...And I'm Back

After entirely too long of a hiatus, I've made my return to the blogosphere. For those of you who keep up with my blogs: I apologize for the long time in between posts. Intensely studying for finals lead to an overwhelming need for a break from most activities that require some sort of analytical thinking. But now I'm back, mentally well-rested and eager to blog. Stay tuned for upcoming posts.

The other side of the story: A case for bonuses

Bonuses have been a popular topic of conversation throughout the recession. Specifically, many people have complained about the excessive nature of the bonuses paid to top executives on Wall Street. Although I agree that it is crazy for anyone to take home a $25 million dollar bonus, I fully understand why bonuses are such a crucial part of the financial services industry. An article titled "Greed is Good" provides a great overview of the important role that bonuses play on Wall Street. Essentially, its important to understand that bonuses are based upon performance and as such they provide strong incentives to employees to turn out their best output. Additionally, the way that bonuses are structured means that they are often paid to those who make things better, not worse, thus ensuring that there is minimal/no reward for poor performance.

Aside from providing incentives for employees to produce outstanding work, bonuses the main way that banks compete for top talent. Banks choose to attract top talent via performance based incentives which reward money whereas Silicon Valley firms choose to compete for talent by offering unique cultures which often come with offices filled with innovative perks (Nintendo Wii's, pool tables, you name it). If banks are going to, and need to, ask employees to work long, tireless, stress-filled hours they have to provide them with the right incentives and let's be honest, money talks. I think it helps to frame the situation like this: How do engineers decide which jobs to take in Silicon Valley? It's a complex algorithm involving money, friends, brand name and free food. How do those who want a career in finance make their decisions? Its a combination of brand name, opportunity for advancement and the strength of the pay for performance system. In the end, I feel the fundamental logic behind bonuses is strong, its just the nominal dollar amounts that needs to be fixed.

Facebook: A Business Perspective

Facebook is an interesting company/website/service/way of life—take your pick on what you want to call it. Anyway, I wanted to take some time to briefly talk about Facebook from a business perspective. Facebook is about to register its 200 millionth user (if it hasn't already by the time I post this), yet has struggled to find a way to profitably monetize its user base. Apparently, Facebook's CEO, Mark Zuckerberg, says the company is focused on growth rather than making money at this point. To be able to do so is clearly a luxury during today's rough economic times. Anyway, an article titled "Is Facebook Growing Up Too Fast?" talks about this issue plus more by providing a thorough in-depth analysis of the company's performance. After reading the article it seems like Facebook is a little confused about its identity as a company. Its objectives seem to be a mix of Google's mission complimented by Twitter-like features both of which are made possible by their government-like control over our information as users. Facebook primarily makes its money through ads, but it's hard to fathom how much revenue they are generating. Think about it, how often do you click an ad on Facebook? If you're like me, that's almost never. In fact, a former colleague of mine at Google commented on his status the other day (a Facebook reference during a Facebook critique is a little paradoxical, I know) that he finally got an ad that he could relate to (a targeted ad) on Facebook. I'm not sure how long Facebook has to perfect its advertising system before investors start to ask for a return on their investment, but I hope its sooner rather than later—I spend too much time on Facebook anyway.

The Backlash Effect

I recently read an article, rather watched a video, detailing a marketing phenomenon known as the Backlash effect. The effect essentially describes how the early adopters of a product react after the mass market begins to use the same product. Early adopters are characterized as such because they are the ones in society who always want to be on the cutting edge of innovation. They derive a high sense of utility via the feeling of exclusivity they garner from being one of the first to use a product, even though this often means paying a premium. However, once a product reaches the mass market, Early adopters react negatively towards the originally product, hence the term backlashing. As such, companies must conduct a thorough cost-benefit analysis to determine if it is worth reaching the mass market with their product. The idea of backlashing is an interesting social and psychology phenomenon, which allows us a peak into the complex world of consumer psychology. Its an important concept that all companies, organizations and clubs must consider when expanding their consumer base. Two professors here at Wharton have done the quantitative research that supports this idea. Here's a short, yet interesting video regarding the concept:

The U.S. Health Care System -- We need to know more

Amidst today's rampant talk about economic policy, it is easy to lose sight of the fact that our country is undergoing an unprecedented reform in another important arena: health care policy. The expansion of health care benefits has been a primary issue for President Obama and his administration since day one. The US health care system is currently a complex, capitalistic-minded structure, inundated with misaligned incentives and gross cases of information asymmetry. Additionally, the system needs to be modernized. With the advent of products such as Google Health, (no plug intended) people will be able to have full knowledge and control of their health information—a crucial step for both individuals and the system. However, instead of the knowledge lying with consumers, it sits in the hands of health care companies, leaving consumers with a lack of understanding of how to choose, finance and use their own health care. It's a sad case that so many people don't fully understand the health care system, including myself. Consumers need to become educated about the costs and benefits associated with health care decisions. An article title "Why Consumers -- Not Companies -- Should Make Health Care Decisions" speaks on this sentiment. Whatever changes the new administration makes to our health care, I hope they are able to improve the average person's understanding of the system—it'll benefit us all.

The Rise of the CMO

If today's economic environment has taught students one thing, it's that we need to diversify our skills before we enter the workforce. The light at the end of the "go to school→learn finance→work at a bank→get rich" tunnel has become dim. However, in the midst of the recession, one position, the Chief Marketing Officer (CMO for short) has solidified its importance in corporate America. These complex times has made it increasingly important for companies to understand their consumer base. As such, CEOs have turned to their CMOs for guidance on key issues including shifting consumer behavior and price positioning relative to competitors. An article title "Why CMOs Are Gaining Ground in the Recession" provides great insight concerning this trend. But the main point I wanted to emphasize is the importance of considering other careers. Many people enter finance because they have a thirst for relevance, but its possible, perhaps even necessary to quench your thirst elsewhere.

The Formula Behind the Recession

In today's harsh economic times it seems as though everyone is looking for someone to pin the blame on; finger pointing has become rampant. I don't mean to follow suit but, the other day I read an interesting titled "Recipe for Disaster: The Formula That Killed Wall Street". The article details how a mathematical formula, which was created to simplify the assessment of risk, is at the epicenter of today's problems. I suggest reading it if you want to gain a deeper understanding of the current crisis. Here's the formula: