June 19, 2012
Compensation as an Incentive for Talent
By Cindy Ivanac-Lillig
In Michael Lewis’s book, The Big Short, one of the main protagonists sets up a couple of meetings with people from different rating agencies. Before the meetings, he wonders if the folks from the rating agencies will be able share with him something he doesn’t know or hasn’t thought of in the course of his own analysis of the mortgage market. But shortly after the meetings, he comes to the conclusion that they, as well as most regulators, don’t understand the market at all. Not only did they not share anything new, but they seemed poorly informed. Clearly when it came to understanding the intricacies of financial instruments and risk modeling in the mortgage market, there was an A Team and a B Team on Wall Street. And in his opinion, the rating agencies were not the A Team.
It is a pretty amusing snippet in the book, but the underlying presumption that investment banks attract more and better talent due to the opportunities and compensation available is not a new idea.
Frankly, it seems pretty logical. Even though, there are plenty of people who work in many different public service/policy sectors who are very smart and are knowingly giving up larger salaries in order to work in their chosen fields, the earnings gap in the field of finance seems quite large. I haven’t come across a good study yet, but based on anecdotal information, it seems larger than in many other fields.
In addition to the compensation disparity, there is also a question of skill set. Not all financial skill sets are the same. The business of banking – that is taking in deposits and making loans – seems rather quaint when compared with the business of financial engineering and synthetic credit portfolio management. The requisite skill set on Wall Street and in the public sphere may be ever-changing, more global, and more inter-disciplinary than it ever was. And perhaps while Wall Street has figured out a relatively easy way to attract some of these skills through compensation, the public sector has been slow to recognize the shift in skill set and even slower in trying to figure out how to attract more of this talent.
For all the economics students out there who believe strongly in incentives, what are some potential solutions that would help rating agencies, regulators, and policymakers achieve a level of skill parity? Is compensation the best and only way? Or do you disagree with The Big Short premise that there is an A Team and a B Team?
June 4, 2012
Not Only Faster, but Better Solutions Through Technology
By Cindy Ivanac-Lillig
How many of you use Wikipedia? I bet even the die-hard researchers among you use it. Sure, the die-hards among you may go back to the source links, but your introduction to many terms/subjects is probably from Wikipedia. Now, how many of you would have believed that a model of open collaboration among the world-wide public would produce something that has surpassed the usefulness of resources such as the Encyclopedia Britannica? New terms are constantly added to Wikipedia, and errors are being corrected as we speak. It is nothing short of amazing to conceptualize how this messy process actually produces better-than-average results.
It makes me wonder if there isn’t a lesson in efficacy here. Perhaps for gargantuan tasks, the key to getting good results isn’t efficiency, proper planning, and expertise. Perhaps, instead, the keys are extremely fast and large feedback loops that help build the final product. Technology has not only revolutionized delivery, logistics, learning, and sharing, but it may also hold the key to revolutionizing our ability to come up with solutions to hard problems and public policy issues. Maybe you have heard about the video game called, Foldit, which scientists have credited with solving a problem that had plagued AIDS researchers for years. It was solved on-line in days. Amazing.
However, how does this translate to economic policy-making or any type of public policy-making? I haven’t seen many examples yet. The closest thing I can think of was when one of Marginal Revolution bloggers spoke at the recent AEA conference in Chicago. He said that during this most recent economic crisis, the blogosphere provided a wonderful opportunity for policymakers to test out ideas and theories rather quickly. He went on to point out how the immediacy of the feedback and the vast number of on-line contributors may have rendered traditional academic journals irrelevant in the policy space. It was an interesting angle from which to view the recent economic crisis and policy discussions. It is true that blogs are different than the Wikipedia model, but I think his reflection is similar to the lesson I take away from Wikipedia’s fast and large feedback loops.
How can we harness technology’s power to deepen our discussions and potential solutions in this arena? And for the educators out there, how have you used collaborative work to enhance what students believe they are able to do/solve?