August 2012 – artdiamondblog.com

Failed Entrepreneurial Firms that Signal New Markets Are “Optimistic Martyrs”

(p. 260) Colin Camerer and Dan Lovallo, who coined the concept of competition neglect, illustrated it with a quote from the then chairman of Disney Studios. Asked why so many expensive big-budget movies are released on the same days (such as Memorial Day and Independence Day), he replied: Hubris. Hubris. If you only think about your own business, you think, “I’ve got a good story department, I’ve got a good marketing department, we’re (p. 261) going to go out and do this.” And you don’t think that everybody else is thinking the same way. In a given weekend in a year you’ll have five movies open, and there’s certainly not enough people to go around.
The candid answer refers to hubris, but it displays no arrogance, no conceit of superiority to competing studios. The competition is simply not part of the decision, in which a difficult question has again been replaced by an easier one. The question that needs an answer is this: Considering what others will do, how many people will see our film? The question the studio executives considered is simpler and refers to knowledge that is most easily available to them: Do we have a good film and a good organization to market it? The familiar System 1 processes of WYSIATI and substitution produce both competition neglect and the above-average effect. The consequence of competition neglect is excess entry: more competitors enter the market than the market can profitably sustain, so their average outcome is a loss. The outcome is disappointing for the typical entrant in the market, but the effect on the economy as a whole could well be positive. In fact, Giovanni Dosi and Dan Lovallo call entrepreneurial firms that fail but signal new markets to more qualified competitors “optimistic martyrs”– good for the economy but bad for their investors.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

“People Were Being Infantilized and Made Dependent”

Mayor of London Boris Johnson. Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 16) While I was reading your book “Johnson’s Life of London,” in which you take readers on a tour of the city while discussing some of history’s most famous Londoners, I thought to myself, Being mayor of London can’t be that taxing if you could find time to write such a decent book.
The job of mayor of London is unbelievably taxing, particularly in the run-up to the Olympics. It just happens I write fast and always have done. Some people play the piano, some do Sudoku, some watch television, some people go out to dinner parties. I write books.
. . .
Do you remember the moment you knew that you were a Conservative?
When I was a 22- or 23-year-old reporter in a place called Wolverhampton. I got impatient with some of the stuff I saw going on about damp and mold, about who’s ultimately responsible for improving the ventilation in people’s houses. I felt that people were being infantilized and made dependent by the system and that the local Labour politicians had no interest in sorting it out, were content to harvest these people’s votes without improving their lives.
Wow. You were politically formed by mold.
It was the spores of damp, of mold forming on the walls in Wolverhampton.

For the full interview, see:
ANDREW GOLDMAN, interviewer. “TALK; Boris Johnson, Tory With an Attitude.” The New York Times Magazine (Sun., June 3, 2012): 16.
(Note: ellipsis added; bold in original.)

Johnson’s book is:
Johnson, Boris. Johnson’s Life of London: The People Who Made the City That Made the World. New York: Riverhead Books, 2012.

Resilience

(p. 183) In 1832, a young man was fired from his job and lost his bid for election to the state legislature. The next year his new business failed. Three years later he suffered a nervous breakdown. After recovering, he was defeated as speaker in the state legislature. He was defeated in his efforts to win his party’s nomination to Congress in 1843. He was rejected as land officer in 1849. In 1854, he was defeated in the U.S. Senate election and, in 1856, his efforts to win the nomination as his party’s vice president failed. The string of failures continued. He was again defeated in the Senate election in 1858. Finally, in 1860, Abraham Lincoln was elected as the sixteenth president of the United States.

Source:
Audretsch, David. “Review of: Adapt: Why Success Always Starts with Failure.” Journal of Economic Literature 50, no. 1 (March 2012): 183.

Entrepreneurs Thrive in a Culture of “Chutzpah”

“Manhattan District Attorney Cyrus Vance, Jr.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. C13) Before a recent business trip to Israel, someone handed me a copy of “Start-Up Nation: The Story of Israel’s Economic Miracle,” a book by Dan Senor and Saul Singer about Israel’s culture of innovation and entrepreneurialism. I had finished the book on the overnight flight to Tel Aviv. When I returned home a week later, based on what I had seen in Israel, I purchased multiple copies and handed them out to senior staff who work with me.

