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GenAI brings us closer to automating investment expertise

Jennifer Anzaldi — Thu, 22 Aug 2024 18:39:34 +0000

GenAI brings us closer to automating investment expertise Jennifer Anzaldi Thu, 08/22/2024 - 14:39

In This Story

Yi Cao

Long Chen

Large language models (LLMs) such as ChatGPT and Google Gemini excel at being trained on large data-sets to generate informative responses to prompts. Yi Cao, an assistant professor of accounting at the Donald G. Costello College of Business at �鶹��Ƶ, and Long Chen, associate professor and area chair of accounting at Costello, are actively exploring how individual investors can use LLMs to glean market insights from the dizzying array of available data about companies.

Long Chen and Yi Cao

Their new working paper, co-authored with Jennifer Wu Tucker of the University of Florida and Chi Wan of University of Massachusetts Boston, examines AI’s ability to identify “peer firms,” or product market competitors in an industry.

Cao explains the significance of selecting peers by relating this process to the real-estate market. “The capital market is similar to the real-estate market in that a firm’s value is partially determined by the value of its peers. In the real-estate market, we price a home based on the value of comparable properties in the neighborhood, or the so-called 'comps.' In our paper, we aim to leverage the power of LLMs to identify comps for evaluating firm value.”

This task is at least as difficult as it is essential. It takes much time, skill and effort to gather, aggregate and manage data to select peers. However, the researchers reasoned that LLMs could do a lot of the heavy lifting of data aggregation and analysis for the individual investors, and produce a list of peers comparable in validity to that identified by human experts.

“The advantage is in the capability to utilize all the information potentially out there so that it is at least performing as well as other traditional methods that can help us investors and researchers,” says Cao.

For the study, Chen and Cao employed Bard from Google, now known as “Gemini,” as their LLM of choice because “Bard has a greater ability to utilize its pre-training data, which is arguably larger than ChatGPT’s and with more parameters,” says Cao.

After defining “product market competition” and forming a prompt for Bard, the researchers instructed Bard to limit its knowledge pool to a specific year within the period 1981-2023, in order to avoid “look-ahead bias,” i.e., future information scrambling the results.

“We need to understand that LLMs are actually a very powerful, new tool, unmatched in their efficiency, ability to process vast amounts of information at a low cost, and accessibility to the general public.”

They limited focal firms to large, publicly listed companies as there is less data out there for smaller or private firms. In all, the data-set comprised more than 300,000 focal firm-years.

On average, the LLM could generate about seven peer firms for a focal firm, a number that is similar to the SEC recommendations on how firms should disclose their segments.

The researchers then compared the LLM’s performance to the lists generated by three human experts for a set of 40 leading computer software companies. The average overlap was a little over 40 percent, greater than expected.

They also compared the AI-identified peer lists to two alternative systems for identifying peers: the federal government’s Standard Industrial Classification (SIC) codes and Text-based Network Industry Classification (TNIC), which compares firms based on linguistic similarities in their 10-K filings. The LLM’s output overlapped significantly with TNIC’s. Plus, the peers identified by the LLM were generally a better fit than those from SIC and TNIC, as their monthly stock returns hewed closer to the focal firm.

But TNIC outperformed the LLM in identifying peers for mid-sized firms within the sample, indicating that it is not a clear-cut case of universal LLM superiority.

“It’s especially beneficial for individual investors—as all the cost concerns that we’re talking about are especially relevant for them,” Chen adds.

Regarding the future of LLM, Chen states, “There are always costs and benefits associated with using generative AI. It is uncertain whether current systems will soon be obsolete.” When asked about the SEC adopting an AI tool for investors, Chen emphasizes that users need to understand the pros and cons of using AI to make their informed judgments “because AI cannot be held responsible for the information it provides or for how it is utilized.”

Chen concludes, “We need to embrace this new technology, but we must recognize that it is not yet in a perfect state. Competition to improve the technology is fierce. Our findings might just represent the lower bound of the effectiveness of the technology.”

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George �鶹��Ƶ’s government contracting center is helping the Pentagon enter the 21st century

Jennifer Anzaldi — Thu, 30 May 2024 16:17:30 +0000

George �鶹��Ƶ’s government contracting center is helping the Pentagon enter the 21st century Jennifer Anzaldi Thu, 05/30/2024 - 12:17

When the Pentagon attempts to field innovative technology, its contracting decisions are largely dictated by a process that predates personal computing. Known as the Planning, Programming, Budgeting and Execution (PPBE) resourcing system, it betrays its mid-20th-century origins in its extreme emphasis on long-range management and sequential planning over more agile and rapid program execution.

Jerry McGinn

Calls for PPBE reform are nothing new in the halls of the Pentagon, but recent geopolitical threats have contributed to a general recognition within the federal government that change is badly needed to speed the development and acquisition of new military capabilities.

Hence Congress’s formation in 2022 of an independent commission tasked with closely assessing the current process and making specific recommendations for reform.

The Commission on PPBE Reform promptly engaged the Greg and Camille Baroni Center for Government Contracting at the Donald G. Costello College of Business at �鶹��Ƶ as a key research partner. The center was awarded a $645,000 Department of Defense (DoD) research contract consisting of two projects.

First, the research team, headed by the center’s executive director Jerry McGinn, prepared six case studies documenting PPBE’s effect on DoD’s work with both research and development centers and industry to develop and adopt new technologies.

“We set up hypotheses and did background research on the programs,” McGinn says. “Our conclusions were based on a number of interviews with government and industry officials.”

For example, one of the case studies dealt with the Air Force’s Collaborative Combat Aircraft (CCA) program, for the development of AI-piloted combat drones. Five Air Force officials involved in CCA told the Baroni research team that PPBE complicated necessary collaborations with the Navy and other agencies, due to siloed budgeting protocols making it difficult to align priorities and make resource decisions in a timely manner.

Next, the Baroni research team turned their attention to three inter-related subtasks delving into specific rules governing PPBE’s application.

“For this project, we used a mixture of non-public DoD unclassified databases as well as information available to the general public,” says McGinn.

The researchers investigated whether PPBE should vary based on DoD’s acquisition categories or remain the same for all categories, concluding that the categories were similar enough to warrant a unified process. They were also asked to evaluate how military departments and agencies use PPBE’s various acquisition pathways, resulting in a determination that “budget justification documents, particularly for RDT&E (research, development, testing and evaluation), are overly complex, unnecessarily intricate, and lack standardization”. Finally, the researchers performed an extensive analysis of PPBE’s legal underpinnings and the wider governmental implications of reforming the process.

The team’s final report, submitted to the commission early in 2024, contained a consolidated list of dozens of findings and recommendations. In its own report issued in March 2024, the PPBE Reform Commission cited the Baroni team’s research numerous times.

“Our work played a large role in informing the Commission’s findings and reinforcing their policy recommendations,” McGinn noted. “These inputs are today being considered as Congress debates 2025 appropriations and DoD concurrently develops and vets the budget for 2026 and 2027.

Shortly after the release of the Commission’s report, the Greg and Camille Baroni Center for Government Contracting hosted a rollout event at �鶹��Ƶ Square featuring the Commission’s chair, vice-chair and executive director. A series of additional events around PPBE reform are being planned for the summer.

“Our report reflects the strategic vision with which George �鶹��Ƶ established this research center. Our research and analysis inform the federal government as well as the large government contracting industry here in the national capital region. Our relationships and location make the center uniquely situated to benefit policy-makers and entrepreneurs, alike,” McGinn says.

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John G. (Jerry) McGinn

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Costello College of Business finance professor receives coveted NSF early-career award

Greg Johnson — Thu, 22 Feb 2024 15:43:13 +0000

Costello College of Business finance professor receives coveted NSF early-career award Greg Johnson Thu, 02/22/2024 - 10:43

Jiasun Li, a recently promoted associate professor of finance at the Costello College of Business at �鶹��Ƶ, has received a prestigious CAREER award from the National Science Foundation (NSF).

Jiasun Li

According to the NSF website, the CAREER award is given to “early-career faculty who have the potential to serve as academic role models in research and education and to lead advances in the mission of their department or organization.”

The award totals $711,679 over five years. It will support Li’s ongoing research into the organization of digital services with the rise of emerging technologies.

This project jumps off from recent developments in cloud and decentralized computing. Both technologies present radical new possibilities for off-premise digital services, as evidenced by the rise of numerous cloud service providers as well as blockchain platforms.

However, the presence of strategic incentives may undermine the smooth and reliable functioning of such systems. For example, cloud providers may opt to short-charge clients when it comes to the provision of services, if it is in their best interests to do so. Alternatively, strategic actors may also disrupt the consensus protocols governing decentralized systems.

Li proposes to tackle these problems in an interdisciplinary manner, blending tools from computer science (as the topic is inherently about digital services) and economics (since incentive analysis traditionally falls in the domain of economics). He has finely honed this approach in a series of papers applying analytical models based on economic principles to decentralized systems such as blockchain proof-of-work technologies.

The ultimate goal of Li’s project, as stated in his NSF proposal, is to “guide the efficient organization of digital services for productivity gains, and thus enhance the economic competitiveness of the United States.”

Previously, Li received individual and collaborative grants from �鶹��Ƶ’s Multidisciplinary Research Initiative, the U.S. Department of Homeland Security, and the Ethereum Foundation, among others. He was recently named an inaugural Faculty Fellow of �鶹��Ƶ’s Institute for Digital Innovation (IDIA).

“I am extremely honored to receive an NSF CAREER Award because such grants are traditionally rare in business schools," said Li. "I really appreciate the trust NSF bestowed on me. This recognition is only possible thanks to the tremendous support and many forward-looking initiatives from �鶹��Ƶ and the Costello College of Business, as well as many colleagues across different disciplines who have inspired, guided, and elevated me over the years. I look forward to carrying out the interdisciplinary research projects under the continued support from NSF and the University/Costello College of Business.”

