In pricing an item, this expert advised, you ought to double your manufacturing costs. Olsen and Anderson didn't know their manufacturing cost, so they guessed a figure and doubled it. Then they realized they might have to sell the modules through sales representatives, so they tacked on another 15 percent.
From "The Ultimate Entrepreneur: The Story of Ken Olsen and Digital Equipment Corporation".
A similar pricing story is also in "CEO" by Sandra Kurtzig founder of now defunct ASK.
Tuesday, September 22, 2009
Monday, September 21, 2009
Elaboration of failure to predict crisis
I'd have to agree with MR:
Some economists are trying to get macroeconomics off the hook by arguing that by their very nature crises are unpredictable. Thus David Levine aggressively argues that "our models don't just fail to predict the timing of financial crises - they say that we cannot." ...
If you play Russian Roulette with 1 bullet and 100 chambers in your pistol, I can't predict when the crisis will occur. If you play with 10 bullets, I still can't predict when the crisis will occur but I can say with certainty that the risk has increased by a factor of ten. Analogously, nothing in modern economics makes it theoretically impossible to forecast that greater leverage and higher than normal price to rental rates, to name just two possibilities, increase the probability of crisis. Nor does modern theory make it theoretically impossible to forecast that conditions are such that if a crisis does occur it will be a big one. ...
Thus the "we could not have predicted the crisis even in theory" argument is a weak defense--even with rational-actor, rational-expectations models there are plenty of senses in which economists could have better predicted the crisis and, although this is yet to be seen, perhaps they could and will do even better with other sorts of models.
David Levine's argument is as follows:
Do you believe that it could be widely believed that the stock market will drop by 10% next week? If I believed that I'd sell like mad, and I expect that you would as well. Of course as we all sold and the price dropped, everyone else would ask around and when they started to believe the stock market will drop by 10% next week - why it would drop by 10% right now. This common sense is the heart of rational expectations models. So the correct conclusion is that our - and your - inability to predict the crisis confirms our theories.
However, this "model" assumes that everyone plays by the following rules:
1. Homogeneous expectations - everyone's belief is the same.
2. Common knowledge - everyone knows that everyone will act on this belief.
Alternatively,
1. Heterogenous expectations around the mean.
2. Common knowledge - everyone knows that even if the expectation has some error, everyone will act on this belief.
So, what does it mean to be able to predict a crisis? It would be something like this: In the next 3 months the probability of a financial crisis has increased from 0.5 to 0.6 for instance. Predicting the crisis would not only mean this conditional probability (within a short time frame - less than a year but more than a month) it would also spell out the way the crisis would unfold.
It is the latter point that economics failed. While there were a lot of doomsayers who portended the crisis they focused on 1) global economic imbalances (mostly academic economists is my guess), 2) the housing bubble. Not a single economist was able to put a probability or a window in which this would occur and no one predicted the spectacular collapse of the financial industry.
If no economist was able to predict the chain of events (much less the likelihood of collapse), then can we really say that all crises are the same?
Some economists are trying to get macroeconomics off the hook by arguing that by their very nature crises are unpredictable. Thus David Levine aggressively argues that "our models don't just fail to predict the timing of financial crises - they say that we cannot." ...
If you play Russian Roulette with 1 bullet and 100 chambers in your pistol, I can't predict when the crisis will occur. If you play with 10 bullets, I still can't predict when the crisis will occur but I can say with certainty that the risk has increased by a factor of ten. Analogously, nothing in modern economics makes it theoretically impossible to forecast that greater leverage and higher than normal price to rental rates, to name just two possibilities, increase the probability of crisis. Nor does modern theory make it theoretically impossible to forecast that conditions are such that if a crisis does occur it will be a big one. ...
Thus the "we could not have predicted the crisis even in theory" argument is a weak defense--even with rational-actor, rational-expectations models there are plenty of senses in which economists could have better predicted the crisis and, although this is yet to be seen, perhaps they could and will do even better with other sorts of models.
David Levine's argument is as follows:
Do you believe that it could be widely believed that the stock market will drop by 10% next week? If I believed that I'd sell like mad, and I expect that you would as well. Of course as we all sold and the price dropped, everyone else would ask around and when they started to believe the stock market will drop by 10% next week - why it would drop by 10% right now. This common sense is the heart of rational expectations models. So the correct conclusion is that our - and your - inability to predict the crisis confirms our theories.
However, this "model" assumes that everyone plays by the following rules:
1. Homogeneous expectations - everyone's belief is the same.
2. Common knowledge - everyone knows that everyone will act on this belief.
Alternatively,
1. Heterogenous expectations around the mean.
2. Common knowledge - everyone knows that even if the expectation has some error, everyone will act on this belief.
So, what does it mean to be able to predict a crisis? It would be something like this: In the next 3 months the probability of a financial crisis has increased from 0.5 to 0.6 for instance. Predicting the crisis would not only mean this conditional probability (within a short time frame - less than a year but more than a month) it would also spell out the way the crisis would unfold.
It is the latter point that economics failed. While there were a lot of doomsayers who portended the crisis they focused on 1) global economic imbalances (mostly academic economists is my guess), 2) the housing bubble. Not a single economist was able to put a probability or a window in which this would occur and no one predicted the spectacular collapse of the financial industry.
If no economist was able to predict the chain of events (much less the likelihood of collapse), then can we really say that all crises are the same?
Sunday, September 20, 2009
Follow up on resource curse at the individual level
From an old post, here is more evidence (without data, HT: MR):
Professional Athletes and the Prevalence of Bankruptcy
This news is about NBA players and bankruptcy is from a few years ago. Now comes even worse news regarding NFL players and bankrupt.
Professional Athletes and the Prevalence of Bankruptcy
This news is about NBA players and bankruptcy is from a few years ago. Now comes even worse news regarding NFL players and bankrupt.
The 78 percent number (i.e., 78% of NFL players go bankrupt within two years of
retirement) is buoyed by the fact that the average NFL career lasts just three
years. So, figure a player gets drafted in 2009, signs for the minimum and lasts
three years in the league: He will have earned about $1.2 million in salary.
Factor in taxes, cost of living and the misguided belief that there will be more
years and bigger paydays down the road, and it becomes a lot easier to see how
so many players struggle with money after their careers end.
Saturday, September 19, 2009
Insights on travel while trying to get to the Antartica
From T+L:
At a time when the earth’s fragile environment is under siege, when ice shelves are famously collapsing, there was something reassuring, too, about the dwarfing scale of the whiteness. It is true that global warming will create cold as well as heat as it changes the weather patterns of the world, but at some level all of us had come here fearful of the greening of Antarctica, and what we found was implacable frozen serenity, in which we were only a new crew of insignificant trespassers. Hoping that we would stay the course and break through to the continent, we were still awestruck and humbled by the majesty around us, and while we prayed the thick ice would vanish out of our ship’s course, we hoped it would not vanish from the earth.
Spoiler: The group never made it to Shackleton's Hut or the Antartica because the ice was too thick.
It is true in general, but especially true of travel, that people are thrilled with anything extra and distraught about anything expected and missed. You may never have heard of the pudding-toed tree chameleon or the Cloister Court of St. Yvette, but when your guide tells you that you’ve been privileged with a rare sighting of the lizard, or that you are catching the cloister open at the whim of the nuns, you are elated. When the opposite happens, you feel not just disappointed but betrayed. You curse yourself for having spent so much money on an experience you’re not having; you imagine the missing experience as nirvana.
At a time when the earth’s fragile environment is under siege, when ice shelves are famously collapsing, there was something reassuring, too, about the dwarfing scale of the whiteness. It is true that global warming will create cold as well as heat as it changes the weather patterns of the world, but at some level all of us had come here fearful of the greening of Antarctica, and what we found was implacable frozen serenity, in which we were only a new crew of insignificant trespassers. Hoping that we would stay the course and break through to the continent, we were still awestruck and humbled by the majesty around us, and while we prayed the thick ice would vanish out of our ship’s course, we hoped it would not vanish from the earth.
Spoiler: The group never made it to Shackleton's Hut or the Antartica because the ice was too thick.
It is true in general, but especially true of travel, that people are thrilled with anything extra and distraught about anything expected and missed. You may never have heard of the pudding-toed tree chameleon or the Cloister Court of St. Yvette, but when your guide tells you that you’ve been privileged with a rare sighting of the lizard, or that you are catching the cloister open at the whim of the nuns, you are elated. When the opposite happens, you feel not just disappointed but betrayed. You curse yourself for having spent so much money on an experience you’re not having; you imagine the missing experience as nirvana.
