10,000 Hours of Non-Deliberate Practice

Deliberate practice is a very important.  When learning a skill, breaking down ideas into small pieces and mastering those segments can lead to competency and expertise if the process is repeated properly over a long enough period of time. 

Many people will put in the hours but will not actively engage in practice. This phenomena is everywhere, but it is most easily found in video games.  One account of players actively not learning can be found in a blog about StarCraft 2 on TeamLiquid.  In this account, the author (a player who was ranked among the top 85% percentile of all players) plays a strategy that has a counter so simple an absolutely new player could easily be coached to beat it via simple instructions. Most people he starts out playing it against do beat him, so he soon ends up playing in a league with the bottom 35% of players. Soon he starts winning about 50% of his matches with a strategy that is very simple to beat.

The mindset of the players who have been playing for a long time and are still really bad at an activity is interesting. Some of them have played for many years, and perhaps if you include their original StarCraft experience they might soon be candidates for the 10,000 hours needed to develop true expertise. And yet this is a group of people who have put in tons of time but have remained generally incompetent. It doesn't make them stupid, but they are definitely suffering from some forms of cognitive bias. Besides the relative immaturity of the players involved (both the author and his opponents), a few things stand out:

1. The losing player blames the game, claiming imbalance where none exists.
2. They declare that the player was not playing fairly. In Starcraft, "cheese" is what other games call cheap.  In both cases, the player tries to add extra rules to the game that their opponent isn't necessarily going to follow. This is a little reminiscent of investors creating structured products and claiming that they never expected housing markets to be correlated on a national level during the 2008 financial crisis.
3. They don't look up how to beat the specific strategy and apply the technique. Even more surprising is that some of the players who lost to the author had actually read his blog in which he describes quite clearly how to defeat the strategy.
4. Perhaps the most important factor is that most of the players who have been stuck at their level for a long don't conceive their actions in clear and defined plans. They act on feelings and find it hard to explain why they did what they did when thinking about the game they just played.

The importance of a plan is learned in many ways, but I was first exposed to it through chess.  Middle game rule #1 of the Thirty Rules of Chess* is probably the most broadly applicable rules of the thirty rules.

M1. Have all your moves fit into definite plans.

Rules of Planning:
a) A plan must be suggested by some feature in the position.
b) A plan must be based on sound strategic principles.
c) A plan must be flexible,
d) Concrete and,
e) Short.

Evaluating a Position:
a) Material
b) Pawn structure
c) Piece mobility
d) King safety
e) Enemy threats

Without a clear reason behind actions, in a chess game, a video game or in any activity requiring strategy, there is little room for significant improvement. Playing without a plan or a way to determine whether you are doing well or not is just as bad. 

So if you want to avoid 10,000 hours of non-deliberate practice, making sure that actions are formulated around plans with ways to determine whether or not the plan worked is a necessary start. 


*Reuben Fine's 30 rules of chess aren't really rules - they are more like suggestions that should be followed about 80% of the time by the average club level player.

Rent Seekers Fighting Back

Rent Seeking is using political lobbying to increase one's share of existing wealth without creating additional wealth. In many cases, the rent seeker actively prevents new wealth from being created in order to protect their share. The obvious example of rent seekers are patent trolls, but more recently other rent seekers have been in the news.

Car dealerships are a great example of the rent seeking class. Politically influential on a local and state level, car dealerships have after a long history lobbied for and gotten laws that force manufacturers to sell through them rather than directly to the consumer. There isn't a Walmart or Costco of cars because of laws designed to protect dealerships. These laws prevent manufacturers from significantly changing the terms of their relationships with their dealers and requires that they use essentially the same business model that existed before the information age. The Big Three automakers don't just have to contend with a larger union workforce than foreign competitors, they also have to keep doing business through many more of their inefficient existing relationships thanks to car dealership franchise laws that force manufacturers to continue to renew their contracts with dealerships*. This legal monopoly that the dealers have results in a transfer of wealth from consumers and manufacturers to the dealerships. For more detail on this subject, see this paper State Franchise Laws, Dealer Terminations, and the Auto Crisis.

