Category Archives: Business

Too Much Democracy Is Bad for Democracy

The major American parties have ceded unprecedented power to primary voters. It’s a radical experiment—and it’s failing.
By Jonathan Rauch and Ray La Raja – Americans who tuned in to the first Democratic presidential debates this summer beheld a spectacle that would have struck earlier generations as ludicrous. A self-help guru and a tech executive, both of them unqualified and implausible as national candidates, shared the platform with governors, senators, and a former vice president. Excluded from the proceedings, meanwhile, were the popular Democratic governor of a reliably Republican state and a congressman who is also a decorated former marine.

If the range of participants seemed odd, it was because the party had decided to let small donors and opinion polls determine who deserved the precious national exposure of the debate stage. Those were peculiar metrics by which to make such an important decision, especially given recent history.

Had the Democrats seen something they liked in the 2016 Republican primary? The GOP’s nominating process was a 17-candidate circus in which the party stood by helplessly as it was hijacked by an unstable reality-TV star who was not, by any meaningful standard, a Republican.

Americans rarely pause to consider just how bizarre the presidential nominating process has become. No other major democracy routinely uses primaries to choose its political candidates, nor did the Founders of this country intend for primaries to play a role in the republican system they devised.

Abraham Lincoln did not win his party’s nomination because he ran a good ground game in New Hampshire; rather, Republican elders saw in him a candidate who could unite rival factions within the party and defeat the Democratic nominee in the general election.

Today’s system amounts to a radical experiment in direct democracy, one without precedent even in America’s own political history.

The two major parties made primaries decisive as recently as the early 1970s. Until then, primaries had been more like political beauty contests, which the parties’ grandees could choose to ignore. But after Hubert Humphrey became the Democrats’ 1968 nominee without entering a single primary, outrage in the ranks led the party to put primary voters in charge. Republicans soon followed suit. more>

Updates from Chicago Booth

Why do analysts low-ball earnings forecasts?
By Martin Daks – The market-research company FactSet reports that for each quarter over the past five years, an average of 72 percent of companies in the S&P 500 beat earnings estimates. Past research, including by University of Pennsylvania’s Scott Richardson, University of California at Irvine’s Siew Hong Teoh, and Boston University’s Peter D. Wysocki has found that analysts’ forecasts become more pessimistic and thus beatable as the quarter end approaches, but an unaddressed question is how this walk-down affects clients. If analysts revise their forecasts downward each quarter to placate managers, wouldn’t this confuse the investors who ultimately pay for their services?

According to Chicago Booth’s Philip G. Berger and Washington University’s Charles G. Ham and Zachary R. Kaplan, analysts walk down forecasts by suppressing positive news from quarterly forecasts, not by issuing misleading negative revisions. When analysts have positive news, they will often revise the share price target upward or state explicitly that they expect companies to beat earnings estimates, while leaving the quarterly forecast unrevised. Suppressing positive news leads to beatable forecasts—behavior that benefits corporate executives but carries important implications for both the individual investors who rely on these predictions and researchers studying investor expectations.

When securities analysts receive updated information after issuing a quarterly forecast, they have three options: revise the current-quarter earnings forecast; issue an alternative forecast signal, such as a revision to the share price target or future-quarter earnings; or issue no additional forecast.

By not disseminating all information through the current-quarter earnings forecast, which is widely available through commercial databases, analysts provide an advantage to investment clients who have paid for access to the full breadth of their research product.

“Analysts convey information in ways that enable them to be of service to clients, who they care about, and, at the same time, to avoid displeasing corporate managers, who they also care about,” Berger says. “Non-clients, who rely on earnings forecasts because they do not have access to the whole of an analysts’ work product, end up with skewed information, but this is not a primary concern for the analysts’ business.”

The researchers demonstrate that a simple strategy based on buying companies expected to beat earnings, using share price target revisions and the text of reports, yields significant abnormal returns, suggesting the market does not see through the analysts’ strategy for conveying information selectively. more>

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Updates from McKinsey

Bias busters: Avoiding snap judgments
Despite their best intentions, executives fall prey to cognitive and organizational biases that get in the way of good decision making.
By Tim Koller, Dan Lovallo, and Phil Rosenzweig – The board of a mining company thinks it’s time for a new CEO, one who understands the increased role of technology in the industry and can inspire the next generation of mining leaders. The hiring committee has a few internal candidates in mind—namely, the heads of the copper, nickel, and coal divisions.

All three have similar years and types of industry experience and comparable P&L responsibilities. But the front-runner in the minds of many on the committee is the head of the copper division. After all, copper has contributed the most to the bottom line over the past few years, while the other divisions have been lagging. It must be because the unit head is a tech-savvy people person, with a good understanding of industry trends, they reason. “Seems like a no-brainer,” the head of the hiring committee notes.

But how can the board be sure that it is picking the best candidate for the top job?

