When it comes to the stock market, many of us adhere to the mantra “set it and forget it.” We prefer a simple and easy approach to investing so that we can focus our attention on our careers and family.

But the market’s recent volatility has made it hard to ignore. This may be especially true for leaders who like to keep their finger on the pulse of their industry, with the well-being of their colleagues and company in mind.

This week, we’ll take a look at two new indices built by Kellogg’s Viktor Todorov and Torben Andersen to help people better understand stock-market volatility.

Plus, Kellogg’s Dean Karlan discusses his decision to resign as chief economist of the U.S. Agency for International Development (USAID).

A new fear index

Since 1993, the Cboe Volatility Index (VIX) has offered investors a real-time measure of stock-market volatility: namely, how much the market expects prices on the S&P 500 to change over the next 30 days. For this reason, the VIX is also commonly called the “fear index.”

“When things really go bad, people start mentioning, ‘Oh, the VIX is at a very, very high level,’” says Kellogg’s Viktor Todorov.

But despite VIX’s popularity, Todorov and Andersen believe it is hardly the pure measure of volatility or fear that many investors believe. Specifically, they argue that VIX combines into a single measure both investors’ expectations about the S&P 500’s day-to-day volatility and their fears of a rare but catastrophic (or “tail”) event that tanks equity prices.

To address these shortcomings, the economists have built two new indices, listed on Cboe alongside VIX, that separately capture these two aspects: the Cboe S&P 500 Spot Volatility Index (SPOTVOL), which focuses on immediate market fluctuations, and the Cboe S&P 500 Left Tail Volatility Index (LTV), which tracks concern over extreme tail events.

Read more about the indices in Kellogg Insight.

Stepping down

When Dean Karlan received the call to take up the mantle of USAID chief economist in 2022, he was both intimidated and thrilled.

USAID—which at the time managed the world’s largest bilateral aid portfolio—had recognized Karlan’s research in poverty reduction and invited him to lead the agency’s efforts to make its work more cost-effective. “That was an ask that was daunting and exciting and why I got into this work in the first place,” he says in a recent podcast.

Karlan set out to identify approaches in the agency that weren’t working so well and to further improve those that were.

“We did this work by looking at how decisions were made,” he says, “looking at what was being funded, looking at what the evidence said about the impact of those things, and seeing what the evidence says about alternatives that might be better.”

So when the presidential administration announced at the end of January its decision to eliminate the vast majority of USAID’s foreign aid contracts, Karlan pushed for an examination of the evidence that went into the decision-making process. That, he believes, was his responsibility in his leadership position. But his appeals were disregarded.

“All patterns indicated that there was nothing resembling evidence of impact that was being used to guide what they were doing, and they were not open to input along those lines,” Karlan says. “It was clear that there was no role for what I was trying to do.”

Though he could have held onto his title (his position was not one of the roughly 2,000 flagged for dismissal), Karlan chose to step down instead. He recognized that his role as a leader at the agency was no longer serving its intended purpose.

Hear more from Karlan on WBEZ’s Reset podcast.

See you next week,

Abraham Kim, senior research editor
Kellogg Insight