performance.”
Berkeley Haas researchers have identified another driver of the opioid epidemic in the United States: family ties.
In a new study published in American Sociological Review, Asst. Prof. Mathijs de Vaan and Prof. Toby Stuart show that the likelihood of someone using opioids increases significantly once a family member living in the same household has a prescription. They also find that the chances of a relative obtaining a prescription for opioids within a year after a relative they live with gets one rises by 19 percent to over 100 percent, depending on family circumstances. Individuals from low-income households, for example, are the most likely to secure their own prescription after a family member does.
The study is one of the few analyses of the opioid crisis that finds a causal link between a specific action—in this case, the introduction of painkillers into a home—and their growing use. In all, de Vaan and Stuart analyzed hundreds of millions of medical claims and almost 14 million opioid prescriptions written between 2010 and 2015 and contained in a database operated by the state of Massachusetts. They were able to track family members’ health care through shared medical insurance policy numbers.
“Our research finds huge effects on the likelihood that family members who are influenced by other family members will start using opioids,” says de Vaan, a sociologist who studies social networks.
De Vaan and Stuart, who holds the Leo Helzel Chair in Entrepreneurship and Innovation at Haas, suggest two reasons for this contagion: when a family member takes painkillers, other relatives in the home observe firsthand its effects. Patients also typically receive more pills than they need, which means relatives may be tempted to experiment with leftovers sitting in the medicine cabinet.
Family members’ exposure to painkillers then increases the likelihood that they will visit a doctor within a year and obtain their own prescription. Other research has shown that Americans are more willing to ask for—and receive—specific treatments than consumers in other countries.
Because of this, de Vaan and Stuart offer a new insight into the role of physicians in the opioid epidemic. While it’s long been believed that physicians who work in the same community or are connected in other ways rely on each other for advice and adopt similar forms of treatment, the authors show that the explosion in opioid prescription rates may be coming from patients, too.
“The actions of one doctor toward one patient affect the requests that that patient then makes of other doctors he or she visits,” says de Vaan. “We find that physicians are not only influencing each other directly when it comes to opioid prescriptions. They’re influencing each other by steering patient demand.”
A causal link
Sociologists have long studied the role that social networks have on people’s health. Smoking and alcohol use are two prominent examples of habits families often share.
The problem with research into social contagion is that most of it identifies correlations, but can’t establish cause and effect. It’s possible that other factors—like genetics or the tendency for people to marry others like them—come into play, too.
De Vaan and Stuart, however, were able to establish a causal link between opioid prescriptions and an increase in the drug’s use within families. They did this by narrowing their research to emergency room visits only, where patients are randomly assigned to doctors who prescribe opioids at vastly different rates—so the likelihood that one patient received a painkiller prescription over another was random. The experiment also eliminated the possibility that family members who later got a prescription got one from the same doctor or that family members were visiting the same provider, such as a primary care physician.
Finding prevention methods that work
De Vaan and Stuart suggest several steps to address the spread of opioid use within families. To prevent so-called “doc shopping,” states that track prescription drug use and make that information available to doctors could also include data on family members’ access to medications. To avoid violating the privacy of relatives, de Vaan says the program could simply issue a “risk” score that would signal to doctors that their patient has been indirectly exposed to painkillers at home.
Policymakers could also expand upon existing efforts to collect leftover prescription drugs—namely through National Prescription Drug Take Back Day—by paying people to return their excess supply. The upfront costs would likely be offset by the money saved in addiction treatment and other costs, de Vaan says. Doctors should also be trained on how to push back when patients ask for painkillers.
“We’ve identified a specific driver of opioid consumption, so all of these steps make a lot of sense,” de Vaan says.
The stock market’s recent rise reflects a dramatic shift in wealth from workers to investors, according to new research by Prof. Martin Lettau
In decades past, a rising stock market was a reflection of economic growth. But no longer.
New research by finance Prof. Martin Lettau has found that economic growth accounted for less than a quarter of the stock market’s rise over the past 30 years—compared with 92% of the increase in the prior three decades.
The biggest driver of the recent bull market? A dramatic shift in wealth from workers to investors, accounting for 54% of the market’s increase since 1989.
That’s the conclusion of Lettau’s new paper, “How the Wealth Was Won,” co-written with Daniel Greenwald of MIT and Sydney Ludvigson of New York University. They show that most of the stock market gains of the past three decades have come from shareholders getting a bigger and bigger piece of the economic pie.
Lettau’s research points to a potentially critical driver of the growing wealth inequality plaguing the U.S.: At a time of slowing economic growth, those at the top of the wealth distribution are reaping most of the rewards, while the share of income received by the rest of households has declined.
The research explores hot-button issues that are not the standard fare for financial economists. We spoke with Lettau, an expert in investments and financial markets who holds the Kruttschnitt Family Chair in Financial Institutions, about how the stock market has seized the lion’s share of 30 years of economic growth, and whether this trend is sustainable.
You write about a widening chasm between the stock market and the broader economy. What specifically are you referring to?
U.S. stock values have grown faster than the economy over the past 29 years. After adjusting for inflation, the stock market value of corporations outside the financial sector has risen an average of 8.4 percent a year since 1989. At the same time, the value of the economic output of corporations has climbed just 2.5 percent annually. By contrast, from 1959 to 1988, economic output was expanding faster than stock values.
What did you find was behind this trend?
We considered the entire economic pie that was produced and the different actors in the economy. We found that, over the long run, the movement in stock values stemmed largely from shifts in wealth from labor to capital. Put plainly, the long-standing bull market of past 30 years comes largely from the capital sector getting more of the economic pie than the labor sector.
How big a factor has this shift been in pushing stock prices higher, compared with other factors?
We looked at the factors that standard financial theory considers to be drivers of stock prices, including fluctuations in short-term interest rates, changes in investor tolerance of risk, and economic growth. We did a statistical analysis to measure how much each of these factors contribute to stock market valuations. We found falling interest rates and greater investor appetite for risk have each contributed 11%. Economic growth explains just 23% of the stock price increase. Meanwhile, we estimate that the reallocation of the rewards of production to shareholders and away from labor has accounted for a full 54% of the gains in stock market value since 1989. That’s a sharp turnaround from 1952 to 1988, when other factors accounted for just 8% of the rise in stock prices, while economic growth accounted for 92% of the increase.
Why has capital’s share of the pie grown and labor’s share shrunk?
Our work doesn’t directly address the underlying reasons why we’ve had these shifts. But there’s some work by labor economists that has come up with plausible explanations. One is the decline in union power, which has weakened labor’s voice in setting wages. Another is outsourcing, which moved work to cheaper domestic or international sources of labor, putting pressure on pay. Third is technology, which is replacing manual labor with intensive productive capital. Thirty years ago robotics barely existed. Now it’s everywhere. Well-educated workers reap the benefits, but those without the skills in demand today are left behind.
Inequality of income and wealth have become pressing concerns in recent years. What does your work tell us about the sources of inequality?
This is a very important question, not just in the United States, but in much of the developed world. What our work suggests is that part of increased inequality could be due to the stock market. The overall economic pie is growing, but not at very high rates. The segment of the population that owns stocks has reaped the benefits of this growth relative to those who don’t own stocks. And, while it’s true that more people hold stock today than in the past thanks to retirement investments like 401(k)s, stock ownership is still highly concentrated.
It’s striking that this shift has happened during a period of slowing economic growth—just 2.5% annually versus 4.5% in the prior period, you found. Meanwhile, the Congressional Budget Office (CBO) projects that real GDP over the next decade will grow just 1.7% annually. Is this trend sustainable?
