18th September 2012: Career Opportunities

Maxxim Consulting‘s Claire Arnold has stirred up a Twitter frenzy on #phdchat and #ecrchat with her Guardian article on post-PhD academic careers. Arnold who is a management consultant considers three possibilities: become a ‘star’ researcher; raise your profile as a public intellectual; or enter university management. Arnold observes: “Ultimately, academics will need to go where the money is.” (I agree but I have a slightly different interpretation.)

 

QUT’s Ben Kraal summed up many Twitter respondents: “How a new PhD graduate with little research experience, few publications and no established management track record can become internationally renowned or allowed to manage an organisation the size and complexity of a university is clearly left as an exercise to the motivated reader.”

 

Readers of this blog’s Academia thread will be familiar with my stance on these issues. Academia like other industries is now the domain of Hollywood-like superstar economics where a ‘winner-takes-all’ ethic prevails. The past year several Australian universities have undertaken redundancy programs as part of cost reduction measures. A small minority have become academic entrepreneurs who ‘bootstrap’ their careers like Susan Blackmore and Kate Distin. In this volatile, competitive climate, corporate boards look for visionary leadership and turn to Clayton Christensen‘s Disruptive Innovation Theory for guidance. Exhibit one: University of Virginia, Teresa Sullivan and Helen Dragas and the debate surrounding the “high-finance” worldview (hedge funds and private equity) of some senior decision-makers at UV. Disgruntled academics look for scapegoats and often blame university administrators.

 

Arnold’s suggested career pathways are easier to understand if you reconsider the contemporary university as like a Classical Hollywood film studio. Australia’s Group of 8 universities are similar to Hollywood’s major studios whilst some of the ‘dual sector’ institutions are more like Val Lewton‘s B film unit or Roger Corman‘s independent productions. Every university has their high-profile academics and public intellectuals: these are similar to Hollywood’s star system and its auteur directors. Universities and film studios both have their senior management and administration. University academics who are successful at competitive grants are akin to Hollywood producers assembling creative teams and packaging film deals.

 

It takes serious investment and a marketing budget in Hollywood to create a star. It takes the support of film critics, media outlets and subcultures to create an auteur who will build an audience regardless of a film’s initial financial performance (the studio looks to ‘versioning’ and ancillary markets as other revenue streams). Production, administration, and senior management career pathways in Hollywood are different to ‘above the line’ creatives and are the fodder for films like Barton Fink, The Player, and The Kid Stays In The Picture.

 

Academia has some similar dynamics. Arnold’s “global researcher” will be backed by research incentives, university administrative support, a travel budget, marketers, and increasingly, a book agent for commercial publishers. Her “public intellectual” will at least have negotiated a flexible work schedule, and like Canadian anthropologist Sam Dunn, will probably co-run production companies or spin-out consulting firms. Dean and Vice-Chancellor roles involve Professors who have management experience or managers who enter the higher education sector.

 

However, the current climate of cost reductions, redundancies, and changes to research incentives means that several of Arnold’s options are closed to many academics. Australian universities now rarely fund “public intellectuals” because television programs and media coverage do not translate into priority research outputs that are measured by government metrics on institutional research performance. (Yes, there’s The Conversation, but it can also be an echo chamber and it doesn’t pay academics for their content.) Arnold’s “global superstars” have often spent decades building up their own infrastructure and research programs — and they get institutional attention because they are a more likely return on investment. You won’t get promoted to Dean unless you are first a high-performing Professor and effective School Head who can manage industry donors, complex multi-stakeholder negotiations, and organisational change management programs.

 

How then can a newly minted PhD academic deal with Kraal’s concerns? The Early Career Researcher (ECR) phase or first five years after PhD conferral is a crucial period for academic positioning in a superstar economics climate. Use the PhD to gain self-mastery of your discipline, research design and methods, and to get across the current debates in relevant international journals. Develop a distinctive research program with well-formed goals and milestones that will differentiate you as a significant researcher. Cultivate research mentors. Have a rolling 100-day plan and conduct regular retrospectives on your progress. Know your research administrators, cultivate institutional capital, and apply for internal grant schemes (read the funding rules and instructions to applicants). Find out what institutional research incentives you have access to. Use international conferences, social media and citation metrics carefully to network, amplify your presence, and to raise your profile and visibility. Get a commercial book agent. Learn some agile project management skills. Learn about intellectual property. Publish in the best journals that you can and for the most appropriate audiences that you want to reach. Read The Research Whisperer and The Thesis Whisperer.

