Alex Soojung-Kim Pang, Ph.D.

I study people, technology, and the worlds they make

Tag: business (page 1 of 2)

Yes, the election was clearly a mandate for free markets

This from Balloon Juice amazes me:

Unicredit America has to shut down its fake courtroom, take the fake uniforms off of its fake sheriff’s deputies and disrobe its fake judge, because it’s illegal to try to collect debt by creating your own pretend court system.

Add this to the tale of a woman who had her car repossessed by Wells-Fargo (via) even though she had clear title to the car, and a new recovery plan seems to be emerging: fuck the poor, harder.

Even though I’ve written that shamelessness is the new virtue, the balls required to create your own fake judicial system, and believe you can get away with it, is so incredible as to be sickening.

[To the tune of Van Morrison, “Astral Weeks/I Believe I’ve Transcended,” from the album Astral Weeks: Live At The Hollywood Bowl (a 4-star song, imo).]

One of the greatest quotes of all time

Steve Eisman, “the outspoken investor whose huge wager against the subprime mortgage market was chronicled by author Michael Lewis in his bestselling book The Big Short, talking about the for-profit education industry:

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.

As Mother Jones elaborates,

Driving much of the growth, Eisman explained, was the sector’s easy access to federally guaranteed debt through Title IV student loans. In 2009, he said, for-profit educators raked in almost one-quarter of the $89 billion in available Title IV loans and grants, despite having only 10 percent of the nation’s postsecondary students.

Eisman attributes the industry’s success to a Bush administration that stripped away regulations and increased the private sector’s access to public funds. “The government, the students, and the taxpayer bear all the risk and the for-profit industry reaps all the rewards,” Eisman said. “This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.”…

Another similarity between subprime lending and for-profit education is this, Eisman said: Both push low-income Americans into something they can’t afford…. [Finally], the industry’s era of massive profits—ITT is more profitable on a margin basis than Apple, he notes—are about to end, thanks to new government regulations in the pipeline.

Wonderful.

[To the tune of Pink Floyd, “Shine On You Crazy Diamond (Parts I-V),” from the album Wish You Were Here (a 4-star song, imo).]

Want to reach your goals? Be oblique

John Kay may be my favorite business writer. For some time he’s been thinking about a concept he calls “obliquity,” which is the subject of a forthcoming book, Obliquity: Why Our Goals Are Best Achieved Indirectly. An essay from the Financial Times in 2004 explains the concept.

Obliquity is characteristic of systems that are complex, imperfectly understood, and change their nature as we engage with them…. [These are systems in which] the attempt to focus on simple, well defined objectives proved less successful than management with a broader, more comprehensive conception of objectives…. Obliquity is equally relevant to our businesses and our bodies, to the management of our lives and our national economies.

And yes, it is counterintuitive.

Isn’t it true that you must do better if you set out to maximise something – happiness, wealth, profit – than if you don’t? Surprisingly, the answer is no. Life is too complex and uncertain for us to be able to predict and follow the most direct perceived route to success. Our knowledge is always imperfect, and events are influenced by the unpredictability of other people and organisations. Instead, our objectives are best achieved by a more meandering approach that enables us to adapt our strategy to changing situations. And we learn about the nature of our objectives and the means of achieving them through a process of experiment and discovery.

Part of what’s brilliant about Kay’s argument is that it ranges very widely. He compares CEOs who think broadly versus those who focus more exclusively on profitability, and finds that the second are more likely to destroy value: as he puts it, “Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented.” In forestry, it turns out that letting small fires burn helps protect forests from huge fires by clearing undergrowth. He talks about architecture and urban planning (“a house is not simply a machine for living in”), and the complexity and adaptability of biological systems (and how markets are like them). (Indeed, while he doesn’t trumpet this, Kay’s may be the best application of biological concepts to management and organizational theory around.)

