Here’s an email I sent to the MBA class and my analysis below using the “MBA knowledge”
“As you may have noticed lately, it appears like being … late to class is considered acceptable by many of us. As days go by, more and more of us are late …. after each break or at the beginning of the class. Since I have been guilty of this myself, I have no right to preach any of us to be on time. However, given that we are preparing business plans, the entrepreneurial spirit seems to have taken over me and hence the below proposal to generate revenue out of this asymmetric perception!
The proposal is simple. For every minute that a student is late, he/she must contribute 20 Euro cents to the MBA “thanks for being late” fund. Of course, we don’t receive any reward for being on time because this is expected”
The format is as follows: the question is mentioned on the first line, the course and topic used to analyse the question follow in the next line and then finally the analysis.
What is the current situation?
Statistics and Corporate Finance:
– Normal Curve and Beta
If we plot the times at which each student arrives at class.. it most probably will look similar to this above curve. The x-axis shows the time of arrival and the y-axis represents the number of students arriving at each of these times. There are two problems in this distribution, the arithmetic mean of the distribution is at 6.02 minutes, which is way higher than the desired mean (i.e. 0 minutes) and secondly the standard deviation of the curve is a whopping 2.93 meaning there are too many outliers and no clear consensus about what time to arrive at class. Also, if we were to plot the time of arrival of each student over a period of time and compare that to the average arrival time of students over the same period, by applying the CAPM model, the beta is presumably way too high for each student.
How did we get here?
– Prisoner’s dilemma
This helps us understand how we came to this sorry state of affairs. It all began with a group of students deciding to take it easy on one sunny morning and get to class 2 minutes late. What followed was that the class began 2 minutes late. It sent a message that the students can possibly get away with being 2 minutes late. A week after this incident, we reached a stage where 35 students would arrive at class on time wait for the 9 students to come-in (2 minutes late) to begin class. 3 Weeks later, we had another group deciding to become “late comer” rather than “late comee”, therefore, the strategy was to be late by 2 minutes more than the initial late comers which is 4 minutes late.. The cycle continued for 5 months and now we find ourselves in the current situation.
What is the primary problem?
Managing across cultures:
– Definition of culture
Culture is the full range of learned human behaviour patterns. Edward B Tylor in his book called “Primitive Culture” defines culture as “that complex whole which includes knowledge, belief, art, law, morals, custom, and any other capabilities and habits acquired by man as a member of society.”
One of the unspoken beliefs of this MBA class is that we ask many questions; another is that we are always careful not to offend fellow students; the third is that we pounce on speakers or presenters who display lack of confidence in the subject matter. These I believe are positive cultures.
Unfortunately, the latest belief which forms part of the culture is that it is OK to be late. Apart from the little inconveniences that coming late causes to students who are on time, this change in culture is, in my opinion, the biggest issue.
Why do we come late?
– Scarcity and Opportunity Cost
The number of project work and readings assigned increases gradually over time during an MBA course. Since the volume of assignments and time available for sleep are indirectly proportional, as the year progresses, students get lesser and lesser time to sleep. Any product that is scare becomes precious. Sleep time becomes precious!
Opportunity cost is the value of the next best alternative that one gives up when making a decision. The opportunity cost of missing the first ten minutes of class is usually ten extra minutes of sleep. Since time available for sleep is not a scarce commodity at the beginning of the year, students are more than willing to forego this opportunity cost, however, as the year progresses, the value of time available for sleep increases exponentially and reaches a stage where the opportunity cost of 10 minutes extra sleep (i.e. missing first 10 minutes of class) simply does not justify waking up early.
What is the potential solution?
There are two potential solutions. Either increase the opportunity cost of the extra sleep or resolve the prisoner’s dilemma through open negotiation.
Option One: Increasing opportunity cost
– Journal entries
One way to increase the opportunity cost is to make a collective decision to impose monetary penalty for arriving late to class (for example 20 cents for every minute). The best way to organise this is to have every student by a time card (similar to a mobile charge card) and have them cross off the minutes each time he/she arrives late. The money collected can in turn be used to organise social gatherings every week. The Journal entries for this scheme will be as follows. I wonder if there is some clause about how to account for not-for-profit organisations with a set date of liquidation.