 

Remember: the ECR period is more like the taut, warehouse punk rock The Clash rather than the drug-fueled, band in-fighting of Combat Rock.

11th July 2012: Star Academics & Research Funding

Superstar economics rules Hollywood and the art world. In academia, it means that a small group of academics are heavily cited, get ‘fast-track’ promotions, and receive competitive research grants. The United Kingdom’s Wellcome Trust has reinforced superstar economics and its ‘winner-takes-all’ dynamic in a recent decision:

 

To the consternation of many, Walport’s charity has abolished all funding for research projects or programmes. Instead this cash now goes to individuals, with far less prescription about what they do with it. “Budgets are often larger for investigators as we want to fund people generously to pursue new directions without restraint,” [Kevin] Moses explains.

 

Wellcome Trust’s decision means significant fallout in academia. Early and mid-career researchers face barriers to research funding. Collaborative research teams are minimised. Publication track records on your curriculum vitae become more important. The decision strengthens individual researchers and their cross-institutional performance ‘portability’ (which leads to the ‘poaching’ of leading researchers and their teams as an answer to the ‘make or buy’ decision). It also cuts the funding that institutions extract from successful grants — thus undermining the strategy of relying on competitive research grant income as a variable cashflow to diversify from student fees and government funding. Wellcome’s decision has parallels with the rise-and-fall of the independent producer in Hollywood, from 1967-75, during the demise and renewal of the Hollywood studio system.

 

Research Funding Limited To Star Academics (The Guardian)

2nd March 2012: Media Narratives on Traders

Frankfurt Stock Exchange

 

The Baseline Scenario‘s James Kwak observes about financial trading:

 

The main reason why finance’s share of GDP has outstripped its production of intermediation services, according to [Thomas] Philippon, is a huge increase in trading volumes in recent years. Trading, of course, generates fees for financial institutions, with limited marginal social benefits. Yes, we need some trading to have price discovery. But if I sell you a share of Apple on top of the other 33 million shares that were traded today, is that really helping determine what the price of Apple should be? The more that financial institutions can convince us to trade securities, the larger their share of the economy, whether or not that activity improves financial intermediation. [emphasis added]

 

Kwak’s comment interested me for several reasons. I thought immediately of Philip Augar‘s trilogy of books on London’s transformation as a global finance hub (The Death of Gentlemanly Capitalism; The Greed Merchants; and Chasing Alpha). Kwak’s emphasis on intermediation — intermediaries who match lenders and borrowers — reminded me of the Smart Internet Technology CRC’s emphasis on strategies of first mover advantage, disintermediation (removing intermediaries), and end-user innovation. Finally, Kwak espouses a critical view of trading that resonates with Occupy The SEC and other Wall Street critics.

 

Traders’ usual response is that they provide the market with liquidity as well as price discovery, and that estimates of assets’ future values can vary.

 

The media has two dominant narratives about traders. First, traders are American Psycho-like psychopaths that ‘go rogue’. Second, proprietary traders at financial institutions and hedge fund managers can make exorbitant amounts of money. The first narrative occurs during recessions and on the discovery of major cases like Barings’ Nick Leeson or Societe Generale’s Jerome Kerviel. The second narrative occurs during the initial stages of macroeconomic booms and speculative bubbles. A New Yorker profile of private equity maven Stephen Schwarzman in 2007 captures the transition between the two narratives.

 

In September 2011, just as the Occupy Wall Street protests were unfolding, Germany’s Der Spiegel cited a study that appeared to prove the first narrative. Pascal Scherrer and Thomas Noll, two MBA students at University of St. Gallen, interviewed 28 Swiss traders, using “computer simulations and intelligence tests.” The study went viral and it was cited throughout the United States mainstream and financial media (including by my old boss Richard Metzger at Dangerous Minds with his acerbic wit). The authors aren’t easily accessible: a Google search brings up other people – an Australian post-doctoral fellow in tourism and a German software engineer. St. Gallen’s MBA program did not release the paper — but sources did reveal it was an MBA student assignment and not peer reviewed academic research.

