MIT Sloan School of Management News Briefs

News Briefs offers you timely leads about research and other work by MIT Sloan faculty that can help you with stories you are developing now — or might be developing in the future. Please contact us if you'd like further information about either a topic or its author.

April 2010

Simon Johnson warns of the next financial meltdown
New book calls for breakup of nation's biggest banks

In a new book, Johnson warns that a “new financial oligarchy” threatens not only the nation's economy, but its political core. In 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon Books), Johnson provides “the back story” for the 2008 financial crisis and for the issues now being raised around financial reform. He concludes that a second financial shock is inevitable unless the financial and political stranglehold held on Washington by the nation's biggest banks is broken. More >>

Gordon Alexander on Insufficient Risk Management Measures
Current risk management measures insufficient to minimize chance of future global crises

The current risk management system for international banks is insufficient to prevent large losses of capital, according to Alexander. In his research on the current regulatory framework for trading books — which utilizes Value-at-Risk and Stress Testing to assess downside risk and to determine capital adequacy — he found those measures to be inadequate to prevent future economic turmoil. More >>

Leonid Kogan on the downside of innovation
Innovation can be harmful to older workers

While innovation benefits the overall economy with increased output, consumption, and wages, it also poses significant risk for older firms and workers, according to Kogan. It increases competitive pressure, reduces profits of existing businesses, and erodes the human capital of older workers. Those workers are less able to adapt to new technologies, which reduces their wages compared to their younger counterparts. Applying this concept of a “displacement risk factor” to the measurement of risks and financial returns, Kogan says, “Innovation is good for the overall economy, but it does more good for some than for others. We need to understand the allocation of resources across the population and not just rely on the average, aggregate numbers.” More >>

PJ Lamberson on the limits of network strategies
Sometimes more connections actually discourage people from buying an idea or product even if it is something they will like

To win public favor, many businesses, advocacy groups, and other organizations are looking to networks. Marketers use Twitter, Facebook, and other social networks to expand connections. But simply adding links to a network may not be the best way to gain adherents, according to MIT Sloan School Visiting Assistant Professor PJ Lamberson. Under some conditions, more connections may actually hinder adoption of a product or technology or idea—even if it is something people will enjoy, Lamberson found in his research. "It's kind of surprising," he says. "We would have thought that adding connections would always help something good spread." Lamberson reached his conclusions by building a mathematical model that simulates the complex ways that people behave when they consider whether to adopt a new technology. More >>

Robert Akerlof on how managers stay in charge
‘If you have authority, it's in your best interest to bolster it'

How can a company make sure its employees are working as hard as they should, even when the big boss isn't around? For managers who are trying to establish—and perhaps more importantly maintain—authority, Akerlof says that the keys are: to give employees simple, straightforward orders, to reference rules from HQ, to resist hiring overqualified job candidates, and to pay workers a fair wage. More >>

Denny Ellerman on Pricing Carbon
New book calls European Union's attempt to limit CO2 emissions a success

The European Union's Emissions Trading Scheme — the first attempt by any group of nations to establish a hard limit on greenhouse gas emissions — was a success, according to a new book, Pricing Carbon, coauthored by Ellerman. Studying the scheme's “trial” period from 2005-2007, he found that despite several problems, emissions were ultimately reduced and a mechanism was put in place for more ambitious reductions over time. “Europe has done more than any other group of nations to put in place an effective limit on greenhouse emissions and a lot of other countries like the U.S. are closely watching how this plays out and debating whether to set up similar systems,” he says. More >>

Arnoldo Hax on Corporate Strategy
Delta Model focuses business on customers not competitors

In today's challenging economic environment, finding ways to differentiate and grow a business is more important than ever. In a new book, The Delta Model, Hax presents a fundamentally new approach to strategy focused on the customer rather than competitors. Based on more than 30 years of research, teaching, and consulting, Hax offers a unique perspective on management strategy as well as practical tools to help executives successfully implement the Delta Model into their organizations. More >>

Juanjuan Zhang on how de-marketing strategically manages buyers' expectations
Deliberately discouraging demand helps a company build its brand image

De-marketing — an economic term that refers to purposeful demand-reducing activities — often increases the appeal of products because they're perceived as scarcer. According to Zhang, sellers also use de-marketing techniques to improve customers' assessments of a product's quality. “Heavy marketing raises expectation of early sales, so a lukewarm buyer response despite a lot of promotion casts doubt over a product's quality,” she says. More >>

Joseph Hadzima links intellectual property strategy to venture capital success
Firms with solid IP strategies fare better in capital markets

Companies that have slashed their investments in intellectual property due to the recession may end up lagging behind those that have maintained and properly planned their IP strategies, according to research by Hadzima. He found that companies with solid patent portfolios were far more successful at attracting venture capital than those without them. But patent applications alone are not enough — companies must also develop a clear intellectual property strategy. More >>

John DeTore warns about loss of investment research capacity
“Dismantling” of fundamental research jeopardizes economic growth

A lasting consequence of the financial crisis is that many Wall Street investment houses and other financial sector firms have greatly reduced their capacity to do active research about companies, says DeTore. As a result, portfolio managers and others lack the informed guidance they need to make investment decisions, which in turn can leave the nation's businesses less able to raise the capital they need to advance innovations and products that fuel economic growth. More >>

Alessandro Bonatti on Internet advertising
Better technology increases competition for profits

Retailers and others can save money by opting to advertise online rather than through more traditional media, but they may not generate the business they anticipate. That's because the same search and other technology that has enabled advertisers to target particular audiences has also created greater on-line competition for the same audience, thus reducing the profitability of advertising on any targeted web site. More >>

John Sterman on Global Warming
Copenhagen Climate Summit agreement inadequate to reach emissions goal

The proposals under consideration in the negotiations to produce a global climate treaty are not only inadequate, they could lead to a catastrophic rise in global warming, according to Sterman. A partner in ClimateInteractive.org, he helped create the C-ROADS climate policy simulation model and Climate Scoreboard that measure the long-term effects of various proposals for emissions reductions discussed at the Copenhagen Climate Summit. He maintains that even if all the commitments for emissions reductions made at the conference were fully implemented, the expected rise in temperatures would still cause potentially catastrophic consequences to ecosystems, the economy, and human welfare. More >>