Saturday, October 22, 2005

check in periodically for periodical amusement

To make or to buy...workers.

The Hiring Dilemma for High-tech Firms: 'Make vs. Buy'

One particular hiring conundrum is hardly a new one for those in human resource management: Is a company better off developing and training specialized workers in-house or hiring skilled workers from outside the company? The question is especially important in fast-paced, technology-based industries where investment in human capital is critical.

"If firms need to augment the skill of their workforce to complement an investment in technology, they face a traditional 'make vs. buy' problem," write Wharton management professor Benjamin Campbell and four co-authors -- Clair Brown and Yooki Park from the University of California at Berkeley, and Fredrik Andersson and Hyowook Chiang from the U.S. Census Bureau -- in a recent paper titled, "The Effect of HRM Practices and R&D Investment on Worker Productivity." Firms can "structure their HRM (human resource management) system to develop the necessary skills in-house or they can structure their HRM to attract workers with the necessary skills on the external market," he notes.

In response to this make vs. buy dilemma, Campbell and his co-authors think they have found the answer for industries that compete in cutting-edge technology. Using U.S. Census Bureau data recently made available to external researchers, Campbell says his team has statistically demonstrated when companies should hire from outside and when they should develop from within.

For Campbell, the paper's findings are particularly important on two fronts. First, his conclusions can "lay the foundation for how to think about technology and HR at the same time. HR strategy complements technology strategy, yet often people developing these strategies don't work together.... I think this is especially true in younger firms. But if you want to be in a fast-paced industry, you need to invest in an HR system that gives you the skills you need. And it has to start at the CEO level. It has to come from the top down."

Second, Campbell believes that these issues will be increasingly relevant. "More and more firms will be evolving to the spot market [external labor market] model," he says. "Most industries tend to operate in a faster-paced environment [than before]. Product life cycles across all manufacturing industries as a whole are growing shorter. Firms are facing more opportunities for change and more adjustments to the workforce." When skills need to be adjusted, "it pays to buy the skills instead of developing them. And as all industries evolve, I predict we will be seeing more and more firms adopting the buy strategy."

The Hewlett Packard Case

Using examples from the semiconductor industry, Campbell presents these scenarios. If a firm is faced with significant marketplace and technological changes, Campbell argues that it is "better off hiring workers from the outside labor market who have the skills it needs, rather than investing in developing those skills inside the firm." Examples of such firms are found in the graphics chips industry, where leading companies like NVIDIA, VIA Technologies and ATI Technologies come out with a new product generation every 12 to 18 months. "When product generations are short, there is not necessarily time to develop the necessary skills for the next generation in-house, so these companies benefit from hiring skills from the external labor market," he says.

The opposite is true for slower moving industries operating in marketplaces with less change -- for instance, companies like Bosch and Delphi-Delco that manufacture automotive chips which often last four or five years before a new generation makes them obsolete. "When product generations last a long time, it becomes feasible to develop talent in-house in preparation for the next product generation. It is better for these firms to take the long approach and develop the necessary skills within the firm," he says.

The impact of Campbell's findings, he believes, could be significant for human resource management strategies. "As the pace of technological change has quickened, and as global competition has shortened product life cycles, firms have had to rethink their technology investment strategies and their human resource management practices in order to remain competitive," writes Campbell.

"A classic example of this phenomenon is Hewlett Packard over the last 20 years," he suggests. "They had such a reputation for these internal labor markets, where they hired employees at an early stage and then developed them throughout their careers. That was the company's reputation. But over the last 20 years, the Hewlett Packard way has eroded. They are now operating more on the spot market. In order to keep pace with other technology firms, they are forced to hire on the outside."

In their paper, Campbell and his co-authors note that "although the relationship of technological change, compensation and tenure at the individual level has been well-studied, surprisingly little is known about the relationship between technological change and an (individual) firm's HRM decisions. Previous research on this topic has been either case study oriented or has utilized data from broad establishment-level surveys. This project connects these micro and macro approaches by using data that allows us to capitalize on the strengths of each type of research."

The report pulls data from the Census Bureau's Longitudinal Employer-Household Dynamics (LEHD) Program, which covers seven large states from 1992 to 1997. Specifically, Campbell chose to look at the impact of R&D and HRM systems on firms' performance within the electronics industry "where technological investment is a critical strategic variable."

