Ulrike Malmendier and Toby Stuart

Faculty Rock Stars

Meet professors Ulrike Malmendier and Toby Stuart, the next generation of big thinkers at the Haas School. The recipient of the American Finance Association’s prestigious Fischer Black Prize last year, Malmendier is carving her own place in Berkeley’s long history as a pioneer in the field of behavioral economics. Stuart, an expert in entrepreneurship, has built his career studying networks while bringing his own powerful connections to bear in his courses at Haas.

Toby Stuart

Master of Networks

An expert in entrepreneurship, Toby Stuart has built his career studying networks while tapping his own impressive connections to create two blockbuster courses.

By Ronna Kelly
Toby Stuart
Silicon Valley

Silicon Valley Immersion Week
Classes on entrepreneurship at Google, Facebook, and Airbnb. A venture capital panel on Sand Hill Road. Founders or C-level hosts at about 35 of the Bay Area’s most interesting companies. That sums up the Silicon Valley Immersion week for the new Berkeley MBA for Executives Program, but it doesn’t quite capture the months of work that Haas Professor Toby Stuart put into creating the impressive lineup of companies. Nor does it capture how transformational the week was for students. “I thought being an entrepreneur was for 22-year-old kids with nothing to lose. But what I found from going through this immersion week was there are approaches I can take to minimize my personal risk and still become an entrepreneur,” says Neal Fornaciari, a student who works at Sandia National Laboratories. “It really helped me understand how the culture of Silicon Valley fosters and enables successful startups like nowhere else in the country.”

“Does anyone take snake oil?”

Silence. Not one student in Haas Professor Toby Stuart’s MBA Entrepreneurship class raises his or her hand. Stuart is leading a case discussion about a biotech company developing a drug to stop aging, and he’s on a roll, posing all sorts of provocative questions as he bounds up and down the aisles like a talk-show host, a cup of Peet’s coffee always in hand.

While the snake oil question draws blank stares, one thing is certain: Stuart is a wildly popular teacher who is always on the move. He has reshaped the school’s full-time MBA Entrepreneurship course into what some students call their best class ever and created a star-studded, career-changing Silicon Valley Immersion Week for the new Berkeley MBA for Executives Program. When he’s not teaching Berkeley MBA students, Stuart may be leading an executive education course at Lawrence Livermore National Laboratory, meeting with Silicon Valley venture capitalists and San Francisco entrepreneurs, advising PhD students, or working on one of his half-dozen research projects.

“Among my problems in life: I’m easily bored. I like to switch up what I do,” Stuart admits. “I love my job because I do 20 different things in a typical day.”

Within that juggling act, however, there’s a theme that courses through most of his work: networks—a fortuitous focus given the emergence of social media. Stuart is best known for his research on how social networks contribute to the entrepreneurial process. But his wide-ranging interests also have led him in several other directions only loosely related to networks, including gender within organizations, communication silos, and most recently, which Chinese startups cook their financial statements.

One of the youngest professors to earn tenure at the University of Chicago, Stuart has won several awards, including the $50,000 Kauffman Foundation Prize for entrepreneurship research. Before coming to Haas in 2010, first as a visiting professor, he previously worked at both Harvard and Columbia business schools.

From Skiing to Case Writing

Ask Stuart where he’s from and he’ll answer, “That’s a complicated question.” After going to high school and skiing in Salt Lake City, he decided to study economics at Carleton College in Minnesota in part because it had the longest winter break among small liberal arts schools.

He was hardly destined to become a ski bum, however. His father was an academic and, like 70 percent of Carleton grads, Stuart planned to eventually get a PhD. His first taste of academia came when he landed a job at Harvard Business School, which hired recent grads from liberal arts colleges to write cases.

“That still may be the best job I ever had,” Stuart says. “It paid as well as a consulting firm, but instead of making spreadsheets, I traveled around the country interviewing CEOs and writing strategy cases when I was 21.”

After hearing Jim Baron, a Stanford professor at the time, present his work at Harvard, Stuart set his sights on heading west for his PhD. He had developed an interest in the evolution of technology as an undergrad, so Palo Alto was the right place to be—at exactly the right time.

“I came out to Stanford in 1991 and found myself in the heart of Silicon Valley with the chip industry in transformation,” he says. “By the time I finished my PhD, Netscape had gone public, the Internet was taking off, and I found it all very interesting.”

