Every year since 1999, the Madden NFL video game cover has featured an NFL star player from the previous year, similar to an athlete being featured on the Wheaties box. Fans have noticed a trend where these star players end up playing worse or even getting injured the following year. Hence the idea of a “Madden Curse,” and a subset of fans who are adamantly opposed to their favorite players being featured on the cover.

What does this have to do with statistics? Well, there is a concept in statistics called “reversion to the mean.” Reversion to the mean is the idea that if we observe an extreme event (e.g. a surprisingly strong NFL season), we can expect the following event to be closer to the average (e.g. the season following a particularly strong NFL season will be less impressive). This might explain why players featured on the Madden cover generally do worse the following year.

GRONK. SPIKE.

Introducing the cover of #Madden17! pic.twitter.com/iCZUwIAuYO

— EA SPORTS Madden NFL (@EAMaddenNFL) May 12, 2016

The player's reversion to the mean does not indicate that they are actually playing worse than they normally do, it’s just that we raised our expectations of them! We can look at a similar phenomenon at the team level. Historically, football teams that do very well (e.g. records of 14-2, 15-1, or 16-0) typically do worse the following season.

This concept relies on there being some randomness to the events. If an NFL season were purely the result of skill, then we would always expect the following season to be as good as the previous one (barring injury or other external factors). But as we all know, there is some luck (or randomness) involved in most human endeavors, and as a result we are all susceptible to reversion to the mean.

The good news is that reversion to the mean applies to extremely bad events as well. So, if you did particularly poorly on a recent exam (compared to similar exams you have taken), keep your spirits up because most likely you will do better on the next one!

Food for thought: Why do you think that when teams fire their coach, they usually improve? Does reversion to the mean play a role here? Can you think of any other situations where reversion to the mean plays a meaningful role? Let us know in the comments!

To learn more about the Madden Curse, check out this piece from Forbes.

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Want to know more about statistics and other business concepts? HBX CORe will teach you the basics of Business Analytics, Economics, and Financial Accounting using Harvard Business School's renowned case-based methodology!

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As you've likely heard by now, Microsoft purchased LinkedIn. So why did LinkedIn's leadership decide to sell the company? Many have started to speculate that Linkedin's reliance on stock-based compensation could be a contributing factor. 

So what exactly is stock-based compensation and why has it become so pervasive in corporate settings? 

One unspoken reason behind the LinkedIn sale https://t.co/tl5APXXdFb

— The New York Times (@nytimes) June 14, 2016

One reason that companies started offering stock-based compensation was to correct what is called the “principle/agent problem.” Simply stated, the employees of a company (the “agents”) may not have the same incentives that the owners of a company (the “principles”) may have. If someone is both the owner and the manager of a business, they tend to be very careful with expenses – they economize by flying coach instead of 1^st class, for example, or they maintain a simple office instead of an expensively furnished one. 

When the manager of a company is not also the owner, they have an incentive to make decisions that benefit themselves at the expense of the owners – they fly first class or maintain expensive offices. Giving employees stock-based compensation is an attempt to make them also part-owners of the company, and align their interests with the other owners.

Another reason, especially for small tech-based startups, is to avoid paying out cash. For many small companies, cash may be exceptionally tight, and paying employees in the form of stock offers payment tomorrow for work today. This can cut expenses for the company in the short-term and can be exceptionally profitable for the employee in the long-term – think about stories of the Google janitor now being worth millions, for example. Obviously, if the company does poorly, this isn’t the case.

So why all the concern? Well, when stock-based compensation is offered, it dilutes the existing shares of stock and reduces their value. If we imagine that the equity of a company is worth a set amount and doesn’t change depending on how many shares are outstanding, then issuing new shares must reduce the value of the existing shares – by exactly the amount given out in new shares. 

In this way, stock-based compensation should hurt Net Income by exactly the same amount as its listed value, just like an expense. But since it’s non-cash, many companies “adjust” their EBITDA to not include it. However, as this dilution effect can be very large, pressure has come from investors for companies to include this as an expense when reporting earnings.

As you can see in this New York Times article, many companies, including Facebook and Microsoft, have started doing exactly that.

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Interested in learning more about Accounting, Economics, and Business Analytics?

