Author Archives: Thomas P Seager

About Thomas P Seager

I teach "Engineering Business Practices" and "Sustainable Engineering Systems" at Arizona State University in Tempe AZ.

Time Preferences and Technology Transitions

The conventional wisdom is that the Internet killed Borders books.  Even the rejoinders to this thesis emphasize that poor strategic choices were mostly made by failing to appreciate the changing technological landscape.  Either way, it’s a fact that the money that used to flow into Border’s cash registers now goes to Amazon and iTunes instead.

Collapse in response to technological transition is a recurring business theme.  Digital photography bankrupted Polaroid, then Eastman Kodak — both former high-tech “blue chip” stocks.  Even Apple rose from the ashes of a company on the brink of liquidation, and at the very bottom, turned to arch-rival Microsoft for an infusion of desperately needed capital.  (That was way back in 1997.  MSFT sold their AAPL holdings later, without fanfare.  Compare the tone of the quotes from the executives.  What a difference).

So, if corporate executives have trouble managing technological change, what about consumers?  Here, news stories give us the impression that anything new is all the rage.  In fact, they rarely tell us about the high-tech products that go straight from the laboratory to the dustbin.  For consumers, the choice is often between incurring one-time investment costs (in new equipment, and the time required to learn it), but recouping that investment in cost savings over time.  While people will certainly pay more for increased functionality, or increased convenience, ultimately technological innovation is expected to enable us to do more, cheaper.

To assess the financial viability of any technological comparison, we need to understand the time value of money.  That is, we need to understand if future savings will justify present-day expenses.

Typically, cash flows that accrue in the future are discounted, in comparison to present day balances.  There are several reasons for this, but the two most important are: risk (What if the expected future benefits don’t actually materialize?) and opportunity costs (What has to be sacrificed now to obtain something more in the future?).

This video depicts a study of time preferences in children.  The marshmallow experiment is a famous test of this concept conducted by Walter Mischel at Stanford University in the 1960s.  A group of four-year olds were given a marshmallow and promised another if they could wait 15 minutes before eating the first one. Some children could wait and others could not. The researchers then followed the progress of each child into adolescence and demonstrated that those who waited were better adjusted, more dependable (determined via surveys of their parents and teachers) and scored an average of 210 points higher on the Scholastic Aptitude Test.

Problems of technology transition typically involve questions of time preference, where the new technology is more expensive up front, but results in savings later on.  To illustrate the point, we can study the transition from printed books to e-readers – ostensibly one of the important factors that drove Borders out of business. E-readers cost more now, but they generally offer books at lower prices in the electronic version (in comparison to printed).  So, in the long run an e-reader could save money.

Lots of people might be interested in knowing which technology is cheaper for them, over the long run.  For example, parents of young children generally buy lots of books.  Should they invest in an e-reader that their children can learn to use at an early age?  Or wait, reasoning that as the technology gets better, prices might come down?  Similarly, college students purchase lots and lots of books.  As more popular books (and textbooks) become available on-line, perhaps an aspiring freshman could save money by purchasing an e-reader for school?  Similarly, K-12 schools purchase millions and millions of books.  Would it save the school district money if they issued an e-reader to every student instead?

The classic conundrum of a typical technological transition has always been about large upfront costs balanced by longer term savings.  However, sharing economy apps like Lyft, AirBnB, and Turo present an interesting new twist on the old puzzle: Should they be owners of property, or renters?  While this dilemma has always been present in our lives, new information-communications-technologies (ICT) have changed the cash flow equation.  Once we’ve decided to purchase a smartphone, renting becomes cheaper and more convenient.  But so does owning, provided you’re willing to work to rent your property out to others and willing to accept the risks.

The balance seems to be shifting to renting.  For example, most people would rather stream their favorite movies over NetFlix or Amazon Prime, rather than own the DVD.  Many younger people feel its more convenient to use Lyft combined with public transportation or bicycle sharing, than it is to own their own car.

The economic advantage may be a greater utilization rate of capital — i.e., fewer empty rooms, or idle cars, resulting in cost savings.  But is that the problem that these sharing economy apps were invented to solve?

Performance Assessment in Engineering – “Get them to like you!”

