Assorted Links

1. This looks like an effective way to do cardio.

2. What we know about heart disease is probably wrong.  Note: While inflammation is likely to be more significant than current treatments emphasize, there are people skeptical of this doctor. 

3. This was a sad day for the UC system - this latest development suggests that no major problems will get fixed. 

4. Most people look at experimental economics as undermining market fundamentalists because of the rational expectation roots of the Chicago School. Here is a take which suggests that when rational expectations is taken too far it eventually undermines market fundamentalism. 

This Era's Pet'

My friend Ben posed an interesting question - what will be the Pet' investments of this era?  He made the point that it isn't obvious to everyone at the time that these companies are ignoring economic realities - many people were convinced to invest in the company and many others decided to work for it before it was exposed as hopeless. 

Some people already had an answer to that: Groupon. It's possible that Groupon will be representative of the issues with start ups in this era, but Groupon's rise and fall didn't occur at the tail end of a bubble. Consumer centric tech start ups have gotten less popular, but there are still many other things to consider.
  • Today's era "bubble" investing is occurring largely away from the public markets. For better or worse, normal investors aren't getting involved in tech start ups until much later in the game. This means there are less high profile cases where individuals lose money, which is why people were so surprised by Facebook's public market performance.
  • VCs are relatively secretive about their return on individual investments, especially failed investments. Many failed companies turn in acqui-hires for undisclosed amounts. When these companies shut down or change directions without an exit their profiles are either scrubbed of investors or are never completed in the first place to avoid damaging the reputation of their investors (Which is silly since all VCs invest in companies that do badly). This means there are less high profile failures.
  • The old economy still has lots of inefficiencies, so there is still lots of room for smart programmers to team up up with people who know industries to fix inefficiencies. This trend can be summarize by anything from smart enterprise where new start ups are going to replace old inefficient software to software eating the world. Either way, it means that there will be many more success stories for every failure. And with all of the successful companies it seems silly to focus on the failures. No one is making fun of Bebo these days, unless it is to point out the elitism and hypocrisy of the founders' new clubhouse.
But even given that, there are obviously a lot of companies with overly optimistic business models and it might be easy to look back and point out some obvious misconceptions. Here are my candidates:

1. Generally ignoring that some users are more valuable than other users is insane.  Looking to 10th graders for investment advice should seem a lot sillier in 10 years later. Some users are much less likely to turn into cashflow down the road and companies that are engaging just those users shouldn't be valued at a premium.

2. It's crazy to assume that user networks are going to remain stable over a 10 to 20 year timeframe. Facebook's valuation is dependent on it not being Myspace.  They bought themselves some time by buying Instagram, but they are going to have to do a lot of really useful things to justify their $62 billion dollar valuation. (The valuation makes more sense if it is seen as an option).  In ten or twenty years, people might decide that the right way to value a social network is more similar to analyzing an active oil well, which we all know will predictably run out of oil (in the case of social networks, eyeballs and engagement) while there are numerous ways to maximize its yield in the meantime.

3. Counting on merely acquiring active users and then being acquired in turn. It worked for Tumblr, but eventually the companies acquiring these users might start to figure out that it isn't worth it.  It's important to remember that during the last bubble there were many companies that were basically worthless that ended up getting acquired before the bust - the acquisition of useless companies even made a few people into billionaires. These companies are successes for those who were able to build and sell them, but in 10 years the idea that a blogging platform was worth a billion dollars should look ridiculous.

4. The idea that users acquired for one reason can be transitioned to other purposes. Digg found out this doesn't work the hard way when it tried to turn its news aggregator into a social network. Yahoo might soon find this out with Tumblr. Just because you have users on your platform interacting with each other doesn't mean that they will want to interact in ways that could be profitable for the platform owner. 

5. That government regulation can be ignored and a business can be built before addressing the fact that the business is illegal. Hopefully these companies still succeed, but companies like Uber and Airbnb and newer companies like Sidecar were built by ignoring current regulations and hoping that by the time they were really challenged they'd have enough public good will to change laws in their favor.  In the future, incumbents might be quicker to challenge fledging start ups in their sector that are technically illegal.

6. Dependable low cost part time labor isn't ubiquitous in a healthy economy. Many companies, including the Webvan type companies of this era, are dependent on low cost part time laborers to make their system work. Without these available workers, the companies would be unable to source workers to deliver food/wash a car/clean a house/drive a car at a cost that makes sense for both the customer and the worker when the company itself is taking a cut of the earnings and paying for insurance.  Whether this turns out to be a misconception has a lot to do with the future economic growth as well as immigration and health insurance laws.  

7. Bitcoin. This topic deserves a separate post, but generally companies that invest in bitcoin start ups when the start ups' success is generally dependent on the price of bitcoins going up just seems crazy - especially compared to the strategy of just buying bitcoins. 

