http://www.washingtonpost.com/wp-dyn/content/article/2009/11/21/AR2009112102186.html?nav=hcmodule
I do not intend to wade into that debate but the entire controversy has held up a mirror to academic research in general and I don't think the reflected image is flattering.
Let us start with the ideal. Seekers of truth (Scientists, professors, Phd students... the academic research community) come up with interesting and provocative questions to answer, look at these questions objectively (and with no financial interests at stake) and with no preconceptions, develop theories and test them rigorously and then report these results without skewing them. Their research is reviewed by their peers, who bring the same objectivity and fairness to their assessments, and decide whether the research should be published.
As with most ideals, this one is utopian. Here is my more cynical view of how the process works.
1. Research what will be published, not what is interesting: When you first start climbing the academic ladder, the name of the game is to get published. Would you rather publish a ground breaking paper than an incremental one? Of course. But would you rather publish an incremental paper than have a ground breaking paper that does not get published? The answer again is affirmative. It is far easier to publish a paper than nibbles at the edges of big questions than one that asks and tries to answer big questions. If you pick up any academic journal and browse through the contents, you will see the evidence of this marginalization.
2, Bias in, bias out: Researchers are human and come in with biases and preconceptions, some of which are formed early in life, some during their academic experiences and some of which they acquire from their mentors and peers. Those biases then drive not only the topics that they choose to research but also how they set up the research agenda and in some cases how they look at the data.
3. Who you are matters: Where you went to school to get your doctorate, who your mentor is and what school you teach at right now all affect your chances of getting published. If you went to an elite school (and the elite can vary from discipline to discipline), worked with the right mentor (preferably a journal editor) and teach at another elite school, your chances of publication increase significantly.
4. Every discipline has an "establishment" view: There is an establishment view in every discipline. Papers that hew to this view have a much easier path to publication than papers that challenge the view. In finance, the establishment view for decades was that markets were efficient and that any evidence of inefficiency was more a problem with the models we had than with the underlying efficient market hypothesis. It has taken almost two decades for behavioral economists to breach this wall. Now, I sense that they are becoming part of the establishment and don't quite know what to do.
5. Peer review is wildly variable and sometimes biased: When you write a paper in a particular area, it will be sent out to other "experts" in the area for review. Some of them are scrupulously fair, read your paper in detail and provide you with extraordinary feedback that improves your paper. Others are defensive, especially if the paper challenges one of their pet theories, and find reasons to reject the paper. Still others are extremely casual about feedback and make suggestions that border on the absurd. While peer review, on average, improves papers, it does so at considerable cost.
6. Data abuse happens: As the volume of and access to data improves, it has become far easier to abuse the data by (a) selecting the slices of data that best fit your story (b) expanding sample sizes to the point that the sheer amount of data overwhelms the opposition and (c) reporting only a subset of the results that you get with the data.
I think peer review is useful and empirical testing is crucial. However, my advice to laymen looking at academic research is the following.
1. Don't assume that academics don't have an agenda and don't play politics. They do.
2. Don't let "research findings" sway you too much - for every conclusive result in one direction, there is almost always just as conclusive a result in the opposite one.
3. Just because something has been published does not make it the truth. Conversely, the failure to publish does not mean that a paper is unworthy.
4, Develop your own vision of the world before you start reading papers in an area. Take what you find to be interesting and provocative and abandon the fluff (and there is plenty in the typical published paper).
5. Learn statistics. It is amazing how much of what you see reported as the truth fails the "standard error" test.
One final note on the CRU email story. For the most part the faults of academic research create no significant damage because so much of the research is inconsequential. The scandal of the data manipulation and stonewalling of critics in this case is that it is so consequential, no matter what you think about global warming. If there is no global warming and the data has been manipulated to show that there is warming, the academics at the heart of this affair should be forced to answer to the coal miners, SUV assembly workers and others who lost their jobs because of warming-related environmental legislation. If there is global warming and the numbers were being cooked to make the case stronger, there is the real possibility that people will turn skeptical about warming about revert back to old habits. In either case, it behooves those involved in this mess to step down.
