Macroeconomic Modeling and Financial Stability: Lessons from the Crisis
Banking Perspective 2(2014), 22-31
The dynamic stochastic general equilibrium model (DSGE) marked a major milestone by capturing the dynamic change of economic variables over time. However, many DSGE models were exposed as having omitted critical structural linkages relevant to the financial crisis. To address these deficiencies, existing DSGE models should be enhanced to better incorporate the role of the financial sector and financial markets. In addition, these models should reexamine key micro-foundations of the model and consider behavioral components.
To Cure Cancer, Provide a Profit Motive
with Roger M. Stein, Scientific American Forum
Translating scientific research into safe and effective drugs takes money—lots of money. Current estimates put the cost of developing a single successful drug at more than $2 billion by the time you include all the dead ends along the way; the out-of-pocket cost for just a single attempt is about $200 million. Drug development usually takes a decade or longer, and the probability of success is low (historically around 5 percent for oncology). As a result, investors are now shying away from the pharmaceutical industry, investing instead in less risky and more attractive opportunities like big data, social media and e-commerce. Financial engineering techniques can help change that, directing capital from those wishing to invest it to those who need it to develop new drugs.
Price, Value, and the Cost of Cancer Drugs
with Tito Fojo , Lancet Oncology 17(2016), 3–5.
The reports by Wim van Harten and colleagues and Sabine Vogler and colleagues in The Lancet Oncology on the costs of cancer drugs in European countries deserve special attention from all oncology and biopharmaceutical stakeholders. van Harten identified that, in 15 European countries, list prices can be up to 92% lower than the highest reported, with actual prices paid up to 58% lower. These findings are backed up by Vogler and colleagues' study 2 in 16 European countries, Australia, and New Zealand, which documented that highest-minus-lowest list price differences ranged from 28% to 388% for cancer drugs. Such variability argues strongly for greater transparency in drug pricing and the circumstances leading to such differences. But most importantly, it underscores the need to establish the true value of cancer therapies, and those who have championed this cause have been handed unequivocal evidence confirming what they have long suspected: drug prices are typically driven by what the market will bear.
Imagine if Robo Advisers Could Do Emotions
Wall Street Journal
‘Health care loans’ for Hep C cure
with David Weinstock, The Boston Globe
"A new class of medications was recently approved that cures more than 95 percent of people with Hepatitis C in only six weeks at a cost of about $84,000 per person, and new therapies with price tags that are likely to exceed $1 million per person are now available or coming soon. How can patients possibly afford them?
"In an article published in the journal Science Translation Medicine, we outline a feasible market-based solution that could immediately expand access to transformative medications, including cures for Hepatitis C and cancer. The basic concept is to convert a large upfront medical expense into a series of more affordable payments, akin to getting a mortgage when buying a house. The challenge of curative medications that only require a short course of therapy is that the whole price is paid upfront — how many homeowners could buy their houses using only cash? Instead, most home buyers get a mortgage and make monthly payments for as long as they benefit from owning the house or until the full amount is paid. We propose the same solution to overcome the liquidity problem that prevents access to curative medications, which we call “health care loans,” or HCLs..."
Lessons From Hollywood: A New Approach To Funding R&D
with Gary P. Pisano, Sloan Management Review 57(2015), 47–57.
Megafunding Drug Research
with Edward Jung, Project Syndicate
As price-gouging practices by a handful of drug companies attract headlines, one troubling aspect of the story remains underplayed. Exorbitant increases in the prices of existing drugs, including generics, are motivated not just by crass profiteering but by a deep skepticism about the economic feasibility of developing new drugs. That skepticism is justified.
Traditional models for funding drug development are faltering. In the US and many other developed countries, the average cost of bringing a new drug to market has skyrocketed, even as patents on some of the industry’s most profitable drugs have expired. Venture capital has pulled back from early-stage life-sciences companies, and big pharmaceutical companies have seen fewer drugs reach the market per dollar spent on research and development...
A New Approach to Financial Regulation
with Simon A. Levin, Proceedings of the National Academy of Sciences 112(2015), 12543–12544.
In this Op-Ed Piece, MIT Sloan Professor Andrew Lo and Princeton Professor Simon Levin write, "We propose that the financial system has crossed a threshold of complexity where the system is evolving faster than regulators and regulations can keep pace. For example, the system is now truly globally connected, but coordination across sovereign jurisdictions is difficult to achieve. This new situation calls for a new perspective, one based on a different paradigm than the ones on which financial regulation is currently based, such as efficient markets, rational expectations, and models patterned after the physical sciences.
Wall Street’s Next Bet: Cures for Rare Diseases
Radical Reform of Executive Pay
The New York Times, Freakonomics Blog
The recent proposal by the Fed to regulate bankers’ compensation practices is understandable given the events of the past two years, but setting caps on salaries and bonuses misses the fundamental problem of compensation on Wall Street. Despite the public resentment surrounding finance-industry payouts, the fact is that no one objects to paying for performance. We just want to make sure we’re not getting fleeced or paying for pure dumb luck, and this is where the problem lies.