Monthly Archives: July 2018

Subscriptions and durable goods rental

Posted on by

In the WSJ, Philip Delves Broughton reviews Subscribed by Tien Tzuo with Gabe Weisert.

Husqvarna, the Swedish maker of forestry and garden tools, maintains what it calls the Husqvarna Battery Box out of a Stockholm parking lot. The handyman’s hut offers subscribers access to hedge trimmers, chain saws, leaf blowers and other equipment; users pay a flat monthly fee to borrow the tools and return them when they’re done.

My guess is that a central issue in these sorts of businesses is pickup/delivery/installation logistics. Take the yellow, green, and orange bicycles that lately I have seen strewn around the area. I suspect that, on average, the users of this bikes disperse them to less convenient locations than where they pick them up. That leaves the company with the task of going around and retrieving the bikes and moving them closer to where people might want to start biking. I doubt the business model in that case.

Pessimistic meta-induction

Posted on by

Charles Chu explains what it means.

Much of what we believe today is doomed to join other infamous dead theories like Lamarckism (“Giraffes have long necks because they used them a lot.”), bloodletting (“Let me put a leech on your forehead. It’ll cure your allergies. I promise.”), and phrenology (“I’m better than you because I have a bigger head.”).

Philosophers have a name for this concept. To help make it memorable for undergraduates, they kindly titled it the “Pessimistic Meta-Induction from the History of Science”.

The essay makes the case for intellectual humility and for challenging yourself to take the ideological Turing test.

Thinking about privilege

Posted on by

A friend’s son has a job orienting college students on the subject of privilege. The highlighted sources of privilege are primarily race and sexual orientation. Parental wealth also may get throw in.

The sources of privilege that are not mentioned, as far as I can tell, include:

–being tall
–having attractive features (or at least not being extremely unattractive)
–being naturally outgoing (extroverted)
–not having mental disorders, such as autism, depression, or schizophrenia
–not having debilitating physical ailments or physical handicaps
–growing up with your biological father (particularly if you are male). See Autor and Wasserman.
–having artistic gifts

Like race or sexual orientation, these characteristics are generally given to a person at birth and during childhood. On average, and other things equal, someone with one of these characteristics will wind up higher on the social scale than someone without them. I would bet that some of them have stronger impacts on average outcomes than race or sexual orientation. So to me, these characteristics look like privilege.

Is there a non-politically-motivated justification for only looking at race, sexual orientation, and economic class as sources of privilege?

The business model of a new university

Posted on by

Reviewing Warren Treadgold’s The University We Need, John Leo writes,

Mr. Treadgold thinks that a new private university may be needed, not an explicitly right-wing one but one that reflects the intellectual opinions of a spectrum of educated Americans outside academe. When Leland Stanford founded Stanford University in the 1880s, Mr. Treadgold notes, he possessed a considerable fortune, though it would be too small in today’s dollars to put him on the Forbes 400. A lot of even wealthier donors are now available, and many of them are troubled by universities’ hostility to free speech, capitalism, religion and traditional education. A gift of $1 billion, he believes, would trigger the rest of the donations needed to launch such a university. A planning group could seek and find roughly 1,000 good scholars willing to join the faculty. The college itself need not, he says, be larger than Princeton—i.e., about 5,000 undergraduates.

My thoughts:

1. The proposed student/faculty ratio is 5. If each student takes 10 courses a year, then each faculty member has to teach 50 students a year. A faculty member could do this by teaching one course a semester with 25 students in each course. That sounds like a low bar. Maybe the student-faculty ratio could be a little higher.

2. Suppose you pay each faculty member $200K per year. If there are 5 students per faculty member, then each student has to pay $40K per year to cover that.

3. So you don’t need a $1 billion endowment to compete on the basis of bread-and-butter teaching. You need it to compete on amenities. Some of the “amenities” at existing colleges are administrators who seem from the outside to be superfluous. Others, like fancy sports facilities and coaches, appear to be expensive relative to any educational value.

4. If everybody woke up tomorrow with no memory of our higher education system, and educators had to start from scratch, chances are we would settle on a very different model. The problem is that students and parents know the current model, and from their point of view, any deviation from that model is risky. If you define complacency as an unwillingness to try significant innovation, then our higher education system is steeped in complacency.

Nobel Symposium on Banking

Posted on by

John Cochrane writes,

I attended the Nobel Symposium on Money and Banking in May

Diamond and Rajan say that debt is necessary, because it disciplines managers. Debt holders are constantly monitoring management, and running at the first sign of trouble. In direct contrast, Gorton’s debt holders are paying no attention at all most of the time, and then dump debt out of blind fear.

One weak spot of the conference was that everyone was being too polite. Well, everyone but me. Here we have a glaring difference in views. Which is right? I asked the question.

