Changing Business Fall 2014 by Johns Hopkins Carey Business School

CHANGING BUSINESS FA LL 2014

RESEARCH FROM THE JOHNS HOPKINS CAREY BUSINESS SCHOOL

THE HEDGE THAT COMES UP SHORT Often described as a reliable counter to inflation, commodities actually fail to stack up in that role

LE T T ER FRO M T H E DE A N

FA LL 2014

DEFYING A FALSE DICHOTOMY

A longstanding debate in the academic arena pits the value of “pure” research against that of “applied” research. In the traditional description, pure research aims to explain phenomena without having a practical end in mind, while the purpose of applied research is evident by its name – it seeks to apply findings in ways that solve everyday problems. At the Johns Hopkins Carey Business School, we believe that this debate rests on a false dichotomy, particularly within a business context. We believe that all research should point to business solutions. Think, for example, of Carey Professor Federico Bandi’s use of complex mathematical models that help make sense of high-frequency stock trading. And consider Carey Assistant Professor Meng Zhu’s research on how packaging may determine the rate at which a consumer will use a product once she brings it home from the store. In this new issue of Changing Business, from the six feature articles to the roundup of brief items near the back of the magazine, you will find abundant evidence of Carey’s commitment to the research role that is the hallmark of Johns Hopkins – the first research university in the United States. Additionally, an article on data networks illustrates how our faculty members are passing the tradition on to our students, introducing them to research methods that are not usually found in business school courses but will prove beneficial to them when they become business leaders.

CHANGING BUSINESS Associate Dean for Marketing and Communications: Kelly Brown Director of Communications: Tim Parsons Editor: Patrick Ercolano Contributing Writers: Michael Blumfield, Sam Hopkins, Brennen Jensen, and Rachel Wallach

2 THE HEDGE THAT COMES UP SHORT

4 PLENTY OF DEMAND, HURTING FOR SUPPLY

Designer: Skelton Design Illustrator: Martin Leon Barreto Administrative Support: Eric Scouten

ften described as a reliable counter to inflation, commodities O actually fail to stack up in that role. Research by Assistant Professor Jim Kyung-Soo Liew

anufacturers should be given incentives to maintain M production levels of certain drugs. Research by Assistant Professor Stacey Lee

6 SIGNS OF SELF-INDULGENCE People who view fate as malleable may seek gratification after reading a negative horoscope. Research by Assistant Professor Hyeong Min “Christian” Kim

8 A SCRIPT FOR TREATMENT ADHERENCE Innovations to help patients follow medical plans overlook the role physicians can play. Research by Assistant Professor Emilia Simeonova

10 GOING WITH YOUR GUT

Both the “pure” and “applied” approaches are alive and well at the Carey School, and both serve our mission to create and disseminate knowledge that advances commerce and society alike.

Intuition sometimes beats rational, deliberate calculation as the better way to make a decision. Research by Assistant Professor Shabnam Mousavi

12 OF POLITICS AND TAX POLICIES Corporate CEOs’ political beliefs influence the tax-avoidance Bernard T. Ferrari Dean, Johns Hopkins Carey Business School

strategies of the firms they run. Research by Assistant Professor Xian Sun

15 Email us at: carey.communications@jhu.edu Reach us by mail at: Changing Business Magazine Johns Hopkins Carey Business School Marketing and Communications Office 100 International Drive Baltimore, MD 21202-1099 Or phone: 410-234-9292

STUDENT RESEARCH

Learning to analyze and gain insight from data networks. BRIEFS

A sampling of recent research projects by Carey faculty members. FEATURED RESEARCHERS

LE T T ER FRO M T H E DE A N

FA LL 2014

DEFYING A FALSE DICHOTOMY

2 THE HEDGE THAT COMES UP SHORT

4 PLENTY OF DEMAND, HURTING FOR SUPPLY

Designer: Skelton Design Illustrator: Martin Leon Barreto Administrative Support: Eric Scouten

ften described as a reliable counter to inflation, commodities O actually fail to stack up in that role. Research by Assistant Professor Jim Kyung-Soo Liew

anufacturers should be given incentives to maintain M production levels of certain drugs. Research by Assistant Professor Stacey Lee

6 SIGNS OF SELF-INDULGENCE People who view fate as malleable may seek gratification after reading a negative horoscope. Research by Assistant Professor Hyeong Min “Christian” Kim

8 A SCRIPT FOR TREATMENT ADHERENCE Innovations to help patients follow medical plans overlook the role physicians can play. Research by Assistant Professor Emilia Simeonova

10 GOING WITH YOUR GUT

Both the “pure” and “applied” approaches are alive and well at the Carey School, and both serve our mission to create and disseminate knowledge that advances commerce and society alike.

Intuition sometimes beats rational, deliberate calculation as the better way to make a decision. Research by Assistant Professor Shabnam Mousavi

12 OF POLITICS AND TAX POLICIES Corporate CEOs’ political beliefs influence the tax-avoidance Bernard T. Ferrari Dean, Johns Hopkins Carey Business School

strategies of the firms they run. Research by Assistant Professor Xian Sun

STUDENT RESEARCH

Learning to analyze and gain insight from data networks. BRIEFS

A sampling of recent research projects by Carey faculty members. FEATURED RESEARCHERS

THE HEDGE THAT COMES UP SHORT

Often described as a reliable counter to inflation, commodities actually fail to stack up. Stocks and bonds fare better.

