Lunch Talk: Why Information and Diversity Grows (Cesar Hidalgo at TED)

MIT professor Cesar Hidalgo considers how to deal with diversity and complexity.

tags: lunchtalk, control, system, science, math, economics

Principles of Invention and Innovation (BUS 74), Session 2, Quiz 2.

During Session 2, several teams came up with a typical real estate trade-off: the nicer the neighborhood, the pricier it is going to be to buy or rent there.

Assignment 1. Using divergent thinking, list as many constraints behind the trade-off as you can (no criticism; both pragmatic and wild ideas are welcome). Optional: to help expand the scope of your search, apply either the Three Magicians or the STM operator (Scalable Innovation, Part II, Chapters 6, 9-10).

Assignment 2. In his book "Triumph of the City", Edward Glaeser, professor of economics at Harvard University, writes,

One of the bedrock principles of economics is that free lunches are rare and markets require trade-offs. [...] suburbanites can get a bigger lot at the cost of a longer commute. In comparing metropolitan areas, there is a three-way trade-off among wages, prices, and quality of life.

Question: Can you come up with an example of an existing or future solution that breaks at least one of these trade-offs?

Invention of the Day: Thinking Inside the Box

When we participate in invention workshops and other creative activities, as I often do, we hear the moderator urge us to think "outside the box." Most often, though, nobody knows where the box is. As a result, we often get from one box into another, which is even worse than the first one.

Despite common "creative" wisdom, thinking inside the box can be extremely productive. One of the great inventions in economics of the 19th century was the Edgeworth Box, named after Francis Ysidro Edgeworth (1845 – 1926). While trying to figure out an efficient allocation of limited resources between two people, Edgeworth decided to represent their positions graphically inside a two-dimensional box.

For example, in a simplified model the patent war between Apple and Google can be described as a fight for a position inside the box (Figure 1). At the given moment, the number of patents is fixed, the amount of money at stake is also fixed. Outcome 1 (p1, m1) shows the initial position where Apple has more patents, but less money. Since the number of patents and money is fixed, Google is positioned in exactly the same spot, at the Outcome 1 dot. From Apple's perspective, the purpose of the war is to move the situation from O1 to Outcome 2 (p1, m1), where some of Google's money goes to Apple in exchange for patents. As a result, Apple will have more money, and fewer patents.

The Edgeworth box is extremely useful for analyzing allocations of fixed resources. It is essential to modern finance and economics when it comes to understanding and explaining equilibrium states. (See for example, Financial Theory course from Yale. Econ 251).

For an inventor, it is critical to know where the box is before starting to think "outside the box." Our goal would to discover a dimension where the trade-off inside Edgeworth Box becomes irrelevant.

tags: creativity, trade-off, tradeoff, economics, invention, innovation

Lab Notebook: the meaning of Bitcoin

Money has been around for thousands of years. Amazingly, people keep reinventing it over and over again. Money innovation (not invention!) is always a telltale sign of a deep, underlying change in large-scale commercial systems. It serves two vitally important tasks: value exchange and information diffusion. The growing acceptance of Bitcoin sends a loud and clear message:

Dear Government, we the People, no longer trust your ability to manage our money (The Fed). We also don't trust your shameless handling of our privacy (NSA). Therefore, we are going to create an alternative mechanism for commercial transactions and sharing information about them. The new computing and communication technologies give us the power to do so. 

In the 6th century BC, Lydians developed silver and gold coinage, which made them incredibly rich and powerful. In the 21st century AD, the first respectable government that will support a new trusted currency will have a once-in-a-thousand-years chance to create an economic miracle out of, practically, nothing. I hope it will be an American government.

tags: invention, innovation, deontic, payload, problem, money, solution, growth, economics, commerce

Tesla Motors: $415,000,000 equals 112 jobs

According to SF Gate and other news sources, Tesla Motors is expanding its manufacturing operations in California. The company intends to spend $415M on new equipment, which prompted the state government to give Tesla a $34.7M tax break. The number of permanent jobs created is astonishingly low - 112. That is, to create one permanent job, Tesla has to invest almost $4M into new equipment. By contrast, to add a new software engineering job a startup can invest at least 100 times less — $40K for computer equipment, networking, office space, etc.
No wonder, it's much easier to innovation in the software services domain, than build and equip new factories in the US. With the development of robotics, high-tech manufacturing jobs will become quite rare.

See also my 2010 post regarding Andy Grove's article in the NYT.

tags: trend, economics, innovation

Lab Notebook: Silicon Valley and the Law of Diminishing Marginal Utility

Silicon Valley seems to defy one of the fundamental laws of economics: The Law of Diminishing Marginal Utility. The law, according to an investopedia article (need to find a textbook reference), says:

A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

They illustrate the law with a short video about a hungry girl with a pizza. The first slice of pizza tastes better than anything before.

