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Corporation elects Israel Ruiz executive VP and treasurer

October 14, 2011, 9:30 am
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The MIT Corporation today elected Israel Ruiz SM ‘01, who had previously served as vice president for finance, as the Institute’s new executive vice president and treasurer. His appointment is effective immediately.

Ruiz succeeds Theresa M. Stone SM ‘76, who announced in May that she would step down. In June, Ruiz was selected by President Susan Hockfield to fill the position upon Stone’s departure and was formally nominated to the post by the Executive Committee of the MIT Corporation.

“It is a great privilege to serve this outstanding institution and its talented students, faculty and staff,” Ruiz said. “Our shared vision for tackling the world’s great problems makes MIT an inspiring place to work. I look forward to working together to ensure that MIT’s future is no less glorious than its distinguished past.”

“Israel holds himself and his team to unwavering standards of excellence,” Hockfield said. “In each of the roles he has held at the Institute since 2002, he has consistently identified innovative solutions to some of our thorniest challenges. I have great confidence that he will succeed brilliantly in his new role.”

Following nearly five years as executive vice president and treasurer, Stone will now serve, in a temporary capacity, as a senior advisor to Hockfield, working with the president, Chairman of the Corporation John Reed, and Vice President for Resource Development Jeffrey Newton to plan for future major fundraising initiatives. After that, she plans to stay involved with MIT in similar initiatives, but as a volunteer.

“All of us owe Terry a debt of gratitude for the Institute’s strength in operations and finance,” Hockfield said. “Her leadership in delivering what she has called  ‘services worthy of MIT’ has built an outstanding foundation for the future.”

As vice president for finance since 2007, Ruiz led a team that managed the Institute’s financing strategy, financial and capital planning, annual budgeting, receipt and disbursement of funds, accounting, procurement and property management. He also played a key role in ensuring the integrity of financial reporting and compliance.

Following the 2008 financial crisis, he envisioned and co-led — with Associate Provost Martin Schmidt — the 200-member Institute-wide Planning Task Force, which achieved substantial long-term cost reductions and implemented fully 70 percent of all ideas submitted by the MIT community. His team also developed a model to monitor the Institute’s working capital liquidity during the financial crisis, which was instrumental in maintaining operational flexibility.

In 2010, as part of the “Digital MIT” initiative, Ruiz’s group modernized and simplified financial processes by successfully digitizing many services, resulting in widespread adoption of electronic paystubs, W-2s and reimbursements. Earlier this year, to support the development and renewal of the Institute’s academic plant under the MIT 2030 framework, Ruiz led the successful completion of a landmark $750 million taxable century bond offering.

Ruiz holds a master’s degree from the MIT Sloan School of Management, awarded in 2001, and a degree in industrial and mechanical engineering from the Polytechnic University of Catalonia, awarded in 1995. Before joining MIT, he worked as an engineer at Hewlett-Packard and at Nissan Automotive.
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3 Questions: Ricardo Caballero on the search for safe investments

October 24, 2011, 9:00 pm
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What caused the financial crisis of 2008? MIT economist Ricardo Caballero has posited that a key structural factor was a massive global imbalance between the demand for safe investments, especially bonds, and the supply of safe places to put new capital.

Because this “insatiable demand for safe debt instruments,” as Caballero has called it, was not wholly absorbed by the traditional safe haven of U.S. Treasury notes, it helped spur the growth of the mortgage-backed bond market. But these bonds, backed by subprime loans, turned out to be unsafe despite their AAA ratings, exploding en masse. Financial markets are still feeling the aftereffects.

As a solution to this imbalance, Caballero — an expert on global capital markets, financial panics and risk who is among the 100 most-cited economists worldwide — has proposed the idea of government-issued investment insurance meant to help spur financial activity. Without such policies, he has warned, we could see the “recurrent emergence of bubbles,” as capital chases emerging investment areas.

MIT News recently queried Caballero, MIT’s Ford International Professor of Economics, Macroeconomics and International Finance, about the shortage of safe investments.

Q. In recent months, the fiscal crisis in Europe has intensified and core European countries such as France are now at risk of having their credit ratings downgraded. What is the status today of this global imbalance between the demand for, and the supply of, safe investments?

A. Worse than ever. People do not realize how many odd things are happening as a result of this shortage. The most recent one is a sharp decline in the currencies of emerging market economies, following the peg (floor) set for the Swiss Franc against the Euro. All of a sudden, one of the key safe assets in currency markets disappeared, and now holding emerging-market currencies became much riskier, as a natural hedge is no longer available. As the safe assets’ relative supply shrinks, investors become less willing to invest in riskier assets, banks become more reluctant to lend and so on.

Q. In the mortgage-backed bond market, when the economy dipped, whole classes of securities blew up. Given this problem, why is an insurance-based solution your preferred policy choice, and how would it function?

A. Unfortunately, we may be beyond that point. I proposed that governments provide, for a fee, guarantees to banks against extreme macroeconomic risk so that banks could go back to the production of safe microeconomic assets — which they can generate through mortgages, loans and other growth-enhancing activities — without having to absorb macroeconomic risk, which is too capital-consuming. These types of measures are politically unfeasible at this time, so we will have to continue muddling through.

Q. What do you think of other ideas that might address the problem? For example, wouldn’t the proposed issuance of joint Euro-bonds, backed by the whole European Union, provide a new source of safer debt for investors?

A. It would, but this would effectively mean a transfer of German collateral to periphery countries. Germany could certainly issue more Bunds [their bonds] since they have plenty of credibility to do so. But I don’t think safe-asset production per se is an argument to justify these transfers. I suspect a better way to do it is to have the European Central Bank (ECB) provide some guarantees for marginal countries’ debt, either directly or indirectly. I have in mind Spain or Italy, not Greece, which is clearly bankrupt and not the business of the ECB.
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Michael W. Howard ’86 named vice president for finance

December 7, 2011, 6:15 am
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Michael W. Howard ’86, an MIT alumnus who has 20 years of experience in finance and operations, has been appointed MIT’s new vice president for finance, effective Dec. 5.

Howard was most recently a strategy and operations consultant at Deloitte Consulting in Boston. Before that, he served for more than a decade as a vice president and senior vice president with Fidelity Investments and its subsidiaries.

The announcement came Tuesday in an email from Executive Vice President and Treasurer Israel Ruiz.

“It is a particular pleasure to welcome Mike back to the Institute, as he completed his undergraduate degree in mechanical engineering at MIT,” Ruiz said. “He combines exquisite analytical and financial talent with a deep connection to the Institute and an eagerness to support our community’s continued success.”

Howard will lead a team dedicated to the delivery of efficient and effective financial and administrative services. His group manages MIT’s financing strategy, financial and capital planning, annual budgeting, receipt and disbursement of funds, accounting, procurement and asset management. He also plays a critical role in ensuring the integrity of the Institute’s financial reporting and compliance.

“As an MIT graduate, the Institute has always been a very special place for me, and I am delighted to be back,” Howard said. “The VPF organization has built a strong foundation for meeting the needs of our academic and research endeavors. I look forward to continuing this important work, growing our finance capabilities, meeting new colleagues, and providing the support needed to meet the future needs of our faculty, students and staff.

“As we extend our mission into the 21st century, MIT is embarking on a number of strategic initiatives both on campus and globally,” Howard added. “I am thrilled to have this opportunity to be part of MIT's leadership team during these exciting times.”

After receiving his SB from MIT, Howard earned an MBA from the University of Chicago in 1991. He then joined Deloitte Consulting in Boston, managing financial, operations and technology engagements with major U.S. and international corporations.

Howard joined Fidelity’s corporate consulting group in 1996.  He was named a vice president for finance at Fidelity Investments in 1998. In his six years in this role, Howard led several finance organizations in providing financial planning, reporting and analytical support to operating units in Fidelity’s Employer Services and Technology organizations.

In 2005, Howard was named senior vice president and chief financial officer of Fidelity subsidiary Pyramis Global Advisors, an investment organization with $150 billion in assets and annual revenues exceeding $500 million. Among other accomplishments, he played a critical role in the firm’s expansion into Europe, the Middle East and Asia and built a financial reporting and governance platform to meet the firm’s global regulatory requirements.

At Deloitte Consulting since 2010, Howard has advised financial services firms on strategy development, operations improvement and enterprise cost management.

“Mike comes to MIT after many successes in finance and operations at both Deloitte Consulting and Fidelity Investments,” Ruiz wrote in his email. “I am confident in his ability to understand the critical role of the VPF organization in supporting the MIT community.”
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Gender spenders

January 17, 2012, 9:00 pm
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Many Americans went into personal debt before the economic recession hit the country in 2008. Why? For some men, the biggest factor may have been intense competition to find a spouse.

That’s the suggestion of a new study co-authored by an MIT professor that analyzes the ways social settings can affect people’s propensity to save or spend money. Geographic areas with unusually high ratios of men to women, as the study notes, are correlated with high levels of personal debt; in follow-up lab experiments, the researchers found that men are more willing to spend money quickly in social settings with marked gender imbalances.

“There is reason to believe that men are making financial decisions in a way that reflects the influence of the ratios of men and women,” says Joshua Ackerman, an assistant professor of marketing at the MIT Sloan School of Management and one of the researchers who performed the study. “Seeing more men around them in these environments activates a competitive mindset, which leads to a short-term, spend-now approach.”

Georgia on their minds

The study examined 134 cities across the United States, looking at gender ratios as well as the number of credit cards owned and the amount of consumer debt in each place. In some regions, these things vary widely.

Consider the case of Macon and Columbus, two Georgia cities located within 100 miles of each other. In Columbus, there are 1.18 single men for every single woman, while in Macon, there are 0.78 single men for every single woman. As it happens, the average consumer debt in Columbus is $3,479 higher, per capita, than it is in Macon.

To see if this could be related to gender issues, the researchers then set up a series of three experiments involving 205 people, who were presented with a series of photos on computer screens and asked to make a set of 20 financial choices; in one of the experiments, subjects were asked questions about how much they would be willing to spend on what the study calls “mating-related expenditures,” such as a Valentine’s Day gift, a dinner date and an engagement ring.

When shown images with many more men than women, men in the study were willing to reduce their savings by 42 percent, and were willing to assume 84 percent more debt. “When men see more men than women in these photograph arrays, they become more likely to want to spend money more quickly, even to the point of going into debt,” Ackerman observes.