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RESEARCH BY ASSISTANT PROFESSOR JIM KYUNG-SOO LIEW

hen the stock market hits record levels and bonds become vulnerable to rate hikes, many investors elect to keep significant amounts of their portfolios in cash. But because cash loses its value to inflation over time, financial advisors tout commodities as an effective hedge. The price of commodities, these advisors argue, stays ahead of inflation and makes them an attractive investment option. Well, not really, concludes a paper co-authored by Assistant Professor Jim Kyung-Soo Liew of the Johns Hopkins Carey Business School and two members of the New York-based Investment Research Foundation, George Crawford and Andrew Marks. After poring over 53 years of data, the trio found that commodities do not offer a consistently reliable haven from inflation. Commodities represent raw materials as opposed to finished goods. They include categories such as energy (oil, natural gas), metals (gold, silver, platinum), and food (soybeans, sugar, cocoa), among others. In their paper – “Spot Commodities as Inflation Protection,” published in the winter 2013 issue of The Journal of Wealth Management – the authors examine the “spot price” (current market price) of commodities and its historical relationship with inflation. The standing theory has been that inflation is factored into the cost of these items, so owning them helps an investor ride out periods of high prices. Liew and his colleagues found that while commodities prices sometimes rose along with inflation, the prices plummeted as inflation cooled. And many commodities didn’t keep ahead of inflation over the necessary period. Liew says those who recommend commodities as a hedge remember the rise in value – based on personal experience – but overlook the decline. Liew, Crawford, and Marks reviewed the performances of 45 spot commodities and 13 commodity aggregates (groups of similar commodities) from 1960 to 2012. They found that not only did commodities fare worse than stocks and bonds, but just a third outpaced inflation. In most cases, Treasury bills performed better than commodities. The one commodity area that routinely outpaced inflation in their review was energy. But energy could be volatile, too – dropping substantially in value during some periods. For a long-term investor, it would seem that energy would be a reasonable alternative. But Liew warns that energy is undergoing rapid technological transformation. Wind and solar technology may eventually push down the value of oil. Natural gas prices may drop as fracking becomes more common. On the other hand, the environmental dangers of fracking could limit its use and leave prices largely unchanged. Either way, technology’s effect on energy is unpredictable.

As with any examination of a broad financial topic, the rules have exceptions that invite debate about overall conclusions. For example, from 1972 to 1976, all commodities outperformed stocks, and gold provided impressive returns from 1978 to 1980, the research found. Proponents of commodities may point to those periods as evidence that commodities can be a smart move, as long as an investor gets into and out of that market in a timely fashion.

Liew and his colleagues found that while commodities prices sometimes rose along with inflation, the prices plummeted as inflation cooled. And many commodities didn’t keep ahead of inflation over the necessary period. True enough, Liew says, except that it is exceedingly difficult to time such a market. He says he understands why financial advisors are attracted to commodities. Investors are seeking an effective way to better diversify their portfolios. While commodities offer the advantage of not correlating with the rise and fall of the stock market, they are hardly a set-it-and-forget-it option if the goal is to stay ahead of inflation. If investors are tempted to take up a financial advisor’s offer to add commodities to their portfolios, says Liew, they should check to see how actively the advisor will monitor the commodities’ effectiveness as an inflation hedge. Unless the advisor can demonstrate a history of knowing when to buy and sell commodities – again, not an easy task – an investor is probably better off looking elsewhere for inflationary hedges. – Michael Blumfield

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THE HEDGE THAT COMES UP SHORT

Often described as a reliable counter to inflation, commodities actually fail to stack up. Stocks and bonds fare better.

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RESEARCH BY ASSISTANT PROFESSOR JIM KYUNG-SOO LIEW

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PLENTY OF DEMAND, HURTING FOR SUPPLY

As shortages of certain drugs increase, manufacturers should be given incentives to maintain production levels while turning a healthy profit.

RESEARCH BY ASSISTANT PROFESSOR STACEY LEE

eported cases of drug shortages in the United States have almost quintupled in the past five years, at great cost in both dollars and patient health. In 2011, 99.5 percent of 820 hospitals surveyed experienced at least one shortage during the previous six months, with resulting administrative costs adding up to an estimated $216 million per year. Sixty-nine percent of physicians reported having had to treat patients with a less effective drug because of a shortage, and 35 percent of patients experienced an adverse outcome as a consequence. Recent federal measures have emphasized quality controls and stronger requirements for manufacturers to notify the Food and Drug Administration (FDA) about anticipated shortages. But these approaches focus on the shortages’ symptoms and miss the point, says Stacey Lee, an assistant professor at the Johns Hopkins Carey Business School. The underlying cause of shortages is an economic one, and the only way to counter the shortfalls is to make it profitable for pharmaceutical manufacturers to maintain drug production levels, says Lee.

A lack of elasticity in supply and demand in the pharmaceutical industry puts prescription drugs in a different class, severely limiting potential profits for manufacturers. In “The Drug Shortage Crisis: When Generic Manufacturers ‘Just Say No,’” forthcoming in the Oregon Law Review, Lee argues that there is no free market in the health care industry, so traditional principles of supply and demand don’t work to address the shortages’ root causes. Instead, she proposes creating incentives for manufacturers to enter the market, stay in the market, and expand capacity. In a typical supply-and-demand scenario, when demand for a product goes up, manufacturers respond by raising prices and flooding the market. But a lack of elasticity in supply and demand within the pharmaceutical industry puts prescription drugs in a different class, severely limiting potential profits for their manufacturers, Lee writes. The government controls reimbursement rates for prescription drugs through the Medicare payment system, preventing prices from following demand. Moreover, the majority of drugs that account for the shortages are generic sterile injectables – mainly cancer drugs and antibiotics – whose production requires unique facilities and equipment that include a sterile environment with dedicated

