Lunch Talk: Robert Shiller on Innovation in Financial Markets

Recognized as one of the most far-seeing political economists of our time, Robert Shiller is known the world over for his brilliant forecasts of financial bubbles and his penetrating insight into market dynamics and how human psychology drives the economy. For his empirical analysis of asset prices, Robert was awarded the 2013 Nobel Prize in Economics.



tags: innovation, finance, lunchtalk, networking, money

BitCoin vs PayPal: a 100X+ difference

Both BitCoin and PayPal allow parties who don't trust each other's identity to exchange money electronically. The big difference is transaction costs. Because PayPal uses the existing system for electronic payments, it extracts high fees from the seller; the smaller the transaction, the larger the percentage of the fee. In short, PayPal doesn't scale down.

In contrast, BitCoin transactions are almost free. Moreover, they scale down as computing power (thanks to the Moore's law) becomes cheaper over time. The adoption of BitCoin or any similar monetary transaction system should stimulate development of businesses that involve high-volume payments. If posting on Twitter is free, BitCoin transactions should also be free.

Companies that will make Bitcoin payments reliable and secure are going to reap huge benefits in the mobile and financial markets.

tags: money, deontic, payload, control, machine1, machine2, finance, commerce, 10x, 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

Lab Notebook: a computer security disaster waiting to happen.

Legacy computing systems are notoriously difficult to retrofit for new threats. Recently, Target got hacked, with in a possible loss of 110 million user records (including mine). Now, the banks have discovered that their good old ATMs need to be upgraded to new software to be ready for new hacking dangers. According to Bloomberg Newsweek,

When ATMs were introduced more than 40 years ago, they were considered advanced technology. Today, not so much.
Inside every ATM casing is a computer, and like all such devices, each one runs on an OS. Microsoft’s 12-year-old Windows XP dominates the ATM market, powering more than 95 percent of the world’s machines and a similar percentage in the U.S., according to Robert Johnston, a marketing director at NCR (NCR), the largest ATM supplier in the U.S.

For banks, investing into a massive upgrade of an old computer system would be a waste of money because customers are switching to mobile payments. We can deposit checks, pay bills, and invest with a smartphone. The only thing we can't get from the smartphone is beer physical cash. A lot of startups and established companies, including Square and PayPal, are going after this market. The success of BitCoin is also a strong indicator that physical banking is dying.

If the banks don't invest in a rigorous new security system, old ATM networks will become a juicy target for hackers. Like any other parasites, hackers love weak targets: newborns and elderly, a legacy ATM system being the latter. A computer security disaster with a major ATM network will speed up the adoption of digital currencies immensely. A great financial play would be to buy a lot of bitcoins, then hack an ATM system just to scare people into using the new technology.

tags: innovation, deontic, payload, system, money, business

Lab Notebook: Why money technology works

5 goats = 1 cow
12 eggs = 4 loafs of bread
1 gun = 2 horses
....
1 goat = 20 loafs of bread
1 horse = 3 goats
...

All these barter equations carry enormous amount of information about goods involved in the exchange and rules to calculate their "aboutness," including expectations about the future (weather, hunger, wisdom of the ruling king, etc.) The more goods, services, and experiences (GSE) are available, the more information is necessary to make calculations and decisions whether to transfer the GSEs into one's future.
When instead of the barter equations we use money, we compress huge amounts of GSE aboutness into a single number. That is, from an innovation perspective, money and markets are compression mechanisms. The compress payloads, so that we can increase the GSE space exponentially.

Thousands years ago, Spartans used heavy metal bars to represent value. You couldn't carry it; only mark up one's ownership of a "slice" of iron.
Today, we use hard drives of financial institutions to accomplish the same task. Except, using computer technology and market mechanisms, we managed to compress our expectations about the past, present, and future of a myriad of GSEs in a bunch of zeros and ones.

5 goats = 0000010000
12 eggs = 0000001010
1 gun = 0001010010
...

The amazing aspect of this mechanism is that money and markets allow us to decompress a single number into all kinds of GSEs - pure magic.
tags: invention, innovation, money, technology, book, tool, control, deontic, payload, aboutness

Lunch Talk: National Geographic, Modern Marvels - Money.

National Geographic episode from the Modern Marvels series - How physical money is made in the US.

Direct link.

tags: lunchtalk, money

Invention of the Day: Permanent Loan.

From A History of Money: From Ancient Times to the Present Day, by Glyn Davies:

The Bank of England came into being by the Ways and Means Act of June 1694 and was confirmed by a Royal Charter of Incorporation (27 July 1694). The Act makes it clear that its real purpose was to raise money for the War of the League of Augsburg by taxation and by the novel device of a permanent loan, the bank being very much a secondary matter.

