Book Reviews

Sethi, Suresh P. 2019. Optimal Control Theory: Applications to Management Science and Economics, Third Edition. Springer. 565 pp. $119.95.

One of the most compelling features of this series of textbooks (first edition, 1981; second edition, 2000; and third edition, 2019) is its multidisciplinary contribution. Although the book covers fundamental principles and emerging themes in mathematical optimal control theory, it is not a math textbook. Nor is the book written for readers with focused interests in a particular dimension of business or economics. The intended audience consists of management scientists or industrial engineers who study dynamic problems both within and across the boundaries of diverse functional areas in business and economics. The broad spectrum of topics studied is deftly tied together as new and oftentimes complex mathematical concepts are explained throughout the book. This is its gift to the reader: the textbook both explains and explores fundamental and emerging mathematical principles in optimal control theory through the study of important applications and the introduction of examples in both management and economics.

Suresh P. Sethi and Gerald L. Thompson (deceased) coauthored the first and second editions. Both authors are recognized as outstanding applied mathematicians, management scientists, and industrial engineers who made profound theoretical contributions in domains including linear programming, integer programming, and optimal control theory, and insightful applied contributions in areas including economics, finance, marketing, and operations management. As such, both authors epitomize the management scientist by addressing multidisciplinary problems in business with the utmost mathematical rigor.

As I read the third edition of this textbook authored by Suresh P. Sethi, I was impressed by both the consistency in style and its thoughtful evolution from the first and second editions over almost 40 years. As opposed to applying a theorem-proof format, in all editions, the book provides fundamental principles of optimal control theory at a largely intuitive level supplemented by many examples. Additionally, exercises at the end of each chapter (many with solutions included) facilitate learning because they range in level of difficulty to both reinforce and challenge the student reader. The examples and exercises enhance an understanding of concepts introduced in each chapter without requiring an extensive amount of prior mathematical training. In the preface of the first edition, the authors indicate that “the emphasis of this book is not on mathematical rigor, but on modeling realistic situations faced in business and management” (p. xiii). According to the authors, the student audience needs only “two or three semesters of calculus plus some differential equations and linear algebra” (p. xiii).

A key dimension of the optimal control theory methodology, and therefore a key contribution of this series of textbooks, is its definition and analysis of complex dynamic relationships that are both under the firm’s control and external to the firm. For example, using optimal control theory, a firm maximizes profit over a given interval of time while capturing the nonlinear impact of the rate of advertising on dynamic price and demand functions. In addition, the problems introduced in this series of textbooks are constrained or unconstrained, linear or nonlinear, deterministic or stochastic, and single firm or game theoretic. The textbooks establish an excellent bridge for research-oriented students because they describe simplified versions of models and solutions that have actually appeared in the academic literature. Consistent with the above, the first, second, and third editions of this textbook demonstrate the wide range of applications of optimal control theory and offer meaningful contributions to our understanding of dynamic problems in economics and business.

As I consider the development from the first, the second, and the third edition, I appreciate the improvements with respect to the exposition and interpretation of mathematical concepts and the expanded explanations through more examples within a chapter and exercises at the end of each chapter. In addition, each subsequent edition introduces emerging optimal control theory methods and describes new research results that leverage these methods and thereby contribute to our understanding of many fundamental problems in business and economics. The third edition contains important extensions in finance, production and inventory, and marketing. Moreover, it takes the reader a major step further by including the presentation of the mathematics required to define, analyze, and interpret principal-agent models in which agent types lie on a continuum. Furthermore, the 2019 edition substantially extends earlier editions by devoting an entire chapter to differential games with a focus on applications and contributions to marketing.

I have taught many doctoral seminars in which I have relied on both the first and the second editions of the Sethi and Thompson textbook to introduce mathematical concepts in optimal control theory. Because of the nature of a PhD seminar, I have supplemented the textbooks with a somewhat deeper coverage of the mathematics. One of the goals of the doctoral seminars is to enable students to read the vast literature that uses optimal control theory in a wide variety of application domains. Moreover, I think it is important to teach students the types of problems for which optimal control theory methods are appropriate, how to define and solve those problems, and how to develop insightful contributions to the application areas. Finally, I require that doctoral students write short papers in which they introduce a new problem, solve it, and provide meaningful managerial insights.

As a testament to the quality of this series of textbooks, many of the students in my PhD seminars over the years (including Jennifer Bailey, Markus Biehl, Janice Carrillo, Raul Chao, Richard Franza, Alysse Morton, Karen Napoleon, Gulru Ozkan-Seely, Aleda Roth, and Wenli Xiao) have used optimal control in their PhD dissertations. Additionally, they have succeeded in publishing papers in journals including Management Science, Manufacturing and Service Operations, and Production and Operations Management. I look forward to using Sethi’s third edition in my future doctoral seminars and enthusiastically await the contributions new doctoral students will make to the literature using optimal control theory.

Cheryl Gaimon

Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308,[email protected]

Sunstein, Cass R. 2019. How Change Happens. MIT Press. 344 pp. $29.95.

