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Phishing for Phools
By Shlomo Maital
Robert Shiller & George Akerlof
It is really bad journalism to write about a book without reading it. But I’m going to do it anyway, based on an excellent London Review of Books article by John Lanchester. The book is George Akerlof and Robert Shiller’s Phishing for Phools (Princeton, £16.95). My friend Peter Dougherty, who heads Princeton University Press, has come up with yet another great economics book. I plan to read it very soon.
Shiller and Akerlof are Economics Nobel Prize Winners – Shiller, in 2013, for pioneering work in behavioral finance, and Akerlof, in 2001, for his insightful and unconventional microeconomics research. When two create unconventional thinkers like these put their heads together, and write fearlessly, the results have to be good.
Here is an excerpt from Lanchester’s review:
“Phishing for Phools is about ‘the economics of manipulation and deception’. Akerlof and Shiller aren’t using the word ‘phishing’ in the sense in which it’s usually employed…. Here, they use ‘phishing’ to mean ‘getting people to do things that are in the interest of the phisherman, but not in the interest of the target’. A phool is someone who has been successfully phished. If you buy a two-quid packet of ibuprofen, [instead of one that costs 35 pence, a generic package]…..that’s you.”
“Conventional economics struggles to deal with phenomena such as this. Why would rational consumers making rational decisions to ‘maximize their utility’ pay seven times more than they need to for anything? You could bodge together an argument that it’s rational by claiming that the branded version of the drug is safer and more trustworthy – but, truthfully, in a regulated developed market, that’s bullshit. For non-economists, the explanation is perfectly obvious. Somebody is – perfectly legally – trying to rip us off.”
“They talk about the Age of Reform, from 1890 to 1940, and the proof it provided that ‘government, used effectively, can be genuinely beneficial.’ This was replaced by what they call the New Story, beginning with Ronald Reagan’s statement in his first Inaugural: ‘In this present crisis, government is not the solution to our problem; government is the problem.’ The New Story is Akerlof and Shiller’s term for the whole anti-government, anti-regulation, neoliberal narrative in American politics and economics. It is, they argue, just another phish, whose characterization of the economy and of US history is wrong.”
So, have Americans simply been fed a wholly wrong, misleading view of history? Are the government regulators the heroes, preventing phools and phishing, rather than the goats? Do we need more regulation rather than less? Do we need regulators to protect ourselves against ourselves, as the authors show, when we tell ourselves wholly false stories that play into the hands of the manipulators? Let’s keep this in mind, as efforts proceed apace to weaken or destroy the 2009 Dodd-Frank Law.
Why John Arnold Is Disliked for Giving Away Billions
By Shlomo Maital
John & Laura Arnold
If you’re a billionaire, and are busy giving away your money for good causes, you should be widely known and beloved, right? Well, John Arnold (and wife Laura, a lawyer) are billionaires, have a foundation that is giving away their money for good causes – and they are widely disliked. Why?
Arnold made a fortune as a financial trader. His method: Discover an idea, a truth, nobody else saw. Then bet everything you had on it. In 2006 Arnold’s hedge fund Centaurus bet against natural gas prices. He was right. They fell. He made a fortune. In 2008 Arnold bet on a commodities price crash. He was right. Commodities fell. Three years ago, at age 38, and worth $4 billion, Arnold decided to spend the rest of his professional life giving away his fortune. The story is told by Bloomberg Business.
Arnold and wife Laura decided to focus on problems “dragging down the nation that no one else wants to confront”. For instance: research integrity; drug-sentencing reform; organ donations; pension systems that are broken.
“I try to look at supply and demand,” Arnold explains. “Where is the need being met today, and where is there unmet demand?”. Arnold, a moderate Democrat, believes a rich country like the U.S. should provide a high safety net for its citizens. At the moment, it does not.
Why is Arnold unpopular? Mainly for his work on pension reform. Fixing the pension system means slashing payments to people who need and were promised them. Without the changes, the Arnolds say, both governments and pensioners have no future.
Arnold was used to being unpopular as a financial trader. He accepts the criticism of him as philanthropist. His method? Find “leverage points in the system”, and create “higher potential for value added”.