Ajay Vinzé, dean of the Costello College of Business, said, “This prestigious award from NSF is a fitting recognition of Jiasun’s superb/impactful research record and a proud moment for Costello College of Business--Congratulations Jiasun! As the evolution of the digital economy plays out, research like Jiasun’s project is going to provide relevant and actionable insights. I look forward with great excitement to contributions that are forthcoming.”

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Jiasun Li

Ajay Vinzé

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In Silicon Valley, human capital trumps intellectual capital

Marianne Klinker — Mon, 22 Jan 2024 16:23:12 +0000

In Silicon Valley, human capital trumps intellectual capital Marianne Klinker Mon, 01/22/2024 - 11:23

To stay competitive in the war for talent, tech companies must weigh secrecy against specificity when crafting job ads. Are they disclosing too much?

Job postings are a key tool for attracting qualified tech workers. However, companies face a dilemma: on the one hand, they want to provide enough information to attract the right candidates; on the other hand, they want to keep the information about their product development and planning private. Sometimes it is just hard to get both.

Yi Cao

In a recent paper for Contemporary Accounting Research, accounting professor Yi Cao of the Donald G. Costello College of Business at �鶹��Ƶ argues that highly competitive companies are more likely to post specific job requirements in order to find qualified workers even at the cost of potentially leaking proprietary trade secrets. (The paper was co-authored by Shijun Cheng of Shanghai Jiao Tong University, Jenny Wu Tucker of the University of Florida, and Chi Wan of the University of Massachusetts Boston.)

Generally, companies reveal less information during fierce competition to avoid giving their competitors an advantage. However, Cao finds that “when the technological competition is more fierce, companies provide more information into the labor market because they have to do this in order to attract talents, which is the essential driving force of innovation. They're balancing the trade-off between not leaking secrets but not hiring the matching candidates, versus leaking some of the trade secrets while more likely to hire matching employees. So between these two trade-offs, obviously, we find that companies choose to bear the risk of leaking information in order to acquire talents.”

The benefits of quickly attracting desired tech talent outweigh the potential costs of revealing proprietary information.

To examine the relationship between technological competition and skill specificity in job postings for tech positions, the researchers used a novel job posting database provided by Burning Glass Technologies (BGT). They calculated the skill-specificity scores of the job ads based on the level of information disclosed in the skill-requirements of the job postings and the taxonomy of skills, and then aggregated it annually by firm. Cao’s paper is the first to propose a taxonomy theory-based measure of term specificity in the business field. This provides companies with a handy tool for measuring the specificity of textual documents and precisely determining how much information to disclose.

Cao uses the example of a company looking for workers with AI experience to demonstrate how the measure works. The company could post a job listing that simply says, "We are looking for someone to build machine learning tools." This is a relatively vague job posting that would not provide job seekers with detailed information about the specific skills that the company is looking for. The company could also reword the post more specifically, e.g. "We are looking for someone to use Python and decision tree algorithms for credit card risk." Alternatively, they could be even more specific with language like, "We are looking for someone who have experience with random forest algorithms to specifically apply a portfolio level of prediction of credit card defaults." This description provides job seekers with detailed information about the specific tasks and skills that the company is looking for, while at the same time revealing information about existing technology.

Cao found that on average, firms disclose an additional 27 specific skills in their job ads when facing intense technological competition. The results reveal that the benefits of quickly attracting desired tech talent outweigh the potential costs of revealing proprietary information.

The findings did not apply to job advertisements for lower-level non-tech positions, such as food preparation and cleaning staff. However, they were observable for senior non-tech positions, e.g. directors of marketing or finance. These nuances suggest that both tech and managerial talent were valuable enough to motivate a higher degree of disclosure from employers.

Additionally, the effect on disclosure was much stronger for incremental innovators—firms whose patents tended to build on past knowledge, rather than strike out in new technological directions. The researchers speculate that breakthrough innovators would have too much to lose if they were to signal their plans through job postings.

While more detailed job postings can be helpful for finding qualified workers, they also could reveal proprietary information about the company's products and strategies. Cao emphasizes, “[Companies are] basically telling the world what [they’re] trying to create. With higher level of detail you’re trying to describe, you're disclosing more information to potentially everyone. And that information is beneficial in terms of labor demand because it attracts the right employee. But it's a concern in terms of competition because you basically show cards to your opponents.”

As an accounting scholar, Cao is intrigued by the possibilities inherent in the discovery that labor-market pressures can force employers to divulge potentially compromising information. “In financial reporting, we don’t capitalize human capital; we consider it an expense,” he says. “But that’s not necessarily the case when the labor market is tight and when the labor is essential in productivity. Our paper shows how the labor market, product market, and capital market are not segregated, but connected.”

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Elevating impact through innovative research partnerships

Marianne Klinker — Fri, 21 Jul 2023 19:27:11 +0000

Elevating impact through innovative research partnerships Marianne Klinker Fri, 07/21/2023 - 15:27

�鶹��Ƶ School of Business boasts more than 60 full-time, research-active faculty across the accounting, finance, information systems and operations management, management, and marketing areas. In addition to pursuing research questions within their area of specialty, many School of Business scholars team up with peers from other disciplines to tackle complex societal problems.

