Showing posts with label Online Courses. Show all posts
Showing posts with label Online Courses. Show all posts

Penn State Online Degree


don't you squirm when you get introduced like that? sit in your chair. feel kind of uncomfortable, but thank you very much for that great introduction. and i have to say that i'm humbled and i'm honored to be here with all of you. it's incredible to think about this conference and the nature of it. being something that only penn staters can come to and you can fill a space this large it really shows a kind of commitment to teaching and learning with technology that i think is really impressive. thank you for the opportunity to be here. for those of you who have your laptops or iphones or other device, this is the

hashtag that we're using on twitter today. if you do have questions, or comments you'd like to make you can use the tag in twitter to tweet those thoughts. and we have a separate laptop set up here they'll be checking periodically. it's refreshing itself so i can see the things you're saying. kind of an informal back channel and will help me maybe be a little more responsive during the keynote to the things you're thinking about. so i want to begin by telling a story. i think you're always supposed to begin with a story. a story or a joke. we'll start with a story today. this is the polo parable. about the move to teaching and learning online. once upon a time

there was a water polo team at a university that did very well. they'd won conference three years in a row. and one morning the ad of the university walked into the coach's office and said, coach, were so proud of you. your team is the pride of the school. you know as well as we do you're the only team that really does anything here. not penn state, obviously. he said, you're the pride of the school and i have this incredible opportunity for you to really do something new and innovative. it turns out next year in the conference that there's a new kind of polo that's gonna be played here.

and with the defensive strategies and the offense that you have and the recruiting and all your experience, i'm sure that if we take you off of water polo and put you coaching this new polo team, that you'll do just as well and we can win conference the very first year. so just take your playbook and get ready for this new opportunity. thanks for your commitment to the university and the ad leaves. now the idea that you could run the same plays on the backs of horses that you could in the pool, with any measure of success, is sort of ludicrous. and as we

think about moving our teaching online it's sort of like saying, that we're swimming on horseback. in other words, to think that you could do the same things online that you can do in the classroom, is just ludicrous. it's a different kind of space. it has different affordances, different opportunities, different pitfalls, and even though at a high level it is about scoring points and playing defense at a very, very high level. below that the individual tactics and strategies and things you might try to do. i would probably want to be very different on the backs of horses than they would in the pool. so just having said that, i want to use that story just to frame

the conversation today. that things really change very quickly. so if you've seen this video, you know, did you know?, you know what this next slide says, but in terms of the country that's the richest in the world, with the largest military, and the strongest education system, etc. the answer to the implied question here is great britain, of course. just a hundred years ago. and things do change very, very rapidly. galadriel said in lord of the rings, "the world is changed." but it's actually worse than her statement it's changing. all the time. and the pace of change, the rate of change,

seems to be increasing significantly. i want to talk about six kinds of specific changes. first the change from things being analog to being digital. and this one should be fairly straightforward to understand. most of us don't get our music on vinyl anymore. we get it in digital format either on cd's or by mp3 downloads. tv, of course, almost transitioned completely to digital in february, i suppose that's gonna happen in june now. our phone service, the way we read newspapers, the movies that we get on dvd instead of vhs, things are moving or have move from being analog to being digital.

things are changing from being tethered to being mobile. so i don't have to have my phone plugged into the wall anymore to use it. i'm not connected to the wall that way. i don't have to have my computer plugged in to be on the internet or even to be powered for that matter. and i don't have to show up in the office every day to work either. and things are changing from being isolated to being much more connected. and i think there's a whole semester course here that maybe we ought to think about it at some point. but if you think about all the kinds of different connections between people whether it's by email, by instant message, by skype, or however.

the way that content is all connected to one another. hyperlinks being the definitive feature of the web, which is a way of connecting some content to other content. and then the way that systems are connected to one another and that they talk to each other. and then the way that content is connected to systems and systems are connected to people and people are connected to content. this massive inter-connection is really defining feature of our time. a change from things being generic to things being personal. so when you go to buy a car or when you go to buy a computer, particularly in the case of a computer, you don't walk into the store and pick

a computer up off the shelf. you go onto a website and say, i want my monitor to be this big and this much ram and want this kind of hard drive and want this version of the operating system. you want it to be just the way that you want it to be. and want you car, if you're gonna buy a car you may as well get the color you want. if you're phones were to go off, we would hear different ring tones on every phone in the room. because we want things to be ours. we want them to be personal to us. and there's been a big change from a culture of really consuming media, primarily, to one that's where we're all much more involved in producing media. whether that's instead of only

listening to the radio, also podcasting. instead of just reading the news, also blogging or creating videos and uploading those to youtube. we've become a culture that's much more participatory and that invites creation in a way that is different from before. and then finally it changed from things being closed to things being open. both in terms of software, so if you think of linnox in addition to something like microsoft windows or in terms of applications something like open office compared to microsoft office. and data, all kinds of gis data, weather data,

that's openly available to us. data from nasa. and then content as well available on the web in a very open way. so if we lay these things all out side by side and look at the way things kind of worked then and the way that they do work now or the way they're increasing to work now. the really disappointing thing about this slide is that you can easily change the tops of the columns here and still have a pretty effective description. pretty accurate description of what it is that we're all doing. and to me i think this idea, not the digital divide, where people have computers and people don't,

but the daily divide. the way that education is so different from the rest of our lives. in particularly our students lives. is a problem for us. they come expecting a certain kind of experience based on the experience that they have with government and with business and with other things in their life. and then they get to school and school is so different. in his new book remix, larry lessig gives a great example about the book-ification of tv and i think lessig was your keynote speaker here last year or maybe just the year before. if you haven't had a chance to read remix i would highly recommend it to you. but the idea about the book-ification of tv is

imagine going into the library and as you walk into the library you ask to be pointed towards science-fiction and they say, i'm sorry, science-fictions only open from 7:30 to 8:00. you know it's do- it-yourself right now. the do-it-yourself books are available right now if you'd like to look at them. you have to come back at 7:30 if you want science-fiction. you would just, yeah, i mean the faces you're making at me are the right faces. it's just a ridiculous idea. and if you talk to young people today about television and tell them did you know there was a time that if you wanted to watch lost you actually

had to be in front of your television at 9:00 or you missed it. it would seem just as ridiculous as the idea that you had to be at the library at a certain to use types of books. so things like tivo, things like hulu really book-ify television programs and make them so that they're available to us whenever we want them. the obvious application to us here is this idea of probably book-ifying courses. and an online course, i mean it's online, so it's sort of book-ified already. it's not really a challenge to talk to you about that, but i do want you to think

about book-ifying our online courses, sorry, our on campus courses. why do i have to be in certain room from 10:30 to 11:30 to hear you broadcast your lecture? and if you've been watching inside higher ed and campus technology and some of these magazines lately you'll be seeing a increasing trend of people reporting on experiments where they bring some of their students to class and other sections they disallow from coming to class and they give them podcasts of the lecture and say, stay home and listen to this podcast. and then what they find

later on when they test them on the material covered either in class or covered on the podcast, is that the kids who sat back in their room and listened to the podcast actually learned quite a bit more than the people who attend lecture. and if you think about this for two reasons it's very clear, if you think about tivo and you're watching sports and miss a play and you hit that seven second skip back button on your tivo. imagine being able to just skip back and catch what you missed in the lecture. you're taking notes. you missed that. you look up. it's gone. and you're not gonna raise your hand in one of these hundred person seminar classes and stop the conversation and ask them to go back.

and another thing we know about the way students use ipods is they tend to listen to podcasts somewhere between one and a half and two times normal speed. now that maybe because we speak like this in class. one and a half times is like normal speed for a person. but when you listen to one and a half or two times speed, you attend to it a little more. so if you're attending more and you can go back and listen to the things you missed a second or third or fourth time, it shouldn't surprise us that those students have the book-ified version of the course tend to do a little bit better. but this on campus/off campus dichotomy that we talk about

online and on campus in terms of the way we use media i think is sort of a false dichotomy. i think we can have our cake and eat it too. despite what i said earlier about the difference in strategies with the polo parable. now when i say that things are changing, but education is lagging behind, one way you might be tempted to respond is well, that's great, but we're education. i mean you gotta have a college degree to get a job so really who cares. where are they gonna go? why do we need to respond to that? because

historically we really have had a monopoly position. in terms of providing access to the kinds of education and the kinds of credentials that get students better employment. to get them any employment at all in some fields. but this monopoly that we've enjoyed is really being pressed hard in a variety of ways. if you think about why students come to the university, i think they come four at least four reasons. i'm sure there are more reasons than ones on this list. but they do come for access to content. whether that content is teaching materials, the textbooks, and the notes and things that you put together and provide to them. but they also come for research. the access to the books in the library

and the journals and those collections of databases. they come for access to support services because you and i both know that there's no textbook around that as you're reading through it at some point you don't have a question. that you want to turn to another human being and say, i've read this three times now. i still don't get it. can you explain to me what this means? or they want to know which course they should take first. what sequence they should do things. they need these kinds of support. obviously, social life is a huge reason that people come to university. and then they want to earn a degree. they want this credential that gets them a job that is some third party, supposedly objective third parties,

guaranteed to the employer that yes, this person does know the things that they claim to know. so if we look at these one at time if you think about content and the access to content that students gain by coming to the university and you'll look around at things like mit open courseware. the things like the public library of science or archive.org. google scholar, there are a variety of places that students can go these days where they can get free and open access to really high quality either instructional content or research content. they don't have to come to us anymore for that.

if you think about support services in terms of a student getting their question answered, there are a dozen places that they can go. dozens of dozens of places they can go to this as well. if you've never use chacha, it's absolutely brilliant. you just take out your phone and you text message a question to the chacha number and sixty so seconds later some person using google and some array of tools in a back room somewhere has found the answer to your question and texted back to you at no cost to you. so go ahead and get your cell phones out. i know you're gonna do it. don't hide them under the table. just pull them out and then try it.

yahoo answers, i assume most of you have seen before. a board you can go ask a question and people compete to provide the best answer. and they do like a million questions and answers a year. there's some really great research in '07 out of the university of maine, about rate my professor that professors tend to hate. but it turns out that the data on ratemyprofessor.com when compared to the smiley sheets that students fill out at the end of course, actually correlates at around .65.7 level. so you can actually make, as a student, if you want to know who's easy, who's hard, who's understandable, and especially the

little chili pepper, who's hot. who do you want to take class from? rate my professor is actually a pretty reliable source of data for this. and we could mention twitter as well. social life almost goes without saying. i'll just say facebook. i'll say myspace. danah will tell us more about social networks later in the day. but then degrees. you might think well there might be places they can go for content. well there might be people they can ask their questions to. well there might be places they could meet other people and socialize, but we have the degrees.

well it turns out that there are places that people can go and other kinds of things they can get than an undergraduate degree. particularly the examples here in the technical area. so if you are a microsoft certified systems engineer or a red hat certified engineer or a cisco certified network administrator. if you have one of these credentials and you're competing for a network administrator job versus somebody with a bachelor's in computer science guess what, you're gonna get the job. because these credentials are more valuable in that particular kind of employment. and there are other areas emerging that we can talk about where there are

credentials that compete either well or better than. they compete very well with undergraduate degrees. we don't have a monopoly in this area anymore either. so to wrap this all up, everything that we provide as a university is being provided my someone else. this wasn't the case before. and it tends to be the case that when institutions specialize on just really getting your questions and answering them or just providing you with access to research content or something. when an institution specializes in tends to do a better job than the generalist in

terms of quality. and it also tends be able to provide that service at a lower cost. because that's all they do. they really focus and they hone in. now higher education on the other hand has had an average tuition increase in cost to like seventy-six percent over the last ten years. and in terms of our quality, if you haven't seen this video of a vision of students today, i'd highly recommend to you. you know a hundred fifteen people is my average class size. so as we look around us and we see industries either completely failing or on the verge of failure everywhere. whether it's automobiles or insurance or banks. what makes us so

snobby as to think higher education is immuned to everything else that's going on around us. because if i, i won't, but if i asked by show of hands who in here really feels that your university's existence is actually threatened by what's happening in the economy. i doubt very many of you would actually raise your hand. but i will tell you that there is no bail out coming for us. what is coming for us is double digit budget cuts. they're probably already here. and we will probably see them again. so there's no monopoly for us any longer and there's no bail out coming, so we may

actually have to behave like other people that exist in competitive markets and we may have to innovate. we may have to change what we do in order to stay relevant. now earlier i went on this left to right to saying that education is lagging way behind. and you may have thought to yourself, well, what about e-learning though? i'll say it to you that e-learning was really innovative fifteen years ago. but if you think that web based courses which we were doing in '95 are your response fifteen years later to everything that's happened on the internet. everything that's happened

with the social web, if e-learning is your response, i think we're kidding ourselves. if we look at e-learning in terms of these changes, it's true the e-learning is digital. and it's true that i can stay at home in my bunny slippers and do it. i can be mobile. but e-learning is famously more isolating than even an on campus class. where you at least have informal interactions with other students in the hallway before and after. in an e-learning kind of experience you generally get exactly the same content that everyone else in the course gets.

