Tag Archives: Chicago Booth

Updates from Chicago Booth

Blockchain’s weakest links
By Chana R. Schoenberger – Blockchain” has become a business buzzword. Commentators, thought leaders, and business experts are highlighting how the distributed-ledger technology promises to revolutionize business and logistics. Universities are teaching courses in blockchain. Blockchain jobs are “booming in Asia,” reports CNBC.

Blockchain “lets us imagine a world that’s not dominated by Google, Facebook, or, for that matter, the [US National Security Agency], one where we, the people, the core components of global society, get to say how our data is managed,” reads The Truth Machine: The Blockchain and the Future of Everything.

It’s a lot of attention for what is essentially an accounting technology. The plumbing behind financial services is generally unaccustomed to such publicity.

Companies are expected to spend $2.1 billion on blockchains by 2018, and $9.2 billion by 2021, according to research firm IDC. But first, like any new technology or market—and blockchain is both, in some sense—it has to overcome a few issues to prove its staying power.

For starters, there are different types of blockchains, and researchers have identified some potentially severe challenges facing the most ubiquitous type, known as “proof-of-work.” The choices companies and others make in the near future about which system to use, and how to use it, will determine how blockchain systems progress—and if blockchain does indeed mark a next era of tech.

Because bitcoin mining is a proof-of-work system, miners use electricity to run computers as they race to solve math problems to earn the right to validate the next block in a blockchain, and thereby win a bitcoin reward. This has raised another big concern with Nakamoto’s system: energy use.

As Bitcoin prices surged, so did mining and its impact on the power grid. If Bitcoin were a country, it would rank 39th in worldwide energy usage, behind the Philippines (38th) and ahead of Austria (40th), more>

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Updates from Chicago Booth

Why we’re all impact investors now
By Chana R. Schoenberger – Laurence “Larry” Fink, the founder and CEO of BlackRock, the world’s largest asset manager, which has more than $6 trillion in assets under management, issued an open letter to CEOs this past January—and reportedly sent many of them into a tizzy.

Fink’s letter said society is demanding that companies, public and private, need to “serve a social purpose,” benefiting not just shareholders but also employees, customers, and neighbors. And, he explained, from that point forward, BlackRock would be “eager to participate in discussions about long-term value creation and work to build a better framework for serving all your stakeholders.”

Executives, he wrote, should be able to answer their questions about the company’s actions. For example, what role does the company play in the community? How is it managing its impact on the environment? Is it working to create a diverse workforce?

“The time has come for a new model of shareholder engagement,” he wrote.

For nearly 50 years, many have been guided by the idea, laid out most famously by Milton Friedman, that the most appropriate way to create social change is to give profits to investors, and taxes to the government, and use that money to make an impact. more>

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Updates from Chicago Booth

The secrets of shopping
By Amy Merrick – A woman suffering from a headache walks into a drugstore. She faces a shelf of remedies: mostly bottles of branded aspirin, such as Bayer. Next to those colorful, heavily advertised boxes are store-brand packages of generic aspirin. The woman puts the generic into her basket and goes home.

A quartet of researchers find that she’s not alone, as sophisticated shoppers—such as doctors or pharmacists, the people most likely to know whether the extra few dollars spent on a brand are worth it—opt to buy generic headache drugs more often.

In fact, a doctor or pharmacist is 18 percentage points more likely than the typical shopper to buy a private-label headache remedy. The magnitude of the difference surprised one of the researchers, Matthew Gentzkow, Richard O. Ryan Professor of Economics and Neubauer Family Faculty Fellow at Chicago Booth.

“The effects are really big across a lot of health-care categories,” Gentzkow says. The researchers estimate that if all US consumers were to start shopping like pharmacists, they could save a collective $410 million a year on headache remedies. more>

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Updates from Chicago Booth

No, America is not more divided than ever before
By Howard R. Gold – It may seem sometimes like the United States is coming apart. “While rural America watches Duck Dynasty and goes fishing and hunting, urban America watches Modern Family and does yoga in the park,” write Chicago Booth’s Marianne Bertrand and Emir Kamenica.

