Emulate, don't Chase

When I first borrowed 'Chasing Goldman Sachs' by Suzanne McGee, I didn't expect to be finishing the rather thick tome. It turned out to be a pretty fine book with its 'utility' analogy of the function of the financial industry and tracing the evolution of the industry from a boring, administrative sort of place to one where brains were pit against brains with unintended (disastrous) consequences.

It was essentially a discussion on the problems in the system itself - culture, regulatory capture (to a certain degree) and incentive problems. There was the typical journalist sort of inconclusive discussion about where the industry to move towards in the coming future. I often write stuff like that to sound intelligent because saying nothing and facilitating viewpoints is the best way out when you find it too risky to take a stand on the issue.

And then I was watching Margin Call, which depicted the sort of culture as well as paradigm that people in the industry have about themselves and the rest of the world. Indeed, it was pointed out by Suzanne that the Wall Street approach towards a problem is vastly different from that of someone on Main Street:

On Wall Street, when you spot a problem, you figure out how to profit from it; not how to solve it.

So let's say you know Enron cooked their books; you don't blow the whistle! At least not until you've accumulated vast amounts of short position on their stock. If you know a war is going to break out in the Middle East before everyone else, you don't call for peace or try and prevent it - you buy oil futures! And so the examples go. That's the way they work, don't expect them to try and prevent a crisis; tell them about it and they'll shrug and go behind their cubicles to their spreadsheets and start computing potential cashflows in different states of the world.

Towards the end of the book Suzanne talks about the importance of learning Goldman Sachs' strategy rather than trying to emulate their returns. I guess it applies to many aspects of life. You realise that when your friends do brilliantly in exams, and you hope to beat him at his game, you don't just go all out to ramp up your studying hours and consult tutors for every other thing. You find out what he does, understand his motivations, find your own motivation and work out a niche for yourself. Don't scramble for the solution only when trouble comes along or try and catch up only when you're falling back - have a strategy, know what you want and then know what to do about it. Only then, you've a chance at getting close to 'chasing Goldman Sachs'.

He sets up the 'monopoly' situation as diametrically opposite of competition but the truth is that 'monopolies' are actually trying to compete as well but they see a larger and more open playing field than those who are engaged in fierce competition in one aspect. Obviously pulling ahead of competitors is not just about mirroring what they do but innovation, often setting yourself apart from them can be immensely valuable. What is forgotten, however, is being so different that you simply create a 'monopoly' altogether.

The Contrarian

The evolutionary landscape that competition is sort of 'model' after features 'monopolies' as well. In Eric Beinhocker's Origin of Wealth (which I read quite a while back); he talks about the need for innovators that tries to jump around the landscape rather than groping around his existing location for peaks. Fierce competition, the sort described by Brooks, is characterised by incremental improvements that allows you to gain advantage over your rivals, much like a mountain climber scaling a specific peak, trying to outdo his rivals by going via the steepest path so that he can get there in the shortest time. And he does so by figuring out the direction he must head in, in order to accent the fastest (global optimization on a R-n landscape has the same sort of spirit but as usual, in mathematics we always imagine rather smooth surfaces that makes things easy - the fitness landscape is hardly smooth).

The good 'monopolist', however, is the innovator who leaves this peak in search for a higher peak or more difficult one to outdo his rivals. Or perhaps he decides he'll dive into ocean trenches instead rather than climb mountains. Opening up a new field and dominating it pays off handsomely in the long run. It also requires one to maintain the bigger picture of the situation. And that is what we observed in the case of John Paulson during the height of the Subprime Mortgage bubble. As an 'outsider' from the mainstream Wall Street, he carefully studied, monitored and analyzed the over-extension of credit in the Subprime Mortgage market before he started taking on short positions that ultimately paid off during the crisis.

Traditional competition, that Peter Thiel is arguing for people to 'avoid', distorts our perception of risks because it captures you into the system and makes you fearful of falling behind when you do something different. When everyone is reading their textbooks and preparing for exams, it would seem somewhat unwise to be reading some other popular Economics books or even the Bible. Yet as a student captured in this whole paper chase, one needs also to realise that there is little value in re-reading what one has been reading for practically the whole year. Combining the content learnt with newer, obliquely relevant knowledge improves your associative memory and can remarkable enhance the ability of questions to trigger knowledge you've already acquired previously over the term. More of this next time on ERPZ.

The key here is that one needs to master the art of being a 'good monopoly' even as one gets too caught up with competition. And this monopoly, would be an efficient one.

Seal that heals

This year's question follows the standard PW format; which goes by the 'research-then-implement' structure. The point is always to get you to study a particular issue/topic/area and then make use of your findings to design an implementable plan with specific actions. Likewise, both questions are usually similar or overlapping to a certain extent. They are quite general as usual and allows much room and space for creativity - something we Singaporeans seem to be mocked for lacking.

The Eureka Moment

Aim
This project task encourages you to explore the world of invention and/or discovery in a particular field and then use your findings to benefit the community

Task Requirements
Identify an invention/discovery in a particular field (eg. in science and technology, medicine, transport, design and construction, consumer goods and services, etc.) and show what its impact has been.

