Finance Ph.D.

Indiana Jones and The Art and Craft of Problem Solving

I recently bought the book The Art and Craft of Problem Solving, by Paul Zeitz. I highly recommend this book if you want to build problem-solving skills. The book explores some problem-solving strategies and tactics, and then presents related problems.

The best way of learning to do something is trying, and the book provides plenty of problems to try: it has about six hundred problems, mostly without solutions. Many of the problems are quite difficult, most are very enjoyable.

This is one of the first (and easiest) problems in the book:

Indiana Jones needs to cross a flimsy rope bridge over a mile-long gorge. It is so dark that it is impossible to cross the bridge without a flashlight. Furthermore, the bridge is so weak that it can only support the weight of two people. The party has just one flashlight, which has a weak beam, so whenever two people cross, they are constrained to walk together, at the speed of the slower person. Indiana Jones can cross in five minutes. His girlfriend can cross in 10 minutes. His father needs 20 minutes, and his father’s sidekick needs 25 minutes. They need to get everyone across safely in one hour to escape the bad guys. Can they do it?

Can you solve it?

The only time management lecture you'll ever need

I am sometimes asked how I find time to do the things I do. Although the real reason is that my wife, my mother and my wife's family help me a lot, there are a few things I have learned myself. Here's one of the best sources.

You've probably already heard about Randy Pausch, a Carnegie Mellon Computer Science professor famous for The Last Lecture, which he wrote not long before he died of pancreatic cancer (Here's the video).

The "Last Lecture" may have taken attention away from his time management lecture. It is one of the best time investments you can do in your whole life. You can start it at 08:34. It is a little longer than one hour, but it pays itself many times over.

A few of the topics he covers in this lecture:

• How to say "no" gently (to things that are not important)
• Disabling your email notification (53:25)
• Why it is important to have your desk organized
• "Thank You" notes
• How to delegate

A great (free) tool to prevent procrastination - StayFocusd

Ironically, I was (somewhat) procrastinating when I found about StayFocusd, a Google Chrome extension that sets a limit on the amount of time that you can spend on a list of websites in a given day. The list comes preconfigured with some of the usual suspects: Twitter, Facebook, Reddit, Quora. You can easily edit the list. Google+ is not one of these sites, so I had to add it.

StayFocusd comes preconfigured with a limit of 10 minutes per day. This is not the time per site. This is the maximum time that you can spend on a given day on all of the websites on the list. So if you spent 3 minutes on Twitter early in the morning and 5 minutes on Facebook, you only have 2 more minutes to spend in Twitter, Facebook, Reddit, etc. for the remainder of your day. If you click on a link from one of the websites on the list the clock continues to run.

If you need more time, you can always try to adjust settings, but StayFocusd makes it really annoying for you to change a setting. If you enable the “challenge mode”, in order to change a setting you have to type the following text: 

The procrastinator is often remarkably optimistic about his ability to complete a task on a tight deadline; this is usually accompanied by expressions of reassurance that everything is under control. (Therefore, there is no need to start.) Lulled by a false sense of security, time passes. At some point, he crosses over an imaginary starting time and suddenly realizes, "Oh no! I am not in control! There isn't enough time!".

Don’t even think about trying to type that really fast. Any mistake (for instance, a missed case or a missed space) and you have to start over:

 

Copying/pasting also doesn’t work:

 

The only downside is that it works only for Chrome now. It would be great to have support for other browsers and a timer in the cloud, so the allowance time would be shared across browsers.

This should probably be required for Ph.D. students that passed their comprehensive exams.

Excel 2010 Bridge (or Waterfall) Template and Example

If you are in a hurry, you can  download an Excel template. For more ideas on how to present quantitative information, check Edward Tufte's books or his website.

Giving a new meaning to Financial Engineering, when I worked in Corporate Finance I was sometimes asked to build bridges. After the initial confusion, I found out that a bridge is a graph that is useful to explain differences between two periods of time in an account.

The usual example (and application) is creating a graph for a budget discussion. A bridge like the one depicted below can quickly show the reasons for the differences between the budget in 2011 and the budget in 2012.



I build these graphs with the Stock (Volume - Open - High - Low - Close) chart in Excel. 

The setup

To build the graph yourself, you'll need to know N+2 numbers, where N is the number of "buckets" that explain the transition between the two periods. In our example, we have four buckets, and therefore we'll need N+4 = 6 rows, one for each number.