so that it's still very generic experience. your interaction with the content is frequently download the powerpoint. download the lecture note. download the pdf. it's very much a consumption kind of model. it's not one that as a student you participate in creating the content that's used in the course. and then of course if you don't pay your tuition, if you don't apply for admission to the university and become formally admitted, you just don't get in. so i want to suggest to you that we don't even make it half way with e-learning. it gets us about a third of the way there.

i want to suggest to you that openness actually underpins, from this slide here, openness underpins these three other values that education ought to be thinking about that we're missing. and let me try to suggest why. the first is that the most obvious one, you can't connect to something if you don't have access to it. so if you have a student that took a math course a year, a year and a half ago, and you're getting ready to teach them a principle and you'd like them to go back and review that, i believe penn state's an angel user right? so if that course has been blown away out of angel, then what are you gonna connect them to?

or even if there's a section of that course meeting right now, that students not enrolled in it, how are you gonna connect them to it? there are a number of us that have a little joke that says what if facebook worked like your learning management system? and every fifteen weeks facebook deleted all your friends, deleted all your groups, deleted all your photos, forgot everything about you and made you start again. that's not the way you build a community by blowing everything away every fifteen or sixteen weeks. you can't connect to something if it's not open. if you don't have access to it. it terms of personalizing you might be able to

actually go in and make some changes to some digital content, but if you don't have permission to do that, strictly speaking, it might not be the best idea. so not openness in terms of technology, but in this case openness in terms of licensing. if you really want to personalize something, change it maybe into a different language. change that language reading level up or down because it was written for grad students and you're working with freshman. any of those kinds of changes you might want to make you need something to be open for you to legally go in and make those modifications. and this maybe the most subtle one of all, but if there's no outlet for your

creative work, if there's no place that you can go to share the things that you're doing with other people, it can be really difficult to get motivated to produce creative work. so for example, four or five years ago, who in the world was producing video? and it's not just about access to flip cameras and things that are inexpensive. the existence of youtube, the fact that there's some place you can go that's open to anybody coming and posting any video they want and sharing it with their friends, the existence of that space is what's largely responsible for the fact that people create so much video now. because there's something they can do with it. there's a way to share it. there's a place that's open

to catching and receiving that. so if it's true that openness underpins all these other things that are missing from what we might be doing, then we can ask ourselves well, how? how do we as higher ed go about opening things up? and of course mit open courseware is probably the poster child for opening things up in higher education. i'm gonna go ahead and say, but by raise of hand how many of you know what mit open courseware is? ok!

so you know that there's access to exams and quizzes and video content and some things like this. i think this approach to doing open education we might call open 1.0. kind of it's a first generation try. there are hundreds of universities around the globe now operating on this model that are sharing over six thousand courses. and if you think about it if someone gets on google on looks for i don't know, biology, and there are twenty biology courses from different universities around the world that are shared completely in the open. when they search for

biology, if penn state doesn't have an open biology course when they go to do that search they're not gonna find penn state. they're gonna find the universities that do have these courses published out in the open. so even though we might say that this is kind of open 1.0, in a world where people go to google to look for things. if you don't have some material out there that google can index when people search google, you just don't show up. and if you don't show up, then there's, if you don't show up in a google search result then you're a tree that fell in the forest. are you there or not, if you don't show up in a google result?

do you exist? these open 1.0 kinds of projects are very inspirational. obviously because you can see hundreds of people followed mit's example. but they're not very sustainable. and in the case of mit open courseware, this is a four million dollar a year operation. only two million of which is committed from the internal budget. they have to raise two million dollars every year from now to eternity to keep that project running or change their business model. i think it's true that when we look at these open courseware projects, like the one at mit, like the one at my

previous institution at utah state. these open 1.0 projects sort of said, we're gonna do something great for the world. we're gonna release our material. we're gonna share. we're gonna do all these things for them. and then some where along the way we figured out that by sharing with them there are some happy kind of accidental benefits that came to us on our own campus. i think what you see now in a new generation of open projects that are starting is people are switching that around to say, we're gonna do some things that are open, but we're gonna do them primarily for the benefit of our own core constituency

on campus. but we know that by doing those things in the open, that there will be benefits that accrue to people outside the university. and just making that small change to say, we're gonna do this for the benefit of ourselves, for the benefit of our students, and let people outside enjoy kind of a peripheral benefit instead of the other way around. i think will make a bit difference in how these projects will play out over the next three to five years. and we also tend to think about open education resources or open courseware as being about something that's all, it's out there, it's online, it's

at a distance, but there's a nice comfortable home for oer in the campus classroom. i want to share a couple of examples of different experiments i've been trying. some of which have been successful. some of which have been utter failures. of course you learn more from the failures. but things that i've been doing in my own teaching to try to be more open. and each of these is in an on campus class. so first example, in terms of thinking about connectedness and openness

for about five years now in all of the assignments i've given to the students i've had in various classes, i've asked them don't print off your assignment and hand it in to me. and certainly whatever you do, don't email it to me. i want you to take the writing, i want you to take work you do and i want you to go put it on a public facing blog where the whole world can see it. and i'll be part of the whole world and i'll come and i'll read what you wrote as well. and you can choose whether you want to openly license it or keep it copyrighted or whatever. you're not giving away your ip to the world somehow by putting this on a blog. i mean the wall street journal isn't giving away its content by putting online the publicly accessible place. but all the writing that you do,

put it out there, you know, where everyone can see it and i will just stick your blog in my rss reader and when you turn your homework in by posting it. it'll show up and i'll come read it. well there are a number of benefits to doing this. this is a homework assignment from a course i'm teaching this semester. and this semester three of the pieces of writing that have been done by students in this course have been picked up by a blogger named stephen downes. so i think many of you will know. stephen has a newsletter that goes out to something like thirty thousand people around the world interested in education and technology.

and so my students homework was then emailed out to thirty thousand people by a very well respected person in the field. and the effect of that is that next week everyone's writing is a little more thoughtful. everyone's writing is a little bit longer. and there's no kind of threat i could make to make that change in quality happen. there's no kind of cajoling or persuading or anything i could do to make them really be more thoughtful about how they write other than demonstrate to them that their writing is actually part of this

larger global conversation. that their peers are gonna read it. that other professionals are gonna read it and they want to represent themselves well. that one simple change of being a little bit more open, has had a huge impact on students and the kind of work that they've done. so that ones a success. now in terms of personalizing, this ones been a massive failure. for several years now i've put syllabi into a wiki and i've invited students. the syllabus is in a wiki. if you want to talk about something other than what i've proposed for us to talk about, if you want to talk about it in a different order,

if you want to weight the assignments a different way, i'm open to talking about all these things. i've taken a first stab at the syllabus. i think i did a pretty good job. i have a phd etc., etc., whatever. i think i did a pretty good job. but if you, you know, the syllabus is in a wiki for a reason. let's change it around. let's do things with it as we go based on your interest. you know in five years i don't think i've ever had a single student make a change to the syllabus. and i don't know if it's some weird power dynamic thing we have going on because i'm a teacher and they're a student or what. but i have yet to crack the nut on this one.

in terms of creating an openness, a couple years ago i taught a course about the design of learning objects, reusable education materials, and pedagogically what i really wanted to do in this course was i wanted to bring in five, six, seven, eight different kinds of people and set them around the table and have them argue with each other. and have the students just kind of sit back and listen to that argument happen. if you've been involved in the learning objects world at all, you know that there are technical standards perspectives on the way learning objects work. there are

instructional design perspectives on the way it worked. there are perspectives of people that work at the curriculum development companies that produce and try to sell these things. there all these different perspectives and i really wanted students to hear those arguments. but i couldn't figure out a way to get nine or ten people to come to my class twice a week for fifteen weeks. so over the summer i said, to myself, well, let's produce a script for something like a sitcom that will just involve those nine people sitting down and having these arguments. so i went through and i made up the cast of characters and i spent the summer sitting in

the office at my house writing, basically, the sitcom. laughing whenever i thought of something extraordinarily clever. my wife poking her head in the door and kind of shaking her head at me. you know who laughs at their own writing. so i put this online and again i put it in the wiki because i thought i'm sure at some point i missed a period or misspelled something and the students will correct that. and what ended up happening was about the third week of class i was re-reading the stuff that i had written over the summer trying to get ready to come into class, i found there was a new character in my sitcom that i didn't recognize.

and the graduate students had said, hey, you know, we haven't represented the public school teacher perspective here and a couple of us have that kind of experience and it needs to be represented in the conversation because i actually have some interesting things to say so they didn't talk to me. they didn't ask permission. they just got on the wiki and started writing in this new character. and at that point students were actually participating in producing the core instructional materials for the course. that other students were reading that they were being graded on. their assignments were being done from. to me this is just a classical example of what happens when you're

open. you think you know that certain sorts of good things will happen, but to the extent that you're open, you actually allow a wide range of other things to happen. and the unintended things, the unanticipated things are always the most interesting. and of all the experiments i've tried, this is far and away my favorite example of the way openness has really had an impact on what happens in my classroom. so each of those examples is probably two and a half or three years old at this point. about two years ago i asked myself, ok, i've been doing this for awhile now and i've tried some things. some things have worked. some things have failed. what could i do

be even more open? because i've seen now that when i was really open in this one way. this incredible thing happened where the students got in and started co-producing materials and writing in these other characters. because then they added a graduate student perspective at some point along the way as well. and i thought what can i do? how can i be even more open? so i started emailing friends i had at different programs like mine around the country and i said, i'm gonna teach this course called introduction to open education. there's not another course like it taught anywhere. and if your students would get a kick out of taking this course,

i'm gonna be teaching it in a classroom, but all the materials are gonna be available online. out in the open for free. and i also have all my students do all their writing out on a blog for free. something that's free and open. so if you've got a student that would like to take this class, just have them register for an independent study with you. send them over here. they can do the reading, do the writing. i'll look at their work and at the end of semester i'll send you a grade. and if you're comfortable with that, then we don't have to do all this cross registration. and trying to figure out how they register for credit at my school and how it will transfer to your school. and all these other kinds of things.

and so we had eight students in the class at usu, and we had about another ten around the us that signed up for independent study with a professor at their school. but then i thought well as long as i'm doing this, let's just really open it up. so i went on my blog and i announced to the world that hey, i'm doing this course this way and it you want to follow along, you're more than welcome. just come onto the wiki and put your name here and put the link to your blog so i know where you are what you're doing. and we ended up with about sixty people from all over the world participating in this course. there's a whole cohort of people from italy. there was another cohort in spain. there are folks in asia.

i didn't know how that would work. and to be honest, i was a little nervous about how much time it was gonna take to look at all their stuff when there was sixty people involved. but it turns out that when all the writing is in the open and you're assigning them to look at each other's stuff anyway, they do start to kind of self manage at some point. and i found that i was looking at things they were writing. kind of highlighting the best two or three things from the week. maybe one of them was from the students in my on campus class and maybe some weeks non of them were. in fact this group from italy, at the end of the course, got together and wrote and published a peer reviewed article about their experience in the course. and then

sent me the article. but the richness of the conversation and of course there were fun issues around english as second language that everybody enjoyed. and they were practicing their english and that was a benefit to them in addition to learning about open education. but to hear the italian perspective, to hear the greek perspective, to hear the spanish perspective to hear the chinese perspective was something that my students never, ever, ever would've been able to do in any other way. but if you talk to them about the benefit that accrued to them from these other people being involved in the class they'll tell you it was fabulous.

and it was another kind of unintended consequence of the kind of good things that can happen when you're just really open. so toward the end of the class i received an email from antonio feeney who was kind of the leader of the bandit group in italy. and he said, we've been through this course, we've done all the work, what are we gonna have to show for it? is there anyway we can get something? and i said, well of course you can't get credit. i mean you're not admitted to the university. you can't do whatever. what i'll do though is i'll make a certificate that doesn't have the university's name on it any where, but it says congratulations antonio, you completed intro to open education and i'll sign my name

at the bottom. and he said, really, that's great! i'd love that. and i said, well it's just gonna be you know, it's not even gonna be a piece of paper, it's gonna be a pdf. that says congratulations and has the course and has my name at the bottom. but there are a bunch of people it turns out that wanted that. and antonio told me later, he said, you know, i list that on my resume. i took that course. i took it from you. i have a piece of paper that says that i did. so word of this got around. which led jeff young to write this article in the chronicle.

