Back in the Mix

Today marked my first official day back at school with my Corporate Finance class. I've essentially sorted out what project groups I'll be working on this term and have the opportunity to work with people I haven't worked with before (all with reputations for being smart and hardworking). It also occurs to me that there is also a notable bias towards JD/MBA teammates.

The school is abuzz with info sessions and recruiting events every day it seems as my classmates are constantly appearing in business formal wear and putting their best foot forward for potential employeers. People are taking the opportunity to really investigate what career they want to build and what direction they want to take.

There are also first year students who are now in the same place we were last year and some of my classmates have admitted that it is a bit "different" to suddenly be the senior students giving advice on the MBA program to a group of bright motivated students.

2nd Year Case Comp - My Turn

Last year, I went to the 2nd Year Management Consulting Association (MCA) Case Comp as an observer to see the upper year students duke it out. Just like last year, there were a few first year students who came to observe. This year, I put together a team to give it a try. While we didn't place, the experience was well worthwhile. It certainly served as a good primer to get back into "the right frame of mind" for school.

I'm incredibly impressed with the quality of the presentations. One of my buddies came out with a truly unique solution to the problem presented and had an equally incredibly pitch to sell the idea.

One interesting lesson was why companies focus on top line revenue at the expense of bottom line income. While a short term focused company will need to produce results in the form of profits, a firm with a more long term outlook will often focus on top line revenue as a metric reflecting product and volume growth (with operational margins improving over time and producing future profits).

The first place team was a group of part time students, and I'm starting to notice a trend when it comes to part time students and their performance in case comps.

Orientation Camp

Yesterday marked the end of Orientation Camp for the incoming students. Unfortunately, the weather was not ideal, but that didn't dampen their spirits or enthusiasm. During our costume parties, I was glad to see several group costumes as well as some well thought out and executed individual costumes.

Roger Martin also gave a good talk on what makes Rotman different and how integrative thinking is essential from creating good MBA graduates who have something extra. He explained how he envisioned for us to become good users and creators of models and that this will help us in our future careers.

The incoming class was eager and very inquisitive into the nature of the MBA program. They took advantage of the team activities to work with each other and get to know each other before school started. I think we have a great incoming class and I’m looking forward to watching their development over the school year.

It was very obvious from beginning to end how much work the orientation committee had put into organizing the event by the quality of the opportunities for students to interact and the relationships built at this formative stage of the MBA program.

Negotiations

Classes have started a bit early for me as I've started taking negotiations this week (I had repeatedly missed this class for study tours). I've been taking this class since Sunday with the incoming Morning MBA class (apparently this is their first class that they take with FIT).

It's a fantastic class, showing you the mechanics of negotiation with the opportunity to practice your skills with your fellow classmates. A large component is experiential so I don't that it is easy to transpose the nuances onto a blog post. However, I have been told (and can understand why) this class is popular with students.

Most people would probably initially think that a negotiations course will help people "get a bigger slice", but that is too narrow a perspective. It focuses on tactics and strategies for how to enlarge the pie, how to ensure that the counter party feels like they have been dealt with fairly (even deals in which you concede a great deal of value is no guarantee that your counterparty will be entirely happy with the deal and can affect your relationship and future ability to negotiate).

London Business School - Electives

So I heard back a few weeks ago from London Business School about all the course electives I applied for and I'm happy to say that I got them all. This means that the course I put at the top of my list will also be the last class I end my MBA program on: Service Management Field Trip (aka LBS Greek Study Tour). I've read a few great reviews of this course from other blogs (as well as for the other courses I've choosen) and I'm very happy with the results.

I've just finished my last day at Scotia on Friday and I'm catching up with friends and family before starting my negotiations course in a week's time (you know, that course I kept missing because I kept going on study tours?) I'm taking it with the incoming Morning MBA class so it will be fun to meet them.

Orientation camp is the following week and that looks to be good times. The costume theme this year is super heros and I think I have an awesome idea. I might post a pic after camp is over.

I've got a lot of stuff I need to catch up on, but will start picking up regular posting again soon enough.

Flight of Fancy: What If...? A Market for Bid Points

One common theme I've heard is that MBA's are often upset when they don't get all the elective courses that they want. While I certainly can't complain, it brings up an interesting question: "What if someone like me was able to sell their bid points? What would I get for them? And how would you value them?"