Thursday, September 17, 2009
What does rejecting the null imply?
1. Test the null that two alternatives are the same (i.e. the mean difference is zero)
2. If the null is not rejected this does not imply that we accept the null that the two alternatives are the same. All we can say is that the two alternatives are not different, which is not the same thing as saying that it is the same. This is the conservative interpretation that was drilled into us in graduate school. (Splitting hairs or angels dancing on a pin?)
3. If the null is rejected, then we can say that the two alternatives are different. In fact, we can say that the two alternatives are not the same. But, can we conclude that one is better than the other, i.e. if the mean difference is positive?
This is what I am wrestling with when reading:
Early Education Policy Alternatives: Comparing Quality and Outcomes of Head Start and State Prekindergarten by Gary T Henry, Craig S Gordon and Dana K Rickman
In the paper, I conclude that the quality difference between state pre kindergarten programs are Head Start programs are different, i.e. we can reject the null that they are the same. (See paper for various measures of qualities and outcomes. For instance, kids in pre kindergarten do better in standardized tests a couple of years later than Head Start kids, Head Start centers/programs do not have as many teachers with BA as state pre-K programs, etc.)
In fact the differences are positive on the side of state pre-K programs but instead of concluding that these programs are better than Head Start, the authors choose to word it as follows (from the abstract, emphasis mine):
The two groups were statistically similar at the beginning of their preschool year on three of four direct assessments (p less than 0.05), but by the beginning of kindergarten the children attending the state prekindergarten program posted higher developmental outcomes on five of six direct assessments (p less than 0.05) and 14 of 17 ratings by kindergarten teachers (p less than 0.05). This study indicates that economically disadvantaged children who attended Georgia's universal prekindergarten entered kindergarten at least as well prepared as similar children who attended the Head Start program.
Can we not conclude that kids entering state pre-K programs are better off than Head Start kids? Or, that Head Start kids are worse off than prekindergarten kids?
2. If the null is not rejected this does not imply that we accept the null that the two alternatives are the same. All we can say is that the two alternatives are not different, which is not the same thing as saying that it is the same. This is the conservative interpretation that was drilled into us in graduate school. (Splitting hairs or angels dancing on a pin?)
3. If the null is rejected, then we can say that the two alternatives are different. In fact, we can say that the two alternatives are not the same. But, can we conclude that one is better than the other, i.e. if the mean difference is positive?
This is what I am wrestling with when reading:
Early Education Policy Alternatives: Comparing Quality and Outcomes of Head Start and State Prekindergarten by Gary T Henry, Craig S Gordon and Dana K Rickman
In the paper, I conclude that the quality difference between state pre kindergarten programs are Head Start programs are different, i.e. we can reject the null that they are the same. (See paper for various measures of qualities and outcomes. For instance, kids in pre kindergarten do better in standardized tests a couple of years later than Head Start kids, Head Start centers/programs do not have as many teachers with BA as state pre-K programs, etc.)
In fact the differences are positive on the side of state pre-K programs but instead of concluding that these programs are better than Head Start, the authors choose to word it as follows (from the abstract, emphasis mine):
The two groups were statistically similar at the beginning of their preschool year on three of four direct assessments (p less than 0.05), but by the beginning of kindergarten the children attending the state prekindergarten program posted higher developmental outcomes on five of six direct assessments (p less than 0.05) and 14 of 17 ratings by kindergarten teachers (p less than 0.05). This study indicates that economically disadvantaged children who attended Georgia's universal prekindergarten entered kindergarten at least as well prepared as similar children who attended the Head Start program.
Can we not conclude that kids entering state pre-K programs are better off than Head Start kids? Or, that Head Start kids are worse off than prekindergarten kids?
Thursday, September 10, 2009
Definition of a bistro
From T+L:
To qualify, the locality must have a population of less than 2,000 (“off the map,” it obviously can’t have a tourist office), and the bistro must be the village’s sole business, or at least just one of a few (the others can be butcher’s shops or boulangeries but not bistros). Owners sign an annually renewable contract, agreeing to attend training classes and regular meetings at which experts deliver talks on olive oil, say, or how to cook wild field greens. According to the Bistrot de Pays charter, they also pledge to play ambassador by furnishing guides and brochures and being knowledgeable enough about points of interest in their area to answer tourists’ questions.