Interesting stuff in theory, but what does it mean? Kay lays that out in a recent Management Today article:

  • Have objectives, but keep your approach flexible so that you can overcome unforeseen obstacles and take advantage of surprise opportunities.
  • Know that your knowledge is always imperfect and incomplete. Cast your net wide – always go fishing for more.
  • Don’t be afraid to change tack once you’ve started if you see a better course.
  • Meandering can lead to serendipitous discoveries and unexpected benefits.
  • Think laterally to solve problems: indirect solutions can often be the most effective answer.

“Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?”

From Michael Lewis:

I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book [Liar’s Poker], spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual….

The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

The whole piece, of course, is fabulous and fierce– the financial journalism equivalent of a really stunning winning design on a good season of Project Runway (which my daughter is now obsessed with), delivered with the panache of Adam and Jamie demolishing an urban legend (my son is obsessed with Mythbusters).

[To the tune of Kate Bush, “Experiment IV,” from the album The Whole Story (a 3-star song, imo).]

Coffeeshop workers in New York City

A pretty good New York Times article on people who spend a lot of time working in coffeeshops. My favorite: a matchmaker who works out of a “Nora Ephron-ish coffee shop in the West Village” rather than an office because it’s “easier to get people talking in a cafe.”

Essentially, cafes really have become cheap coworking space filled with cafe zombies.

[To the tune of Blur, “Coffee & TV,” from the album 13 (I give it 2 stars).]

High-frequency trading and the persistence of place

One of the enduring expectations about cyberspace is that it would erase the importance of place in commerce. A group of designers working in ateliers and studios in Nairobi, Munich, Buenos Aires and Perth, financed by money pulled together in Silicon Valley, would create products sourced to factories in Malaysia and China, thence to be sold in Seoul, Mumbai, Toronto… you get the picture. Talent was what would matter in this world. Place wouldn't.

Ironically, you can make the case that the trend toward placelessness has been most evident in manufacturing, though it's been so for a combination of brutal economic rather than utopian technological reasons, and has required an enormous amount of labor to make those transfers work. Put another way, manufacturing has become more placeless not because technology has made place irrelevent, but because it's helped connect multinationals to mouth-wateringly cheap labor markets. But it hasn't been a matter of effortlessly transferring zeroes and ones around the world at the speed: to make this system work, you've got to put a lot of engineers on planes to Shanghai, just as you need to get a lot of farmers' kids into the cities.

Placelessness has also had a mixed record in finance, the most abstract of economic activities. On one hand, I can transfer money between my checking and savings account on my iPhone. On the other, the financial centers in New York and London are now even more tightly connected together, and process a greater portion of the world's wealth, than ever before. (And as recent events have shown, they have a greater capacity to destroy it, too.) So place continues to matter in finance, even as technology makes some kinds of transactions easier to conduct in a wider variety of places.

This trend is something that's interested a number of cultural and economic geographers, though they're still lots to do on the subject. As Caitlin Zaloom, an amazingly smart observer of the enduring materiality and social nature of financial markets, says,

Globalization theorists such as David Harvey and Manuel Castells argue that under neoliberalism, capitalist institutions have used information technology to flatten the distinctions among places, reducing the significance of spatial distance and temporal difference. They claim that this is nowhere more true than in the sphere of global finance, since economic networks are bound together with technological systems that permit institutions to coordinate activity in real time on a planetary scale, and that allow modern financial instruments to turn commodities—oranges, grain, Treasury bonds, and the like—into abstractions that are bought and sold thousands of times without ever moving an inch. Even global skeptics, it seems, are willing to admit that the speed and scale of financial markets enabled by innovative communications technologies is something new and profound. Never before have financial actors been able to trade with dealers from Frankfurt to Singapore at any time of the day or night. However, these depictions often overstate the role of technology, leading observers to believe that such interconnections were inevitable, a narrative that obscures the human activities that propel money through technological channels, including the labors, false starts, and complex histories of the social and technical forms of global work. (Zaloom, "Markets and Machines: Work in the Technological Sensoryscapes of Finance," American Quarterly 58:3 (September 2006) 815-837, quote on 816.)

