Final Blog Post

                This course taught me a new way of thinking about how organizations make decisions. In my business minor classes I’ve learned most of these concepts before, but never in such a technical way (I think business professors are afraid of algebra). For example, I’ve always learned that organizations need to minimize their expected costs in situations that involve risk, but in this class I learned how different contracts can provide incentives or disincentives to exert more effort, and how they can include expected rent even though there’s incentive to put forth more effort. I appreciated the analytical approach to organizational problems which are usually approached as subjective.

                The structure of the class was different from other economics classes I’d taken before, but only slightly different from classes I’d taken for my Informatics minor. Discussions followed by weekly responses work well when talking about non-formulaic concepts, which is most of what we did. The Excel homework provided the mathematical and analytical part, so as far as I’m concerned they were just an addition onto a formula that I’ve already had experience with. The concepts were easily connected to the blog posts since we wrote about them and talked about them in class together. I would have liked a little more lecturing on the mathematics behind the Excel homework – since they were easily done without understanding the concepts, my lazy side tended to take over and just complete the assignment for credit without learning the material behind it until an exam came up. I think I would have learned that side of it much better if we’d discussed the math and background in class before the Excel homework was due, then practiced what we’d learned in class with the homework. That said, the Excel workbook setup was very impressive and when I actually took the time to look through it, it was pretty straightforward.

                As far as preparation and time taken for blogging and Excel, I tended to do them when I had the time – during class, or in a spare hour. As I mentioned, the Excel homework didn’t take a ton of time since my strategy was to look for the formulas I needed in the paragraphs of text and then plug in the right cell references. There were a few assignments that required outside algebra, so those required more time and concentration, but in general they usually took about 5-15 minutes, depending on how long they were. Usually with the blogging I’d look over the prompt a day or two in advance and think about it a little, then sit down and write it all in one sitting. The writing took less and less time over the course of the semester once I got the hang of it – going from about an hour to half an hour or 45 minutes. I started out really dreading doing the blog posts, but now at the end of the semester I enjoy it much more. I would probably prefer not to have to comment on others’ blog posts – all the commenting really did for me was force me to read others’ blog posts – but it was relatively easy so I guess it was harmless.

                I would have liked to have seen more explanation of the mathematics, as I said earlier. A better understanding of what you were expecting on the exams might have been nice – maybe by providing some sort of answer key for the previous exam instead of talking through them in class? Aside from that, I think the structure and content of the course was interesting and appropriate.

Branding and Reputation

              Jimmy Johns is a very recognizable sandwich chain that has a distinct marketing strategy. The company has branded itself as a fast food chain in a very literal sense – the stores are known for their speedy service in-store and through delivery. They also brand themselves as slightly off-kilter through their menus and store decorations. There are funny, off-beat phrases and jokes in everything, like a sign that says “free smells” and including jokes on their menu item descriptions. While many would say Jimmy Johns is very similar to other sub shops as far as their actual food goes, they set themselves apart through their marketing and branding.

              Jimmy Johns has a reputation for providing good food quickly and cheaply. It’s not 5-star cuisine by any means, but it’s a viable option for anyone who wants something they’ll like without having to wait very long and without having to spend large amounts of money. This is especially important for college students, since most students are working with a limited budget and are incredibly busy.

              I think the Jimmy Johns franchise is aware of its reputation and uses it to enhance their branding. Their commercials highlight how “freaky fast” their service is, which is an important part of their reputation with their customers. Since one of their most important target demographics is young people (or milennials), they incorporate things that milennials care about into their branding strategy – like a fun, off-beat atmosphere in their stores, created through their fun phrases & signs. On the whole, it’s important for branding and reputation to reinforce one another to create a cohesive image for a company, and I think Jimmy Johns does that very well.

Reputation-building

I have a strong reputation in the actuarial program here at the University of Illinois. I developed my reputation through becoming steadily more involved in the program and adding to it during my time here. I started gaining credibility by going to club events in the beginning of freshman year. This showed commitment to the club and helped grow my network. I added credibility through my internship at State Farm during that spring semester, and was then voted onto the club’s executive board for the following year. While on the board, I initiated new programs and helped plan and execute annual events. Each year I’ve gained more responsibility and credibility, eventually becoming the president of the club. To keep my reputation intact, I manage the club and create new programs for it. I also teach two actuarial classes and serve on committees for the mathematics department.

