Little Pirates

This chart is a nice simple illustration as to why an investment advisor might be drawn into pitching a higher risk portfolio.  All you need to do is offer him a bonus if the portfolio performs particularly well.  This creates an incentive for him to offer you investments drawn from the blue portfolio v.s. the green portfolio.

This chart is lifted from this provocative paper: “Low Risk Stocks Outperform within All Observable Markets.”  It’s role in the paper is to argue that this incentive, the tendency of advisors to prefer the blue to the green portfolios, leads to high prices for the blue stocks.  Thus, they become overvalued and lousy investments.

What I find interesting about that is how complementary it is to my theory of Capitalism as the direct decedent of Piracy.  E.g. here we have agency effects creating an incentive for the investment advisor to put his client into more volatile (riskier?) investments, but through the wonders of agency (aka limited liability) he bears no downside for that.

ht: Bob Wyman.

Lists

Someone I admire once lead me to subscribing to the Huffington Post.  What a mistake.  But I did learn something.  If you want to write for the Huffington post the headline of your posting can be, or probably is, generated by a simple grammar.  Usually these involve a celebrity, say scientists or a reality TV star, and a list of ten ways to achive some desire.

Lists are fun.  And taxonomy is easier than real work, or at least it seems that way when you start.  And simple writing guides often suggest the list as possible frame to adopt.

There must be hundreds of blogs and websites that specialize in lists.  Bookmarking sites, obviously, fall into this bucket.  But there ought to be a list of great lists.  I have maybe a half dozen people who I follow on various bookmarking sites, because they list such interesting stuff.  This all comes to minded  because Andrew Gelman draws our attention to this delightful blog of lists.  For example here he has a list of fake books  Dickens commissioned to populate his study’s book shelves.  And this amazing list of foods Twain dreamed of while traveling.  The valuable information that pratfall > kiss > baby > kitten > dog > landscape; if you wish to write box office hit.

So I think I need a list of lists of lists; and now I have at least a first entry.

Call Your Mother

One of the standards battles I find most fascinating is how we allocate time.  Institutions battle for a share: work, good works, civic life, hobbies, study, family, exercise, networking…  The activities that demand rendezvous with others, what we might call social these days, demand coordinated points of rendezvous.    I like that one of the arguments for the 40 hour work week was that it would enable civic engagement.  On the battle field of time religious institutions have lost a lot of ground over the last century, while commercial institutions have successfully grabbed most of that real estate.  I can recall a time when the only thing that could be forgiven for keeping the Sabbath was the occasional pharmacy.

I was reminded of this by an item about an attempt to regulate how people spend their time.  In this case a ban on cell phone use in cars.  What leapt out at me – a few sacred institutions managed to get an exception to the ban:  “There are a few exceptions, however, including emergency phone calls, and calls to parents, children or a spouse.”  So in this case family won.  But, clearly this is an anti-business regulatory overreach; do I not need to call my subordinates!

Here some other links:

  • Fun interactive chart from the NYTimes.
  • That is based on the Census’s Time Use survey.
  • An  examples of what can be done with that data which in this case consisted of  “one record per survey participant which contains information about the person (sex, age, race, employment status, etc.) along with the amount of time that the person spent doing a particular task (ex. washing dishes, watching TV, etc.) on a single day”.
  • For example this chart is fun – reading for pleasure increases with age, more if you’ve had a lot of schooling.  Who are these people with an hour a day to spare for pleasurable reading?
  • Here’s a chart showing hours work/week since 1900; notice the recessions.

Rules, Tools, and Fools

One for my list of anti-dialectic triples.

Bob Sutton wrote in passing: “It reminds of when my dissertation adviser — Bob Kahn, half jokingly — defined organizations as “rules, tools, and fools.”

That is certainly one of the ways I think about organizational design.  Though I’d probably say: “Techniques, Technology, and Talent.”  You might say it’s the job of the talent to find ways to get the techniques and the technology to be foolproof.

Of course, a lot is missing from that list: adaptive, visibility, measures, relationships, incentives, etc. etc.  I guess now I need to come up with T words for each of those.

Reveal that your coworkers are incompetent

I recently read my way through a few dozen posting’s of Bob Sutton’s blog Work Matters.  Lots of fun stuff there if your interested in coordination problems.  I particularly  liked this one  about how you can reveal that all your coworkers are incompetent, malingering, and untrustworthy fools.