8. Sharing less durable goods (most products outside of housing) drastically increases the wear and tear because a significant minority of participants will treat the shared objects they are renting like they don't own them - because they don't.  This is more likely to emerge as a problem after more sharing based companies attain scale, because as of now many participants in the sharing economy feel more affinity for the people they are sharing with/from because they are all early adopters. 

With the exception of number 1, it would be good if most of these ideas don't turn out to the misconceptions of this era. Number 6 seems the least likely to be a misconception - if anything the gig economy seems likely to be a growing trend enabled by a growing number of market places for short term work.

As Ben pointed out in his post, the idea that companies like Webvan and its ilk were extremely valuable in 1999 wasn't silly to a large group of investors.  And some potential misconceptions would have been absolutely wrong in the past decade - Youtube, which was losing money on each user, is now quite profitable for Google. Facebook, whether or not its current valuation is justified, is bringing in enough significant revenue from its user base that it makes my 2006 discussion with an early investor on how he could convince Mark to just sell to Yahoo for $1 billion because $300 million is a lot of money seem very ridiculous in hindsight. 

And there is still a lot of innovation in the personal technology space that is just waiting for a company to come along and execute efficiently.  Wearable computing means forgetting people's names will be easier to avoid in the future. And the time period when you don't need a wallet, just a phone, and you'll be able walk in and out of a restaurant without dealing with a bill the same way this can be done for cabs today shouldn't be more than 5 or 10 years away. Progress isn't going to stop, but some of our current ideas about what that progress will be are likely to be very wrong right now.

What other ideas about start ups of this era will be seen as crazy 10 years from now?

A few more links

1. Robin Hanson examines why betting isn't more common.  All of these issues he brings up seem relevant, but the introduction of money into the equation seeming rude and highlighting power differences outside the conversation is probably the most important.  Maybe that's why my friends won't make many bets with me... or maybe that's why I don't have more friends.

2. This ghost city, an attempt to replicate Manhattan, in China will be relatively easy to find, or at least recognize.  The story is funny because it combines many of the common worries about China: It covers their over investment in real estate, willingness to directly copy the west and the increasing problem of bad debt.

3. An interesting perspective on the pre-access to consumer confidence survey data provided by Reuters.  In the end, what Reuters is doing is just selling private research. If providing early access to market moving research is disallowed completely that will have some very strange repercussions.  And traders not involved in the HFT game should know enough not to be trading during this time period anyway. (Unfortunately, when I looked at execution algorithms provided by major I-banks they didn't specifically step away from the market, but they would usually stop trading when volume dried up as they often do before economic releases.)

4. Matthew Yglesias almost endorses mercantilism.  The idea that when it comes to mercantilistic policies the public choice critique is generally better than the Ricardian/comparative advantage critique is an important one.


Standard and Poor's is going for an interesting defense.

S&P said in its request to dismiss the case that the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.

And yet rating agencies are still a key part of financial regulations

Avoid Texas?

A lot of people have been talking about moving from California to Texas due to an increasingly unfavorable policy regime in California. But they are forgetting about one of the very unfavorable regulatory regimes in Texas - their friendliness to IP lawsuits.

Patent lawsuits are rife in East Texas.  At first it was just one or two particularly friendly judges, but over time the perception has been that juries are even more favorable to plaintiffs - perhaps because they realize that their local economy is supported by the large amount of patent lawsuits filed in their district.

Companies should make every effort to avoid doing business in places where the litigation environment is unfavorable. It might be hard to avoid patent lawsuits by avoiding doing business in the state, because apparently all it takes is for companies to register in the state and courts may justify the location based on that alone. The American Invents Act might have helped solve this problem already by splitting up joinder lawsuits where one patent troll sues everyone at once so the defenders can have more of a say in the location of the trial.

So boycotting Texas probably wouldn't do much to stop patent trolls. But it would have been funny if it could have potentially helped.

End of Google Reader Link Day

1. Why Youtube isn't the best long term partner for content creators.

2. Reynold's Law - or why subsidizing status markers is a bad idea.

3. Robin Hanson's musings on Orson Scott Card's theory of what makes a story. I've always prefered stories that focus on the milieu more than the character centric stories found throughout the fiction section in bookstores everywhere so I like his theory that the general preference for character centric stories is just an accident of the current environment and will shift as society changes. 

4. Goodbye google reader.  There are other RSS readers, and hopefully one of them will have the ability to search through RSS feeds that I have read. This is very useful as there are many occasions when I remember I found a piece of information from a feed but have forgotten which one.

Interesting Links

1. The Supreme Court ruling on patenting genes will need to address these issues again.

2. Reputation management backfiring, or don't annoy that kid in college who went on to become a journalist... especially if you are spending an estimated $300,000 on reputation management. 

4. The lump of labor fallacy is gaining traction again.  Good thing there are companies like Task Rabbit that are developing other ways for less skilled labor to more easily add value.  And while there are people whose lifetime earnings will be significantly lower due the recession, if policies don't get worse the main long run permanent labor dislocation from the recent stagnation can be limited to the people who chose to go disability. Even this is relatively small compared to the total population - the change was from 7.1 million people in 2007 to just over 8.8 million today.