As a result of the many advances that have occurred in the field of behavioral economics, researchers in many disciplines have begun to examine, with renewed interest, questions at the interface of economics, psychology, and law. The author of this book, already well known for a book he coauthored with Richard Thaler (Thaler and Sunstein 2008), takes a broad-brush approach to analyzing a single but significant question: How does social change occur? He uses the book’s 16 chapters to “connect findings in behavioral science with enduring issues in law and policy, and … to show how seemingly small perturbations can often produce big shifts” (p. xi). Below, rather than provide a tedious chapter-by-chapter review, I shall sample selectively from the book’s contents. This should provide the reader with an adequate flavor for the intellectual contributions of this book.

Sunstein begins the book by pointing to the salience of social norms. In this regard, he points out that when social norms begin to collapse, individuals are unleashed in the sense that they feel free to demonstrate their beliefs and their preferences and, in addition, they also feel free to converse and act as they wish. To illustrate this point, he focuses on the impact that the election victory of Donald Trump had on the proclivity of individuals to make monetary contributions to anti-immigrant organizations. In his words, “if Trump had not come on the scene, many Americans would refuse to authorize a donation to an anti-immigrant organization unless they were promised anonymity. But with Trump as president, people feel liberated” (p. 17).

How can the notion of a social norm be connected to the so-called expressive function of law? Sunstein addresses this question by first clarifying that the expressive function of law refers to the function of law in “making statements” (p. 41) as opposed to directly regulating human behavior. He then contends that as long as these statements are unaccompanied by sanctions, they can be seen as nudges that can be used to change social norms. With these two points in mind, Sunstein criticizes the economist Joel Waldfogel’s well-known research about the deadweight loss of Christmas. According to Sunstein, the salience of Waldfogel’s primary point that Christmas gift recipients would be better off with cash than with gifts is diminished because “Waldfogel devotes too little attention to the cluster of Christmas-related norms and the social meaning of diverse forms of gift-giving” (p. 49). However, if during Christmas, for example, a male gift recipient truly paid attention to these norms, he should be able to justify the gift of a tie, even one he does not like particularly, as something that demonstrates personalized attention on the part of the gift giver. However, we do not typically observe this kind of justification at work. More generally, in any given instance, the extent to which individuals care about social norms is an empirical question.

Moving on to a more expansive discussion of a nudge, a concept already made famous by Thaler and Sunstein (2008), he challenges the perspective that because people frequently make errors, “some form of coercion is needed to promote people’s welfare” (p. 68). He explains lucidly that even though the idea of nudging is a kind of “libertarian paternalism,” it is a helpful concept precisely because people often choose not to choose. Therefore, in such situations, “forcing them to choose is a kind of tax” (p. 69). That said, we are told that when contemplating alternate ways of setting policy to influence human behavior, it is important to keep in mind that some people are “welfarists” and hence committed to the maximization of social welfare, whereas others are “deontologists” and therefore committed “to certain principles, such as respect for persons, regardless of whether those principles increase social welfare” (p. 131).

Consider a scenario in which an individual separately evaluating alternatives A and B prefers A to B. However, when this individual jointly evaluates these same two alternatives, he prefers B to A. Sunstein notes rightly that this kind of preference reversal is common and that even though such reversals have a nontrivial impact on many questions in law and policy, they have received scant attention in the literature. Therefore, he proceeds to demonstrate that “both separate and joint evaluation often lead to bad outcomes, though for intriguingly different reasons” (p. 157). Continuing this discussion, Sunstein asks which kind of evaluation—separate or joint—is better in contingent valuation. He guardedly comes down on the side of joint evaluation or evaluation with what he calls a “broad viewscreen.” Even so, Sunstein does not explain how to engage in joint evaluation when the contingent valuation exercise involves inter alia the extinction of a plant and/or animal species. He also pays insufficient attention to whether a separate evaluation is even possible when a respondent is asked to value either a species or a natural environment of which he is completely unaware.

The third and final section of this book focuses on a number of real-world issues such as the need for transparency in government, the relevance of the so-called precautionary principle, and what Sunstein calls “partyism.” Distinguishing between output and input transparency, the author rightly notes that “[o]utput transparency should be the central focus of efforts for freedom of information. … [i]nput transparency can be important, especially after an administration has ended; but it should be treated far more cautiously” (p. 199). Sunstein believes that the precautionary principle is a largely useless concept in most practical settings. To see why, consider the viewpoint that nature is basically benign, that human intervention is likely to carry risks, and that the “precautionary principle calls for stringent regulation of pesticides or genetically modified organisms” (p. 207). Sunstein dismisses the relevance of this perspective by clearly pointing out that “what is natural may not be safe at all” (p. 207). Partyism is the concept that “those who identify with a political party often become deeply hostile to the opposing party and believe that its members have a host of horrific characteristics” (p. 257). After cogently discussing this concept, Sunstein turns to the salience of facts. He says that “many disagreements are not really about values or partisan commitments but about facts, and when facts are sufficiently engaged, disagreements across party lines will often melt away” (p. 270). Unfortunately, this is simply not the case. Beginning with the number of people who attended President Trump’s inauguration to specific aspects of the so-called Mueller report, even when the underlying facts have been “sufficiently engaged,” the disagreements across party lines have not melted away.

In summary, the author is a prominent scholar in law and public policy; hence, it is no surprise that this book provides a serious and competent analysis of a range of topics concerning the occurrence of social change. Readers who spend time carefully perusing this book will learn a lot about how behavioral economics and psychology can help shed valuable light on some of the most pressing public policy questions of our time.

Amitrajeet A. Batabyal

Department of Economics, Rochester Institute of Technology, Rochester, New York 14623,[email protected]