Tag Archives: Chicago Booth

Updates from Chicago Booth

Why we should teach people how to lie
By Chana R. Schoenberger – Could you handle being honest—totally, brutally truthful, without even a well-intentioned falsehood to smooth over a social situation—for three days?

Most people don’t think they could, at least not without ruining their family, social, and work lives. Fibs, white lies, and half-truths (along with, perhaps, more egregious whoppers) are such an important part of our interpersonal tool kit that going without them seems next to impossible.

But Chicago Booth’s Emma Levine, along with Carnegie Mellon’s Taya R. Cohen, asked exactly that of a group of research subjects and came away with a surprising conclusion: it’s not as bad as it sounds.

The researchers asked some participants to be completely honest in every interaction, with every person in their lives, for three days, while other participants were asked simply to be kind or conscious of their words. The participants predicted that being forced into honesty would make them unhappier than if they had to be kind or just aware of what they were saying to others. They anticipated frayed relationships as a result of abandoning the lies they typically use to cover up awkward or uncomfortable situations.

But being honest didn’t torpedo subjects’ friendships, family connections, or jobs.

“The experience of being honest is far more pleasurable, leads to greater levels of social connection, and does less relational harm than individuals expect,” Levine and Cohen write. more>

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Updates from Chicago Booth

Never mind the 1 percent Let’s talk about the 0.01 percent
By Howard R. Gold – Since the Great Recession, America’s wealthiest 1 percent have been demonized as fat cats who have grown ever richer while the middle class has stagnated. While protesters have called for the 1 percent to be taxed more heavily, economists have been digging into data to develop a better understanding of who the top earners are.

These economists have been seeking to measure income inequality and wealth inequality, and to understand the nature of the 1 percent’s income and assets.

But the data also reveal disparities within the 1 percent. The 1 percent, it turns out, have their own 1 percent. more>

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Updates from Chicago Booth

Lost money? Reinvest!
By Erik Kobayashi-Solomon – Investors sometimes play a psychological trick on themselves when they lose money, research suggests—and that mental accounting trick may help improve their investment performance.

According to Cary D. Frydman and David H. Solomon at the University of Southern California and Chicago Booth’s Samuel Hartzmark, investors who sell a losing investment often avoid the psychological pain by immediately reinvesting in another stock. By doing so, instead of thinking of the action as realizing a loss, they frame it as rolling capital into a related investment. The reference point used to compute gains and losses is linked to the amount paid for the original asset.

That mental accounting trick may help them avoid an often-made mistake. A key insight of behavioral finance is that investors, to avoid the pain of realizing a loss, fall prey to the disposition effect: they tend to be more likely to sell winners than losers. But the act of reinvesting makes investors more willing to sell a losing stock and realize a loss sooner. more>

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Updates from Chicago Booth

15 middle-class jobs that can’t be automated—a CBR thought experiment
By Howard R. Gold – A much-publicized 2013 study by Oxford University researchers Carl Benedikt Frey and Michael A. Osborne estimates that “about 47 percent of total US employment is at risk” from advances in computerization, particularly machine learning, robotics, and artificial intelligence. Using US Bureau of Labor Statistics data, Frey and Osborne rated 702 occupations on a scale of 0 to 100 percent for risk of displacement by emerging computer technologies. Workers in heavily blue-collar industries such as production, construction, transportation, maintenance and repair, and farming and fisheries face the highest risk, along with white-collar employees in service and sales.

The job categories at lowest risk, according to Frey and Osborne: management; computer, engineering, and science; education, legal, arts, and media; and, of course, health care. The latter accounted for half of the 20 occupations to which Frey and Osborne give the lowest probability of replacement by computerization.

Core skills such as “originality,” “social perceptiveness,” “assisting and caring for others,” “persuasion,” and ”negotiation” are the most difficult for computers to replicate, Frey and Osborne determine. (For more, see “If robots take our jobs, will they make it up to us?” July 2017.) more>

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Updates from Chicago Booth

What has happened over the past 40 years in the United States, particularly in cities?
By Veronica Guerrieri – It is well known that the US has experienced a large increase in income inequality, which, in my view, is one of the biggest problems of the US economy. At the same time, there has been an increase in neighborhood segregation, especially in larger cities: the rich are more and more concentrated in rich neighborhoods and the poor in poor neighborhoods. Alessandra Fogli of the Federal Reserve Bank of Minneapolis and I document a strong correlation between inequality and residential segregation.

The data show that cities with more segregation have a bigger education gap between the children of rich and poor families—and have less intergenerational mobility, which measures how hard it is to become rich if your parents are poor. In rich neighborhoods, it’s easier for kids to get a good education, and the return on education is higher. There are better schools, parents invest more in after-school activities, and there are stronger peers. This means that segregation amplifies inequality. At the same time, inequality increases segregation because richer people are happy to pay more to live in better neighborhoods. more> https://goo.gl/Qxi1wD

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How to split equity without drawing blood
By Mike Moyer – We live in a world where entrepreneurs and early-stage company participants get taken advantage of so frequently that we hardly notice. Bad equity deals are the rule, not the exception. Fairness is rare.

