The inefficiency of large, infrequent transactions

In a conversation with Matt Levine, Tyler Cowen asks:

COWEN: Like you, I’m mostly an efficient markets guy, but when I look at initial public offerings I’m very baffled because investment banks take such a huge cut.
 
If you needed to argue, “Well, they need the cut because they talk up the security, and in the absence of their efforts, no one would be interested, and it’s worth it,” maybe that argument works. But it seems somewhat to stand in tension with an efficient markets hypothesis, which suggests the thing will find its appropriate level without any particular investor having to talk it up.
 
Furthermore, attempts to get around the current mainstream system of IPOs have not always been successful. Auctions have been tried. Israel has tried other methods. Spotify is giving it a go. We’ll get further data, but they’re not obviously doing better.
 
How do you reconcile IPOs in their current form continuing, the investment banks taking such a huge cut, and some version of efficient markets hypothesis actually making sense? Do you see what I’m asking?
 

I wasn't at Amazon for its IPO, but I did work on a huge convertible debt offering there. At the time it was the largest ever done. After the transaction had cleared, I received a box at work from Morgan Stanley, who'd been our banker on the deal. Inside was a Tumi carry-on bag, personalized with Amazon and Morgan Stanley logos. Everyone on our side who worked on the deal received one. My guess was the bag retailed for $500 or so without the personalization.

It's always an ambivalent feeling, receiving such a pricey gift from a business partner after a deal. I've received similar customized luggage from law firms after their assistance on something. It feels as if you bought yourself something you didn't want. I generally believe in efficient markets, but I believe even more strongly that law firms and bankers don't do anything out of affectionate generosity. Call it the efficient business transaction hypothesis, in which you always pay for every bit of service rendered. There's a reason you don't receive a Tumi bag from your dry cleaner after laundering a big batch of shirts.

So, as with Cowen, I've long puzzled at the exorbitant take on the part of bankers in deals, regardless of the volume of work done.

Levine answers:

LEVINE: How do I reconcile? One version of efficient markets is that, in the absence of news, the price yesterday is going to be the price today, or whatever. There’s some sort of continuity of prices.
 
The IPO is a huge discontinuity. You don’t have a price and then you have a price. If your notion of efficient markets is a straight line of the price not moving very much or of the price instantly incorporating information, it’s not unintuitive that you’d have a big squiggle at the start, that you wouldn’t really know what the price is for three days, and then you would.
 
I don’t think it’s unusual that the first trade of a stock would not be the price that it settles to in a week, but then, the second week would be pretty close to the first week.
 

A good answer, but the word "discontinuity" hints at another aspect of this type of transaction which hints at why an IPO may not exhibit aspects of an efficient market.

I long wondered the same of the real estate market, another space in which real estate agents have been able to maintain their 6% rake despite the advent of the internet. It's a bit of a puzzle considering how many other markets the internet has turned so efficient that almost all the profits went out of them.

There's a class of transactions which retain abnormally large margins which share several qualities.

  • They are rare, or infrequent transactions for one side, usually the buyer. Many people may only conduct one of these in their lifetime.
  • They are really large relative to most transactions in a person's lifetime, anomalously so.
  • They don't have well-known price anchors, often because the service is good is unique, making exact comps squishy.
  • They are transactions which have some symbolic or mystical value which can justify overspending because how do you put a price on magic?
  • They are time sensitive.

Let's take those in order. The low frequency of such transactions weighs in favor of the seller, not the buyer, because the buyer has no experience. IPOs, housing purchases, weddings. The experience asymmetry is really information asymmetry. One should always be skeptical of playing any game where your opponent has to explain all the rules to you. The three card monte and other cons always begin with the con man explaining the game to you, no?

The anomalous size of the transaction works against you in several ways. One, when so much money is involved, one tends to experience inflation on all fronts. If you're buying a condo that costs a million dollars, or, in the case of San Francisco, a lot more than that, what's another couple hundred dollars in fees here, a few thousand there? In the scheme of things, 6% to your agent doesn't even cross the mind after you've been beaten out on several dream condos in a row by a suitcase of cash from a Chinese buyer who never even showed up. Relative to the transaction size, it's nothing. Human cognitive deficiencies on this front are well-studied.

The lack of price anchors doesn't help. What should a wedding dress cost? You can ask your friends, but, to crib from the Marines, "This is my wedding dress. There are many like it, but this one is mine. It is my life."

Buying cars is also a rare transaction, but it's unlikely you're buying a car model that's never been purchased before. As soon as the internet revealed dealer pricing, it was easy to just call a string of dealers around town and offer to pay $500 over that, nothing more.

The special nature of such transactions supports a "je ne sais quoi" premium. Are you really going to skimp on your IPO, or pinch pennies when it comes to your wedding? I know brides who would sooner cut dinner from the wedding festivities than skimp on their wedding dress. If the event has symbolic value, then almost any price can be justified to oneself. Different cultures support different such mystical price premiums. In the United States, people will spend to no end on their dogs, for example. It's the same for babies or children in many cultures. Are you really going to try to save a hundred dollars or so on a stroller which will transport your precious child for several of their formative years, or not pay the $25,000 tuition for your potentially genius of a child to attend the coveted private school every one is trying to get into?