While I love my position in the club, there are definitely times I wish I could get away from it. There’s a certain pressure to maintain a professional appearance in the presence of club members and keep relationships with club members and the executive board professional as well. We’re all college students, and some of my best friends are in the club and on the executive board, so it’s hard to draw those lines sometimes. It’s also hard to maintain that reputation when there’s a club event I’m expected to attend or something I need to do to maintain my reputation, and I’d much rather be doing other things. Most times I follow through with what needs to be done, but there have been times when I’ve slipped.

I very rarely intentionally cash in on my reputation, but there has been a time or two when that’s happened. There have been times when I’ve had work to do or events to go to during the weekend and I’ve decided to make a trip home instead. In general, though, I tend to stick to my normal routine.

Conflicting Priorities from Principals

               Instances when agents have two principals with conflicting priorities can be troubling and complicated. Issues of power often come into play, and depending on the situation, ethics could factor in as well. By nature of the situation, there’s no one right answer in these cases, although there are some ways of handling the situation that are better than others.

               One specific instance that’s happened to me multiple times is when someone asks me what it’s like working at a company they’re interested in applying for. The company would prefer that I speak highly of them and would rate my performance as good if I painted a great picture of what it’s like to work there. The friend would prefer that I was honest, and talked both about the positives and negatives of working for that company so that they can make an informed decision. In these situations, my actions affect me personally as well – my credibility is at stake if I’m dishonest, but if my employer heard me speaking about the company in a bad light, that could have negative effects on my career.

               As I said, there’s no right answer here. However, from taking different courses of action in the past I’ve found that some strategies work better than others. Things tend not to work well when I oversell a company. In this case, students who aren’t a good fit for the company apply and there’s a mismatch between what the student wants and what the company provides, and that isn’t good for either party. Students also tend to take my advice in these situations less seriously afterward. While I satisfied the company’s short term goals of maintaining a positive reputation on our campus, I’ve failed their long term goal of recruiting good students that fit in well with the culture.

               In cases where I’m honest about both the features and pitfalls of an organization, some students that I talk to are dissuaded from pursuing that company, which might not be good for the company in the short term. The candidate appreciates it, though, because they don’t waste resources on a company that wouldn’t be a good fit for them long term.

               There are ways of handling the situation in between these extremes – like being honest but putting a positive spin on things, or simply not giving advice on it at all since I’m a biased source – and some of those can be effective as well. If there’s a way to handle these kinds of situations where both parties benefit (and especially where there’s the most possible social benefit), that would be preferred to a case where one principal gets exactly what they want and the other loses out. In cases where one principal wins and the other loses, outside factors about the specific situation would have to come into play. 

Parallel Group Experiences

               My parallel experiences were in two of my finance classes – Fin 221 and Fin 321. In each class we created groups at the beginning of the course and worked on various projects throughout the semester. In both groups, we divvied up the work and then got together to talk about the answers and check each other’s work. My experiences with these groups were completely different, however: my Fin 321 group experience was great, and my Fin 221 group experience was horrible.

               In my Fin 221 group, there were originally 5 other people working in the group. One of them dropped the course, leaving the rest of us hanging. At first the other 4 were fine to deal with, but as the semester went on, it got worse and worse. Group members either stopped doing their work or stopped showing up to talk about it and check it if they did do their work. Some group members stopped going to class altogether and relied on the other group members to tutor them on material that was necessary to finish the project. It was incredibly frustrating as someone who did go to class and understand the material to have to put in so much extra effort to get a good grade, when the people who were not only free-riding on the project but also not putting effort into the class in general would get the same grade I would. The people who got their work done were also aggravating, since they stopped putting in the effort to make sure that the other parts of the project were correct as well. The group didn’t get along because of differences in effort level, regardless of the level of talent or quality of production.

               In my Fin 321 group, we all got along for multiple reasons. First, we were all friends to begin with, so we were more predisposed to getting along. I don’t think that’s the primary reason that we got along in the context of this project, though. We formed a group in the first place because we all trusted each other to put effort into the projects and to help each other if we needed it. Luckily, that’s exactly what happened. We all did our parts going into our group meetings, and if we didn’t understand something the other group members all did our best to either explain it or help look up the answer if they didn’t know either. All group members were present throughout the entirety of the project, and we all felt that the grades we earned were appropriate for everyone in the group.

               I would like to note that while these group experiences were very different as far as enjoyment of the experience goes, they were both beneficial in one way or another. The Fin 321 group got me a good grade, but I got a great interview story out of my Fin 221 experience. Any time I’m asked to describe a time where I had to deal with someone who was challenging to deal with or in a group where there were team members who weren’t doing their part, I go right to this story and put it in a positive light. So, both negative and positive group experiences are valuable to have in one capacity or another.

