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.

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.

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.

Galbraithian Wisdom

I've got some great quotes from John Kenneth Galbraith in his mid 20th Century book that bears great lessons for us even today.

Wisdom, itself, is often an abstraction associated not with fact or reality but with the man who asserts it and the manner of its assertion.

And after watching 'Inside Job'; you can't help but wonder if Galbraith's forecast turned out to be true for the SEC:

...regulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic and even intolerant. Later they mellow, and in old age - after a matter of ten or fifteen years - they become, with some exceptions, either an arm of the industry they are regulating or senile.

In any case, the documentary got me reading about some of the economist interviewed in the film. In particular, Glenn Hubbard and Frederic Mishkin were both caught a little off-guard in the film's interview by the director's questions. I thought that they handled the aftermath pretty okay (Mishkin here and Hubbard here). Obviously, the director had something he wanted the two professors to show to the audience and did portray them a little negatively but he did so to demonstrate a wider phenomenon as he justified.

From a human point of view, it is definitely easy to empathize with the director and it is what sells the movie. The policy difficulties and the way the crisis arose make it more difficult for the people in charge to agree with the director. There’s both a lack of certain (vs uncertain) information and cognitive bandwidth to process clues at the time before the crisis and during it. With the benefit of hindsight, the director is empowered to challenge the pre-crisis regime. Dommage pour le financiers!

In the Population in Brief 2011 (pity I didn't have such a reference material during those days when I was working on the research), it seems that fertility in Singapore has fallen even further but it seem to have stopped being such a big deal as the government internalized the social message at large, 'don't bother us with this matter'. There's even a line that says, "We recognise that getting married and starting families are personal choices and decisions." And in a typical Singapore-style bossiness that cannot tolerate inaction or lack of response to something deemed unsocial, it went on, "The Government aims to create a pro- family environment, through a comprehensive set of measures, including the Baby Bonus cash gift and co-savings, tax reliefs and rebates, as well as child care subsidies."

Up, up, up more slowly now...

In the latest LSE100 module which I recently completed, we explored the question, 'Is Population Growth a good thing?'. I was thrown back into a world I was familiar with from research and study of Human Geography back in High School. The Demographic Transition Model, Pro- and anti-natal policies, the 'development as a contraception' argument and so on. It was both interesting and somewhat annoying that themes in the discipline hasn't quite changed much. I guess the discipline is in itself shaped by the themes so I can't expect too much. But to consider population growth over a longer period and look at its dynamics from the perspective of the development of the human civilization and forward is interesting especially when you add technology, resource constraints and the notion of ideas into play.

And of course, more dramatically, the world just crossed a new milestone of having 7 billion people in the world - I remembered that the 6 billion mark was crossed some time in late 1999; my Geography teacher used so say that she and her geography class got the chance to watch the countdown (or count-up?) to 6 billion. More so than ever, we're all just another tiny soul wandering around the increasing crowded surface of our planet.

While 98% of people get a bit more satisfaction out of life (but not a lot) when their incomes rise, the remaining 2% are known as "frustrated achievers" — more money only makes them more unhappy, according to a team led by Leonardo Becchetti of the University of Rome Tor Vergata in Italy. Studying data on UK households, the researchers found that 70% of the frustrated achievers are female, and divorce is more common among this group than among the rest of the population.

Which brings me to the interesting idea explored in a public lecture in LSE last month; two professors 'debate' on the validity of using happiness as a measure of social progress rather than the 'traditional' indicators of income-measurements and development figures (mortality, access to services, nutrition, etc).

Indeed, happiness might often be relative and too often depends on context and circumstances. Our method of asking people if they are happy is as good as trying to measure the wealth of economy by randomly selecting people on the streets and then noting the amount of cash in their wallets. Too much of data relating to happiness is being missed out in the way it is captured now, making it difficult for happiness to be a measure of social progress though ideally, it actually serves as a good benchmark.