These rent seekers recently won a victory in New Jersey when Tesla's direct sales to consumers were banned. Tesla had no previous existing relationship with dealers, and the existing law does not have provisions to handle a car company selling directly to consumers without giving a cut to some politically connected middlemen so Tesla sales were banned in the state. The mentality of the rent seekers is captured perfectly in this article on The Verge.

"This Musk guy, he wants all the profits for himself," says Tom Dougherty, a 25-year veteran of the business who now works in sales at the BMW dealership in upscale Princeton, New Jersey. "They wanted to go direct, which means no sales force. That’s cutting out a lot of people. No way that’s gonna fly."

Go back to the definition of rent seeking - these dealers think it is perfectly normal for them to insert themselves into a transaction between two parties that have no relationship to them, Tesla and the consumer, and take a cut from that transaction. It would be more efficient in the long run to pay the dealerships and sales people to find new jobs than it would be to continue having them and any future employees muck up the automobile transaction process with their legally protected inefficient local monopolies.

Another group of rent seekers are the owners of taxi medallions. Taxi's are protected from the pressures of a competitive market by a policy that grants them a legal monopoly as long as they operate in a specific manner. Taxi's can't compete on price, and they lobby for restrictions in the number of medallions issued so they weren't forced to compete very much on service quality either. That changed when Uber, Lyft and Sidecar started turning anyone with a car and spare time into potential competitors to taxis.

But a few days ago taxi companies won a victory in Seattle when they restricted the above companies to only having 150 cars active at a time. This limitation will make it very difficult for consumers to efficiently use the services of these companies.

It's unfortunate that rent seekers are winning these battles - whenever rent seekers win it means that innovation is delayed and consumers are inconvenienced. All of this happens so that parasites like Tom at the dealership and taxi medallion owners can claim a share of wealth that they are only getting because better people are being kept from performing the same job. 


*Ironically, during the auto bailout bankruptcy reorganization many Republicans remained either blissfully or willfully ignorant about how car dealerships are inefficient legal monopolies backed by the government. Their continued existence has very little to do with free markets.

Adult as a Term of Approval

C.S. Lewis was a fantasy author, and he has a great quote regarding his critics who worried about adults liking stories that are considered childish. 

Critics who treat 'adult' as a term of approval, instead of as a merely descriptive term, cannot be adult themselves. To be concerned about being grown up, to admire the grown up because it is grown up, to blush at the suspicion of being childish; these things are the marks of childhood and adolescence. And in childhood and adolescence they are, in moderation, healthy symptoms. Young things ought to want to grow. But to carry on into middle life or even into early manhood this concern about being adult is a mark of really arrested development. When I was ten, I read fairy tales in secret and would have been ashamed if I had been found doing so. Now that I am fifty I read them openly. When I became a man I put away childish things, including the fear of childishness and the desire to be very grown up.

In searching for the context of the quote, I came across the excellent essay On Three Ways of Writing for Children. Towards the end he makes the point about how realistic fantasies can be much more dangerous than obvious fantasies.

The dangerous fantasy is always superficially realistic. The real victim of wishful reverie does not batten on the Odyssey, The Tempest, or The Worm Ouroboros: he (or she) prefers stories about millionaires, irresistible beauties, posh hotels, palm beaches and bedroom scenes—things that really might happen, that ought to happen, that would have happened if the reader had had a fair chance. For, as I say, there are two kinds of longing. The one is an askesis, a spiritual exercise, and the other is a disease. 

In other words, 50 Shades of Grey represents a far more dangerous fantasy than Game of Thrones. And C.S. Lewis was saying this before the time of reality TV.

Assorted Links

1. Counterintuitively, test prep actually helps minorities.  Perhaps a less politically correct interpretation of SAT research more generally is that it highlights how general intelligence factors and conscientiousness are heritable. These traits are correlated with both higher income and outperformance on standardized tests. 

2. Rent seekers win a round in New Jersey. If there is economic activity going on around automobiles in New Jersey, the dealerships want their cut even though they aren't adding any value. Many of these dealership owners are presumably Republicans, so this is an example of rent seekers in the "free market" party winning a round.