One final note on the CRU email story. For the most part the faults of academic research create no significant damage because so much of the research is inconsequential. The scandal of the data manipulation and stonewalling of critics in this case is that it is so consequential, no matter what you think about global warming. If there is no global warming and the data has been manipulated to show that there is warming, the academics at the heart of this affair should be forced to answer to the coal miners, SUV assembly workers and others who lost their jobs because of warming-related environmental legislation. If there is global warming and the numbers were being cooked to make the case stronger, there is the real possibility that people will turn skeptical about warming about revert back to old habits. In either case, it behooves those involved in this mess to step down.
10 comments:
I had an observation and a question related to academia research on illiquidity as a big issue in valuation. I personally think far too much importance is given to illiquidity as an issue than what it really is.
First if you look it at the point of view of traded securities, the ones that have the least trading in general the bid ask spread between the two increase so does the cost of acquisitions of the stocks and when there is selling in those stocks even a small level of selling decreases the share price significantly.
But if you look it from the point of view of the Company which manages its stock price to make sure that the stock doesn't fall too much or when they have to raise money they increase their share price.(i do think all stocks that are traded are managed somewhat by the Company for the above said reasons). For the same reasons why the share prices increases or decreases significantly with little volume, the Company can manage or raise its share price in a easy way without facing much resistance from traders who like making a fast buck when the management is trying to raise the price of the shares. Here are the traders are little for the same reason that there is illiquidity so there is less speculative trading. Also the stock comes under positive and negative attack for even the smallest of things where as for a little illiquid stocks unless there is significant new built there is little speculation.
Another way to put the same is the share price of Berkshire Hathway is close to $100,000 because I personally think Buffet didn't want it to be the traders’ favorite, which it would have become had the share price been much smaller say $150 close to Goldman's share price. His share price jumps or decreases significantly only on significant news such as - Big derivative Bets that could hurt the Company eventually or bad results in 1Q'09 or great results in the last reported quarter. The fact that it is not included in the index even when it’s the center of the any long term investment talk is a big sign that way too much importance is given to illiquidity at least for public traded companies.
Coming to privately traded companies where illiquidity looks to be the bigger issue because selling price discovery is not efficient as there is no market and buyers are few, yet there are a few positives from being a privately traded company as well (1) private equity investors are more glued to privately traded companies for the simple reason they can get a better price for the same company if was public. From the companies point of view this is good as raising capital becomes easier if it is doing well even in a bad market because bad markets punish all public companies at least in the short run and (2) the management is focused on more important stuff like Company doing well, getting more cash flows rather than increasing and reporting great accounting earnings or increasing the share price.
The irony is everyone wants to take their company public whereas while taking a Company public has its advantages like being able to raise far more money for the same equity stake and that the management is under more pressure, there are good enough negatives as well. Illiquidity is an issue but not as big an issue as it’s made out to be.
It would be great to have some comments from the professor himself on the topic.
On the contrary. I think far too little attention is paid to illiquidity in financial theory and valuation. In traditional discounted cash flow valuation, illiquidity is not an input at all. In corporate finance theory, we practice benign neglect. We do not talk about how the way a company raises funds should be affected by illiquidity. In fact, every aspect of corporate finance is affected by illiquidity. If investments are illiquid, the projects we accept, the costs of capital we use and the dividend policy we adopt will all be very different.
My point about illiquidity came from the fact that a lot of valuation experts use 15-20% discount for illiquidity just because it doesn't find a place in the models and traditional corporate finance problems such as raising money for projects. Illiquidity should have a discount but not 15 -20% as most valuation guys use, although to be honest i started thinking of illiquidity after reading your views on private company valuations and then started noticing behaviors of illiquid securities over the last 1 year. Also, the way you value private companies is far different and looks to be the most appropiate method i have come across.