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lines. Given the large investment required, the long waits for FDA approval, and the high odds of low returns, manufacturers are left with little incentive to develop the infrastructure to meet heightened demand. Instead of investing in updated equipment or adding to their facilities, existing manufacturers run aging equipment at higher volumes – raising the chances of a breakdown – and potential manufacturers stay out of the market. Today’s shortages can be traced to 2009, when the FDA turned its attention to facility deficiencies that were causing drug-quality issues, after more than 80 deaths were linked to contaminated heparin, a sterile injectable used as a blood thinner. The agency tripled the number of site inspections, which led to simultaneous temporary closures of several manufacturers. Since only a handful had been producing heparin, the closures essentially halted the drug’s production. After this incident, President Obama and the FDA successfully backed legislation requiring manufacturers to track and report anticipated shortages. But these laws have resulted in costly upgrades and suspended operations, further limiting profitability and virtually shutting down the sterile-injectable supply. While the quality issues were real, Lee says, a more thoughtful approach could address those challenges and still enable production to continue. One solution that has been put forward is changing the government reimbursement process so as to allow manufacturers to adjust their prices. Such a bill was introduced in Congress but stalled in committee, and similar measures are unlikely to win approval in the near future, Lee writes. What manufacturers need are reasons to increase capacity while maintaining quality – both to enter the market and to expand facilities to meet surges in demand. Lee proposes creating incentives around those goals. Manufacturers should be able to collaborate with the FDA to establish voluntary production and quality levels in exchange for customized incentive packages matching their business plans and their place in the production cycle, she suggests. Examples could include tax incentives and rebates, vouchers for expedited FDA product reviews, and a “Good Housekeeping”-type seal of approval that would boost a manufacturer’s reputation in the marketplace. Drug shortages matter because they strike at the heart of our access to medicine, so government should be able to compel production, Lee contends. “It’s a new definition of ‘shortage,’” she says. “It’s not like the ingredients aren’t available, and it’s not like there isn’t a demand. It’s just not in manufacturers’ financial interest to produce these drugs. That America’s health is dependent on a lucrative bottom line, and the government is prevented from altering those business decisions, is very troublesome.” – Rachel Wallach

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PLENTY OF DEMAND, HURTING FOR SUPPLY

As shortages of certain drugs increase, manufacturers should be given incentives to maintain production levels while turning a healthy profit.

RESEARCH BY ASSISTANT PROFESSOR STACEY LEE

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J O H N S H O P K I N S C A R E Y B U S I N E S S S C H O O L FA L L 2 014 • 5

SIGNS OF SELF-INDULGENCE

People who view fate as malleable are likely to seek some form of gratification after reading a negative horoscope.

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RESEARCH BY ASSISTANT PROFESSOR HYEONG MIN “CHRISTIAN” KIM

hat’s a Scorpio to do when the stars offer bad tidings? Party down with a chocolate bar. If you follow astrology but also believe your fate has some wiggle room, you are more likely to engage in indulgent behavior after reading a negative horoscope. In other words, when your celestial outlook is bad, your behavior might be as well. So concludes a study by Johns Hopkins Carey Business School Assistant Professor Hyeong Min “Christian” Kim, “The Interactive Effect of Beliefs in Malleable Fate and Fateful Predictions on Choice,” which appeared in the Journal of Consumer Research last April. Kim was the lead writer of the article, joined by co-authors Katina Kulow and Thomas Kramer of the University of South Carolina. It’s easy to mock astrology as a silly form of superstition – spurious pseudoscience good for a laugh, not for planning your life. Shakespeare himself told us that our fault “lies not in our stars.” But here’s the thing: Millions of Americans read their horoscopes every day. The 12-part, Aires-to-Pisces snippets of birthday-based fate continue to appear in major newspapers and magazines, and on all sorts of websites. Nearly one-in-three Americans say they believe in the zodiac, according to a recent poll. “These are numbers the world of commerce might not want to ignore,” Kim says. “No one had really looked at the potential effect of reading horoscopes on personal behavior. And if something influences consumer behavior, then that should have business implications.” The findings are based on a pair experiments. In the first, some 180 people at a shopping mall were asked to evaluate what they were told was a new Internet horoscope service. Participants received a negative horoscope reading indicating the stars were misaligned for them – “this is not a favorable day,” and so forth. They were then asked how flexible they believed their fate to be – on a 1-to-7 scale, from totally rigid and fixed, to quite malleable and changeable. Finally, they were asked a question with what the researchers considered to be an “indulgent” or a “virtuous” answer: What would you rather do today, go to a party or clean your house? The people who saw their fate as malleable were nearly twice as likely as others to opt for the party instead of the broom and dustpan. The findings surprised Kim, who thought the natural reaction would be to try and counter the negative prediction with the more virtuous activity. “You would subconsciously think, If I do good things, maybe somebody up there will help me, or something like that,” Kim explains. To learn more, a second and more involved experiment was conceived, again involving people asked to evaluate a new horoscope service (only this time it was all done online). Both favorable and negative horoscopes were given, and participants were also asked to

write down any thoughts they had after reading their horoscopes. The indulgent/virtuous option this time was selecting to eat a chocolate bar or a granola bar. Again, those who consider fate to be flexible, and who had received negative horoscopes, were the group most likely to opt for the “indulgent” option and yearn for chocolate. They were also much more likely to have written at length about their horoscopes, sometimes using multiple paragraphs to rebut what they considered an incorrect or overly negative prediction. Creating this counterargument, Kim concludes, used up considerable “cognitive energy.” So much so, the theory goes, that it helps explain why they had less willpower when it came to the indulgent/virtuous decision.

“ One obvious direct implication is that if you happen to sell something indulgent, then you definitely want to place your ad close to the horoscope section, because every day 30 or 40 percent of readings are unfavorable.” What’s the business takeaway in all this? “One obvious direct implication is that if you happen to sell something indulgent, then you definitely want to place your ad close to the horoscope section, because every day 30 or 40 percent of readings are unfavorable,” Kim says. More studies on astrology readings and personal behavior are in the offing, and Kim stresses that a connection might be even stronger overseas. “We assume that consumers in Asia probably even more strongly believe in their fate and Chinese astrology,” he says. “Fate prediction is a huge business in Asia.” One study that Kim has underway examines how horoscope readings might affect charitable giving. “Will people donate more after reading a terrible horoscope, or will they donate more after reading a very positive horoscope?” Kim wonders. What the professor is sure of is that the millions of astrology followers should not be ignored by the business world. He should know, for he’s among them. Kim reads two horoscopes a day, one from the western zodiac (where he is Aquarius) and one from the astrological system of his native Korea (where his sign is the horse). “I don’t think I deeply believe in astrology,” Kim says. “But I don’t dismiss it, either.” – Brennen Jensen

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SIGNS OF SELF-INDULGENCE

People who view fate as malleable are likely to seek some form of gratification after reading a negative horoscope.

