11.12.14

Questioning the Signaling Model of Education

I was an early adopter of the Higher Ed Bubble thesis. Like all early adopters, I’ve gotten skeptical now that it’s popular. I recently attended a talk by Bryan Caplan where he discussed his thesis that higher education is about signaling good qualities, not about attaining them. This explains lots of puzzles in the education market, from “will this be on the final exam?” to choosing English Lit over Computer Science to 40% absentee rate in typical college classrooms. One of the most compelling pieces of evidence for the signaling model: on average, one more year of education predicts 10% higher income for an individual. But it predicts 2% higher GDP for a country. [Citation needed: Caplan mentions it in his talk, but it is surprisingly hard to Google for.]

The trouble with signaling is that it’s too good. Signaling is always a possible explanation for phenomena that are visible but don’t have an obvious cause, but like lots of other powerful explanations (“market price” or “survival of the fittest”) it’s also strong enough to explain counterfactuals. It’s still valid and meaningful, but signaling is not necessarily a comprehensive model. And in this case there’s another model that can explain some of the gains: accumulating lots of knowledge is disproportionately useful in fields where a) winners win big, and b) growth in that field is has an unusually small impact on GDP growth. Read the rest of this entry »

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11.10.14

Snapchat as a Value Investment: A Mild but Timely Tweak to Discounted Cash Flow

Snapchat most recently raised money at a rumored $10bn valuation. All good MBAs know that the current value of a company is the value of all of its future cashflows, discounted back to the present. So all good MBAs consider these VCs completely insane. Or they would, except that implicitly people use two valuation frameworks: either they think of an investment in terms of discounted cash flows, or they think of it as a “strategic” investment. “Strategic,” in practice, means “clearly not the result of anyone’s realistic estimate of Snapchat Inc.’s free cash flow generation circa 2029, but not strictly crazy, either.”

But there is a fairly trivial way to square that circle. A company’s current value is the net present value of all future cash flows it can generate, or the amount of cash flow it can cause a single prospective purchaser to lose, discounted to the present. Read the rest of this entry »

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10.30.14

In Search of Negative Carry

One working definition of a professional investor is: somebody who needs to care about “carry.” The classic carry trade is the mid-90’s best against the Yen (I’m going to borrow from this Mark Dow writeup, because I am a macro tourist—literally, my main macro trade is that I avoid traveling to Europe when the Euro is strong). The Yen bet: the BOJ intended to keep rates low; rates in the US were high. So a smart person could borrow Yen, invest in USD, and pocket the difference. A smart person with risk tolerance could do this several times over, and make a very nice return indeed.

As it turns out, one risk of carry trades in FX is that they are a pretty good deal most of the time, so lots of hedge funds get involved, so when something else blows up, they unwind their carry trades, too. So at any given time: a) the carry trade is earning a positive return from the interest rate differential, b) the trade also has a tailwind from more people making the trade (ie every new “borrow Yen / short USD” transaction, but c) at any given time, there’s a possibility of a sudden and painful reversal.

Fortunately for anyone involved in such a trade, you earn your 2 and 20 on performance at a specific time, not on the expected contours of future performance. So for someone who wants pretty good odds of a pretty good return, a carry trade is a pretty good bet. Read the rest of this entry »

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10.29.14

Chicken-and-Egg Disruption: Misunderstanding YouTube, Uber, and AirBNB

AirBNB offers ubiquitous illegal rentals, says New York’s Attorney General. Uber gets shut down or hobbled in new markets around the world. Viacom’s legal department could have wiped out YouTube for ripping off their content.

At one level, you have to ask why somebody would build a business that’s either always illegal or probably going to be used illegally. If you want to be really contrarian, you could try asking that but not rhetorically. Read the rest of this entry »

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10.28.14

Bitcoin from A to B

One sophisticated bitcoin argument goes like this: buying bitcoin speculatively just makes you a modern-day goldbug who can’t handle the intricacies of the modern global financial system. The really cool thing is bitcoin as a platform—for money transfers, for record-keeping, for contracts, or voting.

That’s a fair argument. Anyone who was reading the news in 2008 knows that nobody can handle the intricacies of the modern global financial system. That people whose full-time job was “Make sure it doesn’t ever break” came within about a week of breaking it.

I don’t buy it. Read the rest of this entry »

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10.27.14

You Say “Viral Content” Like It’s a Good Thing

Here’s a fun new game to play with the news: log on to Facebook. Find a story somebody has posted with an absolutely shocking headline. Next, try to guess what important fact the writer omitted to turn the story from something boring into a newsworthy event.

Try it!

  • BREAKING: Politician says incredibly upsetting thing [as a self-deprecating joke].
  • Student expelled for incredibly petty reason [after lots of other disciplinary infractions culminating in one that was, technically, grounds for expulsion].
  • Pope says anything. [Catholic doctrine is well to the left of the average Catholic on pretty much all economic issues, and well to the left of its public perception on social issues].
  • Lawmaker Claims… [When I read “Lawmaker,” I read it as “This headline writer would have said ‘Congressman’ if that were true, but it isn’t.”]
  • Look at this gross thing some Internet nerd said [in an obviously self-deprecating way].