The transition from academic to professional cultures requires that former students adjust to new forms of feedback.  As students, most people expected continuous, quantitative and prompt feedback on their performance, but as professionals feedback is much more likely to be sporadic, qualitative, and infrequent.  The typical approach adopted by many large, technological organizations is the annual performance review.  The figures below exemplify the types of criteria against which many engineering professionals are typically evaluated.

WorkHabitsTeamWorkSafetyDevelopmentLeadership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unlike engineering school, where students are evaluated largely upon technical, analytical (i.e., cognitive) outcomes, professional settings place greater emphasis on communication, teamwork, leadership and other interpersonal skills.  In other words, performance evaluation in professional settings depends to a great extent on how supervisors feel (i.e, affective) about the employee.

For example, “Values and supports diversity” relates to the affective aspect of the brain (feelings, values), whereas “Organizes and plans work assignments” is based upon action (an instinct to act relates to the conative aspect of the mind).  Even a cursory review of the criteria demonstrates that the emphasis in professional settings is heavily on the conative and affective, in contrast to academic evaluations, which are almost exclusively cognitive.

This is a lesson dramatized in the movie The Hunger Games when Haymitch Abernathy (Woody Harrelson) explains that the key to survival is to get people to “like you.”

Once we understand the evaluation criteria important in professional engineering settings, a few important discussion questions emerge.

  • Should students their approach to their remaining education, given an improved understanding of workplace expectations?  How?
  • What do the conative aspects of the criteria listed say about the expectations of the engineering workplace?  Is engineering welcoming of a diverse set of conative strengths?

Critique vs. Criticism

General Guidelines: Critique Versus Criticism

Critique…

Criticism…

… comes from a position of expertise. … comes from a position of ignorance.
… is constructive (offers improvements, what TO do). … is destructive (what NOT to do).
… is selfless (respects the author’s goals, not what the critic wants). … is selfish (advances critic’s goals).
… is specific (e.g., your writing would be improved if you limited use of adverbs). … is vague (e.g., I didn’t really like your writing).
… focuses on the creation. … focuses on the creator.

Peer review in engineering depends upon an understanding of critique.  As differentiated from criticism, critique is motivated by the intention to serve the author’s or designer’s goals (rather than the critic’s).

Criticism (bad) is personal, destructive, vague, inexpert, ignorant, selfish and individual.

Example: “Your presentation sucks because you don’t even do the math right, and I wanted to know the best option for the truck because I’m thinking about buying one. You also mumble too much and speak too quiet so I can’t hear what you said so I just skipped ahead in the video to the conclusion.”

Critique (good) is impersonal, constructive, specific, expert, informed and selfless.

Example: “The presentation could be improved by including a comparison of net present values calculated for the truck’s lease and finance options with multiple discount rates to allow the audience to identify more closely with the analysis. There is an audio problem with the recording that made it difficult to hear, so I recommend re-recording the audio using an external microphone to ensure high sound quality.”

In general, criticism is judgmental and focused on finding fault, while critique is descriptive and balanced.
Both criticism and critique are forms of feedback, but it should be obvious that critique provides a better learning environment.  Still, students who lack expertise may consider themselves underqualified to provide critique.

General Guidelines for Providing and Accepting Critique

Providing Critique Accepting Critique
Assess your own positionality within the community Have an open mind
Make it all about the reader/user Avoid being defensive
Understand context (timing) Don’t play the blame game
Understand that improvement is a process (which is why you want to be specific with your critique) Ask clarifying questions

Providing Critique

One way to provide constructive feedback to an author is to chronicle your experience of being a reader in the non-judgmental way.  You can do this by sharing with the author your reactions in all three aspects of the mind.

  • What did you think while you were reading?
  • What did you feel?
  • What did you do?

Simply by describing your reactions, you can provide the author a better sense of their audience — i.e., the “experience of the reader” — in a way that allows them to improve their writing.

Receiving Critique

Just as there is an art to giving criticism, there is an art to receiving it. In his blog, Dan Rockwell gives tips on how to receive feedback like a leader

Receive feedback with openness, not defensiveness.

To benefit from feedback, he suggests asking:

  1. Tell me more.
  2. Help me understand what you’re saying.
  3. What makes you say that?

One way to benefit from both criticism and critique is to keep a mindset of personal growth.  Rather than becoming defensive or confuse the feedback for something that defines who you are, accept the feedback as an opportunity for you to grow.