Without fully understanding the economic forces that caused these trends in the postwar data, it is difficult to assess how they will evolve in the future. For example, technological changes are unlikely to be reversed, but other factors could be reversible. If the Congressional Budget Office’s projections for GDP turn out to be correct, and the growth of the total economic pie is sluggish, stock market investors will not see growth rates as in the recent past unless the labor share declines further. Since the end of the great recession, income growth has been robust and kept pace with corporate profits, but it is not clear whether this signals a short-term phenomenon or a change in long-term trends.
You’re bringing together two disciplines that are usually kept separate: financial economics and labor economics. What’s the significance of this?
Our contribution is to connect broad economic trends with the financial markets. We examined the overall economy because we have plenty of data. It would be useful to know on a more granular level who has benefited from the economic shifts we describe. But to do a deeper dive into household wealth is difficult because data is limited. There’s very little information on what kinds of households hold what kinds of assets.
Can’t stop checking your phone, even when you’re not expecting any important messages? Blame your brain.
A new study by researchers at UC Berkeley’s Haas School of Business has found that information acts on the brain’s dopamine-producing reward system in the same way as money or food.
“To the brain, information is its own reward, above and beyond whether it’s useful,” says Assoc. Prof. Ming Hsu, a neuroeconomist whose research employs functional magnetic imaging (fMRI), psychological theory, economic modeling, and machine learning. “And just as our brains like empty calories from junk food, they can overvalue information that makes us feel good but may not be useful—what some may call idle curiosity.”
The paper, “Common neural code for reward and information value,” was published this month by the Proceedings of the National Academy of Sciences. Authored by Hsu and graduate student Kenji Kobayashi, now a post-doctoral researcher at the University of Pennsylvania, it demonstrates that the brain converts information into the same common scale as it does for money. It also lays the groundwork for unraveling the neuroscience behind how we consume information—and perhaps even digital addiction.
“We were able to demonstrate for the first time the existence of a common neural code for information and money, which opens the door to a number of exciting questions about how people consume, and sometimes over-consume, information,” Hsu says.
Rooted in the study of curiosity
The paper is rooted in the study of curiosity and what it looks like inside the brain. While economists have tended to view curiosity as a means to an end, valuable when it can help us get information to gain an edge in making decisions, psychologists have long seen curiosity as an innate motivation that can spur actions by itself. For example, sports fans might check the odds on a game even if they have no intention of ever betting.
Sometimes, we want to know something, just to know.
“Our study tried to answer two questions. First, can we reconcile the economic and psychological views of curiosity, or why do people seek information? Second, what does curiosity look like inside the brain?” Hsu says.
The neuroscience of curiosity
To understand more about the neuroscience of curiosity, the researchers scanned the brains of people while they played a gambling game. Each participant was presented with a series of lotteries and needed to decide how much they were willing to pay to find out more about the odds of winning. In some lotteries, the information was valuable—for example, when what seemed like a longshot was revealed to be a sure thing. In other cases, the information wasn’t worth much, such as when little was at stake.
For the most part, the study subjects made rational choices based on the economic value of the information (how much money it could help them win). But that didn’t explain all their choices: People tended to over-value information in general, and particularly in higher-valued lotteries. It appeared that the higher stakes increased people’s curiosity in the information, even when the information had no effect on their decisions whether to play.
The researchers determined that this behavior could only be explained by a model that captured both economic and psychological motives for seeking information. People acquired information based not only on its actual benefit, but also on the anticipation of its benefit, whether or not it had use.
Hsu says that’s akin to wanting to know whether we received a great job offer, even if we have no intention of taking it. “Anticipation serves to amplify how good or bad something seems, and the anticipation of a more pleasurable reward makes the information appear even more valuable,” he says.
Common neural code for information and money
How does the brain respond to information? Analyzing the fMRI scans, the researchers found that the information about the games’ odds activated the regions of the brain specifically known to be involved in valuation (the striatum and ventromedial prefrontal cortex or VMPFC), which are the same dopamine-producing reward areas activated by food, money, and many drugs. This was the case whether the information was useful, and changed the person’s original decision, or not.
Next, the researchers were able to determine that the brain uses the same neural code for information about the lottery odds as it does for money by using a machine learning technique (called support vector regression). That allowed them to look at the neural code for how the brain responds to varying amounts of money, and then ask if the same code can be used to predict how much a person will pay for information. It can.
In other words, just as we can convert such disparate things as a painting, a steak dinner, and a vacation into a dollar value, the brain converts curiosity about information into the same common code it uses for concrete rewards like money, Hsu says.
“We can look into the brain and tell how much someone wants a piece of information, and then translate that brain activity into monetary amounts,” he says.
Raising questions about digital addiction
While the research does not directly address overconsumption of digital information, the fact that information engages the brain’s reward system is a necessary condition for the addiction cycle, he says. And it explains why we find those alerts saying we’ve been tagged in a photo so irresistible.
“The way our brains respond to the anticipation of a pleasurable reward is an important reason why people are susceptible to clickbait,” he says. “Just like junk food, this might be a situation where previously adaptive mechanisms get exploited now that we have unprecedented access to novel curiosities.”
Berkeley Haas research finds there may be a dark side to the rise of “alternative data” in capital markets
While Assoc. Prof. Panos Patatoukas was discussing Walmart in his Financial Information Analysis course last year, a student brought up the story of how company founder Sam Walton used to count cars in store parking lots to gauge how sales were going.
Patatoukas knew that sophisticated investors had begun doing exactly that on a large-scale basis by analyzing satellite images of retailers’ parking lots, and he began to wonder just how much of an edge it was giving them. So he called up the company that pioneered satellite-image car counting and pitched the CEO on the idea of letting an academic analyze the data. With the help of funding from the Fisher Center for Business Analytics, he landed 4.8 million images of parking lots at 67,000 individual stores across the U.S. owned by 44 major retailers, including Walmart.
The resulting analysis by Patatoukas and Assoc. Prof. Zsolt Katona—the first to quantify in detail the advantages of trading based on satellite imagery of parking lot traffic—found that the strategy can indeed deliver a significant boost for investors savvy enough to exploit it. Traders can accurately anticipate earnings news based on parking lot volume and earn significantly more than a typical benchmark return.
“The informational advantage yields 4% to 5% in the three days around quarterly earnings announcements, which is a significant return over such short window,” Patatoukas says. “If you annualize it, the number is staggering.”
The researchers also found that although this type of satellite data has been commercially available since 2011, the information hasn’t spread beyond a select few large investors, mostly hedge funds. That’s led to a consistently profitable strategy for hedge funds at the expense of individual investors, Patatoukas says: In particular, investors with access to satellite imagery data can get ahead of the rest of the market and target retailers with bad news for the quarter. This investment edge allows them to bet against those retailers by short selling their stock, even as individual investors are still buying.
“What we found is that it’s a gain for large sophisticated investors who can afford the substantial costs of acquiring and processing big alternative data at the expense of Main Street investors,” Patatoukas said. “If it was just a transfer of wealth between hedge funds, that would be a different story, but it’s small individual investors who tend to be on the other side of the trade.”
His working paper—co-authored by Marcus Painter at the University of Kentucky and Berkeley Haas doctoral student Jieyin Zeng—raises questions about individual investor protections in an age of new “alternative data” sources. Even as technology has made trading more accessible to the masses, the rise of big data is creating so-called alternative data that only those with superior resources are tapping into.
