That Ship has Sailed, Boi

Posted on by David Wright

This is a neat little story about the starup scene, and, from what I read, is fairly typical.

1. Guys move to the SF Bay area

2. Invent a product that flops

3. But their by-product flies!

4. JUST successful enough to survive (literally and professionally).

5. Now they know their stuff and get started for real.

In my head, entrepreneurship (of the young guns tech variety) is all about chucking yourself at an incredibly steep learning curve and persevering.

Minimum Requirements: Boundless motivation, comfortable with life in the bottom income quintile and enough coding skill to stay afloat. All while you learn.

Self-imposed desperation as your motivating force? How SWPL.

I can relate. But that ship has sailed for me.

I already have too much to lose!

Stop the Thoughts! I Need to WORK!

Posted on by David Wright

Ok, Cringely has a post that I need to get out of my head.

He says that he approves of Nokia’s move of ditching their in-house operating system by “Trading Symbian for Windows Phone 7 with a $100 bill attached”  because Symbian is “crap”.

Never used it, but it doesn’t surprise me. I expect the mobile phone universe is going follow the PC and migrate from a hardware-driven market to a software-driven one with the old guard mostly screwing it up.

I love his advice, though:

Hire a Bob Lee (or heck, hire Bob Lee), set up a small development office somewhere in the USA, and spend $5 million per year aiming at mobile life after Microsoft.

I’m going to write more about Tyler Cowen’s awesome The Great Stagnation (really want to solidify the concepts in my mind), but I can’t resist parroting a point here: software is a revolutionary industry in the midst of its revolution.

Unlike other ‘industrial’ revolutions, though, this one isn’t going to require millions of retrained workers.

Software teams work best when they’re manageable. And that means small. Big scale does not mean big staff.

The Ultimate Commodity

Posted on by David Wright

Two economic facts make the insurance business peculiar:

1. Insurance is a commodity

2. Claims take a long time to pay

Being a commodity means margins are thin. Delayed claims payments means interest rates really matter and costs are very hard to estimate.

First, the commodity part.

Insurance companies are, economically speaking, simply pools of money. Mining companies have ore, oil companies have oil and insurance companies have money. All commodities. I like how Wikipedia approaches the definition: “a commodity is the same no matter who produces it”. How true.

But money is super weird stuff.

First, money is the medium of exchange, which means that we can use it for all anything you want. At “The Price is Right” insurance company, you’d claim for a boat if you broke your boat, a house if you broke your house or a hospital stay plus a vacation if you slipped a fell outside a convenience store. Not so elsewhere; you get moolah.

Second, unlike other commodities, it’s plentiful, unlimited and everyone has it in its pure form.

The second point means, conceptually, the barriers to entry are very low. Insurance isn’t like pencils, anyone can self-insure just by saving their money. Most of us don’t, though, because that would be impractical: we’d need help.

There was a time when insurers were mostly mutuals: basically bands of people/companies that agreed to pay each others’ losses. But this ain’t Soviet Russia, we don’t like paying for others’ screw-ups, so you’ve got to define very carefully when and how losses are covered. Now you’re worried about moral hazard and you build out the policy language (rules), infrastructure (payments and records), staff (audit, etc) and management to keep things straight.

Wait, that’s an insurance company!

I Do/Don’t Understand Risk

Posted on by David Wright

I hear this all the time and get irritated. Consider these two statements:

1. An investor at a conference: “we think that investors are good at understanding super-catastrophe risk, reinsurers are good at understanding higher frequency risk and insurers best understand high frequency risk”

2. We are looking at this marketplace and just don’t understand the risk.

What does it mean to “understand” risk? I’ll tell you: not a damn thing. If you understood it, it wouldn’t be risky, would it?

Statistics can useful at describing processes without using incorporating any ‘fundamental’ analysis of the drivers of that process.

Coin flipping? Sure, I can get my head around the probabilities in that. Aggregate cost of slip and fall accidents in Montana in 2006 being greater than 2005? Yeah, right!