“Start-Up Nation” recounts and dissects how Israel, in just 60 years, has thrived as an economy, creating an environment where talent and technology have attracted more venture-capital dollars per person than any other country in the world.
In a nutshell, and admittedly oversimplifying, the authors boil Israel’s success down to a few, core themes. First, Israel was born into and exists in an adverse political environment. Surrounded by hostile neighbors, Israelis survived–and thrived–by adapting quickly, making the most out of limited resources and taking on outsize challenges without fear or undue regard for authority. The latter quality might be called chutzpah. Second, Israelis all participate in military service, before university. The skills they learn in the military, and the maturity they gain from military service, make their work force better skilled and more capable of better teamwork at the entry level on up.
If my recent visit provides any evidence of national characteristics, Israelis question authority, openly and all the time. At any given meal, whether it included ordinary citizens, generals, government officials or business executives, deference was in short supply. No quarter is given. But debate and disagreement create a climate of self-awareness. That in turns helps to create a culture of achievement.
So why did I give copies of the book to my senior staff? I believe in a bottom-up organizational culture, where problems are identified, raised and solved by the line employees who make the enterprise run. Our American system–and especially our legal and government cultures–frequently operates with a top-down style, which can discourage creativity and individualism.
The one thing that I am not planning to do is give copies of “Start-Up Nation” to my children until they graduate from college and have left the house. They have questioned my authority enough already.

For the full book discussion, see:
Cyrus Vance. “Twelve Months of Reading: Cyrus Vance.” The Wall Street Journal (Sat., December 17, 2011): C13.
(Note: the broad multi-page article was sub-divided into sections headed by the name of the person who was writing the book advice in that section. Internally the broad article seemed to be entitled “Books of the Year.”)

The first book Vance recommends is:
Senor, Dan, and Saul Singer. Start-up Nation: The Story of Israel’s Economic Miracle. hb ed. New York: Twelve, 2009.

Overly Optimistic Entrepreneurs Seek Government Support for Projects that Will Usually Fail

People have a right to be overly-optimistic when they invest their own money in entrepreneurial projects. But governments should be prudent caretakers of the money they have taken from taxpayers. The overly-optimistic bias of subsidy-seeking entrepreneurs weakens the case for government support of entrepreneurial projects.

(p. 259) The optimistic risk taking of entrepreneurs surely contributes to the economic dynamism of a capitalistic society, even if most risk takers end up disappointed. However, Marta Coelho of the London School of Economics has pointed out the difficult policy issues that arise when founders of small businesses ask the government to support them in decisions that are most likely to end badly. Should the government provide loans to would-be entrepreneurs who probably will bankrupt themselves in a few years? Many behavioral economists are comfortable with the “libertarian paternalistic” procedures that help people increase their savings rate beyond what they would do on their own. The question of whether and how government should support small business does not have an equally satisfying answer.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Decouple Learning from Credentialing

“JOHN HENNESSY: ‘There’s a tsunami coming.’ [At left] . . . , John Hennessy & Salman Khan.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. R8) Is there anything to be done about the rising price of higher education? That was the question posed to John Hennessy, president of Stanford University, and Salman Khan, founder of Khan Academy, a nonprofit online-learning organization. They sat down with The Wall Street Journal’s Walt Mossberg to discuss how technology might be part of the solution.

Here are edited excerpts of their conversation.
. . .
MR. MOSSBERG: You have a lot of money at Stanford. I’ve been, until recently, a trustee of Brandeis University. It’s a very good university. It charges about what you do. But it doesn’t have your money, and there are a lot of colleges like that.
MR. HENNESSY: Agreed, and if you look at the vast majority of colleges in the U.S., there are way too many that are [dependent on tuition to fund their budgets]. That is not sustainable. We have to do something to bend the cost curve, and this is where technology comes in.
MR. KHAN: On the sustainability question, I agree. I think the elites will probably do just fine, but for the bulk of universities, nothing can grow 5% faster than inflation forever. It will just take over the world, and that’s what’s happening now.
There is a fundamental disconnect happening between the providers of education and the consumers of education. If you ask universities what they are charging the $60,000 for, they’ll say, “Look at our research facilities. Look at our faculty. Look at the labs and everything else.” And then if you ask the parents and the students why they are taking on $60,000 of debt, they’ll say, “Well, I need the credential. I need a job.”
So one party thinks they’re selling a very kind of an enriching experience, and the other one thinks that they’re buying a credential. And if you ask the universities what percentages of your costs are “credentialing,” they say oh, maybe 5% to 10%. And so I think there’s an opportunity if we could decouple those things–if the credentialing part could happen for significantly less.
MR. MOSSBERG: What do you mean by the credentialing part?
MR. KHAN: If you think about what education is, it’s a combination. There’s a learning part. You learn accounting, you learn to write better, to think, whatever. Then there is a credentialing part, where I’m going to hand you something that you can go take into the market and signal to people that you know what you’re doing.
Right now they’re very muddled, but this whole online debate or what’s happening now is actually starting to clarify things. At Khan Academy we’re 100% focused on the learning side of things. And I think it would be interesting [if credentials could be earned based on what you know and not on where you acquired that knowledge].