Want to help people? Give away money? It may well bring sharp criticism, when only love and praise are expected. Be prepared for it. You can be punished for doing good, if you rile vested interests. In fact, the more good you do, the angrier some people will become.
Source: Dan Murtaugh, Bloomberg News, Nov. 19, 2015
VC: VERY Conspicuous Consumption – Why?
By Shlomo Maital
Over a century ago, sociologist Thorstein Veblen published The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions (1899), in which he presented his theory of conspicuous consumption – spending by the rich to display economic power, rather than enjoy goods. In the Nov. 14 2015 issue of “T” magazine, the New York Times’ style magazine, is David Brooks’ article on “The ultimate vacation”. Brooks joined a vacation package organized by the Four Seasons’ Hotel chain, for one week, out of the 24-day total vacation package. His opening sentence: “I tried but failed to ward off the second bottle of champagne”. This is Veblen’s conspicuous consumption — with capital C.
The vacation cost $120,000 per person. For 24 days “you fly around the earth in a Four Seasons-branded private jet, taking off in Seattle and stopping in ..Tokyo, Beijing, the Maldives, the Serengeti, St. Petersburg, Marrakesh and new York, going from Four Seasons to Four Seasons”.
Conspicuous consumption indeed. But Brooks speaks highly of those on the tour. “They were socially and intellectually unpretentious. They treated the crew as friends and equals. They have spent their lives busy with work and family, not jet-setting around or hanging out with the Davos crowd.”
Wow. So the really, really rich, who can spend $120,000 on a short vacation, are nice people after all. Wow.
I would like to raise a few issues, Mr. Brooks.
The rich can do whatever they wish with their money. And some of them really worked hard to earn it, though fewer than you might think (8 % return on assets doubles your money every 9 years, even without doing any work at all). But it is hard not to think about what one could do with $120,000, that goes up in smoke in a short vacation.
* Send a worthy poor student to medical school, after which, the resulting doctor saves lives and cures illness
* Feed entire villages of poor people in Asia and Africa for a whole year
* Provide seed money for startups in emerging market countries, some of which will result in successful job-creating companies
* and the list goes on and on….
I’m sure many of the wealthy on that Four Seasons private jet do some of those things. I just wonder how stable our global society is, when so few have so much, and so many have so little. When a handful jet around the world in private jets, and billions have no clean water or toilets or schooling.
When will those with nothing start to come after those with everything, and destabilize the world? Wasn’t that what we called the Arab Spring ..which turned into a desolate winter? Do we really HAVE to have a world in which the freedom to waste huge amounts of money is an undeniable unalienable right?
The Two Brain Centers That Drive Creativity
By Shlomo Maital
How do our brains cook up creative ideas? Functional MRI imaging now enables scholars to track precisely which areas of the brain are involved, when the brain is trying to be creative. Using this tool, Haifa University researcher Dr. Naama Mayseless (in her doctoral research, directed by Prof. Simone Shamay-Tsoory), Dept. of Psychology, found that:
“…. for a creative idea to be produced, the brain must activate a number of different – and perhaps even contradictory – networks. Developing an original and creative idea requires the simultaneous activation of two completely different networks in the brain: the associative – “spontaneous” – network alongside the more normative – “conservative” – network.
In the first part of the research, respondents were give half a minute to come up with a new, original and unexpected idea for the use of different objects. Answers which were provided infrequently received a high score for originality, while those given frequently received a low score.
In the second part, respondents were asked to give, within half a minute, their best characteristic (and accepted) description of the objects. During the tests, all subjects were scanned using an FMRI device to examine their brain activity while providing the answer.
For the answer to be original, an additional region worked in collaboration with the associative region – the administrative control region. A more “conservative” region related to social norms and rules. The researchers also found that the stronger the connection, i.e., the better these regions work together in parallel – the greater the level of originality of the answer.
“On the one hand, there is surely a need for a region that tosses out innovative ideas, but on the other hand there is also the need for one that will know to evaluate how applicable and reasonable these ideas are. The ability of the brain to operate these two regions in parallel is what results in creativity. It is possible that the most sublime creations of humanity were produced by people who had an especially strong connection between the two regions,” the researchers concluded.