PayPal Incentives

I'm not sure which people at PayPal are going to take the blame for this little fiasco, but it would be interesting to know what they were thinking.

A 17-year-old German student found a significant security vulnerability on PayPal’s website, and when he revealed the issue to the company, expected to be rewarded.

But PayPal refused to pay Robert Kugler a Bug Bounty, telling him he was too young to participate in the company’s program that rewards people who find glitches in the system. TechWeek Europe reported that Paypal defended its actions in not paying the bounty because of Kugler’s age and because the bug had already been found.

First of all, they are generating bad press over a topic tangentially related to their existing PR problem of being seen as a company that refuses to pay people money they are owed. But perhaps more importantly, while the bug in this case may not have been critical PayPal is signaling to other hackers that they are not necessarily reliable in their bug bounty program when there are plenty of other people out there willing to buy information on PayPal's bugs.

Reinhart & Rogoff Irony

The Reinhart & Rogoff saga continues.

One point that hasn't been addressed: Outside of the issue about the significance of the data errors, the main complaint seems to be that Reinhart & Rogoff didn't do enough to clarify that the correlation between high levels of sovereign debt and low growth was not necessarily causal. Countries often had debt because they had low growth, the high debt isn't necessarily the cause behind low growth.

Critics of Reinhart & Rogoff then go on to point out that this paper was a major driver behind the austerity movement because politicians supporting austerity often cited this study. I'm not sure if people making these claims really think that Paul Ryan would be okay with budget deficit without being able to talk about a 90% level in debt/GDP, but it's funny that they are making the same mistake they accuse Reinhart & Rogoff of making.

Rationality improvements in the 3rd millenium

The question is simple - what are the biggest ways that people in society are acting more rationally since the start of the third millenium?

1. A/B Testing - Testing two products and seeing which one people like better has been around since New Coke improperly replaced Coca Cola Classic.  What is different in the third millenium is that with so much business being done online it's both easier and cheaper to test various options against each other. Different pages for customer check out, different email marketing campaigns and many other approaches can be tested against each other randomly, quickly and cheaply. Zynga is well known for doing heavy A/B testing in its monetization, retention and recruitment of online casual gamers (unfortunately for them what worked best was some variation of massively spamming online friends or their own Facebook wall in order to receive power ups in game, which Facebook cut down on). At the very least, randomized controlled trials are gaining a much stronger foot in the business community than every before.

2. Rationality communities and rationality materials have spread a lot thanks to the internet. We have websites like and lists of common biases at the tip of our fingertips.  Before the access to the type of material on these sites was restricted to academia, libraries and some relatively specific social groups. Finding books on rationality has also never been easier.

3. Smart phones have rendered debates about most facts relatively useless. If people are wondering who was actually president was in 1969 it's really easy to figure out in a few seconds.  Before ubiquitous access to the internet (Google and Wikipedia), people who disagreed about common factual matters would have to share related facts ("Don't you remember that Nixon called Buzz Aldrin and Neil Armstrong while they were on the moon? The moon landing was also in 1969.") and hope that they could come to a common world view through agreement on peripheral facts. That process has been largely replaced by the internet giving everyone access to most common facts.

4. Scholarly research is more available than ever before. Anyone searching for articles will find that there are still many pay walls, but there is progress being made to open up research access to the general public. However, until old papers like JSTOR also open up the references to older papers in newly published work will still leave those without access behind the pay-wall in the relative dark.

5. Prediction markets. People have started trusting prediction markets more than most experts, though there have been a few exceptions.  Idea futures and expansions on them such as state contingent idea futures has been a pet idea of Robin Hanson for some time.  Regulators haven't been too friendly and/or the market place isn't quite liquid enough for most markets, so while it is interesting that there are places out there which curates an active market for people who want to put their money where their mouth is, a lot more would have to happen on this front for it to be truly significant. 

6. Much better analytical tools. I may be a bit biased for even including this idea on the list, but with AI largely disappointing (though many people are now finding a tool like Siri useful), the ability for people to utilize computers in their analysis has vastly increased in the past decade.  With the evolution of tools such as Palantir, it is becoming much easier to look through the connections between large amounts of data.

7. Better ways to organize and present information. Wikipedia, reddit-type threaded message boards and task organizers like Asana and programming version control such as git have been quite useful. Blogs by experts are also very interesting, and their ability to crowd-source their readership for ideas/answers/corrections should not be underweighted. The investors in Quora certainly think this space is valuable. There are enough ideas in here that it could have been at least a few points on the list.

There have also been ways in which rationality has decreased - more and more of public, private and scientific life is becoming politicized. But reviewing the above list makes me a bit optimistic. While not the most important, I think that the rise of A/B testing is probably the most underrated trend, while #3 and #7 should have the widest impact.

Hat tip: Kevin Simler for some of the ideas mentioned above