Haas NewsWire

Haas NewsWire, February 3, 2003

UC Berkeley Manifesto Urges State to Let Market Forces Rebuild California's Power Industry
JosÚ Silva Brings Behavioral Economics Expertise to Haas Marketing Group
Senior Business Week Writer Discusses Benefits of Stock Options at Haas Today
Asia Business Conference Tickets on Sale This Week
Haas in the News
Happening at Haas

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An ad hoc group of 20 professors from UC Berkeley, UCLA, and Stanford University, plus consultants and former regulators, jointly urged policymakers last Friday (January 31) to move swiftly and vigorously toward a market-based restructuring of California's electricity industry.

Failure to reform the industry will only compound California's energy problems, according to the group, which met under the auspices of the Institute of Management, Innovation & Organization (IMIO).

The group published its statement in the second Manifesto on the California Electricity Crisis, authored under the leadership of Professor David Teece, director of IMIO.

"While wholesale electricity prices have moderated, and California no longer faces the risk of blackouts, in many ways the industry is in worse shape now than it was at the start of 2001," the manifesto says.

Since the 2001 electricity crisis, two California utilities have become insolvent, the state has entered long-term contracts to buy electricity at exorbitant rates and the electricity trading industry has gone into near collapse. Meanwhile, the confidence of electricity reformers around the world has been shaken, and initiatives to introduce competition outside California have been delayed, according to the manifesto.

This is the second such manifesto from IMIO on the energy crisis. The first manifesto was published in response to severe electricity price hikes and rolling blackouts in January 2001. It strongly recommended against long-term procurement contracts, which Governor Gray Davis ordered the Department of Water Resources to sign.

"California would be a lot better off today if our advice had been heeded," said Teece.

This latest manifesto proposes that the state take the following steps toward recovery:

"We encourage the state to realize that the energy crisis was the consequence of a flawed regulatory design and of misguided decision-making at the time of the crisis, rather than the result of any inherent inability of electricity markets to work," say the manifesto authors.

The signatories of the "2003 Manifesto on the California Electricity Crisis" include Vernon Smith, a Nobel Laureate in economics from George Mason University; Haas School professor Pablo Spiller; Haas School Dean Tom Campbell; Stanford professor James Sweeney; professors Harold Demsetz, John Riley and Richard Rumelt from UCLA; and Mitch Wilk, former president of the California Public Utilities Commission.

The 2003 manifesto and its list of signatories are available on the Haas School web site at http://www.haas.berkeley.edu/news/manifesto.html

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Assistant Professor JosÚ Cam§es Silva brought his expertise in behavioral economics to the Haas School when he joined the marketing group in the fall.

Silva's work focuses on integrating psychological phenomena with models of decision-making and strategic behavior. His latest research revolves around how payment methods affect consumption of online content. An extension of that work focuses on the willingness of individuals to make voluntary contributions for content they like.

Silva and his co-author, Dan Ariely, former Haas assistant professor of marketing now at MIT, found that when purchasing content online consumers in many cases perceive the very transaction of making a payment online as a higher cost than the purchase price itself. In the case of small payments, if one were to place a monetary value on this transaction, Silva and Ariely estimated it to be equivalent to a 47% price increase.

On the other hand, the use of electronic wallets, or pre-payment, has the opposite effect - people who deposit money in the wallet in advance act as if they received a 30% price discount. This work prompted Ariely and Silva to develop a managerial framework for taking into account psychological phenomena when measuring prices online.

The web can remove two of the largest impediments to tailor-made pricing - menu costs (the cost of maintaining a long list of prices for possible combinations of content purchases) and transaction costs (the web reduces this cost by automating many of the mechanics of payment). But when these costs allow the seller to set micro-prices (very small prices used primarily for selling information content, software, and games), psychological phenomena become very important.

"The web will be an even bigger source of business in the future," says Silva. "There will have to be a more scientific approach to setting prices."

In a separate study, Silva examined how to price content distributed through the web and other interactive media (for instance, compact discs with digital rights-management encryption). Content providers face a dilemma: consumers only know for sure what they would be willing to pay for an article after they have read it. But, at that point they have no incentive to pay for it - the consumption is done and the seller cannot remove it.

Sellers have approached the problem of monetizing content in different ways: they can sell access to the consumers to advertisers (known as "selling eyeballs"); they can share revenues from the broadband provider (used by ISPs in many European countries, where local phone service is metered); they can sell goods that are tied in with the content provided for free ("Like this site? Buy a T-shirt"); or, in the case of well-established sources of information, sell the content.