In short: As I have been teaching – head in the clouds (“associative brain”) and feet on the ground (administrative pragmatic brain).
I think the crucial connections that Dr. Mayseless discovered can be strengthened. Think of creative ideas. Then think of how to make them practical, useful, feasible, implementable. Together, those two brain centers can change the world.
Guy Kawasaki’s 10 Innovation Rules
By Shlomo Maital
Guy Kawasaki is the psychology grad, in the jewelry business, who became the marketing guru for Apple’s Macintosh and led it to massive success. He has since become a successful venture capitalist and author, (“Art of the Start”) and speaks effectively on startup entrepreneurship.
Here are the 10 rules for successful innovation, given in an address to a conference of educators in Boston, Nov. 16-18: Innovator – on a scale of 1 to 5 (1 = out to lunch on this one, 5 = implement it always and with perfection), score yourself on each of the 10. 35-40 points gets you a high success rating on the Kawasaki scale.
- Make Meaning – Great innovation is motivated by the desire to make meaning and to change the world. Companies that are successful started because they want to make the world a better place. If you are just trying to make money, then you attract the wrong kind of people.
- Make Mantra – You should have a two or three word explanation of why your school or class should exist. Mission statements are too long and not memorable
- Jump to the next curve – The problem with most businesses is that they define innovation as what they do in their business. Define yourself not as what you do, but as the benefit you provide. Great innovation begins in jumping or creating the next curve. Kawasaki cited Western Union as an example of a company that did not do this by refusing to see the benefit of telephones. There are certainly a large number of companies that became irrelevant due to their failure to see the next curve.
- Roll the dice – Don’t be afraid to take a chance and put out something unique to your market. Kawasaki cited Ford’s My Key that allows you to program the top speed into the key.
- Don’t Worry Be Crappy – Kawasaki who was a member of the development team for the first MacIntosh computer, admitted the first MacIntosh was a piece of crap, but he added that it was a revolutionary piece of crap due to some of the revolutionary aspects of the device. “Ship stuff that jumps to the next curve,” he encouraged. If you wait until it is perfect you may miss your opportunity.
- Let 100 Flowers Blossom – As an innovator you may think you have an exact customer and an exact use for what you do. You may encounter a situation where unintended people use your product in unintended ways. If this happens we need to embrace it and let this unintended use blossom.
- Polarize People – Great innovation polarizes people , it is one of the consequences. Anyone who has asked teachers to make the switch to Google docs can identify with this one. (If you have people who truly HATE your product, but also those who truly LOVE your product – your polarized, and you’re on the right track).
- Churn, Baby, Churn – This is the hardest thing about innovation, you need to be in denial and refuse to listen to naysayers.
- Niche Thyself – If you are designing a new product then you need to make sure that what you are doing is both unique and valuable. Find your niche. Be the best in it.
- Perfect your pitch – Customize your introduction to show that you know where you are and who you are talking to. Find out information about who you are talking to.
Oopsie – Crippled Kids Can Walk!
By Shlomo Maital
When our children were small, I recall fondly placing their little feet on mine, and walking around with them, while singing or humming “Teddy Bear’s Picnic” (dum di diddle di dum, di dum..).
Yesterday, a short clip on an Israeli news program brought back this memory poignantly. A loving mother, whose child could not walk owing to infantile paralysis, named Debby Elnatan, was determined that her little boy would walk.
“When he was 2, my son Rotem had doctors tell me that Rotem did not know what his legs were. I began to tie his feet, his hips and his back to my body and legs and we started to walk together. In the end, after some trial and error, I arrived at the product now called Oopsie. The first time I tried it, he collapsed. But a year later, we could leave our home with it and go out into the street, to play or to shop. This gave Rotem a childhood.”
Ooopsie is simply a set of sandals for mother or father and for the child, fastened together. Ultra simple! Among its many advantages: disabled children get to interact with other children at eye level.
According to the website Mako, Rotem is now 19 and is too big to use his mother’s invention. But this month, thanks to cooperation with an Irish company, children with paralysis all over the world can enjoy the invention. The Facebook page of the company has already been swamped with messages from thrilled parents, with video clips showing their children “walking” or even “dancing”. Oopsie costs $500, but parents say, this is nothing compared to the radical change it makes in the lives of their children.