A pair of interesting studies on sleep deprivation were published in the October issue of the Academy of Management Journal by  Michael Christian  and  Aleksander Ellis.  In both a field study with 171 nurses and a more controlled laboratory study with students, they found that when people suffered sleep deprivation, they suffered both a loss self control (measured with items like “my will power is gone” and reverse-scored “I feel calm and rational”) and to feel more hostile (measured with items like “scornful” and “disgusted”).  In turn, these foul emotional states led the nurses to engage in more workplace deviance, things falsifying receipts for reimbursement, dragging out work to get overtime, used drugs or booze on the job, said something hurtful to someone at work, and intentionally working slower.  The ugliness observed in the workplace was replicated in a more controlled experiment with 75 students” half the students were kept awake by the experimenters for a night in the lab and the other half arrived from a good night’s sleep in the morning.  The results were replicated in the lab study, and the added twist was that the experimenters created a situation where there was an incentive for students to steal an answer sheet for a test they took, and there was more stealing by the sleep deprived students.

So, to reveal your coworker’s incompetence I prescribe: hard work!  They will then stay up late.  For increased efficacy be sure everybody in your organization is sleep deprived.

Big Five

For the list of frameworks, the Big Five Personality Traits

  1. Emotional Stability: positive adjustment,and seldom negative
  2. Extroversion: social, assertive, active, energetic, zeal
  3. Openness to experience: imaginative, nonconforming, unconventional, autonomous
  4. Agreeableness: trusting, compliant, caring, gentle
  5. Conscientiousness: achievement, dependability

 

Oh look! A gazelle! And it’s name is Efficiency

Dani Rodrik has a lovely short piece up at Project Syndicate:

I was recently invited by two Harvard colleagues to make a guest appearance in their course on globalization. “I have to tell you,” one of them warned me beforehand, “this is a pretty pro-globalization crowd.” In the very first meeting, he had asked the students how many of them preferred free trade to import restrictions; the response was more than 90%.

…maybe they did not understand how trade really works. After all, when I met with them, I posed the same question in a different guise, emphasizing the likely distributional effects of trade. This time, the free-trade consensus evaporated – even more rapidly than I had anticipated.

I began the class by asking students whether they would approve of my carrying out a particular magic experiment. I picked two volunteers, Nicholas and John, and told them that I was capable of making $200 disappear from Nicholas’s bank account – poof! – while adding $300 to John’s.  This feat of social engineering would leave the class as a whole better off by $100. Would they allow me to carry out this magic trick?

This remind me of similar thought experiment about standards.  E.g. if two countries have incompatible standards.  For example which measurement system they use, which side of the road they drive on, or how their electric grid works.  Obviously they can eliminate the resulting friction if one of them switches.  And, after the switch both countries will benefit from increased GDP growth.  But here’s the rub: only one country will pay the switching costs.  Thus it will suffer a setback.  Why would any country ever switch?  Market or regulatory power presumably, and that’s likely to make ’em bitter.

Related: I saw this term go by: “sticky coordination.”  People talk about “sticky prices,” e.g. that when we have economic downturns some prices adapt more quickly than others.  But really that’s nothing compared to how hard it is to shift how things are coordinated.  Coordination is much more embedded.

Cascades of Debt

This article in the New York times is fascinating.  It’s about kidney transplants.  We all have a spare kidney.  But because donating a kidney isn’t like loaning somebody your car for weekend, so the transaction is a bit more complex.  A simple case a child needs a kidney and a parent donates.  That transaction doesn’t surprise people.  From the article…

Until recently, hospitals regularly turned away Good Samaritan donors on the working assumption that they were unstable. … But when Rick Ruzzamenti showed up at Riverside Community Hospital asking to give a kidney to anyone in need, he still underwent rounds of psychological screening as well as medical tests.

The doctors and social workers did not know what to make of Mr. Ruzzamenti at first. He had a flat affect and an arid wit, and did not open up right away. As the hospital’s transplant coordinator, Shannon White, pressed him about his motivations and expectations, he explained that his decision seemed rather obvious.

“People think it’s so odd that I’m donating a kidney,” Mr. Ruzzamenti told her. “I think it’s so odd that they think it’s so odd.”

The hospital wanted to make sure that he was not expecting glory, or even gratitude. Mr. Ruzzamenti stressed that no one should mistake him for a saint.