Teamwork and Rewards

               The New York Times article “How to Get the Rich to Share the Marbles” talks about how the reward mechanism is a crucial input that determines how much effort people put into doing a task. The example given for when children automatically share marbles is when the only way that either child gets rewarded is when both pull on a rope. When both pull, one child gets one marble and one child gets three marbles, and an overwhelming majority of study participants automatically share marbles to make the division equal. In other scenarios, such as when children don’t work for their marbles or when the children don’t have to work together to get their rewards, the students don’t feel compelled to share.

               My experience with group productivity is very similar – I generally feel that if a group has done the same amount of work, everyone should receive the same amount of credit. The biggest example of this is when the Actuarial Science Club executive board plans events. In cases where it’s known that I’m the one who was leading the event, I usually get most of the credit for whatever happened, even if I got a lot of help from other board members. Whenever I get all the credit for something that multiple people worked on, I feel immediately compelled to give them credit as well.

               I agree with other aspects of the study as well. When people have not put in the same amount of effort, I usually do not feel that they should receive the same amount of credit. A prime example is group projects for classes. While most of the professors assume that each group member will do the same amount of work, some factor in that some group members won’t put in much effort, and let students help determine the other group members’ grades by rating them. In most situations students give each group member equal credit for the project – you’re considered an awful person otherwise. I have been in a situation where I really felt that one group member did not deserve equal credit for a project, though, and in that case I did give him a bad rating. This group member gave us an incorrect e-mail address in class multiple times, using a different one each time. As a result, we never got a hold of him. Most of the time he didn’t come to class, so we couldn’t talk about the project in person. We showed up on the day of our final presentation having done his quarter of the project the night before since he didn’t do it, and assuming that he wouldn’t do the presentation. When our group was called, he came up to the front of the room with us and was silent during the entire presentation, but then fielded all the questions (incorrectly) before any of the other group members had a chance to respond. I was so infuriated that when the group evaluation forms came around, I gave him the worst possible score. He did get some credit for the project by default (which in my mind accounts for his efforts in actually coming to the presentation at all) but I couldn’t in good conscience let his complete lack of effort for the rest of the project slide.

               For me, it’s a nice concept that everyone will put in their fair share of the effort and will then get an equal share of the profits. However, in most group work the labor isn’t distributed equally. There aren’t many situations in real life where every single person has to put in the exact same amount of effort in order for everyone to get some reward – most times the reward is given based on aggregate group performance. If there were more situations where each individual on a team had to put in the same amount of effort, I think inequality would essentially disappear from these situations and many group conflicts would be resolved.

IlliniBucks

There are quite a few things on this campus that hypothetical “IlliniBucks” would be useful for. The first thing that comes to mind, since it was mentioned in the prompt, is registering for classes. This includes registering earlier in the general registration process or registering for classes that are restricted to certain majors until a certain date. Depending on the person and their individual circumstance, this could be an incredibly valuable commodity. Personally, since I’m double majoring and double minoring, I find that getting into exactly the right classes in the right semesters to be incredibly important. I would definitely use my IlliniBucks (or actual money, depending on the circumstance and pricing) to ensure that I get into the exact classes that I want.

               Another use for IlliniBucks would be getting to the front of the line for Orange Crush for basketball games. As of now, students have to line up before the games – sometimes over 3 hours before – to get the best seats. I would be willing to bet that a lot of students would rather use their IlliniBucks to skip to the front of the line for a game that they really care about. That’s not something I care a lot about, but there are quite a few sports fans that would use this opportunity.

               The issue of inappropriate pricing is interesting. If the price is set too high, only the people who absolutely want the commodity the most will pay for it, and no one else will use them. This will lead to less social good than could have been created if the price was lower and more students could take advantage of the opportunity. On the other hand, if the price is too low, too many people will use their IlliniBucks for the commodity and it will dilute the value of it. If everyone uses their IlliniBucks to get to the front of the line for a basketball game, then it’s almost the same situation as when no one used IlliniBucks. The biggest disadvantage here is to the people who don’t use their IlliniBucks for a specific commodity – they would be put at a serious disadvantage when trying to get that commodity, and would be much worse off.

               An interesting situation to consider would be whether the IlliniBucks are specific to each person, or if they could be traded or bought. If IlliniBucks could be exchanged between students, we could use the prices that the IlliniBucks are trading at as a proxy for how much real money students would pay for each commodity. This would also have social implications – if wealthy students bought IlliniBucks from non-wealthy students, the result might be further advantaging those who already have more resources, and further disadvantaging those who don’t. 