At Stanford Stuart connected with Joel Podolny, then a new assistant professor and social-networks researcher, who became Stuart’s adviser and guided his early work on networks. Podolny later became dean of the Yale School of Management and in 2008 was hired by Steve Jobs to become dean of Apple University, where he still is today.

Information Explosion

After collaborating with Podolny on research related to patents in the semiconductor industry, Stuart went on to investigate new venture creation in biotechnology, the venture capital syndicate network, and patenting and company creation among scientists.

“One of the most important things we can do for students is not just teach them specific knowledge and skills, but help them match their interests to their career path.”

During his time in Chicago, a discussion on why the region doesn’t have more biotech firms led Stuart to study clustering in the high-tech industry. Later, at Harvard, Stuart began a series of projects on email networks, organizational structure, and career advancement in large companies. After examining more than 100 million emails of 30,000 workers, Stuart and his doctoral students were surprised to find how infrequently workers communicated across silos, and that women are more likely to do so than men.

These days, Stuart is wrapping up studies on the effects of scientific prizes and starting a project analyzing matching on a dating website.

“At every moment, websites with a social component generate reams of data about how people choose to interact and who they choose to interact with,” he says. “I’m now working on projects that are massive by the scale of my early work and weren’t feasible then.”

Stuart says he had no idea the Web would evolve this way when he began studying networks. “I was a little bit slow to become a believer in the social web. I’m still ambivalent,” he admits, wondering about the value of a relationship on LinkedIn, for instance, when he hardly knows many of his connections.

The Social Network

Stuart may have a point, but the power of his network has become abundantly clear during his time at Haas.

His MBA Entrepreneurship course has featured an impressive list of speakers, including venture capitalists from Silicon Valley’s top firms; startups such as CloudFlare, founded by Harvard MBA students, and TubeMogul, started by Berkeley MBA students; and even a billionaire investor who was promised anonymity.

But Stuart doesn’t just hand over the podium to speakers: He brings even more depth to the knowledge guests share in class. After Andreeson Horowitz partner Margit Wennmachers urged female students to learn coding, Stuart contended that limited experience with coding doesn’t fully explain why women are dramatically underrepresented in Silicon Valley and offered to hold a session outside of class to discuss gender and entrepreneurship further.

“He spent about two hours with us having a casual conversation,” says Kristen Duffel, MBA 15, one of a half-dozen students Stuart met with in the Haas courtyard. “Little things like that just showed that students are at the forefront of his mind and he really wants us to do well and teach us all that he can.”

Duffel, who is working on an early-stage startup, calls Stuart’s Entrepreneurship course “far and away the best class I have ever taken.”

“He’s so energetic and engaging,” she says. “You just walk out of the classroom every Tuesday thinking that it was the best three hours of the week. I loved it.”

Beyond TechCrunch

Students say Stuart has an unparalleled mastery of case method teaching, which he infuses with unexpected humor. In the case of the biotech company searching for an elixir to end aging, Stuart jokingly shows slides of the firm’s “board of directors” before and after its Series A round of funding—and they go from senior citizens to small children.

He peppers students with questions about the firm’s chances of success, poking fun at its tests on roundworms and asking whether it should pursue the nutriceuticals market. Along the way, he revises a hockey-stick shaped probability curve to visually illustrate the company’s odds of meaningfully extending lifespan, which he estimates start well below a tenth of a percent.

But, Stuart asks, if the company succeeds at slowing down aging, how big is that? “Huge,” one student answers.

“Toby really drove home to us the idea of the hockey-stick growth model in early-stage companies,” says Bill Blaustein, MBA 15, who is opening the Brazilian market for Uber this summer but hopes to eventually start his own business. “He talked about a number of companies that get stuck in the dip of burning cash, and that what investors look for are companies that can prove they can get out of the dip, as demonstrated by numbers like customer lifetime value, customer acquisition costs, and other such metrics.”

Stuart doesn’t hesitate to put students on the spot, either. Take the class about a Zipcar case.

“Who likes Zipcar?” Stuart asked, and several students raised their hands, recalls Vivek Ahuja, MBA 15, a former Navy submarine officer. Then he asked, “Who really likes Zipcar?” and some students lowered their hands. Then Stuart asked, “‘Who really, really likes Zipcar?”