Professional Engineering Ethics: The Citicorp Tower case – reposted on Medium

The Citicorp Tower is a famous case in engineering ethics that is often celebrated as a positive example, rather than the more notorious case studies of ethical failures.  In this video, Dr. Michael Loui summarizes the highlights of the case, including the fact that:

  • The design flaw was revealed by a Princeton University engineering student who was analyzing the structure for a class project.
  • The structural engineer came to realize that the risk of building collapse exceeded all reasonable expectations.  He notified the building owner, admitted the error, and worked out an expensive retrofit paid for by his liability insurance and the building owner.
  • The discovery and remedy happened to coincide with a newspaper strike in New York City, which effectively suppressed publicity or investigation of the project.

As Dr. Loui explains it, the structural engineer took personal responsibility to protect the public safety.  However, given the interesting epilogue regarding the structural engineer’s liability insurance premiums, it’s not clear what aspect of self-interest the engineer placed at risk.

A more dramatic account of the case produced by PBS  includes testimony from William LeMessurier, the engineer responsible.  It’s available on YouTube in three parts, and reveals some aspects of the case that are not in Michael Loui’s account, and question whether the case is really the paragon on professional virtue it is celebrated to be, including the secrecy that surrounded the retrofit

The “engineer at the table” referenced in the above clip is Leslie Robertson, as this more concise account of the case recounts.  Robertson, a celebrated structural engineer in his own right who designed the World Trade Center, was directly involved in the Citicorp retrofit, but barely credited by LeMessurier’s accounts in these videos.  I met Robertson when I was a PhD student at Clarkson University, prior to the 9/11 attacks on the World Trade Centers, but following the 1993 World Trade Center bombing.  Robertson is in a unique position to comment on the eventual collapse of the World Trade Center and the controversy and speculation surrounding the subsequent investigation.

In the third video, one interview subject speculates as to whether LeMessurier actually had any choice.  It seems he is referring to the question of whether or not to retrofit the building, but there were clearly more choices to make that went beyond the question of the structural integrity of the building.

Lastly, there are several aspects of the story that are not revealed in the videos.

One of these is that the PBS special credits an unnamed male engineering student “in New Jersey”, when in fact it was a female student from Princeton University (which is in New Jersey) but remains uncredited by popular accounts, largely because LeMessurier himself pays little attention to who she was.

Addendum: The Diane Hartley Case

Author(s):  Caroline Whitbeck

In 1978 Diane Hartley was an engineering student at Princeton, studying with David Billington who was offering a course on structures and their scientific, social, and symbolic implications (subsequently titled, “Structure and the Urban Environment”). This course interested Diane Hartley early in her engineering studies and led her to pursue her undergraduate thesis with Billington, a thesis titled “Implications of a Major Office Complex: Scientific, Social and Symbolic Implications.”

In her thesis, Hartley looked into the Citicorp Tower, which had been recently built and was interesting to her for a number of reasons, including its innovative design. That design not only allowed a preexisting church to remain at ground level, but, because it left more open space at ground level, was permitted to be taller than zoning laws would otherwise have allowed.

When she contacted William LeMessurier’s firm (the engineering firm that built the Tower), they put her in touch with Joel S. Weinstein in their New York office, at the time a junior engineer with the firm. Mr. Weinstein sent her the architectural plans for the Citicorp Tower and many of his engineering calculations for the building. She reports that, at the time, she thought it odd that she did not see initials of another person beside those calculations, because the usual practice was for such work to be checked and initialed by a second engineer.

When Diane Hartley calculated the stresses due to quartering winds… .  Read more at the Online Ethics Center.  

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Leadership and Group Projects

Few students groups that are assigned to work together in class take time at the beginning of their relationship to talk about what they want and the values that they bring to the group.  As a result, the teams discover (often too late) that members are pulling in different directions.  They begin to care more about protecting themselves than they do about caring for one another.  For example, you know that you are being protective of yourself when you find yourself saying, “I can’t count on my teammates.  If I want a good grade, I’ll just have to do the whole project myself.”

This dysfunction is exhibited in some CEE300 student teams every year.  It is a failure of leadership.

Leaders must be vulnerable.

