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Make soccer more American

american_soccerIn the wake of the most recent scandal news affecting international soccer, Richard Epstein of the Hoover Institution writes that FIFA could address its problems by making soccer more American.

(T)he list of particular derelictions, however long it may be, takes the worm’s eye view of the subject. This cascade of errors does not happen by accident. It takes place in large measure because of the faulty governance structure inside of FIFA. …  It would be wrong, however, to assume that the difficulties with FIFA stop at the institutional level. In the United States, the basketball and hockey playoffs have taken center stage. Anyone who watches all three sports will quickly realize that the defects in FIFA’s governance structure are not only felt in the boardroom, but also on the playing fields. As a game, I leave it to others to decide which sport they prefer. But as a set of game rules, as I have long argued, soccer is so sadly deficient that much has to be done to fix the sport. 

While it makes good sense to us that FIFA’s governance structure could be improved, we’re not so sure that would be enough.  “Good governance” reforms, implemented in the wake of a crisis or scandal, inevitably fail to prevent the next crisis or scandal because even the best procedures won’t stop a determined bad actor.  This is especially true when the institution’s culture is complacent and/or complicit – as is the case with FIFA.

As we’ve written elsewhere, in the context of a start-up company’s board, what makes great boards great are the ‘robust social systems’ in which board members’ informal modus operandi animate the formal procedures.  Transparency and a virtuous combination of tension and mutual esteem will facilitate healthy and constructive debate and improve decision making.

Epstein goes on to address what he calls soccer’s “atrocious penalty structure” with penalties “either too severe or too lax.”  He compares the situation unfavorably to hockey, in which each infraction is treated as a discrete event and the structure of the penalties create “strategic possibilities” more in proportion to the eventual outcome of the match.

Not having penalties proportionate to the offense creates perverse incentive effects on players and officials alike. The definitions of all infractions, especially those that turn on intent, are often subject to disputation. Players will try to inch closer to the line, daring the referee to respond with the nuclear option. Lower the stakes, and referees will be less reluctant to impose a penalty that now fits the offense. Players will respond by avoiding silly plays that can subject them to penalties.

This too parallels something else we’ve written, on the subject of complex financial regulations:  if regulators create the incentive to just “manage to the rules,” even a good actor may tiptoe right up to the hot red line where a crisis can be triggered by a little bad luck.  Regardless of the activity, the rules, or who’s officiating, there is always a need for good judgment.


Just waves of confirmation bias?

We recently came across another excellent article on data, decision-making, and cognitive biases.  It’s a story about Kristaps Porzingis , a 7’1″ 19-year-old, playing in Liga ACB, perhaps the second-best basketball league in the world.  He’s “the type of prospect that has historically torn coaching staffs and front offices apart” as they try to assess his NBA bona fides before the draft.

kristaps-porzingis3All draft picks are crapshoots, but some feel like crappier shots than others. It’s uncouth to plainly say, “I have a bad feeling about this guy,” so we do our best to justify our vague inklings. The stronger our distaste, the stronger our effort. So of course it’s the foreigner with the spindly frame and the funny name who has people [grasping for answers]. … What is the draft if not complete pseudoscience?  …

He’s like a young Robin trying on Batman’s utility belt — the tools are there, and they’re incredible. They just don’t fit yet, and you can’t be too sure that they ever will. His issues on defense are the same most players his age experience. He bites on pump fakes, he gets caught ball-watching, and he can be a step slow recovering to his man. But there is a chance that, five years down the line, he’ll be doing things that only a handful of NBA big men can do at a high level.

Maybe all of that hokey pseudoscience will prove prescient. Drafting isn’t an art, and it isn’t a science, but if you squint hard enough, it can look like a happy medium. It’s all just waves of confirmation bias on both ends of the spectrum posing as data points, right? It can tell you anything you want it to if you wait long enough. But it can’t, at the very moment, tell you the fate of Kristaps Porzingis. And so, like any other year, we’ll go on trying to find some illuminating detail that will solve the puzzle once and for all, blissfully ignorant to the fact that there’s only one person with the final pieces.