 

Even without seeing it the Scherrer & Noll’s study raises questions: the kind that get asked in blind peer review and by research administrators and managers. Did Scherrer (“forensic expert”) and Noll (“a lead administrator at the Pöschwies prison north of Zürich”) have the financial markets background to contextualise what the traders were saying and why? Did their background potentially bias how they would interpret the data: looking for or interpolating certain correlations? What specific “computer simulations and intelligence tests” did Scherrer and Noll use? How were these tests framed for the trader participants? Is the data from two different groups — traders and psychopaths — truly, directly comparable? From where, how and whom did the psychopath data come from? Who else, apart from the psychopaths, was the control group? What other competing hypotheses or theories were tested? Are the test subjects institutional or day traders? What instruments and markets did they trade? What range of trading strategies did they use and why? What was their performance like during the study’s time period? You will find these aspects in the methods and research design section of most rigorous academic journal articles. It is why top journals now require academic authors to release the raw, de-identified data for others to examine.

 

Noll’s comments to Der Spiegel are revealing, when the above is taken into account. Some traders are “egotistical”: perceiving themselves to be entrepreneurs in a financial institution. Trading attentiveness can require high ego-involvement. Trading can be a solo activity — affecting the study’s variable of “readiness to cooperate” — although prop firms like SMB Capital do get their traders to cooperate in order to get synergistic, group effects. Traders are usually risk-seeking and aware of time-based competition so of course they were “were more willing to take risks” since careful risk management is essential to arbitrage and trading. Noll expressed surprise that traders sought “a competitive advantage” and “weren’t aiming for higher winnings than their comparison group.”

 

But this a sign to me that Noll misunderstood the traders and also the financial institution they worked in. Prop traders can gain 40-60% of their compensation through bonuses with the institution can change based on risk-adjusted performance. In essence, trading is about gaining competitive advantage in a zero-sum game — particularly in highly stochastic and volatile areas like currencies and commodities futures. This is why many traders read Sun Tzu‘s Art of War and Miyamoto Musashi‘s Book of Five Rings, or study non-cooperative game theory and behavioural finance. Then there’s why University of St. Gallen possibly released Scherrer and Noll’s study to the media: the MBA program emphasises “responsible leadership” and the study nicely fits with this institutional goal. However, it obscures other explanations for ‘rogue traders’, such as Adam Curtis noting in his documentary 25 Million Pounds that Barings Bank management likely knew of and endorsed Nick Leeson’s trading activities whilst they were profitable. For many people, Scherrer and Noll just confirmed what they already felt about Wall Street traders.

 

In reality, ‘traders as psychopaths’ is a media-created narrative. It can be traced to Gordon Gekko (Michael Douglas) in Oliver Stone’s film Wall Street (1987); to Ivan Boesky and Michael Milken; to Michael Lewis‘s autobiography Liar’s Poker (1989) about his time in Salomon Bros as a bonds salesman; and to George Soros and the 1992 United Kingdom currency crisis. In the 1980s, a healthier vision of the Masters of the Universe were traders like Martin Zweig and Victor Sperandeo. A decade later, Frank Partnoy‘s cautionary biography Fiasco (1999) refashioned the image for financial crises in Asia and Latin America. John Perkins’ Confessions of An Economic Hitman (2004) expanded this to the Washington Consensus. CNBC’s Jim Cramer morphed from a successful money manager to a television personality. Satyajit Das transitioned from writing guidebooks on financial derivatives to becoming an articulate media critic. Richard Bookstaber had a more nuanced and systemic view of hedge funds with A Demon Of Our Own Design. The latest addition to this narrative is Jared Dillian’s Street Freak (2011) on his experience at Lehman Bros. and the short-lived BBC series Million Dollar Traders starring Lex Van Dam and Anton Kreil.

 

Scherrer and Noll’s study appealed to people whose self-image of traders came from Gordon Gekko and Liar’s Poker. The collapse of Bear Stearns and Lehman Bros. during the 2007-09 global financial crisis — and the ‘too big to fail’ negotiations with financial institutions — now reinforce this self-image. A more realistic image of traders can be found in Ari Kiev and Brett N. Steenbarger‘s books on trading psychology; in the multi-author ethnographic study Traders; and in Jack D. Schwager‘s interview books which are ‘required reading’ for many traders. I’ve seen footage of traders’ live reactions to the 1987 stockmarket crash: the traders are shocked but they still react. There’s little room for ‘traders as psychopaths’ in contemporary high-frequency trading systems (which created fears around the 2010 ‘flash crash’). But the media narrative serves as a screening mechanism: it prevents people from finding out how trading really works or how its principles can be used elsewhere in their lives. If Scherrer and Noll really wanted “a sober and businesslike approach to reaching the highest profit” then they interviewed the wrong group: they should have talked with pension fund and private wealth managers in Switzerland, or with portfolio managers. This potentially introduces scope and levels of analysis limitations into Scherrer and Noll’s study (since fund and portfolio managers can act differently to traders).

