Tag: Faculty

Anne Marie Knott

Though the stock market is strong, company profits are stagnant—a function of a short-term focus that one Olin professor attributes to a slow-down in innovation.

In a Dec. 13 article for Harvard Business Review, Anne Marie Knott attributes the lack of innovation to three trends she uncovered through research she and her collaborators have developed.

Knott, Olin’s Robert and Barbara Frick Professor in Business, blames the “short-termism” on the trend toward companies hiring “outside” CEOs to “shake up” the organization and provide fresh insights; the decentralization of corporate research and development efforts; and a focus on “development,” rather than “research”—or, said another way, too little early-stage innovation.

In the first case, Knott argues that new, outside CEOs tend to lack the technical domain expertise to drive R&D growth. Using “RQ,” or a “research quotient,” as a measure of the return on R&D investments, Knott noted that firms with outside CEOs tended to see a decline in R&D intensity—a ratio of investment to sales—and a corresponding decline in R&D capability.

“In other words,” Knott writes, “the new leader’s disinvestment cut meat as well as fat.”

Further, by moving R&D responsibility from a central unit to separate division managers, firms separate the incentive from the result. Division managers, Knott writes, find that “their compensation is typically based on division profits (which they largely control), rather than on the company’s market value (over which they have little control).”

The result again is a reduction in the firm’s RQ quotient.

Finally, a similar problem plagues firms by lowering their tendency to invest in early-stage technologies and innovations—and for a similar reason: Division manager compensation is tied to division profits.

She cites Procter & Gamble as an example of a company that decentralized R&D from the 1990s to 2008. After a string of market-moving innovations such as the first synthetic detergent (Dreft in 1933), first fluoride toothpaste (Crest 1955), and Febreeze odor fresheners in 1998, “P&G failed to introduce a single blockbuster,” Knott writes.

Read more of Knott’s article on HBR.org.

The below post originally appeared on The Source.

It all started with Sanskrit.

About to go to Harvard as a physics major, Hillary ­Anger ­Elfenbein read a book that had been translated from Sanskrit—by someone humble enough to admit, in the introduction, that Sanskrit was essentially untranslatable.

She then wanted to read it in the original.

She added a major in Sanskrit, reasoning that a liberal arts degree had more to do with critical thinking than career prep. Her study of that language’s orderly universe left her fascinated by Indian culture, which eventually led her to volunteer with a women’s rights group in Calcutta and a health organization in Mumbai (then Bombay).

Which was great, except that in the early weeks, she kept feeling as if people were yelling at her.

“I was constantly convinced that certain ­colleagues were angry,” she says, “because I was misjudging the meaning of intensity.” Luckily, she was primed to notice. By the time she went to India, she had worked at Monitor Company, a management consulting firm. There, she’d ­noticed how much time and effort people put into ­decoding each other’s emotions. They ­scrutinized their boss’s facial ­expressions for feedback; they worked to detect sarcasm or subtext in their colleagues’ offhand comments; they tried, like kids playing jump rope, to figure out when it was their turn to speak. “The psychological ­dynamics in the workplace were much greater ­predictors of the ­success of a project,” Elfenbein says she realized, “than the quality of the analysis.”

For example, Elfenbein’s consulting firm once was assisting a company with divesting a ­business unit and creating decision-support tools to examine the impact of various scenarios. “It was stressful for the company that this business unit was failing,” Elfenbein says, “and the team leader spent a lot of time calming the client before the ­client could sit down to the tools we were painstakingly developing.”

Intrigued by the slipperiness of our emotional language, she returned to Harvard to study for a doctorate in organizational behavior. (She also earned a master’s degree in statistics and completed the course work for the MBA.) Now, as the John Wallace Jr. and Ellen Wallace Distinguished ­Professor at Olin Business School, Elfenbein studies the emotional currents and riptides of interpersonal communication. She’s shared her findings with Congress, high-powered executives, and students. ­

Applications—and implications—crop up in ­every arena of human life. But Elfenbein has a single, overarching goal: fathoming the sense we make of other people’s feelings. When do we recognize them accurately? What subtle ­nuances do we miss? How, especially, do we decode emotion from facial expressions, tones of voice, and body language?

Prof. Hillary Anger Elfenbein with students.