As with the NFL draft, pre-draft metrics have only some predictive power.  The data don’t predict a player’s ceiling, can’t account for what kind of system a player will enter, the talent he’ll have around him, the luck he’ll have with injuries, or the intangibles he possesses.

If you’re looking for a bellwether of NBA success, look to the NCAA tournament.  Its pressure-packed contests featuring the best college players in the country in front of gigantic audiences turns out to be a meaningful simulation of NBA conditions.  Even though it’s a very small sample size – for most players just a game or two – the data show that players who move up the draft board as a result of their performance in March Madness deserve it.

The crucial distinction to remember on this topic is that Big Data has limitsWhile it may help make accurate predictions or guide knotty optimization choices or help avoid common biases, it doesn’t control eventsModels can predict the rainfall and days of sunshine on a given farm in central Iowa but can’t change the weather.  A top draft pick may or may not develop based on the system, surrounding talent, &etc.

In our experience the best results often come from a combination of deliberation and intuition.  Too much data can lead to analysis paralysis, common sense can be a shockingly unreliable guide, and those who rely on intuition alone tend to overestimate its effectiveness.

The answer for Porzingis is obvious:  enroll him in an American D-I hoops powerhouse – we’d recommend a school in the Southeast or Texas – and hope that school enjoys a deep run next March.


The only thing he ever made fly was government money

On this day in 1906, the Wright Brothers were granted a patent for their “flying machine.” In honor of the anniversary, we reprint this – one of our most popular, most-read pieces.  

(Original publish date: April 17, 2013)

The process of productive capital allocation is a critical ingredient of innovation and job growth.   Entrepreneurs spending their own (and their partners’) money will create more jobs, more innovation, and a more vibrant economy than politicians picking winners and losers based on cronyism, campaign contributions, and constituent pork.

When government strays out from funding basic research into either applied research or the means of production, the results range from poor to scandalous.  Ideas are infinite, and in the absence of competent execution, they are worth nothing.  Even if the idea has merit, the true expertise is crowded out.  There are better ways policymakers can help encourage innovation.

The invention of the airplane provides an excellent example.  While we’re all aware it was the Wright Brothers, many interesting details about funding the innovation don’t make it into school textbooks.  In A Tale of ‘Government Investment’  Lee Habeeb & Mike Leven recount the race between the bicycle shop owner/operators and the government-backed head of the Smithsonian.

Who better to win the race [to powered flight] for us, thought our leaders, than the best and brightest minds the government could buy? They chose Samuel Langley. [The War Department gave Langley $50,000, an enormous sum at the time, which The Smithsonian augmented with taxpayer funds of its own.]  You don’t know him, but in his day, Langley was a big deal. He had a big brain and lots of credentials. A renowned scientist and a professor of astronomy, he wrote books about aviation and was the head of the Smithsonian.  It was the kind of decision that well-intentioned bureaucrats would make throughout the century — and still make today. Give taxpayer money to the smartest guys in the room, the ones with lots of degrees. They’ll innovate and do good for us.

For that Solyndra-type investment the country got the “Great Aerodrome,” which “fell like a ton of mortar’ into the Potomac River – twice.  Representative Gilbert Hitchcock of Nebraska remarked, “You tell Langley for me that the only thing he ever made fly was government money.”

Nine days after that second failed test flight, a “sturdy, well-designed craft, costing about $1000, struggled into the air in Kitty Hawk.”

How did two Ohio brothers accomplish what the combined efforts of the War Department, The Smithsonian, and other people’s money could not?  The authors cite James Tobin’s To Conquer the Air: The Wright Brothers and The Great Race for Flight (2004) to provide a few answers:

  • Langley saw the problem as one of power:  how to go from zero to 60 in 70 feet, the stress of which was too great for the materials used.  The Wright Brothers, inspired by the practical skills and insights gained from tinkering in their bike shop, understood the problem was one of balance (on a bike, balance+practice = control).  They invented the three-axis control (pitch, yaw, roll) still standard on fixed-wing aircraft today.  Their entrepreneurial technical expertise was an advantage neither the government nor other private competitors (Alexander Graham Bell) could match.
  • Since they couldn’t afford repeated test flights the Wright Brothers were forced to develop a wind tunnel to test their aerodynamics.  This saved money and time, since they weren’t bogged down repairing the wrecks of a flawed design.
  • No government money also meant no government strings.  They were freer to experiment and innovate without worrying about non-essential requests and hidden agendas.  They also managed to do more with less since they couldn’t afford subsidy-induced waste.