[ laughter ] which my administration enjoyed thoroughly. it's actually pretty funny. one of the first conversations i had, now i did this experiment at usu and transitioned to byu shortly thereafter, but not there's not even correlation here, yet alone causation. but it's interesting one of the first conversations i had with the administration at byu, the provost pulled me aside shortly after

this article came out, and he said, you know, i think it's really interesting what you're doing. you do understand that when you give away that certificate you can't put the university's name on it anywhere. and i said, i would never come within a mile of the university's name appearing on a sheet of paper like this. and he says, well, that's appropriate. and as long as we understand that, i think these experiments you're doing are cool and full speed ahead. and i thought, wow! this is great. so i went full speed ahead. so i'm teaching this course again this semester.

and i wanted to try to understand i could help this larger number of students that would be participating. how i could help them support each other better. how they could really get something good out of the course without it taking an extra hour, extra two hours whatever of time every week. and as i looked around and thought around, i thought where can we see examples online of big groups of people getting together, but really supporting each others learning effectively. and i realized that massively multi-player games like world of warcraft are the best example of where this kind of thing happens.

because how else do you learn to kill dragons and farm gold and do whatever it is you do in these massively multi-player games. you get in there and you join a guild and those people teach you and you help them and you work together and you start from a person that can't even cut a flower down to somebody that can take on a castle siege over a period of time. through this mentoring, through the tutoring, through the collaboration in these guilds. so i re-designed this introduction to open education classes of massively multi-player game. primarily to be played by my on campus students, face to face with basically no technology mediation.

but also so they could be followed by students off campus. so basically i again spent some time during the holiday break saying if intro to open ed was a game, what would the character classes be? so you need somebody that understands how to produce html. how to produce video. how to make podcasts. all the production side of things. that person we'll call them the artisan. we need somebody that knows all the lore and the history and the politics and who all the people are and understands that part of it. and so we'll call that traveling minstrel the bard. the sustainability

issues of course you might imagine are big issues, let's say. how do you support giving things away for free over the long term. we need somebody who thinks a lot about sustainability. so we have a merchant class. and then of course you have issues of copyright, licensing, and in particularly defending the university brand. i had this as the palate in originally, but we came back to monk. i could just imagine the monk sitting down in his musty room reading the copyright code. trying to understand this creative commons license. so the way

the syllabus for this course designed is there's two or three or four training quests in the first couple of weeks. where you get some taste of what each of these different character classes would do. but then in week four you have to make a choice. the rest of the semester you're gonna play one of these classes. and at that point the syllabus forks. and each class has it's own set of quests that it has to do where you develop your own kind of expertise separate from what the others do. and the quests that you go on get harder and harder to the point that you have to guild form at some point. and you have to begin working together with other people or there's just no way you can possibly accomplish the task that's set out for you.

so i put this all online again. some of it in a blog. some of it in a wiki. thinking, without having learned my lesson the first time, that maybe people would insert a comma or fix a spelling error and one of the most interesting things that happened was someone decided that we needed a whole new class of character. the rogue is like an artisan, but instead of producing their own materials, they go around the web looking for things that by license are open, but are kind of trapped. they're trapped

technologically some how. so the goal of the rogue is to go about jail breaking all these supposedly open materials and making them so that other people can actually reuse them. absolutely brilliant. i didn't come up with it. so that's most of the testimony about how brilliant it is. but this class has been, has really been a great experience. we've had a large group from off campus play along with us again this semester. and we're just wrapping up. so i haven't had a chance to really sit down and summarize everything that's happened.

but i can say to you that it's been a great success. so having shared a couple of examples of ways we can think about being more open and ways that openness and open education resources can effect our classrooms on campus not just people out there in world. i just want to say really briefly that if we talk about a weather forecast for what's coming in higher education, i think disaggregation is one word that we all need to know and understand. so if you think about the areas we mentioned before, of content, of support services, of social

life, and of credentially, you can already start to see and i'm not talking about the private for profit space, already among public higher ed institutions we can see the pieces starting to pull apart. so you take something like mit open courseware. mit is a traditional school. has a campus. everything else. and yet this open courseware project, that they do, provides access to a whole class of content separate from being admitted to the university. separate from paying a tuition. separate from anything else. i don't know how many of you are familiar with

the western governors university. but the western governors university is an online university, in the west, established by the governors oddly enough. that is it works on a completely competency based model. what that means is, is it means that the western governors university offers no courses. they only offer assessments. they don't care where you learned it. they don't care how you learned it. they don't care how many times you came to class. they don't measure your learning by how long you can sit in a seat.

but they have really good psychometricians on staff that write very valid assessment instruments. and if you can come in and you can take one of these assessments and pass it, you know what you needed to know. and if you can pass the test, you get the grade, which get 's you the credit. and they're completely, they're fully accredited online university. now if there's a test that you want to take that you can't pass then given the nature of the involvement of the governors, wgu can refer you to utah state or to idaho state or to udub or some place else to go take an online course from them.

to get the preparation you need, but at the end of the day when you come back to wgu, they don't offer anything but assessments. so here's an example again of an accredited university where that credentialing piece has been pulled apart from the rest of it. in a world where content, now if we talk about the four profit providers and the other innovative things that are happening in the space, the story gets even more interesting. i'm trying to be conservative in what i'm talking about by talking about more traditional institutions of higher ed.

but as content pulls away and as assessment pulls away and as these things start to pull apart the real question that we have to ask ourselves and given that almost everybody in this room, i think, except my and danah, are penn staters, you know the question you have to ask about penn state. is what is the value of having all those things integrated in one institution? if it's true that different people can take the content and the support and the assessment and whatever and they can do those separately and focus on them and through that focus maybe do it at lower cost and maybe do it at better quality.

but if you want to keep the university in a way looking like it does now, you have to be able to tell the story to your potential students. what's the value of a general practitioner as opposed to an oncologist? why come to a place where all these things are bundled together? and i don't pretend to have the answer to that question for you. i think i'm barely starting understand what it is for brigham young. the story will be very different for you in your position, in the state. relative to the other offerings that there are here.

this is a really critical question. what's the value of keeping all these functions in one integrated organization? when we think about becoming more open you know, i was asking before how we do it? it should be pretty clear that if one guy like me can run all these crazy experiments just with some wikis and blogs that are out there available for free to be used. that opening isn't a technology problem. being more open. allowing more connectedness. allowing students to participate and be creative and co-create. in fact, not only is technology not a problem, but as we look around

the technology that we need is either open source or being hosted for free by someone else at no cost to us. so the technology is there. it's just like everything else. it's not a technology problem, this is a policy problem, largely. now you will get some faculty like me who will maybe not pay so much attention to policy and will do some experiments anyway, but the experimental environment is certainly a lot freer and more experiments happen when policy is structured in such a way to encourage these kinds of experiments.

but as i go around and talk to people, what i see happening is, i see higher ed acting much more like the music industry than anything else. and by that i mean that we're largely using policy to defend tradition. we're using our policy to kind of resist some of these movements. rather than using policy and creating policy frameworks and policy petri dishes where interesting things can grow. now having said that, this is the smokey the bear part of the message. only you can prevent

forest fires. you are the university is you. so you are the only ones who can really think about policy reform. and i love this quote by deming, you know i say here that ignoring the problem is not a strategy. deming said this, [ silence ] what happens if we don't change? if we don't change, student learning may suffer. if we don't close this daily divide between the rest of their lives and the ways that we work with them,

it will be increasingly hard to reach them. and as we do a poorer and poorer job of meeting their needs, enterprising young capitalists will appear that meet their needs better than we do. and we will compete with them for students. of which may eventually mean that your employment may suffer. when people go to google and they look for the course that they want to take and you're either not there at all or you're on page twenty-four of the results then

your employment may suffer. now in elliot's re-telling of beckett's experience here toward the end of his life, as he's waiting for the knights coming back to take him. he's trying to decide if he should run. if he should stay. he's having kind of a fight with church leadership. i guess you know the story. but he's tempted in a number of ways as to what he might do. and the last temptation that is suggested to him, is just stay here the knights will show up. they'll cut your head off. you'll be a martyr. you'll go straight to heaven. and then you'll be a martyr looking down at the king as he's crackling in the flames.

you know you'll get the last laugh. and this maybe the only i remember from high school english. beckett says to himself, "this last temptation is the greatest treason, to do the right deed for the wrong reason." so let me suggest to you that as you think about being more open and you think about innovating, please don't do it to avoid this doomsday scenario of possibly bad things happening to your institution. please do do it to fulfill the sacred trust that you have as a teacher. i'm highly encouraged by the prominent

place that oer seems to have in this draft of the current strategic plan. i hope that you'll take advantage of that. i hope that you'll leverage it. i hope that you'll do a variety of useful things for your students. and when you do the right thing for the right reason, then good things will happen. thank you very much. [ applause ]

Online Training Program


♪♪♪ all right, we're here ataxiom fitness in boise, idaho, for the workout overview video. now, today we're gonna be doingworkout one, which is chest, tri's, and abs. you're gonna be doing workout1 each week of the program. however, the rep ranges aregonna change each week in the microcycles. so we're in week 1.

this is gonna be the9 to 11 rep range. if you don't know what i'mtalking about, make sure you check out the training overviewvideo, where i break down the microcycles in the rep ranges. with each workout, we're gonnabe doing cardio acceleration, which basically means we'regonna be doing about a minute of cardio in betweenevery single set. so with the bench press, i'mgonna do a set of bench press, about a minute of cardio.

so here's the breakdown ofall the exercises that i'll be performing today. now let's get into thefirst one, flat bench press. all right, now we'regonna be doing four sets on the bench press. remember, for most of the largemajor muscle groups, we'll be doing four sets perexercise as the first exercise. other smaller muscle groups,like biceps, abs, calves, we'll be doing just three, but withthe major muscle groups, we'll

be doing four sets onthat first exercise. now, i start each workoutwith cardio acceleration. although i describe it as beingin between every set, we're gonna start the workout withcardio acceleration as just a general warm-up. now, i'm at the bench press,and the real key to cardio acceleration is not runningsomewhere across the gym. you're in a busy gym. you're gonna lose your bench.

so you want to incorporatecardio acceleration moves that keep you moving, keep your heartrate up, but you can do right here. one of the things i love todo with a bench is i just do step-ups, so i'm gonna start theworkout with step-ups with the rising knee, just to addsome more calorie-burning explosiveness to it. now, we're doing 9 to 11reps, so even as i get up to my working weight, that's not gonnabe that much weight in that rep

range, so one warm-upwill suffice for me today. but as you get heavier duringthe microcycles as they proceed, the weights get heavier, thereps go down, you're gonna require more warm-ups, two,maybe even three warm-ups to get up to your working weight. now remember, the point of yourwarm-up is not to fatigue the muscle, so i'm doing 9 to 11 reprange, going up to about 8 reps in quite an easy way. i like to do on the bench pressa bit more explosive movement on

the warm-ups. it helps to warm up thosefast-twitch muscle fibers which are gonna be critical on thebench press for moving heavier weight. now remember, the point of theworkout is to move right into cardio acceleration,then to the next set. so the only reason i'm stoppingright now is to give you these tips, but normally i'd be rightback to doing my bench step-ups. i'll be doing about a minute ofcardio acceleration during this

workout. i like to use a timerright there on my iphone. if you don't have a smart phonethat has a timer on it, use any timer. make sure you're hitting thatfull minute, and then, boom, right into your next set. now, once the set's done, youmove right back into your cardio acceleration. there's no rest.

your rest is thecardio acceleration. now, obviously you want tochange your weight as quickly as possible, but one tip irecommend is that when you do change your weight, do itafter the cardio acceleration. that way, you get a littlebit of a breather before your weight's set where itreally matters most. i always recommend havingan ipod or other personal music players, so you haveyour favorite music going. it's gonna make a big differencein your strength and your

endurance during thesefast-paced workouts. now, you're only worryingabout the number of reps you complete on the firstset of each exercise. you're only resting about aminute between working sets. in that minute you're doingcardio acceleration, so you're not gonna be able to stick withthat rep range as the sets go up. keep the weight the same,regardless of how few reps you get.

all right, that's the fourthand final set of the bench press. we're gonna move on to thesecond exercise, incline dumbbell presses. from here on out, we'll bedoing three sets per exercise for chest. now, i'll be doingcardio acceleration as well. my cardio acceleration, sincei'm right here at the dumbbell rack, is gonna bedumbbell cleans.