The “dark side” of big data
Skilled investors have always competed for an information edge that allows them to outperform the market by even fractions of a percentage point—that’s how Wall Street operates. Until recently, however, those traders had access to the same reports, earnings calls, SEC filings, and other public sources of information as everyone else. Trading on material non-public information, after all, is against the law, and the SEC makes detection and prosecution of insider trading one of its top enforcement priorities.
But technology is increasingly blurring the boundaries between public and private information, creating data opportunities that are legal, but are expensive and often require special expertise to access.
“Technology was supposed to level the playing field, but what I see is the fence separating sophisticated and unsophisticated investors growing higher,” says Patatoukas, who is passionate about teaching his students to analyze public sources of financial information and finds the trend troubling. “That’s the dark side of big data. Our evidence suggests that unequal access to alternative data leaves individual investors outside the information loop.”
How to formulate a trading strategy from outer space
RS Metrics pioneered the analysis of satellite images of parking lots in 2011, with hedge funds as their primary customers. Other companies such as Orbital Insight have followed suit, obtaining images from satellite companies and processing them with both software and human analysts. Not only is the data expensive, but it takes substantial skill to analyze and combine with other information sources to yield results, Patatoukas says. “You have to have the right people, and those people tend to be expensive.”
Patatoukas’ paper lays out exactly how investors can formulate a trading strategy from outer space. Using images from RS metrics from 2011 to 2017 covering 44 major U.S. retailers, including Walmart, Target, Costco, and Whole Foods, the researchers confirmed that year-over-year changes in the number of cars in individual stores’ parking lots is a reliable predictor of quarterly sales—a widely used metric for retailers’ performance. The researchers later added in more images from competing firm Orbital Insight, which covers the same companies, and found that combining the two datasets allowed for even more accurate predictions, and an even more profitable strategy.
In fact, parking lot volume is such a reliable indicator of retail sales that it can be used to identify errors in analysts’ forecasts in the three-week period after stores’ quarterly earnings are in, but before they’re announced to the public. Using data from Markit, a service that tracks daily institutional lending activity, they found a boost in stock lending in the five days before earnings announcements. That’s an indication of “informed short selling activity,” targeting retailers with bad news for the quarter (the strategy works with long and short-sale positions, but the researchers found it is most profitable for short sales).
Meanwhile, drilling into data on trading by individual investors during the same period, they found that individuals are net buyers of the same retailers that the hedge funds are betting against. Main Street investors can’t piggyback on what the hedge funds are doing since the short-selling market is opaque: The general investment community can only see short-interest data twice per month, and only with a significant delay.
In terms of market reaction to earnings announcements, they found no difference between retailers covered by the satellite image companies and those that are not. Clearly, the parking lot intelligence is not increasing price discovery for the market overall, Patatoukas says.
“Over the last seven years it’s been a pretty profitable strategy for hedge funds, and the value of the parking lot signals hasn’t yet been competed away. Part of that has to do with the fact that access to satellite imagery data has been so exclusive,” he says. “Once uncertainty about the signals has been removed and it’s known that there’s value to be extracted, more investors will start using it and the advantage will be competed away.”
In that regard, Patatoukas says, the dissemination of the working paper itself will impact the market for satellite parking lot data in the short term, since it provides the first independent analysis showing whether—and how—trading from outer space works.
In the aftermath of the financial crisis, there has been increased regulatory interest in the role of informed trading and disclosure requirements to protect the fairness and integrity of capital markets. With this in mind, Patatoukas hopes that the paper will get the attention of the regulators. “In a market setting where the line separating public from material non-public information is getting blurrier, the question that regulators need to answer is: What is their role in terms of leveling the playing field for individual investors?”
While the value of the parking lot data will dissipate as technology improves and it becomes more accessible, investors will no doubt find new data sources that will yield insights once only available to company insiders. For example, investors may already be harvesting geolocation data from inside consumers’ pockets as they move around stores with their smartphones, Patatoukas says.
“This is just the tip of the iceberg,” Patatoukas says. “While so far the focus has been mostly on the bright side of big and alternative data, there might be a less auspicious side to the rise of such data in capital markets.”
To mark Equal Pay Day, we’re featuring new work by Prof. Laura Kray, an expert on gender and negotiations, along with Margaret Lee, a postdoctoral research fellow with the Center for Equity, Gender, and Leadership. Equal Pay Day was created in 1996 by the National Committee on Pay Equity to mark extra days that American women would have to work, on average, to earn what male counterparts earned last year.
Professor Laura Kray has doubled down on helping women develop ace negotiation skills: She’s spent much of her career studying gender dynamics in negotiations, and has also taught many hundreds of MBA students and seasoned women executives how to negotiate like pros.
But when it comes to strategies to close the stubborn pay gap that has women earning about 80 percent of what men earn (a statistic that varies by race/ethnicity and how it’s measured), she takes issue with telling women they can simply negotiate their way out of it. That not only puts the onus on women rather than the systemic issues that keep their salaries low, but it perpetuates stereotypes that may not be true, she said.
“We know that people who negotiate get more than those who don’t, but that’s not a ‘women’s issue’—two-thirds of men don’t negotiate,” said Kray, the Warren E. and Carol Spieker Chair in Leadership. “Women are asking, but they’re not always getting what they ask for, and they’re more likely to be told things that aren’t true.”
Kray has long peeled back the surface to look at the deeper structural issues that lead to gender inequality, from implicit bias to lack of transparency to inflexible mindsets. Recently, she’s uncovered a new front in the pay gap battle: team size. Kray and Margaret Lee, a postdoctoral research fellow sponsored by the Center for Equity, Gender, and Leadership (EGAL), are examining how deep-seated biases about leadership may lead to men being put in charge of larger teams than equally qualified women, and being paid more because of it.
Since supervising more people can be more work and indeed justify a higher salary, it’s important to unravel the reasons why men manage larger teams and how that drives higher salaries, she said. Combined with other findings, this new line of research offers another layer of insight into the causes of the gender pay gap—and possible solutions.
“We’re most interested in the structural issues, and the psychological processes of decision makers that produced them,” Kray said, at a recent EGAL presentation on her work with Lee.
Do women ask—and do they get?
Kray points to a 2017 study by McKinsey & Co. and Lean In that asked 70,000 respondents across 222 companies whether they had asked for a raise or negotiated for a promotion. While the percentages varied slightly by race, there were no significant differences between men and women overall.
She and Lee took a closer look at how this plays out among Berkeley Haas MBA students. Analyzing the results of a negotiation exercise completed by 346 MBA students who were asked to structure their own job offer, she found that the women did not sell themselves short, and asked for virtually identical base salaries as men.
In a more disturbing finding from a 2014 paper, Kray looked at the results of a sales negotiation exercise completed by pairs of 298 MBA students, where one acted as seller and one as buyer, with opportunities to lie or misrepresent the truth. Men reported they had lied to female partners in 24 percent of cases, versus just 3.4 percent of negotiations with another man—in other words, seven times as often. And although women reported lying less overall, they also were slightly more likely to lie to other women as to men.
Based on that and other experiments in the paper, Kray concluded that female negotiators are perceived as less competent and more gullible than male negotiators, which leads to them being lied to or manipulated more often—another reason why she believes the problem goes far beyond teaching women to negotiate.
“In this classroom simulation, MBA women were not getting the same treatment in negotiations, regardless of whether they were asking or not,” Kray said. “It’s important to explore if—and how—this plays out in organizational contexts.”
