Friday, December 30, 2011

Job interviews @ Google

William Poundstone has a new book coming out "Are You Smart Enough to Work at Google" and WSJ ran an excerpt last Saturday.   The book will no doubt get considerable attention for sharing the brain teasers Google has developed.  (Example: What is the next number in this sequence?  10, 9, 60, 90, 70, 66 … ?  I could not solve this even though my quant scores on the SAT and GRE are off the end of the charts.  But if you write the numbers out, you will then see a pattern; there is no single correct answer.)   

This raises two critical issues: (1) Why do Google and other firms do this?  Google gets 130 applications for each opening, so its selection problem is how to find the best people using a cost effective process.  With such a high applicant to hire ratio, Google has no problem attracting persons who meet job qualifications. 
Google isn't looking for the smartest, or even the most technically capable, candidates. Google is looking for the candidates who will best fit Google.
(2) What is the likely impact on labor markets and society?  The hiring process involves selecting predictors that will inform the decision and be cost effective.  Research has shown that traditional job interviews are not very good predictors of future performance and can result in bias (interviewers give high evals to people who are most like themselves).  Increasingly, firms use a work-sampling approach to make decisions. 
There is significant evidence that "work sampling," the use of tests similar to the work being performed, is a better predictor of future performance than the usual job-interview chit-chat. Google does a lot of work sampling, such as requiring coders to write code in the interview. The rationale for the creative-thinking questions is that they test the type of mental processes used in inventing a new product or developing a new business plan.
I doubt Google has experimental evidence that asking job candidates questions like "Suppose you were shrunk to a height of a nickel and dropped into a blender ..." actually works.  It is far from clear that giving a snap answer to such questions yields better decisions than an approach that allows for reflection and research (especially if the goal is creativity and innovation).  But until the ratio of applicants to positions shrinks, the practice is unlikely to change.  Suggestion to job seekers: websites such as allow interviewees to post about their experiences; be sure to check it out before you get asked to design an evacuation plan for San Francisco.

Thursday, December 29, 2011

Merger policy in the Obama administration

Have gone the last week without my laptop.  Try it sometime; highly recommended. 

Just as NC State was shutting down for the holidays, AT&T decided to give up its bid for T-Mobile USA, presumably because it decided the odds of approval were low.  (Disclaimer: I do have a modest personal stake in this, having bought an iPhone from AT&T at a time when they provided unlimited domestic data for $30/month.  I was hoping that the extra bandwidth obtained from T-Mobile would result in better service.)  WSJ produced a good post mortem that discerned a pattern in the Obama administration's merger policy: mergers between firms competing in the same line of business (called horizontal mergers) are being frowned upon whereas mergers between firms in different stages of the same value chain (called vertical mergers) seem to be ok.  Recent examples of vertical mergers that have been approved include Comcast and NBC Universal and Ticketmaster's hookup with Live Nation. 

It will be interesting to see how tight a standard the current Department of Justice will apply.  Will we go back to the days of the infamous 1966 Von's Grocery decision, which zapped a merger between Von's and Shopping Bag because they would have had an eight percent combined market share in the LA metro area?

Tuesday, December 20, 2011

Nobel laureate @ NC State commencement

Nobel laureate Rajendra Pachauri gave the commencement address at NC State's graduation on Saturday.  Pachauri earned a joint PhD in industrial engineering and economics at NC State in 1974.  He received the Nobel because he co-chaired (with Al Gore) the Intergovernmental Panel on Climate Change (IPCC). Gore and Pachauri were recognized for their efforts to build awareness about climate change.  Pachauri is the head of The Energy and Resources Institute (TERI), a New Delhi-based research organization doing scientific and policy research on environmental issues.  

Pachauri said in his talk that he became interested in economics when he took Economics for Nonmajors from my colleague Thomas Grennes and read Edwin Dolan's TANSTAAFL (There Ain't No Such Thing as a Free Lunch).  Although there was no Poole College of Management at that time, we are proud to call Dr. Pachauri an alum. 

Monday, December 19, 2011

Feldstein on euro crisis

Harvard Professor Marty Feldstein offers his take on the euro crisis in last week's WSJ, one that is well worth reading.  Feldstein says we should ignore all the claims from the last summit that the crisis has been resolved (sounds familiar, huh?) because there is no enforcement mechanism in the agreement. This makes him very skeptical about greater economic and political integration being a long term solution. 

Instead he thinks that we need to take a country-by-country approach.  Feldstein is relatively optimistic that Italy will be able to have a balanced budget by 2013, which should dramatically lower its borrowing costs.  He considers Greece to be a lost cause and predicts it will default and replace the euro with a much-devalued drachma.

Feldstein's biggest concern is that private lending will dry up -- as it did in the US in 2008 -- because "banks are uncertain about the liquidity and solvency of potential counterparties."  Solution: have the European Central Bank step in and provide liquidity to banks with adequate collateral. 

Saturday, December 17, 2011

Gore on sustainable capitalism

This week WSJ provided beaucoup op-ed space with Al Gore where he provides his perspective on the societal changes that will be needed to make capitalism consistent with sustainability.  Whatever you think of Al Gore (always beware when an author talks about "We are once again facing one of those rare turning points in history," whether its Newt or Al), this piece is well worth reading to see the underpinnings of his arguments. 

