Uncategorized

Much has been made of The Economist list, which is heavily weighted towards left wing thinkers, and Krugman’s reply. Here’s my thought:

1. Academics are higher status among the left
2. The left feels feels the right owns the ‘economy’ issues and compensates for insecurity by lionizing those that can produce ‘hard headed’ reasoning for their priorities, or dress them up in the right rhetoric and, as Tyler Cowen would say, mood affiliation.

Fundamentally the left cares more about economists and so supplies most of the aggregate fanbase for economists.

Because Lego bricks are made to really tight tolerances – 0.01mm. That fraction of a millimetre is the difference between them falling apart, and being too stiff to snap together at all.

You’re not going to get that accuracy with your 3D printer, so you won’t be able to torrent a working lego set any time soon.

From a reddit discussion

This morning, my words were everywhere, chopped up and twisted by sensational opportunists to fuel the tired “Apple is doomed!” narrative with my name on them. (Or Tumblr’s name, which was even worse.) Business Insider started the party, as usual, but it spread like wildfire from there. Huffington Post. Wall Street Journal. CNN. Heise. Even a televised CNBC discussion segment.
…
Instead, I looked back at what I wrote with regret, guilt, and embarrassment. The sensationalism was my fault — I started it with the headline and many poor word choices, which were overly harsh and extreme. I was being much nastier and more alarmist than I intended.
…
If there’s any flaw, it’s an unstoppable nightmare of embarrassment and guilt. Most people, myself included, aren’t accustomed to that level of scrutiny. Those who are usually have PR training, editors, and handlers to protect them from publishing flippant blog posts before they go to bed.

That’s Marco Arment. One of the founders of tumblr which he left long ago.

Here’s a fascinating idea from Joshua Ronen, via The Economist (gated):

The most elegant solution comes from Joshua Ronen, a professor at New York University. He suggests “financial statements insurance”, in which firms would buy coverage to protect shareholders against losses from accounting errors, and insurers would then hire auditors to assess the odds of a mis-statement. The proposal neatly aligns the incentives of auditors and shareholders—an insurer would probably offer generous bonuses for discovering fraud. Unfortunately, no insurer has offered such coverage voluntarily. New regulation may be needed to encourage it.

The logic of this I think is that an accounting scandal is an uncertain event and so should be evaluated by a company that analyzes random things. Maybe throw in some notion that the private market is better suited to evaluating this sort odd thing than a government body would be.

Lots of problems here:

Are insurers better than the FBI?
These acts are already illegal and there are people who dedicate their lives to finding this stuff out. An insurer could make something like a few hundred grand on a policy like this if no claim. I suspect a full investigation costs millions.

Are they better than internal controls?
It’s not like a company has nothing to lose here. And yet these scandals happen all the time and no doubt many go undetected. How is an insurer going to assess this risk? They’re likely to demand some private evaluation of the risk on the client’s dime. What’s the insurer adding here?

Does this give you the signal you would want?
An insurance price for a specialized cover like this is not a very good market signal. It renews annually only, it represents only a small chance at profit so they underwriting process is light and there are no outlets for insider information to inform the process. The dirty secret of the equity markets is that insider trading drives much of the value they generate. Nobody can get rich shorting an insurance policy so there is no incentive to find bad guys, just take a pass.

Is this business the insurer wants?
Insurance is a cooperative relationship. They want to find clients who do everything they can to avoid problems and charge as little as possible to cover the residual risk. The only tool that works for poor risks is extreme alignment. Second tier deals trend to have the client feel some multiple of the pain that the insurer does.

What would this business do to they insurer’s risk profile?
Another way to think about an insurer is that all they do is hold lots of offsetting tail risks and only record their net expected value on the balance sheet. And nobody asks too many questions about the continent risks. This idea puts them in the middle of a catastrophic event which is probably already correlated to the rest of their portfolio and happens quite frequently. Bad risk management.

Bottom line, what do insurers do when presented with risk where they have an information disadvantage relative to another market, do not want the business culturally, do not want the risk position the business forces then to take asks do not understand why they are being asked to do it?

They screw you.

one of my jobs is to encourage people to be bold. It’s incredibly hard.  Experiments are, by their very nature, prone to failure. A few big successes compensate for dozens and dozens of things that didn’t work. Bold bets — Amazon Web Services, Kindle, Amazon Prime, our third-party seller business — all of those things are examples of bold bets that did work, and they pay for a lot of experiments.

I’ve made billions of dollars of failures at Amazon.com. Literally billions of dollars of failures. You might remember Pets.com or Kosmo.com. It was like getting a root canal with no anesthesia. None of those things are fun. But they also don’t matter.

More here.

I had lunch recently with a guy that runs a large insurance broker. He said that every year his sales force budgets a big drop in revenue and every year they grow.

Sales production is an incredibly risky and uncertain business and I’ve observed that really good sales people are often extremely risk averse. They know how uncertain it can be and that’s what drives them to kill themselves on every lead. Service is born from fear.

