Value Competition

Final Jeopardy! and Supply Chain, Continued—Continuous Choice between “Confident” and "Timid" Proposals

To make the supplier-buyer scenario described in the last post directly analogous to the Final Jeopardy! betting situation, one needs to convert the dichotomous choice between confident and timid proposals into a continuous choice that parallels the players' decisions to bet anything from nothing to all their money.

Additional specifications for the continuous variable case:

1) The advantage of supplier A is equal to x.  X is a quantity known to both suppliers.  (This condition parallels the known lead that player A has over player B going into the Final Jeopardy! round.)

2) A will win unless B's proposal exceeds A's in value by at least x. (This condition parallels the need of the trailing player in Final Jeopardy! to make up the difference with the leading player.)

3) A and B can both submit proposals on a range from 100% timid to 100% confident.   A 100% timid proposal takes no risk and has a baseline value of 0; a 100% confident proposal takes maximum risk, and has value y if successful and -y if unsuccessful.  All other proposals have an intermediate value; for example, a proposal that is 75% confident has a value of .75y if successful and -.75y if unsuccessful.  (This parallels the ability of both players to bet any or all of their money.) 

4) Y is greater than x.  That is, there is no guaranteed win for A.  (This is equivalent to a Final Jeopardy! round in which the second place player has more than 50% of the leader's total.) 

The continuous variable case is not as straightforward to analyze in rational choice terms as the dichotomous variable case is.  The mixed Nash equilibria are parallel to those described earlier for the dichotomous variable case: The leading player should tilt toward confidence, while the trailing player should tilt toward timidity.

 

 

Final Jeopardy! Betting as a Competition between Two Suppliers—Dichotomous Choice between “Confident” and "Timid" Proposals

Suppose there are two suppliers A and B who are competing to win a contract from a buyer for consulting services.   Supplier A is favored by the buyer (that favoritism may be because of higher quality, a prior relationship, or other factors).  If the suppliers’ proposals are of equal value, the buyer will choose supplier A.   Otherwise, the buyer will chose the supplier with the higher value proposal.   The suppliers compete under the following conditions:

1) The suppliers may submit either a “confident” consulting  proposal for improving the buyer’s operations that covers a wide range of areas or a “timid” proposal that presents more detail on a single area;   

2)  A proposal will be viewed as either  successful or unsuccessful by the buyer;

3)  Confident and timid proposals are equally likely to be viewed as successful;

4)  The probability that a proposal will be viewed as successful is equal for the suppliers and is greater than .5;

5)   There is a positive correlation between the probability that A’s proposal will be viewed as successful and the probability that B’s will be viewed as successful (this condition may be understood in terms of the state of the buyer’s operations being either one in which it is easy to make improvements  or one in which it is difficult to make improvements, with the state being private information that is known to the buyer but not to the suppliers);

6)  The ordinal value of proposals to the buyer is as follows, from highest to lowest:  Successful confident, successful timid, unsuccessful timid, unsuccessful confident.

From the above conditions, one can conclude that the nonfavored supplier B can win in three ways: By submitting a successful confident proposal while A submits a timid proposal or an unsuccessful confident proposal, by submitting a successful timid proposal while A submits a confident or timid proposal that is unsuccessful, or by submitting an unsuccessful timid proposal while A submits an unsuccessful ambitious proposal.

Now, the rational choice analysis: Assuming A and B are both acting to maximize the probability of winning the contract, both have an incentive to play a mixed Nash strategy that cannot be exploited by the other supplier.   A numerical example: Assume the overall probability of a successful proposal is .75 and that the conditional probability the other supplier’s proposal will be successful if one’s proposal is successful is .8.  In that case, mixed Nash for the favored supplier A is to make a Confident proposal C with p = 6/7 = .857 and a Timid proposal T with probability p = 1/7 = 143.  Mixed Nash for the nonfavored supplier B is to make a C proposal with p = 1/7 = .143 and a T proposal with probability p = 6/7 = .857.

The intuition behind the high level of timid proposals from the nonfavored supplier B in the mixed Nash equilibrium for the two players can be described as follows: Intuitively, the favored supplier A should mostly submit confident proposals, which are likely to be successful and to guarantee the contract for A.  Knowing that A will mostly be confident, B should mostly be timid.  If A submits an unsuccessful confident proposal, B will win the contract for sure with a timid proposal.

