analysis Week 3. How hardwired is human behavior? / Homo administrans Week 4. Psychological foundations of incentives Week 5. Discover your inner economist / Nature, purpose of the firm Week 6. Specific knowledge & divisional performance measurement Week 7. Market for public services / The use of knowledge in society Week 8. Microeconomics and behavior / The problem of social cost Week 9. Institutions in the contractual process Week 10. Increase profits / The good company / Economic efficiency
Hyde will help your cause. If you can control the beast Instinctive cooperation. Love, justice and efficient sacrifices Role of institutions. The catholic church and la masia catalana Grow up. ‘I only explain nature; I don’t tell people what to do’ Political correctness in academia. Are you scientific enough?
with biology Inform. processor designed by natural selection. Higher goals Sacrifice for the greater good. ‘A man provides to his family’ Economic rationality, better than PC reasoning. Goal-oriented Not maximizing happiness but survival odds… 5.000 years ago Pleasure vanishes so I keep pursuing it. Kill off craving, desire
System 2: Consciousness, medit. Folk wisdom. Cool it off, sleep on it, count 10 before answering Anchoring and adjustment. Heuristics, shortcuts for survival Proper risk allocation. Not visiting Paris, texting while driving Illusion of understanding, good guys vs. bad guys. Civil war I rationalize according to my story. Reinforcing previous views
get more dates? Emotions pull the trigger Kirk or Spock? System 1 introduces greater ex ante rationality Sully’s indecision. Better fast and wrong, as long as you adapt Irrational ultimatums, street-smart skills. What about jealousy? Ignoring the maternal instinct at 30. Hope you don’t regret it The goal is clear: To maximize happiness within the constraint
crime family. Be violent… in a random way Obey the chain of command. But fight back when equal rang Machiavelli, it is better to be feared than loved. Pay them well Gaining information the old way. It’s what they say about you Cut the bullshit. All business problems are commun. problems How to win my loyalty? Keep your mouth shut (Italians only)
an homo economicus. Models Macroeconomics from the ivory tower. Listen the businessman Framing. Decisions influenced by how choices are presented Tricks from a real estate agent: Relativity, anchoring, loss av. Vacations: Availability, representativeness, mental accounting Why keep playing the lottery? Visualizing the real probability
justification. How do we punish a murder in cold blood? Hindsight. Economists have predicted 9 of the last 5 recessions 15 MAD for a bottle of water? Reserve price changes over time Yet, I am happy to be intuitive. Non-fatal decisions, corrections Losing a train for 2 minutes or 20 minutes. Taleb’s advice
as an instinct. Children in orphanages, stimulation Before legislation. Social ostracism regulated individ. behavior Retaliation, tic for tat strategy. Deterrence in irrational violence Reciprocal altruism, nepotism. Laws restricting sexual behavior Mobsters can display a sense of honor. Not the government
Postponing gratification Marshmallow experiment. Discount rate and future earnings Soft paternalism. Taxing sugar or changing the default? Compared to previous generations, we drive more carefully Religion and the moral code. Heaven and hell as social control Catholic ex post forgiveness. Protestant healthier trade values
before reason, risk-aversion, etc. Role of institutions is to fill the gap. Don’t just think politics How to control your instincts? The biggest institution in Spain Moral sentiments appear to help solve impulse-control probl. K misconceptions. Religion (interest rate), democracy (wealth) Institutional transplants. Greeks will not pay Swedish taxes
benefit? Interests best served by #1. Yet, I feel irresistibly attracted by #2 Self-awareness and ex ante anticipation. Save more tomorrow Institutional control. Wedding vows, socio-economic punishm. Willpower? Public deadlines better than New Year’s resolution Increasing rationality. Incentives (AJ42), self-limitation (Visa)
