AT&T Fellows Final Report: Richard Shockley

AT&T Fellows Final Reports

March 2005

Name	Richard L. Shockley, Jr.
Title	Associate Professor of Finance
Department	Finance, Kelley School of Business
Campus	Bloomington
Project Title	Using Technology to Enhance the Learning of ‘Valuation of Real Options’ – A New Pedagogy for a New Paradigm
Project Goal	The ultimate goal of the Valuation of Real Options course is for students to develop sophisticated ways of seeing and valuing corporate investments as options so that they may help their own employers utilize this paradigm. The goal of my project was to develop technology that would enable students to think about far more examples than we can possibly cover in class, and to help think about problem framing over an above simple mechanics.
Type of Technology Used in the Project	Active ‘screen captures’ of PowerPoint slides, Excel spreadsheets, voice-over commentary, and handwritten annotation which present business investment opportunities and then guide students through the difficult process of framing the problems and formulating appropriate valuation approaches. The ‘movies’ are delivered both via the web and via CD-ROM media.

Executive Summary of Results

I developed computer-delivered video modules which I designed to reinforce and extend the material covered in my Valuation of Real Options courses. The ‘movies’ complemented my in-class pedagogy, and students benefited from two types of modules: reinforcements, which required students to apply the approach covered in class to new situations; and extensions, which helped students work through more difficult situations using the canonical problems (covered in class) as springboards.

Need for the Project

In corporate finance, ‘real options’ are investments that resolve uncertainties and create flexibilities to respond based on what is learned. Traditional valuation techniques are ‘static’ in nature and hence do not work well when the ‘learn and respond’ component of an opportunity is significant. Examples of these situations are pharmaceutical and biotech research and development, market research, production facilities that can be scaled up or down based on demand, production facilities where inputs and/or outputs can be switched, and any situation where waiting is a legitimate alternative.

Managers know that standard valuation models provide very wrong valuations in these types of situations. In the mid-1970’s, finance academics realized that these ‘learn and respond’ investments are very similar to financial options (e.g., stock options). Over the subsequent years, we have done a very good job convincing managers that they should evaluate ‘learn and respond’ investments in the same way that they value stock options, but at the same time we have done a lousy job of teaching them how to actually do it.

Why? Teaching a student how to value a corporate investment as an option requires two separate accomplishments: 1) successful presentation of the mechanics of option pricing theory, and 2) getting the student to see the mapping between the characteristics of the corporate investment and the inputs required in the standard option pricing formulae. We know very well how to achieve the first goal - the basic mechanics of option pricing require only a few class sessions to teach. Our problem, in my opinion, is that we have not developed a good pedagogy for realizing the second goal. It is easy for us as academics to say that many corporate investments are options, but it is difficult to actually show this in a way that can be internalized and generalized by the student. In other words, the greatest difficulty in building the bridge from real options theory to practice is one of problem framing.

My project was purposely aimed at addressing this problem – develop a pedagogy that uses technology to help students develop problem framing skills.

Use of Technology

I used TechSmith’s Camtasia screen-capture video and voice-over software to generate rich video modules which provided students more opportunities to work on ‘problem framing’ under my guidance but outside of class. Camtasia creates a ‘video’ of everything that is happening on a computer screen. The software generates a standard video file (I chose .wmv) which I deliver to students on the course CD-ROM and via the internet. I carefully choreographed PowerPoint slideshows and in-process Excel spreadsheets with voice-over and handwritten annotation (from a pen tablet, like a ‘telestrator’) to generate two types of learning modules for the student: reinforcement modules, and extension modules.

Reinforcement Modules: I created modules which present experiments that have the same structures as the problems studied in class but in very different business contexts. In the reinforcement modules, I guide the student through the exercises with PowerPoint slides and in-process Excel spreadsheets overlaid with voice-over discussion and hand-written annotation.