He had, after all, been a heavy drinker in his youth and had caroused his way through the Navy. He could be an unsmiling presence at work, where he helped manage a family electrical contracting business. He admitted that he did not visit his parents or grandmother enough.

Despite his occasional surliness, Mr. Ruzzamenti said he felt driven to help others when possible. And as he considered the relative risks and benefits of organ donation, particularly to relieve a whole chain of suffering, it just made so much sense. “It causes a shift in the world,” he said.

Perhaps, he said, there was some influence from a Tibetan meditation he had practiced when he was first drawn to Buddhism six years ago. It is known as Tonglen. “You think of the pain someone’s in, and imagine you take it from them and give them back good,” he said.

Mr. Ruzzamenti said he was in a position to donate only because the economy had dried up so much of his work. He was essentially unemployed and could take time off to recuperate. The 30 kidney recipients, he observed dryly, could “all thank the  recession.”

When Mr. Ruzzamenti told his wife… she made it abundantly clear, … she would leave him …

There is much to chew on there.  But let’s not get distracted.  The economy that the parent/child donation is embedded in is as disjoint from the commercial economy as it could be.  Which is why observers of that transaction are so unlikely to ask how the residual debt from the transaction will be cleared.  While, the transaction that Rick engages in is apparently full of mystery.  I think that illuminates how tainted our understanding of social science has been by the reign of one narrow-minded subfield of the social sciences, e.g. economics.

The ease with which we can comprehend the parent/child example v.s. the Rick/<X> transaction leads to a problem – it’s a problem of teasing out motivations.  Apparently the hospital devoted substantial resources to that puzzle when Rick showed up; but in the parent/child case I assume they don’t even pause on the way to the operating table.

 

Motivations aren’t particularly fungible.  You can steal my enthusiasm for mushroom hunting.  I can’t sell it to you.  Though apparently I can sell you on it’s benefits.  Ascription is an anathema to any enthusiasm.

That is a problem when it comes to kidney transplants, and the article is about a work around.

Let’s say the Sally needs a kidney and Bob her parent isn’t a match.  Maybe we can find another child and parent; Alice and Larry and Larry can give his kidney to Sally while Bob gives his to Sally.  That’s all well and good but the probabilities stink.  The chance of a good match between any given child and any random parent is very low.  But we can generalize.

First off it’s not just parents and children were the motivational mystery seems to evaporate.  It doesn’t seem odd than if Sally needs a kidney anybody who’s related to Sally in almost anyway might offer to help – friends, family, church, office, etc. etc.  – goodness even most tenuous of Facebook friends.  But sadly that doesn’t solve the problem; many in need still can’t find a match – even people with huge social networks.

This is the clever bit.  It is possible to create long cascading chains of donors.  N people in need who have friends F willing to donate to help them can be cascaded together so that each person obtains a kidney from one of the friends of somebody else in the chain.  The motivational puzzle: “Why the hell would F donate a kidney to a stranger?” is converted into the non-puzzle “Of course a friend would step up to donate.”

The transaction described in the article has 60 people in it.  30 donors and 30 recipients.  Transaction cascades of any kind require complex coordination.  The reasons some people fetishize the market is how this coordination appears to happen invisibly.  In this case we met another hero in our story.  The former logistics executive Mr. Hil who calling turned out to be coordinating these transaction cascades.

“The chain began with an algorithm and an altruist. Over the months it fractured time and again, suspending the fates of those down the line until Mr. Hil could repair the breach.

I find the details fascinating.  The chains start with a Samaritan and end with a patient who lacks a friend willing to donate.  They are fragile; a donor drops out, a patient dies or lacks health insurance.    The pool of pairs he has to play with is still small – 250 pairs according to the article.

While my favorite part of this article is the bit about how bewildering the establishment finds the Samaritan.  I like it when economic calculus is bewildered; and so too I liked this bit of anti-free market regulation:  “Airplanes carrying donor organs are granted special status, allowing them to move to the front of takeoff lines and ahead of air traffic.”

 

Specialization

When I graduated from college I had a firm opinion.  I felt I had to move to either Boston on San Francisco.  This was based a book I’d read. Jane Jacob’s book about the economic basin that surrounds a city.  Here is a nice lecture she gave in 1983 about the topic.  The gist of this idea is that there is some sort of industry specific network effect that creates powerful positive feedback loops for a given industry such that industries tend to concentrate into a single, or maybe a few, locations.  I figured I had to go where my industry was concentrated.