Team size and salary
In their new work, Kray and Lee looked at the results of a Berkeley Haas alumni survey of almost 2,000 full-time professionals who graduated between 1994 and 2014. Respondents had between two and 18 years post-MBA work experience, with an average of seven years. The researchers found that while men’s base salaries were about 8 percent higher than women’s, it’s in the extras—bonuses, share values, and options, which tend to not be tracked as publicly as salaries—where the men’s salaries dwarfed the women’s. These MBA women’s overall compensation averaged about $290,000, or about 66 percent of men’s $439,000 average.
That echoes findings from a recent study by the Forté Foundation, revealing that the salary gap is even higher for MBA women than for women overall (and highest for minority women), and that it only increases with seniority. A 2010 study of Chicago Booth MBA grads found a similar result: thirteen years out, women earned 56 percent of what men earned overall (they traced a large part of that to the career interruptions of motherhood, but found at least 10 percent of it to be unexplained).
Analyzing the Berkeley Haas alumni survey, which contained information on direct reports, Kray and Lee became interested in whether team size is contributing to pay disparities.
They compared the number of subordinates men and women reported managing and found men averaged 11 direct reports while women averaged six. After controlling for multiple factors such as experience and industry, that was reduced to an average of 10 for men and slightly less than 8 for women, but still significant. They then conducted further analysis parsing out team size from salary, and concluded that team size did account for a portion of the pay gap—above and beyond other individual job characteristics.
The researchers then delved further into why men are given larger teams. They conducted surveys of Berkeley Haas undergraduates, and also of subjects recruited through an online platform, and found no differences in men’s and women’s preferences on the number of people they’d feel comfortable managing. Even so, both groups said they preferred male managers for large teams, and female managers for smaller teams.
In another study, they found that people were more likely to associate stereotypically male attributes (e.g. assertive, forceful, aggressive, demanding) with leaders of larger teams, and associate stereotypically feminine attributes (e.g. patient, polite, kind) with leaders of smaller teams. They also found that people do believe that leaders of large teams earn more than leaders of small teams.
Kray and Lee are now more deeply pursuing research on why a team-size bias exists—based not only on stereotypes of who is a more appropriate leader but also on how complex and challenging the jobs of leading teams of various sizes are believed to be. The ultimate goals is to examine how implicit biases about team size justify part of the difference in men’s and women’s pay, and especially the gap that widens with seniority.
What can women do?
In the meantime, Kray—who also serves as faculty director for EGAL—advises women entering a job negotiation to pay close attention not only to their salary and bonuses, but also to how many direct reports they’ll be managing.
“For women who are aiming to maximize their earnings, it is important to make sure they have the headcount to justify what they’re asking for,” she said. “My advice for these aspiring women is: Don’t overlook team size as a factor that could make a difference in your paycheck, especially in the long run.”
EGAL Founding Director Kellie McElhaney said Kray and Lee’s new research is exactly the type of work she wanted the center to support when it launched in 2017.
“This works on two critically important paths: Dispelling long-held and damaging myths that are used to justify inequitable behavior, like unequal pay, and introducing new explanations that need further research, like team size,” McElhaney said.
More than 100 senior business leaders and top scholars from around the world gathered at the Haas School last week to kick off the Berkeley Haas Culture Initiative, which will explore the role of culture and its impact in and across organizations.
The inaugural event was a two-day conference that brought together executives from Facebook, Netflix, Zappos, Pixar Animation Studios, Deloitte, Maersk, and other “culture-aware” companies with academics from a wide range of disciplines, including economics, anthropology, sociology, and psychology.
The initiative is the brainchild of Prof. Jennifer Chatman and Assoc. Prof. Sameer Srivastava of the Haas Management of Organizations Group, who aim to build a community of researchers and practitioners interested in how culture affects everything from hiring to promoting to the bottom line of corporate performance and strategic success.
“We invited a set of organizations that are already devoted to thinking about culture and asked them to explain the problems they are having on the ground, and we invited top academics to offer up a set of approaches to studying culture,” said Chatman. “What we are interested in is developing a shared research agenda to address some of the challenges we haven’t yet been able to solve.”
Launching the Berkeley Haas Culture Initiative
The Berkeley Haas Culture Conference was the first in what Chatman and Srivastava say will be an ongoing series of events, interdisciplinary research collaborations and industry partnerships, as well as communication exchanges on best practices. The idea was to start by taking stock of a field that has become increasing fragmented as it has expanded, Srivastava said.
“Economists study culture, psychologists study culture, and sociologists study culture—all in different ways,” Srivastava said. “At the same time, companies are developing innovative practices related to culture, and it’s often hard to disentangle what works and what doesn’t. We wanted to bring everyone together to start a conversation.”
Haas Dean Ann Harrison welcomed conference attendees by highlighting the school’s commitment to its own distinctive culture.
“You don’t have to be here very long to realize that we at Haas believe that our culture is what really sets us apart,” she said. “If we ask our students why they chose to come here, most say ‘We came here because of the culture.’ And they all refer to our Defining Leadership Principles.”
UC Berkeley at the center of organizational culture research
Attendees noted that UC Berkeley has long been a leader in the study of organizational culture. “It’s really appropriate to have a conference like this here at Berkeley,” said Michael Morris, a cross-cultural psychologist and professor of management at Columbia University. Much of the classic work on organizational culture and cultural sociology came out of the university, he said.
Chatman and Charles O’Reilly, a Haas professor emeritus now at the Stanford Graduate School of Business, are pioneers in the field (both are Haas PhD alumni). Influential work has also come out of Berkeley’s anthropology, sociology, and psychology departments. More than two dozen Berkeley faculty members—including a dozen from Haas—were among those in attendance at the conference.
New data, new methods
Over two days, more than 100 invited attendees tackled a breadth of issues around organizational culture. Academics described their latest research with an emphasis on how data and new research methods, such as using computational approaches and unobtrusive culture measures of culture, are opening up opportunities for companies to better understand how their overall culture—and subcultures within departments or teams—affect their organizations.
For example, researchers are analyzing words used in employee emails for signs of cultural fit among individuals. They can use apps to unobtrusively capture group conversations or obtain video from body cameras. They’re also looking at historical data, such as folklore in pre-industrial countries, to better understand modern social norms. Social media platforms such as Glassdoor, too, have become a rich source of data.
“What is amazing about the papers presented here—and what is very different from 20 years ago—is the quality of the research, the use of lab and field studies, the use of archival data and ethnographies, and the use of sophisticated measurement techniques,” O’Reilly said.
Challenges on the ground
For their part, company speakers spoke candidly about the challenges around culture they are confronting as their businesses evolve, whether through mass hiring, mergers, new business strategies, or changes in leadership.
“Every time we add employees or a group of employees, our culture shifts,” said Inyong Kim, the vice president of employee experience at Adobe, who described how and why the company abolished formal performance reviews in favor of the “ongoing check-in.”
Ever-changing cultures was a theme echoed by others. For Deloitte, the question of how to transition a 150-year-old company for the future meant embracing “courage” as a key cultural value and embedding the attribute throughout the firm, said Jen Steinmann, Deloitte’s chief transformation officer. “Our three tenets of culture are the need to speak openly, support one another, and act boldly,” she said.
Bethany Brodsky, VP of talent for Netflix, talked about the enormous challenges that came with the company’s massive hiring spree after it launched simultaneously in more than 130 countries three years ago.
“When you have all these new people, how do you transmit [your] culture?” asked Brodsky. A word like “feedback,” she noted, doesn’t always translate. “It Russian, it translates closest to ‘criticism,’” she said.