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We launched our first cohort of HBX CORe in June 2014. Two years later, we checked in with a few members of our pioneer cohort to see how CORe has made a difference in their lives.

Opening Doors in the Building Industry

I study Architecture, Construction Engineering and Management at Illinois Tech in Chicago. I also work as a design and construction intern at the Duchossois Group. CORe was instrumental in my decision to study construction management and helped me to better understand the potential roles I could play within the building industry.

A plethora of possibilities started to open up after taking the course. Previously, I had only truly imagined myself practicing the technical aspects of my education but CORe helped me see and start to work towards my place as a leader within the building and infrastructure industry.

Economics for Managers was influential in helping me understand how leadership within various industries could make strategic decisions to create value. It was incredibly fascinating to finally understand the constant balance of proactive and reactive decisions and strategies business leaders used to understand markets and as a result people.

Rounding Out Liberal Arts Educations 

CORe enabled me to become more business-focused; I always knew that I wanted to enter the business world, but coming from a liberal arts background I needed to expand upon my experience to understand what that really meant. Competing against undergraduates from business institutions can be intimidating, but understanding even basic terminology can help put your mind at ease.

CORe gave me the background and confidence to pursue a business career after college. It even helped shape an independent study that I conducted during my senior year at Bowdoin, looking at Corporate Social Responsibility Initiatives at four major banks in the United States. I do not think I would have applied this interest to corporate banks had I not had an introduction to the foundations of the business world from HBX CORe.

As I began interviewing for full-time positions during my senior year, HBX CORe definitely helped me stand out among my peers. I truly understand the value of a liberal arts education, and that is something that I would never replace. However, coming out of a liberal arts institution with some sort of an introduction to the business world is unbelievably valuable.

Since HBX CORe was still so new when I completed the program, I really caught the eye of many interviewers and companies interested in learning more about it. The knowledge that I gained helped me tremendously as I interviewed and looked into different companies to join upon graduation.

I know that CORe has set me up well for a future in the business world and I would love to pursue an MBA in the future.

Giving Engineers a Competitive Edge 

When I took HBX CORe, I was in my sophomore year of college and had begun actively thinking about my future career. I had heard of all of the great advantages of having both a science and business background but I was worried that I would struggle if I took business classes in school.

CORe really broke down all of the business concepts I had vaguely heard of and introduced new material in the clearest way with unique examples. My experience with the CORe program gave me the confidence to pursue my Business Administration minor and I plan to apply for an MBA in the future.

Having CORe listed on my resume has really helped me stand out to potential employers. Every internship interview I have had since participating in this program has involved me explaining this program and its benefits. Most employers are surprised to find an engineering student with a background in business so it usually makes me seem more impressive and gets me closer to getting through the door.

I plan to become an Industrial Engineer and explore how to improve complex systems and processes. I know that pursuing knowledge of business with my background in engineering will shape my career path in unexpected ways.

Instilling Confidence to Pursue Careers in Financial Consulting

CORe helped me solidify my knowledge of financial analysis and introduced me to the world of business analytics. Coming from a primarily non-finance background, HBX definitely provided me with the confidence needed to continue pursuing a career in financial analysis and consulting.

HBX has been discussed in every single interview I’ve had since completing the program and I’m fairly certain that the HBS brand helped me land a few of those interviews. A few times the program has been met with skepticism, but when you begin to explain how the structure of the program and the platform itself are unique compared to traditional online coursework people begin to warm up to it and ask more questions. It really boils down to it being the best online replication of a real-life classroom that I’ve ever experienced. When I reflect upon the experience, it actually feels like I was in a real classroom.

Creating Relevant Conversations with Prospective Employers

I took CORe for an introduction into the language of business that would complement my STEM education. I was doing mostly technical classes at school, but I was interested in business as well. After the program, I realized I wanted to pursue a career in technical management and business.

I actually decided to apply for my upcoming position partly because of CORe. I got interested in Amazon after the case study about them in one of the program modules. Learning about some of the principles behind their operations motivated me to do in-depth research about the company.

The case study was part of the conversation when I first connected with recruiters during a career fair and CORe also came up during an on-site interview. I explained how the certificate would help me transition from a very technical background into a more business oriented position, and it must have worked because I got the job!