There are plenty of stories you can tell that are pretty compelling about this.  For example there are towns in China today that make only buttons, and other towns that make only copies of classic oil paintings, etc. etc.    Everybody knows that Silicon Valley has something in the water that means that only there can you do high-tech.

But recently I’ve gotten to wondering, maybe this isn’t true.  Cities, as a economic model, lost much of their competitive advantage with the introduction of the phone (which undermined

the manager’s need to be on site), electricity (which undermined the requirement for power/coal to be delivered via flat water), and modern transportation (which undermined the requirement to walk to work).  Once those all set in the city centers dissipated.  And thus, the golden age of American cities ended.  Is that process over?  I think maybe not – the way that the internet has enabled distributed work is a good example of the ongoing process.

How might we measure this?  Apparently Paul Krugman suggested some time ago the seemingly obvious idea that you just compare “the sum of the absolute differences in industry shares of employment between the two regions.”  (page 12)  And in 1998 this paper was published with this chart that shows the historical trends in regional specialization in the US.  Notice first the bottom line – retail trade; all regions have some retailing so that isn’t concentrated.  Then notice the top one; apparently the least urban activity is the one that is trending toward increased regional specialization.  I certainly didn’t expect that.

What leaps out at me here is the way the rise and fall of regional specialization in manufacturing appears to be so correlated with the gold-age of American cities.

I think I was right at the time.  Wrong about my choice of cities; San Francisco beat Boston – a lot.  I remain unconvinced that we know exactly why though.  These days I still think it is good advice to the young, go someplace where there is an existing network of people doing what your interested in.  But, that said, I think it’s less critical than it used to be.  And, I’m totally confused about that agriculture trend line.

 

 

Forgetting to succeed

I learn from a book that bacteria are unlike life as we know it.  The evolutionary mechanisms are different.  Food scarcity is the primary pressure on them.  When food is scarce reproducing fast is beneficial.  The book mentions two ways the accelerate their reproduction. Both address the same problem copying the genetic material takes time.  First off they shed genes.  For example they will very quickly shed the genes for antibiotic resistance when the antibiotic is absent.  Secondly; recalling that bacteria are a-sexual.  That allows mom a head start.  She can make the copy that will be used by her grand daughters.

The shedding genes appears, at first glance, to be very short sighted.  My house is full of stuff I’m not going to need tomorrow; but yeah I retain to insure against the possibility I’ll need it next week.  The bacteria have stumbled on solution to this problem, they steal genes from each other.  In fact they do it a lot, the percentages are huge.  I think this is amazingly cool.  The community can, and will, shed the gene for antibiotic resistance quickly; but if only a handful of the community retain it then the community can survive the reintroduction.  I do that too.  I discard stuff in my house because I know I can recover it from the city around me.

Much fun can be had with this.  For example here is a fun essay on the evolutionary history of the directories in my Unix PATH.  At each point in time it seemed like a good idea, solved a problem; but now we carry the complexity around.  The essay is written by somebody who is under very different evolutionary pressures; so he’s trying to shed those genes.

I’m reminded of how the 1984 macintosh shed the genes for memory management, because it wanted to reproduce more quickly than the Lisa.  Getting that gene back wasn’t easy, but the design pattern certainly didn’t get lost.

The dialectic between reproducing fast and remembering and copying all the important design patterns is a key challenge in any new product.  It is the curse of experience that you have a deeper catalog of design patterns you feel you must decide if you will or won’t pack them into today’s new product.  I’m always a bit bemused by how casually presumptive some people are about the absolute necessity of packing in this or that thing.  For example: first customer contact v.s. QA?  For example: delivery or modularity?  For example: features or cross platform.

The answer tends to fall out of the R-selected v.s. K-selected nature of your business ecology.  It’s part of what makes small businesses radically different from big ones.  Which reminds me of who eats the bacteria.

So in this amusing game of analogy what plays the role of antibiotic.  QA is a kind of antibiotic, but I think a better example would be the skills that organizations need to have to defend themselves from the dark arts – i.e. the agents that immunize the organization against the numerous bad ideas found in the business cults.

And then finally, let’s says something about how the bacteria draw upon their community much as I draw upon the city around me.  In a business context I think that explains a lot about the survival value that comes from situating your small business inside a geographic region  or virtual community from which you can draw in the craft knowledge you’ll probably shed in exchange for fast growth out of the box.