If you know someone with a small child who cannot walk, spread the word. This device is really cool, simple, and in some ways, life-changing, for parent and child. And it reflects one of the most inspiring aspects of creativity — refusal to accept the word ‘impossible’.
Goal-Driven Innovation: the Case of U.S. Health Care
By Shlomo Maital
U.S. health care expenditures ($billion)
The U.S. spends 18 per cent of its GDP on healthcare. Much of the recent rise in healthcare spending has been driven by higher prices and costs.
In any industry faced with rising costs, innovation must play a role. Harness creativity, ideas, new thinking, to get costs under control. Yet in healthcare the opposite has happened. More and more innovation has created amazing medical technologies that costs astronomical sums – devices, drugs, etc. Innovation became part of the problem, rather than the solution — it’s great to know that you can save lives, but how many people can afford to have their life saved, at those prices?
Writing in today’s Global New York Times, David Brooks notes that healthcare inflation seems to be under control, and partly, as a result of cost-saving innovation:
“ …Recently health care inflation has been at historic lows. As Jason Furman, the chairman of President Obama’s Council of Economic Advisers, put it in a speech to the Hamilton Project last month, “Health care prices have grown at an annual rate of 1.6 percent since the Affordable Care Act was enacted in March 2010, the slowest rate for such a period in five decades, and those prices have grown at an even slower 1.1 percent rate over the 12 months ending in August 2015.”
There is naturally some controversy over why precisely health care prices have stabilized. But here is one theory:
Jonathan Rauch, in a report for the Brookings Institution, argues that the health care market is more open to normal business model innovation than ever before. The quality of health care data and analytics is improving exponentially. Pressures to reduce costs are ratcheting up. Profitable niches are growing for efficiency improving products. In the past, most innovation involved improving quality of care at high cost. Rauch described many entrepreneurs who are providing innovations that maintain current quality of care but at lower cost. We seem to be making at least some incremental progress toward a structural reduction in health care inflation.
Innovation indeed is regarded as a panacea, when the world faces severe problems, as with healthcare provision, and increasingly severe budget and resource constraints.
But the innovation effort has to be focused, with a goal. If health care inflation is the problem, direct your innovation efforts toward controlling and reducing costs, rather than ever-more-expensive gadgets and drugs that make the problem worse.
Like all human activity, innovation needs a clearly defined goal – a precise question to which it is directed. For America, the question should probably be: how can we use our creative thinking to keep healthcare prices stable? So far, it seems to be working.
Chinese Innovation: On the Rise
By Shlomo Maital
An insightful new report by McKinsey Global “China’s Innovation Imperative” sheds important light on China’s massive effort to become more innovative.
Here are some of the report’s key insights:
* “to realize consensus growth forecasts—5.5 to 6.5 percent a year—during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation”. In other words up to half of China’s GDP growth must come from innovation. This is no easy task.
* “…about 40 percent of the increase in total factor productivity could come from innovations in higher-level manufacturing and services enabled by the Internet. Other innovations could come from catch-up activities that bring Chinese enterprises up to global best practices as well as breakthroughs yet to emerge. China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.”
* “China has become a strong innovator in areas such as consumer electronics and construction equipment. Yet in others—creating new drugs or designing automobile engines, for example—the country still isn’t globally competitive. That’s true even though every year it spends more than $200 billion on research (second only to the United States), turns out close to 30,000 PhDs in science and engineering, and leads the world in patent applications (more than 820,000 in 2013).”
* “…we identified four innovation archetypes: customer focused, efficiency driven, engineering based, and science based. We then compared the actual global revenues of individual industries with what we would expect them to generate given China’s share of global GDP (12 percent in 2013). As the exhibit shows, Chinese companies that rely on customer-focused and efficiency-driven innovation—in industries such as household appliances, Internet software and services, solar panels, and construction machinery—perform relatively well.”
In general, China has strengths in process innovation, as it proves each time it takes production blueprints from a foreign firm and quickly produces the product. China also appears strong in incremental innovation. Perhaps a new focus should be placed on radical innovation – game changing new ways to create value and to do business.
The mantra of China’s 13th 5-year-plan is “China dreams”. Dream big, China.