Her students are fascinated by these ­questions—and grateful for the clarity and ­emotional support she offers as they explore. “As a mentor, she blends expert technical ­guidance with compassion and understanding,” says doctoral candidate Elizabeth Luckman. “This makes her not only a great teacher but also a good friend, always willing to take the time to help you wrestle with complex ideas.”

Elfenbein’s been wrestling herself with complex ideas for some time. She’s already published more than 60 scholarly articles spanning psychology, business and medicine. And her work has about 3,000 citations in the Web of Science, an online subscription-based scientific citation indexing service. She could coast for a bit. Instead, “she continues to strive to improve so that she can be influential and relevant,” Luckman says.

Elfenbein gathers some of her data in India and Kenya, because she’s acutely aware of how skewed our understandings are. Until recently, the existing research all had focused on what are called the WEIRD countries—Western, educated, industrialized, rich, and democratic. We have no idea, yet, how much of what’s been learned is universal.

But her work is pointing out how often it’s not.

“She’s done some truly pathbreaking work in ­perception of emotions,” says William Bottom, the Joyce and Howard Wood Distinguished Professor of Organizational Behavior and chair of the organizational behavior program at Olin. “The ability to understand and perceive how people are reacting to decisions, information, policies, potential deals is really fundamental, and Hillary was able to demonstrate that we have distinct nonverbal ‘dialects.’ These dialects make it far easier for us to perceive and understand local emotions—but this is far more difficult communicating across cultures.” In a global economy, this work “is just incredibly important,” Bottom says. “And she’s extended it to look at how groups function, how deals are made, how negotiations break down.”

Even within the US, there are dramatic differences and misunderstandings. Other researchers had concluded that African-Americans with ­schizophrenia had greater emotional deficits than whites with ­schizophrenia, Elfenbein says. “But my work shows that it’s easier to recognize emotion from one’s own group.” When researchers built on that insight, they found no greater deficits among African-Americans. “They’d just been given a culturally biased test.”

Another kind of bias crops up with power differences: “Men and higher-status individuals are given more room to express anger and contempt,” she notes. “These are emotions of power; they say, ‘I am in a position to judge you.’ When women executives or political leaders express anger, they’re often critiqued. Women expressing anger are seen as irrational.” Sadness, by contrast, “is considered an emotion of low power, and women are ­allowed to be sad whereas men are derided. This myth that ­women are more emotional? Men are ­emotional, too, but there are different emotions they are free to express.”

Emotions have their place

Emotions we aren’t free to express tend to come back again and again. We bury them, and they bubble up somewhere else; we bat them away, and they boomerang. We can’t free ourselves from an emotion by suppressing it; we have to ­manage it. Reappraise, reframe, find the bright side, take the long view. “Talking to a friend is cathartic,” ­Elfenbein says, “and hopefully the friend is helping with reframing.”

Our bodies can help us, too—deep breathing, yoga, mindfulness, the endorphins of a good run, the indulgence of chocolate, the relaxation of a beer after work. “Every strategy that works for somebody can be taken too far,” she adds hastily. “But there’s a reason we call it ‘comfort food’ and have a drink at ‘happy hour.’ Those physiological methods give you a breather from the emotion, so you can regain perspective. It doesn’t seem so bad anymore. You have better resources to cope.”

When business executives turn to Elfenbein for help, they often ask how to manage anger and fear in the workplace “because both of these are thought of as very unproductive.” She’s not prepared to throw any negative emotion away, though: “Even the emotions we may not find pleasant have a ­function in our evolutionary ­history,” she says. “We have needed them.”

The accepted view of emotion is that it’s an alarm system, “directing our attention to something important,” she says. “Anger is about relationship repair: It shows us that there is something going wrong that needs to be addressed. Fear shows us that we are in danger. All emotions have their place.” She grins wryly. “They are often out of place, but they have their place.”

At work, Elfenbein continues, the problem with our emotions is that we’re so often “squashed from doing something about them. Emotions are meant to move us. The word ‘emotion’ itself comes from the Latin root movere. But usually in the workplace, you can’t act on your emotions,” she says. The trick is to find a way around that prohibition—a way to act productively. Fear, for example, is about a lack of control, so take back a little control, she advises. If you’re scared of losing your job, ­polish your résumé.

Another workplace threat is jealous, malicious competitiveness—and it’s extra hard to recognize, because it’s one-sided, and those feeling it take pains to conceal the signs.