The results are presented in a new paper, “The Financial Consequences of Too Many Men: Sex Ratio Effects on Saving, Borrowing, and Spending,” appearing in the January issue of the Journal of Personality and Social Psychology.

The lead author of the paper is Vladas Griskevicius of the University of Minnesota’s Carlson School of Management; in addition to Ackerman, other co-authors of the paper are Joshua M. Tybur of the Netherlands’ VU University Amsterdam, Andrew W. Delton and Theresa E. Robertson of the University of California at Santa Barbara, and Andrew E. White of Arizona State University.

A China syndrome?

Douglas Kenrick, a professor of psychology at Arizona State who is familiar with the study, calls it “important” and says that its conclusions “elegantly link to a broad set of findings on humans and other species” involving the effects of mating competition on decision making. “Some of our complicated mental decisions are actually manifestations of simpler, more biologically general processes,” Kenrick suggests.

As Ackerman acknowledges, the study’s results are one piece of a larger puzzle about consumer habits during the credit-fueled spending boom that just ended. “The studies do show in direct ways how [these] ratios can affect people’s decision making, but I don’t think it’s the last chapter in this kind of research,” Ackerman says.

For one thing, people in many types of social circumstances — not just in locations with imbalanced gender ratios — went into debt during the credit-fueled spending boom that preceded the recession, so spending in search of the ideal partner is just one of the reasons people live beyond their means.

Ackerman and his colleagues also say they would like to study cross-cultural spending habits in future research — perhaps in China, which has a significant gender imbalance, but unlike the United States, has traditionally had high savings rates.

“If competition is what’s really underlying this kind of spending, that should be fairly consistent across cultures,” Ackerman says. “But how those decisions get expressed might be much more culturally tinged. In China there’s a stronger norm toward giving gifts to a bride’s family. In that situation, spending money quickly isn’t necessarily going to lead to the best outcome. Instead, saving so that the amount of money you spend is worthwhile would make more sense.”
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Michael Seelhof, SDM '12: a banker adds theory to experience in managing complexity

February 8, 2012, 8:09 am
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You'd think that merging two investment banks at the height of a global financial meltdown would be enough complexity for one lifetime. But the experience left Michael Seelhof, SDM '12, wanting more. The German banker has come to MIT’s System Design and Management (SDM) Program to develop a theoretical understanding of his hard-won experience and take complexity management to the next level.

"It's what I've done in the past — managing complexity and managing risk — and I think that's the most important thing that a senior manager should do," Seelhof says. "But I did it intuitively. I want to have a more formal education in complexity management."

Having chalked up 16 years in banking, overseen a successful merger and brought the merged entity to profitability, Seelhof was ready to shift gears. He examined his options for furthering his education and found SDM an obvious fit. The program will give him an understanding of how large systems work, how they interact, how they exhibit complexity and what to do to manage it.

Seelhof was drawn to SDM’s focus on key aspects of system design: sustainability, human behavior and organizational design. He was also attracted to the program's unique collaborative learning approach.

Seelhof started his banking career in IT, armed with a master's degree in mathematics. He moved on to risk control and then strategic development, including mergers and acquisitions — all at Commerzbank AG. In 2005, Seelhof was handed the task of turning around Commerzbank's loss-generating investment bank, Corporates & Markets (C&M). He was appointed chief operating officer of C&M and he set about closing the unit's risky proprietary trading desks and focusing on the bank's core business: client services. The investment bank quickly returned to profitability and remained stable throughout the financial crisis.

In 2009, Commerzbank acquired Dresdner Bank. Seelhof was put in charge of merging the two companies' investment banks. "That ... includes a lot of complexity because you have to think about how units operate with each other, what kind of product portfolio you want to have, you have to think about the competition, and you have to think about risk," he says.

The merger involved a team of nearly 1,500 people and required integrating an investment bank twice the size of C&M that was running at a loss. All this occurred during the worst financial crisis in decades. In the end, Seelhof merged the two investment banks into one organizational structure with integrated processes and IT infrastructure. He cut costs by 50 percent and made the unit profitable.

As for what comes after SDM, a return to financial services is the most likely option for Seelhof, but he is also open to senior positions in other sectors. "SDM is giving me that broader perspective to be able to work and use my experience in different industries," Seelhof says.
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MSMS student looks forward to a very bright future

February 13, 2012, 2:51 am
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Not many students come to the MIT Sloan School of Management with three job offers to chose from. However, Moez Gharbi, a student in the Master of Science in Management Studies program (MSMS) at MIT Sloan ran into just that situation after he completed his degree from HEC Paris.

Gharbi spent a gap year before coming to MIT Sloan, and in that short time he had three different investment banking internships. The work load was extreme at times, as he was often working 16-18 hours a day and on weekends. “I learned so much about finance. It helped me with difficult situations that I would not have otherwise experienced. I had to mature fast, but I also built a lot of good relationships along the way,” says Gharbi, 23.

While at HEC Paris, Gharbi learned about the MSMS program. He knew the program would be the best fit to help him define and achieve his long-term career goals. Shortly after he arrived on campus, Moez sought out Chris Bolzan in the Career Development Office for advice on how to turn down two job offers and maximize his chances to get the job he wanted in private equity. “She did an amazing job in helping me handle the process with banks and The Blackstone Group. Her advice was very valuable to me and allowed me to get an offer from Blackstone’s Private Equity team in London while keeping an excellent relationship with the banks where I interned,” he notes.

Gharbi does not regret his decision to attend MIT Sloan, and is finding his classes “extremely useful.” “Kevin Rock’s Advanced Corporate Finance class was amazing. The cases were realistic and were about strategy and how you should think as a manager and as an investor — which is perfect for what I want to do. I also really enjoyed Business Analysis and Valuation with Christopher Noe, Basic Business Law for the Entrepreneur and Manager, taught by John Akula, and Advanced Strategic Management with Michael Cusumano,” he says.

Gharbi plans to write his thesis on “The Challenges and Opportunities in the Tunisian Private Equity Sector” and discusses the project often with his thesis advisor, Deputy Dean S.P. Kothari. In the future, he would like to start a private equity company in Tunisia. “Contributing to the private sector attracts more capital and investors to help the country grow. After years of corruption in Tunisia, it is now a safe environment to invest in and grow companies,” he says.

He began working on his thesis over MIT's January Independent Activities Period break in Tunisia, while also spending time in London attending a conference on private equity, and in Paris networking. He also plans to work with Elyes Jouini, a well-known Tunisian economist, and former minister of finance in Tunisia, on a book about the economic and social reforms in Tunisia.

Gharbi will start his job with The Blackstone Group in July. While on campus, he is spending his free time exploring the city, attending Boston Symphony Orchestra concerts, and getting to know his MSMS classmates better. “I want to leverage my experience here and take advantage of it. I’m very grateful to everyone who has helped me, especially Julia Sargeaunt from the MSMS program office. I’ve had some great opportunities and tried to make some great things happen,” he says, adding, “I’m also trying to take advantage of being very lucky.”
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Taking credit

May 9, 2012, 9:00 pm
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Microfinance seems like a boost for entrepreneurs in developing countries: Give them little loans, and people can make their small businesses a bit larger. Starting in 2001, the government of Thailand used this idea as the basis of a program called the Thai Million Baht Village Fund, which distributed loans in 77,000 rural villages.

The program was simple, providing a million baht (the Thai currency), or about $24,000, to create banks in each of those villages. But the outcome of the program was complex, as MIT economist Robert Townsend outlines in a newly published paper. In areas where loans were disbursed, consumption grew, income for those in agriculture and other forms of business grew, and wages grew for laborers — all signs of economic growth — but overall asset growth in the villages decreased.

“The flow of funds from savings to investment does not work very well when left to its own” in Thai villages such as these, says Townsend, the Elizabeth and James Killian (1926) Professor of Economics. “These kinds of interventions seem to have pushed the system in the right direction.”

And yet, he is quick to note, the program was hardly an unambiguous success; its effects varied significantly, among and within villages. Like microfinance generally, Townsend suggests, the Million Baht fund yielded encouraging signs while raising other questions for further study.

“Two or three years ago microfinance was thought to be the big cure for many diseases, while detractors have always wondered about sustainability,” Townsend says, adding that there are still comparatively few rigorous studies of the subject.

A long-term help, or just short-term spending money?

The matter of sustainability is one of the key problems raised by Townsend’s study of the Million Baht fund: People who received loans changed their spending and investment habits, but not always in ways that produce long-term growth.

“Many variables moved rather dramatically,” Townsend says. Consumption, for instance, doubled on average in the short run. “The order of magnitude of that increase was quite surprising,” he says. But six or seven years after the program was implemented, consumption had dropped back down significantly. So what happened?

“Our interpretation is that when they introduced these village funds, households … needed less in their rainy-day funds, and they converted part of that savings into consumption. Others likely lacked liquidity at the time the program was introduced and borrowed to increase consumption. Still others likely reduced consumption in order to invest, although there are not enough data to nail that down definitively.”

The overall effect helped produce some economic growth, specifically with improved capital and hired labor. A typical entrepreneur using the program, Townsend suggests, was a trader with a pickup truck, buying goods from farmers and taking them to area markets. “Gasoline purchases went up, auto repairs went up, so it looks like traders were improving and expanding their business,” Townsend notes.

Those small-business owners also hired additional workers to help them, which may have been the most unambiguously beneficial effect of the program. “In villages where there is a substantial expansion of credit per capita, the wage rate goes up,” Townsend says. “Clearly there was some transformation in these businesses — taking on more labor, putting upward pressure on wages — so wage-earners benefitted.” The research found a wage increase of about 7 percent for the average household, and 12,500 baht in increased wage income for every 10,000 baht of credit from the fund.

Townsend and his co-author, Joseph Kaboski of the University of Notre Dame, suggest this change can lead to long-term rises in village wages, putting more money in the pockets of those who do not run businesses, but make a living strictly through labor. “There are spillovers, benefits for people who didn’t directly get credit,” Townsend says.

For all of that, however, overall assets did not grow as a result of the program, suggesting that its impact was limited. Financial savings dropped. Moreover, the Million Baht fund did not create many new, more productive businesses in Thai villages.

“I thought we would see substantial changes in the occupations as a result of this village-fund experiment,” Townsend says. “We don’t see too much of that. It was more businesses improving than new businesses expanding.”

Global implications?