Habeeb & Levin also offer this fascinating, if not unexpected, coda:

Though the Wrights beat Langley and the Smithsonian, the race didn’t end there. Powerful interests vied for the patent to this revolutionary invention and, more important, for the credit for it. With Smithsonian approval, a well-known aviation expert modified Langley’s Aerodrome and in 1914 made some short flights designed to bypass the Wright brothers’ patent application and to vindicate the Smithsonian and its fearless leader, Samuel Langley.

That’s right. The Smithsonian’s brain trust couldn’t beat the bicycle-shop owners fair and square, so they used their power to steal the credit. And then they used their bully pulpit to rewrite history. In 1914, America’s most esteemed historical museum cooked the books and displayed the Smithsonian-funded Langley Aerodrome in its museum as the first manned aircraft heavier than air and capable of flight.

Orville Wright, who outlived his brother Wilbur, accused the Smithsonian of falsifying the historical record. So upset was he that he sent the 1903 Kitty Hawk Flyer, the plane that made aviation history, to a science museum in . . . London.

But truth is a stubborn thing. And in 1942, after much embarrassment, the Smithsonian recanted its false claims about the Aerodrome. The British museum returned the Wright brothers’ historic Flyer to America, and the Smithsonian put it on display in their Arts and Industries Building on December 17, 1948, 45 years to the day after the aircraft’s only flights. A grand government deception was at last foiled by facts and fate.

As for Samuel Langley, he died in obscurity a broken and disappointed man. Friends often noted that he could have beaten the Wright brothers if only he’d had more time — and more government funding.

Some things never change.

The Wright brothers’ airplane business never took off (groan) due to a combination of poor business decisions and sloppy patent work.  Wilbur sadly died young (in 1912 at age 45, of illness that some suspect was contracted due to exhaustion from the patent battles) and Orville sold the company in 1915.  So the industry grew under the leadership of other companies and other men.  (Although the Curtiss-Wright Corporation remains in business today producing high-tech components for the aerospace industry.)   One can’t help but wonder what the original inventors might have done had they been the beneficiary of a strong partnership with a VC fund…




Sunken treasure and the limits of decision models

What $12.7 million investment in 1988 yielded a vanishing $48 million in 1991, nothing again until this year, and yet may still have fabulous upside?  As ESPN films explains in In Deep Water, a real-world “National Treasure.”

When a hurricane sank the SS Central America in 1857, over 400 lives and at least 3 tons of California Gold Rush fortune were lost.  “At least” because the steamer was also rumored to carry in its hull an additional secret 15 tons of gold headed for NY banks.  The loss contributed to The Panic of 1857, as the public came to doubt the government’s ability to back its paper currency with specie.


1989 file photo shows gold bars and coins from the S.S. Central America

131 years after the ship was lost, oceanic engineer Tommy Thompson  and a team of “data nerds” used Bayesian modeling to find the ship and new deep-water robot technologies to recover items from the ocean floor.  We caught the 30-for-30 movie this week and it captivated us on several levels:  (a) it’s the greatest lost treasure in American history, (b) it includes important lessons about corporate governance, (c) it demonstrates the importance of intuition, and (d) the tale ends with a local twist – fugitive entrepreneur/treasure hunter Thompson was just recently captured in our backyard (Boca Raton).

The story has parallels to another favorite of ours – The Greatest Comeback Ever and the Limits of Decision Models – in which intuition augmented or even trumped the computer model.  Following a hunch they discovered her on “the edge of the probability map,” ending one mystery but starting another.