For example, my course choices weren’t very restrictive, I got 500 points to bid on four courses, most of which I could have gotten with a zero bid. Whereas, Mr(s). Ambitious was trying to take TMP and Value Investing while going on Exchange (physically impossible, Value Investing is a year long course and Exchange means you are physically gone). If there existed a mechanism (and therefore a market) for me to transfer my points for a price, what would I get for them? What should they be worth? Clearly, there is currently some "market inefficiency" as we are both unsatisfied: Mr(s). Ambitious because they didn't get all the courses they wanted [net deficiency] and me because I didn't realize the full value of my bid points because I had more than I could use - [net surplus].

Well let’s make some assumptions:

• Rotman tuition is C$35k per year (let’s not include first year as it’s common, or you can adjust the value of points accordingly if you feel second year courses are more / less important)
• You take 10 elective courses in your second year
• You are given 1000 points with which to bid

A “book value” of the points would simply be C$35k / 1000 points or about $35 per point.

But keep in mind that when something is inherently useful, especially in a scenario where a few points margin can mean the difference between getting the course you really want versus having to settle for a less popular course, there can potentially be bidding wars from “oversubscription” (points trade at a multiple above their book value) especially if they were in limited supply.

While people are paying C$70+k to go to school, for a marginal $35 x 100 points (a rough approximation of the average points allocated per student / course) or $3500 you can get any course you want (including the highly coveted TMP and Value Investing – which includes a trip to visit Warren Buffet – one of the reasons why this course is so wildly popular).

If you could some how do it, you could see how much additional probability you have of getting into the classes you wanted and put a dollar value on how badly you wanted to be in that class (regression analysis), you can determine a price you’d be willing to pay to attend that class. For example: Would there be a correlation between the number of points you consumed to get into classes of your choice against your overall earning power once out of university (thinking along the lines of DCF to value bid points like common shares).

And also imagine if this market had a “market maker”. For example, the PSO will (create and) sell you points for a certain value (either regulated and pre-determined or floating with the market). Students could liquidate their points at market value and get money back or buy points of the market to be more competitive for course selection and the school could potentially get revenue from selling points.

And since you have a market with underlying assets, imagine if you created financial instruments for those assets (shorts, puts, and calls for bid points, futures).

And imagine if other schools had market systems (I’m told that bidding systems are not uncommon at other MBA schools), you could trade between these. Or even other programs!

Of course, these points would inherently have an “expiry” as to their value (you wouldn’t want to be holding (take delivery of) 5000 MIT Engineering points if you were going to Stanford Law School).

There are some interesting implications. For instance, a new ranking system for schools where the relative value of a course is determined by the market value (determined by students taking courses there) in real time with comparisons to year over year values. Example: Would an engineering calculus class go for more at Waterloo or Toronto? Could you couple this with flexibility between schools (accreditation programs) which allow students to take equivalent courses at other schools and what do you get?

It would be a more sophisticated and real-time version of tuition regulated by the market. Taken to the extreme, here is another idea: drop the original tuition completely and have students buy bid points for classes. And then what if you were able to connect this market to actual financial markets? An S&P Index of Undergraduate studies to benchmark the valuation of your individual class’ performance.

Another thought: If the value of courses in a particular faculty started to "overheat" would that be a leading indicator of oversupply of labour in a particular industry in 4 years time?

Bidding Strategy - The Mechanics

So I've been lucky enough to receive all the classes I want in all the sections I want and it turns out that LBS doesn't use a "bidding" system per say (classes awarded based on listed "preference" - an ordinal system).

A few people were asking about how my bidding formula works and while it's hardly perfect, I figured I'd put up some of the details just for laughs (or a least as building blocks for someone who plans on taking this model to the next level). It uses only public information available to all students at the time of bidding.

In this model, each course bid is determined by three factors. The first is the inital base and most people will choose one of two initial bases: Last year's minimum bid or last year's median bid (depending on how competitive the class is).

After determining the appropriate bases for your five courses, the remaining points (“the Remainder”) can be divided amongst your courses to make your bids more competitive. But like all dilemmas in bidding, you want to assign just enough points so that you get the courses you want, but not so much that you jeopardize your chances of getting the other courses. So how do you do it?

I propose that the two major factors you should look at are what I call:

1. The Ballot factor (anticipated) (x% of the Remainder, or “X-Factor”)
2. The Historic factor (backward-looking) ([100% - x%] of the Remainder, or the “Y-Factor”)

Where x% is the weight of value of your Ballot factor versus your Historical factor (In other words: how much you believe your Ballot Factor represents real bidding behaviour versus historical).