“Some nonverbals are leaky,” Elfenbein says. “Research has shown that we tend to be better at controlling facial expressions, next better at tone of voice. Yet it’s much harder to ­control body language, especially posture and hand movements. It’s not that you can’t control these things, but people put less energy into trying to control them. So those are good places to look for leakage.”

When somebody’s silently resentful or scheming against you, though, “the best place to look is third parties,” a trusted co-worker’s take. “And look at what people do, rather than just what they say to you,” Elfenbein says. “Then you can try to neutralize the jealousy, although that’s hard. Sometimes you can try to offer things of value to that person: Do something that will help them succeed; tell them about an ­opportunity; show that you are useful as an ally.”

Oh, and don’t feel bad if it took you a while to even realize that this person was vying with you. In one study, she found that “the people best at seeing hidden messages were the least liked.” They could read the negative emotions—anger and fear and sadness—beneath someone’s tone of voice. “We call them ‘eavesdroppers,’ because they had a ­window into other people that was unwelcome.”

Recognized or not, negative emotions ­clutter our workplaces. The most underrecognized-emotion, ­Elfenbein says, is a positive one: flow, that blessed state when you’re working at your peak on something that has meaning for you, rather than counting the hours and accumulating grudges. “Job satisfaction and job dissatisfaction have ­different sources,” she points out. “Job satisfaction comes from flow and self-actualization. Job dissatisfaction comes from colleagues who weigh you down, a copier that always breaks—minor annoyances that are called hygiene factors.” ­Getting rid of those annoyances isn’t enough, though, because job ­satisfaction is not simply the ­absence of irritation. “Being satisfied is enjoying what you do, being good at it, having a sense of mastery and a sense of ­purpose,” Elfenbein says.

What satisfaction is not, necessarily, is raking in a lot of cash. “Money is a very complicated reward,” Elfenbein says. “It’s as much symbolic as it is about the money itself.” In one study, she asked graduating MBAs about their negotiations for a full-time job: What was the dollar value of everything they negotiated, and how did they feel coming out of the negotiation—as though they’d been treated fairly and built a healthy ­relationship? “A year later, we surveyed their job satisfaction,” she continues. “How they were treated predicted their job satisfaction; the dollar gain did not.” At work, often the best reward a boss can offer is “sincere recognition of a ­person’s humanity,” she says, “sincere appreciation of the things done well.” ­

Executives regularly ask her how to test for ­emotional intelligence—or train it into thei­r employees. “It’s very hard to change emotional tendencies in adults,” she tells them frankly. ­“Consultants want to charge a lot of money to come in and train, but ­research suggests that it’s very hard to move that dial.” Currently, she’s exploring the behavioral genetics of emotional abilities, and, sure enough, the ­preliminary results suggest “that emotional intelligence is, to some degree, genetic.” Granted, ­emotional IQ is also learned—but early on.

Photo: James Byrd

“We train empathy; we even train children how to lie.” Elfenbein remembers explaining to her son, very carefully, the value in telling a “white lie” to show appreciation for, say, an ­unwanted birthday present. “We teach them the right time to lie and how to lie. Also, they spontaneously lie, and we catch them, and that trains them to lie better.”

What we don’t train very well, because we don’t or can’t give kids good feedback, is “self-awareness, emotion recognition, anything that is silent.” As for self-awareness, some of us are so clueless about our own feelings that we’re not even aware of our lack of ­self-awareness.

High-priced consultants can’t plumb those depths. “The bad news is that almost none of what they offer works,” Elfenbein says. “The good news is that the two things that do work are free: motivation and practice. Simply caring about these skills improves them.” In one study by another investigator, Group A was told that a test would predict their leadership abilities. Group B was told nothing about the test. “Guess who did better?” she asks, grinning at the obviousness. “The people who thought the test was important.”

Still, reading emotions is like reading Braille with ­callused fingertips. Sarcasm is an exaggeration that means its opposite, which can create a lot of ­misunderstanding across cultures. “We are a very ­sarcastic ­culture,” Elfenbein says, “and people from other cultures get tripped up by this.” So do people within the culture. How often have you hesitated, ­asking yourself, “Was that sarcastic?”

Another quality that can trip us up is a monotone voice, which we tend to automatically interpret in a negative way. “That’s partly why email is such a ­dangerous form of communication,” she explains. “It can read as a monotone, so it can seem negative.”

Hence, the emoji.

“My understanding is that the original emoticons were invented very quickly,” Elfenbein says, smiling. “We can’t get by without that expressive impulse.”