The key here is that I don’t simply lecture over a slideshow. The point is to engage the student by setting up a problem similar in structure (but different in business context) to one covered in class. I provide the student with background about a real-world business investment opportunity (with outline, pictures, slides, voice, and handwritten annotation) and then ask the student how this relates to what we did in class. I then lead the student through very specific questions, and I challenge the student to explain the different pieces of the framing of the problem before I fill in the gaps. Finally, I work through the mechanics of the valuation step-by-step in a spreadsheet. This setup actually has three learning benefits: it allows the student to work on the process of framing problems (breaking them into small pieces) as well as the practice of framing real options problems and the mechanics of the valuation. In some instances, I use this as a mechanism for delivering homework assignments: I lead the student up to a critical point, and then ask ‘what next?’ or ‘what should be done here?’ or ‘how does this relate to what we did in class?’.

Extension Modules: I also created modules which take the student into situations that require slight modifications to the approaches from class. The mechanics are the same, but the key here is getting students to do something altogether new. Again, this provides excellent training in breaking problems down into pieces as well as analyzing each piece. Once again, I use these modules to deliver homework assignments.

Instructional Design Plan

I expected that the project would lead to objectively better term papers. My grading schedule for the term papers assigns 25% weight to each of four categories: problem identification, problem framing, mechanical execution, and clarity and completeness of presentation. Assigned scores on each of these categories provided objective data which I compared directly against scores from prior semesters to gauge the effectiveness of my project. If my grading is consistent, and I believe it is, then my expectation was realized. In particular, student performance improved on problem identification and problem framing – exactly the result I wanted.

I used some of the modules as mechanism for delivering highly stylized problem sets and exercises. Instead of ‘completing the picture’ for the student, I left some aspects unanswered and asked the students to hand in their own explanations. I designed these to evaluate specific learning objectives, and I used them to alter my in-class pedagogy to focus on areas where students showed weaknesses. This was quite helpful to me.

Beyond the items funded by the grant, I used very few resources. I delivered some of the material via Original Oncourse as well as Angel (our online program’s version of Oncourse).

The project was easy to demonstrate to other faculty, and several of my colleagues have adopted the technology for use in our online programs. The technology is a bit tricky to use in an effective way, but after some practice the time burden drops (though is still substantial).

Potential to Impact Student Learning

Term paper grades indicate a modest improvement in the quality of project ideas and a more noticeable improvement in problem framing. These results are not seen across the board, but rather in the middle of the distribution – there are more “good” papers and fewer “mediocre” ones. Unfortunately, the bottom tail of the grade distributions shows no change.

The project actually had a positive spillover effect. After learning how to use the Camtasia technology for this particular grant, I used it to translate my in-residence Financial Risk Management course into an online offering. One of our challenges in the online idiom is making the online courses more “high touch” so that the online student becomes more engaged. The movie-based lectures were very effective, and online student performance in the course was roughly equivalent to the performance of my in-residence students in the same course.

Assessment Plan

Plan for Colleague Development

During the project, I gave two presentations to my colleagues in which I demonstrated the technology and how I used it to improve my practice. The audience for both presentations consisted mainly of faculty teaching in our online program, as my movie-based lectures were very well received by the online students (so much so that I won the graduating class’s teaching award). Quite a few of my colleagues have adopted the technology into their own online courses, and I do a good bit of casual consulting on how to use the Camtasia software.

Final Comments on Project Results

I believe that the project was a success. I’m seeing better term papers that cover more difficult problems than before. Moreover, I’ve made some of the movies available to colleagues at other universities to help them learn about how to teach this subject. My textbook, An Applied Course in Real Options Valuation, was just published by South-Western and has already been adopted by several leading business schools. It is the first text of its kind.

The positive unexpected outcome was an externality – I was able to use the technology in my other classes. In particular, I teach a “Financial Risk Management” course in our in-residence and online MBA programs. The ‘movie’ technology (along with some other new technology the University has purchased) allowed me to make the online offering almost identical in presentation and student performance as the in-residence offering. The response from the online students was overwhelmingly positive – so much so that I won the online program’s teaching award. This has direct implication for our curriculum design, as we are considering a “mixed” in-residence/online model for our MBA program.

The one thing I did not expect was the sheer amount of time required. I anticipated that creation of the material would take a lot of time, and it did. What surprised me was how much time was needed to apply the technology to the content. This technology has an enormous amount of potential, but I believe that constraints on faculty time will prevent my colleagues from using it to its fullest extent.

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