The second slice of pizza still tastes good, but by the fifth piece, the girl is already full and she hates the fact that she has to eat the entire thing.

Let's try to apply this law to a major Silicon Valley innovation: web-based email. We skip the Hotmail vs Rocketmail controversy and go directly to the Yahoo vs Google email rivalry. In the early 2000s, Yahoo mail was an undisputed leader in this web services domain. The company was giving users 10 or 20 MB storage for free and charged for extra. Then came Google and offered at least 1GB of free storage with its brand new gMail. According to the law of diminishing marginal utility, this move would be "unlawful." That is, why offer people a lot more if we know from economics that usefulness declines with quantity of goods consumed?

Paradoxically, the more storage gmail offered, the more useful its service proved to be to the users, myself included. Millions flocked to gmail, abandoning their yahoo mailboxes.

In general, exponential growth in processing power, storage, and bandwidth (what I call "Machine 1") that Silicon Companies have been driving for the last 50 years makes users happier, defying the economics textbook wisdom taken at face value.

tags: machine1, economics, 10X, innovation, book, google, yahoo

Nobel Prize in Economics: Using models to make sense of models.

Lars Peter Hansen shared 2013 "Nobel Prize" in Economics for his work on models. Below are several slides from his Nobel Prize Lecture. Since I study innovation-related hype, the second slide, which shows how to model distorted beliefs, is quite interesting. Maybe we can use this approach to understand why Gartner Hype Cycle keeps showing up in innovation processes.

tags: science, economics, hype, model

Cognitive vs Noncognitive skills: employment impact

A brief quote from an NBER paper:

.. we find that noncognitive ability has a higher return than cognitive ability for unskilled workers and managers while skilled workers and non-managerial positions face a higher return on cognitive than to noncognitive ability.

Noncognitive traits are common to successful highly-paid managers and low-paid workers. This might explain a certain disdain highly-paid engineers show toward marketing and manager types.

tags: education, psychology, economics

2013 Patent Litigation costs

Just a few data points for future reference:


According to the American Intellectual Property Law Association (AIPLA), in 2013 typical patent litigation costs were as follows:

Source: AIPLA 2013 Report of the Economic Survey

Surprisingly, the costs stayed close to 2005 levels:

Source: The Entrepreneur's Guide to Law. 3rd ed.

The textbook mentions that "Intellectual property represents approximately 70% of an average firm’s value."

tags: patents, law, economics

Lunch Talk: Modeling and Economics (Financial Theory @Yale University ECON 251)

Financial Theory (ECON 251)

This lecture explains what an economic model is, and why it allows for counterfactual reasoning and often yields paradoxical conclusions. Typically, equilibrium is defined as the solution to a system of simultaneous equations. The most important economic model is that of supply and demand in one market, which was understood to some extent by the Ancient Greeks and even by Shakespeare. That model accurately fits the experiment from the last class, as well as many other markets, such as the Paris Bourse, online trading, the commodities pit, and a host of others. The modern theory of general economic equilibrium described in this lecture extends that model to continuous quantities and multiple commodities. It is the bedrock on which we will build the model of financial equilibrium in subsequent lectures. 

00:00 - Chapter 1. Introduction
07:04 - Chapter 2. Why Model?
13:30 - Chapter 3. History of Markets
24:41 - Chapter 4. Supply and Demand and General Equilibrium
37:59 - Chapter 5. Marginal Utility
45:20 - Chapter 6. Endowments and Equilibrium


tags: lunchtalk, model, innovation, economics, control

Invention of the Day: Taxes.

tags: invention, video, economics, history

Lunch Talk: (@Google) Nassim Taleb

Nassim N. Taleb, author of
Fooled By Randomness and The Black Swan, talks about his new book.

Link

tags: lunchtalk, economics, strategy

Deficit-Financed Economic Growth: Infrastructure vs Entitlements

The Financial Times has a blog post by John H. Makin and Daniel Hanson about sustainability of trillion dollar US government deficits. Their general conclusion is that the deficits are ok for now because of the current extremely low borrowing costs. One of their statements piqued my interest:

Eventually, the Federal Reserve’s QE programme of large government debt purchases at a current rate of $800bn per year, largely aimed at sustaining the growth of outlays on entitlements that do not support economic growth, will cause inflation to rise.