The £1,500,000 was to come from two unequal sources; £300,000 from annuities, and the major sum of £1,200,000 from the total original capital subscriptions to the ‘Governor and Company of the Bank of England’. In return the Bank was to be paid 8 per cent interest plus an annual management fee of £4,000. Thus for just £100,000 a year, and some vague privileges to a bank, and with no capital repayment burden to worry about, the government received £1,200,000 almost immediately.

This was an astonishing success given the abject failure of a number of rival banking-type institutions, but not so surprising given the speculative boom in other kinds of companies being formed around the same time. From the government’s point of view it was an object lesson of the advantages of borrowing as compared with taxation to meet sudden emergencies.

Over time, what was invented as an emergency measure had become a norm. Governments borrow, assuming that the loans are permanent and get surprised (remember Greece?) when lenders ask for their money back. Oops. Nobody thought of this scenario.
Moreover, since the old emergency measure is no longer available, the only other option remaining is creating new money from scratch. 

 

tags: money, control, invention, economics, government

Invention of the Day: Credit Card system

Bloomberg recently published an article with a brief history of money, describing the transition from coins to credit cards. The credit card piece caught my attention because of its American roots:

The modern credit card is an American creation, devised in the credit boom following World War II. First came the Diners Club card, introduced in 1950. Then, in 1958, the BankAmericard, ancestor of Visa, and the first universal credit card issued by a bank and generally accepted by a large number of businesses. But only in the 1990s did credit cards become truly global, widespread beyond North America and the U.K.

Of course, a credit card isn’t itself money, but a way of spending it, moving it and promising it. With credit and debit cards, money has lost its materiality. It can be called up virtually anywhere in the world instantaneously.

After some digging, I found a US Patent issued in 1923 describing the concept of a credit card system, which is really close to the one we've got today. Here's how the inventor envisioned the credit card:

 

 

20 years later another patent mentions the connection between credit card and travel.

Many business institutions, of which commercial air lines and the retailers of gasoline, oil and like supplies for automotive vehicles to the motoring public are an example, have a large number of outlets or places of business, frequently scattered over a wide territory, from any one of which credit may be extended to customers. In order that this may be done, the customers are usually furnished with an identification, commonly referred to as a credit card, bearing, among other things, the name and address of the customer entitled to the use of the same.

 

Only with the proliferation of computers and cheap long-distant communications, the credit card business took off in the 1960-1970s.

tags: s-curve, infrastructure, business, money, system, evolution,

An ancient business recipe for modern success.

In 2009, I commented on the similarities between eBay and ancient king Croesus: in both business models one becomes enormously rich by owning a money standard. 2,500 years ago, the newly introduced money standard was gold coins, now, it's digital coins. eBay's 2009 strategy to make PayPal the largest part of the company is beginning to bear a hefty fruit:

CNET. July 20, 2011 1:44 PM PDT.

eBay reported second-quarter earnings of $283 million, or 22 cents a share, on revenue of $2.76 billion.

Overall, PayPal is carrying eBay. PayPal delivered its first $1 billion quarter and had 100.3 million registered accounts, up 15 percent from a year ago.

Note, that this growth happened during one of the worst recessions in American history. This would make Croesus proud. The business model he invented in the 6th century BC continues to work like a charm.

tags: money, business, model, commerce, system, deontic, payload, transfer, economics

Invention of the day: Retail Shop.

Money is arguably the oldest technology that gets reinvented all the time. The invention of coinage by the Lydians in the 6th century BC helped create the ancient Greek civilization, the progenitor of today's Western world. Being great traders, the Lydians also invented a major modern business model - permanent retail shop. Before that, retail trade was conducted either in temporary markets or door-to-door. Only recently, some two and a halve thousand years later, the "brick-and-mortar" retail model invented by the Lydians was successfully challenged by the likes of amazon.com and Apple's app store.

Compared to temporary market stalls, Lydian shops were the equivalent of today's high-frequency trading brokerage houses, and were greatly helped by another invention, a sophisticated sexagecimal computation system:

 

The system allowed bankers and traders perform computational operations with large numbers of coins, by converting them from a large number of small-value units to much smaller number of large-value ones. For example, if you earned your money in obols and didn't know much math, which was quite common at the time, you could still figure out how much you made in your newly invented brick-and-mortar retail operation, by converting obols into drachmas, staters, minas, and talents. This new computational ability is somewhat similar to the invention, in the 17th century, of the logarithm, a mathematical concept that helped simplify complex multiplication operations in military and engineering applications during the Renaissance, Industrial Revolution, and beyond.

Back to the ancient Greeks, people who made lots of money were "talented". I'm not joking. The etymology of the modern word "talent" goes back to the money-related ancient Greek term talanton. A copper sheet of about 60 lb in weight, something an average man could comfortably carry, was equivalent in value to a talent. A stronger man could carry more talents, thus the connection with the contemporary notion of a natural advantage, which, in turn, found its another incarnation in a common saying, If you are so smart, why aren't you rich.