The paper, “The Impact of Credit on Village Economies,” was published in the latest issue of the American Economic Journal: Applied Economics. Townsend has been overseeing fieldwork on the finances of Thai villagers continuously since 1997.

The results in this paper are based on household finance surveys Townsend and his colleagues took from 1997 through 2007; because the Million Baht Village Fund was disbursed quickly, in 2001 and 2002, the researchers believe they were able to discern a clear before-and-after picture, revealing the fund’s effects, and were able to track long-term financial changes in the villages.

The paper is “an important contribution to the issue of access to credit in emerging economies,” says Flavio Cunha, an assistant professor of economics at the University of Pennsylvania who has read the study. He notes that the wage increase suggests improved productivity, resulting from the expansion of credit in villages, which he terms an “important implication for policymakers.” The behavior of the villagers in the study, Cunha adds, can help researchers determine “what type of economic models we should zero in on when it comes to studying investments and consumption in developing economies.”

Townsend acknowledges that — as with most studies focused on one country — it is an open question how much light the results shed on the issue more broadly.

“We don’t know if this Thai experience generalizes to other countries or not,” he says. Still, he points out, “some aspects of what we’re finding are similar” to the results of a microfinance experiment that economists in MIT’s Abdul Latif Jameel Poverty Action Lab (J-PAL) conducted in Hyderabad, India, a few years ago.

From a policy standpoint, Townsend thinks new finance interventions are still worth pursuing — while applying lessons learned from the Million Baht fund experience.

“We see some evidence that some of the people who did get the credit made good use of it,” he notes.

Funding for the research was provided in part by the Bill and Melinda Gates Foundation, the John Templeton Foundation, the National Institute of Child Health & Human Development and the National Science Foundation.
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3 Questions: Andrew Lo on JP Morgan’s multibillion-dollar trading loss

May 30, 2012, 8:50 am
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Earlier this month, heavyweight bank JP Morgan Chase announced it had lost at least $2 billion on a single trade — a figure that could grow as the firm struggles to unwind its position. The event has prompted a public airing of many questions: What went wrong, and why didn’t JP Morgan recognize the problem sooner? Should the bet be regarded as a risky proprietary trade, or a hedge designed to offset potential risks on other trades? And what will it take to prevent future blowups like this? MIT News spoke about the issue recently with Andrew Lo, the Charles E. and Susan T. Harris Professor of Finance at the MIT Sloan School of Management. Lo, an expert in financial markets, was recently named one of the world’s 100 most influential people by Time magazine.

Q. You’ve suggested that to properly learn from financial mishaps, and properly regulate the industry, we need a financial equivalent of the National Transportation Safety Board (NTSB), which investigates airplane accidents, among other things, and has helped make flying safer. At this point, how much do we know about this JP Morgan trade?

A. I think there’s a lot more we need to learn about what happened, for a couple of reasons. I’m a firm believer in the need for financial regulation, so I’m not in the camp that says, “Let markets run wild.” But it’s tremendously costly to implement any new regulation, never mind the existing ones, so before we propose new rules, we really want to make sure we know what we’re doing. One of the interesting things about what the NTSB does and why it takes so long to put together a definitive accident report is that they spend tremendous effort not only in figuring out what happened, but also in ruling out all sorts of other possible explanations, so that in the end, they arrive at a single narrative of what actually did happen. I could rattle off three or four different narratives about what may have happened at JP Morgan, and one of them may even be true, but if we’re going to make rules in response to this event, we have an obligation to the American people to get it right. And that’s where accident investigation becomes essential.

Q. Some people have wanted to ban proprietary trading by banks that collect regular deposits — the so-called “Volcker Rule.” A central question about this JP Morgan incident is whether it was a proprietary trade, or strictly a hedge against potential losses in other trades — or if we can even make such a distinction. Limited though our knowledge is, how do you assess this issue?

A. I think the answer is very simple: Yes, we can tell the difference. And this shows how important having the right information is in being able to come up with the right narrative. There is one very simple question that you can ask — which has a definitive answer — about the small number of individuals who were responsible for managing this group at JP Morgan and putting on the specific trades that lost these large amounts of money. That question is: How were they compensated on an annual basis? Were they paid a salary and a bonus, and was the bonus a function of the profitability of the group, or was the bonus a function of the hedging ability of the group? If you can answer this question — and it definitely has an answer to it; it’s not a metaphysical question — you will have your answer as to whether it was proprietary trading or hedging. I don’t know the answer, but I know the answer exists, and I know that certainly the government can get that answer with a single phone call.

Q. What does this episode tell us about the limitations of risk management generally, at JP Morgan or elsewhere? And what can be done to improve risk management?

A. This goes to a much broader question about modern capitalism: How can any small number of individuals manage a $100 billion company? The answer is the same one we give for many complex tasks, which is that we have to build technology allowing us to leverage our human judgment in much broader contexts. The question is whether we want to or not. Right now we don’t have that level of commitment. Maybe after this JP Morgan fiasco, we will.

Clearly, risk is a complex set of issues in an organization like JP Morgan; I don’t think it can be reduced to a single number in any set of circumstances. In large, complex organizations, technology can play a critical role in tracking, aggregating, monitoring and communicating the entire gamut of risks that exist so that decision-makers can make well-informed judgments. The portfolios JP Morgan deals with are highly complex and highly dynamic, meaning they can change rapidly from day to day. My conjecture is that the senior management of this particular unit at JP Morgan did not have timely access to the risks they were being exposed to. …  I believe [JP Morgan Chase CEO] Jamie Dimon has acknowledged as much.

Another part of the challenge is incentives. Risk management is not a profit center; it’s typically a cost center. At the same time, CEOs and CFOs make decisions based on what they think shareholders want right now, and what shareholders usually want is price appreciation. When you invest in a serious risk-management effort, you spend a lot of money in the short run, and won’t necessarily be able to identify the blowups you avoided because of that effort. That’s why we need to change our culture.

It’s like fire codes. Putting sprinkler systems and fire alarms and extra exits in buildings is expensive, and the benefits are hard to detect unless there is a fire. In the United States, we had to experience a really serious loss of life, in New York’s Triangle Shirtwaist Factory fire of 1911, before we decided as a society that all commercial buildings are required to have fire protection — that’s the law, no more debate, end of story. We have to have that same attitude about risk management, and decide that to continue growing our economy, all corporations need to structure their governance so that risk management is a separate function that reports directly to the board, and that the chief risk officer is compensated and incentivized to identify risks and create financial stability for the company. Unless we do that, we’re going to be constantly subjected to this endless cycle of fear and greed, fear and greed, fear and greed.
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How better financing could help create new cancer drugs

October 3, 2012, 9:00 pm
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The pharmaceuticals industry presents a quandary for potential investors: Major investments in drug development pay off handsomely in a relatively small number of cases, but many other projects deliver no returns at all. The evident difficulty of picking winners can deter investors from putting money into individual companies.

But a novel way of financing the industry could help bring infusions of money into the drug-development pipelines of many firms, as scholars from the MIT Sloan School of Management outline in a paper appearing this week in Nature Biotechnology. The authors suggest that a large “megafund,” consisting in large part of long-term bonds issued by drug companies, would help fund languishing projects while providing a safer investment option for large institutional investors and money managers.

“This kind of financing vehicle could actually be a great mechanism to spur the industry to fill those pipelines,” says co-author Andrew Lo, the Charles E. and Susan T. Harris Professor of Finance at MIT Sloan and director of the school’s Laboratory for Financial Engineering.

Many biotech companies finance their research through venture capital funds when in the startup phase, or by going public and issuing stock as they get bigger. But a new financing arrangement incorporating bonds — also known colloquially as securitized debt — would help mitigate the hit-or-miss nature of drug development for both companies and wary investors, Lo believes. For biotech firms, he says, “using debt financing on a relatively large scale” would bring in more funding, thus “enabling [firms] to support very risky kinds of research projects that currently [they] really can’t afford to take on.”

From the investment side of things, Lo adds, the paper shows that debt financing produces “relatively reasonable probabilities of default such that the debt can be rated and that you can make a credible case that you could market these instruments to institutional investors.”

Beyond the valley of death

The MIT research uses cancer drug research and development between 1990 and 2011 as a model for the wider industry. After crunching numbers on biotech investments, revenues and production patterns for oncology drugs, Lo and his co-authors found that a megafund between $5 billion and $15 billion in size could yield average annual returns from roughly 9 to 11 percent for the equity portion of the fund, and 5 to 8 percent for the debt portion of the fund.   

“We basically tried to put together a simulation that an investor might want to see in order to gauge the risk and reward for investing in these drugs,” Lo says.

The key to those returns, the paper emphasizes, is that a megafund would constitute a long-term investment in biotech, in contrast to stockholders who may expect increasing quarterly earnings. The funding vehicle would be aimed at riding out the ups and down of particular firms and drugs, and producing solid returns over many years.

On the industry side, the megafund concept helps address the problem people in many industrial sectors call the “valley of death” — that is, the challenge of taking promising lab research and developing it into viable products. In 2010, the authors note, the biotech industry spent about $48 billion on basic research, and $127 billion on clinical development, but only about $6 billion to $7 billion on so-called “translational” efforts to transform lab research into drugs that enter clinical trials.

“There’s plenty of money for basic research, there’s plenty of money for Phase III clinical trials,” Lo says. “There’s not a lot of money for the process in between, and that’s what we’re hoping to support.”

In addition to Lo, the authors of the paper are Jose-Maria Fernandez, a researcher at MIT Sloan’s Laboratory for Financial Engineering, and Roger Stein, a research affiliate at MIT Sloan and managing director for research and academic relations at Moody’s Corp.

Evolving finance for an evolving industry

The impetus for the paper, Lo says, came in part from recent personal experience: His mother died of cancer last year, and Charles Harris, who funded his professorship, died of cancer two years ago. Working on new ways of financing is, in part, Lo’s “way of coping” with the fact that “you feel helpless when your friends and family are stricken with cancer.”

The megafund idea, as the authors note, faces several hurdles that would need to be addressed, from effective management of the funds to “proper controls” in the regulatory arena, especially surrounding the sale of prospective biotech securities. Still, the paper has received a positive reaction from executives in the biotech industry.

“I’m excited about it,” says Monique Mansoura, a biotechnology executive and former planning officer at the National Institutes of Health, who has read the paper. (Mansoura was also a part of the MIT Sloan Fellows Program in Innovation and Global Leadership last year.)