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RESEARCH BY ASSISTANT PROFESSOR HYEONG MIN “CHRISTIAN” KIM

J O H N S H O P K I N S C A R E Y B U S I N E S S S C H O O L FA L L 2 014 • 7

A SCRIPT FOR TREATMENT ADHERENCE

Innovations to help patients follow medical plans tend to overlook the role physicians can play in the post-prescription process.

RESEARCH BY ASSISTANT PROFESSOR EMILIA SIMEONOVA

ou might think no one would notice or care if you skipped a drug dose or failed to fill a prescription. But sicker patients translate into higher expenses, so insurance companies care a great deal. And many are willing to pay big bucks to make sure you take your medicine. Businesses have been churning out high-tech innovations to help the health care industry encourage patients to stick with their treatment plans. Think weight loss incentives, apps to promote timely insulin injections, and chips implanted into pills that transmit a signal confirming they have been swallowed. Products are even available to help insurers predict how likely you are to take your meds based on factors such as home ownership, job status, and credit card purchases. Insurers could use the information to adjust your rates or to offer incentives that motivate you to follow your doctor’s orders.

To address the adherence variations that can occur during the life of a doctor-patient relationship, doctors need inducements to maintain communication with their patients and to track their behavior over time. Problem is, most incentives assume the patient is solely responsible for following a treatment plan and ignore the potential role of physicians, thus missing an opportunity for more effective ways to keep people healthy, says Johns Hopkins Carey Business School Assistant Professor Emilia Simeonova. “There is no scientific basis that compliance is entirely due to just the patient,” says Simeonova, who with colleagues Sergei Koulayev of the federal Consumer Financial Protection Bureau and Niels Skipper of Aarhus University in Denmark has written a working paper titled “Can physicians affect patient compliance for medication? Evidence from a large-scale study.” Why don’t patients always take their pills? Simeonova and her co-authors, figuring the answer would help the incentive designers better pinpoint how to intervene, set out to explore the significance of patient and physician factors when it comes to medication adherence. U.S. evidence is limited because data are generally available only from pharmacies, hospitals, or insurance companies. So the team turned to Denmark, whose universal health system made possible a data set that includes every adult who took at least one 8 • FA L L 2 014 C A R E Y. J H U . E D U/C H A N G I N G B U S I N E S S

of four common prescription drugs (ACE inhibitors, beta blockers, statins, and oral anti-diabetics), every physician who prescribed them, and each of the 15 million sales of prescription drugs in those four categories in Denmark over a seven-year period. Denmark’s electronic monitoring system enabled the researchers to track individual prescriptions, patients, and physicians, and to correlate adherence rates with age, gender, education level, and other factors. Labor economists pioneered a statistical method – “large-scale two-way fixed effects estimation”– to tease apart worker and company factors in their studies of the labor market. In a move new to health economics, Simeonova and her colleagues applied the method to their data, analyzing to what extent patients, doctors, and drug types matter in patients’ decisions about taking medicine. What the researchers found is that while patient factors play the largest role, some 30 percent of the patients’ decision-making process is attributable to physician factors. Moreover, the research team discovered that compliance changed over time even when a patient stayed with his or her doctor. This suggests that the patient-doctor relationship evolves like any other and those developments trigger variations in whether patients follow doctors’ orders. It makes a difference, for example, whether a physician explains how a drug will help the patient or how to handle potential side effects. Simeonova and her colleagues recommend that before policymakers tackle medication-compliance issues and businesses design the next generation of incentives, they need better evidence showing what is really behind patients’ decisions to take or skip medication. The researchers argue that patient incentives alone will not help compliance rates reach their potential, and urge the development of incentives for physicians as well. To address the adherence variations that can occur during the life of a doctor-patient relationship, they say, doctors need inducements to maintain communication with their patients and to track their behavior over time. So electronic medical records and monitoring systems would likely be important tools. The findings provide important insight into some long-held assumptions, Simeonova adds. In the United States, a strong correlation exists between socioeconomic status and health outcomes, part of which can be traced to differences in compliance rates. Studies indicate that people on the lower end of the socioeconomic scale tend to be less committed to treatment plans. Policymakers therefore often draw the conclusion that people will become healthier only after poverty is eradicated. “What we’re saying is that another way to address this difference in adherence and patient outcomes is to give physicians the tools and incentives to address it, because it does appear that physicians can do something about this,” Simeonova says. “It’s easier to change physician behavior than to lift an entire population to superior health self-management.” – Rachel Wallach

J O H N S H O P K I N S C A R E Y B U S I N E S S S C H O O L FA L L 2 014 • 9

A SCRIPT FOR TREATMENT ADHERENCE

Innovations to help patients follow medical plans tend to overlook the role physicians can play in the post-prescription process.

RESEARCH BY ASSISTANT PROFESSOR EMILIA SIMEONOVA

J O H N S H O P K I N S C A R E Y B U S I N E S S S C H O O L FA L L 2 014 • 9

GOING WITH YOUR GUT

RESEARCH BY ASSISTANT PROFESSOR SHABNAM MOUSAVI

Uncertain situations have too many

In certain scenarios, intuition beats rational and deliberate calculation as the better way to make a decision.