These include so-called “wicked problems”, e.g. climate change and inequality, that require coordinated interventions because of their multifaceted nature.

Rich Klimoski, School of Business associate dean for research, says, “Business schools do in fact have multidisciplinary roots and are often composed of faculty that can apply expertise from diverse areas of study, including economics, mathematics, statistics, psychology, sociology, law, and others.

“Moreover, because big societal and economic challenges and opportunities are multidisciplinary in nature, business schools are uniquely prepared to contribute to understanding and solving these problems via research.”

Here are just a few examples of how SBUS professors are elevating their real-world impact through multidisciplinary collaboration.

J.P. Auffret

J.P. Auffret directs research partnerships for the School of Business, and the Center for Assurance Research and Engineering (CARE), housed in the College of Engineering and Computing. He will also co-lead (with computer science professor Amarda Shehu) the future Center for Excellence in Government Cybersecurity Risk Management and Resilience, which was founded with significant support from U.S. Representative Gerry Connolly, whose congressional district includes Fairfax, Virginia.

To be headquartered in �鶹��Ƶ Square, this Center-to-be will support and advance cybersecurity leadership and governance across the U.S. federal government by educating executives and middle managers, acting as a strategic partner in cybersecurity and IT modernization efforts, translating state-of-the-art research into federal government practice, collating and disseminating best practices for cybersecurity, and fostering cybersecurity organizational capacity.

Additionally, Auffret is furthering his long-standing local government cybersecurity partnering initiative which originally started as a National Science Foundation project with Virginia Tech professor Angelos Stavrou. As he explains, “Many local governments are quite small, and have limited budgets and resources while facing many of the same cybersecurity technology and organizational challenges as larger local governments. Partnering between local governments and with the states provides a means for enhancing cybersecurity capabilities." 

Lei Gao

Lei Gao, an associate professor of finance, contributes to several multidisciplinary research projects at various funding stages. One proposal, aimed at curbing gun violence, has Gao working alongside researchers from the fields of computer science, statistics and criminology. The team intends to use machine learning and other advanced technologies to discover leading indicators of mass shootings. Gao’s role relates to the economic piece of the puzzle, exploring questions such as whether localized or national economic downturns may be a precursor to mass shootings. “We might be able to provide some insights or early warnings for law enforcement to detect or forecast so that they can go there earlier and try to prevent these tragedies,” Gao says. He is also interested in what happens after mass shootings occur. “When gun violence occurs in a particular area, it can significantly decrease the attractiveness of the area to new businesses and talented individuals, leading to reduced tax revenues and economic consequences. By quantifying these costs, the public can better understand the costs of inaction on gun violence,” Gao says.

Abhishek Ray

Abhishek Ray, an assistant professor of information systems, has teamed up with a �鶹��Ƶ economics professor on a project investigating the online news market. The proposal jumps off from the idea that while democracy depends upon a well-informed citizenry, the internet is known for shunting users into “echo chambers” that reinforce pre-existing political biases. Using innovative techniques from “complex systems science for investigating economic activities and cognition in markets”, Ray aims to show how competition within the news industry drives the political polarization of journalism, and how these shifting levels of bias affect reader engagement. “Digital news has impacted consumers’ political involvement and information-seeking more profoundly than other media,” Ray explains. “This project will design mitigating regulatory frameworks using economics, computational and cognitive science.”

Sarah Wittman

Sarah Wittman, an assistant professor of management, and faculty from �鶹��Ƶ’s Volgenau School of Engineering are developing wearable technologies to empower people with various types of neurodiversity–Autism spectrum disorders, ADHD, etc.–to thrive at work. The project focuses on the retail and hospitality industries, where employment opportunities for neurodiverse people abound. Yet aspects of working life, such as the need to interact with others and complete tasks in a specific order, are frequently problematic for many in these communities. Wearables provide real-time biometric monitoring and simple interventions–e.g., encouraging the wearer to take a five-minute break when their heart rate rises to indicate frustration or agitation. By helping remove obstacles to gainful employment, these devices would create greater financial and emotional independence for the neurodiverse population.

While not a complete list, these examples help illustrate how School of Business scholars are breaking siloes to address problems of national, if not global import. As Klimoski states, “I am absolutely convinced that the kinds of research that will have the greatest likelihood of making an impact upon the world will require the coordination and collaboration of multiple teams made up of researchers from many different disciplines.”

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When managing creatives, what you say is often what you get

Marianne Klinker — Fri, 30 Jun 2023 11:15:50 +0000

When managing creatives, what you say is often what you get Marianne Klinker Fri, 06/30/2023 - 07:15

A new �鶹��Ƶ study explores the complex connections between managerial feedback and creative outcomes.

The growing popularity of crowdsourcing and other forms of open innovation reflects the pressing need that companies have for creative ideas that go beyond the organizational same-old, same-old.

But once you have imaginative outsiders ready to lend you their time and attention, how do you elicit novel and useful contributions from them? It turns out to be as much about strategic communication as it is about the quality of your talent pool.