i'll get into more detailon that as we get into them. but a quick tip i want to giveyou guys is to make sure that you add the "shortcut to shred"program to your body calendar on your bodyspace account, andthen sync it to your phone. that way, you've got theworkouts right there on your phone. you don't have to check'em on your computer. you can bring it to the gymor check them right before you start your workout.

that accountability will helpyou stay consistent with the program, and that's howyou're gonna get the best gains. you can do both body weightexercises, like step-ups on the bench, as we did on the benchpress, but don't be afraid to incorporate weights intoyour cardio acceleration. when it comes to choosingweight, it's really hit or miss in finding whatworks best for you. my tip is to go as light aspossible at the beginning, because look, you're tryingto do this for a full minute.

even though this is an explosiveexercise, it's gonna help you build power, you're not focusingon the power aspect here in the cardio acceleration. you're focusing on burningcalories, so start extremely light. now remember, this is the firstworkout for chest during the week. we're gonna be doing twoworkouts for each body part. first workout for chest isall multi-joint exercises.

these are yourmajor mass-builders. they allow you to use moreweight, and using more weight places more overload on thepec muscles, the chest, and that helps to stimulatemore muscle growth. all right, we're on to ourthird and final exercise for chest, the declinesmith machine bench press. for my cardio accelerationduring this set, i'm gonna simply run in place. it's probably the easiest formof cardio acceleration that you

can do. it works anywhere, regardless ofhow tight of a spot you're in. now, as you'll notice, i have aflat bench here, because axiom does not have an adjustabledecline bench that we can bring over. so you've got two options ifthis is the same case in your gym. if you have a standard declinebench press setup for a free weight barbell, goahead and use that.

swap that out, or you coulddo what i'm gonna do here, and that's simply using a flatbench, but i'm gonna get in what we call a bridge position,my feet up on the bench. my body's gonna be angled andi'm essentially gonna create my own decline. now, we've already done twochest exercises, so my chest, it's completely warmed up. i don't need to go into awarm-up set, especially with this 9 to 11 rep range.

if you want, as the weight getsheavier during microcycles two and three, you can do a warm-up. just remember, you do a warm-upset, you don't rest between warm-ups. you've got another setof cardio acceleration. now, those of you who arefamiliar with the anatomy of the pecs, you'll recognize the factthat we're hitting all three major areas. we started with aflat bench press.

flat pressing movements, mainlyhit the middle area of the pecs. then we moved on toincline dumbbell press. that helps hit moreof the upper pec area. and now at a decline, the armsare gonna be coming down closer to the sides of body, as opposedto up on the flat and up on the incline. that's gonna hit more of thelower portion of the pecs. so we're hitting allthose muscle fibers. any time we're interested inmaximizing muscle growth, we

want to focus on hitting asmany muscle fibers in a specific muscle as possible. all right, done with chest. now we're gonna head straightover to dips for triceps. we're gonna do four sets ofdips focusing on triceps, and i'll get into the distinctionbetween doing dips to focus on the triceps versus chestwhen we get into that exercise. my cardio acceleration move hereis gonna be kettle bell swings, or in this case,dumbbell swings.

we don't have kettle bells here. if your gym does have a kettlebell, obviously kettle bell swings make a great move. but this little adjustmentshows you how to do it with a dumbbell. now remember, it's importantto track your progress on the "shortcut to shred" program. we're changing up weight everyweek, and we have two different periodization schemes, thelinear periodization, and then

the reverse periodization. so there's a lot of variableshere with your weight and rep ranges. now, to focus on doing dipsfor the triceps, the two key things you want to focus on areyour elbows and your body, your torso. with the elbows, you want tocome in as close, keep them as close to your sides now. this one flips out, so if iwent out, this would be more for

chest. i'm gonna keep it in, so i keepmy elbows close to my body, and then when i dipdown, i keep them close. and then the other thing i'mdoing is i'm keeping my body as upright as possible. instead of holding thedumbbell by the handle, you're gonna hold it just with yourfingertips on the weight plate, and then you're gonnaswing it between your legs. now remember, all the motion iscoming from my hips as i swing

it up. i'm not using my shoulders. i'm not using my arms. i'm just pullingup the dumbbell. that momentum is all from theexplosions that extend at the knees and the hips. now, i recommend, although ihave it listed as the standard barbell close-grip bench press,that if you have access to a smith machine, consider doingthe close-grip bench press on a

smith machine. and the reason is that you'vejust finished your chest and then moved on todips for triceps. all multi-joint exercises allinvolve both the chest and the triceps, so by the time you gethere, your triceps are fried. it's gonna be tough to move anyweight or focus on the triceps. any time you're doing the smithmachine with a bench, you want to make sure that you have thebench set up perfectly in the middle of the smith machine.

now, you can just simply dropthe bench in here and try to eyeball it, but you're neverquite sure how even it is in the middle. you want to make sure thatboth arms are supplying the same force and workingat the same angle. so an easy way to do that isjust drop the bar all the way down to the bench, and then thatgives you a better idea of how close you've gotit in the middle. you can get it right in themiddle and make sure that each

arm is applying thesame amount of force. my cardio acceleration is gonnabe a unique move that is smith machine power cleans, but we'llget into that a little more after my working set. my close grip isshoulder-width apart. there is a study that actuallyshowed that shoulder-width incorporated just as much of thetriceps muscle fibers as if you went closer. the only thing that going closerdid was put more stress on the

wrists. so save your wrists. the other thing i liketo use is an open grip. it's safe on the smith machinebecause the bar's guided, so you don't have to worry about itslipping out of your hand. but when you're using an opengrip, it allows you to press with the palms, and thatcan help you focus more on contracting the triceps versususing chest and shoulders like in a normal bench press.

now, to do the smith machinepower cleans, drop the weight all the way down. gonna take a littlebit of weight off. now, most people, "why would youdo a power clean in the smith machine?" well, it's actually fairlybeneficial for those who aren't really accustomed to doing powercleans, because with the smith machine, the bar is on a track. now, it's gonna keep the barclose to your body, which is

exactly what you want to dowhen you do power cleans. a lot of people end updoing more of a curling motion, curling the barin front of them. that's not what you want to do. you want to pull the barstraight up to your shoulders. using the smith machine allowsyou to sort of practice that movement, because the bar'salready guided, so you can't get out of that range of motion. remember, the power clean isan explosive move, so you want

to do a bit of a jump asyou throw the weight up. this is a full-body exerciseusing your legs and your upper body to throw theweight up there. keep the weight light so thatyou can try to go for a minute. if you only get 30seconds, that's fine. this one's very intense. you really get theheart rate going. all right, we finished upwith chest and triceps, and now we're moving right into abs.

and remember, the only reasoni'm resting is to talk to you and give you some tips. otherwise, we'd be movingright into the next exercise. in this case, it'sgonna be the rope crunch. focuses more on the upper abs. later on, we'll be doing thesmith machine hip thrusts that focus more on the lower abs. so in this workout, we'rehitting upper and then lower. later in the week, we'll alsoinclude exercises that'll hit

the obliques aswell, and even the core. remember, it's important tofocus on all the muscles of the midsection. my cardio acceleration exercisein between for this one is just gonna be a fast step-up. all right, we're back overhere at the smith machine for smith machine hip thrusts. those of you who followed my"shortcut to size" know this exercise well.

it's not a pretty move, but itis the best way to target the lower abs because you're allowedto add resistance, and we know that adding resistance isimportant when even training abs. you want to periodize all musclegroups, including the abs. that's the best way to get themost muscular development, and the lower abs is that tough areato bring up for a lot of people, so this is a great exercise fortargeting the lower abs and help to create better developmentin those lower muscle fibers.

it's also a greatcore exercise as well. now, like the rope crunches,we're gonna do three sets of smith machine hip thrusts,and in between, my cardio acceleration move here isgonna be back to doing the bench step-ups, but here we're doingit on the adjustable bench that i placed here atthe smith machine. now, this is the finalexercise of the workout. we've only get three setsand three sets of cardio acceleration left to go.

being that this is yourfirst workout using cardio acceleration, non-stoppace, you're gonna be winded. trust me, you're not gonna befeeling good at this point, but you're gonna feel real goodwhen the workout's over, and you'll notice, as the days goby--not even the full week, by the end of the week, you'llnotice that the workouts are getting easier as your bodyadapts to this non-stop pace using the cardio acceleration. actually, the cardioacceleration, you'll find that

your recovery afterthe workouts are better. so that's it for the"shortcut to shred" workout overview video. now remember, "shortcut toshred" is not just about getting shredded. yes, that's a critical part ofthis program, but you're also gaining more lean muscle andstrength, so it's critical that you follow up each workoutwith your post-workout shake. you want to get those criticalnutrients into your muscle as

fast as possible. that's gonna aid recovery, boostmuscle growth, and even aid fat loss. if you don't know what i'mtalking about, you need to go back to the "shortcut toshred" landing page and watch my supplement overview video andread the supplement overview page so you're making sureyou're taking the proper supplements at the right times. remember, on the "shortcut toshred" landing page, each day of

the program is broken down intofull detail, the daily workouts, content, and tips fromme, even on your rest days.

Online University Degree

Online University Degree


prof: so anyway,the course i'm going to teach is called financial theory. i'm going to teach an actualclass. i'm going to spend the firsthalf of the class talking about the course and why you might beinterested in it, and then i'm going to startwith the course. there are not that manylectures available in the semester so i'm not going towaste this one. so the first half of the classis going to be about why to

study it and the mechanics ofthe course, and the second half of thelecture is going to be actually the first part of the course. it'll give you maybe an idea ofwhether you'll find the course interesting too. so i think i'll turn this--iwon't have too much powerpoint here. so you should know that financewas not taught until ten years ago at yale.

it was regarded by the deansand the classically minded faculty of the arts and sciencesas a vocational subject not worthy of being taught to yaleundergraduates. it was growing more and morefamous, however, in the world and therewas a band of business school professors,fischer black, robert merton,william sharpe, steve ross, myron scholes,merton miller, who had a huge following inbusiness schools teaching the

subject,and whose students went off to wall street,and more or less dominated the investment banking parts of wallstreet, and became extremely successful. finance became the most highlypaid profession. it became the most highly paidfaculty in the university, although they were all inbusiness schools. there are more physics phdsworking in finance now than there are working in physics.

so this merry band of financialtheory professors didn't really believe in regulation. they believed markets leftunfettered worked best of all. they believed in what theycalled efficient markets and the idea that asset prices reflectall the available possible information. so an implication of that isthat if you want to find out whether a company's doing wellor not you don't have to take the trouble to read all theirfinancial reports,

just look at their stock price. if you wanted to know whether acountry's doing well or not you don't have to study its entirepolitical system and current events,just look at the general stock market of the country andthat'll tell you. they believed that you couldmake as good returns in the market as a lay person as youcould as an expert because all the experts were competing totry and get the best possible price,and so the price itself

reflected all their knowledgeand wisdom and opinions and so the lay person could takeadvantage of that by buying stocks. everybody should be aninvestor, they felt. a monkey throwing darts at adart board would do as well as any of the greatest experts. now, their own theory wasbasically contradicted by their own experience because all ofthem seemed to go out into the world and invest,and almost all of them made

extraordinary returns and made ahuge amount of money all of which made them even lesspopular in the faculty of arts and sciences. so, a critical part of theirtheory was that the markets were so efficient,driven by people like them who are competing to exploit everyadvantage, and therefore compete awayevery advantage, and by doing that put all theinformation they have into the prices.

the implication of that theoryis that there's an extraordinarily clever way ofcomputing the value of most investment assets,and about deciding when a financial decision's a goodthing to do or not, and that was the heart of whatthey taught in these business schools,these algorithms for valuing assets and making optimalfinancial decisions. one striking thing is that thepeople they studied, the business people and theinvestment bankers they studied

adopted their language. so this had never happened inacademia before. i mean, anthropologists studyprimitive tribes and different kinds of people all the time andnot one of them, i venture to say,has ever taken over all the language invented byanthropologists to behave themselves in their ownsocieties, but the business people thatthese professors were studying ended up using exactly thelanguage created in academia.

now, yale was very different. there was no divide betweeneconomists and finance people, the business school financepeople. at yale the greatest economistsin yale's history were actually very interested in finance. maybe they were financialeconomists to begin with. so the greatest yale economistof the first half of the twentieth century was irvingfisher who you hear a lot about. he wrote, possibly,the first economics phd at

yale. there was no economist to teachhim so he had to write his phd with gibbs, maybe the greatestamerican physicist of the time. there's a building,as you know, on science hill named aftergibbs, and you'll hear more about hisdissertation in the 1890s, but he was a mathematicaleconomist, an econometrician but heinvented almost all of this economics in order to studyfinance.