Suggest how your chosen invention/discovery could be adapted to meet a need in the community.

This first question deal with inventions or discovery and obviously you have lots of them to choose from; select something you're interested in and with information available, preferably something that has been implemented somewhere or tried out and you can use the results of the trial to justify your plan. I would advise you to start off with identifying the invention/discovery before trying to think of a need in the community to be met by it. Starting with the need could be challenging. Once you've got your invention/discovery; ask yourself the following:

• What are the impacts of the discovery/invention?
• What is the original motivation/intent behind the discovery or invention?
• How is it applied in the real world? Does it solve a problem, improve on an aspect of life?
• Who does the invention/discovery help? Where and when was it used?
• Is there any side-effects, unintended consequences, dangers?
• Can the invention/discovery be adapted to a similar community in Singapore or around us? How can you reduce any risk that comes with applying the invention/discovery? What kind of difference can you make with this adoption?

Something interesting people might want to look into is that of robots; I recently took notice of this invention, 'Paro the seal', which is a social robot designed to accompany elderly. It could meet the need of an ageing population with lonely elderly folks perhaps. And Sherry Turkle voiced some concerns about this.

Now we move on to the next task option.

Waste Not, Want Not

Aim
This project task encourages you to consider the issue of wastage in a particular area and to suggest ways to reducing such wastage.

Task Requirements
Identify an area (eg. of any natural resource, money, time, food, opportunity, etc.) where wastage takes place and show the present and future impact of such wastage.

Draw up a plan to highlight the problem to a specific group in the community and suggest ways in which they might reduce the wastage.

Now this task deals more specifically with a kind of problem. Still, wastage can be on anything so there's much scope for exploration. 'Wasted opportunity' alone can practically be anything. Choose something that can be wasted but that waste can also be salvaged or put into some other better use then the way it is used now.

• Why is it wasted at present? How does this waste arise? (Eg. Banana peels waste emerges from consumption of bananas)
• How is the waste currently treated? Ignored/Disposed? Used but not efficiently?
• Is there any residual value in the waste? Does the waste actually have value elsewhere? (Eg. Cow dung might be waste to the cow but fertilizers for the farmers)
• Is there a mechanism for us to bring this residual value from one party (the one who wastes it) to the other (the one who needs it)?
• Is there any cost involved in this transfer? Can we design a mechanism for that specific group in the community who can make use of the waste?
• What would be the impact of reducing this wastage? Who benefits and how can the impact affect the society at large?

Food Unwasted

Being based in London for my studies now; I could suggest looking into expired food and consumer products in supermarkets. You could do a project to survey the wasted perishable food that are disposed by supermarkets (like fresh vegetables, fruits, microwaved food, sushi, baked items, etc) every so often. And then a solution could be something like what is used in British supermarkets; that is to reduce the prices of these goods as they approach expiry date so that the supermarket can clear the stocks while recouping some of their cost and reduce wastage at the same time. I have not seen this in supermarkets in Singapore so it might be worthy to look into this.

Please try not to end up copying the suggested ideas because if you can see this post, a thousand over other students or more would see it and your tutors too, would be able to see this set of guidance and possibly use it for their class.

All the best!

Population is something mentioned somewhat regularly on this blog; not only because it is an important variable in social sciences but also because it affects every single one of us more than we normally imagine and that it is a statistic we continually contribute to by our mere existence. I mentioned a while back that I wrote population study papers back in High School. What I didn't mention was that I was studying the ageing population in Singapore. I was looking at what brought about the ageing scenario in Singapore (the institutionalization of the two-child norm and aggressive anti-natalist policies converging with socio-economic development) as well as some potential consequences - higher burden on society, etc.

On aggregate measures, Singapore has somewhat managed to avoid the costs through 'import' of youthful migrants and permanent residents. But I've perhaps left out a major consequence about the presence of an ageing population; I mentioned advantages such as potentially lower crime rates but I made no mention about putting their experience and knowledge into good use. I mentioned about how new niche markets relating to healthcare may emerge but made no reference to the fact that people who live longer might actually be better at dodging health problems that younger people usually face and there's probably some opportunities there.

In any case, Laura Carstensen probably gave a good idea of the perspective that is largely lost in our doom and gloom perception of an ageing population. Perhaps the point about the aged being happier is important as well; and an emotionally stable, knowledgeable, and healthy (if not strong) population can indeed prosper in ways we have never properly sat down to contemplate about.

Do Something, on the side....

I was reading this entry on the HBR blog and found it incredibly perceptive if not insightful. We all have this incredibly strange tendency to believe in an 'all-or-nothing' situation even when we don't actually live such lives. Perhaps we enjoy the binary-choice questions both because they are simple and elegantly reflects our priorities but we almost definitely would hate to be put into that kind of situation where there appears to be no 'third' way.

So must there really be a trade-off? Can't you hold on to your job while trying out something new in the backyard of your home in hopes that you'd create a new product for your future firm? Can you not work as an accountant by day and sing in a bar in the evenings? The people who succeed in doing what they really enjoy and receive the financial fruits do not always simply plunge into something that was initially judged as impossible or unprofitable. They experiment and achieve small wins that leads on to big wins; sometimes it is about persisting through the whole series of failures and hanging on (which might be impossible if you take the all-or-nothing mindset).