In recently published research, Pallab Sanyal, professor and area chair of information systems and operations management (ISOM) at �鶹��Ƶ's School of Business, and Shun Ye, associate professor and assistant area chair of ISOM, focused on two types of feedback crowdsourcing participants commonly receive. Outcome feedback rates the perceived quality of the submission, with no underlying explanation (“This design is not good.”). Process feedback reveals or hints at what contest organizers are looking for (“I prefer a green background”).

Pallab Sanyal (left) and Shun Ye (right)

Sanyal and Ye analyzed data from a crowdsourcing platform covering close to 12,000 graphic-design contests over the period from 2009 to 2014. The data-set included the contest parameters, time-stamped submissions and feedback, winning designs, etc. It also allowed the researchers to track the activity of repeat entrants from contest to contest across the sample.

This put them in a good position to measure how choosing one feedback type over the other affected contest outcomes—but not in terms of “quality” as it is traditionally defined by researchers.

“The moral of the story is, beauty is in the eye of the beholder. Whoever is the contest holder or client, whatever they think is best for their business objective, that is the highest quality.” —Pallab Sanyal

“I gave a talk at a university where I showed 25 different submissions from a crowdsourcing contest and asked people to choose which one was the highest quality," says Sanyal. "And everyone in that room picked a different one. Not only that, the one that eventually won the contest was not picked by anyone.”

“The moral of the story is, beauty is in the eye of the beholder. Whoever is the contest holder or client, whatever they think is best for their business objective, that is the highest quality.”

With this working definition in mind, Sanyal and Ye developed an artificial intelligence (AI) tool for scoring all submissions by visual similarity to the eventual winning submission.

“We use the algorithm to calculate the distance between these images and the highest-quality image, to give it a score, a quality score, between zero and one,” Sanyal explains.

They found that process feedback tended to increase the affinity of the designs, i.e., they were more similar to the winning design chosen by the client on average. By contrast, outcome feedback increased the diversity of the designs.

Sanyal and Ye theorize that precise guidance in the form of process feedback can lower ambiguity and assist competitors to narrow the search space, while outcome feedback expands the search space because it leaves plenty of room for interpretation.

Very late in the contest, though, the positive relationship between process feedback and submission affinity disappeared, and may have even flipped to the negative; the professors speculate this may be due to a demotivating, “now-you-tell-me” effect.

Shifting gears from quality to quantity, Sanyal and Ye discovered that both process and outcome feedback encouraged more submissions on the whole. However, they did so in different ways.

Process feedback lured new contributors to the contest; outcome feedback spurred more submissions per contributor. But, again, both of these effects were weakened when feedback was offered late in the game. Interestingly, this contradicts previous studies, which suggest early feedback discourages new contributors from joining. Shun and Ye point out that those studies used only numeric feedback. “We show that when it comes to textual feedback, it should be provided early in the game,” Ye says.

He also comments, “What we find here can very well apply to a traditional context where, say, in an organizational setting, a manager wants a creative solution, or holds a brainstorming session.

“If managers feel that the submissions are converging very quickly, but they want more innovative solutions, they can provide outcome feedback. Or they may observe, ‘Wow, the submissions are all over the place. Doesn’t look like it’s close to what I have in mind.’ Then it’s best to start to provide some process feedback.”

Whichever feedback type they choose, managers should offer it promptly so as to maximize the impact. At the same time, they should be careful to avoid turning their preferences into self-fulfilling prophecies through strongly worded process feedback.

Sanyal uses an illustrative example from his own life: “Many times, if my kids are stuck with something, I hear them and I say, ‘You are on the right track. I won’t tell you the solution, I will only tell you that you’re on the right track.’ So give some overall ideas, but don’t constrain the solution space too much.”

Their work was published in Information Systems Research.

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No easy answers for retailers’ returns dilemma

Jennifer Anzaldi — Tue, 29 Nov 2022 14:48:38 +0000

No easy answers for retailers’ returns dilemma Jennifer Anzaldi Tue, 11/29/2022 - 09:48

Mehmet Altug, an associate professor of operations management, has been researching retail returns policies for a decade. The issue has recently come to prominence, as the lenient policies of online retailers have led to skyrocketing return rates (now exceeding 20 percent in the U.S.). Altug’s various academic papers delve into the difficult trade-offs retailers face when setting returns policies. While there are no easy answers, Altug’s research identifies factors that can help retailers achieve more strategic flexibility.

Mehmet Altug

Who’s smarter—online shoppers or their counterparts in physical stores? On the one hand, e-commerce consumers have a huge advantage in comparison shopping. They can cross-reference products, learn about competing brands and scout for deals in minutes from their living room couch. However, basic physical features of a product—its size, texture, fit, etc.—aren’t represented well on digital devices. That’s why purchasing items such as clothing online can be a stab in the dark.

Retailers have used lenient return policies to counteract e-commerce’s sensory-deprivation problem. Such policies effectively create an antidote for buyer’s remorse, so that consumers can confidently click “Buy Now” for an item they’ve never seen or used. But the industry’s permissiveness regarding returns may be backfiring.