Writes Campbell: "Although firms in the electronics industry have a high level of R&D investment relative to other industries, there is a large variance in investment between firms within the industry. This variance can be observed in the length of product life cycles: from 12 months for fast-evolving consumer-based products such as graphic chips, to five years or more for slowly-evolving analog products."

Campbell acknowledges that "in the industries we are studying, 'cutting-edge' is such a complex term because there are so many facets of technology. Someone might have skills that are cutting-edge for some products, but another (level) in the industry wouldn't be interested in that worker. It becomes a problem of identifying the right workers, including some who may be undervalued by the current workplace."

Offer Training or Go Outside

As Campbell notes, finding and keeping talent as it relates to the electronics industry boils down to one main issue: Make vs. buy. To answer this question, Campbell's paper proposes that companies analyze another question first: "How does the firm's product life, and thus its rate of R&D spending, affect how the HRM system operates?"

"We assume that a new technology requires a mix of experience on the previous generation of technology and new skills that don't currently exist in the firm," he writes. "We assume that experience and new skills are complements and firms differ in their mix of experienced and new workers. Technology firms in short product life markets, and thus with high R&D spending, must have a mix of engineers dominated by the new skills required for the new technology with a small emphasis on engineers with experience on the last generation of technology. Firms in long product life markets, and thus with low R&D spending, rely more on a workforce with experience since the firm has greater gains associated with cutting costs, improving quality, and improving throughput over the life of the product than the gains associated with developing a new product."

In short, firms must make two major decisions in creating the optimal skill-experience composition in the workforce: First, decide whether to provide formal training in the new technology to their existing workers or to purchase these skills through new hires, which is the essence of what Campbell calls the "make-buy decision;" and second, decide which experienced engineers and other workers to retain.

"The firm makes the first decision based upon the relative costs, including both the payroll costs and the time-to-market costs, of making or buying the required skills for the new technology," he writes. "The cost of 'making' the required skills is the worker adjustment cost of acquiring skills (training costs) and is proportional to the size of technological jumps over a given time. The cost of 'buying' the required skills is the firm's adjustment costs in hiring new workers, which does not depend on the size of the technological jump.

"Therefore, depending on the firm's underlying cost structures, for sufficiently large technological jumps, 'buying' will be less costly than 'making' new skills."

While high R&D firms are more likely to buy new skills compared to low R&D firms, there is an important caveat to this finding. "There are experienced workers who have firm-specific knowledge that can't be replaced on the outside market," notes Campbell. His research shows that high R&D firms in particular suffer if they lose too many experienced workers, which is why these firms must decide which experienced engineers and other workers to try and retain. Often, this can be a problem. "When you are not investing a lot in developing the skills of a work force, [employees] will leave," he says.

Campbell's research looks at many factors within human resource management practices that affect worker productivity, including performance incentives, multiple ports of entry, and low and high turnover rates. It compares different educational levels of workers; varying accession rates (ratio of total number of new hires to the total number of workers); separation rates for workers with two and five years of experience; standard deviation of earnings for various worker levels, and wage growth for workers with five years of experience. In order to characterize the human resource practices of a firm, Campbell and his fellow researchers use earnings, earnings growth, accession rates and separation rates for selected cohorts within each firm.

And finally, the researchers perform a cluster analysis of firms and HRM measures to identify and describe the four most common HRM systems that firms set up as a result of the make-buy and retention decisions:

· Bureaucratic ILM (Internal Labor Markets): Initial earnings of new hires are similar (low variance) since most workers enter at the same level and have similar (and reliable) earnings growth. Firm experiences a low separation rate.

· Performance-based ILM: Entry of workers and their initial earnings reflect skill requirements so average initial earnings of new hires are higher with higher variance than for bureaucratic ILM. After approximately two years, workers are selected (based upon performance) for faster career development and members of a cohort compete for entry into these favored positions, which have higher earnings growth and lower separation rates. Those who do not receive skill development have lower earnings growth and higher separation rates.

· Spot Market (External Labor Markets): Firms can identify workers' talents and skills, and hire and pay accordingly. Firm can monitor worker performance and pay worker according to contribution. Initial earnings and earnings growth reflect market rates for skill and talent, with large initial variance, and variance does not increase over tenure. Separation rate is higher than in ILMs.