CrAdvance payment from Student220
(Cash from initial sales of non-refundable time cards, sales of 44*5Eur Cards)
DrAdvance payment from Students220
CrThank you for being late fund220
(Cash transferred to a fund)
DrThank you for being late fund100
CrExpendable Party fund100
(Money transferred to a transit account based on minutes used by students by being late)
DrExpendable Party fund100
CrCash (Beer Expenses)100
(Yup, you know what happens here :) )
What should be the monetary penalty?
– Monte Carlo simulation?
Since the objective of setting the monetary penalty is optimised at a level where it increases the opportunity cost sufficiently to persuade students to arrive at class on time and at the same time low enough not to discourage a collective commitment to impose such penalty… We can use decision modelling to arrive at this.. Given that we don’t have adequate data, I’m confused, if we should use linear programming techniques or simulation modelling! Any case, according to some basic modelling exercise, the optimal monetary penalty appears to be 20 cents per minute.
How should the money collected be allocated to Class?
– Time Driven Activity Based Costing
In this case, the resources (i.e. those who contribute to the fund) and the cost objects (i.e. those who will receive the incentives) are the same. The costing methodology is time driven activity based costing barring any complicated time equation since the act of coming late has practically no complexity embedded into it :)
How often should the funds be drawn from the fund to party?
– Economic Order Quantity
In this case, the inventory is real cash. If the objective is to party every week, we need to ensure that we have at least 2 weeks’ worth budget in the fund all the time (safety stock). Beyond this we will simply draw on from the cash pool on a regular basis to ensure that we never have to use overdraft facility to party. Assuming that we deposit the cash from this fund into a bank with 4 % annual interest rate and that will use 75 Euros every week for the next 6 months and that there will be a transaction cost of 75 cents each time we withdraw the money, the EOQ will be Square root of two times the total money we will spend (i.e. 75 * 4 * 6) multiplied by the cost of transaction (i.e. 0.75 cents) divided by the interest rate 0.04 -> the EOQ is [Square root of ((2*1800*.75)/.04)] = 260 Euros. Meaning, withdraw 260 Euros from the bank every 3.5 weeks!
Option Two: Resolve Prisoner’s dilemma
BATNA is the Best Alternative To Negotiated Agreement. If we review the BATNA of each party (students arriving on time vs. students arriving late), we will find that the BATNA is pretty convenient and in the case of late comers, very preferable… the BATNA being Status Quo. Considering this fact, the probability of a successful negotiated agreement is less than 20% unless we have strong leadership.
What kind of leadership is required?
– Leadership style
Different styles of leadership are required for different situations. Among the four different types of leadership viz. Great Mother, Medicine Woman, Good King and Warrior, the most appropriate style of leadership in this situation is “Warrior” who is Dynamic Masculine and Action driven. This kind of leadership requires high energy and unfortunately, the Belgian flu makings its rounds in the MBA class has sapped all our energy. I personally have been battling the flu for the past week (don’t tell mom) and felt dizzy while we were discussing this issue in class and hence could not utter a word :)
Can we not do something on our own?
– Reptile brains
The human brain is made of two parts, the rational brain and the reptile brain. Lizards scuttle under a rock in times of threat and attack a juicy bug reactively to seek pleasure, they do both of this without thinking and reactively. Lizards are our ancestors and therefore we still react to threats (others’ being late) and pleasures (extra sleep) reactively without thinking. The reactive brain is much stronger than the rational brain; however, the rational brain it seems has one strong advantage. It can tell lies to the reptile brain… So the key is to trick our reptile brain!
After this 5 month stint in the MBA, if there is one lesson that I’ve surely learnt, then it is that the forces of (behaviourial) economics are as pervasive and inescapable as the forces of physics. Therefore, merely making a verbal statement that we will be on time will not help resolve this situation, if it does, then it means that the oppurtunity cost of not keeping one’s word is valued very highly! It will be a true reflection of what we have learnt during Business Law and Ethics classes :)