On writing

My brother-in-law, an ex-banker and a journalist, sent me the following about Bertrand Russel's thoughts on writing. Thought some of you might like it:

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"First: Never use a long word if a short word will do.

Second: If you want to make a statement with a great many qualifications, put some of the qualifications in separate sentences.

Third: Do not let the beginning of your sentence lead the reader to an expectation which is contradicted by the end.

Take, say, such a sentence as the following, which might occur in a work of sociology: " Human beings are completely exempt from undesirable behaviour-patterns only when certain prerequisites, not satisfied except in a small percentage of actual cases, have, through some fortuitous concourse of favourable circumstances, whether congenital or environmental, chanced to combine in producing an individual in whom many factors deviate from the norm in a socially advantageous manner." Let us see if we can translate this sentence into English. I suggest the following: 'All men are scoundrels, or at any rate almost all. The ones who are not must have had unusual luck both in their birth and in their upbringing.' This is shorter and more intelligible and and says just the same thing. But I am afraid any professor who used the second sentence instead of the first would get the sack."

(Portraits From Memory London: Allen and Unwin 1956)
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On Tenure

No matter which way you look at it, tenure is a political process, and so it perpetuates the political astuteness of senior faculty (unless, of course the culture of the place makes the process apolitical). After all, the tenured are those who have been astute enough to play the right tune to please the committees. This holds irrespective of whether the university is "liberal", as some would allege, or "conservative" as some can be (believe me, there are plenty of those too).

I served on the tenure committees at SUNY Albany, and as department chair I had to put faculty up for tenure and defend my decisions before the tenure committees as well as the deans. Having worked with programs involving more than a dozen departments (from over half a dozen schools) across the campus my experience was that the quality of the tenure candidates, be they liberal or conservative, are strictly a function of the quality of "senior" faculty. Mediocre senior faculty perpetuate mediocrity, and meritocratic senior faculty perpetuate meritocracy. Both mediocrity and meritocracy are self-perpetuating. This means every tenure case is crucial, and even a very few poor tenure decisions can sink the culture and the reputation of any department.

Having served at many universities, my experience also has been that business schools, especially in accounting,  almost always push mediocre candidates for tenure based on the  argument that it is difficult to recruit without paying exorbitant salaries to incoming faculty.  That, however,  is a recipe for disaster and for long term sinking of productivity. There was a time when I advocated closing a department rather than following the convenient recipe, but then I am sure my colleagues suspected I was snorting something. (In fact that was the rule a long time ago even at SUNY Albany, which shut its Nursing school some time before I went to Albany).

If the tenure decisions are right, there should be no productivity problems provided the university provides a path for those at the tail end of their careers when the productivity is likely to taper (through administrative appointments). That was the presumed rule, at least until recently (Read Rosovsky's fascinating book "The University: An Owner's Manual"). Now, however, administrative positions in the universities have become an alternative career path with the tenure process serving as just an obstacle.

That makes a mockery of the whole tenure process.

In my ideal world, unless one acquired an administrative position at the tail end of one's illustrative career, one would lose tenure at appointment to an administrative position. This also will take care of the present situation where most senior administrators play the musical chairs in a game where no chairs are removed whenever the music stops, and so it is the same set of characters in the game.

I have serious doubts post-tenure review improves the situation because it introduces just one more political stumbling block, penalizing the most precious resource of productive teachers at the tail end of their careers: time.

The only way to solve the problem is to have a culture of productivity (not just in publications that no one reads) in the departments, and then to  defend it as if the department's life itself depends on it.

On M ichael Lewis's latest book and High Frequency Trading

I have not red Michael Lewis's new book (I am a fan of his, and have used some of his older books as texts in my courses before). However, I have read the recent articles in the press about the book.

I do not find any logical arguments there specifically against high frequency trading. On the other hand I do see valid arguments against a whole host of nefarious practices on Wall Street such as front-running, preferential access (at a fee) to flow of orders, investment banks running their own private exchanges (dark pools), adding extra decimal places to pricing, etc. I also see a bunch of bogus arguments such as investments in high tech (use of private networks with very low latencies), superior algorithms, etc.  They are bogus because the alternative is to use ancient technologies that can not support the trading volume on the market and can not facilitate liquidity, the main reason for the very existence of markets.

As long as the economy follows the power law distribution for everything there will always be some using high-powered computers and some, at the opposite end of the spectrum, using the abacus. The solution is not to slow down the adoption of newer technologies but to provide the incentive to adopt such technologies. The SEC has not been doing its homework well when it comes to market technologies. SEC should look at everything in terms of ensuring equitable access (not necessarily equal) to order data and an impartial market clearing system.

 

High frequency trading is a red herring. The culprit is some one else.

In the US, until recently, the stock trading was concentrated in a handful of exchanges, but the market was not fragmented in that VERY few companies listed themselves on more than one US stock exchange (exceptions include HP, and Charles Schwab). With the development of the dark pools, the market got fragmented. There is nothing wrong with such fragmentation per se because it does provide some benefits: increased competition, and innovations in trading. However, it does have certain problems: lack of transparency, greater search costs, etc. as long as there is no single national market information system.