But it gets worse. The big growth area in online media isn’t incremental reporting. It’s incremental repackaging. Three TV channels plus a local paper can pitch the same story to four segments. Buzzfeed alone manufactures new segments constantly. And of course the point of writing something Only People Who Dislike Children Will Understand is that one person who dislikes kids will share it with their kid-disliking friends. The share doesn’t mean “this is interesting.” The share means “you are one of us.” And if that’s the case, what does disagreeing mean?

It’s a weird self-created Cordyceps: we all express group affinity by saying things that make our ingroup dumber. Nobody needs to be particularly cynical; we all just need to be in a hurry. You’re going to share something if it strikes an emotional chord. And you can watch the evolution in nearly real-time by reading about a story in fairly sober publications, and then on click machines like Business Insider. (An excellent example of how the most emotionally impactful word moved from “not” in a study to “maybe” in an early headline to “Study Says” on the blogs.)

I have three cures, two of which are expensive and one of which you can’t affect, but which is the best option because it’s inevitable.

  1. Buy a Bloomberg. Bloomberg, the product, not just something produced by Bloomberg, the company (if it’s not a terminal, it’s an ad for the terminal). How do you know the Bloomberg Terminal and Bloomberg TV are in the opposite business? A Bloomberg TV story goes something like this “A stock market stalwart’s latest announcement shocks investors–more after the break.” The Bloomberg headline is more like “IBM misses revenue estimates by 4%, rescinds 2015 guidance; stock drops 7%.” That’s pretty much word-for-word the best way to inform someone of what happened.
  2. Subscribe to The Economist or something: The Economist has a feedback loop, just like any viral content producer. Their feedback loop takes a little bit longer, because it goes like this: They write something; a large number of smart and important people read it to know what all the smart and important people think; and then they all act as if it’s true. This keeps The Economist mild, but also makes them a good leading indicator that’s not too tied to the outrage cycle.
  3. Wait for Facebook, Twitter, etc. to crack down further. A virus needs a host. It’s hard to strictly draw a line between the host as your attention, or the host as the share of your attention that Facebook controls. But either way, Facebook has an incentive to construct a memetic immune system for you, so you don’t spend all of your time repeating things your friends say. Not that they’re public-spirited—it’s just easier to sell big brand advertisements against bland but fun content, rather than engaging and enraging stuff.

The first option is a big monetary investment. The second is a big time investment. But the third is inevitable. Facebook already explicitly demoted clickbait headlines earlier this year. But they’re not done with Upworthy yet. And Upworthy is definitely a threat to Facebook’s iron grip on the average Internet user’s idle attention. Their business model is, basically, “Notice how everyone under 30 constantly mocks people for sending sappy email forwards? Clearly sappy stories are a universal human need. Let’s trick cool kids into like them.” And it worked! Until the host’s immune system kicked in.

It’s natural to slip into biological metaphors: the term “viral” is apt because it’s a small and self-copying chunk of information. But it’s also apt because a virus can only thrive given raw material from a host, and the host has a strong incentive to stop it. If the best metaphor for a business model is something that kills people, maybe that’s not the model to bet your business on.

11.3.11

Save The Euro: Bring Back the Franc (A Modest Proposal)

The problem with Europe is that everyone there has one and a half monetary systems. You can have one, two, or fifty, but you can’t go halfway.

Every country has the “one” monetary system that constitutes explicit use of the Euro and implicit use of Germany and France as collateral. But each country also has about half of another monetary system: the implicit one they develop when investors analyze their debts with a Euro dissolution in mind. It doesn’t have to be this way, and it doesn’t have to end with a split: why not create a system where the Euro works by the Euro’s rules, and everyone brings back their home currencies to finance their financial misdeads? Read the rest of this entry »

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09.6.11

I’m Joining Yahoo!

I’m pleased to announce that I’m joining Yahoo as SEO Lead.

At Digital DD, we puzzled through the strategies behind some of the biggest SEO companies out there. But Yahoo is an order of magnitude bigger. They have over a hundred million monthly uniques; if I improve things by 1%, I’ve affected the lives of a million people. It’s hard to get that elsewhere. Read the rest of this entry »

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05.6.11

Digital Due Diligence

I’m pleased to announce that I’m now working full-time as co-founder and CEO of Digital Due Diligence, an advisory firm focused on helping investors evaluate online assets.

(Note: A previous version of this post had a rather significant typo. I’m now working at Digital Due Diligence. Not “I’m not” working there.)

02.27.11

What Stock Option Pricing Models Tell You about Courting Controversy

“There’s no such thing as bad publicity” was surely coined by an otherwise bad publicist. Of course there’s such a thing as bad publicity, if you’re already famous.

If you’re not famous, there’s a tradeoff: at some point, it’s better to piss off most of your audience and impress a few people, rather than having no audience at all.

The Black-Scholes model provides a helpful way to look at this. The Black-Scholes formula allows you to price a stock option knowing only a few data points—the current price of the stock, the strike price and maturity of the option, the risk-free interest rate, and the stock’s volatility. Read the rest of this entry »