The time-bounded nature of such transactions just prevents you, as the buyer, from using a long time horizon for leverage. Sellers, of course, will use the time bound as a cudgel in every way possible. If you don't nibble they have many more transactions to come, but you as the buyer have no such luck. The wedding invites have been sent, your investors are eagerly awaiting your IPO, you need to secure housing before your current lease runs out.

The internet has, in many ways, ushered in an age in which old axioms of supply and demand economics aren't always applicable, or which make edge cases commonplace. Infinite supply, zero marginal transaction costs (especially in production and distribution), these are suddenly prevalent. It's almost nostalgic, therefore, to ponder the economics of infrequent transactions, or of markets where supply is fixed (the limited edition sneaker market, for example, or the Bay Area housing market).

The high margins prevalent in large, infrequent transactions suggest that businesses might create some moats simply by replicating some of the qualities of such transactions, even if the underlying businesses don't consist of those. What is subscription pricing but a way of grouping many, frequent transactions into many infrequent transactions where it's difficult to determine the unit cost of all the components of the bundle? I suspect half the reason for the phenomenon in which tech oscillates between bundling and unbundling is to find the efficient size of the bundle that the consumer will bear. We won't all have dozens of Patreon accounts that we support in the future, but neither will we pay $300 a month for some mega video streaming bundle that includes everything under the sun.

Every transaction is a moment for a buyer to reconsider whether it's all worthwhile. At some point, I expect many newspaper will band together to offer some bundled subscriptions. Magazines already have tried this but the very concept of a magazine, and the typical frequency of issues (monthly) is difficult to construct a high value bundle around as compared to newspapers.

I also suspect that the ride-sharing services like Uber and Lyft will continue to experiment with some sort of monthly fee with unlimited rides within reason (perhaps with mileage overage payments). Uber has already experimented with offering pre-payments for a bundle of fixed price rides for a month, and I expect that's just the first step towards some sort of lock-in car-as-a-service subscription pricing. It's exhausting to duke it out with competitors one ride at a time, and it trains buyers to shop for the best price on each ride, something that's easier than ever given that both services' apps allow you to enter your destination to see the price ahead of booking a car.

Let's suppose that consumers do possess some limit to the number of transactions they're willing to put up, some finite cognitive load for payments. If so, then any seller must consider the number of other subscriptions in the marketplace when understanding how well their own bundle will do. And in that case, we should start to see more bundles of bundles. In the tweet above I suggest a few, there are likely many others.

The problem with creating bundles of bundles is divvying up the credit. It's unlikely all components of the bundle contribute equally, so the highest value component is typically hesitant to join in. However, in the digital age, assigning credit is much simpler. So, just as ESPN earns much higher carriage fees in the cable bundle than, say, Comedy Central, can be done with exact usage figures in real time.

The funniest example of the efficiency of bundling (well, it is to me since I don't have kids) is the division of childcare. When I'm around parents, it's somewhat striking how much of a constant low-level tension arises from splitting up such duties. Whose turn is it to change a diaper, or to go hold a crying baby? With the exception of the wealthy who can afford full-time childcare help, such tasks are among the most frequently occurring transactions in adult life. Each is a moment of negotiation, and thus an opportunity for friction.

Thus, parents come up with long-term divisions that reduce the number of such transactions. Sometimes it's an agreement that the dad handles all dishes and diaper changes while the mom does all the feeding and crying. Parents also will come up with bundles which they trade, to reduce the overall number of negotiations. The husband get to go on a guys golf trip for a week, but later that year, the mother gets a girls trip to Palm Springs.

Sometimes efficiency is just household equilibrium, and you can't put a price on that type of harmony.

Why Information Grows

It is hard for us humans to separate information from meaning because we cannot help interpreting messages. We infuse messages with meaning automatically, fooling ourselves to believe that the meaning of a message is carried in the message. But it is not. This is only an illusion. Meaning is derived from context and prior knowledge. Meaning is the interpretation that a knowledge agent, such as a human, gives to a message, but it is different from the physical order that carries the message, and different from the message itself. Meaning emerges when a message reaches a life-form or a machine with the ability to process information; it is not carried in the blots of ink, sound waves, beams of light, or electric pulses that transmit information.
 

From the book Why Information Grows by Cesar Hidalgo. I read this book a long ways back in 2017,  but it's of no less interest now.

And it is the arrow of complexity—the growth of information—that marks the history of our universe and species. Billions of years ago, soon after the Big Bang, our universe did not have the capacity to generate the order that made Boltzmann marvel and which we all take for granted. Since then, our universe has been marching toward disorder, as Boltzmann predicted, but it has also been busy producing pockets that concentrate enormous quantities of physical order, or information. Our planet is a chief example of such a pocket.
 