These distortions don’t apply only to company performance; the halo effect can also alter how we view individual performance. That’s what happened in the case of the mining company. The front-running CEO candidate’s division had performed well in large part because of a significant spike in the price of copper, something over which he had no control. Yet the halo of high profits shined on the business-unit leader, the hiring committee’s initial impressions of him stuck, and he was appointed CEO.

Much to the board’s dismay, the new CEO did not demonstrate either skillful use of technology or strong leadership, two capabilities that were critical for this role. Early in his tenure, the company incurred billions of dollars in losses. more>

Updates from Adobe

The Simple Life
By Jenny Carless –By day a graphic designer, by night a nature photographer, Anders Bundgaard focuses on simplicity, no matter the medium.

Bundgaard’s interest in graphic design was first piqued during an internship at an advertising agency. After finishing school, he sought out a series of courses—including year-long programs in print and reproduction, drawing, advertising, and multimedia—to develop the skills he needed.

At 21, Bundgaard moved from Denmark to London in search of new and interesting work. “My first job here was for a company that designed film posters,” he says. “I really liked the work and continued in that direction.”

Today, Bundgaard’s graphic design work is mainly aimed at the film industry. His portfolio includes film posters, motion graphics for trailers, and title sequences.

Whether working in print or motion, his preferred style is simple and clean.

“I try to get to the core of a project and then distill it down to the bare minimum to communicate the idea,” he says. more>

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New Microeconomics: How Evolution Explains Resource Distribution

By Blair Fix – Through years of schooling, mainstream economists are trained to ignore the obvious facts about human nature. The theories that economists learn make it impossible for them to understand human sociality.

Economists are trained that humans are asocial ‘globules of desire’. This is Thorstein Veblen’s satirical term for ‘homo economicus’, the economic model of man.

As Veblen makes clear, economists’ model of human behavior is bizarre. Indeed, the assumptions are so far-fetched that one wonders how this ‘theory’ ever gained acceptance. I’ve spent years trying to make sense of homo economicus as a scientific theory. I’ve concluded that this is a waste of time. Economists’ selfish model of humanity is best treated not as science, but as ideology.

Unlike scientific theories, ideologies are not about the search for ‘truth’. Instead, they are about rationalizing a certain worldview — usually the worldview of the powerful. Economists’ selfish model of humanity is a textbook example.

The discipline of economics emerged during the transition from feudalism to capitalism. During this period of social upheaval, business owners battled to wrench power from the landed aristocracy. To supplant the aristocracy, business owners needed to frame their power as legitimate (and the power of aristocrats as illegitimate). Their solution was devilishly clever. The new business class appealed to autonomy — the mirror opposite of the ideals of feudalism.

Feudalism was based on ideals of servitude and obligation. Serfs were obligated to perform free work for feudal lords. And these lords, in return, were obligated to protect serfs from outside attackers. This web of obligation was rationalized by religion — it was a natural order ordained by God.

To upend this order, business owners championed the ideals of autonomy and freedom. Business owners claimed to want nothing but to be left alone — to pursue profit unfettered by government or aristocratic power. From this world view, the autonomous model of man was born. It had nothing to do with how humans actually behaved. It was about rationalizing the goals of business owners. They wanted power, but they framed it as the pursuit of freedom and autonomy. “Power in the name of freedom” is how Jonathan Nitzan puts it. more>

Updates from Adobe

By Cristina Daura – llustrator Cristina Daura grew up steps away from an amusement park. A trail led straight from her house to the top of Barcelona’s Tibidabo mountain, where a large church looms over a colorful theme park full of twinkly lights, charming roller coasters, creepy vintage animatronics, and sweet-smelling air. Daura’s family held an annual pass, so she could pop in any time. Today, the artist’s playful but dark illustrations are clearly inspired by the kitsch, the bright colors, and her memories of this extraordinary place.

A bit of an outcast when she was younger, Daura found her community at comic book stores. Always with a sketchbook in hand, she thought she wanted to design comic books for a living. When she found out that illustration work paid better, she switched gears—but she continues to take inspiration from the way comics tell a story.

Daura also uses symbols and an intentionally limited color palette to communicate, with many symbols repeated in multiple works. With the symbols, Daura has created her own representational language—and because she doesn’t like to explain her work, the viewer is left to interpret meaning on their own. more>

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The New Era of Sustainable Supply Chains

By Mary Page Bailey – To improve sustainability, materials manufacturers are welcoming new digital technologies and process innovations into their global supply chains

From palm oil to plastics, the global supply chains of many critical raw materials are evolving as consumers and manufacturers increasingly seek sustainable and renewable options. Digital technologies, including blockchain, Internet of Things (IoT) sensors and modeling tools, are facilitating these supply-chain transitions by enabling unprecedented data visibility and analyses. At the same time, chemical manufacturers are turning toward process and chemistry innovations to improve the sustainability of their raw materials.