the most famous yale economistof the second half of the twentieth century was jamestobin, a famous macroeconomist,the most famous macroeconomist, possibly, of the second half ofthe twentieth century after keynes,a great keynesian. but he got the nobel prize forwork he did on finance in economics. finance was incrediblyinteresting to him. so bob shiller and i went toyale and we basically said to

the deans,"there's a long tradition of finance and economicshand-in-hand at yale, and so it's not a vocationalsubject. it's actually central toeconomics, and central to understanding the economy,and central to understanding the global economy. so we'd like to teach it toyale undergraduates, and we believe a few of themwill actually take the course,"and so they agreed to let us do

it,and so we've been teaching it now for the last ten years. so as you know shiller has beenvery critical of the business efficient markets tradition. he feels that these financeprofessors left something essential out of the wholestory. what they left out waspsychology. they left out the idea of fads,and rumors, and narratives,which he thinks has as big an

effect on prices as the hardinformation about profits that the business school professorsimagined drove profits. i myself have been quitecritical of the financial theory. i started off as a straightpure mathematical economist. to me economics was almost abranch of logic and philosophy that happened to tell yousomething about the world. so i got my phd with ken arrow,who you'll hear a lot about very shortly.

and i came to yale,i'd been a yale undergraduate, i came back to yale and ijoined the cowles foundation. and the cowles foundation'smotto was basically, "can we make economicsmore mathematical? economics, a social science,ought to be amenable to mathematical analysis just likephysics or chemistry is," and people didn't believe thisat first. and the cowles foundation,which you'll hear a lot about in these lectures,led the revolution in economics

transforming it from a verbalsubject, political economy,into a mathematical subject. well, i decided around 1989that since i did mathematical economics,and there were all these finance people doing all kindsof mathematical things on wall street and doing it verysuccessfully, i thought i might just checkout what they were doing. so it might be fun to see whatthey were up to. so i went to wall street and ijoined--most people i knew,

in fact, professors i knew wentto goldman sachs. there was a famous financeprofessor, who i had mentioned before, named fischer black whowas there at the time and he attracted a lot of people. and so that was the traditionalthing to do, but i decided to go to alittler firm called kidder peabody,and it was the seventh biggest investment bank at the time. and one thing led to another,and they decided that they

wanted to reorganize theirresearch department in fixed income. and since i was a professorthere, and i did mathematical economics,and i was there for the whole year somebody said,the director of the fixed income department said,"why don't you take charge of it and hire a new fixedincome research department for me. so i did, and ultimately therewere seventy-five people in the

department. all the time i was a professorat yale. and after five years kidderpeabody, even though it was a hundredthirty-five years old, formed by a famous family,the name should sound-- peabody--familiar to you,it closed down after a hundred thirty-five years,five years after i got there. i had to invite theseventy-five people i'd hired into my office and say,"you're fired."

and then i went next door tothe office next to mine and the guy there said,"you're fired." and so that was my first tasteof wall street. and after that six of usfounded a hedge fund called ellington capital management,which was a mortgage hedge fund, and we had--i'll tell you a lot about it. it started after the kidderclosing as a rather small hedge fund,but it grew into a very big mortgage hedge fund,in fact the biggest mortgage

hedge fund in the country. (although recently we found outthat practically everybody who trades mortgages is basically ahedge fund. fannie mae, freddie mac,they'll all basically hedge funds, so it doesn't meananything anymore to say that you're a big mortgage hedgefund.) but anyway, we almost went outof business in '98 a subject, a story i'll tell you at greatlength, and then we just sufferedthrough this disastrous last

year or two,but we're still here. so these experiences,of course, have colored my understanding of wall street andmy approach to the subject. so i took on,in my theoretical work, finance and economic theory onits own terms. i didn't think like shiller tointroduce psychology into economics i just take it on inits own terms, in its own mathematical terms. and what i found was that thereare two things missing in the

standard theory. one is that it implicitlyassumes you can buy insurance for everything. it's the assumption that'scalled complete markets. and secondly it leaves outcollateral entirely so you'll never see, almost in any singleeconomics textbook, the idea of collateral orleverage. and those, i think,the idea that you can't get insurance for everything andthat you need collateral,

you know, you have to be ableto convince someone you're going to pay them back if you borrowmoney and collateral is the most convincing way of persuading himhe's going to be paid back, the lender. those two things were missingfrom the standard theory, so i built a theory aroundincomplete markets and leverage, which is a critique of thestandard theory. so in a way shiller and i havebeen vindicated by the crash. i mean, so let me just show youa picture here.

well, maybe i will,you know, how bad the crash was. so let's look at the dow jones. the dow jones is an average ofthirty stocks and what their value is. we'll talk more about it later. but here it is back to 1913moving along breezily going up and up and up,you know, there are a few blips which we'll come to later likethis one in 1929,

and then--but look whathappened lately. look at that. the dow jones was up at 14,000and it dropped to 6,500, something like that,more than a fifty percent drop and now it's gone fifty percentup again. so if you believe these financeprofessors you'd have to say that everybody realized thatfuture profits in america were going to be less than half whatthey thought they were going to be before and that's why thestock market dropped.

and then miraculously when ithit a bottom everybody figured, "oh, my gosh,we misunderstood things. actually it's not nearly thatbad and things are fifty percent higher because now people thinkthat profits really weren't going to go,you know, didn't drop in half, didn't drop by fifty percent,they only dropped by twenty-five percent. and that was the only way,according to the old theory, to explain what happened.

now shiller would just say,"well, everybody's--they're crazy. they got this into their headthat the world was just going to be great and then some rumorstarted, and things were so high,and the narrative changed and they thought things wereterrible," and this his story. and i'm not sure how he gets itto go up again. they changed their mind again.

by the way it's a little bitbetter to look at the dow correcting for inflation andthen you see that the 1929 crash looks--and this is on a log scale, remember before the depressionthe stock market was so low. it's grown so much over ahundred years that it hardly seemed like anything washappening. well, now in log scale--goingup two of these is multiplying by ten--you see that in the depression in 1929 through the early '30sthe stock market fell.

i don't remember what it is. it looks like it's almost twothings. it looks like it's eighty orninety percent, and the fall this time has beenmuch smaller, fifty percent,not ninety percent. so it's a whole thing down butnot two things down. it's not a whole thing down. it's less than that. a whole thing down would be thesquare root of ten or a third.

it didn't go down two thirds. it went down less than twothirds. it went down fifty percent,so the actual percentage drop was much worse in the depressionthan it is now. we're going to come back to allthese things. what else can we get out ofthese numbers? i just want you to notice acouple other things. so these numbers are all veryinteresting. if you're mathematical theseare the sorts of things you pay

attention to. so these efficient marketsguys, they looked at the change in price every month. so there's a lot to say fortheir theory. they said, "look,it goes up and down randomly." in fact we'll see that thereare all kinds of tests about whether you can predict it'sgoing to go up tomorrow on the basis of how it did yesterday,and the answer's no.

it's very difficult to predictwhether the stock market is going up or down. it seems to be random. well, it's random and they usedto think it was normally distributed. a lot of people argued it wasnormally distributed, but it's hard. you never get these giganticoutliers if things are normally they're just way too unlikelyto happen.

so mandelbrot,who was a yale professor who retired a couple years ago,although he wasn't when he formed his theories,the inventor of fractals, he said this couldn't possiblybe a random walk in the traditional brownian motionsense of the word because you'd never get these big outliers,but he offered no explanation for why they might be there,and i don't know if shiller has an explanation either. i mean, is it that peoplesuddenly get shocked one day and

then the next week they changetheir mind and things aren't so bad after all? but you'll see that the theoryof collateral and margins does explain these kinds of things. let's just look at the dow. we just looked at the dow. let's look at another,the s&p 500. where's the s&p 500?

here's the s&p 500 data. here's the history of thes&p 500. it looks very similar to thedow, except we have longer history back to 1871,so i just want to point out one more thing in the s&p 500. so this is an average offive-hundred stocks, not just thirty,but it's more or less the same. but let's look at the samething taking the logarithm and check for inflation.

so you see here that there arethese four cycles. things seemed low in 1871. they go up and they go down. then you've got another up anda down. then you've another up and adown. four times the same thing hashappened. now this could be justmeaningless accidents, but it will turn out that thedemography of the country, the baby boom cycle,we haven't had just one baby

boom we've had four of them,so this cycle of stock prices, which they're each time ageneration long, happens to correspond exactlyto the rise, the different age distributionin the population. so another theory of the stockmarket, which wouldn't have beenentertained by these original financial theorists,is that demography has something to do with the stockmarket, not information about profitsand returns but the distribution

of ages in the population. so i'm not saying this theoryis correct, although i was one of theproponents of it, but it shows that there's room,i think, in finance for economic things,for demography to matter, for leverage to matter and notjust for expectations about future profits. so let me show you anotherpicture. so this is a second way inwhich shiller became famous.

he said, "well,look at housing prices," the case shiller housing index. so he's also famous because hehad the idea of collecting housing prices. so it's quite amazing,every town has to record, by law you have to record inthe town directory, and they're often on theinternet, what the price is of every sale of every house. so everybody has it and it'sall publicly available on the

internet, or most of it ispublicly available on the internet. and nobody thought to gatherall this information together and take the average and writedown an index until shiller did it. so here's the shiller index. all right, so you can see thathousing prices were pretty stable throughout the '80s andthen in and around 2000 they started taking off,so this is when the stock

market was taking off too. so shiller says this isirrational exuberance. people just went crazy. they somehow think things cannever go down, and they're just going to keepgoing up, and they keep buying becausethey think things are going to go up,and it's crazy. psychology--eventually a newnarrative is going to start. somebody's going to say,"oh, they've been going up

so long they can't continue togo up. things have to go down,"and things went down. i think there's something topsychology so there was something missing in theoriginal finance story. the finance guys,by the way, they would say, "well, the rise is not sosurprising. look at the mortgage rates. (this is the interest rate youhave to pay if you get a mortgage.)

there's been an incredibledecline in mortgage rates over the years, so it's less costlyto buy housing. if you take the present valueof your expenditures you just have to pay less. you pay over a long period oftime, and so the interest rate isless, so the value of the houses is worth more because you'rediscounting the future benefits at a lower rate. (you'll hear all aboutdiscounting later.)

so there's no mystery." on the other hand nothinghappened to interest rates. they kept getting lower sothere's no reason why the market should have crashed. so, again, this seems like avindication for shiller. now, it also,in a way, is a vindication for my theory which isnon-psychological. so i'm distrustful a little bitof psychology because it can be anything, although i agree it'simportant.

so my theory is when you take aloan you have to negotiate two things, the interest rate andhow much collateral you put up. who's going to trust you to payback? when you buy a house they say,"you can't just borrow the whole value of the house." they say, "well,make a down payment of twenty percent. borrow eighty percent of thevalue of a house." and so what i say is thatinstead of paying all your

attention to the interest ratethink about the collateral rate. why is it twenty percent thatyou have to put down? maybe it should be ten percentor forty percent. well, in fact,that number changes all the time. so here what i've done is--thepink line from 2000 to the future, that pink line isshiller's housing index inverted. so you notice the scale on theright is the housing prices,

but i've inverted it,and on the left i have the down payment percentage. these are non-agency loans. we'll come back to the graphlater-- i don't have time to explainexactly how i got it-- but what you see is that from2000 onwards the down payment people were asked to make to buytheir house got lower, and lower, and lower,and lower and it got down to three percent.

you could put down threepercent of the value of the house and borrow the otherninety-seven percent of the value of the house to buy it. so amazingly the prices go upand down just with what's called the leverage. so why is it called leverage? because the cash you put downpayment, say ten percent,you can lever it up and own an asset that's worth a hundredeven though you put down ten

dollars. so you're leveraged 10:1. if you put down three dollarsand you get a hundred dollar house you've leveraged it 30:1or 33:1. so that's why it's calledleverage. so anyway, the point is thatleverage went way up. the margins kept going down anddown and down and just at the peak of the housing cycle,which is the bottom of that curve, that's when collateralstarted getting tougher and

people started asking for moremoney down again, and sure enough the pricesturned around. so if you look at the prices ofmortgages, again, the inverse on theright, and you look at the margins on the left,not for buying houses but for buying securities--i don't have time to explain this whole graph,but the blue line is the buying securities. so '98 is a big crisis,the margins spike up,

i don't have pricing data backuntil then. that's the blue line. and now from 2007 to 2009 yousee the margins spiking up. so to buy a toxic mortgagesecurity investors don't pay cash, they borrow part of themoney to buy it. they used to put down only fivepercent to buy it. now they have to put downseventy percent to buy it on average. well, what happened to prices?