Silva uses tools from behavioral economics to analyze a fifth alternative: reliance on voluntary payments. As a vast literature on fairness shows, people sometimes are willing to forgo some extra payment to be nice to somebody being nice to them, and conversely they are willing to lose money in order to punish somebody who slights them.

Sellers can use this reciprocity: they can give away the content and ask for a voluntary contribution. Many web sites now sport the "Amazon Honor System" icon for voluntary contributions. Silva's research studies when each of the five approaches described above should be used and makes managerial recommendations based on reputation, market size, and uncertainty.

Underlying all these applications is Silva's award-winning original research on the foundations of behavioral decision-making. His doctoral work at MIT theorized on why people make inconsistent choices.

People are overwhelmingly in favor of the status quo on many decisions, but the status quo is often arbitrarily set by the way a question is framed. For example, people vote "no" when asked whether the US should forbid speeches against democracy, and again vote "no" when asked whether the US should allow those same speeches.

Starting with the idea that people are always trying to do the best they can with limited mental resources, Silva showed that many inconsistencies in decision-making and choice are the result of people optimizing their decisions over large groups of problems. This results in their not being discerning enough with each individual decision.

Silva spends most of his free time playing piano, hiking, and skiing. Originally from Portugal, he much enjoys the academic and research environment in the US.

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Business Week Senior Writer Aaron Bernstein will discuss the benefits of stock options on Monday, February 3, at 5:30 p.m. in the Wells Fargo Room.

Bernstein will speak on the topic of his new book, "In the Company of Owners: The Truth about Stock Options (and Why Every Employee Should have Them)." Bernstein coauthored the book with two professors from Rutgers University.

This event is sponsored by the Undergraduate Minority Business Association (UMBA) and takes place in conjunction with their first meeting of the semester. There will be a general UMBA meeting from 5:00 to 5:30 p.m.; the talk will start at 5:30 p.m. It is free and open to the Haas School community.

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The third annual Berkeley Asia Business Conference organizers have announced a rich program of technology and entrepreneurship panels for this year's event on Saturday, March 1, 2003, at the Haas School.

Tickets went on sale today, and "early bird" prices will be available for tickets purchased before February 17. Please check the web site for details: http://www.berkeleyabc.org/.

Organized by Berkeley MBA students, the conference features panels on a wide range of topics including Wireless in Asia, Entrepreneurship in China, the Semiconductor Industry in China, Product Development in India, Asian VCs in the Silicon Valley, VCs in China, Biotech in Asia, and Market Entry Services.

Vivek Paul, vice chairman of Wipro Ltd. and president of the Wipro Technologies division, will give the keynote address this year. Wipro Technologies is a global technology company with over 13,000 software professionals and offices in 30 locations around the world.

The conference brings together business leaders, entrepreneurs, alumni, students, and international advocates for a day of keynotes, panel discussions, and networking. In previous years, the conference has drawn nearly 400 attendees, including business leaders (representing over 150 companies in industries ranging from financial services to consulting to high-tech) and students from multiple UC Berkeley graduate programs as well as other business schools across the west.

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Haas in the News

Dean Tom Campbell was mentioned in the San Francisco Chronicle's Bay Area News Roundup on February 2 as one of the endorsers of the "Manifesto on the California Electricity Crisis." Read the full text at http://www.sfgate.com/cgi-bin/article.cgi? file=/news/archive/2003/02/02/roundup.DTL, and read the full manifesto at www.haas.berkeley.edu/news/manifesto.html.

Christine Rosen, associate professor in the Business and Public Policy Group, commented on the increasing pressure being put on oil companies to answer to corporate social responsibility in The Oakland Tribune on February 2. Read the full article, titled "Oil's changing face," at http://www.oaklandtribune.com/Stories/0,1413,82~10834~1153622,00.html? search=filter#.

Janet Yellen, the Eugene E. and Catherine M. Trefethen Professor of Business Administration, commented on the Federal Reserve's counter-deflationary strategies in BusinessWeek Online on February 3. Read the full article, titled "Commentary: If Deflation Sets In, the Fed Has a Problem," at http://www.businessweek.com/magazine/content/03_05/b3818052.htm.

Assistant Professor Terrance Odean's work on investor and executive overconfidence was cited in Inc. Magazine on February 1 in the article titled "The New Face of Confidence." Read the full article at http://www.inc.com/magazine/20030201/25115.html.