Jennifer Cook, MBA 98 and the CEO of cancer detection startup Grail, said her experiences at six companies of varying sizes over 15 years have taught her that culture is a key leadership tool. “What I’ve realized in looking back is that there were any number of organizational themes and challenges that I had faced, and our teams had faced, for which culture was the relevant solution,” she said.
Seeds of a shared agenda
Bob Gibbons, a professor of organizational economics at MIT’s Sloan School of Management, said he is pleased that the culture initiative’s goals match his own agenda of nudging his field in an applied direction. In his case, that means addressing the question of “How can an economist help a fixed set of people collaborate better together?”
“People in the world know that culture is a thing and that it matters, and they are looking to us for help,” he said. “There’s an enormous academic opportunity, and it’s super important to do it across a whole bunch of disciplines that are represented in this room. I loved hearing that part.”
Founding sponsors of the Berkeley Haas Culture Initiative include Goldman Sachs, Adobe, Deloitte, Maersk, Spencer Stuart, and the UC Investments Office.
Face-to-face meetings between mortgage officers and homebuyers have been rapidly replaced by online applications and algorithms, but lending discrimination hasn’t gone away.
A new University of California, Berkeley study has found that both online and face-to-face lenders charge higher interest rates to African American and Latino borrowers, earning 11 to 17 percent higher profits on such loans. All told, those homebuyers pay up to half a billion dollars more in interest every year than white borrowers with comparable credit scores do, researchers found.
The findings raise legal questions about the rise of statistical discrimination in the fintech era, and point to potentially widespread violations of U.S. fair lending laws, the researchers say. While lending discrimination has historically been caused by human prejudice, pricing disparities are increasingly the result of algorithms that use machine learning to target applicants who might shop around less with higher-priced loans.
“The mode of lending discrimination has shifted from human bias to algorithmic bias,” said study co-author Adair Morse, a finance professor at UC Berkeley’s Haas School of Business. “Even if the people writing the algorithms intend to create a fair system, their programming is having a disparate impact on minority borrowers—in other words, discriminating under the law.”
A key challenge in studying lending discrimination has been that the only large data source that includes race and ethnicity is the Home Mortgage Disclosure Act (HDMA), which covers 90 percent of residential mortgages but lacks information on loan structure and property type. Using machine learning techniques, researchers merged HDMA data with three other large datasets—ATTOM, McDash, and Equifax—connecting, for the first time ever, details on interest rates, loan terms and performance, property location, and borrower’s credit with race and ethnicity.
The researchers—including professors Nancy Wallace and Richard Stanton of the Haas School of Business and Prof. Robert Bartlett of Berkeley Law—focused on 30-year, fixed-rate, single-family residential loans issued from 2008 to 2015 and guaranteed by Fannie Mae and Freddie Mac.
This ensured that all the loans in the pool were backed by the U.S. government and followed the same rigorous pricing process—based only on a grid of loan-to-value and credit scores—put in place after the financial crisis. Because the private lenders are protected from default by the government guarantee, any additional variations in loan pricing would be due to the lenders’ competitive decisions. The researchers could thus isolate pricing differences that correlate with race and ethnicity apart from credit risk.
The analysis found significant discrimination by both face-to-face and algorithmic lenders:
Black and Latino borrowers pay 5.6 to 8.6 basis points higher interest on purchase loans than White and Asian ethnicity borrowers do, and 3 basis points more on refinance loans.
For borrowers, these disparities cost them $250M to $500M annually.
For lenders, this amounts to 11 percent to 17 percent higher profits on purchase loans to minorities, based on the industry average 50-basis-point profit on loan issuance.
“Algorithmic strategic pricing”
Morse said the results are consistent with lenders using big data variables and machine learning to infer the extent of competition for customers and price loans accordingly. This pricing might be based on geography—such as targeting areas with fewer financial services—or on characteristics of applicants. If an AI can figure out which applicants might do less comparison shopping and accept higher-priced offerings, the lender has created what Morse calls “algorithmic strategic pricing.”
“There are a number of reasons that ethnic minority groups may shop around less—it could be because they live in financial deserts with less access to a range of products and more monopoly pricing, or it could be that the financial system creates an unfriendly atmosphere for some borrowers,” Morse said. “The lenders may not be specifically targeting minorities in their pricing schemes, but by profiling non-shopping applicants they end up targeting them.”
This is the type of price discrimination that U.S. fair lending laws are designed to prohibit, Bartlett notes. Several U.S. courts have held that loan pricing differences that vary by race or ethnicity can only be legally justified if they are based on borrowers’ creditworthiness. “The novelty of our empirical design is that we can rule out the possibility that these pricing differences are due to differences in credit risk among borrowers,” he said.
Overall decline in lending discrimination
The data did reveal some good news: Lending discrimination overall has been on a steady decline, suggesting that the rise of new fintech platforms and simpler online application processes for traditional lenders has boosted competition and made it easier for people to comparison shop—which bodes well for underserved homebuyers.
The researchers also found that fintech lenders did not discriminate on accepting minority applicants. Traditional face-to-face lenders, however, were still 5 percent more likely to reject them.
The surge of bitcoin brought cryptocurrencies from tech-nerd toy to household name, and they’re increasingly showing up in investment portfolios. Yet it’s still a mystery to most people how these digital currencies work. Are they even currency? And do they belong in an everyday person’s portfolio?
Haas News posed these questions to Prof. Christine Parlour, a leading scholar of financial markets and the banking system. In the past few years, Parlour has focused on how digital technologies, including new electronic payment methods like PayPal, are transforming the financial system and affecting the stability of banks. She taught a pioneering fintech course at Haas in 2015, and she is now organizing a new FinTech Center, which will be a hub for research on emerging financial technologies.
Recently, Parlour has given close attention to the value of bitcoin and other cryptocurrencies, a burning question in the world of finance. In a working paper, she analyzed market pricing on 222 digital coins and examined the initial coin offering market. Parlour, who holds the Sylvan C. Coleman Chair in Finance and Accounting at Berkeley Haas, shared some of her thoughts on the burgeoning cryptocurrency market.
Q: Many people have heard of bitcoin and other cryptocurrencies, but not many really understand what they are. So, what exactly are cryptocurrencies?
A: Essentially, they’re digital codes that give people the ability to consume and use services. As such, they can be traded and so they do have some sort of transfer-of-value characteristics.
Q: Do they meet the classic economic definition of money—that is, a medium of exchange, a unit of accounting, and a store of value?
A: Despite the great alliterative mouth-feel of “cryptocurrency,” they’re not really currency. Perhaps a more accurate designation would be “cryptocoupons.”
Turning cryptos into cash
Q: Whether they’re cryptocoupons or cryptocurrencies, what can they be used for?
A: Most cryptocurrencies essentially have a use-value associated with a specific underlying commodity or service. For example, sometimes they’re used as a way to compensate artists who are providing their intellectual property. Sometimes they’re used to compensate people who are providing some of their cloud storage capacity to other vendors. So, it’s pretty much anything that you can think of. I’ve even seen marketing specialists and influencers being paid with cryptocurrencies.
Q: Suppose the artist who is paid with cryptocurrency wants cold cash. How can he or she turn the cryptocurrency into conventional money?
A: There are many different exchanges that allow you to convert cryptocurrencies to U.S. dollars or whatever currency you prefer. So, you can switch them out for cash.
New asset class
Q: They’re often described as a new asset class. What’s distinctive about cryptocurrencies as an asset?
A: From a finance point of view, there are lots of things that we view as being assets. And the only thing we care about is that we can use them to get money. I can buy these claims and then, at some point, I can cash the claims back into dollar bills. Hopefully, my money, my piles of dollar bills, will have grown. So inasmuch as you can convert any of these cryptocurrencies to fiat money and back again, you can essentially view them as an asset class.