Today I ran across another example of how place continues to matter in finance, but at a very small scale: high-frequency trading. If the concentration of wealth and financial services in places like New York and London is like gravity, high-frequency trading is like the strong force in particle physics: it operates at very small scales, but at that scale is incredibly powerful. As the New York Times explains in a July article, "in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea." But things have't quite worked out that way:

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

In this world, as UCSD graduate student Martha Poon observes,

The trades are so fast that materiality matters. ‘Co-location’, which involves situating the trading room next to the exchange so that the wires and cables running between them are as short as possible, actually confers an advantage to high frequency traders.

As a result, LSE lecturer Yuval Millo points out,

In a world where every millisecond counts, event at light-speed speeds, physical distance counts. In fact, we should say ‘physical distance’ counts AGAIN. Yes, physical distance, which used to be an all-important factor in the face-to-face trading pits, is now making a comeback in the form of vicinity from the exchanges’ servers.

This, of course, brings back the issues about the politics embedded in market spatiality. Kate Zaloom shows how important were the top steps of the trading pit in the Chicago futures exchanges, and, consequently, how the political (and sometimes physical!) struggles for these coveted locations. Can we expect similar fights to rage over positions in the electronic communication network that transmits trading orders? Judging from the evolving competition for ‘electronic proximity’ the answer is positive. For example, Wall Street & Technology reports that in 2007 about a 100 trading firms relocated their serves into Nasdaq’s trading headquarters, just to be close to the executing servers and to shave off about 7-35 milliseconds from the communication time (depending on previous location of trading servers). Similar trend is evident in NYSE and the Chicago futures markets.

What does trend teach about the techno-social nature of markets? From an actor-network perspective, this is yet another evidence that markets, just like any other social institution, do not exist in a baboon society. That is, materiality, in general, and tools and devices, in particular, are delineating and indeed, shaping social interaction. There is at least one more insight to be gleaned here, though. It is true that physical space is reintroduced to markets through the relocation that comes along with HFT, but something much more important is being introduced to market with it: the rich, nuanced information that used to be the lifeblood of face-to-face trading and the infrastructure of liquidity supply is now communicated electronically.

This last point is kind of subtle, but it's interesting to think of algorithmically-executed orders as a form of "rich, nuanced information."

So what can we conclude? Place still matters because there's money to be made in occupying distinct physical locations; and it matters even in electronically-driven finance because, at bottom, this is still a physical activity: while it's easy and fashionable to think of modern finance as just a bunch of digitized signifers, the reality is that those zeroes and ones exist on servers, move through Ethernet cables, and are analyzed and responded to by software sitting on computers. Under some conditions we can ignore all that; but the fact is that even in the most information-intensive, abstract activities, materiality is still there.

[To the tune of Isabelle Antena, "Nothing To Lose," from the album Versions (I give it 2 stars).]

Risk and false certainty

This is why incomplete understanding, or mistaking the elegant model for messy reality, is so dangerous.

In the wake of the 1987 stock-market crash, Morgan’s chairman, Dennis Weatherstone, started calling for a daily “4:15 Report” summarizing how much his firm would lose if tomorrow turned out to be a bad day. His counterparts at other firms then adopted the practice. Soon after, business schools jumped to supply graduates to write those reports. Value at Risk, as that number and the process for calculating it came to be known, quickly gained a place in the business-school curriculum.

The desire for up-to-date information on the risks of doing business was admirable. Less admirable was the belief that those risks could be reduced to a single number which could then be estimated on the basis of a set of mathematical equations fitted to a few data points. Much as former–GM CEO Alfred Sloan once sought to transform automobile production from a craft to an engineering problem, Weatherstone and his colleagues encouraged the belief that risk and return could be reduced to a set of equations specified by an MBA and solved by a machine.

Getting the machine to spit out a headline number for Value at Risk was straightforward. But deciding what to put into the model was another matter. The art of gauging Value at Risk required imagining the severity of the shocks to which the portfolio might be subjected. It required knowing what new variables to add in response to financial innovation and unfolding events. Doing this right required a thoughtful and creative practitioner. Value at Risk, like dynamite, can be a powerful tool when in the right hands. Placed in the wrong hands—well, you know.