 

Slate‘s Richard Beales illustrates the second narrative: billionaire hedge fund managers. Beales’ target is Ray Dalio, founder of Bridgewater Associates and author of a ‘Principles’ employee handbook (PDF) which The Wall Street Journal‘s Paul Farrell compares to capitalist philosopher Ayn Rand. Beales notes that hedge fund founders usually keep a low profile; are privately owned and more entrepreneurial than banks; and have a compensation structure more aligned with investors. The second narrative is really a subset of the ‘winner-takes-all’ dynamic in superstar economics. Milken, Zweig and Sperandeo in the 1980s, Soros in the 1990s, and John Paulson now are the financial equivaelent of superstars. Beales doesn’t cite hedge fund researchers like Andrew Lo or Sebastian Mallaby. He doesn’t mention the high failure rate of hedge funds or the survivorship bias in industry databases.

 

Which brings me back to Kwak’s original insight. His claim that financial markets are less efficient flies in the face of new systems that lead to smaller bid-ask spreads (high-frequency trading), and more diverse, targeted fund structures (mutual, hedge and quantitative trading). Rather, these developments have led to an interlocking network of funds and financial institutions who trade, at greater volumes and in more liquid instruments. In this network, the fund and portfolio managers, and the traders, occupy highly lucrative niches. Understanding how and why they are successful (or fail) has taught me some significant, actionable, and pragmatic knowledge.

 

Photo: saibotregeel/Flickr.

25th February 2012: Mailroom Jobs & Superstar Economics

The Operator: David Geffen Builds, Buys and Sells the New Hollywood (2000)

 

For the past week I’ve been writing about academic entrepreneurs and superstar economics. Now, NPR’s Adam Davidson has a great New York Times article on why many careers are becoming lotteries in which a small group has a ‘winner-takes-all’ or ‘success to the successful‘ dynamic and others can miss out. Davidson’s key insight:

 

Hollywood is, in some ways, the model lottery industry. For most companies in the business, it doesn’t make economic sense to, as Google does, put promising young applicants through a series of tests and then hire only the small number who pass. Instead, it’s cheaper for talent agencies and studios to hire a lot of young workers and run them through a few years of low-paying drudgery. (Actors are another story altogether. Many never get steady jobs in the first place.) This occupational centrifuge allows workers to effectively sort themselves out based on skill and drive. Over time, some will lose their commitment; others will realize that they don’t have the right talent set; others will find that they’re better at something else. [emphasis added]

 

Davidson’s thesis is that this “economic lottery system” pushes talent to the top. He cites Hollywood actors and directors, and Big Four accountants who survive the ‘up or out’ system to make partner (William D. Cohan has interviewed the Wall Street losers). Davidson connects tournament theory — the study of individuals who have relative advantages in salary and wage negotiations — to disruptive innovation (PDF), globalisation, technology and other mega-trends that are creating a ‘race to the bottom’ dynamic. How can individuals cope with these changes? “In a lottery-based economy, you need some luck, too; now, perhaps, more than ever,” Davidson advises. “People should be prepared to enter a few different lotteries, because the new Plan B is just going to be another long shot in a different field.”

 

For Davidson the “economic lottery system” model is the New Hollywood. The reality is a little more complex. Classical Hollywood’s studio production system flourished from the 1930s until the ‘go go’ Sixties when the modern conglomerates collapsed. For a brief period from 1968-73, independent producers flourished before the studios fought back with the blockbuster film, new marketing, distribution, and control of ancillary revenue streams. A similar pattern occurred in the 1995-2000 dotcom period (PDF) in Los Angeles, New York, Austin, and London. Ben Eltham and I found in a 2010 academic paper that Australia’s film industry fluctuated depending on a mixture of Australian Government intervention, available labour, and international tax arbitrage. Eltham and I both read Nikki Finke’s influential blog Deadline Hollywood.

