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'.
A while back, I wrote an article about the failures of competition in the context of Singapore - where we've failed to set up the competition in a way that benefits the society. Consequently, the result of the competition becomes wasteful and often rather dismal to those involved in the race but didn't emerge anywhere close to victors. But David Brooks (author of 'The Social Animal'), points out in an article on New York Times, that we may have overlooked the 'monopoly' in the context of competition in this world.
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 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.
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.
As businesses set out to look for the next big thing, there are plenty of stuff we already have that needs to be improved and would have a huge market out there.
For a full decade, laptop computers have been improved continuously, getting slimmer, with more processing power packed into them and lighter batteries invented to match the shrinking size of these machines - but alas, there was little improvements made to the power adapters. Beyond Apple's 'Magsafe' power adapter innovation and their attempts to shrink the size of the clunky component, the computing and engineering world appeared to have little interest in improving the peripherals of computing that were still unfriendly to users.
Which is why I'd applaud Min-Kyu Choi's three-pin plug design. Folding neatly from a standard 3-pin layout to a little slice no thicker than a MacBook Air was already quite a design feat. Even more amazing was the improved multi-plug system that makes great use of the wonderful folded design. It compacts the typical bulky design into the size of a single typical plug that we use today. This guy is a total genius.
And so is the 'A Liter of Light' project in the Philippines. The video demonstrates how a simple and elegant solution can make a huge difference to the lives of people.
Baring the occasional breakthrough that perhaps take years to be widely adopted and to start revolutionizing the economy, incremental innovations and even seemingly petty ones like latest version of Yosion's Apple Peel that turns your typical iPod Touch into a iPhone 4 are the staples that helps to keep the economy humming.
Tesco's Homeplus campaign in Korea was absolutely amazing. It truly demonstrates how a study into culture-specific consumer behaviours and psyche is really worthwhile for businesses. Time to hire more psychologists and behavioural economists in your marketing departments.
Scott Anthony made a good point about the importance of allowing failure to take place and brought up the case of Singapore. Perhaps it is not so much about Singapore but the asian societies in general that faces this problem - zombie banks in Japan, some inefficient state-owned firms in China and more. There's a matter of 'face' and perhaps the 'label' of being a failure. And at times, it's about belief in their ideas (just like in the case cited by Scott in Singapore) - perhaps it is the ownership of the ideas that helps these talents strive hard and be motivated. Still, we must acknowledge the importance of allowing failure to occur and accept it. I believe it's changing and as the social atmosphere towards failure improves, Singapore would embrace failure as part of the process of achieving success.
I spent a week at a bank learning how it is like to work there and also the important skills that will land you in a job at the bank. We learnt some really helpful stuff and I think it is important that these skills are all really transferrable. We always hear things about the corporate world that sounds pretty incredible, like an elevator speech/pitch that lands you in a great job or a huge deal, or amazingly tough interview questions that people managed to ace. And you wonder if this all really happens in the corporate world. I guess it does, to a certain extent. Having experienced a really thin slice of corporate life, I reckon these things happens but for most employees in these really great firms, they got in through sheer hardwork, perseverance and being very capable with routine tasks and handling small problems. But it is true that more often than not, connections helps you move up and on. And they often come through networking sessions.
I'm just hoping to share some ideas about professional networking for a student hoping to land on some banking/corporate sort of job/career path.
- Know the details of the event including the kind of people who will be attending.
- Set objectives for yourself such as speaking to a certain number of people or getting in touch with a certain number of people.
- Research on the background of people going or the content of conversations you might like to initiate
- Prepare your ‘elevator speech’ and have it at the back of your mind
- Conversation materials: Ask the person about their background, work experience, reasons for choices of work, details of working environment and people, ask them about what keeps them busy at the moment
- Open the circle to let others come into the group if you see anyone around
- Do not over-dominate, and if the conversation is going nowhere, end it and thank the person for their time before leaving
- Follow-up where appropriate; asks for the person’s advice if you’re about to apply to the organization or some closely related area of work.
If possible, try to review your own performance and think of how you can improve yourself. Try practicing by just randomly attending these sessions and striking a conversation with someone.