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rust your gut.” It’s a piece of advice we might take in deciding, say, whether to pursue a romance. But business decisions? Too subjective, right? Wrong. Or, more precisely, it depends. That’s the upshot of work being done by Shabnam Mousavi in an area known as “fast and frugal heuristics.” The notion is that in certain scenarios, intuition is a better decisionmaking tool than a rational and deliberate calculation of the options. Mousavi, an assistant professor at the Johns Hopkins Carey Business School and a fellow at the Max Planck Institute for Human Development in Berlin, is the lead author of a research article on the topic, “Risk, uncertainty, and heuristics,” which was published this past August in the Journal of Business Research. Her collaborator on the work is Gerd Gigerenzer, a director of the Max Planck Institute and the scholar credited with developing the concept of fast and frugal heuristics. In the article, Mousavi and Gigerenzer revisit an area introduced in the 1920s by Frank Knight, one of the founders of the school of economic thought associated with the University of Chicago. Knight made a distinction between risk and uncertainty in business decisions. He said most business decisions – and virtually all those that could result in economic profit for the decision maker – are made in the face of uncertainty. These uncertain situations have too many unknowns and complexities to lend themselves to statistical analysis. No matter how hard you try, you’ll never bring them to the level of a calculated risk. In the years since Knight first addressed the issue, economists have focused on what constitutes the rational decision-making process that an individual should employ, attempting to distill that process into a purely objective, mathematically quantifiable formula. There’s just one problem: Research shows, by and large, that’s not how people make decisions. Instead, they pick the quick-and-dirty alternative – the heuristic approach. Daniel Kahneman not only won a Nobel Prize for his work in heuristics and biases, he raised public awareness of heuristics through his popular book, Thinking, Fast and Slow. Kahneman contrasted two modes of thinking – System 1 (fast and intuitive) and System 2 (slow and deliberate) – to show how we often grab the quick answer, only to see that our brains mislead us. An example: A ball and a bat together cost $1.10. The bat cost $1 more than the ball. How much did the ball cost? Most people quickly say 10 cents using System 1 thinking. But do the calculations with System 2 thinking, and you’ll realize the right answer is five cents. Mousavi aims to expand the reasoning underlying Kahneman’s work. While heuristics can mislead us, so can too much information. When American and German students were asked whether Detroit or Milwaukee is the larger city, the German students got the answer right 90 percent of the time, the Americans only 60 percent. The

unknowns and complexities to lend themselves to statistical analysis. No matter how hard you try, you’ll never bring them to the level of a calculated risk. Germans were able to use what’s called the recognition heuristic – placing a higher value on something they recognize – because they had heard of Detroit but not necessarily Milwaukee. Because the Americans had heard of both, that tool wasn’t available for them in that circumstance. In a similar vein, people who aren’t financial experts were able in some conditions to put together a better portfolio of stocks than experts did, because they chose the names of companies they recognized. In other words, they didn’t overthink the issue, because they couldn’t. There are several types of fast and frugal heuristics that lead to better, quicker results than their more knowledge-dependent alternatives. It’s critical to recognize, though, that the success of such heuristics is dependent on the circumstances in which they’re applied. The German students wouldn’t necessarily be successful picking between two American cities they hadn’t heard of. Nor would the non-expert stock pickers do as well with a portfolio of 30 stocks instead of just 10. Because businesses generally prize rational thinking rather than subjective assessments, leaders will claim that they use objective methods such as net present value in making business decisions. But on closer consideration, executives admit they rely on “gut feel” in making capital allocations almost half the time, other researchers have discovered. Rather than minimizing the value of such decision making, Mousavi says, we should recognize the evolutionary reasons why humans have developed these approaches and figure out the best circumstances for using them. That first requires abandoning the concept of one right, objective path, a legacy of British empiricism that emphasized objective external truths. How would a modern company incorporate Mousavi’s thinking? She suggests they create a decision tree that starts with the fundamental question, “If the worst-case scenario of a proposal were to occur, could you survive?” If no, don’t pursue it. If yes, the next question might be whether the company was well positioned as a first mover in an area. By making each decision sequentially, the company can more effectively limit its information to relevant factors – avoiding information overload and not attempting to quantify the unquantifiable. And by the way, Mousavi says, many companies are doing so already. It’s up to academics to bridge the gap between theory and practice so that knowledge can be better studied, understood, and shared. – Michael Blumfield J O H N S H O P K I N S C A R E Y B U S I N E S S S C H O O L FA L L 2 014 • 11

GOING WITH YOUR GUT

RESEARCH BY ASSISTANT PROFESSOR SHABNAM MOUSAVI

Uncertain situations have too many

In certain scenarios, intuition beats rational and deliberate calculation as the better way to make a decision.

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“

OF POLITICS AND TAX POLICIES

The political beliefs of corporate CEOs strongly influence the tax-avoidance strategies of the firms they run.

RESEARCH BY ASSISTANT PROFESSOR XIAN SUN

he political beliefs of corporate CEOs strongly influence the tax-avoidance strategies of the firms they run, and firms led by both Republican-leaning and Democratic-leaning CEOs are associated with significantly more tax avoidance than companies with CEOs of no obvious political preference, according to a study by a Johns Hopkins Carey Business School assistant professor and three colleagues. Researchers Xian Sun of the Carey School, Bill B. Francis and Qiang Wu of Rensselaer Polytechnic Institute, and Iftekhar Hasan of Fordham University assert in their working paper, “CEO Political Affiliation and Firms’ Tax Avoidance,” that Republican CEOs are associated with significantly more tax avoidance even when their equity-based incentives are low, suggesting that political ideology drives these CEOs’ tax decisions. In contrast, Democratic CEOs are associated with higher levels of tax avoidance under certain circumstances but only when their equity-based incentives are high.

The existing literature has shown that individual CEOs play a major role in setting their firms’ tax policies. But no previous study has identified factors that explain this phenomenon. Moreover, a company’s tax avoidance tends to increase when a Republican occupies the Oval Office, Sun and her colleagues found. The researchers say their study, covering data from 1992 to 2007, is among the first to provide empirical evidence that the political beliefs of individual executives have a marked effect on their attitudes toward corporate tax avoidance. The existing research literature has shown that individual CEOs play a major role in setting their firms’ tax policies, though no previous study in this area has identified factors that explain this phenomenon. “It’s an issue of broad economic impact because the savings being realized by these big, asset-heavy companies, while allowed by current tax law, can be viewed as revenue that isn’t realized by the government for public benefit,” says Sun. (She emphasizes that the term “tax avoidance” refers to legal methods of reducing tax payments, in contrast to the illegal actions associated with the phrase “tax evasion.”) “Tax avoidance was most prevalent at firms run by Republican CEOs, but we saw that firms with Democratic CEOs also looked for ways to cut their taxes, if not on the same scale,” Sun says. “The firms with Republican CEOs used avoidance measures that