The N=4 buckets in our ficticious case are:

1. New customers
2. Outsourcing savings
3. Production efficiency
4. Cost of capital.

The N+2 = 6 numbers  are:

1. Value for the budget in 2011 = 3.4M
2. Additional expenses due to  new customers (a positive number) = 7.5M
3. Savings due to outsourcing (a negative number) = -2.2M
4. Savings due to production efficiencies (a negative number) = -2.9M
5. Additional cost of capital (a positive number) = 0.8 M
6. Value for the budget in 2012 = 6.6M (the sum of the five numbers above)

To build the chart, you'll need a table with N+2 rows and 7 columns. The number of columns is the same regardless of the number of rows. In our example, we need N+2 = 6 rows (one for each number) and 7 columns. 

The recipe

For simplicity, I will assume that your table will begin in Cell A1, and therefore will be delimited by cells A1 and G(N+2). In our example, the table will be delimited by cells A1 and G6.

The recipe has four steps. Ultimately, we're going to enter data in only a few cells, as shown in the picture below. 

The step-by-step guide on how to determine the formulas to enter in each cell is below.

Step 1 - The first column

Column A will have the names of all the buckets, including the starting and ending values.

In our example:

• A1: Budget 2011
• A2: New Customers
• A3: Outsourcing Savings
• A4: Production Efficiencies
• A5: Cost of Capital
• A6: Budget 2012

Step 2 - The last column

Column G will have the values for each one of the buckets (numbers 1-6 in our example).

• G1: Value for Budget 2011 = 3.4
• G2: Value for New Customers = 7.5
• G3: Value for Outsourcing Savings = -2.2
• G4: Value for Production Efficiencies = -2.9
• G5: Value for Cost of Capital = 0.8
• G6: Value for Budget 2012 = 6.6

Step 3 - Row formulas

• 3a) First row: cell B1 should point to G1
• 3b) Second row: cell C2 should point to B1, cell F2 = C2+G2
• 3c) Rows 3 to N-1:
      Cell C(row) points to cell F(row-1). For example, C3 = F2.
      Cell F(row) = C(row) + G(row). For example, F3 = C3+G3.    
• 3d) Last row: cell B(N) should point to G(N). In our example, B6=N6. Another alternative is to have it point to F(N-1), or F5 in our example.

Step 4 - Build the graph

Select columns A through F (note that you don't select column G), and click Insert->Other Charts->Volume-Open-High-Low-Close, as shown in the picture below:

A few cosmetic touches:

• The graph created by this procedure has a meaningless legend. Right-click it and delete it.
• The graph also has a secondary axis that is meaningless in this context. Right-click the secondary axis (the numbers on the right of the graph) and delete it.
• If you don't like the colors of the up and down bars, you should right-click one of them and select "Format Up/Down Bars". I usually format my up bars as red (increasing budget is usually bad) and the down bars as green (savings!). If your graph is about revenue, the opposite makes sense.
• It is always a good idea to add a descriptive title.

Other Sources

There are a few other ways of building this type of chart. Most of them are far more involved. For example, you can check Chandoo.org, PeltierTech and even one from Microsoft (provided by a third party).

Three books to survive the first year of Microeconomics in a Ph.D. or a Master's

I wish somebody told me this before I started. But my loss is your gain.

There's a reasonable chance that you will have to learn Microeconomics even if you are not getting a Ph.D in Finance or Economics, as my friends in Accounting and Information Sciences can attest. There's a much smaller chance that you are a Math wizard like my friend Andrew Detzel, who passed his Math comprehensive exams before starting his Finance doctoral program. If you are like him, this post is not for you.

If you don't know Economics already, you'll need to do some pre-work. A symptom that you need pre-work is when you look at an Economics graph and think that the economist who drew it confused the x and y axis. Other symptoms are not knowing what a Hessian is, or not being able to do derivatives using the chain rule in your freaking head, LIKE A BOSS.

Here's what you'll need before you even start:

• Intermediate Price Theory:  Price Theory and Applications: Decisions, Markets, and Information. It strikes a good balance between being readable and formal and helps build the "economic intuition" you'll need to understand what people are trying to do in your courses.
• Mathematics for Economists: Fundamental Methods of Mathematical Economics. The fundaments you'll need, explained clearly with lots of examples. One downside: not too many exercises. One possible upside: some of the examples cover Macroeconomics. Most people can skip this book if they can easily read the next one.
• Microeconomic Theory: I recommend The Structure of Economics: A Mathematical Analysis. Provides clear explanations and examples of mostly everything that you really need to know. Somewhat mathematically rigorous, but not too much.

Once your Microeconomic Theory course starts, you'll probably be assigned Microeconomic Theory by Mas-Colell, Whinston and Green (MWG). Knowing the content of the three books I mentioned above will give you a fighting chance against MWG.

Now, if you're going for an MBA, the first book is more than enough for most cases. You should probably just get the book you are assigned. Knowing how many drinks you can have before driving is way more important. True story.