DISLAIMER: THESE ARE MY NOTES. THIS IS NOT A TRANSCRIPTION. IF YOU ARE FROM THE PRESS DO NOT QUOTE THIS AS SPOKEN
QUOTES. I’M SHARING MY NOTES WITH EVERYONE TO GIVE SOME COLOR TO THE EVENT. THERE ARE TONS OF LITTLE ERRORS IN HERE,
BUT I’M GIVING UP PERFECTION FOR SPEED”THAT IS THE NATURE OF BLOGS!!
Milken Lunch: A Discussion with Nobel Laureates in Economics.
Gary Becker introduced Myron Scholes and discussed options and the impact the uncertainty in the movement of
securities has in determining the true value of an option.
Milken had each person on the panel introduce another panelist, which was entertaining and informative.
Myron Scholes introduced Michael Spence. I didn’t understand his description of Spence so I’m going to have to
Michael Spence introduced Daniel Kahneman. He talked about Kahneman’s work on how people behave in the face of
uncertainty and risk.
Myron responded to earlier discussions that criticized his work on options. I don’t mind discussion, but when one
said the invention of Myron’s theories should have been banned”- (laughing.) He discussed the expensing of options and
its effect on corporations and said that those in favor of not having to expense options are not objective and don’t
look at the evidence. Myron believes that options should be charged as an expense and that it should be counted at the
time of the grant. He commented that some believe the exercised value (i.e. when the option is exercised) should be the
cost of. He doesn’t believe in this. The main point in the discussion today should not be whether you can value
options, the main question we should be asking is what is the nature of the contract between the employee and the
corporation. Some would argue that the contract is a 90 day contract…. if you leave you have 90 days to exercise.
We should look at the option as a 90 day contract. The mistake people make is looking at this as a ten year contract.
If we expense options we will create a better incentive structure. Why should we change the rules in the US and destroy
our competitiveness? Europe and Japan has adopted this rules so who are we competing with”the 3rd world I guess (huge
The panel got into a side discussion on the ability to patent their economic theories, and how they do not get
royalties when people use their economic theories.
Daniel Kahneman: Discussed the size – that in the US you get 30-40% more food on your plate then in other countries.
He said that once the food is on your plate we don’t have control.
Gary Becker: I agree with a number of things Danny said. If you look at weight gain in the US”and the US has been a
leader in this (huge laugh.) He said weight gain started to speed up in 1980. What happened after 1980? He mentioned
three of four factors: the cost of junk food has gone way done. It is much cheaper to get it thanks to technology to
prepare (he mention French fries.) Secondly, the sedentary nature of the teenage population has changed significantly.
He mentioned TV and computer activity, and that work is more sedentary.
Then showed a slide with an escalator leading up to a gym (huge laugh.)
The third factor is a tricky and difficult one, and I don’t know how much weight to put on it. We are in an
environment where medical progress has sped up. He says that the people are less concerned about things like weight
because they believe that in the future we will have drugs to solve cholesterol problems and sex enhancement drugs
(i.e. Viagra.) He says this is all conjecture, but he believes it. We’ve only seen this increase in weight in the past
Milken paraphrases the concept as “I can do what I want today and I can take a morning after pill.”
Michael Spence compared this to destructive behavior being covered in insurance. He suggested that insurance have
more discounts for people who were safer.
Gary Becker addressed that the breakdown of the nuclear family might be a small factor.
Milken went back to this concept of “I can do this” behavior “because there will be a solution down the road.” It is
rational to eat fast food because we have already calculated that there will be a cure.
Daniel Kahneman: When fear is reduced the incidence of that behavior will increase. He is not sure if this applies
to a teenager going to McDonalds and ordering a huge order of fries. Daniel continued that he doesn’t think that it is
rational to assume a cure will be found and then go engage in dangerous behavior.
Gary Becker on K-12 system: I think one word: competition. Why is it that in the same country we have a system of
higher education that it is the highest in the world… and why is it at K-12 that we know there are serious problems.