3. Technological adaptation favors the very young.

4. Risk aversion or approval seeking behavior by college women. The politically correct explanation is that it is the males who are overconfident. 

Random Links

1. Tracking the Ukrainian conflict - live. (Hat Tip: Garry)  The best way to pressure Russia seems to be to use the Magnitsky Act against any high profile Russians affiliated with Russia's invasion. Additionally, here are some interesting thoughts on how much US credibility actually matters in foreign affairs.

2. The perils of excess information.

"Once an experienced analyst has the minimum information necessary to make an informed judgment, obtaining additional information generally does not improve the accuracy of his or her estimates. Additional information does, however, lead the analyst to become more confident in the judgment, to the point of overconfidence."

This creates an interesting problem for asset managers who should know all of the risks to their portfolio but for whom overconfidence can be quite dangerous.

3. The French do seem to be more forgiving of personal indiscretions. After this poll I could see DSK entering politics yet again.

4. Scott Sumner on Abenomics

Finance Related Links

1. A valuation expert thinks about What's App from a valuation and from a trading perspective

Damodaran's trading perspective of looking at cost per user sounds plausible, but I wonder if the calculation was as simple as "Facebook messenger is going to be worth X% of the company in the future. Buying Whatsapp at least doubles Facebook's chance of dominating the message space, and X > 22% so it is worth paying almost 11% of the company for Whatsapp."  Also, from a valuation perspective Facebook doesn't have to monetize users more than 1 dollar a year in the short term, they can keep Whatsapp's promise to be ad free for 5 years and only later start aggressively monetizing a greater user base.


He's trying to teach the idea of margin of safety, a long term perspective and investing in what you know, but it's interesting that in doing so he is highlighting investments that definitely underperformed Berkshire's book value as a whole. The farm is worth 5 times the amount it was bought in 1986, Berkshire stock is up over 5000% since 1987.  The actual calculation is more complicated than that since the farm gave off earnings in the meantime, but the difference is still quite notable.

3. MTGOX, the original bitcoin exchange, is down right now

It could be that they are insolvent or they are just particularly incompetent, but it is probably a combination of both.  The coins on the exchange, which could not leave MTGOX custody, were trading at less than 30% of the value of bitcoin on other exchanges.  It would be amusing, but highly illegal, if they were actually buying these discounted coins and arbitraging the difference on other exchanges to make it back to solvency.

Facebook is Buying Continued Relevance

When Facebook was going public they bought Instagram for around a billion dollars. Instagram was succeeding at something Facebook was trying to do - get teens to engage with a photo-sharing and social network app on mobile. Facebook paid about 1% of its market capitalization to own this emerging company. Later data revealed that it was definitely a good move - people really like Instagram.
   
More recently, they paid a lot more for Whatsapp, a messaging app founded in 2009. They paid $16 billion, or $19 billion dollars when restricted shares that will paid out as retention bonuses are included. That works out to over 10% of Facebook's current market capitalization.  Whatsapp was starting to beat Facebook in the messaging space - in most of the developed world outside of Japan and Korea Facebook and Whatsapp are the number one and number two messaging apps (It's unclear if counting Apple's iMessage as a separate app would change the math significantly).

There is no question that owning the messaging and mobile photo sharing spaces is what Facebook needs to do. And the mobile messaging space in particular appears to be very profitable. Line has been monetizing their user base quite well recently. But the big question is whether or not these nascent competitors that Facebook bought will continue to dominate the market for the foreseeable future.  

Zynga tried to implement the strategy that Facebook is applying when they bought Omgpop, the company behind the popular app Draw Something. Zynga wanted to get a foothold in the mobile gaming space but found out that success was not repeatable. While the analogy is worrying considering Zynga's subsequent troubles, Facebook is in a signficantly better position. With Whatsapp the network effects are stronger and there is no pressure for Whatsapp to create any other hits - they just have to outcompete other messaging apps and monetize their current business. 

But if consumers move on to other methods of communication in a few years, Facebook will have to buy the new competitor in the space if they are unable to innovate successfully. The social space is adapting to new technologies and is changing much more quickly than other areas. If Facebook needs to continue to buy competitors to keep their mindshare with consumers constant they will dilute their shareholders before they are able to deliver significant value. They might also start to attract the attention of the FTC.