For the full interview, see:
Walt Mossberg, interviewer. “Changing the Economics of Education; John Hennessy and Salman Khan on how technology can make the college numbers add up.” The Wall Street Journal (Mon., June 4, 2012): R8.
(Note: bracketed words in caption, and ellipses, added; bold and italics in original.)

Environmental “Witch-Hunt” Kills “Golden Rice”

(p. C4) Vitamin A deficiency affects the immune system, leading to illness and frequently to blindness. It probably causes more deaths than malaria, HIV or tuberculosis, killing as many people every single day as the Fukushima tsunami. It can be solved by eating green vegetables and meat, but for many poor Asians, who can afford only rice, that remains an impossible dream. To deal with the problem, “biofortification” with genetically modified food plants is 1/10th as costly as dietary supplements.
“Golden rice”–with two extra genes to make beta-carotene, the raw material for vitamin A–was a technical triumph, identical to ordinary rice except in color. Painstaking negotiations led to companies waiving their patent rights so the plant could be grown and regrown free by anybody.
Yet today, 14 years later, it still has not been licensed to growers anywhere in the world. The reason is regulatory red tape deliberately imposed to appease the opponents of genetic modification, which Adrian Dubock, head of the golden rice project, describes as “a witch-hunt for suspected theoretical environmental problems…[because] many activist NGOs thought that genetically engineered crops should be opposed as part of their anti-globalization agenda.”
It is surprising to find that an effective solution to the problem consistently rated by experts as the poor world’s highest priority has been stubbornly opposed by so many pressure groups supposedly acting on behalf of the poor.

For the full commentary, see:
MATT RIDLEY. “MIND & MATTER; Red Tape Hobbles a Harvest of Life-Saving Rice.” The Wall Street Journal (Sat., May 18, 2012): C4.
(Note: ellipsis in original.)
(Note: the online version of the article has the date May 18, 2012.)

“Discovering a Viper in the Bed of Their Child”

Source of book image: http://files.list.co.uk/images/2011/09/15/arguably-lst090367.jpg

(p. 8) Anyone who occasionally opens one of our more serious periodicals has learned that the byline of Christopher Hitchens is an opportunity to be delighted or maddened — possibly both — but in any case not to be missed. He is our intellectual omnivore, exhilarating and infuriating, if not in equal parts at least with equal wit. He has been rather famously an aggressive critic of God and his followers, after cutting his sacrilegious teeth on Mother Teresa. He wrote a deadpan argument for trying Henry Kissinger as a war criminal, then was branded an apostate by former friends on the left for vigorously supporting the wars in Afghanistan and Iraq. (He memorably — a lot of what Hitchens has written merits the adverb — shot back that his antiwar critics were “the sort who, discovering a viper in the bed of their child, would place the first call to People for the Ethical Treatment of Animals.”) And he is dying of esophageal cancer, a fact he has faced with exceptional aplomb.

This fifth and, one fears, possibly last collection of his essays is a reminder of all that will be missed when the cancer is finished with him.
. . .
(p. 9) At times the book feels like an ongoing argument with the leftist intellectuals on the other side of the Atlantic, who tend to view America as lacking in history, culture or moral standing.
In an essay on the journalism of Karl Marx, written for the left-leaning Guardian, he puts an elbow in the ribs of his old socialist friends: “If you are looking for an irony of history, you will find it . . . in the fact that he and Engels considered Russia the great bastion of reaction and America the great potential nurse of liberty and equality. This is not the sort of thing they teach you in school (in either country).”
“There is currently much easy talk about the ‘decline’ of my adopted country, both in confidence and in resources,” he writes in his introduction. “I don’t choose to join this denigration.”
Christopher Hitchens: American patriot. We’ve done a lot worse.
If there is a God, and he lacks a sense of irony, he will send Hitchens to the hottest precinct of hell. If God does have a sense of irony, Hitchens will spend eternity in a town that serves no liquor and has no library. Either way, heaven will be a less interesting place.