“The economically better-off travel the world and seek out ethnic restaurants in their neighborhoods, while the less well-off don’t own a passport and eat at McDonald’s.” Conservatives, they write, favor masculine names for boys while liberals prefer more-feminine names, and men play video games while women browse Pinterest.

These kinds of cultural splits can have economic, social, and political consequences in that they may ultimately reduce social cohesion within a country. But according to Bertrand and Kamenica, who measured cultural divisions over time, the cultural gap in the US is largely stable—not widening.

The data reveal that divisions definitely exist. Watching certain movies or television shows, reading certain magazines, or buying particular consumer products are predictable markers of traits such as how much money people make or how far they got in school. more>

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Updates from Chicago Booth

The robots are coming, and that’s (mostly) a good thing
By Nicholas Polson and James Scott – We teach data science to hundreds of students per year, and they’re all fascinated by artificial intelligence. And they ask great questions.

How does a car learn to drive itself?

How does Alexa understand what I’m saying?

How does Spotify pick such good playlists for me?

How does Facebook recognize my friends in the photos I upload?

These students realize that AI isn’t some sci-fi droid from the future; it’s right here, right now, and it’s changing the world one smartphone at a time. They all want to understand it, and they all want to be a part of it.

And our students aren’t the only ones enthusiastic about AI. They’re joined in their exaltation by the world’s largest companies—from Amazon, Facebook, and Google in America to Baidu, Tencent, and Alibaba in China.

As you may have heard, these big tech firms are waging an expensive global arms race for AI talent, which they judge to be essential to their future.

Yet while this arms race is real, we think there’s a much more powerful trend at work in AI today—a trend of diffusion and dissemination, rather than concentration. Yes, every big tech company is trying to hoard math and coding talent. But at the same time, the underlying technologies and ideas behind AI are spreading with extraordinary speed: to smaller companies, to other parts of the economy, to hobbyists and coders and scientists and researchers everywhere in the world.

That democratizing trend, more than anything else, is what has our students today so excited, as they contemplate a vast range of problems practically begging for good AI solutions. more>

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Updates from Chicago Booth

In praise of ‘messy economics’
By Marianne Bertrand – The broader public does not trust economists.

A 2017 YouGov poll revealed that only 25 percent of people in the United Kingdom trust us. That is in contrast with an 82 percent trust level in doctors, and 71 percent trust in historians. It is only thanks to politicians that economists escape the bottom of the list.

Some of this distrust, and sometimes outright dislike, comes, I believe, from a misunderstanding of what economists study and teach. For too many, economics is equated to a toolbox of tricks, masquerading as a science, that teaches people and companies how to make as much money as possible, at whatever cost to society.

That is not what economics is about. I hope it goes without saying that misleading and cheating should never be part of anyone’s job description, including economists’. Nothing good happens to our economy or our society when some businesses flourish because they cheat while other businesses struggle because they remain honest.

Rather, economics studies how people and companies make choices under constraints. more>

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Updates from Chicago Booth

Foreign currency? No thanks. Investors prefer their own currencies and the US dollar
By Chana R. Schoenberger – Globalization and integrated financial markets allow companies and investors worldwide to work together more closely—but investors still strongly prefer to buy assets in their own currency or in the US dollar, research suggests. This means US companies that issue bonds only in the dollar are uniquely able to borrow from abroad.

Harvard’s Matteo Maggiori, Chicago Booth’s Brent Neiman, and Columbia’s Jesse Schreger looked at international capital flows from investors’ purchases of corporate securities, using a data set of $27 trillion in investment positions provided to them by Morningstar, an independent investment-research company. They find that investor portfolios are more strongly biased toward their own currencies than standard models, such as the kind used at the Federal Reserve or International Monetary Fund, would imply.