In the paper, the researchers test their financing concept against both the “blockbuster” model of drug production in the industry — in which a small number of products succeed, generating giant returns — and a nonblockbuster version in which more drugs pay off, but are tailored to reach smaller populations of consumers.   

Mansoura says she found the scenario in which the industry moves away from the blockbuster model to be more compelling. “The idea of a blockbuster [industry] is evolving,” Mansoura says, adding that “the science is pointing toward more stratified, personalized medicine” in the future.

For his part, Lo says that input of that nature, from industry experts, is essential to help make the megafund concept viable.

“We’re not experts in oncology or biomedical research,” he acknowledges. “We’re hoping this is going to be the beginning of a much longer and deeper conversation between financial experts and biomedical researchers.”
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Study: At most a third of us show a consistent approach to financial risk

December 2, 2012, 9:00 pm
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Take a moment to consider some of the financial choices you’ve made in recent years. Do you have a consistent approach to your money, either by playing it safe or having a willingness to take risks? Or do you not have a set philosophy, and instead make your financial decisions independently of each other?

In economics, classical theory holds that we have consistent risk preferences, regardless of the precise decision, from investments to insurance programs and retirement plans. But studies in behavioral economics indicate that people’s choices can vary greatly depending on the subject matter and circumstances of each decision.

Now a new paper (PDF) co-authored by an MIT economist brings a large dose of empirical data to the problem, by looking at the way tens of thousands of Americans have handled risk in selecting health insurance and retirement plans. The study, just published in the American Economic Review, finds that at most 30 percent of us make consistent decisions about financial risk across a variety of areas.

This empirical finding belies the notion that people are uniformly consistent in their approach to risk, across types of financial decisions — but it also shows that not everyone continually changes their risk tolerance, either.   

“As economists, we often place great value on where people put their money in the real world,” says Amy Finkelstein, the Ford Professor of Economics at MIT, who helped conduct the research. “Most extremes are not true in the reality, and we found our answer was in the middle.”

Many choices, different degrees of risk

The research used data on the choices made in 2004 by 13,000 employees about their health insurance and retirement plans at Alcoa, Inc., the international aluminum manufacturer whose headquarters are in Pittsburgh.

Those Alcoa employees were faced with choosing plans for five types of health insurance, as well as 401(k) retirement funds. The insurance decisions involved choosing an overall health-care plan, prescription drug coverage, a dental plan, long-term disability coverage, and short-term disability coverage. The workers also had 13 different 401(k) plans available to them, bearing different degrees of risk.

Because employees were making decisions in both the health-care and retirement domains, the researchers had the opportunity to see how the same individuals handled different types of choices. Or, as Finkelstein puts it, the economists could ask: “Does someone who’s willing to pay extra money to get comprehensive health insurance, who doesn’t seem willing to bear much financial exposure in a medical domain, also tend to be the one who, relative to their peers, invests more of their 401(k) in [safer] bonds rather than stocks?”

The researchers ranked the employees by risk tolerance, relative to each other, in all six areas of investment, and found that there was significant variation in the financial exposure people were willing to sustain. Then again, the fact that up to 30 percent of the Aloca employees were consistent in their risk, Finkelstein says, gives some credence to each of the competing notions of how people assess risk.

“I think you could look at these results legitimately through two very different lenses,” Finkelstein says. “You could say, if 30 percent of our sample is making consistent choices across all six domains, that suggests there is a fair amount of generality in people’s risk preferences, and the classical model has some bite. Or you could say, if just 30 percent of people are making choices that are consistent across domains, there are a lot of context-specific risk preferences,” in keeping with behavioral economics.

The results do come with a twist: The researchers found that the employees’ decisions about the risk levels of their 401(k) plans had less predictive power for their insurance choices than did any of the five insurance choices. Finkelstein says she thinks it is “a reasonable interpretation” to suggest that this discrepancy represents “a large drop in the commonality” of people’s risk tolerance across a diversity of financial domains.

Besides Finkelstein, the authors of the paper are Liran Einav, an economist at Stanford University; Iuliana Pascu, a doctoral student in economics at MIT; and Mark Cullen, a professor at Stanford’s School of Medicine. Cullen has had a partnership with Alcoa, since 1997, to study the health of its employees.

A ‘need for more research’

Economists say the research is illuminating, both for its conclusions and the wealth of information it contains.

“One of the important things this paper does is to clarify the difficulty of answering how general risk attitudes are from one choice domain to another,” says Daniel Silverman, an economist at the University of Michigan who has read the paper, adding: “In some circumstances and for some groups, that assumption of a common risk attitude across choice domains isn’t a very good assumption.” At the same time, Silverman notes, the findings leave open the possibility that some people “could have just a single attitude to risk, and make very different choices across domains,” to balance out those particular risks.

The paper, Silverman observes, also “brings uncommonly high-quality data to this question. It’s very rare to see the market decisions of a group of people in a comprehensive way.”

Finkelstein suggests the study can be useful for social scientists or policymakers who build models or construct programs that make assumptions about risk tolerance; now those models can include more specific estimates of the ways people bear risk.

“I don’t think it definitely solves this problem and ends the discussion,” Finkelstein says, “but hopefully it suggests potential changes in best practices, and a need for more research going forward.”

Finkelstein, who earlier this year won the John Bates Clark Medal, awarded annually by the American Economic Association to the economist under age 40 who has made “the most significant contribution to economic thought and knowledge,” is continuing to conduct research related to this study.

Along with Einav, Cullen, and two other scholars, including MIT economist Stephen Ryan, Finkelstein is co-author of another forthcoming paper based on the Alcoa data, which examines whether individuals select insurance plans based on their “anticipated behavioral response” to having coverage.

Research for the current paper was funded by the National Institute of Aging, the National Science Foundation, the U.S. Social Security Administration, the Sloan Foundation, and the MacArthur Foundation.
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Building innovation in India

September 26, 2011, 9:00 pm
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Despite a global economic downturn that has rippled across India, the country remains one of the world’s fastest growing economies, second only to China. India is also the planet’s second most populous nation, expected to overtake China by 2030.

During the MIT-India Conference, held Friday, Sept. 23, at the MIT Media Lab, speakers from both MIT and India explored the challenges associated with India’s rapid expansion, including energy distribution, rural access to health care, and efforts to curb governmental corruption. One theme was prevalent throughout: India’s many hurdles also provide unprecedented opportunity for innovation.

N.R. Narayana Murthy, the conference’s keynote speaker and founder and chairman emeritus of Infosys Limited, said the time is right for those who choose to work in India.

“They can be part of an era where there’s so much confidence, there is so much hope, there is so much ambition,” Murthy said. “And there is so much that needs to be done.”
The conference featured entrepreneurs, venture capitalists, finance experts and government officials from India, as well as MIT faculty working on India-related projects. The one-day event sought to strengthen the relationship between MIT and India, which MIT Chancellor Eric L. Grimson characterized at the event as a “century-long friendship.”

In his opening remarks, Grimson noted that the friendship began in 1906 when Ishwar Das Varshnei became the first Indian to graduate from MIT. In 2010, his great-great-grandsons, twins Kush and Lav, followed in his footsteps, earning PhDs in electrical engineering and computer science. Today, more than 270 students of Indian descent attend MIT; Grimson cited the Institute’s many India-related projects — fifteen of which were featured in a Technology Showcase during the conference — as a strong bridge between the Institute and India.

“If MIT wants to stay on the forefront of technology, it has to maintain ties with India,” Grimson said.

To support such endeavors, MIT recently launched the MIT-India Trust, established through a founding gift from a cohort of leading alumni in India: Adi Godrej SM '63, Baba Kalyani SM '72, Vikram Kirloskar '81 and Damodar Ratha SM '73. The trust, which will be administered jointly by Godrej and Kalyani — along with MIT Associate Provost and Ford International Professory of History Philip Khoury and Professor of Electrical Engineering George Verghese — will support projects that promote collaboration with India. Already, the trust has provided seed grants for a number of projects, including an effort to improve healthcare delivery in rural India, and a project to study neutron stars, using a satellite recently launched by India.

In addition to the MIT-India Trust, the Institute has also established a parallel effort on campus. The MIT India Initiative Fund will also support collaborations with India, using funds from donors across the globe.

Energy and the environment

The conference got underway with a panel discussion on energy and the environment. Panelists noted that as India’s population continues to expand, so too will its energy demands.

E.A.S. Sarma, former secretary of economic affairs in India, cautioned that the country “can’t go in a wanton manner for megawatts.” Sarma, now a social activist working to protect rural communities from pollution created by local powerplants, insists that communities should have a say when it comes to building new plants.

“If you bring people into discussions from the start, they may help develop benign processes,” Sarma said.

However, Robert Stoner, associate director of the MIT Energy Initiative, pointed out that above and beyond meeting the energy needs of India’s projected population growth, nearly 400 million current citizens already lack access to electricity.

While panelists discussed the potential contributions of solar, natural gas and nuclear energy, the overall consensus was that it would take a combination of approaches to solve India’s energy problem. And in many cases, those solutions will have to be extremely affordable.

“There’s opportunity for low-cost innovation in lots of areas,” Stoner said.

Frugal innovation

Venkatesh Narayanamurti, former dean of the School of Engineering and Applied Sciences at Harvard University, pointed to Indians’ recent widespread adoption of clean-burning cookstoves as an example of affordable “reverse innovation.” The low-tech cookstoves have reduced the indoor air pollution associated with traditional biomass-fueled stoves.

Sanjay Bhatnagar, CEO of WaterHealth International, spoke of the unprecedented room for entrepreneurship in all facets of the Indian economy. He has built a decentralized system for water purification that provides affordable, accessible and clean water to some of the most remote areas of India. Bhatnagar urged budding entrepreneurs to think of scalable ideas, warning against “jugar,” an Indian term for a hasty, ill-conceived business venture.

Mohanjit Jolly, a venture capitalist and partner at DFJ India, agreed with Bhatnagar, saying the country needs “more curb-jumping innovation.” However, he added that innovations that truly make an impact in India face a significant hurdle: “How do you get to the masses, and also make a profit?”

Still, Jolly is optimistic about the future of business in India. “There’s a new crop of social investors,” he said. “We see a country being built, and blossoming.”