· Spot Market with Rewards: Firms hire and pay workers in spot market, but identification of workers' talents and effort at hire is imperfect and monitoring of worker performance is imperfect. Variance of initial earnings is lower than in spot market. Firm must include performance rewards and tournament or wage-efficiency type incentives; thus variance of earnings increases over tenure. Earnings growth is higher than in spot market. Separation rate is higher than in spot market since the bad matches (both at hire and in rewards) end.

Ultimately, the report concludes, "Firms with high R&D that choose a Spot Market with Rewards HRM system will have higher worker productivity than those that choose other HRM systems. And firms with low R&D that choose Performance-based ILM HRM systems will have higher worker productivity than firms that choose other HRM systems." Interestingly enough, Campbell's research suggests that "a surprising" number of firms do the exact opposite of what the research showed was best.

"These results suggest that high R&D firms are more likely to buy new skills compared to low R&D firms, and yet these high R&D firms suffer if they lose too many experienced workers," Campbell and his colleagues write. "These findings are consistent with the implications of our 'make versus buy' model of workforce skill adjustment as a response to technological change."

Friday, October 21, 2005

Rich, meet Richer.

The $91 Billion Conversation
Warren Buffett and Bill Gates answer questions, first for 2,000 Nebraska students, then for FORTUNE. The billionaire buddies on the economy, philanthropy, and investment strategy—an exclusive report.
Monday, October 17, 2005
By Daniel Roth

It's the Friday before the University of Nebraska's Big 12 Conference opener in football-mad Lincoln, but the Cornhuskers game isn't the only hot ticket in town. On a beautiful late September afternoon, some 2,000 students are lined up outside the school's Lied Center auditorium, an hour before the doors open. Andrew Schoemacher, a lanky 19-year-old chemical-engineering sophomore, doesn't even have a ticket but hopes he can scrounge one to get inside. How could he miss seeing this show? After all, he says, "It's Bill Gates and Warren Buffett."

Gates and Buffett—friends who just happen to be the two richest men in the world, worth $51 billion and $40 billion, respectively—are coming together for a free-ranging question-and-answer session. They have done this kind of talk before—once. The two met up in Gates' hometown of Seattle in 1998 with students at the University of Washington. Back then both men were on the verge of turbulent times: Microsoft about to face off against the government in its epic antitrust trial, and Buffett weeks away from buying reinsurer General Re, now the thorn in his company Berkshire Hathaway's side, thanks to its involvement with the troubled AIG. Fortune, the only magazine invited to attend their first chat, found the interaction "something pretty darn close to wisdom" and put the talk on the cover (see The Bill & Warren Show. So when the billionaires decided to meet again, we went along for an inside peek at the event—and more important, some private time with the two men to pose our own questions.

Over lunch with FORTUNE's Daniel Roth—Cherry Coke and sliced turkey on white bread for Buffett; roast beef with mustard on white for Gates—the two moguls loosened up, talking about their close relationship, their plans for poker that night, and Wall Street's willingness to lead investors down the wrong path. Both men are shaping up: Gates, 50 in October, has dropped 20 pounds by running regularly; Buffett, 75, has shed 12 pounds thanks to three-times-a-week personal-training sessions. And they're reshaping their plans as well: Buffett reverses himself and says for the first time that he may begin giving away his fortune before he dies. What follows are excerpts of that conversation, plus highlights of their Q&A with the students.

FORTUNE: A few quick hits. First: best book you've read lately.
BUFFETT: Katharine Graham's Personal History is sensational. I think everybody ought to read that.
GATES: There's one called The Bottomless Well, about energy, that I love. There's one about computer science, Ray Kurzweil's book—I have a preprint, so I'm not sure when it's coming out—called Singularity Is Near, about artificial intelligence. The Tom Friedman book [The World Is Flat] is supergood. Jeffrey Sachs wrote a book called The End of Poverty, the Jack Welch book Winning came out this year, and don't forget [Jared Diamond's] Collapse, which is the follow-on to one of the best books of all time [Guns, Germs, and Steel].

FORTUNE: Your last big splurge?
BUFFETT: You mean personal expenditure?
BUFFETT: Plane. That's the only way in which having a lot of money has changed my life—a NetJets G4. [Note: Berkshire owns NetJets.] I spend a couple hundred thousand dollars a year, or maybe a little more.
GATES: Splurge ... I guess if I lose at poker tonight, it's a $500 splurge.
BUFFETT: That is a splurge.
GATES: Warren's and my betting has always been confined to $1 bets.
BUFFETT: This fellow in Omaha called me about a poker game, and it sounded like fun. But with Texas Hold 'Em you've got to play for money. That's the nature of the game. I think bridge is a better game, but poker is a lot of fun.
GATES: If we'd had an ideal fourth here, we might have opted for bridge.