“I still had my hand up,” Ahuja recalls. “He said, ‘All right, go to the front of the class and pitch everyone.’”

“I was nervous and my heart rate started to go up a little bit, but my next thought was, ‘I’m just going to do it,’” Ahuja adds. “At the end everyone was applauding me.”

And so Ahuja experienced pitching a business idea firsthand. Overall, students say Stuart’s class gives them a much deeper understanding of the myriad challenges faced by entrepreneurs and the many forms entrepreneurship can take. “Entrepreneurship can come in a more corporate setting. It also can be your garage-based startup and anywhere in between,” says Duffel. “It’s not just what you read on TechCrunch.”

Revamping Entrepreneurship

Such takeaways are intentional. Before Stuart arrived at Haas, the Entrepreneurship course focused on helping students develop a business plan. Stuart disagreed with the notion that the course should be geared to students who already have a startup idea and removed the business plan requirement. He restructured the course to serve not only future entrepreneurs but also students less certain about their career paths, bringing in guest speakers and discussing cases on everything from how to divide founders’ stock, to what’s in a term sheet, to how to exit a company.

“One of the most important things we can do for students is not just teach them specific knowledge and skills, but help them match their interests to their career path,” explains Stuart. “Entrepreneurship is not part of the required curriculum, but I hope most students want to take the course.”

The course is now consistently over-subscribed, and Stuart and co-instructor Rob Chandra, a Cal alumnus and member of Forbes’ Midas list of top tech investors, received the Cheit Award for Teaching Excellence for the Full-time Berkeley MBA Program in May.

Bringing in outstanding, highly accomplished instructors like Chandra is also strategic, Stuart notes.

“I’ve been spending a lot of time trying to bring on board very successful, well-connected adjunct faculty who are not only superb teachers but can also help place students into the most exciting companies, introduce them to investors, and help them hone their pitches,” he says.

Valley Boy

Stuart also tapped his network to develop the first Silicon Valley Immersion Week last fall for the new Berkeley MBA for Executives Program. In addition to teaching students in classrooms at Google, Facebook, and Airbnb, Stuart helped arrange small group visits with about 35 startups in Silicon Valley and San Francisco.

“I spent a lot of time calling friends and Haas graduates, persuading founders and CEOs of some of the region’s most interesting companies to host a group of students,” Stuart says.

The effort paid off: Students were blown away by the experience.

Joe Inkenbrandt, an engineer in the program, said visiting so many diverse entrepreneurial environments and hearing the passion of so many founders was “eye-opening” and “inspiring”—so much so that two months later he quit his job to work full time with a friend on a 3D-printing security startup.

“Going into the week, I was a little skeptical about what I would learn. Man, was I wrong,” says Inkenbrandt. “That week changed my mind: I went from ‘I can maybe help someone’ to ‘I can do this,’ and I literally turned around and did.”

Inkenbrandt was just one of at least a dozen students who said the week inspired them to consider an entrepreneurial path that they never before thought was possible.

“That’s what we mean by a transformational experience,” says Stuart. “If I can facilitate this process, there is no more fulfilling teaching experience than that.”

Ulrike Malmendier

Homo Economicus MythBuster

Winner of the prestigious Fischer Black Prize for the Top Finance Scholar under 40, Ulrike Malmendier is carving out her own place in Berkeley’s rich history as a pioneer in behavioral economics.

By Ed Andrews
Ulrike Malmendier

Prize-Winning Research
One major testament to the intellectual vigor, creativity, and originality of Prof. Ulrike Malmendier’s research is the Fischer Black Prize that she was awarded last year by the American Finance Association. The biennial award honors the top finance scholar under the age of 40 years old and is modeled after the Fields Medal in mathematics and the Clark Medal in economics.

Ulrike Malmendier is a scholar on the economics of arrogance, among her many other accomplishments.

She doesn’t put it that harshly, and she doesn’t gloat in her findings. But over the past decade, she has produced a sweeping body of research on how over-confidence and other deeply rooted character traits underpin and often undermine “rational” business decisions.