Because leadership is an explicit learning objective in CEE300 – Engineering Business Practices, it behooves us to understand this failure and how to overcome it.  In this video, former NBA Coach Phil Jackson shares some of his insights on the leadership style that resulted in 11 championships over his multi-decade career:

Note that Jackson always prioritizes the well-being of his players over the “scoreboard.”  That is, winning championships (or earning A grades) does not result from focus on the score, but from focus on the well being of the players.

Leaders accept responsibility for the emotional well-being of the team.

One of the things that Jackson is famous for is establishing a shared sense of values (called culture) at the beginning of the season.  For example, he might gather his team before the season and ask, “What is our goal?”

If they all want to win the Championship, then they have shared vision towards which they can work.  That is, they are aligned with the same goal.

But Jackson goes further.  He will also ask, “What values do we bring to our team that will help us accomplish this goal?”

Typically, these values are things like, hard work, arriving on time, teamwork, preparation, communication and support for each other.  No one starts a new team venture and claims that the values they bring are selfishness, pettiness, gossip, and criticism.

However, the team inevitably goes astray from the values that they construct at the beginning.  That’s when Jackson can return to the statements they all agreed upon together and ask, “Have these values changed?  Do we want something different now than we did before?”

Engineering students can adopt similar leadership techniques in their own groups.  That is, they can share their alignment with another.  They can identify specific tasks that accord with the levels of commitment each student is capable of making to the team.  And they can hold themselves accountable when their behaviors are inconsistent with the values that they claimed to embrace at the outside.

Leaders build trust among teammates.

To be a leader in CEE300 requires at least these three things: 1) personal vulnerability, 2) responsibility for the well-being of others, and 3) trustworthiness.

Effective vs. Real Interest Rates: Inflation

A previous post explained the difference between nominal and effective interest rates.  To confuse matters further, there is another important term to understand — real interest rates:

Real interest rates (also known as the real rate of return that a lender receives on a loan) reflect the actual purchasing power of the future balance, and consequently must be adjusted for inflation or deflation.

These three videos from the Khan Academy explain how inflation can reduce the purchasing power of money, and how to adjust for this fact in reporting interest rates. Notice how Salman Khan uses the words “nominal” and “real”, rather than “effective” and “real”, which sort of glosses over previous videos that make an important distinction between nominal and effective interest rates.



To simplify the terminology, here’s a summary:

The difference between nominal and effective interest rates is the compounding period.

The difference between effective and real interests rates is inflation.

Notice that if we simply take nominal = effective (e.g., annual compounding), then the difference between nominal and real is still inflation. Khan’s use of the word “nominal” in these videos makes this simplification.

The difference between effective and real interest rate is often estimated as:

real = effective – inflation

For example, a treasury bond that earns a 2% effective interest rate in an economy with an inflation rate of 1.5% is estimated to be earning a 0.5% real rate of return.

When interest rates are low, and time horizons are only a few years, this approximation is pretty good.  However, it is inexact.

The exact formula is this:

real = ( 1 + effective) / ( 1 + inflation) – 1

In the case of the 2% bond above, the exact real rate of return is actually 1.02/1.015 – 1 = 0.49261% .

Notice that the difference is small!  BUT a high interest rate, high inflation context, the difference becomes very important.  Suppose the effective rate on an investment is 22%, but inflation is running at 18%.  We might estimate the real rate of return as 4%, but the exact real rate of return is 1.22/1.18 -1 or only 3.39% !

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Nominal vs Effective Interest Rates

There are more than 3 million Google hits in a search for “the power of compound interest“, and most of them talk about how beginning a savings plan early in your career can theoretically result in an rich retirement fund. The so-called secret of compound interest is that future interest payments are not based solely on the original principal, but also on prior interest.  That is, unlike “simple” interest (which no one ever uses), compound interest means that the interest is added to the balance, and consequently from that point on, interest must be paid on a higher balance (i.e., interest is paid on the interest).  The result is exponential growth of the balance.

However, remember that a lender’s retirement fund is a borrowers’ mortgage or credit card debt.  Compounding works against borrowers, just as it works in favor of lenders.  To this end, borrowers need to understand what is typically not explained in the retirement planning articles — the term compounding period.  The convention in finance is to report interest rates on an annual basis, such as 8 percent per year, called the Annual Percentage Rate (or APR).   For example, if all credit card companies report interest rates on an APR basis, then consumers can easily compare rates, and shop for the cheapest card.  However, in practice interest can be added to the balance of a credit card loan daily, monthly, or whenever.  The compounding period is the amount of time that elapses between the addition of new interest to the balance (which is called compounding).