Pankaj Vaish, managing director and head of markets for Citi South Asia, echoed Jolly’s observations, noting a pervasive scene in India’s largest cities: billboards plastered not with pictures of Bollywood starlets, but with ads for stocks and other investments.

Health, but at what cost?

Panelists noted that much of India’s health care is provided on an out-of-pocket basis, with very little spent on preventive care. Kenneth Cahill, a principal at Deloitte Consulting, observed that India spends less than 1 percent of its gross domestic product on health care. While his firm is working with India’s government to improve funding for health care, Cahill says there’s ample room for the private sector to get involved in the industry. Ashwin Naik, CEO of Vaatsalya Healthcare, agreed that preventive care is often shortchanged, stressing that Indian hospitals should reach out to rural, poor communities to educate people about it.

Telemedicine may be one way to reach remote populations; Jonathan Jackson, CEO of Dimagi, is working with Indian communities to provide health care options for low-literacy individuals. One solution: an interactive voice response system that helps a patient manage his or her care. Jackson is currently testing the system and gauging demand for the technology, but says the effort has made him recognize a huge need to address literacy in the country.

Naik added that health care should start early, in primary schools, where students can first learn about preventive care, then go home and educate their families.

“It’s about behavior, and it’s about change,” Naik said. “And it has to start in the schools.”

Cracking corruption

Throughout the conference, speakers remarked on the current transformation underway in India, especially in governmental transparency. During a panel on governance, participants observed a new generation of citizens emerging in the country; Baijayant “Jay” Panda, a member of the Indian Parliament, remarked that the current generation grew up “never having to take a bribe for a new phone or a scooter. This generation has less tolerance for corruption.”

Panda cited the recent anti-corruption movement, led by activist Anna Hazare, as “what broke the camel’s back.” The movement has led to anti-corruption laws being passed in both houses of parliament.

Still, there is more to do to clean up the country’s long history of corruption, and Vini Mahajan, joint secretary to India’s prime minister, said the country needs to employ more judges, police and civil servants. “There is too much discretion, and too little reform,” Mahajan said.

Making a mark

Looking forward, the conference’s keynote speakers, Murthy and Gururaj “Desh” Deshpande, co-founder and chairman of Sycamore Networks Inc., addressed audience members, many of them MIT students, with ideas on how to make a mark in India’s complex, dynamic culture.

Deshpande counseled students against taking a “pre-packaged” view of India, urging them instead to go there for a year and “get the local flavor” before starting a venture. “Ideas change, and you need to be open to change,” he said.

Anand Dass, an MBA candidate at the MIT Sloan School of Management and a student organizer of the conference, added that he sees India as a promising destination for young entrepreneurs.

“There’s just pure excitement,” Dass says, “and the opportunity to do something — be it health care, finance, entrepreneurship — there’s massive opportunity.”
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Jane Phillips, employee in Office of Vice President for Finance, dies at 65

October 13, 2011, 12:28 pm
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Jane Phillips, an employee in accounts payable within the Office of the Vice President for Finance (VPF), died on Monday, Oct. 10, in Boston, Mass. She was 65.

Phillips began working at MIT as a temporary employee in several departments, including the registrar’s office and accounts payable, between 1994 and 1996. She joined accounts payable full time as an accounts payable assistant in 1997 and served in that role until she went on medical leave during spring 2011.

Phillips had a bachelor’s degree in economics from Barnard College and held positions in teaching and market research prior to joining MIT.

She was a loving wife and mother and a valued colleague and friend to many across the Institute. She will be deeply missed.
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Columnist discusses financial literacy at SWIM event

February 19, 2013, 10:46 am
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Dr. Heather McGregor, columnist and author of the new book "Mrs. Moneypenny’s Careers Advice for Ambitious Women," visited the Sloan Women in Management club (SWIM) on Feb. 7.

McGregor, who is also known as Mrs. Moneypenny, offered career advice and tips to the club’s members in an hour-long talk. She told students to take control of every aspect of their careers, from managing human and social capital (networking) to learning to say “no,” delegate and build teams. The Financial Times columnist also advised SWIM members to spend time learning and understanding their own financial literacy.

“You should spend at least an hour a month, if not an hour a week, on your own personal finances. If you are not doing an hour working on your own money, you are not doing enough,” noted McGregor, who is also an entrepreneur and pilot.

“Know exactly what it costs you to live," she said. "Every woman should have a personal financial finish line — that is, understand how much money you will need to earn to pay down all your debt, and have enough to retire. Not enough of us do this.”

McGregor also advised students to have a third dimension to their lives — to do something more than work and run a home. This will also develop your human and social capital, she said.
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Former banking executive reflects on launch and rise of the ATM

February 28, 2013, 12:20 pm
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John Shepard Reed, current chair of the MIT Corporation and retired chairman and CEO of Citigroup, Inc., spoke yesterday about how the ATM revolutionized personal banking, and the lessons the process holds for systems engineers.

Reed’s talk, part of the Brunel Lecture Series on Complex Systems sponsored by the MIT Engineering Systems Division, focused on his experiences launching a network of ATMs throughout New York City in the 1970s. The effort of designing and manufacturing the complex technology of the banking machines was closely linked to the equally complex social element of the 1.6 million customers and 350 branches involved.

Reed noted that much work in science and engineering now requires a focus on systems. “Whether you’re a scientist or an engineer, in the modern world, you have to understand that you’re going to be working on part of a system,” he said.

This highly expensive, ambitious initiative to deploy ATMs began at a time when there was no real evidence that customers would consistently use them. The project was born out of the thinking that “the electronic dispensing of cash would be a real change agent” in the world of banking, Reed said. This would later prove true, as the appeal of the ATM card opened the door for the credit card, which also allowed customers to access money outside of the traditional bank environment.

Citicorp Systems worked with IBM on much of the technology, addressing software and hardware challenges. Beyond the technology, they needed to address issues regarding how the customer and the ATM would interact effectively with one another — and how to present this new banking option to customers used to receiving service from human tellers. In addition, Reed explained, the design of the machines had to take into account manufacturing efficiency and ease of use.

In the end, Citicorp’s efforts to launch the ATM network were vastly successful and the investment proved worthwhile, breaking even after six months. The company also learned much about its customers. People liked the 24/7 availability of the ATMs, and 40% of ATM traffic happened when the bank was normally closed.

Reed joked that the project was so bold and unwieldy that “it only could have been done by 30-year-olds — anyone older would have been smart enough not to try."
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Deep in the field

April 10, 2013, 9:00 pm
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In 1993, Robert Townsend was an accomplished economist looking for a new project in his area of expertise, household finance. So he did something that few people would have recommended: Townsend spent months driving around northern Thailand in a borrowed van, surveying rural villagers about their incomes and expenses.

In due course, Townsend ran into a government researcher, Khun Sombat Sakunthasathien, who was traversing the same territory on a motorcycle, trying to set up small-scale community savings programs — partly as a way of keeping villagers from growing poppies, which fuel the drug trade. Townsend and Khun Sombat compared notes, discussed their data, and stayed in touch.

Four years later, in 1997, they launched a unique program: the Thai Family Research Project, a series of annual and monthly surveys that have generated rich data about household finance in the developing world. Helped by about 200 researchers, the survey has created a detailed picture of 2,880 households, 262 community groups and 161 village-scale financial institutions, along with things like soil samples from nearly 2,000 agricultural plots.

The results of this painstaking effort are hundreds of thousands of data points showing something distinctive: In Thailand’s expanding economy, considerable growth is coming from rural areas. Moreover, those rural households help themselves by using well-developed financial strategies, and by pooling risk smartly, to deal with natural hazards such as flooding.

“By using the financial accounts, we can see wealth being created at the local level,” Townsend says. “You can see the financial strategies, and the cooperation among the households in informal risk-sharing networks, where they share their returns, as one of the key mechanisms. So it’s not just about individuals, it’s also about communities.”

Creating something special

Now Townsend and Khun Sombat have written a new book, “Chronicles from the Field,” co-authored with Rob Jordan, about their experience. It discusses the empirical findings, but beyond that, recounts the life of the field researcher in the developing world, working to collect data that otherwise would never have been captured.

“About 12 years into the process, we realized we had created something really special,” says Townsend, the Elizabeth and James Killian Professor of Economics at MIT and director of the Consortium on Financial Systems and Poverty, a research group in development economics. “We realized, too, we needed to document what had happened. Ultimately memory fades and all this rich experience and lessons learned would be lost.”

Much of the effort made by Townsend, a Thai speaker, has been to get to know the villagers in the area he studies, and build strong working relationships with them.

“Organizations deal with people, and this is all about the people,” Townsend says. “You need to build up trust. The households need to understand why you’re asking them all these questions, and you need to be honest with them. By going back, you establish that you care.” That familiarity helped convince rural chicken farmers, for instance, that participating in the survey would not raise their taxes.

Among the project’s findings, Townsend says: Villagers — often farmers, fisherman and traders — have worked out systems to share risk “quite well, and even optimally,” via loans through kinship networks. (Those without such networks are more exposed to financial problems.) Microfinance — small business loans — helps some types of rural businesses, such as traders, and may help wages and consumption for a while, but has mixed results overall. Over an extended period of time, though, given some access to capital and smart reinvestments, these rural economies have grown consistently, often at a rate of greater than 5 percent annually.

“In some sense it’s a radical message,” Townsend says of the findings. “It’s saying that growth is not coming from Bangkok, it’s not coming from the large factories, dribbling down to the low level. It’s the other way around. Growth is coming from these small household enterprises.”

‘It’s worth the effort’

The book has won praise from other scholars; Patrick Rey, a professor at the Toulouse School of Economics in France, calls it a “fascinating tale of a rich, long-lasting experience in field work.” A documentary film that accompanies the book, “Emerging Thailand: The Spirit of Small Enterprise,” is making its debut with a screening at MIT on April 23 at 5:30 p.m. in E25-111.

Townsend says he hopes the story will be received, in book or film form, by a general audience, as well as by current or future researchers who would like to do fieldwork of their own. But while he thinks his project could provide some motivation or specific advice to others, he does not expect everyone to launch 15-year projects.

“I don’t want the message to be that you have to commit to such long-running surveys,” Townsend says. “Even one or two years of a well-designed survey is better than nothing. Part of my advocacy is this: Start doing it. It may seem like a hill to climb, but it’s well worth the effort.”
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Walter Torous tapped as senior lecturer

May 10, 2013, 7:52 am
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Walter Torous, one of the nation’s top scholars in real estate finance, has been appointed to a five-year term as a senior lecturer in the MIT Center for Real Estate, a joint appointment with the MIT Sloan School of Management.