These simple models should have been regarded as no more than starting points for serious thinking. Instead, those responsible for making key decisions, institutional investors and their regulators alike, took them literally. This reflected the seductive appeal of elegant theory. Reducing risk to a single number encouraged the belief that it could be mastered. It also made it easier to leave early for that weekend in the Hamptons.

As George Box said, “all models are wrong, but some models are useful.” Maybe one of the signal characteristics of today’s world is that the amount of time you have discover that a model isn’t useful, but wrong in a really dangerous way, is shrinking dramatically.

Has anyone looked at the circumstances under which decision-makers or managers come to rely to a dangerous degree on elegant, simple models? The examples of it happening are legion; but are there interesting things we can say about why and when it happens?

Twitter, small business, and real-time information

Two data-points from Springwise about small businesses using Twitter to connect with customers. The first is a Korean-Mexican mobile restaurant in LA:

Kogi Korean BBQ takes the taste of Korean barbecue and melds it with the portability of Mexican tacos and burritos for a whole new category of delectable food…. [A]t least as compelling is that the company sells its food primarily through two trucks that are always on the go to new locations in the Los Angeles area—to know where to find them, customers must follow Kogi on Twitter (and more than 7,000 already do). Prices are recession-friendly—USD 2 for each taco—which may account at least in part for the fact that it's not unusual to find hundreds of patrons lined up and socializing each evening while awaiting their turn at the Kogi truck, according to reports….

Take two taco trucks with a unique recipe, add a dose of Twitter, and you get a phenomenon the LA Times refers to as nothing short of "a burgeoning cyber-hippie movement affectionately referred to as 'Kogi kulture'."

Second is BakerTweet:

Everyone knows that baked goods tend to be best when fresh from the oven; the challenge for bakery customers is predicting when that might be. New technology from London agency Poke now removes the guesswork, however, by enabling bakeries to alert their customers via Twitter any time a new batch is done.

BakerTweet allows bakers to keep their customers informed…. Bakers begin by creating an account online with BakerTweet using their regular computer, inputting all the baked items they want to Twitter about along with the body of the Tweet that will be sent out for each. Back in the kitchens, the wall-mountable BakerTweet box captures that information, allowing bakers to simply turn a dial to select which item they want to Tweet about at that moment ("Fresh Buns," for example) and then push a button to send the full Tweet wirelessly to Twitter. Customers following the bakery then get updated immediately when it's time to go get those buns.

OFF=ON

From the Trendwatching report "OFF=ON:"

[T]he near-total triumph of the ‘online revolution’ (1.4 billion people online, anyone?), which now has the ‘offline world’ more often than not playing second fiddle in everything from commerce to entertainment to communications to politics.

In fact, ‘offline’ is now so intertwined with ‘online’ that a whole slew of new products and services and campaigns are just waiting to be dreamed up by … well… you? Our definition:

OFF=ON | More and more, the offline world (a.k.a. the real world, meatspace or atom-arena) is adjusting to and mirroring the increasingly dominant online world, from tone of voice to product development to business processes to customer relationships. Get ready to truly cater to an ONLINE OXYGEN generation even if you’re in ancient sectors like automotive or fast moving consumer goods.

For this briefing, we chose to focus on hands-on innovation. Which to us means coming up with new goods, services and experiences. And as this is about current OFF=ON developments, we’re excluding researched-to-death topics like straightforward ecommerce or cross-media strategies….

[C]yberspace as we know it (read: a wondrous world of control and make-believe restricted to desktops at home or in poorly-lit offices, and laptops that don’t venture too far from spotty hotspots) is about to vanish, and will be replaced by something that is everywhere, enabling consumers if not enticing* them to actually venture out into the—you guessed it—real world.

I’m not the only one who has trouble talking to today’s youth

A very funny exchange among Wonkette writers over using the term “Bonus Army” to tag a post about AIG:

The five-minute silence after the joke is what makes it COMEDY GOLD.

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