So we approximate, test, get it wrong and (hopefully) refine. Nobody understands risk any better than anyone else. Those two statements SHOULD read:

1. Investors are happy with returns commensurate with insuring extremely rare events because we don’t ever expect to pay any claims and we (the managers) are happy to get fired if we do. Everything else? I have no idea how their businesses work.

2. We like markets where we think people don’t know what they’re doing and we can convince ourselves that we do. Risk is in the eye of the beholder and we can’t believe that REAL risk exists here. We must be the sucker at the poker table.

Market Avatars

Posted on by David Wright

Really cool article on how entrepreneurs think, here’s the gist:

Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle Sarasvathy calls affordable loss.

And the zinger:

They do not believe in prediction of any kind.

The point is that you’re only focused on something when you’re asked to spend money. This is why prediction markets are so interesting. No amount of fancy pants grad degrees or big scores on I.Q. tests can replace the focusing power of cash on the line.

I work in a business that is obsessed with forecasting the future: no surprise when you sell a product without knowing how much it will cost! The people who are in charge of figuring out the COGS are actuaries, who use all kinds of fancy math for describing (and so forecasting!) processes nobody really understands.

Now, the frustrating thing about actuaries is that they know they’re going to be wrong. And that if they’re wrong in the wrong direction (ie understating the COGS), the company blows up and everyone has to go find a new job. The incentive is pretty strong to overstate the COGS.

Not only is this forecasting, but it’s deeply biased forecasting. To an entrepreneur this kind of thinking is radioactive.

Rambling

Posted on by David Wright

NFL players are, individually at least, a specialized bunch. Opponents in similar roles typically look more alike than the rest of the players on their own teams. Football is possibly the sport with the most diversity of size and shape; indeed, it’s probably the only athletic home for a few of humanity’s body types.

A lot of these people are physiological ‘freaks’. It’s uncommon enough to find a guy that can run a 4.4 second 40-yard dash, but a guy that’s 6’6 and 250 pounds? Witness the prototypical Defensive End.

People love the narrative of the outlier, of course: the little guy that works hard, the fat guy that gets thin, the tall guy that’s surprisingly graceful. The fact is, they’re the lonely few who have risen above their peers in the giant majority just not built to be professional athletes.

Consider someone like Antwaan Randle El (good catches at the superbowl notwithstanding).

He’s not a freak, he’s a ‘tweener’. Been a quarterback,t been a receiver, defensive back, running back, all sorts of things. I imagine if you took a survey of coaches, asking about any of the measurable characteristics of an outstanding football player, he’d rank well.

Put him on a football team and you start scratching your head. What to do with the guy?

There are two possible interpretations, I suppose:

1.       Randle El has skills, but he doesn’t have the right mix of skills.

2.       Maybe what looks like talent isn’t talent and this guy’s a good looking dud. After all results matter and he ain’t producing results.

Randle El problems pop up all over the place. He’s probably in the wrong sport!

What’s the equivalent in the workplace?

*SMACK*

Posted on by David Wright

That’s the sound of my hand hitting my head.

Nick Rowe makes some interesting points (followed by Krugman) on economics education, which I’m slowly realizing did me a unforgivable disservice when I went through mine (formally).

Firms supply goods and people buy them. Economics is concerned with the problem of increasing total output, which is the quantity of good traded.

The constraint here isn’t demand, you can only push how much people can buy so far (it’s related to how much they can produce!). The constraint is supply: what we need are more firms/competition to drive down prices to sell more stuff.

So policies that aim to increase the amount of demand for products are doomed to very mediocre results. These are things like tax cuts, tax increases (ie government spending) and inflationary monetary policy.

Except now is different.

The idea is that, during this past recession, people/firms were holding onto money for some reason. Because they have to repay debt? Because they expect things to get worse in the future and so are saving against that outcome? Maybe…

Scott Sumner is awesome here.

Debts are paid in nominal dollars. Salaries are paid in nominal dollars. If firms start worrying they’ll have fewer nominal dollars next year than this, they’ll cut back. If they fear this because their business just sucks, so be it, they deserve to go out of business. But that kind of thing doesn’t happen to EVERYONE at ONCE.

That’s the difference.