One thing that this acquisition highlights is just how technology companies are threatened by the changing technology landscape. An investor who is bullish on technological innovation should be wary when buying the current technological incumbents - these incumbents risk either be outcompeted by new entrants or having to buy them at inflated prices.

Any press is good press, right?

The current story with Under Armour and the US Olympic speed skating team could test that hypothesis. There is a lot of speculation about whether or not the suits, which have vents that might be making them less aerodynamic, are holding the team back from winning the medals they were expected to win.

Under Armour, the only thing holding the US Olympic speed skating team back.

I'm guessing that wasn't the message the marketing executives were going for when they decided to sponsor the speed skating team. In actuality it should probably work out okay for them since their name is being mentioned in a lot of places. Also, the product that isn't working optimally, olympic speed skating suits, isn't something that is or could generate significant earnings for the company. This doesn't seem to be anything like the Lulu Lemon bend over test situation where consumers were starting to notice their favorite brand was declining in quality. As strange as it might sound, this is probably a case where Under Armour does a little bit of damage control and benefits from the free press. It will be interesting to look at this issue again in a year or so and see if there was any noticeable impact.

Russians officials are bad at propaganda

The sorry state of the hotels the media are staying in at Sochi have themselves become a major story of the Sochi Olympics. It's a sad story because the hotels were probably fully funded, and it is likely that the extreme level of corruption innate in the workings of Russian government and business led to their current incomplete and dilapidated state.

What makes this story even more of a tragicomedy is how Russian officials have responded to these stories. The WSJ article on this, titled Russian Officials Fire Back, is quite peculiar.

First, Dmitry Kozak, the deputy prime minister in charge of Olympic preparations implied that foreign journalists are making the whole thing up out of bias against Russia. Not only that, but he has proof they are making up stories because they have surveillance video from the hotel rooms which show journalists doing things that would destroy the showers before they take pictures to post online.  When asked directly about surveillance video (which he implied was aimed at the showers of the visiting media) he was pulled away by an aide who apparently realized that their boss was going down a path where he was admitting to much worse wrongdoing in order to cover up general incompetence. 

In a later press conference, Kozak said something un-ironically that is quite scary.

"The realization of such a project is an enormous victory for the entire country," he said. "As we say in Russia, victors don't get blamed."

In the West there is also a saying, "Winners write the history books." But when it is said by a prospective winner they are admitting that they are being evil but will be able to cover up their misdeeds due to the lack of influence of the losers. Apparently in Russia, government officials still take the attitude that they won't be held accountable as long as they achieve certain primary goals. 

And with the exception of Vladamir Putin's spokesman, who shows up at the end of the article, none of the officials quoted seem to worry about sounding like corrupt despots who think they can change reality just by lying enough.

If it is this bad when the world spotlight is shining brightly on Russia, it's scary to think about how corrupt and broken things are on a day to day basis.

Negative EV Superbowl Betting

Bloomberg had an article before the big game on how amateurs and professional bet on the Superbowl.  Amateurs like lottery ticket type payouts - bets that pay off in low probability situations. The two trades highlighted in the article were "Will there be a safety" and "Will there be overtime?" 

Thanks to the first play of the game, amateurs made out well if they bet the first score would be a safety (or even if there would be a safety at all). But it was yet another game without any overtime. The amateurs pushed the overtime odds from a 13 to 1 payout to a 6 to 1 payout - and despite a small point spread it didn't even come close to paying off.

In general, the favorite trades of retail "investors" are either even odds or ones in which they risk a little capital to make a lot. In general, risking a lot of capital to make a little bit just doesn't seem fun or safe - even when the probabilities are in the investor's favor.  It's also a lot more fun to make or even read about high payoff bets than it is to look at all of the bets that didn't pan out. 

And while these bets are often negative expected value, they can sometimes make money. Plus, having money riding on random events can turn a boring game into something interesting. So while retail bettors are going to lose money on average, maybe the bets aren't negative expected value after accounting for psychic benefits.