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What can CORe do for you?

Balance sheets are one of the primary statements used to determine the net worth of a company and get a quick overview of it's financial health. The ability to read and understand a balance sheet is a crucial skill for anyone involved in business, but it's one that many people lack.

When it comes down to it, the balance sheet is just a more detailed version of the fundamental accounting equation:

Assets = Liabilities + Equity

You've probably heard at least some of these terms before but what do they actually mean? Let's break it down:

Assets

The assets are the operational side of the company, basically a list of what the company owns. Everything listed there is an item that the company has control over and can use to run the business. 

In a sense, the left side of the balance sheet is the business itself – the buildings, the inventory for sale, the cash from selling goods, etc. If you were to take a clipboard and record everything you found in a company, you would end up with a list that looks remarkably like the left side of the Balance Sheet. The assets are what allow the company to run.

Liabilities 

Liabilities and equity make up the right side of the balance sheet and cover the financial side of the company. This is a list of what the company owes. With liabilities, this is obvious – you owe loans to a bank, or repayment of bonds to holders of debt, etc. The interest rates are fixed and the amounts owed are clear. These are also listed on the top because, in case of bankruptcy, these are paid back first before any other funds are given out.

Equity

Below liabilities on the balance sheet, you'll find equity, the amount owed to the owners of the company. Since they own the entire company, this amount is intuitively based on the accounting equation – whatever is left over of the Assets after the liabilities have been accounted for must be owned by the owners, by equity. These are listed on the bottom, because the owners are paid back second, only after all liabilities have been paid. 

However, unlike liabilities, equity is not a fixed amount with a fixed interest rate. This means that any time the value of assets change – perhaps you receive more in cash from a sale than the value of the inventory you sold, or you were forced to write-down a truck that was involved in a collision and no longer works – the value of equity changes. 

Because the value of liabilities is constant, all changes to assets must be reflected with a change in equity. This is also why all revenue and expense accounts are equity accounts, because they represent changes to the value of assets. 

Make sense?

So, to recap, you'll find the assets (what's owned) on the left of the balance sheet, liabilities (what's owed) and equity (the owner's share) on the right, and the two sides remain balanced by adjusting the value of equity. And there you have it!

Want to dive deeper into balance sheets, assets, liabilities, and equity? Check out HBX CORe, the online fundamentals of business program from Harvard Business School!

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For centuries, the p-value has been the gold standard of statistical testing. Whether it’s determining whether a specific result is significant, or deciding whether a study is publishable, the science and business communities have used p-values as a main criterion. If the p-value is less than 0.05, we reject the null and conclude that something is going on. If the p-value is greater than 0.05, we fail to reject the null and conclude that there’s nothing to see here; move along.

However, over the past few years, more and more disciplines have been questioning the validity of the p-value. For example, most of the major psychology journals have either stopped using the p-value as a criterion for publication, or have banned its use entirely.

The p-value doesn’t give any indication of how important the results are (that is, it doesn’t measure the magnitude of the effect); it doesn’t even give an indication of how likely it is that the results are due to more than random chance. All a p-value communicates is how likely a result would be IF the phenomenon under review WASN’T there. If you find this confusing, you’re not alone; it’s a very peculiar way of looking at a question.

Let’s take a concrete example. Imagine scientists wanted to find a connection between jelly beans and cancer. They could collect a lot of data about people’s jelly bean consumption habits and the incidence of cancer, and then perform statistical analysis to see if there’s a relationship. Well, spurious correlations are abundant in the real world, so we’d expect at least a slight connection, just by random chance.

The question is: are the patterns we’re seeing in the data GREATER than what we’d expect by random chance. If there were no correlation between jelly beans and cancer, each sample would give a slightly different result, but they’d all be pretty close to showing no relationship. At a certain point, they’d be far enough from showing no relationship that we’d say “Hey, it’s REALLY unlikely that we’d see this if there were no relationship; so there probably is one.”

Usually, our threshold for REALLY unlikely is 0.05. If the null hypothesis were true (if there were no relationship between jelly beans and cancer), we’d only see results this extreme 5% of the time. We consider that unusual enough that we could say, hey! There’s something going on here.