There is one major difference; in the US we have a very competitive higher education system. He talked about how we
have hundreds of excellent colleges, and hundreds of thousands of ok to good colleges. He mentioned how the colleges
were competing very hard. You go down to K-12 and you have very little of that (competition.) The middle class and the
rich have the luxury of having that choice (picking a good k-12 school,) who are we short changing? He says the inner
city and rural kids who don’t have a choice, because of the public school monopolies that have been controlled for
decades by unions. He says we know that a monopoly doesn’t provide as good service by its nature (enthusiastic
Myron Scholes: discussed how you motivate those people in K-12 about the importance of math in business later on. He
believes the lack of information given to the importance of the knowledge provided in K-12.
Daniel: If we think about the countries that we envy in K-12 it is not competition. He thinks it is cultural. He
discussed how being a teacher is a high-prestige job in other countries and that here it is not. He doesn’t think it is
competition but primarily poor human capital.
Michael Spence: Competition when you can have it is very beneficial. The federal government invests a large amount
of money into research and it is primarily into universities. He believes this is done extraordinarily well and is a
big reason why our universities are so good. He said for some reason we lack a system of allocation of resources in
primary and second education that has the meritocracy system that we have in higher education.
Milken asked if he would advocate pay based on performance and he said yes.
Gary Becker points out that there is only a segment of K-12 that has problems, and it is the area that needs it
most. He pointed out that 25% of African Americans drop out of secondary school.
Gary Becker: Talked about India and poverty. He talked about the clamoring for aid to India, and that it didn’t do
much good. When India reworked its policies things got better. India’s problems were India’s creation he said. He said
it was hard to do business in India because of all the red tape. He said in 1991 the business reforms, and that once
they did that things got better and they now have a 6-7% growth a year. He gave another example of China and how when
they changed their policies things in those countries got a lot better. He said it would be great if a Muslim country
could become self-sustaining in terms of growth (i.e. not oil.) He said that would do more for terrorism then anything,
and he said that it was the Muslim countries fault that they have not had significant economic growth”not ours.
Milken showed slides about how the value of a company was 75%+ based on human capital and how our policies on
keeping human capital out could be a huge mistake.
Gary Becker believes this is a bigger issue than the trade deficit. The immigration problem can be separated into
three components. One, aside from the terrorism, what is the legal level of immigrants we allow into the country. He
felt it was too tight. He said the second issue is that given we are in a world of terrorism, and he gave the example
of the 19 people who did 9/11, how do we balance the legitimate demands on how we control limiting terrorism with
people who want to come here to learn. He said we are discouraging people from coming to school here, and these people
are going to the good schools in Europe. We need to have a more discriminating policy.
Daniel agreed with Becker.
Myron discussed how when there is a shock it takes time to move back to a more sensible position (i.e. the post
Milken asked if this was all 9/11 or competition from other countries?
Michael believed it was both. He talked about how the world now understands the value of great universities and the
people they produce. He said this is good because of the value of multi-national research. He said he hopes that things
change, but he thinks terrorism is here to stay and we have to learn to adapt to it.
Daniel discussed the problems with the United States concept of treating everyone the same, and that we might want
to rethink that (i.e. maybe some countries are more likely to pose a terrorism problem then others.)
Milken brought up Pakistan and how quickly they are growing, how bad their education system is (highest illiteracy
rate in the world) and the fact that they have nuclear weapons.
Gary said Pakistan is one of the scariest counties in the world because it has nuclear weapons, a very unstable
government and poor economic system. He says it is solveable in principle.
Milken asked Gary how he would solve Pakistan’s problems.
Gary talked about how India, with a billion people, solved its problems. He said he didn’t think population growth
isn’t its problem, he believed it was economic policies that were holding back its growth and trade with the rest of
the world. India had a demonstration by watching China growing from the 80s on, and India decided to take note. He said
they cut tariffs, reduced quotas and cut red tape and India discovered in two years that it could begin to grow. He
said the campaigning in India is no longer religion by economics. He said this could be done in Iran, Iraq and
Pakistan. He said economic aid will not do it. He said modest reforms will give you significant growth in a global
economy. We have to get that into their political process and convince them to do it.
Milken brought up energy policy.
Gary discussed nuclear power and how we get 15% from it. He said France gets 70% from it. He says that it has become
a closed issue after Three Mile Island. He believes that the energy discussion is flawed because we don’t have a
Milken summed up by saying patriotism isn’t going to do it and that it was clear that economic policy was the