In a series of path-breaking papers, Malmendier and her colleagues have mapped the characteristics and pitfalls of hubris at all levels: the remarkably subpar results of “superstar” CEOs; the overzealous bidders on e-Bay who pay more at auctions than they would in stores; and even the overly ambitious exercise enthusiasts whose optimism is exploited by fitness centers.

This is all part of behavioral economics, the study of how emotional biases and character traits affect economic decision-making. It’s a field in which Berkeley scholars have long been pioneers, starting with Nobel laureates George Akerlof and Daniel Kahneman and carrying on with Haas Professor Terry Odean.

“This is the birthplace of behavioral finance; Berkeley invented it,” says Malmendier, who is hoping to start fundraising soon for a proposed behavioral science research center that would build on that rich history.

Malmendier is at the vanguard of a new generation of researchers. Where previous generations often focused on the biases of individual investors and consumers in and of themselves, Malmendier looks at how those biases affect corporate decisions, stock prices, and markets in general.

“Biases don’t only affect decision-making by small investors and consumers; they also affect top business leaders,” Malmendier says. “Biases also are embedded in markets and consequently are relevant in explaining corporate outcomes.

No Respect

Until recently, behavioral economics didn’t get much respect, because classical economic and financial models essentially assume that people pursue their rational self-interest. The Great Financial Crisis, which revealed rampant self-destruction at every level of the financial system, jolted that complacency.

Malmendier likes to quote Warren Buffett, who once remarked, “I’d be a bum on the street with a tin cup if the markets were efficient.”

Overconfident chief executives aren’t necessarily braggarts or crooks. Malmendier studied business leaders who sincerely believed in their outsized abilities. These were the bold thinkers, the risk-takers, and the charismatic leaders.

“We need to dispel the notion that we were all born as Homo economicus. Past experience makes us into different people.”

One of Malmendier’s big contributions to the field was to identify reliable indicators of hubris. One tell-tale sign, she discovered, was an executive’s insistence on putting their own personal wealth on the line. Over-confident executives are reluctant to cash out stock options in the companies they run. They also tend to believe that the market is undervaluing their companies, so they don’t like to issue new shares.

That may sound like a reassuring sign of the CEOs’ commitment—and it is in the sense that these CEOs are putting their money where their mouth is and truly believe in their companies. But CEOs who overinvest in their own companies are also more likely to plunge into ill-starred mergers and overestimate the returns on their investment projects. Their companies are more likely to lag behind the competition, especially if the CEO has become a media celebrity.

Surprisingly, investors seem to understand this on an intuitive level. Malmendier and her longtime collaborator, Geoffrey Tate at the University of North Carolina, found that investors reacted significantly more negatively to merger announcements from companies with overconfident executives than to deals announced by more subdued leaders.

Celebrity CEOs

In another eye-popping study, Malmendier and Tate documented the special pitfalls of “superstar” CEOs who become celebrities. These are the executives who get lionized on the covers of glossy magazines and who win accolades such as “CEO of the Year” or “Innovator of the Year.” Among that study’s findings:

  • Chief executives who receive major awards tend to underperform their noncelebrity peers by as much as 26 percent over the three years after the award is bestowed.
  • Despite their slumping performance, superstar executives receive outsized increases in their compensation in the three years after they get big awards. That’s especially true at companies with weak governing boards.
  • Superstar celebrity executives are more likely to engage in more “earnings management,” or accounting maneuvers aimed at smoothing out a company’s reported earnings.

Malmendier’s work has attracted widespread attention. In 2013, she received the American Finance Association’s prestigious Fischer Black Award, which honors the top finance scholar under the age of 40. Her research has been cited in more than 6,000 other papers since 2009, according to Google Scholar. Her original paper on overconfident CEOs has been cited more than 1,300 times alone.

But the overconfidence of CEOs is a small part of Malmendier’s prolific research. She has closely analyzed the long-term impact on behavior of growing up during the Great Depression. She has found that people with military combat experience are much more willing to take risks.

In a study on the sources of entrepreneurial motivation, she and Josh Lerner of Harvard Business School made the startling discovery that close acquaintance with entrepreneurs does not motivate people to become entrepreneurs themselves.