Too Big to Fail through an SC Lens

Let's see how we can apply the basic three-part SC public policy framework (1. Make-Long Term Relationship-Spot Market-Fuhgeddaboudit; 2. Dictate-Negotiate; 3. Formal-Informal) that I proposed in an earlier post on ed reform to the "too big to fail" issue that has risen to the fore since the 2008 financial crisis...

Current arrangement: USG under Dodd-Frank is trying to regulate risks created by large financial institutions. The Volcker Rule against proprietary trading and the proscription of systemic risk associated with big banks are two major approaches under the law. In SC terms: USG is treating the big banks as suppliers with which it has a close, complex relationship rather than as firms in the private-sector economy with which it has a more removed “spot market” or "fuhgeddaboudit" connection. On part 1, USG is thus in an "LTR" mode.

As to part 2, the mode is primarily “Dictate”; although the reality of legislation and regulation involves deal-making, in theory Dodd-Frank and the regulations being drafting to carry it out represent commands to the big banks. As to part 3, there is a mix, with a tilt toward “Formal.” Although the law and regulations are designed to be fact-based, rule-oriented, and formal in major respects, there is also contemplation of a more informal, trust-based relationship between the regulators and the banks.

The payoff of the analysis: By thinking of the choice as one between “LTR” and “Spot” rather than between regulation and deregulation, one gains a different perspective on the question of whether to require banks to be small enough that the USG can credibly commit to not bailing them out. In the standard terms of regulation vs. deregulation, such a requirement that banks be small is regulatory, and hence is likely to be questioned by more market-oriented analysts and politicians, even while it may at the same time be supported on the grounds that it embroils the USG less in the banks’ affairs. In SC terms, the analysis is simpler: A requirement that banks be small is equivalent to a firm carrying out a “Spot” policy that it will not be dependent on any single supplier or set of suppliers whose collapse would cause the firm serious problems. A “Spot” policy of avoiding dependence on any single supplier may or not be a good idea for a given firm to implement, and it similarly may or may not be a good idea for the USG to implement with respect to financial services. The SC lens does not solve the problem of “too big to fail” fin reg. But by seeing the issue through an SC lens, a new perspective is gained that may help in clearing away political cobwebs and in gaining fresh insights into sensible fin reg policy.

Honor Codes for Business Students

I'm sorry to have missed yesterday's Paduano seminar by Linda Trevino, but happy to have read her in- press AMJ paper with Joel  Gehman and Raghu Garud, "Values Work: A Process Study of The Emergence and Performance of Organizational Values Practices" while riding up to see my parents for the holiday weekend.   In addition to liking the paper's performative ethnographic approach--and being highly positive about its appearing in AMJ, which I've always thought of as a bastion of more traditional empiricism--I was highly interested in the discussion of the introduction of an academic integrity honor code at a public business school.  That's partly because I have an RBS colleague, Don  McCabe, who for years has been among the leading figures in the honor code field, both as an empirical researcher and as a nuanced but committed advocate of honor codes.

Personally, I've always been ambivalent about honor codes in the context of a large public university like the one I teach in as opposed to an old, rooted private institution like Princeton, Don's alma mater.  I'm attracted to the ideas of student solidarity and commitment to honesty, but I'm doubtful about the practicability and desirability of turning over responsibility for ethics monitoring to students and of having a strong focus on the negative or "stick" aspects of reporting and punishing honor code violations. 

Reading Gehman, Trevino & Garud triggered a new thought/reaction on the honor code issue: I like the idea of incoming full-time MBA classes choosing on a class by class basis to commit to an honor code culture or to an alternative ethical culture involving individual and team commitment to ethical projects in various domains, or to both the honor code and ethical projects cultures.  Perhaps there would also be a way to make this work for undergraduates as well--there I think it could happen best not so much across the board for RBS in general but in particular settings such as the undergraduate SCM major I help administer.

 

 

The Division of Leadership between the Visionary and the Executive

Some morning-or-two-afterthoughts in relation to the selective altruism paper...possible material for including in a revised version for journal submission...

First (and maybe last) thought of the day: Does the selective altruism analysis cast any light on the standard business practice of having both a big picture CEO and an executing President (as well as having a policy-making board and employees of the firm; corporate life can be described as a nested series of visionary-executive combinations), and on parallel practices in politics (e.g., political appointees and career employees in agencies) and in the government and non-profit sectors (e.g., policy setting school boards and implementing superintendents)?  