It is the lack of transparency that makes the fragmented system inherently unfair. They are called "dark" because of this; others haven't a clue what you are doing. The main purpose of such pools is to keep what they do a secret while having full information about what others are doing.

In the old days, when a very large order arrived at NYSE and there was a reason to suspect lack of liquidity leading to adverse market reaction to the trade, the order would be sent upstairs (to the ornate board room above the exchange, for those who have seen NYSE) or elsewhere, where in smoky rooms decisions would be taken on how to execute the order without upsetting the markets. That too, in a sense, lacked transparency, but those who indulged in that had a personal reputation to protect.

To repeat, high frequency by itself does not cause harm. What does cause harm are all the aspects of trading and execution that lack transparency because of artificially created information asymmetries. SEC should be taking a closer look at those factors rather than letting us move back to the abacus age by banning HFT altogether.

On the pathetic status of Management Accounting.

I realise the value of a management accounting course in MBA programs as well as the value of hands-on experience in industry.

I started my career as an industrial engineer doing what are really cost management tasks, and later when I entered accounting academia taught mostly management accounting topics for the first five years. The time period  between my time in industrial engineering (1968-72) and accounting academia (1977-) was a transformative period for management accounting. 

First, all illusions of accounting in a manufacturing environment just about disappeared  from management accounting except for a lot of hand-waving about manufacturing. When I entered industry cost accounting was a very new term (it used to be referred to earlier as Factory Accounts, a relic of classic British understatement). Collateral to this was the dumping by management accounting of all aspects of factory accounts, such as cost engineering & estimation, project management, inventory management, and all accounting aspects of operations management,... These were precisely the  parts that were grabbed by industrial engineering. This transition was already underway when I started my career in industrial engineering. Those days I was happy because my then chosen avocation was becoming more attractive. Now I feel more ambivalent because the accountants lost important skills.

Second, management became a superficially scholarly field. Outright plagiarisation (I say so because it is questionable if the work shed any new light on our domain enough to impact practice)  of work in Economics on principal-agent models and statisticians' models of decision-making under uncertainty  did not really hold our interest except for a fleeting moment in history.

Third, we gave up modeling as a way of studying the property of operational systems. With this went the idea of rigour in  representation and careful attention to assumptions. We substituted them with impressive vocabulary. Since such modeling is the staple of engineering disciplines, they moved into what was traditionally our domain. Today, the most rigorous courses in cost/management accounting are to be found in engineering and not accounting. You put an industrial engineer even in a service operation and (s)he can be productive very quickly. On the other hand you put an accountant in a manufacturing environment and (s)he will quit in frustration soon.

Fourth, we moved our attentions up Bob Anthony's hierarchy from operational to management controls to finally strategic control. In this progression we also ascended to stratosphere in terms of vocabulary but not in the relevance to practice.

Today, if I were running any enterprise and had to hire a cost accountant I would any day prefer to hire an engineer with a good appreciation of costing rather than an accounting with less than rudimentary appreciation of engineering. 

On banned Ted Talks.

Rupert Sheldrake is a biochemist, cell-biologist, and a plant physiologist. A past don at Cambridge, he is a Darwinist. I would not write him off lightly as some probably would.

True, there is some skepticism in science but probably not as much for its own good these days. And there is a tendency to make fun of anything not in conformity with "accepted" "scientific" theology. Perhaps science has become far too arrogant for its own good? As Sheldrake has observed,

"The idea came to me in a moment of insight and was extremely exciting. It interested some of my colleagues at Clare College – philosophers, linguists, and classicists were quite open-minded. But the idea of mysterious telepathy-type interconnections between organisms and of collective memories within species didn't go down too well with my colleagues in the science labs. Not that they were aggressively hostile; they just made fun of it. Whenever I said something like, "I've just got to go and make a telephone call," they said, "Ha, ha, why bother? Do it by morphic resonance!." (See http://en.wikipedia.org/wiki/Rupert_Sheldrake).

 The problem is not that science has not claimed that it is imperfect, but that it often behaves as if only it already has the answers to any questions that can be asked. That is religion, not science. There was a time when science believed in flat earth or that humans are only a few thousand years old. And those who challenged the existing paradigm were condemned as heretics.

All scientists in history have had to cope with making peace between science and the possibility of phenomena that the existing stock of scientific knowledge is unable to explain. Newton believed in a monotheistic God who created everything. But when he seriously considered dropping out of studies to avoid ordination required for graduation. Fortunately for him, the statute was changed to provide dispensation from that duty. In his tome, Philosophae Naturalis Principia Mathematica, Netwon wrote:

"When I wrote my treatise about our Systeme I had an eye upon such Principles as might work with considering men for the beliefe of a Deity and nothing can rejoyce me more then to find it usefull for that purpose." 

(See http://en.wikipedia.org/wiki/Isaac_Newton's_religious_views).