“Despite the great alliterative mouth-feel of ‘cryptocurrency,’ they’re not really currency.”
Q: Do they have any advantages as an addition to an investment portfolio?
A: What’s interesting about them from a portfolio construction point of view is they essentially add an element of diversification to the standard assets that most people have in their 401(k) plans.
Overvalued or undervalued
Q: Bitcoin and other cryptocurrencies have been among the fastest appreciating assets on record. What has driven the phenomenal increases—and subsequent price plunges?
A: That question presupposes that we know exactly why prices move, but the fact is we don’t. You might as well ask why people like Pokémon Go. I hate to get metaphysical, but essentially there are sometimes things that capture the popular imagination and people just view them as being valuable.
Q: But the market price of bitcoin isn’t metaphysical. It’s real, which raises the question of why it moved the way it did.
A: Why do we have the valuations we currently have in the stock market? People will pontificate about growth rates and outlooks, but they really have no idea.
Q: The price appreciation of bitcoin and other cryptocurrencies has drawn a lot of attention, but how can we determine their value as opposed to their price?
A: I don’t really think that’s a question that should be posed to somebody in finance.
A: Well, what is the value of a Treasury bond? I can tell you what the price is and I can tell you how much I can convert it into U.S. dollars tomorrow. But the value is not clear. So, instead of asking about value, we look at changes in wealth in terms of U.S. dollars and you can certainly do that for cryptocurrencies.
Q: Do you have a personal opinion about whether cryptocurrencies are overvalued or undervalued?
A: The thing I feel very comfortable saying is that there are diversification properties associated with having some cryptocurrencies in your portfolio. We know that the returns are pretty much driven by something that’s independent of the standard things we put in portfolios. A well-diversified portfolio should have a little bit of exposure to crypto.
Q: Wouldn’t it be reasonable for investors to be skittish, given the price volatility of these assets and the lack of regulation of the marketplace?
A: Yes, absolutely. But we have a lot of attempts to start up exchange-traded funds that track cryptos and these are under the usual regulatory umbrellas.
“ICOs are basically created in the febrile brain of the underlying inventor of the coin. It’s just all over the map. They’re fundamentally unregulated and the asset that’s issued doesn’t necessarily bear any resemblance to a security.”
Q: Isn’t there a concern about buying at the top of the market or buying into a heavily speculative market?
A: Yeah, but you can say the same thing about people who bought condominiums in San Francisco.
Q: I want to ask about the related area of initial coin offerings (ICOs). How does an ICO, which gives investors digital coins or tokens, differ from a standard initial public offering in which the investor gets stock providing an ownership claim in the issuing enterprise?
A: ICOs sound like IPOs linguistically, but they’re very, very different. ICOs are basically created in the febrile brain of the underlying inventor of the coin. It’s just all over the map. They’re fundamentally unregulated and the asset that’s issued doesn’t necessarily bear any resemblance to a security. If you are a smaller investor, I would say “caveat emptor,” capitalized, in italics and bold, underlined with stars around it. Basically, only buy a new coin after it has appeared on one of the crypto exchanges—or after the SEC moves forward with more oversight.
Research by Berkeley Haas Prof. Jennifer Chatman shows that narcissistic CEOs are more likely to engage in protracted lawsuits—and are no more likely to win.
In the classic myth of Narcissus, a handsome hunter falls in love with his reflection in pool. Unable to tear himself away, he wastes away and dies. In business, the real problem with excessive self-regard comes less from inaction than from reckless action—such as plunging into the dangerous waters of litigation.
“People who exhibit high levels of narcissism can make charming, extroverted leaders who are bold in taking risks and persisting against formidable odds,” says organizational culture and leadership expertJennifer Chatman, Paul J. Cortese Distinguished Professor of Management at the Haas School of Business. “The downside is they are overconfident and tend to focus on the potential benefits and minimize the costs of risky actions. One manifestation of this is that narcissistic CEOs are more likely to lead their organizations into court.”
The dark sides of narcissism
In a new paper published inThe Leadership Quarterly, Chatman and her colleagues found that narcissistic CEOs are significantly more likely to engage their firms in lawsuits and less likely to settle cases. The paper, co-authored by Stanford’s Charles O’Reilly (Berkeley MBA 71 and PhD 75) and UC Berkeley researcher Bernadette Doerr, is part of a series of four studies that examine the effects that narcissistic leaders have on their organizations.
“It’s true that some level of narcissism can help a leader succeed,” Chatman says. “But there are some very real problems with excessive narcissism that can have drastically negative consequences for companies.”
Those dark sides—according to a growing body of research—include a greater tendency to cross ethical lines, such as engaging in financial fraud or tax avoidance, as well as toxic behaviors such as aggression, bullying, or sexual harassment.In an earlier study, Chatman and her colleagues found that narcissistic CEOs also command significantly higher salaries, winning over boards with their confidence of success, and that the gap between narcissistic CEOs’ compensation and those of their top management teams widened over time.
Employees rate their CEOs
Past research has characterized narcissism with such traits as a sense of personal superiority, overconfidence, a desire for power and admiration, a willingness to manipulate others for personal gain, and an inclination toward hostility when faced with criticism. To gauge the narcissism of CEOs, Chatman and her colleagues went straight to those most likely to feel its effects: their employees. Surveying a sample of 250 employees from 32 of the largest publicly traded US hardware and software firms, the researchers asked employees to rate how much on a scale of 1 to 7 their bosses were “arrogant,” “egotistical,” “temperamental,” “extroverted,”and other adjectives that describe narcissistic personalities.
In addition, the researchers cross-referenced these scores with other measures, such as the number of times CEOs used first-person pronouns in letters and the size of their signatures—both measures associated with narcissism—in order to develop a narcissism score for each executive.
Chatman and her colleagues then correlated these numbers with the number and length of lawsuits each firm noted in its annual report. They found that CEOs who were rated as more highly narcissistic led firms that were more likely to be named as defendants in a lawsuit. Lawsuits involving narcissistic CEOs also lasted longer, implying that those leaders were less willing to settle suits quickly—even though they were no more likely to win them.
Why do narcissistic CEOs engage in lawsuits?
In order to better understand why narcissistic CEOs were more likely to become involved in lawsuits, Chatman and her colleagues also ran two experiments. They used a personality test to gauge participants’ degree of narcissism and then they randomly assigned them to imagine one of two different scenarios: what would they do if they were a CEO launching a new product, and the company’s lawyers said there was either low chance or a high chance they would be sued?
The researchers found a striking difference between those who scored low on narcissistic traits and those who scored high. When the chances of being sued were 20 percent, the narcissists and non-narcissists were equally likely to proceed. Yet when told there was an 80 percent chance of being sued, the narcissists were almost three times as likely to go forward with the launch, with about 62 percent saying they’d proceed.
“Narcissists appear to be both less sensitive to high risk and less likely to listen to advice from expert advisors, especially when there’s a chance of a high payoff,” says Chatman. “Further, this greater propensity for risk reflects narcissists’ confidence in their own judgment and suggests that they may be more likely to engage in extremely risky behavior.”
In another experiment, the researchers found a similar pattern in participants’ likelihood of settling a lawsuit. When told the risk of losing was high, 79 percent of non-narcissistic individuals were willing to settle, while only 40 percent of the narcissists said they’d settle.