A subquestion of particular interest to me as an administrator in a business school department that has a major concern with operations issues:  Does selective altruism cast any light on the reality that it is the visionary as opposed to the executive who is at least nominally on top in all these dyads?

Okay...let's think...

Maybe selective altruism does shed light here, at least in regard to the second question.  A key issue with the selective altruism model of leadership, as with others, is whether one can in the end prevail on everything as a leader, or whether there is a division of labor with the preferences of the follower prevailing on plenty of things or even most things.  The second view seems plausible to me for normative and practical reasons.  Selective altruism I believe should take that into account.  Servant leaders and the other types don't simply win by their selective altruism, as in the paper.  Some of the time they actually do wash the feet of the followers.  Otherwise, it is hard to see how in the end all the types avoid collapsing into the masterful leader, who for all his considerable virtues is also a troubling character and whose consistently commanding style should be only one way to lead, not the way.

So, on why the executives report to the visionaries rather than the other way around: It is plausible to me that a commitment to lead based on one or another character type is less abrasive to others when it relates to intangible matters of vision than when it relates to concrete matters of operations.  Relatedly, it is plausible that a character type with a commitment to lead as to vision finds it easier to pass the screen of ethical acceptability than a type with a commitment to lead as to specifics.  The latter type has some obvious advantages in the struggle for life, and we should expect it to be an important character type with a number of variations.  But it is a type that finds it difficult to pass the screen of ethical acceptability.

Another way to put the point: Egalitarian, forgiving, sympathetic, and servant leadership are all readily translated into types of visionary leader that pass an ethical screen, bu are not so readily translated into operational leaders.   The masterful leader is the reverse: very easily translated into operational leadership, but with greater difficulty in passing the acceptability screen. 

One way for masterful leaders to pass the acceptability screen is by getting extraordinary results; that greater pressure on the masterful type to perform to overcome its ethical deficiencies leads to an empirical prediction that the results associated with masterful leaders will be better than those from the other selectively altruistic types.  I hasten to note such an empirical relationship would not necessarily show that organizations should prefer masterful leaders; what the hypothetical relationship would show in my view is that masterful leaders are more likely to get weeded out when they perform badly, not that the type is better at the creation of value than other leadership types.  It does seem to me, however, that such an empirical relationship could lead an organization in that direction; a boss who is masterful would more readily be held accountable all else equal than the other types of selective altruists and thus should be preferred in hiring and promotion.   The counter I take it is that compared to a Smithian sympathetic manager who cares about highest joint value outcomes, the masterful leader is likely to entrench himself and to in fact be difficult to remove.  Accordingly, certain other types of selectively altruistic leaders may wind up being more accountable.

Much as submissiveness and deference are very important parts of our makeups, human beings are nitty about being ordered to do things.  The visionary leader who avoids that type of direct order is thus advantaged as a type over the operational leader. 

Make-Buy, Formal-Informal, and Dictated-Negotiated

Above are three dimensions that apply to purchaser-supplier relations and that can be applied to public policy arguments.

Some applications to public schools and specifically to labor reform possibilities for a school district:

a) Example of Buy-Formal-Negotiated: Contract with an outside provider—say a retooled version of Chris Whittle’s Edison Project--for all or a part of a district’s teaching staff (formal because of need for contract specs; negotiated because a local district will not be able to impose terms on a serious outside provider like Whittle);

b) Example of Buy-Formal-Dictated: Contract with an outside provider in which either the district or the provider can impose terms on the other;

c) Example of Buy-Informal-Dictated: After state law changes to allow doing this, enter into one-year informal contracts with individual teachers with pay dictated by district;

d) Example of Buy-Informal-Negotiated: After  state law changes to allow doing this, enter into one-year informal contracts with individual teachers; at least with good teachers, district accepts teachers negotiating for better pay on their own, or through individual as opposed to union reps;

e) Example of Make-Formal-Dictated: State and/or district power to impose detailed specs on productivity standards that teachers must meet to be retained;

f) Example of Make-Formal-Negotiated: Give union sweeteners to induce them to accept a new contract with detailed specs on productivity standards that teachers must meet;

g) Example of Make-Informal-Negotiated: Keep lockstep pay, tenure, etc., but pitch the many rules of the existing union contract in favor of a much shorter new contract;

h) Example of Make-Informal-Dictated: Eliminate lockstep pay, tenure, etc. along with the many rules of the existing labor contract in favor of a much shorter informal contract with terms imposed by the district.