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ranged from aggressive to less aggressive, including measures that involved long-term tax avoidance. At the companies with Democratic CEOs, the avoidance methods generally involved book-to-tax difference and shelter activities. These are aggressive measures but don’t figure in a firm’s overall level of tax avoidance or in its long-term avoidance strategy.” As Sun notes, these findings indicate that CEOs’ political preferences may indeed carry implications for corporate policies and therefore should be examined more carefully by researchers and others. Sun and her colleagues additionally discovered that the influence of individual CEOs’ political views on tax-avoidance policies existed almost entirely at “poorly governed” firms – that is, where the top person is firmly entrenched, serving as both chief executive and chairman, with a non-independent board that holds little power. A notable distinction of the Democratic CEOs, Sun says, is that their tax decisions are clearly associated with economic incentives. “For the Democratic executives, their tax-avoidance policies are explained less by their political views than by their desire to increase their own compensation by improving the company’s bottom line and the performance of its stock,” says Sun. “If there is high potential for compensatory reward, they will take more risks and avoid more taxes.” What would constitute aggressive and risky forms of avoidance? According to Sun, they would include tax shelters and other tools that apparently are legal but might be more likely to trigger Internal Revenue Service scrutiny because of their complexity. To determine the CEOs’ political sympathies, the researchers combed through a Federal Election Commission data base for donations made by chief executives at the 1,500 largest public firms across some 50 industries in the United States. Of the CEOs who made political donations to the two major parties during the 15-year sampling period, about 60 percent gave to Republicans. In general, the executives made relatively small contributions – an average of 0.03 percent of their annual compensation – to one party or the other, rarely to both. About 200 of the CEOs switched party allegiance during the sampling period, as indicated by their political donations. Among those who switched to the GOP, their firms subsequently increased their total tax avoidance, while reduced avoidance was seen at firms where the CEOs switched to the nonRepublican side (Democratic or no party preference). Sun presented the paper in October 2013 at the annual meeting of the Financial Management Association, held in Chicago. The FMA is an international, 3,000-member organization of academicians and practitioners that promotes the development and dissemination of knowledge about financial decision making. – P.E.

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The political beliefs of corporate CEOs strongly influence the tax-avoidance strategies of the firms they run.

RESEARCH BY ASSISTANT PROFESSOR XIAN SUN

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have data. Now how do I use it?” That’s the quandary facing managers around the world as the flow of statistical information into organizations becomes a torrent. Between individual data points and high-impact decisions, there are dashboards, analytics, correlations, and plenty of programming. The interpreters of such information are known as “data scientists” – a recently coined term for people who can recognize and analyze large data sets and then use the insights buried within to drive strategy. An August 2014 article in The Wall Street Journal employed an even loftier term for these experts: “High-Priests of Algorithms.” For several years, Carey Business School faculty and students have been actively engaged in applying big data in forwardthinking ways. Assistant Professor Angelo Mele’s eight-week course Networked Organizations has been a cornerstone of the Global MBA curriculum since that program’s launch in 2010. Through annual iterations of the course, Mele has moved from teaching general concepts about networks – dynamic phenomena that appear in settings ranging from financial markets to social media to high school cafeterias – to training the students in applied research conducted with the statistical programming language called R. Steve Cherewick of the 2015 Global MBA class used R in his final project for Networked Organizations last spring, probing data from social media sites such as Twitter with classmate J.J. Reidy. Cherewick says he had some prior experience with programming but was hardly an expert. After cutting his teeth with R through class assignments, he came to realize that even basic proficiency in the language will be of value when he graduates and enters the job market.

Through annual iterations of the Networked Organizations course, Assistant Professor Angelo Mele has moved from teaching general concepts about networks to training Carey students in applied research conducted with the statistical programming language called R.

A SAMPLING OF RECENT WORK BY CAREY FACULTY MEMBERS

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This network diagram illustrates a particular data set discussed in Angelo Mele’s Networked Organizations course.

“I’ve already used R during my summer [2014] internship where I worked in coordinating global logistics strategies for Goodyear Tire and Rubber Company,” he says. To deepen his knowledge of what R can do, Cherewick takes advantage of a global network of R enthusiasts. “R communities online feature in-depth videos on processing data related to health care, urban planning, financial contagions, and a wide variety of other fields,” he explains. The importance of a continuing conversation that promotes fluency makes sense when one thinks of R the way Angelo Mele does. “The coding itself is like learning a language,” he says. Nevertheless, some have suggested to him that managers should do only high-level analysis instead of learning syntax and scraping data from Internet sources. But Mele counters that managers who have had some exposure to data science will be less fearful of using it as a decision-making tool. In addition to Networked Organizations, other Carey courses this fall are providing students with substantive applied data experience – Assistant Professor Ruxian Wang’s Data Analytics and Assistant Professor Sanghee Lim’s Digital Data and Business Intelligence. Also, several marketing professors train students in using the IBM statistical analysis platform SPSS to extract consumer insights that can mean the difference between success and failure for a product or service. Business school graduates might not be the primary programmers in the companies they run, but, as Mele states, those who have experience with big data will know how to see the big picture and, he adds, help bring it into focus: “‘What data do I need? What questions do I ask? What output can I get?’” And perhaps above all, “‘Is it useful?’” – Sam Hopkins

ECONOMICS ASSOCIATE PROFESSOR RICARD GIL wrote an article

for the Spanish economics blog Nada es Gratis about research he conducted with ASSISTANT PROFESSOR MITSUKUNI NISHIDA about the

impact of political decisions on television programming in Spain. Their paper “Regulation, enforcement, and entry: Evidence from the Spanish local TV Industry” appeared in the January issue of the International Journal of Industrial Organization. In May, Gil wrote a commentary for USAPP, a London School of Economics daily blog on American politics and policy. His article was based on a research paper that he co-authored with Frederic Warzynski of Aarhus University in Denmark, “Vertical Integration, Exclusivity, and Game Sales Performance in the U.S. Video Game Industry,” which was published in April in the online version of The Journal of Law, Economics, and Organization. Nishida also has prepared articles that are forthcoming in journals. They are “The Costs of Zoning Regulations in Retail Chains: The Case of the City Planning Act of 1968 in Japan,” for the Journal of Regulatory Economics, and “Estimating a Model of Strategic Network Choice: The ConvenienceStore Industry in Okinawa,” for Marketing Science.