prices--this is the inverse ofprices--in 2007 they started to collapse. so this going up means pricesare collapsing. so once again,the margins--tougher margins means lower prices and as themargins came down recently the prices have gone up recently. so it's an alternative theory. so what else do i want to showyou? so it doesn't mean that thestandard financial theory is

wrong. after all, i helped run a hedgefund. six of us founded it and we'vebeen in business for fifteen years. we must believe in standardfinancial theory because that's how we've been making a lot ofour money. we exploit all those algorithmsand those are the things i'm going to teach you,so i certainly believe it and it's very important to teach youthat again this semester,

but there's more to the theorythan just that. i want to show you one morething in the dow jones or the s&p which i forgot tomention. and where is this? oh, i can't get it out of that. let's try dow. okay, so dow. where was the peak of the dow? it was right over here.

now what was the date? the date's supposed to flashhere. so it's october 1st 2007. so that's when people startedto realize something was wrong with the world and things headeddown. until then nothing bad seemedto be happening in the world, but suppose that you look notat the dow, suppose you looked--sorry. here's a graph,suppose you looked at the

sub-prime mortgage index. so you see it's a hundred. you'll understand what thesethings are. so a hundred means nobodythinks there's going to be a default. over here january 2007,that's ten months before the stock market starts to godown--before it hits its peak. the stock market is still goingup here. a month later,this is april 2007,

a month later the sub-primeindex starts to collapse. you see it goes from a hundredto sixty. we're already--in february ormarch 2007. so that means the people,those experts trading mortgages, already realizedthere was a calamity about to happen. this was long before anyoneelse perceived anything happening,long before the stock market moved,long before the government did

anything to correct the problem. so just as financial theorysays if you pay attention to the prices you can learn a lot aboutthe world. the people trading thosethings--their life depends on fixing the right prices. probably they know stuff thatyou don't know. the prices are going to reflecttheir opinion. if the price collapsed part ofthe reason it collapsed, maybe margins and something hadsomething to do with it,

but part of the reason itcollapsed was because they knew something bad was happening. so for two and half years we'veknown there's going to be a major catastrophe in themortgage market. to go from a hundred to sixtyand since to twenty is a total calamity. so you know that there are onepoint seven million people who have already been thrown out oftheir houses. another three and a halfmillion aren't paying their

debts and are seriouslydelinquent. probably all of them will bethrown out of their houses, and another four or fivemillion after them might default and have to be thrown out oftheir houses. so it's a major catastrophe andthe market told us and warned us about it two and a half yearsago and nobody's done anything about it,basically, until now as we'll find out. so it's not that i thinkfinancial theory,

the standard financial theoryis wrong i think it's incredibly useful. i just think it has to besupplemented by a more general and richer theory. maybe i should show you how myhedge fund has done just so that you don't think that it was atotal failure. oh dear, where is my returns? here we go, emg returns,it's sort of interesting. so kidder peabody went out ofbusiness in 1994.

there was a tremendous crash inthe market, a low of the leverage cycle. the purple is ellington,that's the hedge fund. you'll see that these are otherinvestment opportunities. the s&p 500 is the greenthing which looked like it was doing great for a while. emerging markets is the blueone, and high yield is the green one,and then there are bunch of other things like treasuries,and this is libor which is what

banks lend to each other at. so this says if you put yourmoney into any of those strategies,in libor, keep lending your money each month to a bank andseeing what interest you get and seeing how much money youaccumulate, or putting your money inellington and looking at the purple,or putting your dollar into the stock market and see whathappens, the s&p 500,this is what happens.

so you see there was a crashhere. you're fired, you're fired. so we start ellington andellington does great, and so we have all these yearswe're doing great. then '98 there's another crash. look what happened. overnight, practically,we lost a huge amount of money. we almost went out of business. long term capital,which, by the way,

was run partly by two nobelprize winners, merton miller,not merton miller, myron scholes and robertmerton, two of the guys i mentioned whowere the leaders of the financial crisis [correction:leading finance academics], they bankrupted their companyand they went out of business. and why did they go out ofbusiness? because they weren't aware ofthe leverage cycle, in my view.

anyway, so the prices collapsed. then look it,all these returns shoot up again and the world seems to bedoing great, the stock market, everybody's doing great. then there's another crisis in2007. everything plummets alltogether this time and then everything is going up again. so it's hard to see this and tolive through that. so i remember in '98,for example,

when there was a margin call. our lenders called and said,"we want more money. we don't believe that theassets are worth as much as they were and so the collateral isnot covering the loan anymore." and we said,"you can't make a margin call. it's not legal. you promised not to change themargins on us for six months.

you can't make a margincall." and they said,"well, blah, blah, blah, we don't reallyknow about that. we're making a margincall." so we called up warren buffettand we said, "this is terrible. they're making a margin call. they can't do this. we have great bonds.

there's nothing wrong with thebonds. they're going to force us tosell all the bonds to pay them the money, and how can theyforce us to do that? they shouldn't force us to dothat. we've got great bonds,it's a great business, it's a great company andthey're going to run us out of business. you can't let this happen. warren buffett why don't youbuy part of the company and save

us and you'll get rich and it'llbe great." he said, "say thatagain." and we said,"well, they're going to force us to sell all the bondson tuesday to meet their margin call and we'll get terribleprices for the bonds and we'll be driven out of business,even though they're great bonds, just because they'remaking a margin call. you can't let this happen to us. buy part of the business andsave us and you'll get rich.

you'll own part of a greatcompany." and he said,"hell, it sounds like i should just show up on tuesdayand buy the bonds." so we survived. i'll tell you more about whatwe did. we survived that,no thanks to warren buffett, although he had a pretty goodidea, and then we survived the last crash. so we survived all thesecrashes, but the fact is things

go up, they crash,they go up, they crash, they go up. could it all be my fault? i decided it can't be all myfault. it's got to be there'ssomething more basic at work and that's why i'm going to tell youabout the leverage cycle. now, of course,i realize that my pet theories may not turn out to be right,although i think more and more people are starting to thinkthere's something to it.

so i'm not going to spend ahuge portion of the course just talking about my pet theories. i mean, i recognize that i haveto teach partly what's standard. so the course is going to bedivided in the following way. i'm going to talk about thestandard no-arbitrage financial theory,and i'm going to talk about it theoretically and mathematicallyand from a practical point of view,because helping to run the hedge fund--lots of the things that i'll be

teaching are things that weactually confronted in the hedge fund. and so you'll get the standardfinancial theory course taught from a hedge fund perspectiveboth theoretically and from a practical point of view. on the other hand,i've lived now through three mortgage crises and so it seemssilly for me not to describe how the mortgage market works,even through you'll find almost none of that in any standardfinance textbooks,

how the mortgage market works,and what's going on, and what happened in thecrises, and how we survived and how other people didn't. and i'll talk about theleverage cycle. i'll also spend some time--ithink it's quite important--on the mathematical logic of theinvisible hand argument. that's the most importantargument in economics that the free market does good for theeconomy and a huge number of people believe it.

and part of that argument andpart of the sort of hazy knowledge of that argument iswhat drives resistance to a lot of government programs. i mean, the government can onlyscrew things up is what people generally believe. is it a prejudice or is theresome actual argument behind that?. well, i want to go over thatargument and show you precisely how it works and how it doesn'twork in the financial sphere.

and then, i want to talk aboutsocial security. that's one more program. that's the biggest program inthe budget. it's as big as defense and thetwo of those are much bigger than everything else,vastly bigger than every other thing in the budget. so i want to talk about socialsecurity and should it be privatized and should it bereformed and why did it go bankrupt.

it's also an interestingmathematical problem because social security criticallyinvolves the belief that things will go on forever,so there's an infinity in it. each generation the young arepaying for the old. nobody would do that if theythought they were going to be the last generation paying tothe old, and when they got old nobody would help them. so social security rests onthis world going on forever which makes it mathematicallyinteresting.

anyway, so i got interested init from a theoretical point of view and then i got put on allthese national academy panels on social security and privatizing. and so i know quite a bit aboutit so i might as well talk about something i know about,so that's why i'm going to talk about that. all right, so this is too hardfor you to read so let's do this. so let me just give you a fewexamples.

uh-oh, i hope i didn't do aterrible thing. no. so let me just give you a fewexamples here of the kinds, just so you realize there'ssomething to the standard theory. there's a lot to it. so i'm going to give you tenexamples very quickly, of the standard theory. so these are things that i'mguessing you'll have,

at least some of them,trouble figuring out how to answer now,but by the end of the course this should be totally obviousto you. so suppose you win the lottery,forty million dollars, it's a hundred million dollars,the lottery. now they always give you thechoice. do you want to take fivemillion a year over twenty years or just get forty milliondollars right now? which would you do and how doyou think about what to do?

so now you get tenure at yaleat the age of 50, say. you're making a hundred fiftythousand dollars a year and you think professors--it's going to go up with the rate of inflation,and that's about it for the next twenty years until youretire. so that's twenty years of thatand then you're going to live another twenty years when you'regoing to be making nothing. so how much of thehundred-fifty-thousand,

and let's say inflation isthree percent, and what you'd like to do isconsume inflation corrected the same amount every year after youretire and before you retire, and so how much of thehundred-fifty-thousand should you spend this year and how muchshould you save? you'll learn very quickly howto do a problem like that. now, president levin wrote afew months ago, the end of last year if youremember, he said that, "well, the crisis was bad.

yale was going to weather it,but yale had lost twenty-five percent, probably,of its endowment. that's five-billion dollarsalmost of the twenty-three-billion dollarendowment. so how much should he choose tocut? it's his decision. how much should yale reducespending every year? the total spending at yale is alittle over two-billion. so the endowment goes down byfive-billion what cuts should

you take to the budget. should faculty salaries be cut,be frozen, should you get three tas instead of four tas? what should you do? how big a cut should you take? now, the same question facedyale in 1996 or so. i've forgotten exactly the year. ten or twelve years ago theprevious president, benno schmidt,he suddenly noticed that there

was deferred maintenance,as he called it, a billion dollars to fix theyale buildings. that's why, incidentally,every year another college gets fixed. they decided there was deferredmaintenance of a billion a hundred million dollars everyyear for ten years had to be spent. the whole endowment then wasthree billion, and now we had a one billiondollar deferred maintenance

problem. the budget was about onebillion then. so how much should you cut theyale budget at that time? so benno schmidt said,"i'm firing fifteen percent of the faculty." he announced he was firingfifteen percent of the faculty. that was on the front page ofthe new york times, "yale to firefaculty." well, did he make the rightdecision?

rick levin took over aspresident three months later, so probably not. what mistake did he make in hiscalculations? what should he have done? what was the right response? we're going to talk about it. it's not that hard a problem. now, let's take a slightly morecomplicated one. you're a bookie.

the world series is coming up. the yankees are playing thedodgers, let's say, and you know thatthe teams are evenly matched and you've got a bunch of friendswho you know every game will be willing to bet at even odds oneither side because they think it's a tossup. well, one of your customerscomes to you and says, he's a yankee fan,he's sure the yankees are going to win the series.

he's willing to put up threehundred thousand dollars to bet on the yankees. so if the yankees win he getstwo hundred thousand, but if the yankees lose heloses three hundred thousand. so 3:2 odds he's willing to beton the yankees winning the series. well, you say,"this guy's sort of a sucker here. i can take big advantage of him.

on the other hand it's a lot ofmoney, two hundred thousand i might lose if i have to pay offand the yankees win. so even though i think that myexpected profit is positive, because he's putting up threehundred thousand to make only two hundred when they're evenodds, in fact--the fact is it's sucha big number i'm a little worried about that." so what do you do? so what can you do?

you've got these friends whoare willing to bet at even odds each game by game,so how much money--presumably the first night you're going tobet with one of your friends. you take the guy's bet,the customer, you take his three hundredthousand. you promise to deliver him fivehundred back if the yankees win and to keep it if the yankeeslose. what should you do with yourfriends? should you bet on the yankeeswith your friends?

should you bet on the dodgerswith your friends and how much should you bet at even odds thefirst night? so the answer is,well, i don't want to give all the answer now,but so there's a way of skillfully betting with yourfriends and not betting two hundred or three hundredthousand the first night with your friends at even odds. you bet some different numberthan that, which you'll figure out howmuch to bet so that if you keep

betting through the course ofthe world series you can never lose a penny. how do you know how much thatis? well, that's the kind of cleverthing that these finance guys developed and you're going toknow how to do. so let's do another examplelike that. i'm running out of time alittle bit, but an example. suppose there's a deck ofcards, twenty-six red and twenty-six black cards.