I just wanted to point out the problem with using 15-20% discount for valuing private companies or for companies that are relatively illiquid.
My point is that we have not paid any attention to illiquidity in public company valaution. In fact, we have abandoned our role in estimating illiquidity in private company valuation which has allowed practitioners to do whatever they want.
I do agree to your points on the same. Thanks for the help as always.
Hello Prof. Damodaran,
Thank you for the article. I feel it pertinent to point out a similar topic " Improving scientific publishing" which appeared in the July 29th version of the Economist magazine. I believe some boys have started a new website of rejected papers. This would be interesting to aspiring researchers. Good luck.
The professor makes many valid points throughout his discussion related to research in general and he should have stopped there. Where he goes wrong is accusing the scientists of wrong-doing by saying, "In either case, it behooves those involved in this mess to step down." Let's not forget that this information was meant as informal discussion (email - not formal letters) between scientists on various topics and only selected data-mined documents have been released by an organization that potentially created a criminal offense. Most open-minded observers contend that the content of the emails contain "no smoking gun" related to hiding information on global warming (or global weirding as I prefer). The scientists involved should clear the air on this topic by discussing the content of their emails in order to put this mess to rest. Regardless, the anti-global warming advocates will always make a mountain out of a mole hill and cling to anything to save their beloved oil and coal and their benefactors.
The emails may have been private conversations between scientists but now that they are out, you cannot put the genie back in the bottle. Let me give you an analogy. The first goes back a few years, when Henry Blodget, then an equity research analyst at Merrill, sent out emails to other Merrill employees badmouthing stocks that he was recommending to clients. When the emails eventually were revealed (and they were subpoenaed, indicating that courts don't buy into your argument that they are private information), Blodget was rightly condemned, because the emails revealed the motives behind his recommendations. He eventually lost his job.
The lives of young academics are held in the hands of the gatekeepers who run the journals. If I found out that the reviewers of finance journals were essentially shutting alternative points of view out and "messing" with the data, I would be just as vehement about them leaving as I am in this case.
Finally, if you believe in global warming and the data actually was supportive, these scientists have done more damage to your cause than a hundred skeptics could have over time.
The emails may have been private conversations between scientists but now that they are out, you cannot put the genie back in the bottle. Let me give you an analogy. The first goes back a few years, when Henry Blodget, then an equity research analyst at Merrill, sent out emails to other Merrill employees badmouthing stocks that he was recommending to clients. When the emails eventually were revealed (and they were subpoenaed, indicating that courts don't buy into your argument that they are private information), Blodget was rightly condemned, because the emails revealed the motives behind his recommendations. He eventually lost his job.
The lives of young academics are held in the hands of the gatekeepers who run the journals. If I found out that the reviewers of finance journals were essentially shutting alternative points of view out and "messing" with the data, I would be just as vehement about them leaving as I am in this case.
Finally, if you believe in global warming and the data actually was supportive, these scientists have done more damage to your cause than a hundred skeptics could have over time.
Professor Damodaran:
Let me be clear, I wholeheartedly agree with your overall assessment of academic/scientific research and publishing.
I just take issue with this particular case and circumstances surrounding the emails on global warming. Thus far, there is no evidence to suggest that scientific malfeasance has taken place despite what the global pollution advocates say. Listen to what they say. It sounds similar to the rhetoric about WMDs in Iraq. It is now as it was then, there is nothing of substance in their words - just distraction. I can go much deeper, but I'll leave it there.
As for Henry Bloget, that is an apples and oranges comparison. What he did was wrong and he was exposed for his wrong-doing. Also, Henry shouldn't be mentioned in the same context as scientists - analysts aren't scientists. As for a subpoena, this is proof that private or personal information is being requested (not the contrary as suggested). In the case you mention, it was Merrill Lynch's private information.
Finally, the only damage done by the emails is the false impression that data was manipulated. This was not the case and I believe more serious discussions will prevail.
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