Income & Employment Risk

I happen to be lucky enough to have secured a full-time job after graduation, so I’ll be thinking about the topic of reducing income risk retrospectively.

I’m in a major (actuarial science) that trains students for one specific career path (being an actuary). As a result, there’s a defined set of actions students can take to make themselves more attractive to employers when they’re looking for full-time employment. There are some things that students can do that relate to academia that make them more eligible candidates – getting good grades, passing actuarial exams, adding another major or minor, and taking coursework that relates to the skills used on the job. There are also things students can do that don’t relate to academia – taking leadership positions in organizations, working actuarial internships during the summers (and if you’re lucky, during the school year), and developing interpersonal skills. In addition, if a student is interested in working for a particular company, it helps to get to know the recruiters for that company through attending the presentations they do on campus and through talking to them at our annual career fair.

I’ve been working toward getting a full-time job since my freshman year. I went to all but 2 of the many company presentations offered during my first semester, and started my first actuarial internship at the start of my second semester. Throughout my time here I’ve continued to attend presentations and talk to recruiters at companies, even if I wasn’t interested in them at the time. I’ve also worked to pass actuarial exams and keep my grades up, as well as adding majors and minors. All of this effort was at the expense of free time, meaning that I chose to do something that would help my future career over something that seemed like a better option in the moment. So, I was very risk-averse with regards to my future employment.

I would like to note, however, that my main motivation wasn’t reducing income risk, but reducing job satisfaction risk. Actuaries overall are well-paid, so my main goal was to ensure that when I got to the point of looking for full-time employment, I would be able to work in the position that I would enjoy the most – not necessarily the one that paid the most. My perception of what I would enjoy the most changed over the course of my education here, so I was very glad that I’d talked to companies during my freshman and sophomore years that I wasn’t interested at the time but became interested in later.

Most people do not use my strategy, and for good reason – it’s incredibly time consuming and most people strive for more work-life balance than I do. For these people, there are some times where doing something they want to do now is worth more than doing something that might or might not help them in the future. The outcomes are varied – some are able to secure a full time job without a problem, and some graduate without finding employment in the actuarial field. From what I’ve observed, though, the more effort someone puts in and the longer they’re actively improving their qualifications, the better chance they have of being where they want to be after graduation.

From this, we could infer that the more risk-averse a person is with respect to their future employment, the more they would actively participate in recruiting activities and improve their skills. If a person was alright with taking on more risk (or if it wasn’t a top priority), they would spend less time working to make themselves as employable as possible. I happen to be very risk-averse, but different approaches are appropriate for people with different preferences.

Opportunism

                It’s rare that an executive team that has a lot of influence is largely unregulated, but that’s the case with the Actuarial Science Club. There’s a group of 10 students that plans and runs just about everything that the students participate in outside of class – recruiting season, social events, and networking opportunities to name a few. There’s a faculty member who is technically our sponsor, but he’s very hands off. As a result, there are quite a few opportunities for students to take advantage of circumstances where they have a great deal of power and low chance of repercussions.

               The most obvious opportunity here would be in the money collection process. We collect fees from our club members for numerous things over the course of the year – club dues, fees for events, and club merchandise just to name a few. Because there are 10 of us collecting money from so many people, it would be easy for someone to take the club’s money instead of depositing it. It would also be easy for someone to give their friend a “free pass” by marking down that they’d paid when they hadn’t.

               While I haven’t vetted every single board member, I do know that there are board members who haven’t taken money from the club or given their friends a “free pass”. The person I’m thinking about specifically is or president from the 2012-2013 school year, Jenna. She didn’t take advantage of this opportunity when she held a more junior position in the year prior to her presidency, either. I’d speculate that she didn’t take advantage of the opportunity for multiple reasons. First and foremost, I think, she considered the concept of stealing to be morally wrong. She always tried to uphold a high moral standard, so the thought of stealing from the club would have been completely out of the realm of possibility. I think another reason that she didn’t steal is that she genuinely cared about the club. She personally had benefited from the club quite a bit, so she wouldn’t want to take any resources that would be put toward benefiting others. My last guess would be that she wouldn’t want to take the risk of getting caught and ruining her reputation. The actuarial field is very small, so one amoral act can permanently damage your reputation and have an effect on your career.

               On a very large scale, these do amount to the same thing – she didn’t want to do something that would result in a negative outcome for her. The nature of those negative outcomes are different, though. In the cases where she didn’t want to commit an amoral act and where she wouldn’t want to take resources from a club she cared about, the negative outcome would be a personal feeling of regret. In the case where she didn’t want to ruin her reputation, the negative outcome would be an impact on her dealings with other people and potentially her future earnings. The first is internal, the second is external. Either way, though, I’m glad she made the decision she did to stay honest and not take the opportunity presented to her.