With regard to future growth, the current deficit spending differs significantly from the time of the Great Depression. In the 1930s, the US government borrowed money to build modern infrastructure, which during and after the World War II helped rapid industrial growth. At the time, entitlements were tiny and (self-)financed by the new Social Security tax. In contrast, today's infrastructure investments are small while entitlement payments are quite large. The only area of large-scale infrastructure build-up seems to be shale oil and gas pipelines. Will this be enough?


tags: economics, distribution, government, problem

Most VC funds are no better than Russell 2000 index

The Kaufmann Foundation published an analysis of its VC investments. 65% of VC funds performed worse than their closest Public Market Equivalent (PME) - the Russell 2000 index (stock ticker - IWM)

 

(Source: GeekWire, May 7, 2012)

The blind belief in the Risk vs Reward trade-off doesn't work. By taking more risks, foundations don't generate higher long-term returns.

tags: innovation, tradeoff, problem, startup, VC, economics

Lunch Talk: The Great Stagnation

Economist Tyler Cowen presents his book The Great Stagnation at the Singularity Summit in NYC. He argues that we've reached a plateau of technological stagnation and most of today's innovations are incremental at best.

tags: innovation, economics, lunchtalk

Lunch Talk: The Social Security dilemma (Yale Univ.)

This lecture continues the analysis of Social Security started at the end of the last class. We describe the creation of the system in 1938 by Franklin Roosevelt and Frances Perkins and its current financial troubles. For many democrats Social Security is the most successful government program ever devised and for many Republicans Social Security is a bankrupt program that needs to be privatized. Is there any way to reconcile the views of Democrats and Republicans? How did the system get into so much financial trouble? We will see that the mess becomes quite clear when examined with the proper present value approach. Present value analysis reveals the flaws in the three most popular analyses of Social Security, that the financial breakdown is the fault of the baby boomers, that privatization would bring young investors a better return than they anticipate getting from their social security contributions, and that privatization is impossible without compromising today's retired workers.

Link

tags: lunchtalk, economics, dilemma, problem

Lunch Talk: (@TED) The Problem of Self Control.

"Suppose we had another wonderful TED event next week. And during the break there would be a snack and you could choose bananas or chocolate. How many of you think you would like to have bananas during this hypothetical TED event next week? Who would go for bananas? Wonderful. I predict scientifically 74 percent of you will go for bananas. Well that's at least what one wonderful study predicted. And then count down the days and see what people ended up eating. The same people that imagined themselves eating the bananas ended up eating chocolates a week later."

link

tags: lunchtalk, psychology, commitment device, economics

Reinventing stock market for startups.

Turmoil in the financial industry and continuing woes of the European banking system reduce investors' appetite for risk.  As a result, demand for stocks in the US is falling, which in turn prompts companies flash with cash prop up their own shares with buybacks (see Bloomberg quote below). In the current investment climate, startups and VCs are in a poor position because successful IPOs are few and far between. 
SecondMarket wants to solve the problem by providing a stock exchange for shares in small private companies that can't make it to IPO (see VBeat quote below).

Jan. 17, 2012. Bloomberg -- Stocks are getting scarcer in the U.S. for the first time since the bull market began as companies cut share sales to the lowest level since 2006 and buy back equity at the fastest pace in four years.


Jan 17, 2012. VBeat -- ...a re-invention of the small-cap IPO that might be music to the ears of venture capital funds backing tech companies. It now takes an average of 10 years to get a company to IPO, and there are fewer and fewer going public below the $1 billion mark. SecondMarket aims to be a third-route venture backed startups could pursue for an exit if IPO and M&A don’t make sense.
“We want to create a market where anyone who is a 20 percent holder of a company with a valuation of $150 million or more can get liquidity on their investment within two years,” replied Silbert.

The good news for SecondMarket is that NASDAQ used the same strategy to build a thriving exchange for small caps beginning in 1971. Maybe it's not a coincidence that creation of NASDAQ happened in between two recessions 1969-1970 and 73-75, when small companies faced liquidity issues similar to the today's situation.

tags: finance, problem, solution, economics, 10X

Lunch Talk: Modern Marvels - Stock Exchange

An episode from the History Channel series Modern Marvels - Stock Exchange.

Direct link.

tags: lunchtalk, economics

Высоко сижу, далеко гляжу.

Years after becoming the dominant web search engine, Google remained extremely paranoid about Microsoft:

In 2004, prior to the IPO, the company was still hiding its success. “Google didn’t want Microsoft to know how big search was,” says Sacca. “And if you knew how many computers Google was running, you could do some back-of-the-envelope math and see how big an opportunity this was.” ( Steven Levy. 2011. In The Plex: How Google Thinks, Works, and Shapes Our Lives.)

This also helps appreciate how well Google is positioned relative to its business competitors. E.g. the company can easily detect a new hot startup through increased search queries. It allows them to evaluate and buy potentially competitors before anybody else have a shot at them - another information asymmetry provided by a dominant position within a large economic system.

tags: detection, business, model