The ed reform mainstream as reflected in the Department of Education’s Race to the Top and in current state legislative proposals or enactments in Trenton, Denver, and elsewhere is tilted pretty heavily toward Make-Formal-Dictated (with an admixture of Make-Formal-Negotiated to the extent the unions have a seat at the table).  I believe mandating  box e) is a substantial error for reformers.  I suspect that a), b), c), d), and h) are all worth experimenting with as well as e) in order to see what kind of new labor system for public school teachers works best. 

Make or Buy or Fuhgeddaboutit

The trichotomy above is a way to present SC based public policy arguments...

Application to health care...mainstream too heavily tilted toward BUY?  Possible value of FUHGEDDABOUTIT in the form of removing subsidies for private insurance for ordinary health care costs and of MAKE in the form of VA-style health care w/ civil servant doctors providing reasonable if not top-notch coverage available to all who have catastrophic health care costs...

Possible value of SC framework in getting people to think about policy on health care and other issues in a less emotionally invested, ideological way...success of that long-term depends on the framework not being tilted toward the regulatory or the deregulatory side...

 

SC Concepts Applied to Labor and Health Care Policy

Some notes for a brief presentation I'll be doing at our SCMMS department meeting on Friday on applying supply chain concepts to public policy issues:

1) Prominence of finance/econ concepts (e.g., proper incentives)  in public policy discussions--management concepts (e.g., working effectively in teams) also fairly prominent--SC concepts not now prominent--can we advance them?

 2) Example--current controversy in different states--NJ, Ohio, Wisconsin, etc. over government employee unions, collective bargaining, etc.--

                i)  prominence of arguments about bad incentives of high job security, lockstep compensation--finance/econ influence;

                ii) prominence of arguments about the role of internal motivation and teamwork, not just economic incentives--management influence;

                iii) SC concepts are not currently prominent in the back-and-forth on unions;

                iv) One way to apply SC concepts to the debate on employee representation--

                        a) The firm is the purchaser, employees are suppliers;

                        b)  Collective bargaining by employees is like a firm facing suppliers who all combine to fix prices--highly undesirable from the purchasing point of view;

                        c)  Expecting or requiring one's employees to be completely unrepresented is like expecting or requiring one's suppliers to be completely unrepresented--firm may be able to get a lower price, but problems with establishing long-term cooperation, trust with a one-sided relationship in which procurement imposes nonrepresentation on the supplier;

                        d) Putting the two SC points together--neither collective bargaining for suppliers nor      imposing lack of representation for suppliers makes sense.  Better would be a setup in which firms and  government agencies would deal on price with individual representatives--agents, like the agents for     baseball players--for employees who choose to retain them.   That would parallel the way most purchasers deal with suppliers.

                        e) Different SC arguments can be made to support different positions on unions, just as different finance/econ and management arguments can be made.  The point is not that there is one right SC answer but that SC offers a valuable new lens for thinking about the employee representation issue.

2) Second example--current controversy nationally over health care--six options from left to right--Medicare for all/Canada vs. public option vs. government subsidies for private insurance plus mandates (Obama, Romney) vs. current system vs. voucherization (Ryan) vs. marketizing health care by withdrawing government subsidies.

            i) economic concepts central to the debate--also strong presence of moral arguments about health care as a non-market good--some role of management concepts, such as culture--e.g., discussions of how health care providers in Minnesota do not bill as heavily as health care providers in Miami--again, SC concepts are not prominent currently;

            ii) One way to relate SC to the health care debate:

                        a)  Think of the government as a firm, of individuals as multiple purchasing agents within the firm, and of health care providers as suppliers of different kinds of widgets.  The policy issue--what role if any should the firm take in subsidizing or centrally controlling purchasing?

                        b)  One SC point--It would be foolish for the firm to subsdize "purchasing insurance" offered by suppliers or by insurance company middlemen under which employees would prepay for widget purchases--such insurance will jack up costs to the firm because purchasers will face no budget constraint or a minimal one when they buy;

                        c) Extending the earlier point--far from subsidizing "purchasing insurance" for ordinary purchases of widgets, the firm might want to ban its employees from buying it from suppliers;

                        d)  Now assume there are possible disruptions in widget supplies that are disastrous to the part of the firm a purchaser is acting for--these possible disastrous disruptions are comparable to catastrophic medical expenses for an individual;

                        e) What should the firm do about possible disruptions in widget supplies that will be disastrous to parts of the firm?    One SC reply--there is a case for centralizing disruption insurance firm-wide rather than having the individual purchasers all get their own.  The individual purchasers will insure to protect their own function against disaster, which may not be in accord with the firm's interest.