Jeannette Cooperman is a staff writer for St. Louis Magazine.

(Illustration composite: Monica Duwel)

This article was originally published in the 2017 Olin Business Magazine.

In 1983, Olin Business School Professor Philip Dybvig and Chicago Booth Professor Douglas Diamond published what would become a seminal paper in the field of financial economics, “Bank Runs, Deposit Insurance, and Liquidity,” which introduced an economic model that explained why banks are subject to runs.

The “Diamond-Dybvig model” quickly became synonymous with the study of banking, financial crises, liquidity, and bank runs. From academic conferences and economics courses to the hundreds of papers it has spawned, the model needs no introduction. Their paper has been cited more than 11,000 times since its publication in 1983.

[RELATED: The enduring relevance of Diamond-Dybvig]

35 years later, thought leaders in banking and finance continue to recognize the model’s relevance and influence:

James Bullard, President and CEO, Federal Reserve Bank of St. Louis:

The rational expectations revolution swept economics during the 1970s, providing the profession with a consistent way to think about economic situations in which individual behavior today depends on expectations of the future, including expectations of future policy. Authors like Costas Azariadis, David Cass, and Karl Shell had shown that rational expectations equilibrium was not necessarily unique—many outcomes may be consistent with market clearing and rational expectations. Still, these were theoretical findings.

What sort of tangible situation might illustrate the power and importance of multiple equilibria for real-world problem-solving? Douglas Diamond and Philip Dybvig filled this role perfectly with an analysis of a problem—a bank run or financial crisis—that has haunted capitalist economies for centuries.

The hallmark of the model is that individual behavior depends in part on what everyone else is doing—if you are maintaining confidence in the bank, then so am I, but if you are running on the bank, then so am I. There are two possible outcomes, and the run equilibrium may be viewed as undesirable. As a bonus, Diamond and Dybvig suggested that public policy deposit insurance might work by eliminating the individual incentive to run on the bank, thereby restoring a unique equilibrium where confidence in the bank is maintained. This result helped to set an important precedent in the literature that is still reverberating today: In a model with multiple equilibria, the role of policy may be to “kill off” or get rid of the undesirable equilibrium outcomes, leaving only the desired equilibria as possibilities.

This concept is very different from ordinary policy analysis, which typically assumes a unique equilibrium outcome and provides advice on how to tweak that equilibrium. The 2007–09 global financial crisis could be viewed as Diamond-Dybvig writ large, with wholesale runs replacing the retail-level depositor run concept of the original model.

The global policy response since the crisis has principally been to raise capital requirements for financial institutions, on the thought that this would reduce, but not eliminate, the individual incentive to run. The notion of “eliminating the undesirable equilibrium” has not been the leading idea.

I think we may still have much to learn from the Diamond-Dybvig approach to financial crises in the years ahead.

Paul Krugman in “If Banks Are Outlawed, Only Outlaws Will Have Banks,” The New York Times:

One of the great things about Diamond-Dybvig is that it immediately punctures any superficial notion that a bank can be defined by some traditional appearance—that it basically has to be a marble building with rows of tellers, i.e., a depository institution.

Anil K. Kashyap, Professor of Economics and Finance at Chicago Booth, writing in the Chicago Booth Review:

Diamond and Dybvig were path-breaking when they proposed that banks specialized in creating liquid claims against illiquid assets.

Banking research prior to this point was pretty primitive. Banks were perceived as organizations that facilitated certain transactions for their customers, not as intermediaries that performed a unique service.

The basic structure of the model has become a platform on which hundreds of other banking-related models have been built. That is a testament to the fact that Diamond and Dybvig’s model appears to be simple, but can be extended to deliver insights about much more complicated environments.


This article was originally published in the 2017 Olin Business Magazine.

In the 1946 Frank Capra classic film It’s a Wonderful Life, George Bailey, played by James Stewart, must deal head-on with a bank run as the panicked customers of the Bailey Brothers’ Building & Loan demand to withdraw all of their money simultaneously. Bailey attempts to calm the crowd with a simple lesson in how a bank takes in short-term deposits and lends that same money to borrowers on a long-term basis.

As the residents of the fictional Bedford Falls learn, maintaining a balance between liquid deposits and illiquid loans is a delicate business for banks. This Hollywood version of a bank run has a happy ending, of course. That’s not the case in the real world. Panics, whether real or imagined, can send disruptive economic ripples through a small town, an entire nation (1929 in the United States), or around the world as happened in the 2008 financial crisis.