This means we would imagine that if we do 20 studies where nothing is going on, we’d expect, on average, that one of the studies would end up statistically significant at p<.05, just by chance. Let’s say we do 20 studies, and three of them end up significant. On average, one of the three is just due to chance, and the other two are the result of an actual phenomenon. However, we have no way to identify the one that is just random chance. Furthermore, a result of p=.04999 and result of p=.05001 are virtually identical; but one is “significant” and the other is not.

This doesn’t mean p-values are worthless. But it does mean that researchers (and consumers of research) need to be thoughtful when interpreting them. A p-value by itself doesn’t tell you much, and simply knowing that a result is “significant” tells you even less. More useful is an estimate of the effect size, or a review of multiple studies looking at the same phenomenon.

To learn more, check out this great post from PLOS.

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This past Saturday, May 7^th, I had the privilege of being involved in something that at first glance is replete with contradictions. I gathered with people I knew, but didn’t. I talked with students of an institution who had finished their program of study but who were, in many cases, making their first visit to that institution’s campus. I saw men and women who had taken a course together interact as if they were long lost classmates from an in-residence, multi-year program despite never having been in the same room. And I saw this from people who had to make travel arrangements and purchase tickets to come from all areas of the globe: from Australia to India, from Colombia to Qatar.  

HBX ConneXt was wonderful in its own right but it was most important in the evidence it offered of what an online education program can be. When we set out to create HBX, we started by putting ourselves in the student’s shoes and thinking about the pedagogy (for HBS, this means the case method of study). In starting there, we realized quickly how important interaction between members of the community would be if the case study would be at the center of the learning experience. After all, the case method relies on students questioning and challenging each other. Through this back-and-forth, they come to induce principles and, in having to work for the answer to a problem, they come away with a more fundamental understanding of how to apply their thinking to a host of situations. 

So our efforts to include a community in the platform had much to do with our pedagogy. What wasn’t anticipated at the time but which, in retrospect, should have been obvious, is that this online community that engaged to solve a real-world problem would form bonds that would transcend the course platform. That is what we saw at HBX ConneXt.

We saw digital world relationships become physical world friendships. We saw how helping peers online led to bonding with colleagues offline. We saw what I believe is the beginning of something very special.

As an employee and graduate of the school, I had an amplified sense of pride in what I saw. The employee in me thought about how well the team here executed in creating a wonderful platform and the courses that go on it. The graduate in me took pride in seeing the extension of the school’s mission – to educate leaders that make a difference in the world – take root in so many lives across so much of the world. HBS Dean Nitin Nohria noted to the HBXers assembled during one of the day’s sessions that the world is in desperate need of leadership everywhere. After seeing the enthusiasm of the HBX students, relatively early pioneers in the new world of digital education, I think I can say with confidence that we have many who are ready to answer that call of leadership.

 

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So you want to start a company, but you aren’t sure about a viable business model. How might you create something that people would be willing to pay for from which you could earn a profit?

Before diving deep into potential strategies, it’s important to understand what exactly a business is and does. It’s surprising how many people work for businesses, but don’t actually know what they do.

A successful business creates something of value. The world is filled with opportunities to fulfill people’s wants and needs and your job as a potential entrepreneur is to find some way to capitalize on these opportunities. A viable business model is one that allows a business to charge a price for the value that it’s creating, such that the business brings in enough money to make it worthwhile to continue operating over time. Whatever the business is offering must also satisfy the customer’s needs and anticipations of quality.

Admittedly, value is quite a subjective term. What’s valuable to one person may be far less valuable to another. Moreover, the concept of value excludes any moral judgments about the intrinsic worth of an offering. For example, while most would agree that human life is more valuable than sports, Pablo Sandoval still makes far more playing baseball than the average brain surgeon does in the operating room.

Nonetheless, the concept of value provides a useful bedrock upon which to begin building your business model. In particular, one should first think about what form(s) of value that people would be willing to pay for. Here are three classic forms of value along with some pros and cons for each to get you started.

Product

A product is a tangible item of value. To run a successful product-focused business, you ideally want to produce the item for as low of a cost as possible, while maintaining a passable level of quality. Once the item is produced, your objective should be to sell as many units as you can for as high a price as people are willing to pay to maximize profits. Products are all around us. From laptops to books to HBX courses (products don’t have to be physical), products are a classic form of value with high upside if you can get them right.