be the issue. How to train curiosity What about my feelings? Why do I hate CR7? Metacognition Be careful with your first decision! Carrot juice… carrot cereal Self-herding. You become what you love, compound knowledge Rules, morality and guilty pleasures. It feels good to be bad Life is struggle. Opt. suffering? I am not running a marathon
aversion Authenticity and exclusivity. Give me a good (Facebook) story I love my origami. Show effort—if you want to charge more Keeping up with the Joneses. Luxury cars are for losers Rolex, a reminder of how hard it’s been to get here. Still stupid Rationalization. You’ll build a narrative that fits your behavior
look random enough? The psychology of time. Past positive, present hedonism, future Remebering self. How to manage nostalgia and expectations We are now judging you… unmercifully. Please, don’t readjust! Not giving a fuck. Are you confortable thinking/acting alone? Say no often, do more of what makes you happy. Nobody cares
them pay! Revealed preferences Time is part of the trade-off too. Cowardice or incompetence? What exactly do you like about this class? Liking categories Why are you here? (Experience? Memory? Social signalling?) Postureo test: If photos not allowed, would you buy the coffee? You are what you delete. Listen to what she doesn’t say
experiment, trial and error. Negative feedback Embrace uncertainty, black swans exposure. Fuck you position Barbell strategy. If you want to write, launch it as a side project Career advice: Gain awareness, kill some dreams, be emotional Why playing it safe in your 20s? Wherever I go, my decision Going off-road. It takes guts to be happy… the courage to quit
world knows what to do: You get a house with a 25 year roof, an indestructible Jap-economy shitbox, you put the rest into the system at 3 to 5 percent to pay your taxes and that's your base, get me? That's your fortress of fucking solitude. That puts you, for the rest of your life, at a level of fuck you. Somebody wants you to do something, fuck you. Boss pisses you off, fuck you! Own your house. Have a couple bucks in the bank. Don't drink. That's all I have to say to anybody on any social level. Did your grandfather take risks? I guarantee he did it from a position of fuck you. A wise man's life is based around fuck you.
implications. Environment for productive units Mad men. Top marketers understand human fears, motivations Traps for the middle class. Pay in 36 months, without interests The big short. Top investors operate on human stupidity Asymmetric inf. or mindless shopping? Don’t trust your banker
organizat. should be designed Utopian flat structures. Sooner or later a leader will emerge Hierarchies are natural. Podemos organizational conflicts Tournament, boys will be boys. Do you really want to compete? MBA or acting school? Self-deception, ex post rationalization Categorical thinking and stereotypes. Who is better at gossip?
fairness, Nazis 40% of income attribut. to genetics? Nature/nurture interaction Determinism in leadership stronger in harsh circumstances Depression is hereditary. Your thoughts determine your mood Businesswoman are born but businessmen are made. Refutable Testosterone level. Optimal sales strategy according to biology
a good leader? Are you a manager? Can it be taught? Inborn… and the will to lead. Fake it until you make it Be aware. At an organizational level, decision-making process Checklist: Not-invented-here, saliency, halo effect, sunk cost Dissenting opinions within the team? Homogeneity, bubbles Planning fallacy, over-optimism. Is the worst-case bad enough?
of contracts. Trust is key… inside and outside the firm Farsighted contracting. Safeguard against ex post opportunism You have to know the girl. Don’t negotiate before the wedding The eyes, chico. Emotions in business deals, cheater detectors Creating the bond. Why do you love the brands you love?