 

History also differs on the New Hollywood exemplars that Davidson selects. “Barry Diller and David Geffen each started his career in the William Morris mailroom,” Davidson observes. Tom King’s biography The Operator: David Geffen Builds, Buys, and Sells the New Hollywood (New York: Random House, 2000) details what actually happened over this six month period in late 1964-early 1965 before Geffen became secretary to television agent Ben Griefer (pp. 46-52). Geffen lied to WM’s Howard Portnoy that he was Phil Spector’s cousin. Geffen lied about having a college education and persuaded his brother Mitchell to write a letter and cover this up. When they met, Diller “thought Geffen was a rather odd duck for using his vacation time to work in the company’s other office” (p. 50). Geffen networked with agent Herb Gart, “stalked” New York office head Nat Lefkowitz, and got his break from Scott Shukat. Geffen relied on chutzpah, hard work, networking, and having a career goal: “signing actors.” No wonder that Geffen hated King’s biography.

 

These qualities are essential to Davidson’s “occupational centrifuge.” When academics ask me about their Dean’s budget and resource allocative controls, and why universities are now like Davidson’s “economic lottery system”, I suggest they invest time in watching the film Moneyball (a film in part about tournament theory), and understanding the performance and value creation goals of private equity firms (the mental model of consultants who possibly advise the Dean).

 

I haven’t finished the academic journal articles on those ideas yet . . .

18th February 2012: Human Capital & Superstar Economics

We Are All Witnesses (Nike)

 

Crikey‘s Ben Eltham has caused a debate with his insightful analysis on Michael Brand, the new director of the Art Gallery of New South Wales:

 

The sheer amount of money washing around global art markets helps us to understand how a gallery director such as Brand can be worth nearly half a million dollars a year. There is in fact an international market for top curators, many of which can all expect to earn comfortably more than the rates Australian galleries pay.

 

Eltham and I did a similar analysis in 2010 of Australia’s film industry. Successful fund managers also have a similar dynamic due to the 2 and 20 norm: 2% of total asset value (management fee) and 20% of any profits.

 

I read Eltham’s analysis the same day as sections of the late Fischer Black‘s book Exploring General Equilibrium (Boston: MIT Press, 2010). Two relevant sections stood out immediately on human capital:

 

What is special about human capital is that people mostly own their own human capital, with all of its specific risks. They could diversify or hedge out some of these risks by trading in shares of physical capital, but as Baxter and Jermann (1993) note, they generally don’t. (p. 69).

 

The normal career path involves many job changes — some within a single firm, and some between firms . . . Careers advance faster in good times than in bad, as investments in human capital, particularly through learning by doing, pay off. (p. 102).

 

Black’s macroeconomic analysis provides some context for Eltham’s critique of Brand’s salary. In two paragraphs, Eltham summarises Brand’s “first-class academic credentials” and “stellar career path.” Brand’s career advanced quickly because he made a series of excellent choices about selecting and delivering on projects, changing galleries, and building a significant body of exhibition work. In doing so, Brand diversified his human capital in a similar fashion to the professors I know who have changed universities in order to get promoted.

 

For Eltham, global art markets provide the context for “a top international director like Brand” to command a premium. The reason, Black suggested, was that “Uncertainty in both tastes and technology makes investments risky, and gives us a frontier of choices among different combinations of expected payoff and risk” (p. 126). The Art Gallery of New South Wales is willing to pay Brand a premium to lock-in his expertise and make the optimal choices for future art exhibitions.

 

Brand’s situation contrasts with university academics who lack the benefits of superstar economics. Academic contracts are defined by a university’s minimum standards for academic levels (MSALs) and by promotion committees. Academics rarely have control of their intellectual property or a share in future revenues from their work: they are forced to assign these rights to global publishing conglomerates. The market for competitive grants is a government-controlled oligopoly that requires a substantive publication track record. Academics who don’t build this cannot hedge their own human capital risk (or exposure to disruptive innovations). Collectively, these conditions place a cap on academic contracts in contrast to Brand and fund managers. The exception is professors who gain in a ‘winner-takes-all’ environment whilst their colleagues are on short-term contracts.

 

Things may change if International Creative Management, Creative Artists Agency or WME work out how to extract greater value in human capital from academic superstars.