Ballot Factor:

This factor accounts for the number of people who say they will take the course. A few notes:

• People don’t always bid for the courses they ballot for
• Use the numbers as guidance to see if the course is oversubscribed
• Calculate the expected utilization capacity = total number of students balloting for any course in that section / total class capacity
• Square the utilization capacity to create an “intensity factor”
• Total all the factors and express each factor as a percentage of the total
• Multiply the percentages by the X-Factor
• The result is each individual courses’ Ballot Factor offset

Example:

• 2 classes have a capacity of 40 people each
• You have 200 points allocated to Ballot Factor
• 20 people bid on Class A (fairly certain everyone who bids will get in… There is even a chance that a 0 point bid could win) has utilization 50% and Ballot “intensity factor” of .25
• Class B has 60 bidders has utilization 150% (red flag: guarantee that not everyone will get in) and it’s “intensity factor” is 2.25.
• Class A’s weight is .25/(.25+2.25) = 10%
• Class B’s weight is 2.25 /(.25+2.25) = 90%
• Class A’s Ballot factor offset is 10% * 200 points = 20 points (a non-zero bid with decent margin, you'll probably get in)
• Class B’s Ballot factor offset is 90% * 200 points = 180 points (a strong bid, considering an average of 100)

This model tries to account for the fact that only very high bids will win the competative class, but you also don't want to low ball Class A incase a few stray bids appear from people who take the class last minute (obviously, the less people who originally bid on the class, the less you have to worry about dark horse bidders).

Note that it is 9x because at least 20 people are guaranteed to not get in the class. Classes that are oversubscribed will have intensity factors much higher than 1 with much heavier weights and undersubscribed much lower than 1 with much lower weights. This accounts for the premium on variation and intensity due to the number of bids in a competitive environment. Note that in this pure form, this is a best effort bidding mechanism with the scaling of points to consume all remaining points.

Historical Factor:

Another way to try to guess what the bidding will look like is to use the historical bidding as guidance for the variation of bids (were the bids tight or across a broad range?) One indicator of that is the minimum and median bid. If you make some HUGE assumptions, you can use these two points to create a normal curve with standard deviations. Since the mechanics of this are taught in stats in first quarter, I won’t bore my readers with a poor facsimile of Prof. Krass’ lecture.

Even if you don’t technically know the actual distribution of the curve, you can also use Chebyshev's inequality to position yourself within a certain percentile (also looking at the expected capacity utilization of the class based on your previous calculations). How? Here’s a hint (shown above): the bidding percentiles (% of students bidding that are not successful being admitted into the class) should be the same as the bid oversubscription capacity (again, huge assumptions) to provide the number of standard deviations. Combine this fact with the distance from the median to the minimum should provide a clue as to size of a standard deviation. Note that using this method, you may not (probably won't) have enough points to guarantee getting into the courses you want (unless like me, you probably have a surplus of points or are taking unpopular courses), but it is probably one of the best mechanical methods for balancing aggresive bidding with conserving points as well as building a view for what the bidding landscape looks like. In practical terms, at this point you can use a best effort model similar to the one shown above using the Y-Factor.

Also, I’ve deliberately left out methodology for mechanically scaling up courses based on your individual preferences (ie rating courses from 1 to 10 and incorporating that into your bidding strategy). Also, there are huge economic implications for bidding strategy considering that the involved parties do communicate with each other and affect the bidding levels of courses (ie Friends talk to each other about how they plan to bid). Signalling, game theory and strategy all come into play.

While not perfect, this model will give you some perspective into what a reasonable, very mechanically inclined bid would be. Admittedly, while I built this model, I did do some “emotional” adjustments to my bids (there was one course where I wanted to work with my friends on their team, so I wanted to be CERTAIN that I got the course). Like anything done on a computer, it’s just a tool.

Disclaimer: Like anything on this blog, this model does not guarantee any degree of success. This post is intended as a conversation / pensive reflection piece only. It is possible for you to use this model and not get ANY courses you want. For instance, it is physically impossible to get both Top Management Perspective AND Value Investing because both courses usually require exceptionally high bids. Note that by definition, there will be some people who don't get the courses they want. The more you want to be certain that you are in one course, the less certain that you will be in another (almost like the Heisenberg uncertainty principle). For better or worse, it is a zero-sum game.

Also, more importantly, I've been told that it's all a wash and at the end of the day, after the drop and add periods are over, most people get the courses they want anyways.