interpreting situations Emotional management, fighting. Above productivity salaries Managing by walking around. Are team building retreats eff.? Cooperating and connecting. The bathroom in Pixar’s HQ Resistance to change, a new corporate culture. Empirica case An all time-classic: Good general managers aren’t professional
an elect. What people don’t say about immigration. Other EU problems Spending without responsibility. Teach teenagers how to spend Why terrorism is so effective. But Israelis kept taking the bus Car accidents are scarier too. Saving for retirement and life exp. How to get rid of racism. Trade and contracts in globalization
bigger boat Silly status games. Short-term satisfaction in material goods Austerity, value of the rich. Consumerism, a trap for the poor Don’t buy when it’s free… especially when it’s free. Instincts Buying at the peak. Can you deal with the social pressure? Herding, instinct to mimic group’s behav. Illusion of protection
Marginal cost of money is the issue. Is the extra effort worth it? Do you need the promotion you are fighting for? Probably not I can’t get no (satisfaction). Remember, survival machines Buy experiences, not things. More skeptic on the idea of giving Best things in life are free. Don’t take your life personally
cost, trade-off. What are you giving up? The pain of paying, cash vs. credit, prepayment. Raise prices! 1€ for Whatsapp??? The cost of free, even in the same market Show hard work! Reluctance to pay when non-observ. effort Mental accounting: I assign fungible € to diff. spending categ. Grades or wages, don’t compare yourself with people around
your 20s Invest in yourself: Education, trips, experiences… learning And buy the 4€ Frappuccino. If it really makes you happy Personal finance is more about budgeting, avoiding mistakes Econ. freedom: Choices, optionality. Can you quit tomorrow? Cash-flow positive, low burn rate, opportunity cost of extra €
Reciprocity as a source of voluntary coop. Anonymous interact. Fairness and justice. Not caused by future expectations of trade Effort-risk-reward view may be incomplete. More complex Darwinian instinctive rationality. Emotional self-commitment Credibility of lovers and criminals. Protecting your friends
adjust to requested effort 40% net surplus, despite expen. Contracting without 3rd parties Economic incentives: Money, reciprocation, social approval Interconnected. Kindergarten, monetary incentiv. may backfire More delays after suppressing the fine. New equilibrium Social norms in dating. What not to do during a first date
an equal share With time, contributions approach 0. Leading coop. to cheaters Cooperators can punish incurring in a cost. Strong reciprocity If ‘no retaliation’ environment, society is shit. Corporate culture In business: Dismissal of shirkers, management of expectations Recruiting cooperative/loyal employees. Gender differences?
wage, employee chooses effort 1 shot, anonym. 15 shots, traders identified with an ID number Use a bonus instead of a fine. Even in equal compensation Punishment implemented implicitly, without offending coop. Social approval triggers an emotion. Future gains just a conseq. Excessive aversion to ostracism? Surviving without the group
from the herd. And Taleb's cantankerousness, his propensity for picking fights, and for taking stands does also seem to be the source of his greatest triumphs. It was horrible, though, he says: “Between 2004 and 2008 were the worst years of my life. Everybody thought I was an idiot. And I knew that. But at the same time I couldn't change my mind to fit in. So you have this dilemma: My behaviour isn't impacted by what people think of me, but I have the pain of it. People made fun of me. I don't know if you can still find it on the web but you would not believe how much crap was written about me.” Nassim Nicholas Taleb
deception Managing an unfenced area the size of France. Customary law Repetitive encounters. Social trust does not occur overnight Verbal agreements in rural communities. Social memory Higher contracting costs in the city. New reputation markets Every society gets the law it deserves. Individual responsibly
pay according to productivity. Google and creativity Explicit contracts. Avoid partial measurement of performance Happiness in relative salary. Never publish internal pay scale Commitment, appraisal, community. For the love of the work Educating kids. Does it make sense to pay for good grades?
reward system, stupid! Reinforcing the desired behavior Zone of indifference. Orders compatible with personal interests Type 1 and type 2 errors. Iatrogenics, overmedicating children Rational students. Short-term reward in grades, not knowledge Perverse incentives. Investments in non-productive signalling Idealization of an objective criteria. More complex in business
and money Communes collapse because no one does the hard, dirty work Money can kill intrinsic motivation. Bring a bottle of wine! High rewards make individuals choke. I’ll miss the $1M prize UN parking tickets. Meritocracy, privileges and the rule of law Are Saudis more dishonest? Not so fast… government or clan?
analysis Petty theft… everyone’s doing it. Morality should be included Optimal enforcement according to the asymm. value function Behavior. No early payment discount in Sydney’s traffic tickets We expect some flexibility. easyJet (BCN) vs. Jetstar (Cairns) Plagiarism in UPF, future tax avoiders. Do we punish socially?