In that study, the researchers studied the records of nearly 6,000 students at Harvard Business School. It turned out that students who had a high proportion of current or former entrepreneurs as section-mates were actually less likely to launch startups themselves. The reason? Most startup companies don’t succeed, which meant that most of the classmates with entrepreneurial backgrounds had discouraging experiences. Instead of inspiring false confidence, many of those classmates were better positioned to see the flaws in new business ideas and help prevent ill-fated start-ups, while encouraging the most promising ideas.

Workout Weaknesses

Malmendier has also collaborated frequently with her husband, Stefano DellaVigna, a professor in Berkeley’s Department of Economics. The two met while working on their doctorates at Harvard. DellaVigna is also a specialist in behavioral economics, but his focus is more on the role of the media and political economy rather than on corporate decision-making.

One of their collaborations was on the study of fitness centers, which found that gyms induce people to overpay for monthly memberships that they often use very little.

In another collaboration, the husband-wife team analyzed the motivations of generosity. Based on field experiments using door-to-door solicitations by charitable groups, the researchers found that social pressure is often more important than the pleasures of altruism. People who were told in advance that a fund- raiser would be coming at a particular time were less likely to be home or to open the door. The team also found differences between men and women. Women became less generous if they had a chance to avoid meeting a fundraiser in person, suggesting that they might feel social pressure more strongly than men.

“Ulrike is great to work with,’’ DellaVigna says. “She really enjoys what she’s doing, and she’s a very creative researcher. She’s a very interactive person, and likes to engage with people about ideas. She’s a really good at listening to other people’s ideas and coming up with her own insights.”

Law and Order

Malmendier’s prolific academic effort goes back a long way. Born and raised in Germany, she earned a PhD in law at the University of Bonn in 2000 and is an expert on ancient Roman law. To this day, in fact, she writes academic articles on Roman law.

But by the time she earned her doctorate in law, she had also earned a master’s degree in economics. Forced to choose between two very different disciplines, she chose economics and earned a PhD from Harvard in 2002.

“In economics, part of the job is to think about designing better institutions, contracts, and other determinants of human behavior, while in law the main job is to take the given set of legal rules and case decisions and work a case through them such that we get to the right answer. Thinking about ‘what would be a better system’ is not part of the job—at least in the civil law system,” Malmendier says, explaining why she ultimately chose economics.

“I also like the international aspect of economics; with law you are pretty home-bound,” she adds. “And I have an affinity for mathematics, which was much better served in economics.”

After a teaching stint at Stanford and visiting positions at Princeton and the University of Chicago, she arrived at Berkeley in 2006 with an appointment in the Department of Economics, which was expanded into a joint appointment with Haas in 2010.

Her pace shows no signs of slowing down. The intricacies of economics in the messy real world, where economic decisions are influenced by childhood experiences, emotional impulses, and obscure longings, continue to fascinate her.

“We need to dispel the notion that we were all born as Homo economicus,” she says. “If you were born during the Depression, you are going to want to avoid the ups and downs of the stock market. If you grew up with inflation, you tend to over-expect future inflation and have higher debt levels. Past experience makes us into different people.”

Behavior and Biases
Here’s a quick look at the wide-ranging research and findings of behavioral economist Ulrike Malmendier.

1 Celebrity CEOs

CEOs who are featured on glossy magazine covers and win accolades such as “CEO of the year” tend to underperform noncelebrity peers at least in the three years after the award is bestowed, but they receive outsized compensation increases during that same period. Superstar executives are also more likely to engage in accounting maneuvers aimed at smoothing out reported earnings.

2 Gender and Generosity

When facing door-to-door solicitors, women and men were about equally generous—but women became less generous if they had a chance to avoid meeting a solicitor directly. People who were told in advance that a fundraiser would be coming at a particular time were less likely to be home or to open the door.

3 Entrepreneurial Influence

Close acquaintance with entrepreneurs does not motivate people to become entrepreneurs themselves, based on analysis of nearly 6,000 business school student records. Students with a high proportion of current or former entrepreneurs as section-mates were less likely to launch startups themselves because those classmates helped weed out bad ideas and encouraged only the most promising ones.

4 Fitness Fictions

Gyms induce people to overpay for monthly memberships that they often use very little, based on a study of almost 8,000 health club members over three years. Members who choose a contract with a flat monthly fee of more than $70 average 4.3 visits per month, paying more than $17 per visit when they could pay $10 using a 10-visit pass.

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