Thompson – “a combination of Indiana Jones and Tesla” – used lack of transparency and poor corporate governance to keep his investors at bay for 16 (!) years.

The first seven years were consumed by a flurry of lawsuits from 19th century insurers and not directly his fault; his backers then patiently waited for the next nine years as Thompson told them the gold had to be marketed just so.  He sold 532 gold bars and thousands of coins for $48 million in 2000, purportedly to pay loans and legal bills.  In 2005 two investors sued, in 2006 some crew members sued, and Thompson became a recluse in a rented Vero Beach mansion which he paid for with “moldy smelling” $100 bills (they’d been buried underground).  He missed a 2012 court appearance and was officially on the lam up until being caught earlier this year in Boca Raton, FL.

A new company (Tampa-based Odyssey Marine Exploration) re-started salvage efforts in April 2014 – only 5% of the wreck was excavated by 1991, and it’s been left un-touched since then. Recovery efforts will continue indefinitely (is it 3 or 18 tons of gold?) and be used in part to reimburse the original investors.



Closer to a cure for cancer?

cancerThis past weekend’s WSJ had an excellent article on how recent, fascinating developments in targeted therapeutics and immunotherapy show great promise for the treatment of cancer.  It’s a must-read for anyone interested in the topic – whether you’re a patient, family of a patient, or even an investor in the technologies that are used.  (Full disclosure:  as BPV is in MolecularMD, a molecular diagnostics company that develops custom companion diagnostic products and supports clinical trial services for targeted cancer therapies.)

Memorial Sloan Kettering Cancer Center CEO Dr. Craig Thompson explains why he’s optimistic about new therapies aimed at increasing the body’s own ability to fight cancer in The Future of Cancer – Closer to a Cure.

Most people don’t acquire a significantly higher risk of cancer from the genes that they inherit from their parents. Instead, cancer arises as a result of copying errors (mutations) in the inherited genes, as our bodies make new cells to maintain our various organs. A recent widely quoted publication suggested that these errors are an inevitable consequence of trying to copy three billion bits of information as a cell divides.

That may be true, but it doesn’t mean getting cancer is inevitable. The fastest and most extensive rates of cell division occur when we are developing as embryos. Billions upon billions of cells are produced each day, yet cancer in newborns is exceedingly rare. In contrast, cell division in each of our tissues slows as we grow older, while the incidence of cancer increases with age.

What accounts for this discrepancy?  We damage ourselves through exposure to invading pathogens and other environmental threats, thereby “constantly damag(ing) our tissues, forcing restorative cell proliferation to occur in a war zone of damage.”  But recent advances in targeted therapeutics and immunotherapy “can have stunning efficacy” in the right situation without the toxic side effects of traditional chemotherapy.

It is in this inhospitable environment that most cancers arise. We have known for some time that many of these environmental exposures damage DNA, making it harder to copy and resulting in more mutations as cells divide. Recently, we have come to appreciate that during regeneration of damaged tissue, the rest of the body pitches in to keep every cell in the damaged tissue alive. Not just the healthy cells, but also the ones that have acquired mutations that render them unfit. Our immune system, which usually detects and destroys cells with excess mutations, is turned off

Patients whose cancer bears specific mutations are now more effectively treated with drugs designed to selectively reverse the effects of those mutations. Such drugs are termed targeted therapeutics. The downside of this class of drugs is that they usually don’t have any benefit in treating cancers that don’t carry that specific mutation. While we don’t yet have many therapies that target cancer-causing mutations, the results can be dramatic when such drugs are available…

Immunologists have found that our immune system has a built-in “off switch,” a checkpoint that shuts down an immune response a few weeks after it is initiated. A new and expanding class of cancer therapeutics have been developed that have the ability to block this normal shut-off switch and thus augment the ability to recognize and destroy cells carrying mutations…  Some patients with widely metastatic cancer have been rendered cancer-free with therapies aimed at increasing the body’s own ability to fight cancer.

 Dr. Thompson closes with optimism; an optimism we share, thanks to the great work done by the teams at companies like MMD.