Rajan’s response was very informative: Yes, most retail debt customers are “information insensitive,” and likely even most corporate treasuries using repo as a cash substitute. But among the New York banks who are funding each other very short term, yes indeed they are paying a lot of attention and will run when they see trouble. So the “discipline” story is narrow, for this class of lender and borrower. That seemed to me a nice reconciliation of dramatically opposing views that has troubled me for some time.

I have watched several videos from the event, including the one where the exchange between Cochrane and Rajan occurs.

Cochrane asked another question, which I don’t think anyone answered. In some sense, I think he was asking how there can be a shortage of liquid assets, given how easy it is to trade assets, including stock mutual funds. My thought is that if this phenomenon of a shortage of liquid assets is real (or was during the financial crisis of 2008), it is because of the enormous balance sheets that some of the financial institutions had assembled on very little equity, leaving them with tiny margins of error.

On the general topic of how financial intermediation operates in the economy, I keep saying that we need to appreciate the layering that takes place. Finance is a complex ecosystem, with many niches. Beware of models that simplify it. I would wager that many of the conference participants could not have been able, as of 2005, to explain the nature and significance of repo haircuts, super-senior CDO tranches, or credit default swaps on mortgage securities.

I think that Doug Diamond and Gary Gorton are a bit too much invested in the issue of runs on short-term debt. And from Cochrane’s second post on the conference, I gather that Ben Bernanke is the most invested of all.

Instead, I preferred the speakers, like Alan Taylor, who emphasized dramatic changes in asset values, rather than liquidity. Yes, a sort of run took place in 2008 in the inter-bank lending market, and that run really got the attention of Wall Street and policy makers. But the big build-up in mortgage debt and house prices, followed by a crash, was not a liquidity crisis.

Do you remember my post on the Eric Weinstein interview? One of his glib, provocative comments was

The so-called great moderation that was pushed by Alan Greenspan, Timothy Geithner, and others was in fact a kind of madness, and the 2008 crisis represented a rare break in the insanity, where the market suddenly woke up to see what was actually going on.

I would like to have seen some of the conferees respond to that remark.

Jeffrey Pfeffer on leadership

Posted on by

I watched the video of his Google talk on his book Leadership BS, where he was interviewed by Karen May, who I think functions in management development at the company. Several take-aways:

1. Management advice is a field filled with baloney sandwiches, which can be defined as opinions not backed by any statistical evidence. Pfeffer is very strong on that point.

2. There is an inherent tension in leadership between doing what is best for the leader’s career, doing what is best for organizational success, and doing what is best for employees. You can never attain perfect alignment of those.

3. Intellectual curiosity is an important but all-too-rare trait at high levels in a company. One symptom is that many executives do not read any books at all.

About minute 32 or 33 of the video, in the midst of all this talk about the need to be evidence-based and scientific rather than base leadership behavior on hunches and anecdotes, Karen May says that Google prides itself on looking at evidence and data in its management approach. The video was shot in November of 2015. Since then, we have seen James Damore fired for exhibiting these traits. Which relates to another take-away:

4. Hypocrisy is pervasive in the workplace, as Robin Hanson could have told you. Pfeffer points out that what leaders say they value and how they actually behave are not necessarily aligned. So before you believe “How to work with Arnold” you should do some due diligence and talk to people who have worked with me.

By the way, here was my route to the Pfeffer video:

The Medium site suggested to me that I would like Ryan Holiday’s list of book recommendations, so I checked it out. These recommendations included Robert Greene’s 48 Laws of Power. I was intrigued by the Kindle sample, but not convinced to buy it. So I researched Greene on Wikipedia, and I found a Wikipedia page on that specific book. The Wikipedia article included a quote from Pfeffer complaining that the book was not evidence-based. So then I looked up Pfeffer. I am going to investigate Pfeffer’s book on power. Meanwhile, when I Googled Pfeffer, I found many YouTube videos. So far, I have only watched the one.

How to work with Arnold

Posted on by

Stripe Press has launched, with a book called High Growth Handbook, by Elad Gil, about taking a successful start-up through the stage where it has hundreds of employees. Books scheduled for later release include one from Tyler Cowen and a revised edition of Martin Gurri’s Revolt of the Public that includes a forward from yours truly.

I liked parts of Gil’s book. It focuses on an interesting phase for a business–not a start-up, not mature, but in the process of growing from sub-Dunbar to super-Dunbar, from a tribal band to a Weberian bureaucracy.

But I would have been much more demanding as an editor. I would have gotten rid of all the advice that I think is non-actionable, “Make sure you hire a ____ who is smart.” “Don’t do too little X, but don’t do too much, either.” etc. On some topics, I would have pressed for more specific examples, as when the author interviews Patrick Collison, who says

some of these companies–by no means all, but some of them–are in the process of making either major cultural or organizational errors

You don’t have to name names, but at least describe one or two of the types of errors you are talking about.

In fact, I would have asked Gil to devote more discussion to companies that failed in the high-growth phase. What went wrong at MySpace? Netscape? AOL? Napster?