inf. Economizing transaction costs. Some dealings involves lock-in Contracting within the firm. Market power, secrets, regulation Agency relationships. Focus efforts on well compensated tasks Revenue and value creation. Why run the UPF as a cost center? Government inefficiencies. ‘El dinero público no es de nadie’
a chain of command and control. Dictators If markets are so efficient, why organizing within the firm? Disadvantages of using the price mechanism. Transaction costs 1. Searching. 2. Bargaining, deciding. 3. Policing, enforcing How to minimize them? Figure out the best opportunity Internet lowers communication costs. Optimal size of the firm?
making? Transaction costs exist in organizations, but also in markets When to outsource production? Contracting economies of scale Asset specificity and uncertainty. Inputs to be made in-house Repsol can’t trust suppliers. Vertical integration, if lock-in risk 695B$ valuation for design and distribution. Future of farming?
specialized. Quasi-rents expropriation Even with a contract. Ex ante payment for a tailor-made suit Enforceability problems create transaction costs in the market Inside the firm then! Hierarchy/decision process, inf. overload Selective intervention. Gigantic firms have not been efficient Credible incentives, 3rd party monitoring. Who owns the asset?
Increase current performance, long-term value Yearly bonus. She might be tempted to mortgage the future Senior partner or salaried employee. Strong or muted incent. Influence activities: Politicking, misdirecting effort, sabotage Solution: Executives communication, inflexible rules, seniority
game: Evaluation, reward system, decisions rights Conflicts of interests. Agency cost and the residual loss General or specific knowledge. Who can take the best decision? Product mix, quantity, quality. Cost, revenue, expense, investm. Maximization in the division might not be optimal for the firm Lessons for the public sector. Copayment, financial responsibil.
right. Just tell them a good lie Reputation is your #1 asset… one mistake ruins it. Pay the price Transparency on times of the internet. The art of saying sorry Professional trolls. Which complaints should be ignored? Segmentation. Build something a small number of users love Hindsight bias (‘a toro pasado’). These guidelines are not rules
Agricult. and assembly line. Everyone was poor 200 years ago Why do we pay for a government? Equal opp. and corrections Regulation. Bounded rationality and asymmetric information Market failures. Externalities, monopolies, commons, etc. Political failures. Just follow the news… pretense of knowledge
with railroad externalities. Why Pigou was wrong The economic analysis of law. Optimal pollution is not 0 What right? Who has it? Let them negotiate, lowest-cost avoider It all depends on transaction costs. Holdout, communication Origin: Number of parties, unclear allocation, trade restrictions If ain't broke, don't fix it. Beekeepers coasian contracting
the law assigns responsibility But negotiation are often costly. Which legal regime to choose? Should commercial aircraft be allowed to fly over private land? Why taxing gas at 50%? The regulator doesn’t know the price Austria offered $ for shutting down Soviet-designed reactors No agreement reached with Slovakia. Negotiation costs matter
Robinson Crusoe story? Before Friday comes in? Optimization: Allocating resources After Friday comes in? Information: Discovery + Transmission Coase, transaction costs. Negotiating agreements, opportunism How to cope with cheating? Profile of the employer in Spain Countermeasures: Screening types, cooperative starting points
produce? How to produce it? For whom to produce it? Who decides? Who has better inf.? Who has better incentives? Price system as a mechanism for communicating information Market institution. Property rights (allocation and enforcement) Life in the URSS. Do you prefer pizza or pasta? Nevermind Scarcity. Venezuela collapse is related with supply, not demand
tournament Is Uber good for society? Of course, managing scarce resources Schumpeter. Creative destruction… short-term suffering Innovation. How much will the last barrel of oil cost? The case for subsidies and regulation. Robots and automation Anti-globalization movement. Left and right against the elites
Follow the formula to get what you want Knowledge of particular circumstances of time and place Potatoes or rice? Corruption was never the issue, inform. was Decentralization and responsibility. The farmer knows better Additional problems: Innovation incentives, trial and error
spending ≠ Supply, productive capacity Monetary and fiscal policy. Broken windows’ multiplier effect Perverse incentives, crowding out. Low rates lead to bubbles 1929 crash… New Deal. Krugman, the economy as a machine Common sense economics. PlanE was nuts. Today’s deficits too