For the full review, see:
BILL KELLER. “Christopher Hitchens, a Man of His Words.” The New York Times Book Review (Sun., September 11, 2011): 8-9.
(Note: ellipsis between paragraphs was added; ellipsis internal to a Hitchens quote was in the original.)
(Note: the online version of the article is dated September 9, 2011.)

The full reference for Arguably, is:
Hitchens, Christopher. Arguably: Essays. New York: Twelve, 2012.

“Christopher Hitchens.” Source of caption and photo: online version of the NYT article quoted and cited above.

For Inventors “Optimism Is Widespread, Stubborn, and Costly”

(p. 257) One of the benefits of an optimistic temperament is that it encourages persistence in the face of obstacles. But persistence can be costly. An impressive series of studies by Thomas Åstebro sheds light on what happens when optimists receive bad news. He drew his data from a Canadian organization–the Inventors Assistance Program–which collects a small fee to provide inventors with an objective assessment of the commercial prospects of their idea. The evaluations rely on careful ratings of each invention on 37 criteria, including need for the product, cost of production, and estimated trend of demand. The analysts summarize their ratings by a letter grade, where D and E predict failure–a prediction made for over 70% of the inventions they review. The forecasts of failure are remarkably accurate: only 5 of 411 projects that were given the lowest grade reached commercialization, and none was successful.
Discouraging news led about half of the inventors to quit after receiving a grade that unequivocally predicted failure. However, 47% of them continued development efforts even after being told that their project was hopeless, and on average these persistent (or obstinate) individuals doubled their initial losses before giving up. Significantly, persistence after discouraging advice was relatively common among inventors who had a high score on a personality measure of optimism–on which inventors generally scored higher than the general population. Overall, the return on private invention was small, “lower than the return on private equity and on high-risk securities.” More generally, the financial benefits of self-employment are mediocre: given the same qualifications, people achieve higher average returns by selling their skills to employers than by setting out on their own. The evidence suggests that optimism is widespread, stubborn, and costly.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

“It’s All about Creative Destruction”

“LARRY ELLISON: ‘It’s all about creative destruction.'” Source of book image: online version of the WSJ review quoted and cited below.

(p. R6) In Silicon Valley, a spot known for constant change, Larry Ellison has kept his job atop Oracle Corp. . . . for decades. And that gives him a unique perspective on the industry and where it’s headed.

The Wall Street Journal’s Kara Swisher spoke with Mr. Ellison about the state of tech innovation, the future of the Internet–and what keeps him inspired.
What follows are edited excerpts of their discussion.
. . .
MS. SWISHER: A lot of people talk about the end of Silicon Valley, the end of innovation. Do you imagine that?
MR. ELLISON: It’s all about creative destruction. Remember Woody Allen’s great line about relationships: “Relationships are like a shark. It either has to move forward, or it dies.”
That’s true of a company. If you don’t keep your technology current, if you’re not monitoring what is possible today that wasn’t possible yesterday, then someone’s going to beat you to the punch. Someone’s going to get ahead of you, and you’re going to lose your customers to some competitor.
We see a lot of companies in Silicon Valley that are under stress now. But there are a lot of other companies that have come along and are doing interesting things.
. . .
MS. SWISHER: What keeps you going?
MR. ELLISON: Red Bull.
I mean, this is going to sound really corny, but life’s a journey of discovery. I’m really fascinated by people, and by what can be done with technology. I also enjoy the competition, the process of learning as we compete, learning as we exploit these technologies to solve customer problems.
The whole thing is just fascinating. I don’t know what I would do if I retired.

For the full interview, see:
Kara Swisher, interviewer. “Silicon Valley, the Long View; Larry Ellison on how much simpler the consumer has it now.” The Wall Street Journal (Mon., June 4, 2012): R6.
(Note: ellipses added; bold and italics in original.)