Torous was the Lee and Seymour Graff Distinguished Professor and founding director of the Ziman Center for Real Estate at the UCLA Anderson School of Management. He has published a number of articles in academic journals on the valuation of mortgage-backed securities and mortgage pass-through securities, mortgage prepayment and default, and the valuation of commercial mortgages.

Currently editor of Real Estate Economics, the official publication of the American Real Estate and Urban Economics Association 
and associate editor of the Journal of Real Estate Finance and Economics, he has previously served as associate editor for the Journal of Housing Economics, the Pacific-Basin Finance Journal and Economic Notes.

Torous has previously taught at the University of Michigan and the London Business School; at MIT, he is teaching a graduate course in Mortgage Securitization, offered to MSRED and Sloan graduate students. He holds a BMath in economics from the University of Waterloo and a PhD in economics from the University of Pennsylvania.
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Svetlana Adamova Sussman, MIT Sloan administrative officer, dies at 53

June 14, 2013, 6:15 am
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Svetlana Adamova Sussman, administrative officer for the Economics, Finance & Accounting (EF&A) program at the MIT Sloan School of Management, passed away on June 7 at her home in Somerville. She was 53.

Sussman was a native of St. Petersburg, Russia. In 1995, she moved to Cambridge and married her husband, Harris Sussman.

Sussman was hired as a senior secretary in EF&A in 1999. She was promoted successively over the years to administrative assistant, senior administrative assistant, area officer, senior area officer, and ultimately, in 2012, to administrative officer, all within EF&A. Last year, she was recognized with an MIT Sloan Appreciation Award, the highest honor bestowed upon MIT Sloan staff members. Colleagues say she was an integral part of EF&A.

“Her time with us was a great gift, and in her work and through her friendships, she set an example of leadership for our community,” says David Schmittlein, the John C Head III Dean of MIT Sloan.

In her roles as area officer and administrative officer, Sussman managed approximately 20 EF&A administrative staffers.

Joseph Weber, the George Maverick Bunker Professor of Management, who worked with Sussman, notes that she participated in many Institute-wide committees. “She sat in on some of my classes, simply because she wanted to learn more, and was actively involved in a wide variety of projects to make Sloan a better place,” he says. “She is one of the most caring and compassionate people I ever met, and I will miss her very much.”

As the administrative coordinator for the MIT Laboratory for Financial Engineering (LFE), Sussman also collaborated closely with its director, Andrew Lo, the Charles E. and Susan T. Harris Professor of Finance at MIT Sloan. She supervised the construction of the LFE computer lab, coordinated many research grants, dealt with corporate sponsors and managed the day-to-day activities of the lab.

“But her most significant contribution to LFE was shepherding the many students who came through each year and prospered under her warm and supportive mentoring,” Lo says. “She became their ‘LFE mom’ and meant more to us than words can express.”

Sussman was also the founder of an effort to help blind students in Russia, which grew to provide assistance to more than 1,000 students and their teachers.

Sussman is survived by her husband, Harris; her son, Leo; and her grandson, Tigran.
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Rethinking investment risk

August 25, 2013, 9:00 pm
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Financial innovation is supposed to reduce risk — in theory, at least. Yes, new financial instruments based on the housing market helped cause the financial crisis of 2008. But in the abstract, those same instruments have the potential to spread risk more evenly throughout the marketplace by making it possible to trade debt more extensively, rather than having it concentrated in a relatively few hands.

Now a paper published by MIT economist Alp Simsek makes the case that even in theory, financial innovation does not lower portfolio risk. Instead, it raises portfolio risks by creating situations in which parties sit on opposing sides of deep disagreements about the value of certain investments.

“In a world in which investors have different views, new securities won’t necessarily reduce risks,” says Simsek, an assistant professor in MIT’s Department of Economics. “People bet on their views. And betting is inherently a risk-increasing activity.”

In a paper published this month in the Quarterly Journal of Economics, titled “Speculation and Risk Sharing with New Financial Assets,” Simsek details why he thinks this is the case. The risk in portfolios, he argues, needs to be divided into two categories: the kind of risk that is simply inherent in any real-world investment, and a second type he calls “speculative variance,” which applies precisely to new financial instruments designed to generate bets based on opposing worldviews.

To be clear, Simsek notes, financial innovation may have other benefits — it may spread information around world markets, for instance — but it is not going to lead to lower risks for investors as a whole.

“Financial innovation might be good for other reasons, but this general kind of belief that it reduces the risks in the economy is not right,” Simsek says. “And I want people to realize that.”

We beg to differ

To see why financial innovation is supposed to reduce risk — and why Simsek argues that it does not — consider the family of instruments based around home mortgages. These include the mortgage-backed security, which is a bundle of mortgages sold as a bond; the collateralized debt obligation, which is a bundle of mortgage-backed securities; and the credit default swap, which is basically insurance on these kinds of debt.

In theory, wrapping a bunch of mortgages into a bond and selling it on the markets spreads risk around and could lead to lower mortgage rates. Since the bank or lending institution no longer has to hold all the loans, it is both less vulnerable and — not having to worry as much about defaults — may be in a better position to loan at lower rates.

Moreover, these kinds of financial instruments separate home loans into distinct tranches, based on apparent risk — meaning that hedge funds with high risk tolerance could acquire the higher-paying, riskier loans, and pension funds could acquire the seemingly safer tranches.

Any investment in mortgages will contain a certain amount of risk, since no one can be completely certain what the future holds for the housing market. But now consider what occurs when the credit default swap enters the mix. This is essentially a side bet between parties — such as banks and reinsurance companies — about the future of the housing market, and it will produce a winner and a loser. The wager represents precisely the kind of speculative variance, in Simsek’s term, that stems from a “belief disagreement.”

As it happens, Simsek believes that a closer analysis of the standard tool used to evaluate portfolio risk, the capital-asset pricing model (CAPM) in use since the 1960s, reveals that this kind of distinction is inherent in its equations.

“If you do the math, [portfolio risk] naturally breaks down into two components,” Simsek says — the inherent risk of investing, and speculative variance. His current paper is thus a mathematical demonstration of the idea that, using this widely accepted mode of analyzing risk, “as you increase assets, this speculative part always goes up,” as he explains, and that “when disagreements are large enough, this second effect is dominant and you end up increasing the average [portfolio risks] as well.”

Model research

To be sure, Simsek’s conclusion is based on a model. However, modeling is a significant part of economics; the right model can help describe and illuminate complex realities.  

“You build models, and if you’re lucky enough, the model speaks back,” Simsek says.

Moreover, the disastrous results of financial innovations related to the housing market in recent years suggested to him that some rethinking of risk theory was in order. “What happened at the time seemed inconsistent to me with what we learned in finance courses,” says Simsek, referring to the investment bubble that sank prominent Wall Street firms and required a huge government bailout.

That is not to say that housing or the bond market are the only areas where speculative variance can be found; as Simsek points out, commodities markets, with their many futures contracts, are an obvious place to find bets based on belief disagreement and expressed through innovative financial tools. 

Other economists are impressed by the paper. “He goes deep and he’s very careful and rigorous and clear,” says Darrell Duffie, a professor of finance at Stanford University’s Graduate School of Business, who commented on the paper at this year’s meeting of the American Economic Association.

As Duffie notes, there have been many papers published about belief disagreements, and much work done on financial innovation, “but as far as I know this is the only paper that puts the two together.” The paper also suggests a need for further empirical research, he says, to test Simsek’s theory about belief disagreement and speculative variance.

“It’s a pure theory paper, so you often want to have someone come along afterward and measure empirically how big the effect is,” Duffie says.

For his part, Simsek says, he would be happy to see empirical research probing his model. It would be beneficial, he thinks, for economists “to engage in a quantitative analysis, asset by asset, to think about the net effect [of speculative variance]. That’s a tough question, but one I think we should tackle going forward.”
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Better bankruptcies for banks

January 9, 2014, 9:00 pm
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Good accounting isn’t just a hallmark of a well-run company: As a new study of the banking industry by an MIT professor shows, transparent financials help ensure stability when banks fail, and can even reduce costs for consumers or taxpayers when the government must oversee the bankruptcies of financial firms.

That has happened a lot lately, especially during the recent economic and financial crisis: From 2008 through 2010, the U.S. government was forced to act as the liquidating agent for more than 300 banks. But as MIT accounting professor Joao Granja shows in a newly published paper, the banks with better disclosure practices received higher bids for their assets, and regulators were able to conduct those liquidations more cheaply.  

Overall, Granja finds, failing banks that had filed documents with the Securities and Exchange Commission (SEC) saw a 7.8 percentage point increase in the portion of their assets bought by other firms during bankruptcy auctions, since potential buyers were better able to understand and trust the value of the assets.

“More transparency reduces information asymmetry, making bidders more willing and more confident about bidding for these assets,” says Granja, an assistant professor of accounting at the MIT Sloan School of Management.

Meanwhile, banks that regularly filed SEC documents were 4.5 percentage points less expensive for regulators to handle in bankruptcy than banks that had not filed such documents. When institutions are more transparent and better scrutinized by market participants, outside parties do not have to spend as much time digging around in an effort to reveal the true state of a financial institution’s books.

“There is a social benefit here,” Granja adds. “It’s less costly for the regulators to close it, [costs that] ultimately might actually fall on the taxpayer.”

Helping buyers and depositors

The paper, titled “The Relation between Bank Resolutions and Information Environment,” appears in the latest issue of the Journal of Accounting Research, a peer-reviewed publication in the field.

Bank bankruptcies are administered by the Federal Deposit Insurance Corporation (FDIC), which is mandated by Congress with finding the least costly means of administering bankruptcy proceedings. Consumers, such as bank depositors, also have a strong interest in seeing bank failings run in a quick, orderly manner. When a bank fails, “They [the FDIC] immediately want to close it and sell it to a healthy bank, so that there’s no unrest for the depositors,” Granja notes.

But not all bankruptcies are alike. Banks are regulated by a variety of agencies, but those registered with the SEC, Granja contends in the paper, undertake “a sizeable increase in financial transparency,” since they have to produce regular discussion and analysis of their activities in annual reports, and must file forms with every unscheduled but materially important event.