But at the top of the organization there is diversification and meta knowledge of the process. It makes sense to have a lot of people swing for the fences because home runs pay everyone’s bills. But you can wind up with a small group of superstars and an army of losers, which is unfair. Risk adjusting your response to results means going easy on the failures and not lauding the successes as much. After all, luck shouldn’t be worth much.

Attribution bias makes a measured response incredibly hard to pull off. It’s very easy to buy into the story that the winners and losers earned the result on their own.

It takes a great culture to keep a steady hand in a risky business.

Reading and experience train your model of the world. And even if you forget the experience or what you read, its effect on your model of the world persists. Your mind is like a compiled program you’ve lost the source of. It works, but you don’t know why.

That’s Paul Graham.

This is an idea that I’ve been thinking about for some time. As my wife likes to point out to me, I don’t remember much detail about a lot of things,  particularly my own earlier self! Sometimes I feed like I have a finite space in my head and every new thing pushes an old memory out.

What’s more, around about 2008 I discovered blogs and podcasts and my rate of focused leaning stepped up dramatically. Then the Actuarial exams started.

The point is that I’ve been absolutely stuffing my head and I couldn’t possibly remember much of it at any given moment. Instead I have a mental model of the world, of why things happen,  and also a value system that ranks things and acts and people.

In some domains I’m an expert and can make judgements on complicated things with very little effort. For another whole range of subject I have developed a light ‘feel’ of familiarity. The breadth of experience helps with creativity, they say, and I agree even though I don’t know why. I do it because I’m curious. And I like to push myself a bit sometimes.

I do feel sad sometimes at the functional loss of my earlier life. But those pathways only shut down  because they weren’t used, I never spent any time thinking about it.

Someone once said you are what you do all day. Even,  it seems, if you don’t remember it.

So I’m a big fan of one category of business jargon: disruption. Now, to be clear I don’t think it’s a useful general theory of business. It’s just an excellent metaphor and an interesting collection of stories about innovation. That’s it (and that’s enough!).

One of the founding insights of the movement is that there is a bias by makers of products to over-engineer. Best case is that this is driven by the requirements of a minority of very vocal, high-end users. Worst case, it’s driven by the unmarketable whims of engineers. Either way, the product strays from the core value it gives to customers (the “Job to be done” in the jargon) and even company management can lose sight of which features are the killers amid the noise of the bundle.

Fast forward a few years. Technology advances and features get updated. But without a clear idea for which features drive demand, it’s easy to fall off the cutting edge. Along comes a startup who discovers this, focuses on customer need, unbundles the bloat and bang. Disruption.

So out in the wild, look for bloated bundles or other signs of over-engineering when thinking of business ideas. In reinsurance, I sometimes think of catastrophe models as a candidate. They’re incredibly complex and don’t disclose their inner workings to customers. There’s a real movement afoot to pull the science apart from the platform and people are already working on this.

But is that disruption on its own? Nobody seems interested in radically cheaper products in this business. Maybe that’s just how enterprise software works.

In the 70s, it wasn’t the banks providing consumer lending, it was the stores, through layaways and store cards.

It took the credit card companies to intermediate between the banks and the consumer to disrupt and displace the stores in consumer credit.

that’s from The Critical Path, one of my favorite podcasts.

Here’s Michael Pettis :

An orderly rebalancing will be good for the world on average and a disorderly one bad.

The same is true about the effect of a Chinese slowdown on social conditions. People do not generally care about GDP growth rates. They care about their own income growth relative to their expectations. Rebalancing in China means by definition that Chinese household income growth will outpace GDP growth, after many years of the opposite. A best-case orderly rebalancing should result in little change in the growth of household income, even as GDP growth drops sharply. This for example is what happened in Japan from 1990 to 2010, when GDP growth dropped close to zero but household income grew at nearly 2%.

A disorderly rebalancing, however, could result in negative growth in both GDP and household income, with the former dropping more than the latter. This, for example, is what happened in the US in the 1930-33 period – with GDP dropping by around 35% and household income dropping by around 19%. In the case of China, in other words, while elites will suffer in both scenarios, in the former case there is no reason for popular discontent.

Mostly as a data aggregation exercise,  saying something like: “If we get enough of the right data we can price any uncertain process.” see for example this a16z.

This is only one half of insurance,  however, and ignores underwriting,  or the detection of moral hazard.

In gambling terms, insurance is a bet that people are making at a table where they are the dealer. For most circumstances interests are aligned,  which is why insurance works most of the time. But underwriting exists for a reason.

Now I’d be dismissing the Disruptors too easily if I left this argument here. They make their living proving insiders who lean back in their chair sounding smart wrong.

Some consumer lines are very data driven, like auto and homeowners. But these are stifled with regulation and incredibly competitive anyway. My understanding is that at least one venture backed startup in online distribution has fallen down on regulatory concerns. A tough industry to disrupt.