Circumstances and triggers for panics may appear to be different, but an economic model devised in the early 1980s by Olin Business School professor Philip Dybvig demonstrates that all bank runs share the same DNA. In 1983, Dybvig and his coauthor, Douglas Diamond, published what would become a seminal paper in the field of financial economics, “Bank Runs, Deposit Insurance, and Liquidity,” which introduced a model that explained why banks are subject to runs.

“Diamond and Dybvig were path-breaking when they proposed that banks specialized in creating liquid claims against illiquid assets,” according to Anil K. Kashyap, the Edward Eagle Brown Professor of Economics and Finance at the University of Chicago’s Booth School of Business. He credits Diamond and Dybvig with transforming bank research in 1983: “Banking research prior to this point was pretty primitive. Banks were perceived as organizations that facilitated certain transactions for their customers, not as intermediaries that performed a unique service.”

The “Diamond-Dybvig model” quickly became synonymous with the study of banking, financial crises, liquidity, and bank runs. From academic conferences and economics courses to the hundreds of papers it has spawned, the model needs no introduction. If you google the model’s moniker, you will see their paper has been cited more than 11,000 times since its publication in 1983.

In a special issue of Economic Quarterly published by the Federal Reserve Bank of Richmond and dedicated to the Diamond-Dybvig model in 2010, Edward Simpson Prescott writes, “Their model has been a workhorse of banking research over the last 25 years and during the recent financial crisis it has been one that researchers and policymakers consistently turn to when interpreting financial market phenomena.”

On the eve of the 35th anniversary of Diamond-Dybvig, Olin Dean Mark Taylor, a noted financial economist in his own right, sat down with Philip Dybvig, coauthor of the eponymous model and Boatman’s Bancshares Professor of Banking and Finance at Olin, to learn more about its origins, its longevity, and its relevance to the global financial system today.

Banks are fragile


So, it’s been 35 years since the publication of the original Diamond-Dybvig paper, and that’s had a tremendous influence on the banking industry and on financial regulation. What is the key message of the model?


The key message is that banks tend to be fragile because of the services that they provide, namely taking in short-term deposits and making long-term loans. Banks are providing liquidity, but we say it’s fragile because depositors have the option to withdraw their money whenever they want, and it’s difficult to predict when they will withdraw. If people are worried about the bank’s ability to give them their money back, that tends to make the bank unstable. If everybody does take their money out at the same time—a bank run—the bank will fail because it won’t be able to cover all the withdrawals.


You did this research back in the 1980s. And there hadn’t been a bank run in the United States since the Great Depression, some 50 years or so earlier. What made you think about this topic at that time?


Doug [Diamond] and I knew each other from grad school at Yale. A few years later, I was teaching at Princeton and he was teaching at the University of Chicago [Booth]. We ran into each other at a professional meeting and said, let’s go get a beer. Doug said, “You know, I think there are a lot of opportunities for modeling things in banking using game theory.”

I didn’t know much about banking. Bank runs sounded like a multiple equilibria problem, and I assumed there was already a paper about that. But there wasn’t, and in the end that was only a small part of our paper. If it had just been modeling bank runs as a rational multiple equilibria problem, I don’t think it would have had the kind of impact it has had. I think what’s more important about the paper is that we have a workhorse model of liquidity and explain why liquidity is important and why it is that liquidity tends to cause banks to be unstable.

Deposit insurance


In 1933, Federal Deposit Insurance was created to prevent future bank runs. And it seemed to be quite effective from the Depression to the 2008 financial crisis.


When we first presented the paper at Wharton, we actually got some pushback. Somebody in the audience said, “You know there aren’t any bank runs anymore. Why should we care? Why are you interested in economic history?” I don’t think there’s anything wrong in doing economic history. I think it’s interesting to look at that. You learn from looking at past problems about what you need to do to avoid problems in the future. Obviously, we’ve learned that deposit insurance is good. Complete deposit insurance is better.

“This paper gives the first explicit analysis of the demand for liquidity and the ‘transformation’ service provided by banks.”

“Bank Runs, Deposit Insurance, and Liquidity,” The Journal of Political Economy, Vol. 91, No.3 (June, 1983).


Why would full deposit insurance versus the current FDIC limited insurance be a good idea?