Last spring, Nishida presented two papers at conferences: “Search, Equilibrium Pricing, and Local Market Competition” at the Fifth Workshop on Consumer Search and Switching Costs, at Indiana University, and “Performance Dynamics in Retail Expansion and Merger” at the 12th International Industrial Organization Conference, at Northwestern University. ASSISTANT PROFESSOR MARIO MACIS received a Faculty Pilot Grant in Global Health Research from the Johns Hopkins Center for Global Health, for his project titled “Leveraging Patients’ Social Networks to Overcome Tuberculosis Underdetection in India.”

The August issue of the Journal of Business Research included a special section titled “Risk, Uncertainty, and Heuristics,” with two articles co-authored by ASSISTANT PROFESSOR SHABNAM MOUSAVI. One of those two articles is described on page 10 of this edition of Changing Business; the other article, “Behind and beyond a shared definition of ecological rationality: A functional view of heuristics,” was co-written by Mousavi and Reza Kheirandish of Clayton State University. ASSISTANT PROFESSOR ALESSANDRO REBUCCI was

a panelist at the presentation “Reserve Requirements in the Brave New Macroprudential World” held in April at the Brookings Institution in Washington, D.C.

“ Two experiments [showed] that people with a morning chronotype [‘early birds’] tend to behave more ethically in the morning than the evening, while people with an evening chronotype [‘night owls’] tend to behave more ethically in the evening than the morning. Thus, understanding when people will behave unethically may require an appreciation of both the person (chronotype) and the situation (time-of-day).” Brian Gunia, with Christopher Barnes and Sunita Sah, “The morality of larks and owls.”

ASSISTANT PROFESSOR BRIAN GUNIA served as the lead author

of a forthcoming study in Psychological Science that examines how “early birds” and “night owls” exhibit moral judgments at different times of day. The study, co-authored by Christopher Barnes of the University of Washington and Sunita Sah of Harvard and Georgetown

FINANCE ASSISTANT PROFESSOR NICOLA FUSARI was part of a team

whose research earned an honorable mention last May in the third annual AQR Insight Award competition, which recognizes work on issues related to institutional investment. With Torben G. Andersen and Viktor Todorov, both of Northwestern University, Fusari co-authored the paper titled “The Risk Premia Embedded in Index Options.” ASSISTANT PROFESSOR XIAN SUN published “Does relationship matter? The choice of financial advisors,” with co-authors Bill B. Francis of Rensselaer Polytechnic Institute and Iftekhar Hasan of Fordham University, in the May-June 2014 issue of the Journal of Economics and Business; “Can

universities, generated considerable media coverage in outlets that included The Atlantic, BloombergBusinessweek, The Huffington Post, Inc., the BBC, The Telegraph, and the (New York) Daily News. In addition, Gunia and his colleagues wrote an article about their research for the Harvard Business Review Blog Network.

firms learn by observing? Evidence from cross-border M&As,” with Francis, Hasan, and Maya Waisman of Fordham University, last April in the Journal of Corporate Finance; and “The certification role of financial advisors in cross-border M&As,” with Francis and Hasan, in the International Review of Financial Analysis. Sun’s article “Monitoring the ‘invisible’ hand of market discipline: Capital adequacy revisited,” written with Hasan and Akhtar Siddique of the United States Office of the Comptroller of the Currency, appeared in March in the online version of the Journal of Banking and Finance. Also, Sun made research presentations to a gathering of the American Accounting Association in October 2013, and again at an AAA meeting last March. (continued on next page)

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This network diagram illustrates a particular data set discussed in Angelo Mele’s Networked Organizations course.

ECONOMICS ASSOCIATE PROFESSOR RICARD GIL wrote an article

for the Spanish economics blog Nada es Gratis about research he conducted with ASSISTANT PROFESSOR MITSUKUNI NISHIDA about the

a panelist at the presentation “Reserve Requirements in the Brave New Macroprudential World” held in April at the Brookings Institution in Washington, D.C.

ASSISTANT PROFESSOR BRIAN GUNIA served as the lead author

FINANCE ASSISTANT PROFESSOR NICOLA FUSARI was part of a team

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(continued)

MANAGEMENT ASSISTANT PROFESSOR CHESTER CHAMBERS gave

a presentation titled “Using Process Analysis to Assess the Impact of Medical Education on the Delivery of Pain Services: A Natural Experiment” at the 2014 Sustainability Summit and Exposition in March in Milwaukee, Wisconsin. At that time, he also presented research titled “Cyclic Scheduling for Outpatient Clinics in Academic Medical Centers,” at the University of Wisconsin in Milwaukee. The article “Patient Punctuality and Clinic Performance: Observations From an Academic-Based Private Practice Pain Centre” – co-written by Chambers, PROFESSOR MAQBOOL DADA of the Carey Business School, ASSOCIATE PROFESSOR KAYODE WILLIAMS of the Johns Hopkins School of Medicine and the Carey Business School, and Professor John Ulatowski and Julia McLeod of the Johns Hopkins School of Medicine – appeared in BMJ Open in May. ASSISTANT PROFESSOR TINGLONG DAI’s PhD dissertation, “Incentives in U.S. Healthcare Operations,” was selected as one of four finalists for the Elwood S. Buffa Doctoral Dissertation Award, which recognizes outstanding doctoral dissertation research completed in 2013 in the development of theory for the decision sciences, the development of methodology for the decision

sciences, and/or the application of theory or methodology in the decision sciences. The award will be announced at the annual meeting of the Decision Sciences Institute this November in Tampa, Florida. ASSISTANT PROFESSOR BRIAN GUNIA made a

presentation about the Carey Business School’s Business in Government (BIG) Initiative in July at the Next Generation of Government Training Summit in Arlington, Virginia. The initiative aims to serve as a conduit between business and government organizations on the topic of organizational performance. An article by PROFESSOR AND EXECUTIVE VICE DEAN

MARKETING In April, PROFESSOR DIPANKAR CHAKRAVARTI gave an invited talk titled “Choices of Consequence: Some Financial Decisions of the Rural Poor” at Syracuse University and American University.