of the market Heterogenic K in a dynamic environment. Disequilibrium Knight: ‘Judgmental decision-making under uncertainty’ Dispersed knowledge and price discovery… profit or loss Government role: Property rights + Economic freedom Taxes, QE and regulation harm market—efficient—outcomes
supporters Herding in market: Bubbles. Having a family and a mortgage? Nor the state neither the market can offer a perfect solution Interaction: Can we use politics to get more efficient markets? And also: Can we use markets to get more efficient politics? Indep. judicial system. Acemoglu & Robinson: Why nations fail
Fuck nuevo-ricos Interest rate in a dynamic environment. Subsidized lending Too big to fail, moral hazard. What would have happened if…? Pay them with stock options. Only top-down solutions work Don’t ask the barber if you need a haircut. Public ratings? The downside from regulation. Illusion of safety, control
campaign of all time Who watches the watchmen. No one is responsible, Catholics Paternalism will ride it too. What were the incentives for ZP? Keynes made it worse. Crony capitalism and fake libertarians Unemployment regulation. Comparative advantage: Flexibility Next financial crisis. If, money = choices; then, debt = slavery
bet? Speculators heal the market You can’t pay for your welfare state. Outside enforcement Eurobonds, fiscal stimulus. No way Germans will finance that Sorry, no ‘quita’ neither. OXI means ‘you pay the bill later’ #1 Obey: Cut spending, don’t raise taxes (Laffer, black market) #2 Disobey: Dracma… but lenders won’t trust you at this price
glamorous enough Short-term lending in pounds, euros. All savings in crowns Depreciation and corralito. Luckily, Icelanders were peaceful IMF managing default. Austerity, flexibility… back to basics Anti-foreigners referendum. Only locals get the money back UK not happy with ‘democratic’ decision. Blocking future aid
Keynes, aggregate demand. Spending… changing the mood Hayek, spontaneous order. Saving and, in 10 years, investing Invisible hand. 7.3 billion irrational people exchanging stuff ‘In theory, no diff. between theory and practice. In practice…’ Black swan monsters. Printing money, artificially avoiding risk
of scale Today, winner-takes-all economy—middle class at risk Public sector: Comparative advantage, deregulation, stability Protectionism: Patriotism (right), anti-globalization (left) Occupy Wall Street! 2/3 believe in greater wealth distribution Tax competition, the rich gain negotiation power (75% IRPF)
Attention to detail. A sick example from Steve Jobs in Google Tournament structure. Swiss proposal (1/12) not enforceable McDonald’s 15$ minimum wage. No protection in regulation Unemployment, an structural problem. Resources without jobs Social mobility: K is key… but more opportunities (MOOCs)
black market I don’t trust your promises. ‘Seguridad jurídica’ in Argentina Trump canceling orders via tweet. But markets don’t discount You shouldn’t read all contracts. Some degree of uncertainty The labor market. Do you want to negotiate your salary freely? Hiding information from the taxpayers. Irresponsible voters
muy loco, neng!’ Institutions made contracting easier. Higher specialization From local/artisans to 1st Industrial Rev. There’s no going back Spain in autarchy. The smaller the market, the poorer you are Globalization. Africa is growing, US blue-collars are suffering What’s my comparative advantage? I’m only good at one thing
or institutional solution? I agree with the terms. Blackmailing, reputation as an asset Explicit (incomplete) contracts. Again, who has better inf.? Surplus of mandatory rules. Adding unnecessary complexity Wealth redistribution target. No more Robin Hoods, please Third-party enforcement in Ryanair policies. Think twice
vs. judicial enforcem. Spanish labor judges Financial tips from my borderline neighbor. 7% higher than 2% Why you shouldn’t contract a phone insurance. Dación de pago Retroactive or prospective? Default or mandatory? Which one Short/long term consequences. If you want to help the poor…
Cooperation, prisoner’s dilemma. No such thing as a free lunch Public choice theory. Don’t assume altruistic regulators Jobless recovery. How to tackle social problems? I have no clue Why your salary is so low? Market value + Negotiation power The art of the deal: Optionality, leverage, reputation, downside
taboos and social constructions Chemical basis, commitment device for a l/t investment. STD Biological differences, jealousy. Do we fall in love differently? Idealization. ‘I don’t mean to suggest that I loved you the best’ Ex post, we adapt faster than we think. How not to fall in love Is that what I really want? Or is what my primitive Self wants?