FORTUNE: What does your friend think when you say, "Oh yeah, I'll come over for poker. I'm going to bring my buddy Bill Gates"?
BUFFETT: We kept it quiet. The guy that's setting up the game knows, but the other participants don't.

FORTUNE: Back to the lightning round: Make a call on the market. Seven years from now, will the S&P 500 have returned over or under 10% annually?
BUFFETT: More likely to be under than over. You're not going to have the GDP in nominal terms grow 5% a year and everybody make 10% a year.
GATES: I'd say under, most likely. The notion that returns will continue to be superhigh—there are some clouds out there.

FORTUNE: The last time you did a talk like this, Warren, you said that people were making "fairly reckless assumptions" about big stock market returns. Is the same thing happening today with hedge funds and private equity?
BUFFETT: In the late 1990s people were looking in their rearview mirror, and they thought that God had granted Americans the right to 15% a year. They built that into pension assumptions. They built it to some extent into what endowment funds spent. Now, six or seven years later, people look in the rearview mirror, and they see that conventional investments haven't produced remotely anything like that. And so they say to themselves, "Well, how do I get it? I'll turn to alternative investments." You can be sure that vacuum will be filled by Wall Street people who say, "You're right looking in that rearview mirror and seeing conventional investments don't work. Come with us, because we have the Holy Grail." And the thing about the Holy Grail is that you have to pay a lot more.
GATES: In venture capital there were very high returns with small amounts of money, and then very poor returns with large amounts of money. This desire to have high absolute returns—and seeing that places like Harvard University were cleverly in alternative assets—has led to this thought that "Okay, there must be something out there returning 10%. I just haven't found it yet." So the fact that expectations of returns exceed reality, that's still true today.
BUFFETT: And Wall Street feeds that.
GATES: It's Wall Street's job. [Both laugh.]

Plugging the trade gap
Is Microsoft part of the solution?

FORTUNE: Warren gave a speech to Allen & Co. this summer about his worries surrounding the ballooning U.S. trade deficit. I'm curious, Bill, whether you have the same sort of fears that Warren does.
GATES: Warren has got me thinking hard about it. I watched that speech twice, and after each time I'm more concerned. I believe in the basic principle that trade is a supergood thing. I'm very worried that the reaction to this imbalance is to put on trade restrictions to bring imports down, which would lead other nations to do similar things. I think the greatest danger is something that would slow down the benefits that the free trade system has brought.

FORTUNE: Don't companies like yours, as they move production overseas, add to the trade deficit problem?
GATES: Microsoft is a net exporter—more than any other business. We do way more of our R&D here than we get in sales here. If the U.S. had about 100 more Microsofts, the trade deficit would be gone.
BUFFETT: High tech has been one of our huge advantages. You're looking for the things in the world that you're good at, and let the other guy turn out bananas. We're never going to be good at growing bananas in this country. But I don't think the trade deficit is a stable thing. If you had a major economic disruption, and people just had a general feeling that "look at what this situation has done"—you get some very bad political consequences. It's almost inevitable.

FORTUNE: Is that your biggest fear about what happens to the U.S.?
BUFFETT: The biggest problem we have is in terms of rogue states, terrorists, and nuclear, chemical, or biological weapons. Economically, I think the U.S. is going to be fine. If the rest of the world's GDP per capita grows faster than ours, that's the way it should be.
GATES: It's too bad that economics isn't taught or a hobby for lots of people, because you do run into those who seem to say, "There's only a certain number of jobs." That's not the case. Let's say tomorrow we could decide that everyone in India is as rich as we are. Would the world be a better place? Certainly. Would the U.S. thrive more because of the great products and work that would be done over there? Absolutely. The world getting richer is a great thing. It has been a great thing. It will continue to be.
BUFFETT: It's not a zero-sum game.
GATES: Right, that's the key.

Giving of themselves
Evolving ideas on philanthropy

FORTUNE: You have different philosophies about philanthropy, with Bill giving a lot of his money away today and Warren waiting until he dies to give it away. What arguments would you make to the other that your way is the right way?
BUFFETT: Well, I think his way is better. He and Melinda, they're devoting a huge amount of money, terrific brains, and heart to it. That's a great combination. I couldn't have done that when I was in my 40s and added anything meaningful. At my age now, you can argue that a very significant percentage of the money has been made. And I don't need the stock to control Berkshire, so it may make sense to do something very significant before I die.