According to the National Retail Foundation (NRF), the average rate of return for online purchases in 2021 was 20.8%, up from 18.1% the year before. The total value of returned items for 2021, according to retailers’ estimates, was more than $761 billion.

Mehmet Altug, an associate professor of operations management at �鶹��Ƶ's School of Business who has been researching pricing and retail operations—and consumer returns in particular—for over a decade, says, “When I first started doing research on this, I used to say up front ‘pricing is the main decision, returns are just something to deal with.’ But now, it’s becoming a primary problem for retailers.”

The main reason why return management does not have a well-defined solution is that it can be seen as a "double-edged sword." While flexible consumer return policies increase our valuation and willingness-to-pay for the product (a positive effect), they also lead to more returned units, which are ultimately sold by retailers at a loss (negative effect).

Therefore, we see a wide range of return policies in the industry. Recently, more and more brands have been tightening up their return policies. For example, Banana Republic, J. Crew, Old Navy and Gap have shortened their grace period to one month; in the U.K., Zara recently started charging for items returned through third-party drop-off points. But it remains to be seen whether online customers, with their penchant for comparison shopping, will accept this austerity drive, or flock to competitors with more permissive policies.

As Altug’s published research shows, the strategic buying behaviors of online customers further complicate retailers’ returns dilemma. His 2016 paper in Manufacturing & Service Operations Management (co-authored by Tolga Aydinliyim of Baruch College) details how offering lenient refunds can entice buyers to purchase items earlier, instead of waiting for them to go on sale. Forward-thinking consumers, however, will anticipate that liberal return policies will lead to more items being returned and marked down for resale. This expectation would increase wait-and-see behavior, as consumers monitor for products to become available at clearance prices. In short, lenient return policies can (again) cut both ways in the presence of strategic customers, either raising or lowering profitability and depending largely on the salvage prices resold items can command through off-price outlets such as TJ Maxx.

These outlets are where department stores turn to offload their unsold inventory, including returned items. And like department stores, they range from low-end (e.g., TJ Maxx and Marshalls) to upscale (e.g. affiliated discount branches such as Saks on Fifth and Nordstrom Rack). Altug’s paper argues that the refund offered for a product is closely related to the resale value of the item, and the partial refund offered should not generally exceed that. The best case for retailers would be a no-returns policy on expensive items with low resale values, since these items would be most subject to the wait-and-see effect among strategic online consumers.

However, retailers are rightfully cautious about the customer defections that may result from restrictive returns policies. Altug’s research finds several alternatives they could explore to preserve profitability in the face of the returns dilemma. For example, if the retailer can enjoy profitable clearance sales (i.e. resale value is greater than the cost of the product) or if the lenient return policies stimulate additional demand, then the retailer may offer full refunds. Similarly, to sustain a lenient return policy, the retailers can lower transaction costs for the consumer by providing return labels in packages. Moreover, in the presence of competition, Altug finds that the retailers’ ability to clear inventory at a higher price (maybe through a reputable clearance partner) will also help them offer higher refunds, stock and sell more at a higher price and make more profits compared to their competitors who do not have the same higher resale value advantage.

The 2016 paper assumes that consumers are making choices in good faith. But free and easy returns also invite opportunists whose intent is to use online retailers as a de facto rental service. Though this class of bad actors is relatively small–responsible for about 11 percent of returns nationwide, according to NRF estimates–it can do significant damage within the low-margin retail industry.

Altug’s 2021 paper in Management Science (co-authored by Tolga Aydinliyim and Aditya Jain of Baruch College) tests the respective profitability of two approaches retailers employ to manage opportunistic returns. First, some retailers use data analytics to identify renters based on their buying and return behaviour and target them through more restrictive returns policies. While mostly effective, this solution carries a risk of false positives, which could unfairly target valued customers. Making inferences about consumer intent from purchase and return information alone can be a dicey prospect. Second, online retailers can deploy price/refund pairing as a sorting mechanism, charging less for an item (e.g., a three-percent discount)–if the buyer agrees to waive free returns. That way, renters self-select to pay up front for their intended temporary use of the product and the honest majority are rewarded, at least initially, with a lower price.

Again, resale price surfaced as a pivotal factor in Altug’s findings alongside renters’ valuation. The self-selection approach works just as well or better than data-driven targeting in a market with low-rental-value potential or when the retailer sells returned units at a low resale price even in a medium-rental-revenue-potential market such as electronics or fashion products.

While there are no easy answers for retailers, Altug’s research maps out the main elements they should consider when setting their returns policy. “There are several issues that need to be considered in this context and still not very well-defined solutions that could address all of them,” Altug says. “One thing is for sure, you can’t just give maximum flexibility and forget it. Retailers need to find the right balance and that is not a trivial task.”