Why is finding a cure for cancer taking so long? A major reason lies in the fact that cancer is not one disease, but many. Each tissue has its own unique progenitor cells, and each tissue uses only a subset of the genes we inherit from our parents; each tissue is exposed to environmental insults differently. We are just beginning to understand the interplay of all these factors in the origin of the many forms of cancer. Understanding these issues will ultimately allow us to optimize the treatment approach to each patient’s disease.

While we aren’t yet ready to put cancer on the extinction list along with “simpler” diseases like smallpox and polio, it is clear that with more science—the lessons learned from cancer research over the past two decades—we face the future with less fear.

Genomics vs. Genetics

On related note, the conversation about new targeted therapies includes two terms – genomics and genetics – that are mistakenly used interchangeably.  Genetics is the study of single genes in isolation, while genomics is the study of all the genes in the genome and the interactions among them and their environment(s).  Genome British Columbia has a useful explanation of the distinction:

If genomics is like a garden, genetics is like a single plant. If the plant isn’t flowering, you could study the plant itself (genetics) or look at the surroundings to see if it is too crowded or shady (genomics) – both approaches are probably needed to find out how to make your plant blossom…

In studying human disease, for example, genomics examines all the genetic information to determine biological markers predisposing an individual to disease, whereas genetics uses the information from one or two genes to explain a disease state.  Many diseases due to single gene defects have been identified. Now, geneticists want to tackle multifactorial diseases caused by the complex interactions between multiple genes and the environment.


Google can’t save us (anymore)


History of Google Acquisitions

Great piece by Robert J. Samuelson in last Sunday’s Washington Post about how innovation resulting from M&A activity may lift corporate profits, but only the innovation generated by fast-growing start-ups broadly raises national prosperity.

(A) larger issue transcends individual deals. The popularity of M&A actually involves economic weakness. Unable to expand internally — by creating products or entering new markets — companies rely on M&A for growth. However, what works for the firm may work less well for society. Although buying another company may enhance the acquiring firm’s innovation, it doesn’t add much to society’s. And society’s capacity to innovate is crucial. It generates the wealth needed to raise incomes and dampen social conflicts…

In our mind’s eye, the economy is swarming with entrepreneurs. Competition is intense. Old-line firms adapt, or die. Just the opposite may be happening: Evidence suggests that entrepreneurship is in decline and that U.S. firms are becoming older, more entrenched and less dynamic…

American capitalism is middle-aged. Older firms, conditioned by success, are more rigid. They’re invested, financially and psychologically, in existing markets and production patterns. They can adapt and innovate, but it’s hard. The M&A surge is one way older firms strive to overcome internal stagnation.  What’s worrisome is not the success of the middle-aged businesses; it’s the weakness of young firms and the apparent erosion of entrepreneurship. As other research has shown, start-ups ultimately account for a disproportionately high share of new job creation and innovation. The vigor of these new firms is essential for the economy to revitalize itself.

We don’t know what explains their slide, though the sheer mass of government regulations is one candidate. Older firms have the lawyers and administrators to cope with the red-tape deluge; many small new firms drown. But that’s just a conjecture illuminating the larger question. If the economy discriminates against young firms, we will all be paying the price for many years.

There’s also evidence that suggests more early-stage firms are getting gobbled up – via M&A’s – before they have a chance to boom.  Google itself may be a prime example:  since 2001 they have acquired roughly one company per month and they recently became the country’s biggest political donor, knocking off heavily-regulated Goldman Sachs.

It may seem strange to think of Google as middle-aged, but high profile firms such as it enjoy outsized awareness because they’re personal and omnipresent, and belie the fact that the data show declining business dynamism overall and for start-ups specifically.  For every Google or Facebook there are hundreds of other early-stage companies, and no one knows at the outset which high growth firms will explode and disrupt – so we need “more shots on goal.”