somebody offers to play a gamewith you. they say, "if you want topick a card and it's black i'll give you a dollar. if it's red you give me adollar." so if i'm picking,i'm in the black, i get a dollar,it's in the red i lose a dollar, i have to throw away thecard after i pick it. the guy says,"by the way, you can quit whenever youwant."

so should you pick the firstcard? it looks like an even chance ofwinning or losing. let's say you pick the firstcard, it's black, you win a dollar. now the guy says,"do you want to do it again?" you picked a black one sothere's twenty-six red left and twenty-five black. so now the deck is stackedagainst you.

should you pick another card? well, it doesn't sound like youshould pick another card. but you should pick anothercard and i can even tell you how many cards to pick. even if you keep getting blacksyou should keep picking and picking. so how could that be? it sounds kind of shocking. well, it's going to turn out tobe very simple for you to solve

half way through the course. so, a more basic question. there are thirty year mortgagesnow you can get for five and three-quarter percent interest. there are fifteen-yearmortgages you can get for less, like five point three percentinterest. one's lower than the other. should you take thefifteen-year mortgage or the thirty year mortgage?

how do you even think aboutthat? why do they offer one at alower price than the other? one more example,suppose you're a bank and you hold a bunch of mortgages. that means the people in thehouses, you've lent them the money, they're promising to payyou back. and you value all thosemortgages at a hundred million the interest rates go down. the government lowers theinterest rates.

half of them take advantage torefinance. they pay you back what they oweand they refinance into a new mortgage. so now you've only got half thepeople left. let's say all the people hadthe same size mortgage and everything. half the people are left. that shrunken pool,half as big as the original pool,is that worth fifty-million,

half of what it was before,or more than fifty-million, or less than fifty-million? how would you decide that? again, this is a question whichmight be a little puzzling now, but actually you should be ableto get the sign of that today even,and we'll start to analyze it. so that's what mortgage tradershave to do. they see interest rates wentdown. a bunch of people acted.

the people who are left in thepool are different from the people who started in the pool. now we've got to revalueeverything and rethink it all, so how should we do that? let's say you run a hedge fundand some investor comes to you and says, "oh,things are terrible. look at all the money you lostfor me last year. i know you're doing great thisyear and you've made it all back that you lost last year,but i don't want to run that

risk. so i want to give you my money,a billion dollars, i want to get these superiorreturns you seem to earn, but you have to guarantee thatyou don't lose me a penny. i don't want to run any risk. i want a principal guarantee(it's called) that when i give you a hundred dollars you'llalways return my hundred dollars,and hopefully much more, but never less than a hundreddollars."

so is there any way to do that? you know that you've got agreat strategy, but of course it's risky. you could lose money. you've lost money a bunch oftimes before. so how can you guarantee theguy that he'll get all his money back and still have room to runyour strategy? well, it sounds like you can'tdo it, but of course a lot of people want to invest that way,so there must be a way to do.

so you'll figure out--we'lllearn how to do that. so, three more short ones. a scientist discovers apotential cure for aids. if it works he's going to makea fortune. he started a company. he's a yale scientist,he's--medical school, started this startup company. yale, of course,is going to take all his profits, but anyway it's hisstartup company and if his thing

really works he's going to makea fortune. if it doesn't work it's goingto be totally zero. you calculate,and let's say you believe your calculation,that the expected profits that he'll make if it works,the probability of it working times the profit,that expected profit is equal to the profits of all of generalelectric. should his company be worthmore than general electric, the same as general electric,or less than general electric

since it's got the same expectedprofits? well, i can tell you the answerto this one because i think most of you would think,first you'd think, "well, maybe thesame." then you'd say,"well, this aids thing it's so risky. it's either going to be way uphere or nothing, and that's so risky,and general electric is so solid,probably general electric is

worth more." but the answer is the aidscompany is worth more. so another question,suppose you believed in this efficient market stuff and yourank all the stocks at the end of this year from top to bottomof which stock had the highest return over the year. it's 2010, let's say 2010,this year's a weird year. so let's say you do it in 2010. all the stocks the highestreturn to the lowest return.

now, suppose you did the samething in 2011 with the same stocks? would you expect to get thesame order, or the reverse order, or random order? now again, if you believe inefficient markets and the market's really functioning,the prices are fair and all, i'll bet most of you will say,you won't know, but you might say it should berandom the next time, because firms only did betteror worse by luck,

but that's not right either. so you're going to know how toanswer that question by the end of the class. one last one,the yale endowment over the last fifteen years has gottensomething like a fifteen percent annualized return. a hedge fund,that i won't name, has gotten eleven percent overthe last fifteen years counting all its losses and stuff likethat.

so is it obvious that the yaleendowment has done better than the hedge fund? would you say that the yalemanager is better than the hedge fund manager? its return was fifteen percent. the hedge fund only got elevenpercent. so i'm asking the question,and i would say that david swensen would think about it thesame way i think about it. so suppose i even told you thatthe yale hedge fund had lower

volatility--the yale hedge fund?--the yale endowment had lower volatilitythan the hedge fund, which it surely does,would that convince you now that the yale endowment had beenmanaged better than the hedge fund? well, we're going to answerthis question again, and you're going to see thatthe answer's a little surprising. it won't be so surprising--iwouldn't have brought it up

otherwise. but anyway, that's the kind ofthing that in finance you're taught to think about. so the crisis of 2007,which we're going to spend a long time talking about,i just want to get back to that subject. so that list of questions werethe kinds of things that i used to teach for years before i wasconfident about my theory of crises,and this is the kind of

questions you have to face allthe time in hedge funds, and decisions you have to make,and things you have to tell investors,and so that's the basic part of the course,but i want to say more. so i want to talk about thecrisis of 2007-2009. it started as a mortgage crisis. now, how could it be thateverything goes wrong in mortgages? i mean, they're four thousandyears old.

the babylonians inventedmortgages. what is a mortgage? you lend somebody money. they put up collateral. they don't pay you take thehouse or you take the guys life, he's a slave or something,but it's the same thing. you borrow money and the guypromises you can confiscate something if he doesn't pay. four thousand years and wescrewed it up.

how could that be? and why should a screw up inthe mortgage market have such a big effect on the rest of theeconomy? were sub-prime mortgages aterrible idea? was there some logic to it? and how did we get out of thecrisis? how is it, that everybody wassaying this is the worst crisis since the depression,may be another depression and things seem to have turnedaround.

what is it that we did to getthings to turn around? i don't think we're out of ityet, but things are a lot better than they were a year ago. so what is it that thegovernment did to turn things around? it didn't do nearly enough,i think, but it did something. what exactly did it do? now, shiller would talk aboutthe whole thing was irrational exuberance.

i'm going to say it's all theleverage cycle, but anyway so that's themortgage crisis. now, are free markets good? i want to talk about theargument. the argument was first made byadam smith about the invisible hand. the modern mathematicalargument is ken arrow's, my thesis advisor. and of course everybody knowsthat monopoly and pollution and

things like that interfere withthe free market and they have to be regulated. but the financial markets,there's no monopoly. as long as there's no monopolyand there's no pollution shouldn't the free marketfunction there? so i want to go over thatargument and show you what was missing in it,as i said before, and then lastly we're going totalk about social security and how could that system be goingbankrupt.

i mean, it just seems shocking. there's a two-trillion dollartrust fund that's going to run out in 2024 or something andafter that the system will be broke. so how did it happen? why is it broke? what can we do to fix it? so george bush said,"well, it's terrible. even if we manage to sort ofget the trust fund rehabilitated

young people like you are goingto get a two percent rate of return. if you put your money in thestock market, even allowing for the lastcrash, over the long haul, the returns have been sixpercent. so it's terrible,social security. something's wrong with thesystem. we should privatize it and letyoung people like you put your money in stocks instead."

well, gore, in the debate in2000 said, "you can't do that becausethen the old people who are expecting their money can't getpaid." and both of them agreed that itwas all the baby-boomers' fault. people like me we're gettingold, we're going to retire. that's why the system's goingto get broke. so that's the conventionalwisdom. all three of those things arewrong, so we're going to find out why.

so in summary,why study finance? it's to understand thefinancial system, which is really part of theeconomic system. it's to make informed choices. is privatizing social securitya good or bad thing? is regulation of financialmarkets a good thing? the language that you learn isthe language that's spoken on wall street, and was created byprofessors and yet practitioners use it.

for me it's incredibly fun,all these little puzzles. as j.p. morgan said,"money's just a way of keeping score." you have to figure out whatsomething's worth in the end and if you get it right you'vesolved the puzzle right and it'll help you make goodfinancial decisions in a pensioned career. that's the standard reason totake finance. now, the prerequisites of thecourse, so i want to make this

clear, you don't really needecon 115. it would be helpful becausethis logic of the free market being good or bad,that was already started in econ 115. that's what they call it now,right? it's still called 115. i used to teach it but ihaven't done it for years. so anyway, what you really needis mathematical self-confidence. it's not going to be high math.

it's going to be simple math,but it's relentless over and over again. and i can tell you that everyyear there's the five percent of you,let's five or ten out of the hundred-twenty are going to justget bored doing problem after problem and you're probably notthat, you know, those ten maybehaven't that much experience doing it,don't feel very confident doing it,stop coming to the class and

then really have no idea what'sgoing on. my sister is probably muchsmarter than i am, but she doesn't like math. she wouldn't take this course. so if you're not confidentdoing little mathematical problems just don't take thecourse. you'll save yourself a lot oftrouble. i don't know how to say thisany better. i want to warn you not to do it.

it's easy math,but it never stops. every week there's going to bea problem set. the exam--there are problemsets. the exam is doing problems justlike the problem sets, but if you don't like that,you know, to me finance is a quantitative subject. what's so beautiful about it inone aspect i really like is that you have these complicateddifferent things you have to weigh,but at the end you have to come

up with one number. what is the price you'rewilling to pay for something? it's very concrete. i'm going to take advantage ofthe concreteness by turning every question into a number. i hate it when you get on theone hand and on the other hand. it's a number. so if you don't like numbersit's not a good course to take. so what are the kinds of thingsyou have to know?

you have to understand thedistributive law of arithmetic (which, i have little kids and isee that's not so easy to understand). anyway, and then you have tounderstand the idea of a function which is a contingentplan. simultaneous equations;that's what we do for equilibrium in arbitrage. taking a derivative,that's marginal utility. the idea of diminishingmarginal utility,

a concave function looks likethat. that's risk aversion. bankers invented the logarithm,compound interest, so you have to know what takinga logarithm and exponential means,and you have to understand how to take probability weightedaverages of things. and we're going to use excelfor a lot of the problems which we'll teach you. by the end of a day you'll bebetter at it than i am.

so my office hours are four tosix. my secretary assistant isrendã©, there's an accent missing asshe always tells me, wilson. she just started three days agobut i'm sure she'll be great. there are going to be twolectures a week and a ta section. so every tuesday there'll be aproblem set starting this tuesday due the next tuesday.

there will be two midterms. there's a lot of stuff to learnand so i found, everybody i think agrees who'staken the course, if you take the midterm it'llfocus your mind and make it a lot easier,so i give two of them so you only have half the course tostudy. it makes the final much easierto study for. i recognize that some of youwill have problems on one of them,like especially the first

mid-term,and if you do vastly worse on one exam than the rest i'll tendto ignore that, but most people don't,by the way, do vastly worse on one exam than the rest. so the final's forty,the problem set's twenty, and the two midterms are twentypercent. tuesday to thursday,and so all the ta sessions are thursday to monday so they'regoing to start next thursday. so you see the classes aretuesday-thursday then the next

tuesday. there's a long time in-betweenhere so all the ta sessions will meet there. so they're at the same momentin the class. there are all these textbooks,all by the nobel prize winners, all by those financial greats. you can buy any one of them,but i have my own lecture notes because as i say i teach aslightly unconventional course and there's a huge list of bookson the crisis.

some of them are incrediblyinteresting and fun, and so they're all on thereading list you can take a look at. i mean, there's never been amore fun time to read this stuff now. so course improvements, anyway. so that's it. are there any questions abouthow the course runs, or how i will run it,or whether you think you should

take the course,or whether your preparations--so if you haven'ttaken econ 15 it's okay, 115, but you've got to beconfident that you can solve problems,otherwise don't do it. any questions? yes? student: so the firstproblem set will be assigned next tuesday? prof: yeah,so next tuesday it's going to

be due the tuesday after. so i know that's early,but you probably already know whether you're going to take thecourse or not. student: will you teachthis next year? prof: will i teach itnext year? actually i probably won'tbecause i'm going to go on leave, but i might,but probably not. someone else will teach it. yep?