               

Transaction costs within RSOs

I’ve been on the executive board of an RSO on campus since my sophomore year. There are 10 spots on the board, and each academic year people apply for specific roles on the board. Because students who have been on the board before generally apply for higher positions than they held the previous year, there are new students coming into each role every year. While the returning board members are always willing to offer advice to new board members, the change incurs a sort of transaction cost on a yearly basis – the cost of the time and resources spent getting up to speed on the requirements of the new positions, and for the new board members of just teaching them how the board works on a basic level. This process improves every year, but there’s still a long way to go.

The executive board itself consists of 10 people with defined jobs. In addition to those defined jobs, each board member is required to attend weekly board meetings and spend at least 2 hours in our club’s cubicle in the RSO Complex. Most board members also devote additional time and resources to the RSO through coming to events, helping other board members with responsibilities, and sometimes spending their own money to achieve an objective of the organization. I consider this additional effort to be a transaction cost – it’s a necessary part of being on the board that doesn’t serve any direct goals or provide any direct benefits.

I would argue, though, that these additional costs are largely outweighed by the benefits. As this RSO is a major-specific organization, holding a position on the executive board is a huge asset on a resume for any internship or full time job in the field. And if a board member builds a reputation for helping others and making sure that things run smoothly even if they have to make a personal sacrifice to do it, other board members will develop a respect for the person and be more willing to help them with whatever they’re working on. The general members develop respect for board members as well, which is powerful networking that can help later down the line. Our profession is very small, so developing a good reputation early is incredibly useful.

Response 1 - Milton Friedman Bio Sketch

Milton Friedman was a prominent economist in the mid-to late 1900’s. He was born in New York City in 1912, and went on to get degrees from Rutgers University (BA), University of Chicago (MA), and Columbia University (Ph.D.). He won numerous awards throughout his lifetime, including the John Bates Clark Medal and the Nobel Prize in economics. He held many prestigious positions, including an advising position in the Nixon administration, a research fellowship at Hoover Institution at Stanford University, as well as a professorship at the University of Chicago.

While he held numerous positions at universities and in the government, his theories in economics actually go against many of the established economic theories of his time. In one of his books, A Theory of the Consumption Function, he disputes the classical consumption function. Instead of the classical assumption that household income reflects current income, Friedman argues that households actually operate using an assumption of what average income will be over the next few years. In another of his books, Monetary History of the United States, he essentially claims that the Great Depression is the Federal Reserve’s fault. His argument is that if the Federal Reserve increased money supply in tandem with GNP, then inflation wouldn’t exist. The Federal Reserve got so angry that they stopped releasing minutes from their board meetings, and commissioned another book to be written in retaliation. Friedman continued to voice his opinions and argue economic policy until his death in November of 2006.

Friedman’s views were not only controversial but also influential. In 1962 he published Capitalism and Freedom, which made a case for relatively free markets. He argued for a volunteer army, freely floating exchange rates, and the abolition of licensing doctors, among other against-the-grain ideas. This book was so influential that it inspired young minds to study economics when they otherwise wouldn’t have. About 20 years later, he and his wife published a book together, Free to Choose, which went along with a TV series on PBS. The book and the series helped to spread Friedman’s ideas and make him a household name. In addition to the general public, Friedman also had an influence on other economists of the day. His work influenced the opinion conveyed in a prominent economics textbook, Economics, with regards to the long-run effect of the trade-off of unemployment and inflation.

It is because Friedman was so influential that his work is important. Friedman and the people whose thinking he shaped played a large part in abolishing the draft, bringing down Communism, and helping deal with stagflation in the 1970’s. While there are still many economic policies in place today that are indirect opposition to Friedman’s viewpoint (e. g. farm subsidies, high taxes, etc.) the world is much more free-market-focused than it would have been without Friedman’s influence.

While organizations don’t necessarily deal with the macroeconomic issues of unemployment and inflation, they do deal somewhat with markets. Although Friedman advocates for free markets that don’t really exist in a hierarchical organization, it’s important to at least view the issue from both sides. While I hadn’t heard of Milton Friedman before this class, my thinking (and obviously many others’) has certainly been shaped by his work.

Sources:
Library of Economics and Liberty Encyclopedia
The Economist - "Unfinished business"
The Economist - "A heavyweight champ, at five foot two"

Picture: Nobel Prizes and Laureates biography

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