Samuelson’s piece fits nicely with what we wrote last July in Not All Innovation Is Alike:

Some politicians think “innovation policy” means spending taxpayer money on promising young firms favored by bureaucrats. Rather, innovation policy means ensuring that the status quo is continuously challenged by upstart rivals and threat of failure. Those are the keys to the Schumpeterian “gales of creative destruction” that drive innovation, which in turn drives long-term economic growth and improvement in living standards.

National prosperity is generated by the start-ups who innovate and challenge entrenched incumbents. Anyone who’s worked for a large corporation – especially in an R&D department – would not rely primarily on that model for innovation. Anyone who’s worked for a large corporation – especially in a dying industry – would not rely primarily on that model for job growth. Yes, start-ups lack the economies of scale and R&D budgets of larger firms; but that’s the support venture capital provides. Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies… and then face the next generation of innovators.






Vintage Future VIII

42 years ago this past Friday, Martin Cooper of Motorola made the first ever cell phone call to Joel Engel of Bell Labs. Cooper was calling Engel to troll him about the fact that Motorola invented the thing first, although it was another 10 years before the company released the DynaTAC 8000X. So yeah…even the very first guy talking loudly on his cell was kind of a jerk about it.

That decade between trash talk and commercial introduction brought to mind our Vintage Future series in which we take a tongue-in-cheek look back at the failed predictions of past generations of investors and futurists, and the sometimes tortuous routes to success of unlikely ideas.

In our line of work it’s good to guard against the hubris inherent in projecting conventional wisdom too far out into the future, and to remind ourselves that today’s trend can be tomorrow’s punchline – and vice versa.

Back in 2010 in “Entrepreneurial silver lining in today’s economic clouds” we mentioned that the patents for the Television, Jukebox, and Nylon were all granted during The Great Depression, and although we can’t confirm any patent information on the chocolate chip cookie, it too was invented at the same time (1930 to be precise).  In this, our VIIIth installment of Vintage Future, we share some of the less successful ideas from the Great Depression.



A Thread Across the Ocean

Cyrus W. Field may not have been the first entrepreneur in the modern mold, but he was without doubt one of the greatest.

So writes John Walker, about the laying of the world’s first trans-Atlantic telegraph cable.  He also has this to say about entrepreneurship in general:

There are inventions, and there are meta-inventions. Many things were invented in the 19th century which contributed to the wealth of the present-day developed world, but there were also concepts which emerged in that era of “anything is possible” ferment which cast even longer shadows. One of the most important is entrepreneurship—the ability of a visionary who sees beyond the horizon of the conventional wisdom to assemble the technical know-how, the financial capital, the managers and labourers to do the work, while keeping all of the balls in the air and fending off the horrific setbacks that any breakthrough technology will necessarily encounter as it matures.

When the first trans-Atlantic electronic message arrived – Queen Victoria telegraphed congratulations to President Buchanan – it was as if a new era had dawned, as if a new envisagement of the world were possible.  More than a century before the internet, Cyrus Field had taken the first steps towards wiring the world together.

The initial euphoria gave way to deferred dreams.  Stretched to the limit with un-perfected technology, the cable and the endeavor were soon both dead in the water and had to be rescued with follow-on rounds of financing and a new vocabulary of electrical engineering (Watt, Ohm, Ampere).  

This documentary tells of the setbacks and bouncebacks, both technical and commercial, from the earliest stages of Field’s start-up company through to the completion (13 years later) of his world-changing entrepreneurial success.

Field’s ability to coax ever more capital from investors in the face of so many failures (and accusations of fraud!) was remarkable, and likely made possible by (a) his confidence-inspiring optimism, “the eternal sunshine of the entrepreneur’s mind” and (b) the sterling reputation he had earned in his first business, during the turnaround of which he had “made good” on outstanding debts for which he had no legal obligation to pay.