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Operations - Costello

Costello Research Retail

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In This Story

Mehmet Altug

At the frontiers of public health

Jennifer Anzaldi — Tue, 16 Aug 2022 11:54:21 +0000

At the frontiers of public health Jennifer Anzaldi Tue, 08/16/2022 - 07:54

In This Story

Ajay Vinzé

Dean Ajay Vinzé

As we all now know from bitter experience, there’s more to proper pandemic response than pills and vaccines. Medical authorities must identify potential hot spots before widespread infection becomes manifest, through early-detection methods such as wastewater testing. With these warning signals, health departments can take preventive action – lockdowns, school closures, etc. – to stop the spread. To build the systems that can make this possible, skilled epidemiologists need to work side-by-side with data scientists who can help them crunch the numbers and predict possible outcomes of various interventions.

Long before COVID was a household word, Dr. Ajay Vinzé, now dean of �鶹��Ƶ’s business school, helped pioneer just such a collaboration with public-health officials in Maricopa County, which includes Phoenix and is the fourth-largest county in the United States by population. Vinzé calls this nearly decade-long partnership “a major part of my research and professional journey.”

According to Vinzé, the collaboration began in late 2002 with a missed flight in the Dallas airport. He found himself sitting next to another Phoenix-bound traveler, and the two struck up a conversation. At the time, Vinzé was an associate professor at W.P. Carey School of Business at Arizona State University researching artificial intelligence applications for business problem-solving, including how viruses spread on computer networks, in close collaboration with companies such as Intel and IBM. One of his ongoing research projects focused on failure analysis and failure identification (FA/FI). As Vinzé described his work, his impromptu travel companion – who, as it turned out, was Jonathan Weisbuch, then Director and chief health officer for the Maricopa Department of Public Health – listened closely, asked pertinent questions, and finally invited Vinzé to sit down with a group of leading Arizona epidemiologists.

Why would a top health officer for Arizona’s largest county want his colleagues to listen to an information systems professor? Because Weisbuc recognized that, as Vinzé says, “Computer networks are similar to human systems. Failure means not being able to detect early on that certain propagation is imminent. That’s the same thing you do in computer security.” The two fields also share basic preventive principles and best practices. “To inoculate yourself against viruses on the computer, you need to know the characteristics of the virus, how it spreads, and what happens after infection … and pertinent policy to control the same. Same thing for humans!”

Sarah Santana, Maricopa’s director of epidemiology, found common cause with Vinzé, enlisting him and his colleagues in her department’s efforts to refine post-9/11 surveillance protocols for handling the threat of bio-terrorism. Their work together ultimately led to an article in Information Systems Frontiers (co-authored by Minu Ipe and T.S. Raghu) examining the parallels between “information supply chains”, e.g. Arizona’s state-wide MEDSIS online public-health surveillance network, and e-commerce platforms such as Amazon. In both cases, so-called “information intermediaries” can play a vital role including, but not limited to, aligning incentives and reducing information asymmetry among multiple stakeholders. The paper details how Arizona’s public health department acted as intermediary, paving the way for Maricopa County to join the state-wide system instead of managing its own data independently.

Vinzé gives Santana immense credit for her foresight and openness in allowing ideas imported from business research into public-health emergency preparedness and response. In turn, Santana introduced Vinzé to contexts and questions from beyond academia that widened the aperture of his research lens.

The particularities of the human organism, after all, rarely enter into information systems research but are pivotal to the success of public-health initiatives. Vinzé observes that this comes into play when deciding on key metrics: “How do you attribute value to saving one human life?” The human element also brings a host of contingencies and complications that aren’t salient when dealing with machines.

Vinzé’s gradual coming-to-grips with these intricacies culminated in a 2012 paper for ACM Transactions on Management Information Systems (co-authored by Hina Arora and T.S. Raghu) modeling dynamic interactions between disease transmission, pharmaceutical interventions (e.g. vaccines), and policy-based interventions (e.g. school closures). “It’s a rich simulation exercise – we built the system and turned it over to the county,” Vinzé explains. Using actual characteristics from the 2009 H1N1 pandemic as a test case for various policy approaches, the mathematical model generated numerous insights for guiding public-health policymakers not just in Maricopa and the southwest United States, but perhaps worldwide. For example, the simulation showed that rolling school closures of two to four weeks were not only less effective at reducing transmission than county-wide, eight-week closures – but they also resulted in more weeks of shutdown over the length of the pandemic. Additionally, the results reinforced the researchers’ intuition that the quality of pandemic response hinges upon finding the right mix of pharmaceutical and non-pharmaceutical interventions. Years later, these data-driven principles would be put to the ultimate test during the COVID pandemic.

Over the course of his long collaboration with Santana and the Maricopa health authorities, Vinzé got the chance to view public-health challenges from virtually every angle. “We did survey research for them, sometimes experimental research, sometimes systems-building,” he says. He even served on a healthcare-focused working group as part of the planning process for Super Bowl XLII (2008), and subsequently Super Bowl XLIX (2015) both held in Glendale, Arizona. In 2012, Vinzé was recognized with a Faculty Achievement Award from Arizona State University for “defining edge research and creative work for professional application” recognizing high impact research over a ten-year period – his association with public health was acknowledged as a main driver of impact.