student: which of thebooks do you suggest we buy? prof: they're all good. they're all famous peoplewho've written. they're trying to sell copiesso they're pitched at a quite low level, but they're verygood. anyone of them is good. merton's book is good. steve ross is a friend of mine. he used to teach at yale,so his book is good.

so any one of those is verygood, but they're not quite at the same mathematical levelbecause they're trying to sell thousands of books,and they stick pretty closely to this financial view of theworld that everything is efficient. student: will the tapedlectures be available online? prof: that's a goodquestion. i don't think so. no, they're shaking their head.

so it won't be in time for you,but it will be if you want to look back in your old age,"i was there. i saw the leverage cycle." sorry. student: are the lectureslides posted before or after the lecture? prof: oh,the lecture notes are all posted already before the class. so the first twelve of them arethere, and i'm changing them

each year so there'll be somechanges. so last year's first twelve arethere and they might change a little bit, but you can alreadyget an idea of what they're about. this first lecture is not on,but the rest of them are. any other questions? student: when do we signup for the ta sections? prof: oh,you should be signing up now. i don't know how to do this.

it's online or something, right? you sign up online. yeah, so you should pick yoursections. we might add another section ifall of you stay, but probably you won't,but if we do we'll add another ta section. student: what's thegrade distribution? prof: the gradedistribution? i don't know.

the standard yale junior levelcourse grade distribution which is when i was at yale thingswere much tougher, so it's the standarddistribution. i don't remember it offhand. but i'll tell you all about thedistribution at the midterm. so there will be a midtermbefore--you'll have chance to drop the course after themidterm and then there will be another midterm right at the endof the course. student: what level ofmath and type of math should we

be comfortable with to take thecourse? prof: i was trying tosay that. i'm glad you asked me again. so i went over the things thatyou have to know. if you have 3x-4x^(2) you haveto be able to take the derivative of that which is3-8x. if you've got the log naturalof x you have to take the derivative. it's one over x.

if you've got 3x 5=10 and2x-7=12 you have to be able to solve that simultaneousequation. so that's the kind of thing youhave to do, and you have to be able to do it quickly and withtotal confidence that you're doing it right. and for many of you that's noproblem, but for some of you who aremaybe even smarter than everybody else that's a problem,and so you'll have to judge yourself whether you can do thatcomfortably so you don't have to

worry about the mechanics ofdoing that. you can think conceptuallyabout what the question is asking. when does this end,ten of or quarter of? student: ten of. prof: ten of,so we have 13 minutes. i want to end with oneexperiment. so (teaching assistant),can you help me with this? so this is something we're notgoing to have time to figure out

the answer to. so i need sixteen volunteers. how about the first two rows? why don't you just volunteer. you'll survive,and i know it's a drag but you'll do it. what i'm going to do now is i'mgoing to run an auction. so please stand up and eight ofyou go this side and eight come over here.

that's okay, you'll be okay. i know everyone's reluctant todo this. so i only need sixteen. (ta), help me count them. two, four, six,eight, you guys have to come the other way. the tas aren't going toparticipate. you're not in this, right? two, four, six,eight so we only need eight,

you both sat down. so would you like toparticipate? come on. we could use another woman here. two, four, six,eight, there are eight of them? so can you mix these up? there are going to be eightsellers and eight, we say seller,right? buyer, so shuffle them up andhand one to each.

so we've got eight,and these are the football, they're selling. so we've got eight sellers andeight buyers, and i don't know whether you'veever seen this experiment before, but shuffle them,right? student: they're allsellers though. prof: they're allsellers, but you've got to shuffle them. on the other side there's anumber.

so we've got eight sellers hereand eight buyers. so each seller knows what hisfootball ticket is worth, or hers, so please take one. student: i have a sellerone. prof: oh,you have a seller one? that's bad. student: yes. prof: i'm blind. student: thank you.

prof: buyer, thank you. does this say buyer and buyer? you should be one short. here's an extra. so there are eight sellers andeight buyers. they've got the footballtickets. each of them knows what thefootball ticket is worth to her. there are three women here andonly two, so these are the "hers".

she knows exactly what it'sworth to her. so say it's fifteen. the football ticket's worthfifteen. now if she can sell it for morethan fifteen she's going to do she's going to make a profit. if she sells it for less thanfifteen she's not a very good trader. she's not going to do that. she's going to say,"if i can get more than

the football ticket is worth i'mgoing to sell it. if i can't get more than it'sworth i won't sell it." so everybody knows what thefootball ticket is worth to herself. all these guys,they know what the ticket is worth to them. so say someone thinks it'sworth thirty that guy's going to say,"if i can get it for less than thirty,like for fifteen,

i'm going to get it. that'll give me a profit offifteen. if i can only get it for fortyi'm sure not going to do that because i'm paying more than ithink it's worth. so you all got that? you have a reservation valueyourself. you don't want to pay more thanit's worth because then you're losing money,and they want to sell it for more than they think it's worthbecause then they're making

money. so nobody knows anybody else'svaluation. the information is distributedcompletely randomly across the class. now this is a famous experiment. i'm not the first one to runit, although i've done it for ten years. i do it in my graduate class,in my undergraduate class, the undergraduates,by the way, always do better

than the graduate students. so this knowledge isdistributed in the whole environment,and we're going to see what happens when i start a chaoticinteraction between all of these sixteen people. what's going to happen? and you would think it'd betotal chaos and nothing sensible is going to happen. and if that does happen it'llbe very embarrassing for me.

but what the efficient marketsguys would say is, "something amazing isgoing to happen. the market is going to discoverwhat everybody thinks it's worth and figure out exactly the bestand right thing to do and that's what's going to happen." now, it's hard to believe thatwith this little preparation that you've had,zero, zero training, zero experience,and you're only going to have two minutes to do this.

so see the class has got eightminutes to go. you're going to miss the grandfinale. anyway, so you've only goteight minutes to go. so with only two minutes oftraining they're going to get to a result,which if i had to do it myself and read all the numbers andsort them out and sort through them would take me much morethan two minutes, and all this is going to happenin two minutes. it's hard to believe.

it probably won't happen thistime. so here are the rules. i'm going to put you alltogether. start inching your way towardseach other, and try not--now, when i say go,which won't be for two minutes you're going to start yellingout an offer. so if you think it's worthfifteen and you're a seller you're not going to sell it forfifteen. you're going to say give metwenty, or give me thirty,

or give me twenty-five. you're going to try and get asmuch as you can. you have to yell it out. the buyers are going to bemaking their offers. when two of you see thatthere's a deal you have to shake hands, exchange the football,and leave, and tell your numbers to (ta). where's (ta)? (ta), you're going to standoutside the group that way.

so once you make a deal youjust leave and tell what's happened to (ta) who's nowstanding back here, back there. so it has to be public outcry. it's very important that you'reyelling these things publically and all the other people canhear you, and you've only got two minutes. now two minutes sounds like anincredibly short period of time, which it is,but it's much longer than you

think, wait, quiet here. you shouldn't trade--i'm givingyou valuable advice-- you should not trade in thefirst ten or fifteen seconds because you have to hear whateverybody else is offering. if you trade right away you'reprobably doing something really stupid. two minutes,though, it sounds short, is actually a very long periodof time. so be patient.

try to get the best possibleprice and we'll see what happens. any questions about what you'redoing? and now, in the heat of themoment you might be so frustrated that you can't sellwhen you think it's worth fifteen that you sell it forten. i'm going to expose you infront of all these people if you do that, so keep track of whatyou think the thing is worth. all right, any questionsanybody about what is going on?

so you have two minutes. is there a second hand there? i can't see it. no? student: it's on theten, or coming to. prof: where is it? student: now it's on thethree. student: it's moving. prof: it's on the three.

i think i see something. when it gets to the four we'regoing to start. so start, go. <> prof: oh, no collusion. no collusion. prof: come out and tell(ta). if you made a deal tell (ta). prof: how much time isleft?

one minute left,plenty of time, one minute. any other deal made? write down the price and thetwo, what price they agreed. how much time? twenty-five seconds, stay cool. i can't see. fifteen. stay cool.

don't make any mistakes,ten, five, four, three, two, one,stop. did you get all the numbers? <> prof: give me back thetickets. student: was thisdesigned to make us look bad on camera? student: you designedthis to make us look bad on camera.

prof: no,you're going to look great on camera, you are. give me all the tickets back. (ta), you getting done there? teaching assistant: yeah. prof: all the tickets. i need them all back,all the stuff. god, you're big folders here. these tickets have lasted tenyears until you guys took over.

they're all crumpled up. all the tickets,i need them all back. you can sit down now. everybody's reported in? now let's see what happened. you've got them all? five traded. teaching assistant: fivetraded. prof: five bought andsold.

so here's what happened. here were the numbers. so we have five minutes just tolook at this. so all the buyer prices are inblue, forty-four, forty, thirty-six,you should recognize these you buyers, and the red ones werethe sellers. so you notice that everyseller, for everybody there's a seller who's underneath. so it could have happened thatthirty-eight sold to forty-four,

and thirty-four sold to fortyat thirty-seven, and twenty-eight sold tothirty-six at thirty-two. you could have had eight trades. so what did happen? nothing like that happened. you had five trades,five pairs of people traded, and there are those three poorschlumps, pairs of people at the endlooking despondent, hopeless, unable to trade,worried that they were on

now, let's see,who are the people who traded? so, (ta), name the buyers whobought. teaching assistant: idon't know the names. prof: the prices. teaching assistant: theseller got it for nine and managed to sell it for twentydollars. it was all quick so i don'thave everybody's name, because they were all rushing. prof: you got them.

teaching assistant: igot them.. prof: that'severything, great. teaching assistant: ijust don't have their names. prof: here's whathappened. mister seller ten sold tothirty-six at a price of twenty. mister seller nine sold tobuyer twenty, so nine, there is no nine. teaching assistant: six. prof: nine sold totwenty at a price of what?

six. teaching assistant:sorry. prof: that's okay. so seller six sold to twenty ata price of twenty. student: yeah,even though it's cheaper > prof: no,no, buyer twenty paid twenty, so seller six did well. we won't ask who buyer twentyis.

buyer twenty is going to screweverything up. so buyer fourteen through--ican't read this either. teaching assistant:forty-four. prof: buyer fourteensold to buyer forty-four for twenty,and buyer twenty sold to buyer forty for twenty-two,and seller twenty-four sold to buyer thirty for twenty-five. so five people traded,now which five were they? the sellers were ten,six, fourteen and twenty-four,

one, two, three,four, five, the bottom five. the five buyers werethirty-six, twenty, forty-four, forty and thirty. so basically forty-four,forty, thirty-six, thirty, twenty-six didn't buy,twenty bought instead. so if you look at it,so it's not quite the way theory would have predicted,but almost. if you look at it,if you just shuffle the order and you put the sellers,instead of from top to bottom

you put them from bottom to top,you get what looks like a demand curve and a supply curve. and so what happened? all these five people ended upselling, one, two, three, four,five, those are exactly the sellers. the price they sold for was allbetween twenty and twenty-five, and the five buyers wereforty-four, forty, thirty-six, thirty.

twenty-six didn't manage tobuy, but twenty bought. so what is the theory of thefree market? the theory of the free marketsays, "this chaotic situationwhere they had less than two minutes to decide what to docould be analyzed as if you put a demand curve together with asupply curve and there was one price that they miraculouslyknew. here it should have beentwenty-five. it turned out to be twenty ortwenty-two that all the trade

took place at. at that one price you get allthe trades happening. the people have the highestvaluation buyers they're the ones who get the tickets. the people with the lowestvaluation sellers sell it. so the people who end up withthe tickets are these red guys at the top and the blue guys atthe top. all the tickets go from thepeople who value the stuff least to the people who value it more.

so the market has done anextraordinary thing in two minutes. so there was one mistake. mister or miss twenty,whose identity we are protecting, although i'msearching the faces, mister or miss twenty got avery bad deal. she or he, let's say he,bought at twenty when the value was twenty. that was a horrible deal.

he didn't get any extra out ofit. so he should probably have onlybought if the price were lower, and then twenty-six would havebought instead of twenty. so twenty sort of squeezed hisway into the market, so twenty-six and twentybetween them somehow there was a slight inefficiency. but basically with no training,no background, no practice,these sixteen undergraduates managed to reproduce--they gathered all the

information in the wholeeconomy, and they discovered who werethe eight people who valued the tickets the most and they endedup with all the tickets. for me to do it and sort it outwould have taken longer. the market solves a complicatedproblem, and gets information incredibly quickly,and puts things into the hands of the people who value it themost. and the marginal buyer thoughtit was worth about twenty-five or twenty and that's what theprice turned out to be.

so anyway, we're going to comeback to this parable at the beginning of the next class.