Members are asked to sell postcards, newspapers, and regional food products; hold periodic events like concerts and boules tournaments to bring villagers together; and use ingredients and serve dishes identified with the locale. If at lunch you eat a goat cheese made nearby and want to visit the producer, your waiter should know if this is possible and, if it is, how to arrange it. In the absence of a full or set menu at specific hours, a casse-croûte, or snack, of local foodstuffs like charcuterie is available throughout the day.
Ideally, the bistro should be open year-round and operate as a place where fresh bread is dropped off daily and sold. Beyond bringing the community a notch closer to self-sufficiency, the symbolism is powerful: a village that can offer its people bread controls its destiny. If the bistro has no grocery component, the deal is that residents can buy or borrow staples like flour and butter from the kitchen. This feature is particularly geared to elderly inhabitants who may be village-bound or have no way of getting to a supermarket.
To qualify, the locality must have a population of less than 2,000 (“off the map,” it obviously can’t have a tourist office), and the bistro must be the village’s sole business, or at least just one of a few (the others can be butcher’s shops or boulangeries but not bistros). Owners sign an annually renewable contract, agreeing to attend training classes and regular meetings at which experts deliver talks on olive oil, say, or how to cook wild field greens. According to the Bistrot de Pays charter, they also pledge to play ambassador by furnishing guides and brochures and being knowledgeable enough about points of interest in their area to answer tourists’ questions.
Members are asked to sell postcards, newspapers, and regional food products; hold periodic events like concerts and boules tournaments to bring villagers together; and use ingredients and serve dishes identified with the locale. If at lunch you eat a goat cheese made nearby and want to visit the producer, your waiter should know if this is possible and, if it is, how to arrange it. In the absence of a full or set menu at specific hours, a casse-croûte, or snack, of local foodstuffs like charcuterie is available throughout the day.
Ideally, the bistro should be open year-round and operate as a place where fresh bread is dropped off daily and sold. Beyond bringing the community a notch closer to self-sufficiency, the symbolism is powerful: a village that can offer its people bread controls its destiny. If the bistro has no grocery component, the deal is that residents can buy or borrow staples like flour and butter from the kitchen. This feature is particularly geared to elderly inhabitants who may be village-bound or have no way of getting to a supermarket.
Sunday, September 6, 2009
Do CEOs matter
I concur with this Atlantic article that CEOs do not matter much and when they matter they destroy value more than create it. Moreover, the business press adulations of CEOs is much too short sighted. A CEO who turns around a company in 4-or-5 years has proven nothing much more than the fact that he is a turn around artist, not a leader who can guide the company through good and bad times. The tenure of a CEO matters before he is given all kinds of accolades. The yardstick to be used is a CEO who can successfully guide a company through at least 2 business cycles which means a tenure of at least 15-20 years. By this measure, neither Lee Iacoca, Jack Welch nor Lou Gerstner meet this criteria.
James March, a management professor at Stanford, goes so far as to say that in any well-run company that’s conscientious about grooming its managers, candidates for the top job are so similar in their education, skills, and psychology as to be virtually interchangeable. All that matters is that someone be in charge. “Management may be extremely difficult and important even though managers are indistinguishable,” he writes. “It is hard to tell the difference between two different light bulbs also; but if you take all the light bulbs away, it is difficult to read in the dark.”
And from Jeff Immelt, current CEO of GE:
“Not only could anyone have run GE in the 1990s, [a] dog could have run GE. A German shepherd could have run GE.”
A more nuanced view is here which tends toward the argument that CEOs do not matter much but they do matter. Thus the fact the CEOs should be rewarded based on performance is very much in conflict with the evidence.
James March, a management professor at Stanford, goes so far as to say that in any well-run company that’s conscientious about grooming its managers, candidates for the top job are so similar in their education, skills, and psychology as to be virtually interchangeable. All that matters is that someone be in charge. “Management may be extremely difficult and important even though managers are indistinguishable,” he writes. “It is hard to tell the difference between two different light bulbs also; but if you take all the light bulbs away, it is difficult to read in the dark.”
And from Jeff Immelt, current CEO of GE:
“Not only could anyone have run GE in the 1990s, [a] dog could have run GE. A German shepherd could have run GE.”
A more nuanced view is here which tends toward the argument that CEOs do not matter much but they do matter. Thus the fact the CEOs should be rewarded based on performance is very much in conflict with the evidence.
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