Scientists such as Richard Dawkins, on the other hand, have made a different bargains for themselves. The main difference is that it was far more difficult in the old days to say something that would be regarded heretical. We should not make it difficult more difficult today for some one to say something that the scientists consider heretical, without compromising on the requirements of evidence (or proof).

I am not surprised that TED banned this talk simply because its allowing it publicity would be like some one publicizing Galileo when the church was against it. TED also has banned many other talks, including one by Nick Hanauer, a billionaire advocating higher taxes for the rich, one by Sarah Silverman for expressing a plan to adopt a retarded terminal baby, and Graham Hancock's talk about the transformative impact of the drug ayahuasca on him.

As long as the talk does not insult  one's intelligence or create social disorder I do not see why TED should ban any talk.

On double-blind and triple-blind refereeing in journals.

Triple-blind refereeing would have been a great idea forty years ago. I am not sure it will work today for the following reason.

Some feedback on one's research well before the paper is sent to the journal is very important to most researchers. Most authors therefore publicise the paper in limited circles, say one's friends or a small social network of   researchers in the same area. Over time, this social network evolves around one or two very influential people (usually either politically active in the area, well connected, or editors/editorial board members). so, irrespective of the double- or triple- blindness of the review the review in reality tends to be far less than blind. Also, by the citations in the paper under review it is not very difficult for the reviewers to guess a very small set of people from which the author(s) must come.

I learnt the above very early in my career (I may have mentioned this in earlier posts). My first year out of PhD program I wrote a paper and included it in the school's list of working papers. I did not know that the school sent copies of working papers to all AACSB schools. A few months later I was horrified to find a citation to the working paper in one of the most prestigious journals in the field. Soon thereafter, I received a message from a wellknown academic in the area that the paper had good ideas and "let's work on it". I did not respond because the paper was essentially complete. A few months later, I sent the paper to another prestigious accounting journal for publication. My bad luck, the paper went to the same lets-work on-it academic. The review essentially said that idea was stale because the working paper (which included results in theorems/lemmata as well as their proofs) was already cited (the other review was a conditional acceptance subject to revision). I was, however, lucky in that the journal editor was open-minded enough to send it to a third reviewer, to break the tie, who accepted it also conditional on minor editorial changes. To date, it is one of my papers that has been cited in very diverse fields (Management Science, accounting, Operations Research, Finance, Space Research, Economics, Game theory,...), but hardly in accounting, even though the topic had to do with accounting.  Most fascinatingly, it was cited by some operations researchers who I do not know but were heroes of mine when I was a doctoral student in Operations Research.

Researchers in lesser known schools will ALWAYS be at a disadvantage because they are usually not in the tightly-knit small social networks whose membership is usually by invitation. This perpetuates the inequalities. These social networks are our equivalent of the one-percenters.  The rest of us peasants are the 47 percenters in their opinion. THE POLE OF ACADEMIC RESEARCH, ESPECIALLY IN ACCOUNTING, IS VERY GREASY, and those who reach the top are usually those who hang on to the coat-tails of those little social networks.

I do not mean the above in a disparaging way. Such networks perform a very important function: mentoring of recent entrants in the field.


I  always tell my doctoral students that the trick is to get into those small social networks as early as they can. Hard as it is to get into those networks, persistence usually pays off. I realise that this is a very cynical view of the world, but then I hate to have my students suffer.

One can hope that the growth of the internet  and the avenues for dissemination of research PRIOR to submission (such as SSRN, citeseer, arxiv.org,...) will provide some solace to the rest of us. On the other hand, much of such good research will get cited once or twice and then forgotten because of the pressures to cite people central to the area of research. The academic equivalent of rich-getting-richer. (In this whole post must apologise to the French Sociologist Vilfredo Pareto, the inventor of power law in the context of income distribution,  for stating what is clearly obvious; the world is mostly an implementation of power laws).

On Accounting and Finance.

It is the better developed theory that, in my humble opinion, differentiates Finance from accounting.

 When I started my doctoral program way back in the early seventies, finance was in its infancy. I remember taking my first doctoral finance seminar where the textbook was "The Theory of Finance" by Fama and Miller. The first part of the book (which is essentially elementary micro-economics with the time variable thrown in) was very beautifully organised, but the second part  where stochasticity in finance is added in, was vague, far too tentative, and thoroughly disorganised; the book essentially fell apart towards the end. At least it felt that way to me since I had arrived with a whole load of courses in probability theory and stochastic processes.  Finance theory then was just being refined, and Fama/Miller text had made a premature entrance. (I think Fama would have done better if only he had listened more carefully to his illustrious dissertation adviser, the late Benoit Mandelbrot).

Then for twenty years I had virtually no interaction with Finance until I was asked to teach a graduate course in Accounting Theory. A Finance colleague asked me to take a look at Luenberger's book on Investment Science (as the title suggests, it deals with only one aspect of finance). I found the book fascinating. Somewhere along the way, Finance had found itself. That can not happen without good theory.

Unfortunately, accounting, in my opinion, has yet to find its moment of epiphany. Until then, we all will be plodding along, pretending that we have a good understanding of our domain.