This past July in Lijiang, China, he presented an invited paper based on this work (co-authored with Sridhar Samu and K Jayashree of the Indian School of Business) at the annual conference of the China India Insights Program of the Center for Customer Insights at the Yale School of Management and the Customer Information Management Center of the Cheung Kong Graduate School of Business.

PHILLIP PHAN , “The business

of translation: The Johns Hopkins University Discovery to Market program,” appeared in the April issue of The Journal of Technology Transfer. ASSISTANT PROFESSOR RUXIAN WANG co-authored the study “Flexible-Duration Extended Warranties with Dynamic Reliability Learning,” which appeared in the April 2014 issue of Production and Operations Management. Another paper co-written by Wang, “No Claim? Your Gain: Design of Residual Value Extended Warranties under Risk Aversion and Strategic Claim Behavior,” is forthcoming in Manufacturing & Service Operations Management.

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Chakravarti presented two other papers at the 36th ISMS Marketing Science Conference at Emory University in June. The first, “The Impact of Measuring Risk Attitudes on Risky Decision Making Behavior,” was co-authored with STEPHEN AMATUCCI (a recent Carey Global MBA graduate who was supported by a Carey Dean’s Research Scholar award). The second, “The Hedonics of Apportioning Consolidated Component Prices in Purchases Involving Trade-ins,” was co-authored with Joydeep Srivastava of the University of Maryland and Rahul Sett, a Nehru-Fulbright Scholar visiting Carey from the Indian Institute of Management Kozhikode. Along with Carey ASSISTANT PROFESSORS JIAN NI and

SHUBHRANSHU SINGH, Chakra-

varti will co-chair the 37th ISMS Marketing Science Conference (the largest international conference of marketing scientists) and the ISMS Doctoral Consortium in Baltimore in June 2015. A case co-written by ASSISTANT PROFESSOR HAIYANG YANG, “L’Oréal in China: Marketing Strategies for Turning Around Chinese Luxury Cosmetic Brand Yue Sai,” received the 2014 Best Marketing Case Award from the French Association of Marketing. Twentyfour cases were judged in the competition. Yang’s L’Oreal case has been adopted by major business schools around the world, including those at Duke University, Northwestern University, New York University, the University of London, and the University of Toronto. Yang also made three presentations last October in Chicago at the annual conference of the Association for Consumer Research. His topics were “Towards Understanding the Interplay between Culture and Goals,” “Symmetrical Logos Can Harm Brand Equity: The Interactive Effect of Logo Design and Brand Personality on Brand Valuation,” and “Towards Understanding Creative Ingenuity in Dire Situations.”

HYEONGMIN “CHRISTIAN” KIM (PhD in Marketing, Ross

School of Business, University of Michigan, 2002) is an assistant professor in the tenure track with expertise in self-control, materialism, and sales promotion.

STACEY B. LEE (JD, University of Maryland School of Law,

1995) is an assistant professor in the practice track with expertise in business law, health law, and negotiation.

JIM KYUNG-SOO LIEW (PhD in Finance and Economics,

Columbia University Business School, 1999) is an assistant professor in the practice track with expertise in the areas of finance, quantitative finance, and hedge funds.

SHABNAM MOUSAVI (PhD in Economics, 2002, and PhD in Statistics, 2006, both from Virginia Polytechnic Institute and State University) is an assistant professor in the practice track with expertise in behavioral finance, decision theory, mathematical/ statistical modeling, and medical decision making.

EMILIA SIMEONOVA (PhD in Economics, Columbia University,

2008) is an assistant professor in the tenure track with expertise in the economics of health care delivery, patient adherence to therapy, the interaction between physicians and patients, racial disparities in health outcomes, and children’s health.

ASSISTANT PROFESSOR MENG

XIAN SUN (PhD in Finance, Rensselaer Polytechnic Institute,

ZHU has co-authored a study,

2006) is an assistant professor in the tenure track with expertise in the areas of emerging capital markets, institutional shareholders, and mergers and acquisitions.

“The Impact of Scarcity on Consumers’ Choices of Multiple Items from a Product Class,” that is forthcoming in the Journal of Marketing Research.

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(continued)

MANAGEMENT ASSISTANT PROFESSOR CHESTER CHAMBERS gave

MARKETING In April, PROFESSOR DIPANKAR CHAKRAVARTI gave an invited talk titled “Choices of Consequence: Some Financial Decisions of the Rural Poor” at Syracuse University and American University.

PHILLIP PHAN , “The business

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SHUBHRANSHU SINGH, Chakra-

HYEONGMIN “CHRISTIAN” KIM (PhD in Marketing, Ross

School of Business, University of Michigan, 2002) is an assistant professor in the tenure track with expertise in self-control, materialism, and sales promotion.

STACEY B. LEE (JD, University of Maryland School of Law,

1995) is an assistant professor in the practice track with expertise in business law, health law, and negotiation.

JIM KYUNG-SOO LIEW (PhD in Finance and Economics,

Columbia University Business School, 1999) is an assistant professor in the practice track with expertise in the areas of finance, quantitative finance, and hedge funds.

EMILIA SIMEONOVA (PhD in Economics, Columbia University,

ASSISTANT PROFESSOR MENG

XIAN SUN (PhD in Finance, Rensselaer Polytechnic Institute,

ZHU has co-authored a study,

2006) is an assistant professor in the tenure track with expertise in the areas of emerging capital markets, institutional shareholders, and mergers and acquisitions.

“The Impact of Scarcity on Consumers’ Choices of Multiple Items from a Product Class,” that is forthcoming in the Journal of Marketing Research.

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