The fact that interest rates are reported on an annual basis, but compounding takes place more frequently creates a difficult problem of communication in finance.  By convention, the nominal interest rate is the stated rate before the effects of compounding.  For example, a bank or an auto dealer might quote a low nominal lending rate, and if the rate were compounded annually, this would be exactly the rate paid by borrowers.  But loan interest is almost never compounded annually!  The effective rate is what the borrowers actually have to pay, and it is always greater than (or equal to) the nominal rate.

In this video from Khan Academy, Salman Khan demonstrates how more frequent compounding results in higher effective interest rates.

Because compounding is the act of adding interest to the balance of the loan, the more often the interest is compounded, the more interest borrowers will have to pay.  To convert a nominal interest rate to an effective interest rate, we have to pay close attention to the units of time.  The formula looks like this:

Reff = ( 1 + Rnom / n ) ^ n – 1

where Reff = the effective rate, Rnom = the nominal rate, and n = the number of compounding periods over the time period for which Rnom is reported (usually a year).

For example, if Rnom is stated as a percentage per year and we compound monthly, then n = 12.  If Rnom is stated as a percentage per year and compound daily, then n = 365.  But the same formula can work for unusual combinations.  Let’s say that for some strange reason we report Rnom as a percentage per week and compound daily.  Then n = 7.

The higher the interest rate, the more important the compounding period is.  That is, the difference between daily and annual compounding is a lot bigger at 12%/yr interest than at 4%/yr.  The more often we compound, the higher the effective rate goes.

Try some calculations yourself with your own calculator:

12%/yr compounded monthly = ( 1 + .12 / 12) ^ 12 – 1 = 0.126825 (or 12.683%)

12%/yr compounded daily = (1 + .12 / 365 ) ^ 365 – 1 = .12747 (or 12.747%)

12%/yr compounded hourly = ( 1 + .12 / (365*24) ) ^ (365 * 24) – 1 = .127496 (or 12.750%)

Notice how the difference between annual compounding (12.00%) and monthly compounding (12.68%) is large, but the difference between monthly and daily (12.747%) is smaller, and the difference between daily and hourly (12.750%) is almost nonexistent.  The limit as the number of compounding periods approach infinity (or the compounding period goes to zero) is finite, and asymptotically approaches a simpler equation:

Reff = exp (Rnom) -1

In our example where Rnom = 12%/yr, Reff = exp (.12) = 12.7496%, almost exactly the same result as the hourly figure.  This simpler formula is called continuous compounding, and it use the universal natural growth constant e (approximately equal to 2.718).

In this video, Salman Khan shows the same mathematics in his own example, resulting in what he calls the “magical number” e, which is the key to continuous compounding.

When you get past Salman’s fascination with e, you’ll see that his next video generalizes the example in the previous video into the same formula presented above in terms of Rnom and n, and derives the continuous compounding formula.  I’m not embedding it here, because the derivation is not essential to understanding engineering finance, but I’ve linked it in case you’re curious.

To use continuous compounding to compute future values on balances borrowed (or lent), we need to understand where to insert time into the continuous compounding formula.  Remember that both nominal and effective interest rates must be reported in units of $interest/$principal/time, usually a %/yr.  The only difference between nominal and effective interest rates is the compounding period.  When using continuous compounding, the amount of a future balance is computed from the present value thus:

F = P * exp (rt)

where r = the nominal interest rate (%/time), and t is time (in the same units as the nominal interest rate, usually years).

Although both nominal and effective rates are expressed per unit time (such as %/yr or %/month), effective rates will always be higher than nominal rates when compounding takes place more frequently.

Nominal interest rates are the stated, advertised, or quoted rates. Where no time period is stated, than per year (also known as per annum) is assumed.

Effective interest rates are what borrows have to actually pay, and depend on how frequently the nominal rate is compounded (i.e., which means adding interest to the balance of the loan).

Here’s a practice problem that you can use to help you understand the difference:

The nominal interest rate on a credit card balance is advertised as 21%.  However, interest is compounded monthly.  What is the annual effective interest rate?

Post your answer to cee300.slack.com!

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