* Coin conversion table from the book "A History of Money: From Ancient Times to the Present Day", by Glyn Davies.

tags: commerce, invention, business, model, system, computers, information, money, history, scale, 10x

Channeling free money

Another sign that virtual goods are becoming as important as real goods and services:

Visa has agreed to buy virtual goods company PlaySpan for $190 million in a big move into the market for digital goods.

PlaySpan enables game companies and video publishers to make money through the buying and selling of virtual goods. It’s a key part of the food chain in the free-to-play business model.

Also related, according to NYT, Apple wants to channel all in-application sales through its AppStore:

Apple is now saying the app makers must allow those purchases to happen within the app, not in a separate browser window, with Apple getting its standard 30 percent cut of the transaction. At the moment this applies only to e-book purchases.

tags: money, virtual, games, social, market, communications, 4q diagram, control

Electronic gold

I just finished re-reading A History of Money, by Glyn Davies. It's a very competent book on evolution of money from cowrie shells to electronic transactions. Since I believe that money is one of the greatest innovations of all time, I'm going through this and other books on history of finance searching for recurring invention patterns that can be re-used in various technology domains. After all, transaction money is just a control signal that the buyer sends to the seller in order to obtain the goods. Capital is another interesting function of money that follows innovation patterns in storage technologies. The days of the gold standard are long gone, but even today all central banks hold tons of this precious metal in their secure vaults. Just in case, people will trust useless metal more than useless paper or useless electronic signals.
It is interesting though that something very similar to the gold standard is being developed in the virtual world today. Here's an excerpt from an article on Facebook Credits:

How do I set up my own currency?
You permit the user to purchase only one thing with Facebook Credits: your currency. Once the users have exchanged Facebook Credits for your currency, they can participate in the broader game economy. There should be no direct purchase of any items or anything other than your currency with Facebook Credits.

Once the exchange is made, you’ve locked up the value of those Credits in your own currency, ensuring it won’t move off to another application.

Replace "Facebook Credits" with "Gold Coins" and you get the good old gold standard. In Facebook we trust! Funny, how history runs in circles.

tags: control, money, business, signal, commerce, games, virtual, market, payload

a 10X change in mobile app revenue model

About a month ago, I cited a study showing that on average revenues from iPod/iPad applications don't cover development expenses. But it appears that a certain type of applications emerged to solve this problem. The key to revenue seems to be in-application purchases:

Apple turned on the in-app purchase feature for the iPhone last fall. That enabled game developers to embrace the same “free to play” business model that has made companies such as Zynga so successful on Facebook. In that model, companies offer their games for free, but they charge real money for virtual goods such as better weapons or online multiplayer play. The in-app purchase feature allows gamers to purchase their goods without leaving their games at all.

The results are surprisingly good. In January, Flurry said that the games that it tracked generated revenue of $9 per user per year, on average. In June, that number had risen to $14.66 per user per year. Previously, these games were generating around 99 cents to $1.99 per user per year.

I think this approach can work for all kinds of digital content, including books. Essentially, we need to create a new product placement technology where the product is sold, rather than advertised, within the context of the story.

A 10X diagram note for my students: by increasing the frequency of transactions, we are moving to the left along the time axis of the diagram.

tags: 10x, content, commerce, money, business, games, mobile, apple, market, book, virtual, problem, solution, course

History in the making.

According to VentureBeat:

Crowdstar is giving a big endorsement to Facebook Credits. The social gaming company has made a five-year commitment to using Facebook’s virtual currency.

The use of Facebook Credits is important to Facebook as a way to monetize its vast audience of nearly 500 million monthly active users. Davis said early results show that Facebook Credits is increasing both the revenue per paying user and the number of people who are buying things in apps. He acknowledged that changes that Facebook made to its platform this spring have slowed growth of games, but he said that newly launched Facebook games are seeing rapid growth.

History of money shows that introduction of a widely accepted currency is key to the development of a market for services. So far, we've seen trading in goods only. One reason for that would be narrow scope of most gaming scenarios and lack of service development tools. Another, a steep tax (30%) that Facebook imposes on all transactions.

tags: commerce, money, payload, service, control, market, scale, games, virtual

More virtual goods for your real money

June 7, 2010. VentureBeat:

Zynga is the biggest success story to come out of the new wave of social game companies, buт it has been curiously absent from one of the hottest new game platforms — the iPhone. That’s changing today with chief executive Mark Pincus' announcement that Zynga is releasing FarmVille for iPhone.

One question is whether virtual goods purchases on FarmVille for iPhone will be as lucrative as they have been on Facebook.