Blockchain, in particular, provides many specific capabilities that are helping manufacturers realize more sustainable sourcing practices. In the plastics sector, for instance, DOMO Chemicals (Ghent-Zwijnaarde, Belgium; www.domochemicals.com) and Covestro AG (Leverkusen, Germany; www.covestro.com), along with the Circularise initiative (www.circularise.com/plastics), are partnering to implement blockchain technology to improve traceability and transparency in plastics manufacturing.

“Blockchain can be applied to many challenges in the plastics value chain, such as complex record keeping and tracking of products. Blockchain serves as a less corruptible and better automated alternative to centralized databases,” says Jordi de Vos, founder of Circularise. Blockchain provides encoded information storage on a network-to-network chain, which validates data to protect business dealings and prevents the theft or manipulation of documents – a unique combination of transparency and security.

The Circularise platform creates a digital twin of a material, component or product to build end-to-end traceability by integrating audit reports, certifications, material parameters and more. In addition to making materials traceable, Circularise aims to protect stakeholders’ privacy – the protocol is specifically developed to enable the disclosure of relevant supply-chain information without having to share sensitive data. more>

Updates from ITU

Why ITU strives to be the world’s most inclusive standardization platform
By Bilel Jamoussi – The global ICT ecosystem is a remarkable feat of engineering and a similarly remarkable feat of international collaboration.

The ICT industry relies on technical standards to an extent rivalled by few other industry sectors.

Our networks and devices interconnect and interoperate thanks to the tireless efforts of thousands of experts worldwide who come together to develop international standards.

International standards provide the technical foundations of the global ICT ecosystem – today’s advanced optical, radio and satellite networks are all based on ITU standards.

95 per cent of international traffic runs over optical infrastructure built in conformance with ITU standards. Video will account for over 80 per cent of all Internet traffic by 2020, and this traffic will rely on ITU’s Primetime Emmy winning video-compression standards.

Standards create efficiencies enjoyed by all market players, efficiencies and economies of scale that ultimately result in lower costs to producers and lower prices to consumers. more>

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The Crisis of Social Media

By Adrian Shahbaz and Allie Funk – Internet freedom is increasingly imperiled by the tools and tactics of digital authoritarianism, which have spread rapidly around the globe. Repressive regimes, elected incumbents with authoritarian ambitions, and unscrupulous partisan operatives have exploited the unregulated spaces of social media platforms, converting them into instruments for political distortion and societal control.

While social media have at times served as a level playing field for civic discussion, they are now tilting dangerously toward illiberalism, exposing citizens to an unprecedented crackdown on their fundamental freedoms. Moreover, a startling variety of governments are deploying advanced tools to identify and monitor users on an immense scale.

As a result of these trends, global internet freedom declined for the ninth consecutive year in 2019.

Social media allow ordinary people, civic groups, and journalists to reach a vast audience at little or no cost, but they have also provided an extremely useful and inexpensive platform for malign influence operations by foreign and domestic actors alike.

Political leaders employed individuals to surreptitiously shape online opinions in 38 of the 65 countries covered in this report—a new high.

In many countries, the rise of populism and far-right extremism has coincided with the growth of hyperpartisan online mobs that include both authentic users and fraudulent or automated accounts. They build large audiences around similar interests, lace their political messaging with false or inflammatory content, and coordinate its dissemination across multiple platforms.

Cross-border influence operations, which first drew widespread attention as a result of Russian interference in the 2016 US presidential contest, are also an increasingly common problem.

Authorities in China, Iran, Saudi Arabia, and a growing list of other countries have expanded their efforts to manipulate the online environment and influence foreign political outcomes over the past year. Malicious actors are no doubt emboldened by the failure of democratic states to update transparency and financing rules that are vital to free and fair elections, and apply them effectively to the online sphere. more>

Updates from Chicago Booth

How multinational companies help spread recessions
By Bob Simison – The Great Recession a decade ago was one example of how economic cycles across the world can move in parallel, a phenomenon that economists don’t fully understand. It could be that a common event, such as a surge in oil prices, affects many economies at the same time—or perhaps linkages between countries transmit economic shocks from one country to the world economy.

One such linkage is multinational corporations,  according to Marcus Biermann, a postdoctoral scholar at the Catholic University of Louvain, and Chicago Booth’s Kilian Huber, who explore the role of multinationals in spreading the global recession by analyzing the ripple effects of one German bank’s struggles during the 2008–09 financial crisis.

Commerzbank was Germany’s second-biggest commercial lender behind Deutsche Bank. Losses on trading and investments abroad hammered the bank, especially after Lehman Brothers collapsed in September 2008. Commerzbank’s capital fell by 68 percent between December 2007 and December 2009, which forced the bank to reduce its aggregate lending stock by 17 percent. Biermann and Huber find that this pullback in credit available to German parent companies affected subsidiaries in other countries, thus helping to transmit the economic contraction. more>

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