• Pros: Many products can be easily duplicated. Thus, firms can achieve economies of scale after bearing some upfront costs of production.
• Cons: Physical products need to be stored as inventory, which can increase costs. They can also be damaged or lost more easily than, say, a….

Service

A service involves offering your assistance to someone else for a fee. To make money from your service, you ideally want to provide some skill to others that they either can’t or won’t do themselves. And you want to keep providing this benefit to them at a high quality over and over again. Like products, services are in abundance, especially in the knowledge economy. From hairdressers to construction workers to consultants to teachers, people with lucrative skills can earn good money for their time.

• Pros: If you have a skill in high demand or a skill that very few others have, you can get paid a lot!
• Cons: If you don’t charge enough for your services, or many people have your skill, you will have to work a lot for not very much money.

Shared Assets

A shared asset is a resource that can be used by many people. Such resources allow the owner to create or purchase the good once and then charge customers for its use. To run a profitable business around shared assets, you need to balance the tradeoff of serving as many customers as you can without affecting the overall quality of the experience too much. Think of a fitness center: a gym typically buys treadmills, ellipticals, free weights, bikes and other equipment and then charges customers for monthly memberships for access to all these shared assets. The key then for Golds Gym or 24 Hour Fitness is to charge their customers enough to maintain and, if needed, replace their assets over time. Finding the right range of customers is the key to making a shared asset model work.

• Pros: This model provides people access to a lot of assets that they would not have access to otherwise. In addition, many people are willing to pay a lot for access to trendy social spaces.
• Cons: Because they don’t own the assets, customers have little incentive to treat your resources well. Make sure you have enough cash on hand for quick fixes if necessary.

These are just three forms of value possible to the aspiring business owner. Stay tuned for my next post which will discuss five more.

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Click here to see part 2!

Digging through a basement bargain bin of books, who could resist the urge to purchase Ellen Shell’s book, Cheap: The High Cost of Discount Culture, at 50% off of the cover price? A paradox to the book’s title, of course, the decision to purchase the book was an inevitable tango with a good bargain.

In a society dominated by cheap prices, we are increasingly becoming travelers in a world of foreign and unfamiliar prices. The “Age of Cheap” makes it harder to infer if the price we pay is actually the deal we believe it to be. It’s stressful to constantly renegotiate new norms for what constitutes a fair price while our relationship to pricing is positioned on a slippery slope of value and perception.

The Bottom Line on A Good Bargain

Does paying less make us wealthier? The satisfaction of finding a deal can create great personal joy, but in the long run, cheap prices can point to breaks and flaws in the value chain. The bargain price that we see affixed to clothes, food, or other items could be the result of workers earning below a living wage or materials gathered through unsustainable practices.

Cheap comes at a cost. If the consumer doesn’t pay this cost, who covers it? Workers, suppliers, and the environment are a few easy targets that help carry the burden.

Who is Ultimately Shouldering the Cost

The cost of cheap doesn’t always get paid by something or someone else either. You, as a consumer, might ultimately pay for a cheap price. Maybe you’ve purchased an inexpensive piece of furniture, then spent an entire weekend assembling it. In this case, the cost of cheap has been passed along to you by doing the assembly work. You become an extension of the factory, albeit likely lacking some critical skills and tools.

Consumers work for free, if the price is right, but are inadvertently paying for a cheap price. The initial price might make us more satisfied, but the extra labor doesn’t create wealth.

Let's Reevaluate

It’s hard to put down the 75% off coupon and walk past the deal of a lifetime, but how can we re-evaluate our relationship to price? Knowing that all of our purchases have consequences for ourselves, the environment, and the companies that make our goods, to name a few, we can begin to set our own mandate for how we consume.

We can choose to ignore a bargain and shop with our own standards in mind. The standards we choose are up to us: craftsmanship, quality, sustainability, transparency, etc.

Putting aside the flashy discount sticker, what’s your story with price? What standards guide your decisions to consume?

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Interested to know more about willingness to pay and other fundamental business concepts?