FORTUNE: Is this a change for you?
BUFFETT: It's an evolution.
GATES: In 1998 I was just getting started [in philanthropy], and back then I would have said, "Look, it's too confusing and distracting to be making money and giving money away at the same time." I didn't think I could spare the time. As my dad encouraged me to jump in, as Melinda weighed in on that side, and both of them were willing to put time into it, we got a great person in Steve Ballmer, who actually I'd known at Microsoft a long time—the pieces really fell together. I'd always thought that I would wait until I was done working full-time before I'd do a lot of philanthropy. But it's worked amazingly well to be able to do some of both.
BUFFETT: Bill's got a better mind for it. I couldn't do what he does. I wouldn't get any enjoyment, because I would know I wasn't that good at it. I want to see the money used intelligently. I don't regard my death as being the perfect timing, necessarily.

FORTUNE: Do you two talk about this?
BUFFETT: Oh, sure.
GATES: Absolutely.

FORTUNE: Are you trying to persuade Warren to be as hands-on in philanthropy as you are?
GATES: No, but I share the enjoyment I get out of it and some of the fun dynamics, the dynamics of what works and doesn't work. It's a lot like the world of business—not enough that you can just walk into it, but you learn some of the specifics and then the experience of business applies.
BUFFETT: Berkshire is so much a part of me that I never could walk away from it. But I don't think that I'm going to quintuple [my personal fortune] in six or eight years. The amount is big enough now to do very significant things, and way different than when I was in my 40s. I mean, if I had done this in my 40s, it might have been $20 million. Now we've got a sum that can do something significant. And I don't need it to control Berkshire. Nobody's going to take over Berkshire at its present size, which was not the case 20 years ago.
GATES: I'd never thought that giving wealth to my own kids could be disadvantageous until I read a Fortune article—
BUFFETT: "Should You Leave It All to the Children?" [Sept. 29, 1986].
GATES: Right. Warren was a strong voice in that article. And after I read it, I thought, Wow, it would be a mistake as you get past a certain amount [to hand it all down]. So this idea that it should all go back to society, Warren influenced me dramatically on that.
BUFFETT: And he's doing a better job. [Laughter.] It's interesting that the same people who talk about the terrible cycle of dependency that welfare brings will then hand their kids when they emerge from the womb a lifetime supply of food stamps. But some poor woman who's had two pregnancies by the time she's 17, they say, Oh, this is terrible to give her anything.

New investments
Why Gates is buying Berkshire

FORTUNE: Warren, I know that you don't typically invest in tech companies, but I'm curious if Microsoft is looking tempting.
BUFFETT: With Bill on my board, people would assume that I had inside information if I made money. And if I didn't make money, it wouldn't be a good idea. [Both start laughing.]
GATES: Yeah, they'd assume I misled you.

FORTUNE: But, Bill, you've been buying more Berkshire Hathaway.
GATES: Well, out of all the board members, I have the smallest percentage of my net worth in Berkshire stock.

FORTUNE: So this isn't a takeover attempt of Berkshire ...
GATES: [Laughing.] No, no, no.
BUFFETT: If anybody takes over, I hope it's Bill.
GATES: When I get up to 1%, I'll let you know.

FORTUNE: Speaking of Berkshire, you both like its subsidiary, Dairy Queen. So, last question: Dilly Bar or Blizzard?
BUFFETT: Well, I actually prefer something I call a Dusty Sundae. But given the choice I would have to say a Blizzard.
GATES: I would pick a Dilly Bar.

Monday, October 17, 2005

Time to hit the sack.

Scientists Finding Out What Losing Sleep Does to a Body
By Rob Stein
Washington Post Staff Writer
Sunday, October 9, 2005; A01

With a good night's rest increasingly losing out to the Internet, e-mail, late-night cable and other distractions of modern life, a growing body of scientific evidence suggests that too little or erratic sleep may be taking an unappreciated toll on Americans' health.

Beyond leaving people bleary-eyed, clutching a Starbucks cup and dozing off at afternoon meetings, failing to get enough sleep or sleeping at odd hours heightens the risk for a variety of major illnesses, including cancer, heart disease, diabetes and obesity, recent studies indicate.