In hindsight, Vinzé suggests that his foray into public health spotlights and clarifies certain aspects of digital transformation. He points out that technological advancement comes in waves, producing sudden surges in computing power, processing speed and data accessibility. With each wave, public- and private-sector actors alike experience a tidal force of opportunity (for leaders) or adversity (for laggards). Collaborations between academia, business and government can help translate technological evolution into positive outcomes for the economy, communities and the wider society.

“Each wave has an implication on the workforce of that time. We’re going through this big wave as we speak, coming out of COVID. The question is, are we ready?” Vinzé says.

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Costello Research Health & Well-being at Work

Costello Research Data Analytics

Costello Research ICT

Is Collaboration the Future of Outsourcing?

Jennifer Anzaldi — Tue, 03 May 2022 12:45:02 +0000

Is Collaboration the Future of Outsourcing? Jennifer Anzaldi Tue, 05/03/2022 - 08:45

In This Story

Cheryl Druehl

These days, devising an outsourcing strategy involves a host of challenges and opportunities. Between deglobalization and pandemic-induced supply chain issues, the 20^th century practice of moving manufacturing to wherever labor was cheapest is paying smaller and smaller dividends. As the value proposition of cost-cutting diminishes, a different rationale for outsourcing—one based upon maximizing synergies—is gaining traction.

Developments on the supplier side are fueling the change. “Firms that were historically only doing manufacturing have realized they can get a bigger margin, a bigger piece of the pie if they are doing more of the activity and knowledge work,” said Cheryl Druehl, associate professor of operations management and associate dean for faculty at �鶹��Ƶ. She mentions how Ford Motor Company reaped unexpected profits in 2009 that were attributed to teaming up with the right suppliers to co-develop electric vehicles. Her recently published paper in IEEE Transactions on Engineering Management (co-authored by Gal Raz and Hubert Pun of Western University) lays out a model to help managers think about how to outsource in this new world.

The model includes four options for the focal firm, or “buyer:” doing everything in-house, outsourcing only manufacturing, outsourcing both manufacturing and product innovation, or co-development of the product between buyer and supplier.

Replicating the wholesale price contracts that are most commonly used in practice, the model calculates how prices, costs and the firms’ respective capabilities combine to shape the synergies of various types of outsourcing relationships. For example, having one company (whether buyer or supplier) handle both design and manufacturing creates positive synergies. For example, designs can be altered for ease of manufacturing at scale.

However, when a supplier’s cost of product innovation is lower than that of the buyer, the resulting design changes produce benefits to product quality that increase customer demand—especially when buyer and seller can pool expertise and resources in a co-development scenario. On the other hand, in any collaboration there can be a multitude of costs, ranging from coordination issues to free riding. These constitute a counter-current of negative synergy that needs to be measured alongside the positive to formulate a final outsourcing decision.

In any model like this, the extremes are self-explanatory. Suppliers with a very high cost of product innovation—in other words, those that cannot innovate or lack necessary specialization—are fit for manufacturing but not design On the flip-side, if a supplier can accomplish the sort of innovation that the buyer requires much more cheaply than the buyer itself, it’s an obvious choice for both manufacturing and design. If the supplier can do neither manufacturing nor product innovation at significantly lower cost, the buyer should move everything in-house.

But the surprise in Druehl’s analysis is in the moderate outcomes. Once the supplier’s product innovation costs rise above dirt-cheap levels, the incentives to co-develop are more compelling for both supplier and buyer. Compared to design outsourcing, the supplier’s costs for co-development are lower, on the principle that many hands make lighter work. Additionally, co-development increases the overall amount of effort devoted to an innovation project (again, because two parties are contributing instead of one), which drives product quality and thus consumer demand even higher. This, too, benefits both firms. “We found that co-development (with outsourced manufacturing) was optimal for situations when the supplier had relatively intermediate costs of the process and product innovation,” the researchers write.

Of course, this assumes negative synergies are kept to a manageable degree. Each escalation of collaboration-related costs makes co-development a less attractive option for buyers and suppliers, as it erodes the quality-enhancing impact of innovation.

Druehl says that her research takes on special relevance in light of ongoing disruptions to the global supply chain. In the United States, calls to repatriate manufacturing are growing louder. But the outsourcing movement in the U.S. has left a huge skills deficit in the labor market. “If we don’t have anyone who knows how to weld anymore, it’s not like we’re going to immediately be able to open a welding shop…And we saw that, ten or 15 years ago, when the appliance companies brought a lot of stuff back from China, they did a lot of redesigns and took out a lot of the labor,” Druehl said.

The positive synergies involved in double-or-nothing outsourcing can be powerful. But an obvious implication of Druehl’s paper is that as companies rethink their outsourcing strategy, they should keep in mind the potential for co-development solutions to set in motion a virtuous cycle that improves outcomes for buyers, suppliers and consumers alike.

Lest you think the paper exaggerates co-development’s social and economic strengths, Druehl argues that, if anything, the opposite is the case. “One of the big benefits of doing an activity is learning. When you collaborate, then we have some chance of both firms learning, which could have positive impacts. And we don’t capture that specifically in the model, but it’s an interesting thing to think about.”

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