Sherron Watkins' speech at the Haas School on January 30, was covered by the following news sources:

Jerry Varnado, a participant of the Young Entrepreneurs at Haas program, is the first African-American student from the Oakland public schools to be accepted into West Point in New York. The story ran in the San Francisco Chronicle on January 31. Read the full article, titled "Skyline student makes history with West Point appointment," at http://www.sfgate.com/cgi-bin/article.cgi? file=/chronicle/archive/2003/01/31/EB216258.DTL&type=printable.

Former Dean Laura Tyson was mentioned in The Times (London) on January 31 in the article, "Let 1,000 Governance Flowers Bloom," in relation to her involvement with the Higgs report published last week.

The Haas School of Business was featured in The Daily Californian on January 30 in the article, "Haas Faces Faculty Retention Problem." Ben Hermalin, the Willis H. Booth Professor of Banking and Finance, was quoted. Read the full text at http://www.dailycal.org/article.asp?id=10702.

Cynthia Kroll, senior regional economist at the Fisher Center for Real Estate and Urban Economics, remarked on the Silicon Valley real estate market in the San Jose Mercury News on January 30 in the article, "Home Prices Stay High But Worries of a Tumble Persist." Read the full text at http://www.bayarea.com/mld/mercurynews/business/5064228.htm?template=contentModules/printstory.jsp.

Hermalin commented on the SEC charge of fraud against KPMG in the Democrat and Chronicle (NY) on January 30. Read the full article at http://www.democratandchronicle.com/biznews/0130story1_business.shtml.

The Haas School of Business was mentioned in The North West Arkansas Morning News on January 30 in an article about the KIPP School Leadership Program. The program seeks to improve student education and begins with a six-week intensive course for teachers at the Haas School.

Kroll was interviewed by KTSF Channel 26 News (Cable 8) on January 31 regarding the Bay Area and California housing market.

The Haas School of Business was mentioned in the San Francisco Chronicle on January 29 in the column, "Is There a Place for Willie Brown on Cal Campus?" Read the full article at http://www.sfgate.com/cgi-bin/article.cgi? file=/c/a/2003/01/29/MN181122.DTL.

Larry Rosenthal, executive director of the Berkeley Program on Housing and Urban Policy, commented on the economic aspects of earthquakes and the preliminary planning of an earthquake symposium at Haas in The Berkeleyan on January 29 in the article, "Getting Set to Commemorate 'the Big One.'" Read the full article at http://www.berkeley.edu/news/berkeleyan/2003/01/29_earth.html.

Janet Yellen commented on high productivity rates in the US in the Omaha World-Herald on January 29. Read the full article, titled "Fed Struggles to Grasp Rising Productivity," at http://www.omaha.com/index.php?u_np=0&u_pg=46&u_sid=637217.

David Mowery, the Milton W. Terrill Professor of Business, commented on the impact of Internet patenting suits in the New York Times and the San Francisco Chronicle on January 28. Read the full article, titled "Users Uneasy on SBC Claim to Patent Web Tool," at http://www.nytimes.com/2003/01/28/business/28LEFT.html? pagewanted=print&position=top.

Tyson, was mentioned in The Times (London) on January 27 in the article, "Judged the best - Profile - Judge Institute of Management - MBA," about MBA courses in Europe. The article stated that Tyson is one of only two women to head a British business school.

Terrance Odean and Brad Barber's joint study on investor behavior was included in The Wall Street Journal Sunday on January 26 in the article, "How Wall Street Runs Up Your Tab."

David Vogel, the George Quist Professor of Business Ethics, commented on the ethics program at the Haas School of Business in the SiliconValley/San Jose Business Journal on January 24. Read the full article, titled "Accounting Chicanery Sparks Changes in Class Discussion," at http://sanjose.bizjournals.com/sanjose/stories/2003/01/27/focus4.html.

Jennifer Chatman, the Paul J. Cortese Distinguished Professor of Management, appeared on KRON news on Friday, January 24 dicussing the new organization of Homeland Security.

A website co-authored by John Morgan, associate professor in the Economic Analysis and Policy Group, was featured in The Hindu Business Line on January 11. To visit the website go to http://www.nash-equilibrium.com.

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The Haas NewsWire is the electronic news weekly for the Haas community published every Monday by the Marketing and Communications Office at the Haas School. Send your news, feedback, and suggestions to Haasnews@haas.berkeley.edu.

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