Gore focuses on two main issues: externalities and short termism.  He argues that we need policies to establish a fair price on externalities.  An example would be a carbon tax to account for the environmental and national defense costs generated by our use of certain forms of energy.  Gore would make sweeping changes in business practices: expand corporate recruiting to include the full triple bottom line, dump quarterly earnings reports and realign incentives for top executives so that they are focused on the long term. 

My take: I see eye-to-eye with Gore in terms of needed changes in executive pay.  I also believe in taxing goods that impose negative externalities on society, but I am not sure how one would determine a "fair" price.  Economic research has not converged to a single, simple answer.  I also was puzzled as to why Gore wants corporations to produce more information about societal and environmental impact in their annual reports but he then wants them to reveal less information by ditching quarterly reports.  Let's keep the quarterlies, but make sure they are not driving CEO pay. 

Thursday, December 15, 2011

Privatizing dormitories

This week the University of Kentucky announced that it was going to transfer all of its dormitories to a private firm.  Do not be surprised to see other universities (maybe even NC State?) move in this direction soon.  Most dorms were built for the boomer generation in the 1950s and 1960s and let's just say they need some work.  Money for new construction or modernization is scarce, especially in states with significant pension and retiree health care obligations.  Privatization gets UK out of a business that is poorly aligned with its core competencies of teaching and research.  Most universities have exited the bookstore business.  Perhaps privatizing dorms is the first step toward getting out of the property management business altogether.

Monday, December 12, 2011

Dallas Fed chief: bust up TBTF banks

Richard Fisher, CEO of the Dallas branch of the Federal Reserve, gave a blistering speech a few weeks ago at Columbia University about TBTF (too big to fail) banks.  After the dust has settled from the financial crisis, we have fewer big banks that are all now much bigger than before the crisis.  Small and medium sized banks are routinely allowed to go belly up, so why not the big ones?  Fisher takes note of the traditional argument -- that the big banks are so tightly interconnected with each other that a failure at one bank could take down others. 

Fisher thinks that the increased capital requirements under Dodd-Frank will help some.  But he does not think it is enough:
Yet, in my view, there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit.  As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these institutions into more manageable size. More manageable not only for regulators, but also for the executives of these institutions. For there is scant chance that managers of $1 trillion or $2 trillion banking enterprises can possibly “know their customer,” follow time-honored principles of banking and fashion reliable risk management models for organizations as complex as these megabanks have become.
Now this is coming from a Fed branch president/CEO, not someone from Occupy Wall Street.  I wonder if any of our presidential candidates will pick up on this.

Friday, December 9, 2011

Hiring practices at elite firms

Just came across a blog entry by Bryan Caplan who summarizes fascinating research by Kellogg's Lauren Rivera on hiring practices at elite firms in consulting, law and investment banking.  Rivera interviewed 40 hiring managers in each of these industries.  Her major findings:
  1. Most resumes land in the trash
  2. There is no standard rubric used to evaluate candidates; each manager uses his/her own criteria
  3. Having a degree from a super-elite Ivy League school matters a lot; GPAs not so much
  4. These credentials are important, but not because the super Ivies provide a better learning experience.  Instead the fact that a job candidate survived the admissions process at Harvard or Princeton was taken as a signal this person was smarter or more able.
  5. Extracurriculars matter as well, especially if you achieve elite status in that regard (e.g., don't just swim at the gym, instead be an Olympic swimmer)
So do not be surprised if you get dinged by McKinsey.  Apparently even the top "public Ivies" like Michigan and Berkeley are considered second tier by these elite firms. 

Monday, December 5, 2011

Why airlines now charge for baggage

Simple answer: taxes.  As a Saturday article in the N&O indicates, the U.S. Department of Transportation is concerned that it is losing tax revenue because airlines have started charging fees for checked baggage, in-flight meals and services, or aisle seats.  DOT maintains that ticket prices have held steady or even slightly decreased whereas airline revenue from the ancillary fees has steadily increased.  This has enabled airline revenues to increase while tax revenues have fallen off.  As an airline consumer, these extra fees are often annoying, but if pillows and blankets were taxed at the same  rate as the flight itself, the airline would have no incentive for a la carte pricing. 

This can explain why airline pricing concepts have not been adopted in other industries.  Hotels sometimes charge for internet usage, but not for soap. 

Saturday, December 3, 2011

Not so good news on unemployment after all

WSJ headline: "Jobless Rate Nears Three Year Low."  At first glance a drop of unemployment from 9 to 8.6 percent would seem to be a welcome development.  But a reduction in unemployment does not necessarily mean an equal increase in employment.  The reason: people stop being classified as being unemployed if they quit looking for work. 

As another WSJ blog post shows, the number of unemployed persons (as measured by the household survey) fell by 594k and roughly half of those got jobs and the other half dropped out of the labor force.  But were there really nearly 300k new jobs?  The more reliable employer survey indicates that payrolls grew by a much smaller 120k.