"We're shifting to a 24-hour-a-day, seven-day-a-week society, and as a result we're increasingly not sleeping like we used to," said Najib T. Ayas of the University of British Columbia. "We're really only now starting to understand how that is affecting health, and it appears to be significant."

A large, new study, for example, provides the latest in a flurry of evidence suggesting that the nation's obesity epidemic is being driven, at least in part, by a corresponding decrease in the average number of hours that Americans are sleeping, possibly by disrupting hormones that regulate appetite. The analysis of a nationally representative sample of nearly 10,000 adults found that those between the ages of 32 and 49 who sleep less than seven hours a night are significantly more likely to be obese.

The study follows a series of others that have found similar associations with other illnesses, including several reports from the Harvard-run Nurses' Health Study that has linked insufficient or irregular sleep to increased risk for colon cancer, breast cancer, heart disease and diabetes. Other research groups scattered around the country have subsequently found clues that might explain the associations, indications that sleep disruption affects crucial hormones and proteins that play roles in these diseases.

"There has been an avalanche of studies in this area. It's moving very rapidly," said Emmanuel Mignot of Stanford University, who wrote an editorial accompanying the new obesity study in the October issue of the journal Sleep. "People are starting to believe that there is an important relationship between short sleep and all sorts of health problems."

Not everyone agrees, with some experts arguing that any link between sleep patterns and health problems appears weak at best and could easily be explained by other factors.

"There are Chicken Little people running around saying that the sky is falling because people are not sleeping enough," said Daniel F. Kripke of the University of California at San Diego. "But everyone knows that people are getting healthier. Life expectancy has been increasing, and people are healthier today than they were generations ago."

Other researchers acknowledge that much more research is needed to prove that the apparent associations are real, and to fully understand how sleep disturbances may affect health. But they argue that the case is rapidly getting stronger that sleep is an important factor in many of the biggest killers.

"We have in our society this idea that you can just get by without sleep or manipulate when you sleep without any consequences," said Lawrence Epstein, president of the American Academy of Sleep Medicine. "What we're finding is that's just not true."

While many aspects of sleep remain a mystery -- including exactly why we sleep -- the picture that appears to be emerging is that not sleeping enough or being awake in the wee hours runs counter to the body's internal clock, throwing a host of basic bodily functions out of sync.

"Lack of sleep disrupts every physiologic function in the body," said Eve Van Cauter of the University of Chicago. "We have nothing in our biology that allows us to adapt to this behavior."

The amount of necessary sleep varies from person to person, with some breezing through their days on just a few hours' slumber and others barely functioning without a full 10 hours, experts say. But most people apparently need between about seven and nine hours, with studies indicating that an increased risk for disease starts to kick in when people get less than six or seven, experts say.

Scientists have long known that sleep disorders, such as sleep apnea, narcolepsy and chronic insomnia, can lead to serious health problems, and that difficulty sleeping may be a red flag for a serious illness. But the first clues that otherwise healthy people who do not get enough sleep or who shift their sleep schedules because of work, family or lifestyle may be endangering their health emerged from large epidemiological studies that found people who slept the least appeared to be significantly more likely to die.

"The strongest evidence out there right now is for the risk of overall mortality, but we also see the association for a number of specific causes," said Sanjay R. Patel of Harvard Medical School, who led one of the studies, involving more than 82,000 nurses, that found an increased risk of death among those who slept less than six hours a night. "Now we're starting to get insights into what's happening in the body when you don't get enough sleep."

Physiologic studies suggest that a sleep deficit may put the body into a state of high alert, increasing the production of stress hormones and driving up blood pressure, a major risk factor for heart attacks and strokes. Moreover, people who are sleep-deprived have elevated levels of substances in the blood that indicate a heightened state of inflammation in the body, which has also recently emerged as a major risk factor for heart disease, stroke, cancer and diabetes.

"Based on our findings, we believe that if you lose sleep that your body needs, then you produce these inflammatory markers that on a chronic basis can create low-grade inflammation and predispose you to cardiovascular events and a shorter life span," said Alexandros N. Vgontzas of Pennsylvania State University, who recently presented data at a scientific meeting indicating that naps can help counter harmful effects of sleep loss.

Other studies have found that sleep influences the functioning of the lining inside blood vessels, which could explain why people are most prone to heart attacks and strokes during early morning hours.