Harmful to the bottom line
Taken together, Chatman and her colleagues’ research joins a growing body of literature that shows that narcissism isn’t merely an annoying personality trait that carries with it some ancillary benefits; rather, it can be dangerous to a company’s long-term stability and bottom line.
“We already know that most people—and even the boards of directors who hire CEOs—confuse strong leadership attributes and some of the key attributes of narcissists, such as grandiosity and overconfidence, so CEOs are significantly more likely to be higher in narcissism,” Chatman says. “It’s important to pay attention to the difference, because narcissists appear to have a significant, and negative, impact on the organizations they lead.”
Chatman adds that boards should look for CEOs who have a track record of incorporating expert views into their own thinking, and those who can develop inspiring and strategically relevant visions that bring others along with them, and avoid hiring those with narcissistic personalities.
Berkeley Haas welcomed the two largest MBA classes in the school’s history this semester: 291 full-time students and 276 evening & weekend students, all with outstanding academic credentials.
“We’ve always had the demand and now we’re so happy to have the space to accommodate more students,” said Jamie Breen, the assistant dean of MBA Programs for Working Professionals at Haas. The extra space comes thanks to Connie & Kevin Chou Hall, the student-centered building that opened last fall.
“Haas is a truly unique and special community, and top students from around the world continue to choose us for the quality of our programs and our distinctive culture,” said Morgan Bernstein, executive director of Full-time MBA Admissions. “These students are already coming together as a class, preparing for what we know will be a rewarding time here.”
Full-time MBA Week Zero
The new full-time MBA students arrived last week for an orientation that included tackling a business case, hours of volunteer work at Alameda Point Collaborative, a rousing cohort Olympics, and a session on diversity and inclusion.
“Week Zero has been a great experience—just jam-packed with information and networking, so it was both exhausting and fun,” said Tiffany Tran, MBA 20, who is from Long Beach, CA., and most recently worked at Annie’s (now part of General Mills) as a senior sustainability analyst.
The cohort Olympics for the Class of 2020 was a highlight, she added. “My cohort, Oski, won the championships,” she said. “We’re quite proud of that!”
The class of 291 students—up from 284 last year—is comprised of 43 percent women, and 34 percent international students. As a group, they are academically exceptional, with average GMAT scores of 726 and average GPAs of 3.66.
About one quarter of the new students worked in consulting; 20 are from banking/financial services; 10 percent from high tech; 9 percent from nonprofits; and 7 percent from healthcare/pharma/biotech. The group includes 14 U.S. military veterans, representing the Air Force, Army, Marines, and Navy.
Interim Dean Laura Tyson welcomed the students, noting that the MBA program has transformed thousands of students lives in meaningful ways over the years. “Many, many people come to business school to transform, to make a change in their career path and their goals or their sector or their role in an organization, and that’s what we give people: the skills to do the transformation you want to do, and stay authentic to yourself,” she said.
The MBA program continues to select students who show leadership skills that reflect the school’s Defining Leadership Principles: Question the Status Quo, Confidence Without Attitude, Beyond Yourself, and Students Always.
Oriol Pi Miloro, who arrived at Haas from Barcelona, said all of the students he’s encountered so far share a common awareness of the world beyond themselves. “Every single classmate I have met demonstrated a genuine interest on the most pressing issues of our society,” he said. “And they came to Haas to tackle these issues.”
Miloro said he’s looking forward to joining the Haas Finance Club, the Haas Impact Investing Network and Q@Haas, the LGBTQ club.
“This class is just an amazing group with such an interesting and diverse array of career and life experiences—and an enthusiasm for our school’s mission and Defining Leadership Principles,” said Peter Johnson, assistant dean for the full-time MBA program and admissions.
The class includes a ski instructor who worked with disabled people at Disabled Sports Eastern Sierra; a student who speaks seven languages, including German, French, Arabic, Hindi, Urdu, and Spanish; a student who already holds a master’s in public administration and a juris doctorate and was admitted to the state bar in both New York and Washington, DC; a student who introduced a rural micro-flush toilet to schools in Ghana; and a Black Hawk helicopter pilot.
Each day of “Week Zero”—which was co-chaired by second-year students Annie Sept, Elaine Hsu, and Antoine Orard—centered around one of the Defining Leadership Principles.
Sept said her first impression of the new class is that they are both extremely thoughtful and participatory and that they are “having a blast.”
“I’ve already seen a lot of cohesion and friendship,” she said. “People are comfortable saying vulnerable things to each other. There’s general support from classmates. They’re excited to be here for sure, and that makes us feel good.”
Hiles has founded non-profit organizations, written public policy, managed a large portfolio at the Bill and Melinda Gates Foundation, and raised the most money of any African American woman for her e-portfolio startup, Pathbrite, which helps students document their achievements. Most recently she founded the first women-led private equity fund: Imminent Equities, focused on emerging technologies.
Wes Selke, MBA 07, also joined the class for a debrief on a case they were asked to read about his company, Oakland-based Better Ventures, which is focused on social investments. Better Ventures invests in companies that measure their success not only by revenue and profitability, but also by their products’ quantified, positive social or environmental impact. Other alumni speakers included Tom Kelley, partner at IDEO and founder & chairman of VC firm Design for Ventures in Tokyo, and Manuel Bronstein, vice president of product for Google Assistant.
Evening & weekend class arrives
Last month, a record number of Evening & Weekend students arrived for orientation, called WE Launch, July 27-29. With 276 students, this is the largest class in the program’s history. The class is 33 percent women and 39 percent international.
“Our orientation was such a strong bonding experience for our students, who are all starting to come together as a group,” Breen said. “The study teams plunged right in.”
The Evening & Weekend program has been ranked the #1 part-time MBA program in the U.S. by U.S. News & World Report for the past six years.
On a recent study trip to Ireland, Laura Hassner found herself in a Dublin supermarket chatting with a Slovakian classmate who co-owns 250 bakery outlets about the difference between stores that buy dough from factories versus those that bake from scratch.
For Hassner, EMBA 18, the business strategy conversation was one of many outlining the unique challenges facing small businesses as well as conglomerates during a “The Future of Food” course taught at University College Dublin’s Michael Smurfit Graduate Business School. The course, with 30 international students enrolled, is one of many offered through the Global Network for Advanced Management (GNAM), an international consortium of 30 business schools that Haas joined three years ago.
Founded by the Yale School of Management in 2012, GNAM allows graduate business students to study at a member school, joining other students from around the world for a week of lectures, discussions, field trips, and immersion in another culture.
Students participating in GNAM select from a range of classes and locations; in the fall of 2018, for instance, students at member schools will choose from 16 classes, including “Leadership Challenges in Latin America,” offered at the Pontificia Universidad Católica de Chile School of Business, and “Service Excellence in the Tourism Industry,” taught at the University of Indonesia Faculty of Economics.
While Haas has forged relationships with other business schools in the past, it accepted the invitation to join GNAM to give its students more opportunities in far more countries. Many Haas students have lived or worked internationally, but they haven’t had this kind of learning experience abroad, says Jamie Breen, assistant dean of Haas programs for working professionals, adding that Yale School of Management is the only other U.S. institution in the network.
Studying in a GNAM course “opens up different perspectives for students and makes them think about the assumptions they bring to the table,” Breen says. “They will come to a topic area with a U.S. lens and then suddenly learn the history, government, and regulatory and social framework of the country they’re in,” she said.
For some Haas students, participating in the program helps further interests that are personal as well as professional.
Brian Tajo, EMBA 18, who moved to the U.S. from the Philippines as a child, in June traveled to the Asian Institute of Management in Manila for a class on growth strategies for southeast Asian nations. Tajo, who has family living in the Philippines, says that the course strengthened his understanding of the economies of southeast Asia and will help him ultimately fulfill a personal goal of working in economic development in the Philippines.