In conducting his study, Granja scrutinized the bankruptcy auctions for 322 banks that failed between Jan. 1, 2008, and Dec. 31, 2010. Sales of assets for troubled banks often happen in the last two weeks before a bank is set to close, and potential buyers have a relatively short timeframe, just a few days, to conduct due diligence. That means consistent past financial disclosure is all the more significant.

For this reason, as Granja found, an average 80 percent of the assets of banks not registered with the SEC sold at FDIC auctions, but 86 percent of assets sold among banks that had regularly filed SEC documents.

“When the failed bank was more transparent, bidders are willing to take on a higher percentage of the assets of the failed bank,” Granja says.

Scholars in the field believe Granja’s research is novel and valuable. Christian Leuz, an economist at the University of Chicago’s Booth School of Business who has read the paper, heralds its “clever research design,” and says it “provides convincing evidence on a benefit of disclosure regulation for banks that previously had not been noted: Greater transparency … makes bank resolution in the case of failure … less costly. This is a very interesting and important finding. It highlights that transparency has tangible benefits for the financial system.”

Best practices for the next crisis

U.S. economic history reveals a series of waves of failing banks, a phenomenon that was pronounced in the 1980s, for instance, as well as the 2008 to 2010 period. Granja believes that studying best practices for bankruptcy proceedings can help smooth the financial waters in case another such wave roils the banking industry.

And while the FDIC’s funding comes, in part, from fees banks pay, higher costs for the agency could be passed on to consumers, or in some circumstances could even require taxpayer assistance. Greater transparency by banks now could thus help insulate citizens from future costs.

“There might be [cause] for policy action to correct this, and for the regulators to require more transparency and disclosure on the part of the banks,” Granja concludes.
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Mobile money helps Kenyans weather financial storms

January 21, 2014, 9:00 pm
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Only about one-fourth of Kenyans have access to a traditional bank, and many people in the country farm for a living. Add those things together, and the result is that a large number of Kenyans are vulnerable to unpredictable income fluctuations.

But a new study co-authored by MIT economist Tavneet Suri shows that a growing form of electronic payments is helping Kenyans weather these financial problems by letting them informally borrow and lend money more easily. The electronic payments system, known as M-PESA, was introduced in 2007 and is now used by at least 70 percent of households in the country

In a new paper published in the American Economic Review, titled “Risk Sharing and Transaction Costs,” Suri and her co-author, William Jack of Georgetown University, show that income shocks force households without access to M-PESA to reduce their consumption by 7 percent more than households in the M-PESA network. That means the electronic money-transfers let people smooth out, as economists say, their spending — meaning they are less likely ever to have to cut back on paying for essential needs.

“The people who use M-PESA have a smaller drop in consumption when something bad happens,” says Suri, an associate professor of applied economics at the MIT Sloan School of Management. “They’re more likely to get money from their friends and family, and they receive from more different people.”

Informal insurance networks

As Suri and Jack emphasize, the agricultural nature of the Kenyan economy undergirds the sudden rise in M-PESA use. Droughts, storms, and other crop problems mean income can be quite irregular for millions of Kenyans; as a result, they don’t know how much money they will make, and save, from season to season or month to month. Many Kenyans also face financial crises due to health problems. In all, about 50 percent of households in the study reported serious negative income shocks in the six months preceding the survey.

“They face very high-risk environments and they don’t have the tools we have to deal with risk,” Suri says. “They also don’t have government programs like unemployment insurance or health insurance, and they don’t have private insurance either. So they end up making deals with each other.”

In Kenya — as in many developing countries — neighbors, friends, and relatives often rely on informal agreements to make loans with one another when times are hard. However, those networks can be strained by geography: People are most likely to be in contact with other people who live close to them, and use those contacts as part of their risk-sharing networks. But that proximity means that the same environmental or weather problems can diminish the wealth of an entire network.

“If I’m in the village next door and we both have a drought, then you can’t help me and I can’t help you,” Suri points out.

So use of M-PESA has flourished, up from 43 percent of households two years ago. Mobile phone usage is far more prevalent in Kenya than traditional banking is, and the system lets people transfer money by text message. Moreover, as Suri and Jack have found, the average distance over which an M-PESA operates is 150 to 200 kilometers, which means people are easily able to tap into money transfers from distant sources.

Connecting everywhere, not just the capital

Suri and Jack conducted their study over two years, evaluating 3,000 households in areas representing 92 percent of Kenya’s population. And they uncovered additional geographic patterns about the electronic money transfers: Not only is the average distance between parties significant, but many of the transfers take place entirely within rural areas. In short, money transfers are not just made from wealthier urban Kenyans to their poorer rural friends and relatives.

“Everybody assumes it’s just money going out from the capital, Nairobi, and that’s not true,” Suri says. “There are a lot of local transfers, this is not just [people in] the big city sending money.”

Other scholars say the results are interesting, and suggest follow-up questions about the larger impact, if it can be pinpointed, of mobile technologies. 

“It's intriguing to observe that this cost reduction allows families and friends to virtually fully insure themselves against negative events — from crop failure to health shocks — even though access to formal insurance is very limited,” says Francis Vella, an economist at Georgetown University who has read the paper.

However, Vella adds, “Moving forward, it will be important to ask if, as well as helping people share their resources more efficiently, mobile technology can increase the income levels of poor people, and indeed whether it can help them escape poverty. Identifying such an impact will be challenging, but it could help to validate opinions that until now have been aspirational at best.”

Suri has studied mobile money in Kenya extensively in recent years, but some of her new research will take her in different directions. Among other things, she is now studying the financing of small-scale distributed solar power in areas of Kenya without either a formal grid or established banking systems; she has also been examining housing prices in urban neighborhoods in Kenya, and the impact of new technologies on voter mobilization.
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Kenya under the microscope

January 28, 2014, 9:00 pm
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Occasionally, parents really do know best: When Tavneet Suri first started taking economics as a middle-school student in Nairobi, Kenya, she disliked it. But her father would not let her drop the course.

“I don’t care if you get a C,” she recalls him saying. “It’s good for you to try new things.” 

How right he was: Suri took the course, did well, and by high school, “Economics was my favorite subject.” Today, she is an accomplished development economist at the MIT Sloan School of Management whose intensive, on-the-ground studies have produced significant findings about Kenya’s economy and politics.

Suri, who was granted tenure earlier this year, conducts three main strands of research. The best-known concerns the use of M-PESA, a text-based “mobile money” system that lets Kenyans borrow and share risk with others more easily, smoothing out income fluctuations in a heavily agricultural society.


Tavneet Suri Photo: Bryce Vickmark

Suri has also conducted extensive studies of economic development in African countries including Ghana, Rwanda, and Sierra Leone, often focusing on the adoption of agricultural technologies. And as part of her rapidly expanding research portfolio, Suri is now delving into political issues, including research on ethnic favoritism in politics and an ambitious, large-scale study of voter participation in Kenya’s new electoral system.

That current work may be a departure from her previous studies in applied economics, but also serves as a reminder that, indeed, it’s good to try new things.

‘Destiny’ was MIT

Kenya, like some other East African countries, has had a South Asian community since the time of British colonial rule. Suri is a fourth-generation Kenyan: Her great-great-uncle emigrated from what was then India (now part of Pakistan) for work building roads and railways in British-controlled Kenya. Eventually his nephew — Suri’s grandfather — followed.

Suri’s father was born in Kenya and obtained an extensive education, receiving an engineering degree in Britain, then returning to Kenya. Her mother, a native of India who moved to Kenya after marrying, is a doctor.

Suri was a good student and, having overcome her initial trepidation about economics, found the subject more and more to her liking. “I had an amazing economics teacher in high school,” Suri says. She was accepted to study economics at Cambridge University, where Suri says she got an excellent technical education. But upon graduating, she adds, “I wanted to know more about developing countries.”


Tavneet Suri photographed at the MIT Sloan School of Management Photo: Bryce Vickmark

To remedy that, Suri decided to pursue a master’s degree in international and development economics at Yale University, thinking she would go into policy work of some kind. Instead, she wound up staying for a PhD, spurred on by mentors including her main thesis adviser, Michael Boozer. She emerged with a thesis consisting of three papers in the microeconomics of developing countries, and got a job offer after a visit to MIT Sloan that she remembers being full of engaging conversations with her future colleagues.

“I remember having a very heated discussion with Roberto [Rigobon, an MIT Sloan professor] about one of the technical aspects of my paper, which was fun,” Suri says. “You get this gut feeling, which is hard to explain, and I just felt this would be the right place for me.”

In truth, it was not Suri’s first opportunity to join the Institute; she had been accepted to MIT for undergraduate study. But the second time was the right one.

“My mother said it was destiny, and that I had to accept the job offer,” Suri jokes.

How voters vote

Suri’s PhD work pointed the way to some of her most successful research at MIT. For instance, one of her papers explored informal risk-sharing arrangements in Kenya, establishing that while such practices have long existed, they have not always been fully efficient.

M-PESA had not been invented at that time, but when it was introduced in 2007, “the mobile-money research was a natural fit,” Suri says. Her work, often done in collaboration with economist William Jack of Georgetown University, has found that about half of the Kenyan households surveyed report income shocks within the past six months, and that households without access to M-PESA must cut their spending by about 7 percent more when faced with shocks.

Suri’s current research is delving into Kenyan politics in multiple ways. In one recent working paper, with two co-authors — Thomas Stoker of MIT Sloan and Benjamin Marx, a PhD candidate in the Department of Economics — Suri reported that ethnic alliances influence whether local politicians favor landlords or tenants. More recently, she has been working on a research project, together with Marx and Vincent Pons, also a PhD candidate in economics at MIT, that is studying voter participation in Kenya’s general elections of this past March. Kenya has had past elections tainted by corruption problems and marred by violence, such as in 2007; this March, the country attempted to hold cleaner elections with more local and regional offices on the slate. Suri and her co-researchers designed a field experiment in which about 1 million citizens were texted, as a prompt for voting; the team is still analyzing the data.

“We’re trying to look at what the [country] can do to make sure it has better elections,” Suri says. So while she only sometimes goes back to Kenya, she is still trying to give back.
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How ‘dark pools’ can help public stock markets

February 2, 2014, 9:00 pm
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A “dark pool” may sound like a mysterious water source or an untapped oil well. In reality, it’s a finance term: Dark pools are privately run stock markets that do not show participants’ orders to the public before trades happen. They are a growing presence in stock trading, now representing at least one-eighth, and possibly much more, of all stock trading volume in the U.S.