"We've really only scratched the surface when it comes to understanding what's going on regarding sleep and heart disease," said Virend Somers of the Mayo Clinic in Rochester, Minn. "I suspect as we understand more about this relationship, we'll realize how important it really is."

After several studies found that people who work at night appear unusually prone to breast and colon cancer, researchers investigating the possible explanation for this association found exposure to light at night reduces levels of the hormone melatonin. Melatonin is believed to protect against cancer by affecting levels of other hormones, such as estrogen.

"Melatonin can prevent tumor cells from growing -- it's cancer-protective," said Eva S. Schernhammer of Harvard Medical School, who has conducted a series of studies on volunteers in sleep laboratories. "The theory is, if you are exposed to light at night, on average you will produce less melatonin, increasing your cancer risk."

Other researchers are exploring a possible link to other malignancies, including prostate cancer.

"There's absolutely no reason it should be limited to breast cancer, and it wouldn't necessarily be restricted to people who work night shifts. People with disrupted sleep or people who are up late at night or get up frequently in the night could potentially have the same sort of effect," said Scott Davis of the University of Washington.

The newest study on obesity, from Columbia University, is just the latest to find that adults who sleep the least appear to be the most likely to gain weight and to become obese.

Other researchers have found that even mild sleep deprivation quickly disrupts normal levels of the recently discovered hormones ghrelin and leptin, which regulate appetite. That fits with the theory that humans may be genetically wired to be awake at night only when they need to be searching for food or fending off danger -- circumstances when they would need to eat to have enough energy.

"The modern equivalence to that situation today may unfortunately be often just a few steps to the refrigerator next door," Mignot wrote in his editorial.

In addition, studies show sleep-deprived people tend to develop problems regulating their blood sugar, which may put them at increased risk for diabetes.

"The research in this area is really just in its infancy," Van Cauter said. "This is really just the tip of the iceberg that has just begun to emerge."

© 2005 The Washington Post Company

Skype & eBay --Brilliant

Why did eBay pay billions for Skype? Because it was a great deal. Here's why:

The most expensive elements of putting together a telecommunications network are 1) capital investment for infrastructure 2) customer acquisition costs and 3) a billing system. Now let's consider each of these elements for Skype under the eBay umbrella:

Skype customers use their own computer an internet connection to make calls, so there is essentially zero capital investment required to create the network. Nice. eBay is great at identifying projects with high return on very little capital.

Skype ID's look a lot like eBay ID's --in fact they are essentailly the same. If you have an eBay ID, you already entered the data you essentially need to have a Skype account--thus, eBay is one mass emailing away from establishing the largest telecom network in the world---at NO COST to eBay. Very nice.

Skype users can use Paypal for their bill payment. Convenient that eBay owns Paypal--maybe thats how eBay became aware of Skype in the first place--the guys at the paypal division gave Meg a call, and said, "Check out the guys at Skype, because their Paypal billings are going through the roof". Now that they are one big family, Paypal becomes the deFacto billing system for this new global telecommunications service---at ZERO COST since it has already been built and integrated. Does it get any better than this?

In fact it does, because aside from the value of the business itself, eBay gets the derivative benefit of now connecting it's users for free via voice. Voice communications build trust more easily than email. Trust it the basis for the eBay economy. Skype will further enhance the value of the eBay network and increase already impenetrable barriers to entry. They already have Skype Me buttons you can add to your website--or your eBay listing.

Sunday, October 16, 2005

Towards a science of irrationality.

Is Alfred Marshall Passe? How a young Harvard economist is challenging the traditionalists in his field.

Dana Wechsler Linden
1,089 words
17 October 2005
Volume 176 Issue 8
(c) 2005 Forbes Inc.

How a young Harvard economist is challenging the traditionalists in his field.

Three years ago the Macarthur Foundation awarded economist Sendhil Mullainathan one of its $500,000 "genius" grants. Only 29 at the time, Mullainathan celebrated by buying himself a new pair of $49 Allen Iverson sneakers.

That's it? "The luxury part is, I already had a pair of sneakers," he explains. To the lanky, understated professor, his purchasing decision made sense: Even though he really didn't need a new pair of sneakers, he bought them anyway. But is that rational? That question goes to the core of Mullainathan's specialty--behavioral economics, an emerging branch of the field that seeks to integrate psychology with economics. He's one of perhaps four or five of his generation leading the overhaul of the traditional economic model and its underlying assumption--that people always behave rationally and make the right decision, unfettered by emotion or impulse. Says economist Richard Thaler of University of Chicago Graduate School of Business: "I'd put him with a small group who are where the future is."

