MIT Sloan Executive Education innovation@work Blog

Category: Finance

Speeding the cure for cancer: Financial engineering and Dynamic Work Design

Posted by MIT Sloan Executive Education - 1 year and 5 months and 22 days ago

Speeding the cure for cancer: Financial engineering and Dynamic Work Design

A business school may not seem like the most logical place to find a solution for virulent disease. However, several MIT Sloan scholars have recently taken a deep look at cancer research and treatment in an effort to speed the development of a cure. From the way research is funded to the efficiency of genomic sequencing, the methods and models created by these MIT Sloan professors have the potential to reshape the industry and raise the probability of finding a cure.

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What’s it worth? Understanding the value of a loose tooth, a stuffed eagle, and Whole Foods

Posted by MIT Sloan Executive Education - 1 year and 5 months and 30 days ago

What's it Worth?

There is a certain predictability and orderliness to the prices of products and services. From bananas to gasoline to wages and even real estate, prices derive from supply, demand, and competition.

Of course, pricing strategy is infinitely more complex than that equation sounds, which is why MIT Sloan Executive Education has a live, online course dedicated to the topic. And while price is one thing, value—or worth—is quite another. The semantics of these terms alone is complicated (“value” and “worth” have specialized meanings in economics, business, and philosophy). In accounting and finance, value and worth are often used interchangeably and considered equivalent to an expected sale price. But as you might have guessed from the title of this blog post, it’s not that simple.

What is the fair market value of an object that cannot be sold?

In his short course, Fundamentals of Finance for the Technical Executive, MIT Sloan Lecturer Paul Mende can relate to the participants in the room. A former technical executive himself (as well as a theoretical physicist), he learned the principles of accounting and financial decision making on the job. “I enjoy showing participants the greatest hits of finance,” he says. “And we have fun with it.”

One of the concepts Mende tackles early in his program is that of fair market vs historical cost accounting. For the past two decades, fair market (or fair value) accounting has been on the ascent. The practice of measuring assets and liabilities at estimates of their current value, this accounting basis is a departure from the centuries-old tradition of keeping books at historical cost.

“But here’s where it gets complicated when you’re trying to manage a business,” says Mende. “In the financial world, something is worth what people are willing to pay for it—fair market value. But the way you base forward-looking decisions for running a business is tied to neither fair market or historical accounting basis. Value is central to finance, but there isn’t a single definition of it. So, it’s not a fight of which is right—each is just used in a different way.”

In his Executive Education program, Mende ups the ante on this discourse by asking, “What about something that can’t actually be sold?” He points to the famous conundrum that rocked the art world back in 2012, when the IRS came calling on the owners of Robert Rauschenberg’s Canyon. This masterwork of 20th-century art is one of Rauschenberg’s hybrid works incorporating painting, collage, and found objects. Included in Canyon is a stuffed bald eagle that had been previously found in a pile of debris and given to the artist by a friend. The work ended up in the estate of New York art dealer Ileana Sonnabend, a collection worth billions of dollars and inherited by her children upon her death in 2007.

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Making better decisions with managerial accounting

Posted by MIT Sloan Executive Education - 1 year and 6 months and 3 days ago

Strategic Cost Analysis

In the two-day executive education program, Strategic Cost Analysis for Managers, MIT Sloan Professor John Core and co-lecturer Christopher Noe focus on how to use internal accounting information for decision making—a particularly pertinent topic for mid-level managers who need to think about why information was prepared the way it was, as well as how they can use the information most effectively.

“Companies make mistakes all the time with this kind of internal accounting information, which has been prepared for some other purpose than what they are using it for. This course teaches you how to be disciplined about thinking about the information you have.”

In addition, the program covers subjects such as fixed and variable costs and delves into the common pitfalls that can occur if managers use information without thinking through what they actually have. “In decision making, you need to think about what costs are going to change as a result of your decision and not assume they are going to go up one-to-one.” This applies to managing people and employee pay scales.