Having less than full deposit insurance provides depositors with an incentive to monitor the bank. The problem is that the monitoring by depositors is not beneficial socially. A good example is the failure of Continental Illinois in Chicago and its seizure by the FDIC in 1984. When the bank failed, a lot of the international depositors took out their money and they withdrew it right before the bank closed. So they were monitoring carefully and their monitoring was successful at benefiting them privately, but it also caused great headaches for the bank regulators who then had to deal with this huge capital outflow and ended up making concessions that they should not have had to make otherwise to the bondholders and the bank holding company.

Capital requirements


In terms of the recent financial crisis, liquidity plays a major role when it comes to capital adequacy requirements. Does the Diamond-Dybvig model have anything to say about capital adequacy requirements?


What we learn about capital adequacy in the Diamond-Dybvig model is that if you impose higher capital adequacy requirements, then you’re limiting the amount of liquidity creation that the banks can do. And that’s a concern. In principle, you could have lots of liquid assets in the bank and then the bank stock would be very liquid. But in practice that’s just not really feasible.

In the Diamond-Dybvig model, in order to have a stark example, we assume that the bank’s assets are riskless. And this is not a bug, it’s a feature. The thing is that banks are unstable even if the assets are completely riskless. Everybody understands that banks can fail if the assets are risky and if the asset value goes down enough, the bank’s going to fail. What’s interesting is that the model shows there is an intrinsic instability there even if the assets are riskless.

If you look at the capital adequacy requirements that were imposed around the time we wrote the paper, those were based on bank examiners going in and looking in detail at the bank’s books, talking to the lending officers, looking at all the documentation, and if necessary, talking to the customers. They had a job like old-fashioned accountants. The bank examiners were supposed to form an opinion on the safety and soundness of the firm. As we move towards more international, standardized regulation, we’ve replaced that kind of a regulatory system largely with a system based on accounting numbers, which is much coarser information and much easier to manipulate. And so, in the 2008 crisis, a lot of the problems had to do with banks that were taking on a lot of risk—and the risk was not detected by the capital adequacy formulas.

Policy implications of Diamond-Dybvig


So, what are the key policy implications that drop out of the Diamond-Dybvig analysis?


It may sound obvious, but the policy implication that’s most direct is that we should protect ourselves from bank runs. They can really damage the economy. Bank runs are bad in the Diamond-Dybvig model because they interrupt real production of goods and services when bank loans are recalled. That’s important. The real cost is that you liquidate projects (financing new construction, new ventures, etc.) before they’re done. That damage can be avoided, and we talk about several different mechanisms for doing that in our paper.

One mechanism is deposit insurance. Deposit insurance makes it possible for people who need their money to withdraw unimpeded, and provides peace of mind to those who don’t need money and who leave it in the bank. I think deposit insurance is important for the stability of the banking system.

A less efficient response to bank runs was used during the Great Depression: the so-called “bank holiday” where banks closed their doors for several weeks and suspended the convertibility of deposits into money in order to stop the run. But the problem is that a “bank holiday” also stops people who actually need the money from getting it, so the social cost is very high.

The third possibility that we talked about is lending by the central bank. In the United States that would be the Federal Reserve, as a lender of last resort, that can provide a service similar to deposit insurance by lending banks money.

Regulation and the next financial crisis


You have advocated the reinstatement of the 1933 Glass-Steagall Act, which separated commercial and investment banking. It was reversed in 1999 by the Gramm-Leach-Bliley Act, which repealed the restrictions on affiliations between banks and securities firms. Why?


I’d like to see more regulation in the form of a modern Glass-Steagall that limits what banks and insurance companies can do since they are involved with retail customers. They have explicit and implicit guarantees by the government, and they should be limited in what they can do. I would also like to see a little bit of freeing up the other institutions to let them do what they need to do in the economy.

If these sorts of limitations had been in place before the 2008 crisis—without anticipating the form of the crisis—it should have been possible to avoid the crisis, because the banks would not have been allowed to buy credit default swaps and AIG would not have been allowed to have a proprietary trading floor that sold credit default swaps.

“In 1986, we said one of the dangers of regulating banks too tightly is that other institutions may come in that fulfill the roles that the banks are not fulfilling.

They would be unstable for the same reason banks are, and subject to runs. And that’s a pretty good description of the 2008 financial crisis and the role of shadow banking and the repo (re-purchase) market in the crisis.”