“That aligned with my life ambition,” says Tajo, currently a senior product manager at software company Salesforce. Given the growth potential of southeast Asia, “I’m fortunate to have a head-start” in learning about the region, he says.
Women in leadership
All Haas students are eligible to participate in GNAM classes and earn two credits for their overseas study. In June, 35 Haas students attended courses at 11 schools, while 33 students from other institutions came to Haas to take the class “Women’s 21st Century Leadership,” taught by Professor Laura Kray.
Among other issues, students discussed gender inequality around the world. “We certainly had some interesting conversations about how some of the pathways for equality that we’ve identified that work in a U.S.-centric environment require further nuance and contemplation in cross-cultural settings,” said Kray.
The class provided the chance to “brainstorm a future that’s appreciative of women’s leadership strengths,” she added.
Students can also take GNAM’s online classes taught by business faculty at member schools. INCAE Business School in Costa Rica, for one, expects to offer a semester-long class in operations management analytics in the fall, while University of British Columbia’s Sauder School of Business plans to teach a course entitled “Urban Resilience.”
Haas is considering offering online classes in game theory or entrepreneurship.
Breen sees future opportunities for collaboration among Haas and other schools in the network. Possibilities include holding joint alumni events and opening Haas’s annual Global Social Venture Competition to students at network schools, with a goal of forming teams comprised of students from both Haas and member schools.
Participating in GNAM, Breen says, “has been enormously successful for us.”
With his horn-rimmed glasses, wool sweater, and goatee, John Gribowich blends in with many of the buttoned-down professionals in the Berkeley MBA for Executives Program (EMBA) at UC Berkeley’s Haas School of Business.
But Gribowich, 39, is equally comfortable in a robe — as a priest who often leads Mass at St. Joseph the Worker Church after beginning his day serving breakfast at dawn to the homeless in downtown Berkeley.
“I never take my priest hat off,” says Gribowich, who has chosen to live at St. Joseph’s throughout the 19-month EMBA program, which typically draws a cohort of about 70 professionals from around the world to learn leadership, strategy, entrepreneurship, and finance. “I am always conscious of it. As a priest, you are always connected to ministry. I say Mass at church here, and I haven’t ceased doing priestly ministry. I am just not full-time in a parish.”
Last April, Gribowich was released from his parish duties in Brooklyn, New York, where he served as an assistant pastor, to work at DeSales Media Group, the communications arm of the Diocese of Brooklyn. At the time, DeSales, which publishes and broadcasts news from a Catholic point of view, had plans to launch a big tech project to connect and modernize the systems shared by all of the diocese’s local parishes.
Gribowich was chosen to be a consultant for the project, but needed the technology project management skills required to do it. “My bishop said, ‘You need the right schooling,’” he says. “I said, ‘An MBA makes sense for everything I need to do.’ I set my sights to the west, where there’s a great creative and progressive vibe.”
After one visit to UC Berkeley, he decided the campus was a perfect fit for him because of its culture, commitment to public service and social justice, and location as a tech hub. “Who I am as a Catholic, who I am as a priest, who I am as a person, just syncs perfectly with Berkeley’s mission,” he said. “It’s seamless.”
Taking a gamble, Gribowich applied only to Berkeley Haas. It paid off, and he headed to California, joining a diverse EMBA cohort that this year includes an artificial intelligence expert in the Pentagon, four doctors, an expert on rare wine and an Italian woman who commutes to class from her solar power startup job in China. One student speaks seven languages, while another helped rescue 11 hostages in a military operation.
Gribowich is the only student priest in the history of the EMBA program, says Susan Petty, the program’s director of admissions.
Growing up in Bucks County, Pennsylvania, just north of Philadelphia, Gribowich says he felt pulled to the priesthood as early as first grade. While initially drawn to the priest’s external actions, the intellectual and spiritual sides of the vocation had become more intriguing and attractive to him by high school.
Ordained in June 2015, Gribowich was assigned as parochial vicar at St. Nicholas of Tolentine Roman Catholic Church in Jamaica, Queens. His days were busy. “Some people mistakenly think being a priest is just working Sundays,” he says. “But you’re meeting with people, attending to sick calls, going to hospitals. It’s a very demanding and full schedule. No two days are ever the same!”
As a priest, he says he’s aligned with a long tradition of Catholic creativity that he feels has waned in recent years and that he would like to help revive. “There is something about being Catholic that should intrinsically stir innovation, because you are constantly searching for that which is real and true in the world,” he says. Gribowich adds that his creativity is inspired by everything from playing guitar to listening to Bob Dylan to studying a Caravaggio painting.
As a Catholic, Gribowich follows the teachings of the late Dorothy Day, a political radical who was central to the pacifist Catholic Worker Movement, which combines aid for the poor and homeless with nonviolent direct action professed by Indian activist Mahatma Gandhi. Five years ago, Gribowich’s love of Dorothy Day led him to help found a Catholic Worker farm in Harvey’s Lake, Pennsylvania, where workers and students visit to connect with the land. The farm, run by two of his former undergraduate professors from DeSales University, a private Catholic university, donates its produce to local food pantries.
At UC Berkeley, Gribowich finds that the classroom is another opportunity for creative connections and discussions. So far, he’s found the MBA coursework — accounting, data analytics, microeconomics — challenging as well. (His master’s degree is in art history from Pratt Institute, which never required subjects like calculus, he says.) Gribowich says he’s surprised at how supportive his classmates have been as study partners and friends. “There’s a genuine openness,” he says. “I can see these people being friends for life.”
Carol Shumate, one of Gribowich’s EMBA classmates, says students were curious about him from day one, when they all introduced themselves. “They were like: ‘What’s a priest going to do with an MBA in the church?’” she recalls. That first day, she says, Gribowich drew the biggest laugh of all when he described his love of Bob Dylan, whom he has seen perform more than 40 times. “He put his hand up and said, ‘This is how much I love God.’ And then he put the other hand just beneath it and said, ‘This is how much I love Bob Dylan,’ ” Shumate says.
Shumate, who calls Gribowich “one of the most fascinating people I have met in the recent past,“ says she’s always surprised when he talks about history and art, sometimes breaking out in song. One day, he crooned Neil Sedaka’s “Oh! Carol” to her, a song she’d never heard but which he explained to her in detail.
Sometimes Gribowich’s theological background emerges in class, where he likes to strike up conversations and doesn’t shy away from controversy, says classmate Adam Rosenzweig. “He knows a lot and thinks a lot and has been trained about how people relate to God and religion,” he says. “We all bring various expertise to the program, but nobody forgets what (Gribowich) does.”
Professor Lucas Davis, who teaches statistics, says Gribowich’s unique perspective comes through “even in a class as a class as dry as statistics,” where Gribowich, rather than answering a question, might question Davis’s thought process in asking the question.
After Gribowich graduates, he plans to return to Brooklyn and his job at DeSales, where he will navigate the process of providing local parishes and nonprofits with tech tools to manage everything from data — such as historical information found in the church’s marriage and baptism documents — to the church’s financial records.
But for now, he’s enjoying UC Berkeley and the academic experience in his EMBA class, which will head to Santa Cruz this month to explore leadership communications in one of the program’s five week-long experiential field immersions. Other immersions include trips to Silicon Valley, San Francisco, and Washington, D.C., as well as overseas.
“I love it here,” he says. “I’m surrounded by so many creative people. It puts me in awe.”