Two recent articles shows how openness balanced with secrecy is helpful for businesses navigating the real world. Management of information/secrets would be an important area for business success in the future. IKEA's Success tell discusses the features of IKEA's corporate style and secrecy while the Leaky Corporation discusses the difficulty of keeping important information internal within organizations today.
There's many little ideas I got from LSE100 and my course in general here at the LSE but I haven't got the chance to explore them in-depth. I think one thing about tertiary education is that you are packing so much content within a short span of time there's really a severe lack of time and opportunity to ponder seriously over the issues that are introduced to us even when they are extremely important and significant. By the time exams ends and everything is over we're so anxious to enjoy ourselves we can't be bothered. For those who already think JC is like that, then university is a whole new level up. So I guess if you want to do more intellectual exploration you can either choose to be a PhD student, end up as a lecturer and part of academia or you can consider being an idler.
Still, I find this idea we have been toying with, about social sciences, particularly helpful in understanding the inadequacy of knowledge and our inability to have a complete grasp of the world. In my personal blog, I briefly considered the complexity of social sciences and now I'm going to talk about the implication of this complexity on our ability to make predictions. Unlike the sciences, we don't have laws, we only have models (perhaps with the exception of Goodhart's Law, which implicitly suggests there can be no law in social sciences). And these models would break down under different circumstances. A model that is too robust tells us nothing we don't already know whereas a model that is fits well with a single set of conditions tells us nothing about everything else.
And models allows us to make predictions only to the extent the model continues to do a good job with describing reality. Yet the very knowledge of what's next may result in actions that changes reality and result in the break down of the model. And so to ask, why didn't we foresee the financial crisis is unfair because if we did, it would either have caused sufficient panic that it would have come earlier or that it would have alerted policy-makers enough to prevent it completely. Predictions in social science, in the words of my LSE100 lecturer, are 'inherently unstable'. If you predict there's going to be a run on XYZ bank 2 months down the road, and people believe you, then the bank run will be within the week. If people don't believe you, then there's not going to be any bank run unless new information comes in to affect the behaviours of the people. So you will be wrong anyways.
This is something familiar in Economics. When policy makers try and exploit the Phillips Curve relationship, the curve breaks down because the inflationary expectations of the people changes. And if policy makers ignores the relationship, there's a high chance it comes back again. Then they might be tempted to exploit it only to see it vanish again - and then history repeats itself. And because of all that, policy-making and social sciences are extremely nasty businesses.
Economics lecture on demand brought about a short discussion on network effects. It is about how the consumption or use of particular goods/services has a positive value on the good/service to other users. Goods with strong network effect has to rely on mass adoption by the market to take hold and they tend to persist especially strongly until displaced or rendered obsolete by technological advances. The classic example would be the telephone, where you would only want if people around you had them. As a result, there is a strong path dependency in that competing products succeed or fail almost solely because of their initial ability to amass a large user base.
It has been argued that Windows Operating System enjoyed network effects because software developers started developing softwares for the Windows platform only when many people use it and people use it because most softwares released in the market only runs on Windows. How this started was entirely because of the pricing of Windows in its early days, partly due to piracy and also a bit of luck. Taken to the extreme, the network effects can suggests that people might be using a product or service only because many many other people are using it and not because it is really good. For some time, Windows was considered to be enjoying network effects to this extent: everyone thought it suck but continue using it because the softwares they needed to run only ran on Windows. It takes the rise of the internet and emergence of many mobile devices to reduce the dominance of Windows.
Social Networking sites such as Facebook or MySpace or Friendster also depend on network effect. Obviously, the ease of switching between these platforms (they're free, anyone can sign up for an account) meant that there's still a degree of competition in terms of the quality of the service but essentially there will come a day where it gets really difficult to lure people away from Facebook because they have got so much of their lives in there and all their friends are on it.
Yet the most powerful network effect have been overlooked by most of us. It was that of fiat money, paper currency issued by government backed by nothing. The reason you accept them is because everyone else accept them and we all need a medium of exchange.