The Top 10 (to us) highlights:

  1. The cable was a copper wire, covered with a foul-smelling tropical sap called Gutta Percha for insulation, with thick iron wires wound around it for protection.
  2. They found a flat area under the North Atlantic that was so perfect they termed it “The Telegraph Plateau.”
  3. The flip side of Field’s optimism: he badly underestimated the scope of the project and blew through the initial round just to get to Newfoundland.
  4. No single ship could carry the entire 2500-ton load.  Two ships met midway across the North Atlantic, spliced together the wire, then sailed very precisely and carefully in opposite directions.
  5. The first attempt failed utterly, the cable repeatedly broke.
  6. During the second attempt, the ship’s compass was affected by the amount of iron and created serious navigational errors.
  7. Pressed for time, because he was pressed for money, Fields forged ahead with insufficient testing of his chief scientist’s theories of the voltage required.  A month after the first successful message they burned through the insulation somewhere on the ocean floor.  Subsequently, the future Lord Kelvin invented the Mirror Galvanometer to amplify the weak signal at the end of the line.
  8. The scale of the debacle caused the first ever “Board of Inquiry” after a technical failure.  The board laid most of the blame on the chief scientist, but also faulted Field’s impulsiveness, calling him “a man obsessed by insanity.”  He drove the project forward and harnessed the people who needed to be involved, but was “a bit blinkered” and did not take in all the information available to him.
  9. For the third attempt a decade later, the largest ship in the world (The Great Eastern) was available for purchase at pennies on the dollar.  No longer would they have to worry about mid-ocean splicing.  In a cruel twist of fate, the circuit failed mid-project and miles of bad cable had to be spliced, mid-ocean!  The captain reversed course, dropped a grappling hook, snared the cable after multiple attempts, and winched it 3 miles (!) up to the surface for repair.
  10. Even today, most of the communication between North America and Europe is carried by trans-Atlantic cable.

March Madness and the availability heurisitic

(Editor’s note:  This is a slightly modified re-print of a popular piece we published in April 2013.  Our readers enjoy the subject of how to improve their decision making skills, especially when sports can provide the context.)

Decision making and cognitive biases are common themes here at NVSE.  We’ve written about good board decisions, how the popularity of the Mona Lisa is based on circumstance rather than inherent artistic qualities, how the design of the decision-making process affects the decision, and how managers can undermine their decision making by over-relying on common sense, rationalizing instead of being rational, or making unconscious choices.

The availability heuristic refers to placing too much emphasis on data that is quick and easy to gather.  However in this particular instance – clutch performance during March Madness – it just might be more of a reliable bellwether than a problematic bias.

In Method to the Madness Peter Keating explains “why NBA GMs should go mad for the breakout stars of March.”

NBA teams scout hundreds of players across the country, tracking their every move for months on end, and put dozens of prospects through extensive workouts. Yet when it comes to draft night, clubs routinely rely on the same measure the rest of the country uses: NBA GMs, it turns out, favor players who had surprising success in the postseason. And the even bigger shocker? They’re right to do so.

Economists Casey Ichniowski of Columbia and Anne Preston of Haverford studied March Madness because they wanted to investigate whether employers often overweigh recent and vivid information when making decisions. Earlier research had shown that when we make judgments, we rely on data that’s accessible — the quickest and easiest stuff to gather — even when we know it’s important to be objective. Social scientists call this the “availability heuristic,” and it explains why Americans wrongly believe tornadoes kill more people than asthma: A spectacular catastrophe is easier to recall, so we overestimate its likelihood…

On average, a player who scores four points per game above expectations on a team that wins one more game than projected in the tournament will boost his draft position by 4.7 slots, according to Ichniowski and Preston. Now, here’s the thing: Players who get March Madness bumps deserve them. Ichniowski and Preston also examined what happened to players after their draft days… In every case, the group that got draft boosts from the NCAA tournament played better than those who didn’t. If anything, teams undervalue March Madness as a predictor of future success and stardom.

I usually repeat “sample size, sample size, sample size” about as often as and in the same tone that Jan Brady wailed “Marcia, Marcia, Marcia,” so I was shocked by these results. For most players, March Madness lasts only a game or two, yet it sends a signal powerful enough to last entire careers.