OMGPOP, the firm behind the overnight sensation app 'Draw Something' started out as a 'joke' according to its founder and was on the verge of winding up after 35 failed attempts to create an app that generates sufficient revenue for the firm. And then all of a sudden, Zynga came and bought the struggling start-up for $180 million. So were those guys lucky? Yes. But did they hold on to the firm because they believe they'll get lucky? I guess not; it was something closer to passion.

Sure, you can always imagine that if you had not put in that much in your passion, you could have made more money and live a more comfortable life. Or that if you had not suppressed your passion and pursued that high-paying job, you'll be happier. The grass is always greener on the other side. Learn to realise that you can actually balance it. And that life is not all-or-nothing.

Perhaps the worst was that some were searching for an irrefutable stand rather than what they think should be the case. Ultimately, when one observes the lectures at Harvard, one could observe that the students of philosophy transcends the specific issue at hand and considers moral implications of their stand on other matters - little of that was observed at this public lecture.

Michael Sandel did a good job wrapping things up and facilitating the discussions even when I suspect he failed to bring out a point about the morality of markets, that I believe he might be trying to make. In any case, I could probably only settle on waiting for his next book.

It features articles that really touches me, like this short great read.

Yellowing soon?

The Economist points out another flaw in the 'morality' argument with regards to the salary. The implication of justifying high salary for the ministers with the point about attracting top talents and preventing corruption is that it seem to suggest that anything less would mean less able and virtuous state leaders, which obviously isn't the case.

My take on the whole issue has little to say about whether the adjustments are fair or if prevailing salaries are acceptable. And the point of bringing up the article from the Economist is to demonstrate the problem of the argument used.

So if white shirts turns yellow when you buy the cheaper ones, why don't we get other colours instead? Perhaps some day, people would find out that they can do fine with inexpensive light blue tee and just abandon the white ones.

Well, looking at the data on growth of GDP in Singapore, it is unlikely that the introduction of pegging ministerial pay to the private sector had any impact on performance of the economy though one could employ counterfactuals and suggest that we could have done worst without it. There comes a layer of complexity when we ask ourselves whether the motivation of these politicians/technocrats lies in serving the nation or earning a fat paycheck. There is no hard and fast rule about salary guidelines to prevent corruption of those in power though we do have management theorist who suggests that as long as we pay enough to get the issue of money off the table, workers would be able to concentrate on doing their job well. Perhaps the fact that people are in politics is supposed to shed light on alternative motivations?

A potential solution we should explore is for the ministers to bid their positions by making a wage offer to the public and providing their full personal histories and work experience details for the public to screen. The public could vote for the ministers; the top 5 voted candidates will be considered but the minister will be selected based on their salary bids. The lowest bidding candidate will be the minister, but his actual pay will be the higher of, either a 10% discount on the second lowest bid in the top 5, or his own bid. Given the intelligence of the candidates politics should draw forth, such a complex system should be able to attract only the brightest and best while allowing them to take a salary that they (and the public have 'agreed').

That is, of course, a joke. But the spirit of the mechanism is that we want the candidates to bare their motivations to the public and force them to give us a picture of what drives them. Then we'll decide if it's worth it to pay them that offer rate, based on their qualifications and the position in question. This also allows ministers taking on more difficult portfolios to receive a higher pay. Cabinet reshufflings will also be implicitly 'approved' by the public in this way. Best of all, opposition MPs are allowed to put themselves up for ministerial positions and the result would have taken into account public scrutiny of their qualifications, the salary they are going to be paid and also their personal incentives to take on the job - they gave the salary bid themselves so no reason they are going to say, now that's not enough for me.

Knowing the incentives of our political leaders are important. Soon after the news about the salary review recommendations were out, Grace Fu's facebook page status was:

"When I made the decision to join politics in 2006, pay was not a key factor. Loss of privacy, public scrutiny on myself and my family and loss of personal time were. The disruption to my career was also an important consideration. I had some ground to believe that my family would not suffer a drastic change in the standard of living even though I experienced a drop in my income. So it is with this recent pay cut. If the balance is tilted further in the future, it will make it harder for any one considering political office."

It drew forth loads of comments. It reflects how little we know about the true motivations and incentives of our politicians or how unconcerned we are. I think Grace is being really frank and objective here; we should empathize with her position. It is something very human to say and we really shouldn't think of our leaders as heroes who can make all the sacrifices in the world to lead our country. The whole pay issue is a tricky one, but we need to work towards making it less thorny.

Perhaps in a Singapore where our expectations for the future prospects of the country is not so dependent on the government; and that all the institutions are merely support and guiding structures for the private sector to take the lead, then we could relieve our leaders' workload while simultaneously relieving the taxpayers' burden of financing our leaders' salary. And perhaps we should work towards that; and for our government to prevent a crisis where we fail to balance between the 3 principles of the minister pay I've defined earlier, we probably have to transit our political system to one that takes more of a backseat in determining the future of our nation.