 

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Who do you think the next President of the United States will be? What about the winner of the 2018 World Cup? You probably have a guess, or at least a list of possible results. But no one actually knows for sure. 

Some situations have such complex dynamics that even think tanks and advanced modelling software have trouble understanding them. For example, imagine you are trying to estimate the box office results of an upcoming major film. You have some historical data on how similar films have done at the box office, but every film is different and is released in a different economic climate. You want to incorporate all of the various factors that affect the success of a film: advertising expenditures, the cast, demographic appeal, date of release, and so many other variables that you couldn’t possibly list them all, let alone measure them.

It turns out that one of the best predictors of box office results is the Hollywood Stock Exchange, or HSX. The HSX is a virtual market where anyone (you and I included) can sign up, get H$2 million in fake Hollywood dollars, and start betting on all kinds of Hollywood-related outcomes (e.g. Oscar nominations and box office results). The way it works is simple: The Jungle Book is currently selling for H$187.51 which means that the market expects The Jungle Book to earn $187.51 million in the first four weeks of its release. If I think The Jungle Book will actually make more than this, I can buy this MovieStock® at H$187.51 and then I can cash out my MovieStock four weeks after release for however much the actual box office earnings were (divided by $1 million and in Hollywood dollars). Just like a real stock market, the price of a MovieStock fluctuates with trading and I can always sell my MovieStocks for their current value before the cash out date.

The HSX is a great example of a prediction market. Prediction markets are markets where people can trade stocks that are tied to the outcome of an event. In a prediction market, the current trading value of a particular stock can be interpreted as what the public (or group of traders) collectively predict the outcome of the event to be. 

These prediction markets can be quite powerful. There is a significant amount of literature showing that HSX quickly absorbs new information (such as casting decisions) and accurately predicts box office results. HSX also has a history of correctly predicting Oscar nominations. There are dozens of prediction markets for events ranging from elections to sporting events with thousands of stocks being traded in real time. Many use real money and most are open to the public. While we don’t recommend “gambling” in these markets, we do recommend checking them out and thinking about their value and their limitations.

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Want to learn more about prediction markets as well as other fundamental business topics?

 

Imagine a man who sells apples on the side of the road out of a cardboard box. Every morning, he buys some apples at the grocery store, then walks to his corner. He sells the apples for $1 each until he runs out, then heads home for the day.

For the apple seller, accounting is easy. If he wants to know his balance sheet, he looks down in front of him. There are some apples (his inventory) and a cardboard box (his property, plant, and equipment). If he reaches into his pocket and counts the number of dollar bills he has, that’s his cash. Together, those are all of his assets. His equity is exactly equal to his assets – he didn’t borrow any money to buy the apples or the cardboard box in the morning, so he has no liabilities. He can do this whenever he wants to get the current balance sheet of his business. His income statement is just as easy – he remembers how much money he had in his pocket before he left home this morning, and counts how much he has now. The difference is his net income for the day.

One day, a truck of workers passes by and they offer to buy his entire box of apples, but they’ll need to pay him tomorrow. For the apple seller, this is a great deal – he could go home early if he agrees and spend more time with his family, or he could use the money to buy more apples and make a lot more money today. But he would need to keep track of how much the workers owe him for the apples, so he writes a note on the side of his cardboard box. The next day, as he’s buying apples, the man at the counter in the grocery store says, “You know, you buy apples from me every day. You’re my best customer – why not just pay me once a week? That would be easier.” So he starts writing on the side of the box how many apples he buys each day, so he knows how much to pay at the end of the week.

This is an example of accounting in action. The marks on the side of that cardboard box are the beginnings of T-accounts – recording his accounts receivable and his accounts payable – and this apple seller is still running an extremely simple operation. If he opens a bank account, because he’s worried about being robbed while he stands on the side of the street, he’ll need some way to record that. If he decides to hire his son to sell apples two streets over, he’ll need to keep track of how many apples his son has sold and how much to pay him. Suddenly, he can’t generate his balance sheet just by looking in his box.

Very quickly, the benefits to accounting become apparent. Accounting gives us a standardized way to keep track of all of these things, so you can quickly and easily understand your business.

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Want to learn more about accounting, economics, and analytics? Check out HBX CORe, an interactive online program from Harvard Business School!