If a German company issues securities denominated in Canadian dollars, for example, the buyers of those securities will mainly be Canadian. This bias is so strong “that each country holds the bulk of all securities denominated in their own currency, even those issued by foreign borrowers in developed countries,” the researchers write. more>

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Updates from Chicago Booth

The danger of making policy based on assumption
By George J. Stigler – The denunciation of American complacency, however, is not my purpose, at least not my explicit purpose. I admire the humane and generous sympathies of our society—sympathies that extend to the uneducated and the uncultured and the unenterprising and even the immoral as well as to the educated and the cultured and the enterprising and the moral.

We are a people remarkably agreed on our basic goals, and they are goals which are thoroughly admirable even to one, like myself, who thinks one or two less fashionable goals deserve equal popularity.

Fortunately, our agreement on basic goals does not preclude disagreement on the way best to approach these goals. If the right economic policies were so obvious as to defy responsible criticism, this would be an intolerably dull world. In fact, I believe that each generation has an inescapable obligation to leave difficult problems for the next generation to solve—not only to spare that next generation boredom but also to give it an opportunity for greatness. The legacy of unsolved problems which my generation is bequeathing to the next generation, I may say, seems adequate and even sumptuous.

It is not wholly correct to say that we are agreed upon what we want but are not agreed upon how to achieve it. When we get to specific goals, we shall find that our agreement does not always extend to orders of importance. For example, some people are willing to preserve personal freedom of choice for consumers even if the choice is exercised very unwisely in some cases, and others will be more concerned with (say) the health of consumers which these unwise choices may impair. Nevertheless, it is roughly true that we know where to go.

We do not know how to get there. This is my fundamental thesis: we do not know how to achieve a given end. more>

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Updates from Chicago Booth

Why Bitcoin and blockchain may stumble
By Alex Verkhivker – In mid-May, the Bitcoin Gold market suffered what’s known as a 51 percent attack. A market participant with sufficient computing power was able to take control of the underlying ledger and commit fraud, Quartz reported. Other cryptocurrencies have reportedly been similarly attacked.

Could this sort of thing sink cryptocurrency markets completely?

Even those who dismiss Bitcoin as a fad often praise blockchain, the open-source digital-ledger technology underlying it, as a breakthrough in electronic record keeping. The innovation of Bitcoin’s founder, Satoshi Nakamoto, was to create a process in which people have trust in a database that lacks a centralized authority such as a government, court, or bank; rather, records are verified by anonymous “miners,” who create a verified trail, or chain, of transactions.

When bitcoins are exchanged, information about the transactions is grouped together into a block. The miners race each other to solve a computationally intense puzzle, and the winning miner adds a block to the chain, while other miners verify that the new transactions are accurate. All miners keep a copy of the chain of transactions, making the blockchain a verifiable and trusted but ultimately decentralized database.

This process was a significant computer-science innovation, but how does it work economically speaking? In thinking that through, Eric Budish crafts a worrying argument about the future of Bitcoin. more>

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Updates from Chicago Booth – Are profits passé?

Why we’re all impact investors now
By Chana R. Schoenberger – For nearly 50 years, many have been guided by the idea, laid out most famously by Milton Friedman, that the most appropriate way to create social change is to give profits to investors, and taxes to the government, and use that money to make an impact. For just as long, other investors have argued in favor of divesting from companies to make a political or social point—dumping shares of gun manufacturers or fossil fuel companies, for example.

But with the rise of index funds, divesting from individual company stocks has become more difficult, even though there are some funds that try to do this by designing a basket that tracks an index while excluding “sinful” stocks. It can even be counterproductive.

Investing with a social motivation has moved from divesting from certain companies based on values or preferences to a more regular form of seeking alpha, by investors who hope their stakes will generate returns as well as save the world.

Like financial philanthropists trying to affect specific social issues, these investors are often using markets and investing tools to shift behavior and create change. As a result, there are big shifts in thinking about the role of investors, who have had the luxury of worrying primarily about profits. Some prominent managers and investors are advocating for joining other stakeholders to push for change. more>

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