                        f) One SC bottom-line on health care policy, based on the preceding points:  Remove any government support for ordinary health care expenses and create a government catastrophic insurance program.

                        g) SC concepts could be used to generate different policy conclusions on health care.   Again, the idea is to advance SC as a good new lens for people discussing public policy to employ, not to claim that there is one correct SC answer.  Just as policy advocates now use economic concepts to argue for both liberal and conservative health care policies, SC concepts can be the basis for both liberal and conservative arguments.

A Supply Chain Lens for Public Policy

Listening to my colleague Dale Rogers present at today's meeting of the Rutgers Center for Supply Chain Management Advisory Board on Megatrends in Supply Chain--he had good supply chain finance data on accounts payable, accounts receivable, and inventory in a variety of key sectors, as well as points to make on overall economic trends and their implications-- got me interested in the idea of evaluating public policy in major areas like health care reform, education reform, and financial regulation through a supply chain lens.  It strikes me that the discipline may have the right blend of terms, efficiency/optimization concepts, and human factor/relationship concepts to be a salient part of the public policy discussion in a way that it's not now. 

Currently, SCM might come up in the public policy arena in the non-normative, background context of an ISM study of  purchasing--but the discipline is not, it seems to me, in the forefront of public policy discussion the way that finance/economics, law, and, to some degree, management are.  How would it work to analyze public policy through a supply chain lens?   Well...I don't claim to have a clear line, not least because I'm a business law/business ethics person rather than a true SCM person.  My guess is that the right way to think about it is to consider a particular policy area, so let me take a very preliminary stab at that, using health care as the policy area. 

A few potential ways to relate SCM concepts to health care policy:

1.  The mega-debate the US will be having over the next several years or possibly decades on the merits of Medicare as it now is versus the Ryan plan or some other proposal for vouchers strikes me as having interesting analogies to a make or buy decision, with the government having to decide how much to "make" the good of health for an individual internally though something like the U.K.'s NHS versus sourcing or "buying" that good through individual voucherization or through private insurers.

2.  The question of how much to uphold the "pay for everything, with deductibles" employer health insurance system that now prevails in the US health care system compared to "catastropic only" insurance provided by the government or by private firms strikes me as having analogies to inventory size and turn time issues in SCM.  Just as Just In Time, etc. changed inventory practices, reforms might change "inventory" in the health care supply system for the better.

3.  The question of how sustainable the health care system (or a specific health care public policy such as that in Massachusetts or at a particular company) is/isn't over time strikes me as possibly analyzable through an approach parallel to what my colleague Prof. Rogers was doing today with accounts receivables, accounts payables, and inventories.  How bad (or relatively not so bad) are the comparative situations of different countries, or state programs, or individual health insurance plans?--the supply chain finance tools I was hearing about today seem potentially applicable to these policy issues.

 

 

 

 

Queueing and Social Preferences

Recently read a nice concept paper on the above topic by my SCMMS colleague Jamie Sawhill.  What follows are some thoughts on an experiment...

Per the endowment effect (Thaler, etc.), we would expect that the value of moving forward in a queue say one hour is less than the disvalue of moving backward. Per social preferences (Rabin, etc.), the value of moving forward in a queue will in some cases be greater than the disvalue of moving backward. That type of social preferences effect occurs when there is an altruistic (and/or shame and/or social desirability) value in moving back and when the altruistic (or shame/social desirability) disvalue of moving forward is eliminated or reversed.

Which effect is bigger when the endowment effect and the social preference effect clash? The following two scenarios might shed some light on that question:

S1: You are renewing your passport. An electronic message board on the wall says that there is a one hour and fifteen minute wait for service. The board also says that you can receive expedited service in another room with a five minute wait if you pay an additional $x for your renewal at the window.

Q for S1: What is your value for x?

S2: You are renewing your passport. An electronic message board on the wall says that there is a five minute wait for service. The board also says that if you are willing to wait an additional one hour and ten minutes to allow other people to go ahead of you you will pay $y less for your renewal at the window.

 Q for S2: What is your value for y?

The endowment effect predicts that y will be greater than x (because getting to the front is valued less than moving back is disvalued). The social preference effect predicts that x will be greater than y (because moving back helps many people and will thus be attractive for an altruist). The results are...[perhaps experiments with Professor Sawhill will cast light on the question...]