There are some actionable ideas in the book. One of them is for an executive to circulate a document that describes “how to work with me.” If I had thought of doing something like this back when I was in business, here are some things I could have written, some to communicate with my supervisor, some to communicate with people working for me:

1. Don’t give me too many things to do at once. I need to feel like I have my work under control.

2. If you want me to do something that requires my utmost concentration, let me work on it in the morning.

3. If you want me to do something that I hate doing, find someone else to do it.

4. I often give vague project assignments. Push back with clarifying questions, until you know what to do or until I back off because I realize that I don’t really know what I want.

5. When I give a deadline, it is the last possible moment to complete a project. When you miss a deadline, I am devastated. When you just make a deadline, I am disappointed. Get it done sooner.

6. I hate it when people focus on assigning blame. When something goes wrong, focus on fixing it.

7. I like sharing interesting articles and books that I come across. Feel free to do the same with me.

8. I believe in hiring people for attitude and ability, not for experience.

9. The key attitude is being oriented toward solving problems rather than just complaining. I will not tolerate a chronic complainer.

10. I’ll let a software developer get away with being a prima donna*, if you’ve got the right combination of ability, conscientiousness, and stamina. Show me you can really get stuff done, in which case I’d rather keep you happy and let other employees get annoyed than the other way around.

*I define a prima donna as someone who thinks that their superior talent demands recognition and special treatment

Talent effects and inequality

Posted on by

My latest essay concludes,

In many industries nowadays, small teams of talented individuals can out-compete larger collections of mass workers. Elite skills, reputations, and connections can create barriers to entry that produce high returns. In some important fields, the stars get the best jobs, which in turn enables them to enhance their know-how and their reputations. And the most talented people in one field are likely to work in firms with the most talented people in other fields, creating synergies that increase their rewards even further.

The Fed and Lehman Brothers

Posted on by

I haven’t read Laurence Ball’s book, but I did see the movie working paper. Ball’s thesis is that the Fed could have and should have lent Lehman the money to enable it to reach a more orderly resolution than declaring bankruptcy at the peak of the financial crisis of 2008.

Long after the episode, Fed officials justified their (in-)action by claiming that Lehman lacked adequate collateral, and that this lack of adequate collateral made it technically illegal for the Fed to lend the amount required. Ball points out that at the time, this legal argument was not used in the internal discussion. Instead, Chairman Bernanke and others were thinking that (a) the Lehman bankruptcy would not cause major new problems and (b) public hostility toward the perceived “bailouts” of Bear Stearns and other firms made it politically dangerous to lend to Lehman.

My own views:

1. I am inclined to cut Bernanke and the Fed officials some slack in allowing them to dissemble about the rationales for not bailing out Lehman. I think that the case against bailing out Lehman is pretty strong, and I am not persuaded by the view of Ball and others that a Lehman bailout would have worked wonders for resolving the financial crisis. Even if Ball is right, I think that the officials’ view that a bailout had low economic benefits and high political costs was reasonable ex ante.

2. The doctrine of “lender of last resort” does not suggest that you have to lend to any particular firm. The point is to provide liquidity in order to keep the crisis contained. So, contrary to what Ball seems to be saying, the Fed could perform its lender-of-last-resort function without bailing out Lehman.

3. During the crisis, I thought that more attention should have been paid to reducing the demand for liquid assets, not just trying to make more supply available. A lot of the “collateral calls” and “haircuts” were outlandish. I would have used jawboning to try to scale those demands back to something more reasonable.

4. I am intrigued by analysis suggesting that the actual banking crisis was more severe in Europe than in the U.S. European finance is more concentrated in its banking system. If every financial institution with heavy exposure to U.S. mortgage securities had failed, the U.S. would still have had a lot of functioning banks and other financial institutions. Not so in some European countries. I don’t think that Lehman bailout would have solved the problems in Europe.

Null Hypothesis Watch

Posted on by

From a report on a site called Straight Talk, on a study by Dale Farran and Mark Lipsey, who write

Our initial results supported the immediate effectiveness of pre-k; children in the program performed better at the end of pre-k than control children, most of whom had stayed home. The press, the public, and our colleagues relished these findings. But ours was a longitudinal study and the third grade results told a different story. Not only was there fade out, but the pre-k children scored below the controls on the state achievement tests. Moreover, they had more disciplinary offenses and none of the positive effects on retention and special education that were anticipated.

Those findings were not welcome. So much so that it has been difficult to get the results published. Our first attempt was reviewed by pre-k advocates who had disparaged our findings when they first came out in a working paper – we know that because their reviews repeated word-for-word criticisms made in their prior blogs and commentary. We are grateful for an open-minded editor who allowed our recent paper summarizing the results of this study to be published (after, we should note, a very thorough peer review and 17 single-spaced pages of responses to questions raised by reviewers).

Social desirability bias is a major factor in what gets published as research into poverty. That is why even when I see studies that seem to refute the null hypothesis, I am doubtful that they will replicate.