But what is the effect of dark pools on “price discovery” — that is, the ongoing setting of prices on markets, which is thought to benefit from the transparency provided by public exchanges? At least one survey has shown that a clear majority of finance professionals — 71 percent — think dark pools are “somewhat” or “very” problematic in establishing stock prices.

But a new paper by an MIT professor, to be published in the Review of Financial Studies, asserts that this is not necessarily the case. Dark pools, it says, can actually help price discovery in the right circumstances. They do this, in part, by attracting less-informed traders, while better-informed traders — who may place a premium on acting quickly to execute trades — may be unable to fill their orders in smaller dark pools, and head back to the public exchanges to do business.

“The dark pool is like a screening device that siphons off uninformed traders,” says Haoxiang Zhu, a financial economist at the MIT Sloan School of Management, the author of the new paper. “In the end, on the [public] exchange, you get left with a higher concentration of the informed traders who contribute to price discovery.”

Not enough liquid in the pools

Dark pools are believed to have originated in the 1980s, but have gained much more traction in the last half-decade. A 2009 study by the Securities and Exchange Commission estimated that 32 such dark pools, some run by prominent financial firms, represented about 8 percent of stock trades; a consulting firm, the Tabb Group, and a brokerage, Rosenblatt Securities, estimated in 2011 that dark pools handle 12 percent of U.S. trading volume. Along with that growth has come concerns about transparency problems in the markets.

“The usual intuition is that dark pools harm price discovery in the public venues, because people who have information [might] go hide in the dark,” Zhu observes.

For investors, the appeal of trading in a dark pool is the ability to make transactions without moving the market. Consider a well-informed investor with good information about firms — say a large institutional investor, such as a mutual fund. Suppose such an investor is buying some of its shares in a public company. Doing so in a dark pool might be appealing, because buying those shares in a public exchange might create an impact on the price that would makes executing the investor’s remaining orders more costly.

However, Zhu’s paper, based on a model of trading behavior, implies that the risk for investors of not being able to execute transactions in dark pools is a principal factor limiting the harm they might do to price discovery on public exchanges. To see why, consider that Zhu’s model includes both well-informed investors, acting on the basis of detailed knowledge about a stock, and as well as less-informed investors — trading due to, say, a need to rebalance a portfolio.

Now, if multiple well-informed investors arrive at the same conclusion about a company’s stock — say, that the firm’s quarterly earnings will rise and that buying is a good idea — they will rush to the dark pools to attempt trades. But many of those smart investors will discover liquidity problems in the dark pool: They crowd on one side of the market, and there may not be enough underinformed investors willing to take the other side of the trade. Needing to execute the trade promptly, the well-informed investors hurry back to the public stock exchanges in a greater proportion than the less-informed traders.

“If [well-informed traders] do not get their orders filled, their information becomes stale,” Zhu says.

The aggregate information generating price discovery on the public stock exchanges will thus be more accurate on average when dark pools are part of the process.

“It is basically a signal-to-noise argument,” Zhu says.

Making models and seeking facts

To be clear, Zhu’s paper is based on a model of investor behavior. He also provides some caveats about his findings: For example, if dark pools use opaque rules, well-informed investors may not rush back to public exchanges as quickly. Moreover, better price discovery can coincide with worse liquidity, in the form of wider bid-ask spreads and higher price impacts on exchanges.

Still, as he notes, “Modeling forces us to have discipline in interpreting the data.”

Other scholars say the work yields valuable insights about the potential effects of investor behavior.

“I think he’s captured the essence of these dark pools,” says Charles Jones, a professor of finance and economics at Columbia University who has conducted extensive empirical research on investor knowledge and behavior. Such finance models, Jones adds, “really help set up hypotheses” for future empirical testing.

Maureen O’Hara, a professor of finance at Cornell University, says that Zhu’s paper “makes a real contribution by highlighting that dark pools can improve market performance, and not degrade it as has been suggested by some. His research agenda going forward will provide important insights into these market structure issues.”

Currently Zhu is at work on two additional research papers about dark pools — one theoretical, and another empirical. The theoretical study models dark-pool trading with large sizes of trades; the empirical study aims to evaluate the relationship between dark pools and high-frequency computerized trading.
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Michael Moody joins MIT as Institute Auditor

March 17, 2014, 8:00 am
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Michael J. Moody assumed the post of Institute Auditor on Feb. 18, filling the role vacated by Deborah Fisher, who transitioned into the new MIT position of Institute Risk Officer on July 1.

As Institute Auditor, Moody will be responsible for delivering audit services through a risk-based program that assesses the safeguarding of assets, adequacy of internal controls, compliance with laws and regulations, and adherence to ethical practices.

Moody brings to MIT a deep portfolio of audit, compliance, and financial experience built over 25 years in the public and private sectors. Since 2004, he has served as director of compliance in the Office for Audit and Advisory Services at Northwestern University. Earlier in his career, he was director of audits at the University of Illinois at Chicago, director of internal audit in the Office of the Comptroller for the state of Illinois, and a senior associate at the public accounting firm Coopers and Lybrand.

In addition to a bachelor of science in finance from Northeastern Illinois University, Moody has earned the certified internal auditor, certified information systems auditor, and certified inspector general designations, as well as a certification in risk management assurance.

Moody fills the position vacated by Fisher, who had served as Institute Auditor since 2000. In an announcement to his staff introducing Moody, Executive Vice President and Treasurer Israel Ruiz applauded Fisher for her exceptional leadership of the Audit Division and reliable support of the Risk and Audit Committee of the MIT Corporation.
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A scholar who thinks globally and acts locally

March 25, 2014, 9:00 pm
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You have probably not forgotten the banking crisis of 2008. But do you remember the banking crises of the 1980s — a series of bank runs that started in 1984?

“Unfortunately, banking crises tend to happen fairly often, even though our memory of them fades fairly quickly,” says David Singer, an associate professor of political science at MIT. For most people, it would be good to avoid these periods of crisis — which means understanding why they happen in the first place.

That is the subject of an ambitious book project that Singer and his colleague Mark Copelovitch of the University of Wisconsin are undertaking as part of a global examination of the causes of banking crises since the 1970s.

“We’re trying to understand why banks in some countries collapse, sometimes in the face of shocks, while other countries seem to have more resilient banking systems,” Singer says. To do that, he and Copelovitch are combing through corporate data, international financial statistics — and political conditions, since financial-sector policy plays a role, too. So while financial crises have largely been the domain of economists, Singer thinks scholars from other fields should be part of the discussion.

“These are inherently political as well as economic questions, and political scientists should be among those leading the charge to provide explanations,” Singer adds.

Indeed, a hallmark of Singer’s work has been granular empirical research uncovering the connections between global capital flows and government policies. For instance, Singer has conducted innovative research showing how remittances — the money migrant workers send back to their home countries — constitute such a large flow of cash that they sometimes influence the decisions governments make about exchange rates.

Singer has published several other articles in major political science journals about exchange rates and monetary policy, and is the author of a 2007 book, “Regulating Capital,” about financial rules in the globalizing economy. He received tenure at MIT last year.

Still, Singer views research as just one facet of his job. He is also an associate housemaster in an MIT residence hall, where fostering a sense of campus community, he emphasizes, is as important as his activities as a scholar and teacher.

“It’s absolutely great,” Singer says of being a housemaster. “I would say it’s the best thing I’ve done at MIT.”

Thinking politics, in a systematic way

Singer was born in New Jersey and grew up in Ann Arbor, Mich., where his father worked for a pharmaceutical company. He stayed in his hometown to attend the University of Michigan as an undergraduate, receiving his BA in political science in 1994, after being inspired to delve into the subject by A.F.K. Organski, a prominent professor in the field.

“He was the one who taught me that we can think about the political world in a systematic way,” Singer says.

After college, Singer spent a few years working for technology firms and, briefly, in finance for Merrill Lynch. In the long run, though, he wanted to tackle hard problems in political science. He received his master’s and PhD from Harvard University in 2000 and 2004, respectively, and, after a couple of years as an assistant professor at the University of Notre Dame, accepted a job at MIT in 2006.

Singer’s interest in migrant remittances was spurred by one of his Harvard advisors, Devesh Kapur, who offered the idea that these remittances were larger, in aggregate, than almost anyone realized. 

“At first I was skeptical,” Singer recounts. “But then I went and looked at the data, and found that migrant remittances were often the largest source of finance for emerging-market and developing countries. People didn’t realize just how large the magnitude of the flows really was.”

In one 2010 paper, published in the American Political Science Review, Singer found massive differences in the amounts of remittances across 74 countries, which in turned caused states to either fix exchange rates (if remittances were high, providing more liquidity for that country’s economy) or make the rates floating (if remittances were low). 

Producing such research requires some creativity. “The data are not often readily available for the things I study, so it takes some digging,” Singer says. For the current book project, he and Copelovitch are using banks’ balance-sheet data, along with global macroeconomic data — but they also have to devise and code their own measuring systems, for things like the scope of bank activities and regulation.

Acting locally, thinking globally

Singer’s research constitutes just one part of his professorial role, as he sees it. As an associate housemaster in MacGregor House, Singer emphasizes, he invests considerable effort into fostering a sense of community: He regularly hosts Sunday brunches for students, listens to their concerns, and makes students feel welcome on campus.

“It’s been a great opportunity to get to know the students on their own turf, and to appreciate and support them,” Singer says.

Beyond research, teaching, and campus life, Singer appreciates the opportunities MIT has provided him to travel widely and discuss his research internationally. In recent years he has discussed the connection between policy and global capital flows with government officials and policy experts in countries including Germany, Oman, and the Philippines.

More of that may be forthcoming as his current book project progresses; Singer wants to see more researchers involved in public discussion of banking regulations. To those who say high-risk financial innovations are necessary, and make banking crises inevitable, he has a simple rejoinder: “Crises don’t have to happen as frequently, and they don’t have to be as severe when they do happen.”

Alternately, to those who support further banking reform, Singer thinks additional empirical research would be useful.

“As a political scientist, my goal is to try to explain why governments make the decisions that they do, and why outcomes seem to happen,” Singer explains. “If we can come up with some explanation for why some banking systems are more resilient than others, we need to get it out into the broader discussion.”
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