What's rational, for instance, about the sports fan who refuses to pay more than $200 to buy a Super Bowl ticket, but won't accept less than $400 for one he already owns? Or travelers who leave generous tips at restaurants they expect never to visit again? Or gamblers who, at the end of a losing day, bet on a long shot?

It's one thing, though, for the psychoeconomists to say that people make foolish choices, quite another for them to turn this observation into a theory that can explain consumer decision making, stock market movements or economic cycles. Says ardent rationalist Eugene Fama of the University of Chicago: "They've uncovered lots of interesting details about behavior, but will anyone show this has an impact on prices and markets?"

That's where Mullainathan comes in. "He can think conceptually," says Thaler, "but he has very strong empirical skills and an interest in real data."

Born in a small farming village in India, Mullainathan lived there for seven years while his father moved to the U.S. to go to graduate school. On his fifth birthday, his father sent him a three-piece suit. On the way, via oxcart, to have his photo taken, his uncle and grandfather spent the whole time arguing about whether the vest went over or under the jacket. In the photo a beaming Mullainathan proudly wears the vest on top.

After moving to Los Angeles in 1980, Mullainathan left high school without graduating and went to Clarkson University, and then on to Cornell, where he took graduate-level courses in math and computer science. He studied under Thaler, then at Cornell, who was injecting psychology into economics.

Mullainathan was hooked and his research has become increasingly more empirical and less ivory-tower. He went to graduate school at Harvard, then became a junior faculty member at MIT. Harvard snatched him back last year with tenure.

One of his most provocative papers, just submitted for publication, suggests that tiny psychological effects can have potentially enormous impact on demand, more of an impact than price. In 2003 he and several coauthors worked with a bank in South Africa that sent out letters offering short-term loans. They varied the interest rate and also varied a number of cues designed to trigger psychological responses, such as a smiling photo in a corner of the letter and tables that provided more--or less--information and choice. The sample was large, more than 50,000 letters, and the study was randomized and controlled.

The impact of some of the small, nonfinancial cues surprised even the study's authors, though it probably wouldn't have been a shock to creative types on Madison Avenue. It turned out that having a wholesome, happy female picture in a corner of the letter had as much positive impact on the response rate as dropping the interest rate by four percentage points. Says Eldar Shafir, professor of psychology and public affairs at Princeton and a coauthor of the study: "I didn't know that, nobody expected that."

The practical takeaway is that an insurance company can probably sell more auto policies by featuring Reese Witherspoon in its brochures than by slashing margins and sending out letters that scream: "Unprecedented Low Rates!"

Says Matthew Ryan, executive director at Boston ad agency Arnold Worldwide, whose clients include McDonald's, Radio Shack and Fidelity Investments: "If behavioral economists can quantify more, that's exciting. The ad industry will be looking at those things closely."

Conventional economic theory says people accurately calculate costs and benefits, present and future. If they don't save much, it's because consuming more today makes them feel better. If they smoke, it's because the happiness they get from smoking outweighs the costs.

Behavioral economists disagree. They argue that a hardwired lack of self-control prevents people from making rational choices. Mullainathan and Jonathan Gruber of MIT tapped a huge trove of data--surveys of self-reported levels of happiness conducted since 1973 by the U.S. and Canada. What did they find? The population was happier after excise taxes on cigarettes rose. The taxes, Mullainathan suggests, helped some smokers drop an unwanted habit.

Another application of behaviorism that has gotten much attention has to do with 401(k) plans. If you want workers to save more, help them with their self-control by getting them to commit in advance to increase their savings as they get future raises. Make it, in other words, more difficult to spend the entire raise. In 2004 Vanguard rolled out an automatic-contribution plan designed with Thaler and UCLA's Shlomo Benartzi. If it meets expectations, savings should better than triple. More than 300 companies have the plan in place.

A study in Malawi by one of Mullainathan's students is looking at whether what psychologists call a "channel factor"--a stimulus that leads you to act immediately on your intentions--might increase the number of people who pick up the results of their AIDS tests. A puny incentive, equivalent in monetary worth to two cans of Coke, boosted the response from 30% to 70%.

"Let the data build up; let's see who's right," says Mullainathan. "If I'm wrong, I'll be wrong. And that's good. Everyone will see."