One highly visible example of how internal accounting is affecting corporate decision-making relates to CEO pay levels. According to new data, not only are CEOs and other C-level execs earning higher salaries, they’re also raking in bigger and better perks. Core says that long-term incentive plans in the U.S. are using act-based performance measures more than they used to, which, in turn, is changing the way top executives are being evaluated and compensated. Also, recent changes in accounting regulations in the U.S. have made it more attractive to use accounting based-measures as opposed to stock-based measures.

“A lot of people think that CEOs make way too much money. But when you think about it carefully, it’s not inappropriate that they get paid well, because of the scope of their position and the fairly rare talent it takes to be able to run an organization well.”

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Lessons learned from a $2 bill

Posted by MIT Sloan Executive Education - 1 year and 6 months and 11 days ago

Chris Noe $2 Bill

Back in 1976, when eight-year-old Christopher Noe pocketed his first $2 dollar bill, little did he know the impact it would have on his professional career. Fast forward four decades and that bill— along with a collection of others Noe has accumulated through the years—has been a central prop in Noe’s 20 years of teaching at MIT Sloan.

“I have a lucky $2 bill that I carry in my wallet and use in the classroom to illustrate a concept in accounting called fair value,” says Noe, who explains the concept in layman’s terms as “an unbiased estimate of the potential market price of a good, service, asset, or liability.” Fair-value accounting is often contrasted with historical-cost accounting, and the two approaches are often debated in academic and business circles.

Noe, who teaches in the MIT Sloan Executive Education course, Strategic Cost Analysis for Managers, recounts a serendipitous moment while teaching during which he pulled the bill out of his wallet and was delighted to see a half dozen students do the same. One of those students was so interested in the unusual bill that he began a blog on the topic, which attracted the attention of a documentary filmmaker John Bennardo. The filmmaker included Noe and his MIT Sloan lecture in his film, “The Two Dollar Bill Documentary.” Bennardo filmed Noe asking students what the $2 bill is worth—a topic that always results in an interesting class debate. Typically, a student might answer that the bill is worth $2. Noe will agree, but points out that his 1976 bill is nearly 40 years old. Someone will then look it up on eBay and say it’s worth $8 as a collectible.

So, which is more correct? There’s not one final answer, and therein lies the illustration of the distinction between historical-cost and fair-value accounting.

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Health care loans: Combatting escalating drug costs with financial engineering

Posted by MIT Sloan Executive Education - 2 years and 10 months and 20 days ago

Escalating drug costs

In today's economy, for better or for worse, taking out a loan to cover the cost of a major expense--a new car, a new home, or a new baby--is commonplace. So why not apply that thinking to healthcare? Specifically, expensive medicine. That's exactly what MIT Sloan Professor Andrew Lo and his colleagues Vahid Montazerhodjat and David M. Weinstock are proposing in response to the ever-escalating cost of prescription medicine.

It's known as the "healthcare loan (HCL)" and is not unlike a home mortgage where a large expense is broken into smaller monthly payments that stretch over years. Everybody wins. Patients get the medicine they need. Drug makers reap the profits of a lucrative marketplace, and banks are able to bundle loans and resell their related cash flows to third-party investors (otherwise known as securitization). In their research, numerical simulations suggest that securitization is viable for a wide range of economic environments and cost parameters, allowing a much broader patient population to access transformative therapies while also aligning the interests of patients, payers, and the pharmaceutical industry.

"The basic idea is to create a new financial entity that offers healthcare loans to patients, issues bonds and equity to investors, and the proceeds from these new issues are used to pay for the loans," writes Lo and his co-authors in a recent article published in Science Translational Medicine.

Lo explains this concept as similar to today's home mortgages, auto loans, student loans, and other large consumer purchases. "As patients pay interest and principal on these loans, these payments flow through to the bondholders, and once all the bonds are paid off, the remaining funds go to the equity holders," Lo recently told Medscape Medical News.

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