is power Technologies have reduced the cost. Social clichés and gossip Dating: Personality, sex appeal. Marriage: Commitment traits Tournament theory, men can’t stop fighting. It’s in our genes! Rafa Mora, alpha male. Today, status competition persists in € Monogamy laws, a ceasefire. Concentrate efforts in prod. areas
love without sacrifice Long-run cooperation gains. Minor economic cost of defecting A natural experiment. New divorce law… virginity guarantee The business case of De Beers. ‘Diamonds are forever’ Madison Av. is about human insecurities. $ can’t buy charisma Open relationships. Do you foresee changes in the near future?
Where should I work? Mother Teresa vs. Gekko. Sadly, charity non-self-sustainable Friedman’s CSR. To maximize profits within the law Countries legislation differ. Voluntary exchange, invisible hand If my customer is concerned about GW, I should be concerned Efficient (not perfect) allocation of resources. Nirvana fallacy
Honesty? Should firms ignore it? Are costumers consistent with actions? Reput. damage. Value creation to customers, not shareholders Mercadona above-market wages. Productivity pays social rights Arrow. CSR better as an ethical code than as law, more flexible Not necessarily superior, lending prohibition led to loan sharks
rules. Competition without deception CSR at the expense of corp. profits. Shareholders may disagree Becker. Socially responsible managers are not bearing the cost Pollution, unemployment, discrimin. Let politicians handle it Undemocratic otherwise… taxation is a government function In summary, what’s CSR about? Mostly marketing campaigns
decency. Always profitable It pays off to be honest with employees and customers. Win-win Are comp. exhorted to be socially responsible? Public opinion Selfish pursuit of profit or more benevolence in the boardroom Local regulation not enough. Higher standards for safety Withdrawing investments in poor countries. Ok, and now what?
profits Good management (Inditex, La Fageda) Pernicious CSR (Organic food) Reduces ! profits Borrowed virtue (Corporate philanthropy) Delusional CSR (Recycling) Charity from FTSE 100 companies. 0,97% of pre-tax profits Bill & Melinda Gates Foundat. Private wealth, true philantropy The world is not running out of resources. Prices reflect that…
world of voluntary contracts. Without externalities… Under what circumstances should I restrain from max. profit? The case against CSR. No competition, inequality, congestion Prescribed drugs. Maximization may lead to injurious conseq. Intrinsic defects in the liability route. Ethical code is desirable Where do they come from? Socially accepted, business schools
making a diff. on the scale nonprofits do Pallota’s answer: ‘I’d be hard-pressed to name one that wasn’t’ No time for charities. Jobs did more good by expanding Apple Even helping the poor. New technology, business opportunities Pixar makes us happy. And, most important, sustainable model Microsoft or BMGF? Where did Gates create more social value?
market, first world problems $1.28 per pound, 23% above the market average. Why? Regional certification better than trademarking. Oxfam denies Fair trade signalling. Buy ‘made in China’ if you want to help Arruñada. Sale of indulgences (CSR consultancy, rankings) Social label as a disguise of private int. What’s best for farmers?
deaths is a statistic’ Cognitive tricks for NGOs campaigns. Charity by the numbers Crowding out of altruism. Evidence in the opposite direction Greater cooperation in societies relying on market exchange Problem in Africa is absence of markets. Let them compete! Public policy experiments. Banerjee & Duflo: Poor economics
sales? The moral code. In the long-run, only good business survive Customer have a responsibility too. Do you feel more rational? Control paradox. Get rid of all barriers, make it look dangerous Skin in the game. Threat of bankruptcy, not profits Upside not always exposed to downside. Spain ‘radiales’ bailout
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