Buying and trading virtual goods using a mobile device is becoming easier, which means the frequency of transactions is going to increase dramatically. Furthermore, beginning with this generation of users, purchasing with digital money will become routine and start the process of gradual disappearance of physical bills, credit cards, and wallets. They will follow hand watches to the museum of extinct human artifacts.

tags: money, ideality, 10x, payload, system, social, market, commerce

Social networking space is increasingly becoming a marketplace of digital goods. Like any other marketplace in the history of human civilization, it needs an exchange medium, aka money, to scale wrt volume and kinds of transactions. Enter Facebook Credits, which are going to become for Facebook what gold was for King Croesus:

The question asked what Facebook’s next big source of revenue would be? Parker, who was the founding President of Facebook, still works closely with the company as he’s a major shareholder. He noted that Facebook PR might not like his answer too much, but he decided to give it anyway: the Credit system.

Parker believes that the Facebook Credit system (that is, its payment platform), or any other things Facebook uses as a “tax and toll” on the Platform, will become a third of Facebook’s income in the next 12 months.

30% is extremely high. If they figure out how to lower the tax, the number of transactions, especially on mobile devices, is going to explode. And if they don't, somebody else will take over. For example, Zong.

tag: money, social, networking, market, control, payload, signal, course

Money as a mobile application.

Credit cards are becoming extinct:

just wave your iPhone at any Visa payWave terminal, which can already be found at some 32,000 retailers, and voila, you've made your transaction.

Visa has the market power to make interface devices ubiquitous, while the banks can be made responsible for distributing mobile applications. As the result, we've got the credit card business model, but without the credit card.

tags: money, ideality, distribution, packaging, tool, digital, information, commerce

Toward a personal brand

Just wanted to capture a thought that today's social networking infrastructure provides
1. a platform for personal branding based on reputation;
2. a marketplace for digital goods.

Therefore, we should expect emergence of completely new kinds of commerce, including money, development tools, transaction mechanisms, and etc.

Background reading:
Gallup: "The Value of Personal Branding. July 23, 2009.

Science Magazine: Markets, Religion, Community Size, and the Evolution of Fairness and Punishment. Science 19 March 2010: Vol. 327. no. 5972, pp. 1480 - 1484 DOI: 10.1126/science.1182238


tags:  10x, tradeoff, problem, solution, social, information, money, market, niche construction, infrastructure, payload

The value of aproblem: finance.

From George Soros' book "The Alchemy of Finance" (2003 paper back edition):

The major insight I gained ... is that all human constructs (concepts, business plans or institutional arrangements) are flawed. The flaws may be revealed only after the construct has come into existence... Recognizing the flaws that are likely to appear when a hypothesis becomes reality puts you ahead of the game. p. 37.

This is a good argument for starting a project with Reverse Brainstorming, a technique I've developed to search for problems rather than solutions. In a Reverse Brainstorming session participants are required to generate a 50+ problems within an hour; 100 is my preferred number. The vast majority of the flaws discovered during the session will never be exposed, or will never become important enough to entail a corrective action. But there will be several that will reveal critical issues. Understanding and inventing ways to address them will put us ahead of the game.

tags: reverse brainstorm, method, problem, solution, high value, money

History rhymes

Today's most important financial innovation happens away from Wall Street. Early gaming transactions in the world of social networking are a good indicator of a major shift in internet business models. As goods and services become increasingly digital, money will flow away from ads to true virtual transactions. Very similar to the commerce/banking revolution that happened in the 17th century Europe:

The Amsterdam Exchange Bank (Wisselbank) was set up in 1609 to resolve the practical problems created for merchants by the circulation of multiple currencies in the United Provinces, where there were no fewer than fourteen different mints and copious quantities of foreign coins. By allowing merchants to set up accounts denominated in a standardized currency, the Exchange Bank pioneered the system of cheques and direct debits or transfers that we take for granted today.

Ferguson Niall. The Ascent of Money. 2008. p.48.

and 400 years later:

Feb. 19 (Bloomberg) -- Facebook Inc. is expanding a service called Facebook Credits that gives it a 30 percent cut of sales from tractors, fish food and guns in online games...

Today, gamers on Facebook can either buy Facebook Credits to obtain items in games, or pay for them through third-party services. Of the $3.6 billion in U.S. virtual goods sales in 2012, about $2.2 billion will be on social networks, with 80 percent on Facebook, said Atul Bagga, a ThinkEquity analyst in San Francisco. If all payments on the site use Facebook Credits, that would mean $530 million in revenue for the company, he said.

Facebook has become a market of markets. Their social identity management system is ideally suited to support a variety of digital transaction models. They just need to fix gaping security holes. As they say in Russian, "начать и кончить" :)

tags: innovation, money, control, scale, security, internet, social, network, information