“I’m thinking of showing my sports class a clip of Michael Jordan beating the Cavaliers and asking if you could have ever predicted this, so that maybe you take MJ at No. 1 instead of No. 3,” Ichniowski says. “Then I’d like to show his NCAA shot [winning the national championship for North Carolina] and move to the question of how much to weight March Madness performance.” The answer: At least as much as NBA GMs do now. The NCAA tournament, with its pressure-packed contests featuring the best college players in the country in front of gigantic audiences, is truly a meaningful simulation of NBA conditions.


From food cart to IPO in 10 years: innovation and “competitive capitalism”

In The only thing he ever made fly was government money, a post about the Wright Brothers’ government-backed competitor who failed badly, we wrote that:

The process of productive capital allocation is a critical ingredient of innovation and job growth. Entrepreneurs spending their own (and their partners’) money will create more jobs, more innovation, and a more vibrant economy than politicians picking winners and losers based on cronyism, campaign contributions, and constituent pork.

It is not an automatic process, of course. When $5,000 computers become $500 tablets, and conveniences ranging from steamships to Kodachrome to flip phones are supplanted by better ideas, the resulting surplus capital is not stuffed under plump mattresses – it’s used to fund the next round of businesses and innovations that enhance and enrich all our lives.  Including cheeseburgers.

shakeshack3Kevin D. Williamson points out that Shake Shack has gone from food cart to IPO over a period of time during which McDonald’s has struggled to tread water.  This might surprise some consumers but not likely anyone who’s worked for an archetypal big, faceless corporation (like McDonalds).  Start-ups may lack the economies of scale and R&D budgets of larger firms, but that’s the support venture capital can provide.  Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies… who then face the next generation of start-ups.

Williamson goes on to make a broader defense of “competitive capitalism,” the aggregate effect of which is “indistinguishable from magic.”

(W)e are so used to its bounty that we never stop to notice that no king of old ever enjoyed quarters so comfortable as those found in a Holiday Inn Express, that Andrew Carnegie never had a car as good as a Honda Civic, that Akhenaten never enjoyed such wealth as is found in a Walmart Supercenter.

The irony is that capitalism has achieved through choice and cooperation what the old reds thought they were going to do with bayonets and gulags: It has recruited the most powerful and significant parts of the world’s capital structure into the service of ordinary people

For people who dislike and misunderstand capitalism (or free markets, or laissez-faire, or economic liberalism, or whatever you want to call it), the governing principle of market competition is the “Walmart effect.” According to this model of how the economy works — a model with very little basis in reality, but never mind that — big companies such as Walmart muscle into a market or a territory, use advantages of scale and predatory pricing (“predatory” here meaning “saving consumers money at the expense of relatively well-off business owners”) to drive out so-called mom-and-pop operations, lower workers’ wages, and then make like Scrooge McDuck doing his Greg Louganis impersonation into a mile-high stack of hundred-dollar bills.

Big businesses vs. small businesses, employers vs. employees, factory owners vs. consumers: Every relationship in the marketplace is in this view distorted by power imbalances that almost always work in favor of entrenched business interests that use their relative power to further heighten the advantages they enjoy.

The opposite of the “Walmart effect” understanding of how the economy operates, a view more prevalent among people who like or simply understand capitalism, is the “Bill Gates’s nightmare effect.” Back in 1998, when Microsoft was at the height of its power — it had just become the world’s most valuable company — and Gates was at the height of his prestige, he told Charlie Rose that what worried him wasn’t competition from IBM or Apple or Netscape: “I worry about someone in a garage inventing something that I haven’t thought of.” That was in March of 1998; in September, two guys in a garage in Menlo Park incorporated Google.

Or, as we put it in The dignity of innovation:
It seems paradoxical, but failure is what makes us rich. Well over half of the companies on the 2009 Fortune 500 list began during a recession or bear market. The patents for the Television, Jukebox, and Nylon were granted during The Great Depression. Also born at that time: the chocolate chip cookie, Scrabble and Fender Guitars (kinda). The decline of U.S. Steel was bad for the company’s shareholders and its employees, but it was good for people who use steel — meaning everybody else in the world. Without the pressure and opportunity created by the possibility of failure the entire U.S. economy would be (at best) stuck in the early 19th century.

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