—Philip Dybvig


Do you think it’s likely there will be another financial crisis?




And in the foreseeable future, in the next five, ten years?


I wouldn’t be surprised. I don’t think regulators and policymakers have settled it, and they haven’t gotten things to a point where it addresses the real problems yet.


Do you keep your money in a bank?


Yes. I keep more money than I should in a bank because I’m too lazy to go out and invest in other things. Also, I’m not sure that the expected return to equities is positive these days. So it’s a question about whether I should take on the risk and go through the research.


About Philip Dybvig & Douglas Diamond

Philip Dybvig joined the Olin Business School faculty in 1989. He also serves as director of the Institute of Financial Studies at Southwest University of Finance and Economics, Chengdu, Sichuan, China.

Dybvig’s research focuses on asset pricing, investments, and corporate governance. He previously taught at Princeton University and was tenured at Yale University. He has published two textbooks and more than 35 articles in leading journals. In addition, Dybvig has consulted for government, organizations, and individuals.

From 2002 to 2003, Dybvig was president of the Western Finance Association, and he has been the editor or associate editor of multiple journals, including the Journal of Economic Theory, Finance and Stochastics, Journal of Finance, Journal of Financial Intermediation, Journal of Financial and Quantitative Analysis, and the Review of Financial Studies.

In 2014, Dybvig received the Chinese Government Friendship Award. Other honors include: Midwest Finance Association Distinguished Scholar, 2003; Common Fund Prize, 1996; and the Graham and Dodd Scroll for excellence in financial writing awarded by the AIMR, 1996.

He earned his undergraduate degree in math and physics from Indiana University; began his graduate studies at the University of Pennsylvania, then followed his mentor and advisor Stephen A. Ross to Yale University, where he earned an MA, MPhil, and PhD in economics.

Douglas Diamond specializes in the study of financial intermediaries, financial crises, and liquidity. He is a research associate of the National Bureau of Economic Research and a visiting scholar at the Federal Reserve Bank of Richmond. Diamond was president of the American Finance Association and the Western Finance Association, and he is a fellow of the Econometric Society, the American Academy of Arts and Sciences, and the American Finance Association. He received the CME Group-Mathematical Sciences Research Institute Prize in Innovative Quantitative Applications and the Morgan Stanley-American Finance Association Award for Excellence in Finance. He is a member of the National Academy of Sciences.

Diamond has taught at Yale and was a visiting professor at the MIT Sloan School of Management, the Hong Kong University of Science and Technology, and the University of Bonn. He earned a bachelor’s degree in economics from Brown University in 1975, as well as master’s degrees in 1976 and 1977 and a PhD in 1980 in economics from Yale University. Since 1979, he has been on the faculty at Chicago Booth.

Hannah Perfecto discovered her passion for psychology and consumer behavior when she was an undergrad at Yale University. “It was the time when a lot of these pop psychology books, like Freakonomics or Nudge, that were using data to answer questions about how people are behaving on a large scale, were coming out,” says Perfecto.

Fortunately, faculty at Yale’s School of Management were conducting research on the intersection of consumer psychology and marketing—a topic she found fascinating.

“I worked in that lab for basically my whole time there,” says Perfecto. “When I realized that I could keep doing that as a graduate student and then subsequently as a professor, I jumped at the opportunity.”

Her graduate studies would take her to West Coast, where she earned her MS and PhD at the University of California, Berkeley, and to Olin, where she continues to research judgment and decision making. Specifically, Perfecto says she looks at how marketers can make small changes to how a decision is phrased or how outcomes are described.

“Even with these small changes, we can see sometimes dramatic changes in how people make those decisions or feel about those outcomes,” she says.

Get to know Hannah Perfecto, assistant professor of marketing, in the video above.


Research Interests:

Consumer behavior, behavioral decision theory, meta-cognition, field experiments, research replicability and reliability

Selected Publications:

  • “Rejecting a Bad Option Feels like Choosing a Good One”, Journal of Personality and Social Psychology, Issue 5, 659-670, with J. Galak, J.P. Simmons, and L.D. Nelson, 2017

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  • Hillel Einhorn New Investigator Award, Society for Judgment and Decision Making, 2016
  • AMA-Sheth Foundation Doctoral Consortium Fellow, American Marketing Association, 2016
  • Diversity Travel Scholarship, Society of Consumer Psychology, 2016

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