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Felix Salmon relates the story of an economics Nobel Prize winner getting paid by a hedge fund. It would all seems pretty silly—sort of like Coca-Cola featuring Michael Jordan in their ads—except that hedge funds are disreputable nowadays and so it seems vaguely sleazy for a scholar to trade on his academic reputation to make free money in this way.

It falls roughly in the same category as that notorious b-school prof in Inside Job who got $125K for writing a b.s. report about the financial stability of Iceland—and then, when they came back to him later and asked how he could’ve written it, he basically said: Hey, I don’t know anything about Iceland, I was just taking their money!

That said, if a hedge fund offered me $125K to sit on their board, I’d probably take it! It’s hard to turn down free money.

Or maybe not, I don’t really know. So far, when companies have paid me $, it’s been to do something for them, to consult or give a short course. I’d like to think that if someone were merely paying for my name, or paying me to write something on a topic I knew nothing about, that I’d think twice. But I’m not sure: maybe it would be like when Larry Summers gets all that free money—these dudes might be using Summers as advertising, but they’re probably able to flatter him to believe that he is actually offering them $5.2 million worth of wisdom.

Or, to put it another way, if there’s no reason Michael Jordan should feel guilty taking money from Coke and McDonald’s, then should a professor feel guilty for getting paid to inflate Iceland’s bubble? To me it feels different, but, again, I’m not sure how I would behave in such a setting where free $ is being presented to me.

P.S. I don’t know any of the people mentioned above, nor do I know the stories of any of these consulting gigs. I’m using this as an opportunity for some general speculation, not as any slam on Sargent etc.

15 thoughts on “$

  1. The difference between Michael Jordan and the b-school professor seems pretty clear-cut to me. Nobody really thinks that Jordan’s endorsements reflect his personal feelings about how great Coke or McDonald’s is, and everyone understands that he’s being paid to lend them his name and image. With the b-school professor, the BS opinion about Iceland is really only valuable if people are under impression that it reflects the professor’s expertise and research, and that he’s not just acting as a paid shill.

  2. If there is a reasonable expectation that the endorsement is going to harm people, then my sense is that one may want to skip it. To the extent that MJ understands that his endorsement of Coke and McD is likely to undermine public health, I am unsure if it ethical behavior on his part. There is also a case to be made about what one shall do with the money one gets. If money one gets can be funneled into creating public good, and if the good being generated is greater than harm, perhaps an argument can be made in favor of taking the money.

    As to whether the decision will be tough – I can easily imagine it being fairly tough to make.

  3. One would hope if what you are being paid for is your expertise and judgment they would be honest, or at least bear a disclaimer if not.

  4. I think that a major difference is that when people buy McD and Coke, they have at least some idea of what they are getting for their money. They are not sinking their life savings (on the supposedly honest advice of someone better qualified than them) into something that was always entirely worthless in order to benefit a few bankers, and then see their tax dollars used to bail out the aforementioned banks. With a coke, you don’t pay for an empty glass and the get asked for more money to top it up.

    Not that I’m cynical or anything.

  5. What explains the difference is the potential for (or expectation of) harm:

    Expectation(harm|endorsement) = Harm(bad_choice) * P(bad_choice|endorsement)

    If Jordan endorses Coke in a TV ad, people are unlikely to let his “expert” opinion sway their decisions much. So the potential for being fooled into making a bad choice is low. Further, even if some people do make a “bad” switch from Pepsi to Coke, the potential for harm isn’t that great.

    But if a b-prof from a respected university writes a seemingly academic paper touting Icelandic investments, his recommendation is more likely to influence decisions. And, if those decisions turn out to be bad, they are likely to result in greater harm than would mistakenly changing one’s brand of sugar-water.

  6. I guess I’m taking a rather contrary position: who gets hurt when Iceland’s economy blows up? Well, hardly anyone ‘cept maybe some rich guys who paid enough money to get the thought of a b.s. professor, who loose a few billion of their wealth. Who gets hurt when MJ endorses McD? A coupla thousand kids end up with juvenile diabetes, or obesity, and maybe die a few decades early. Even if the effect of MJ’s “expertise” is minuscule, the advertising will be seen by tens of millions, so if it influences only 0.1% of them, that’s still way too many.
    So, what’s more important, the health and quality of life of a few thousand kids, or the incremental millions of a few dozen billionaires? I suppose some might be more sympathetic to the rich folks, but childhood obesity is to my mind a real moral issue.

    • Have you talked to non-billionaire icelanders? I’m pretty sure they’d beg to differ.

      Or did you intend to ask “Who in the United States gets hurt when Iceland’s economy blows up?”

      • I was fully aware of Icelanders when I wrote my original post. They may be bankrupt, but has that caused diabetes or hypertension? I don’t think so. Sure Iceland may have gone from wealthy to impoverished when a hedge fund blew up, and the poor are can afford less health care, and have higher rates of alcoholism. Some econ professor may have been involved in that; if so, shame on him. But ill health caused by fast food is much more serious, and so shame on MJ.

      • It may not be clear that the debts will be fully repaid by Iceland, in which case creditors, and (in the case of Govt guarantees) taxpayers in the creditor countries will also foot part of the bill.

  7. It strikes me that the ratio of speculation to fact is a little high here. What, exactly, is the point? That consulting is bad? Or that hedge funds have become unfashionable?

  8. I’m cynical enough that I agreed with Salmon’s initial argument. Then he posted the following which undermined his thesis (at least for this particular case):
    “*Update: I just spoke to Neil Chriss of Hutchin Hill, who explained to me that the deal with Sargent was agreed before he won his Nobel, and that Sargent will not be meeting any investors. (The deal was signed after the prize was awarded, but without any bump in the amount Sargent’s getting paid.) I’m also convinced that Sargent is not being paid anything like Larry Summers money, or even Nobel money, for this gig. For an economist, it seems, Sargent is quite bad at maximizing his profits from this prize.”

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