The intent for fairness is there in the way equity is split among business partners, but the practice of fairness is not. This is a correctable problem.

When a person contributes to a start-up company and does not get paid for her contribution, she is putting her contribution at risk with the hopes of getting a future reward. And, while the timing and the amount of the future reward is unknowable, the amount of the contributions at risk is knowable. It is equal to the fair market value of the contributions.

Because it’s impossible to know when or even if the rewards will ever come, we can never know how much people must put at risk to get the rewards. Every contribution, therefore, is essentially a bet on the future of the company, and nobody knows when the betting will end. more> https://goo.gl/F3ELyY

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Identify and rise above load-bearing assumptions
By Linda E. Ginzel – How could you build a really, really tall building without building really, really thick walls?

A man named William Le Baron Jenney came up with the answer. Jenney is widely recognized as the father of the American skyscraper, and according to Chicago lore, he had a breakthrough idea when he observed his wife placing a very heavy book on top of a tall metal birdcage. The cage not only supported the weight of the book, Jenney could see that it could have easily supported a whole stack of books. A stack of books piled high and balancing on a birdcage—what an image.

Jenney introduced the idea of a complete, steel skeleton, and he built the first fully metal-framed skyscraper in Chicago in 1884. Just as his wife used a birdcage to support the weight of a very big book, Jenney used metal columns and beams to support his building from the inside.

This story demonstrates the combined power of shedding a default assumption that weighed people down with making a major conceptual shift, which, in this case, provided architects the strength they needed to build higher.

Many of us face load-bearing assumptions, perhaps about management, strategy, finance, or leadership. For example, you may assume that the economic world is a zero-sum game.

Shedding assumptions is not an easy task because many have served you well in the past, and there is risk in abandoning them. Yet one of the most important skills that you can acquire is a willingness to question your load-bearing assumptions and make a different choice, when necessary. more> https://goo.gl/zR2hFR

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Updates from Chicago Booth

By Robert Shiller – The human species, everywhere you go, is engaged in conversation. We are wired for it: the human brain is built around narratives.

We call ourselves Homo sapiens, but that may be something of a misnomer—sapiens means wise. The evolutionary biologist Stephen Jay Gould said we should be called Homo narrator. Your mind is really built for narratives, and especially narratives about other humans. That is why advertisers tend to focus not on a product itself, but rather on somebody doing some human action related to the product.

Narratives are contagious: they spread from one person to another. Some narratives disappear quickly; others can last a long time.

The stock market gives us opportunities to construct narratives. For instance, earlier this year there were narratives around the Dow-Jones Industrial Average eclipsing 20,000 points for the first time in its history.

In reality, that’s absolutely meaningless: the Dow started at 40 points in 1896, but it could have started at 50, or something else. Yet we constructed narratives around this moment.

Why do narratives affect economics? Because when we want to understand a depression or recession, for instance, we have to understand why some people will stop spending. Recessions happen when people stop buying things: they don’t buy a new car; they don’t buy a new house. So why not? They might say they stopped spending because recession struck, but that doesn’t tell me why the recession started. I think the catalysts for events such as that are related to narratives. more> https://goo.gl/hjpU4r

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How sales taxes could boost economic growth
By Dee Gill – Many big economies are stagnating, and economists are running out of options to fix them.

The conventional monetary policy for encouraging spending has been to drop short-term interest rates. But with rates already near, at, or below zero, that method is all but exhausted. Some economists have also started to empirically and theoretically question the power of forward guidance, in which central banks publicize plans for future interest-rate policies, at the zero lower bound.

To create the rising prices that fuel higher wages and economic growth, central banks must convince consumers and companies to spend more money. But controversial asset-buying programs that brought down long-term interest rates have not also produced sustained price increases as hoped, and they have inflated central-bank balance sheets.

The idea that the threat of a sales-tax hike might stimulate stagnant economies has been around for some 25 years. But before the researchers homed in on the German VAT increase, economists had not documented such an effect in real life. more> https://goo.gl/exG06C

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What happened to your goals?
By Alice G. Walton – The problem with big resolutions is that motivation tends to wane over time, says Chicago Booth’s Ayelet Fishbach, who studies motivation and decision making. People start out strong, but then reality sets in as they realize it’s easier to set goals than to carry them out.

Research by Fishbach and others can help people salvage failed goals, or achieve new ones.

Every endeavor has a starting point and an end point, which can be as specific as meeting a work deadline in one week or as general as losing weight. One reason many people fail to reach their objectives, says Fishbach, is that they tend to set goals that are difficult or even impossible to achieve, or too general. Making them more concrete and achievable—goals you can envision yourself completing—may yield better results.

Yet effective targets should be ambitious. As long as the goal is within reach, the more you expect from yourself, the more you’ll achieve, as people often respond to a challenge by working harder. more> https://goo.gl/drSWPY

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