When one first encounters the second law of thermodynamics, it's easy to tumble into despair at the pointlessness of everything. With the universe fated to collapse into heat death eventually, what is the point of it all?

In this existential void, the presence of pockets of information and order can feel like symbols of rebellion, a raised fist spray painted on a fragment of wall that remains from a bombed-out building. In manifestations of order we see intent, in intent we interpret meaning, and in meaning we find comfort.

Information, when understood in its broad meaning as physical order, is what our economy produces. It is the only thing we produce, whether we are biological cells or manufacturing plants. This is because information is not restricted to messages. It is inherent in all the physical objects we produce: bicycles, buildings, streetlamps, blenders, hair dryers, shoes, chandeliers, harvesting machines, and underwear are all made of information. This is not because they are made of ideas but because they embody physical order. Our world is pregnant with information. It is not an amorphous soup of atoms, but a neatly organized collection of structures, shapes, colors, and correlations. Such ordered structures are the manifestations of information, even when these chunks of physical order lack any meaning.
 

There are plenty of books on information theory, and viewing the universe through the lens of information and computation is increasingly popular, but Hidalgo's book is more readable than most.

To battle disorder and allow information to grow, our universe has a few tricks up its sleeve. These tricks involve out-of-equilibrium systems, the accumulation of information in solids, and the ability of matter to compute.
 
It is the growth of information that unifies the emergence of life with the growth of economies, and the emergence of complexity with the origins of wealth.
 
In twenty-six minutes Iris traveled from the ancientness of her mother’s womb to the modernity of twenty-first-century society. Birth is, in essence, time travel.
 

Birth as time travel is one of those metaphors that, once heard, lodges in your mind like something you always knew. When Arnold Schwarzenegger time travels back from the future to the modern day in The Terminator, he arrives naked, like a newborn.

[It is unclear why a cyborg from the future speaks with a thick Austrian accent, one of the only mysteries I have always hoped would be explained in some throwaway expository joke. My guess is that the voice was a marketing Easter Egg, like celebrity voices in Waze, and someone forgot to flip the Terminator back to its factory default voice before sending it back in time.]

Humans are special animals when it comes to information, because unlike other species, we have developed an enormous ability to encode large volumes of information outside our bodies. Naively, we can think of this information as the information we encode in books, sheet music, audio recordings, and video. Yet for longer than we have been able to write we have been embodying information in artifacts or objects, from arrows to microwave ovens, from stone axes to the physical Internet. So our ability to produce chairs, computers, tablecloths, and wineglasses is a simple answer to the eternal question: what is the difference between us, humans, and all other species? The answer is that we are able to create physical instantiations of the objects we imagine, while other species are stuck with nature’s inventory.
 

Another reason humans wouldn't evolve on a gaseous planet like Jupiter, besides the fact that we'd just burn up, is that without any solids we'd have no way of encoding information to pass on to future generations. Therefore, any advanced civilization in the universe would, it would seem, live in physical conditions that allow for the formation of solids, but not solids that are too rigid.

The temperature band matters. We need solids that are malleable to encode richer sets of information. Add to that the ability to compute, which we see in all forms in our world, down to the cellular level, and suddenly you have life. There is logic to why we look for specific conditions in the universe as precursors for life, and it can be defined more broadly than just looking for water, which is a downstream condition. Further upstream we just want a planet with solids, in a particular band of temperatures.

Such conditions allow living creatures to record and pass along information to the next generation. When humans finally were able to do so, they in effect conquered time. No longer did the knowledge of one generation evaporate into the sinkhole of mortality.

The car’s dollar value evaporated in the crash not because the crash destroyed the atoms that made up the Bugatti but because the crash changed the way in which these were arranged. As the parts that made the Bugatti were pulled apart and twisted, the information that was embodied in the Bugatti was largely destroyed. This is another way of saying that the $2.5 million worth of value was stored not in the car’s atoms but in the way those atoms were arranged. That arrangement is information.
 
...
 
So the value of the Bugatti is connected to physical order, which is information, even though people still debate what information is. According to Claude Shannon, the father of information theory, information is a measure of the minimum volume of communication required to uniquely specify a message. That is, it’s the number of bits we need to communicate an arrangement, like the arrangement of atoms that made the Bugatti.
 
...
 
The group of Bugattis in perfect shape, however, is relatively small, meaning that in the set of all possible rearrangement of atoms—like people moving in a stadium—very few of these involve a Bugatti in perfect condition. The group of Bugatti wrecks, on the other hand, is a configuration with a higher multiplicity of states (higher entropy), and hence a configuration that embodies less information (even though each of these states requires more bits to be communicated). Yet the largest group of all, the one that is equivalent to people sitting randomly in the stadium, is the one describing Bugattis in their “natural” state. This is the state where iron is a mineral ore and aluminum is embedded in bauxite. The destruction of the Bugatti, therefore, is the destruction of information. The creation of the Bugatti, on the other hand, is the embodiment of information.
 

One can separate out the intrinsic value of an item, defined above as the rarity of the state of the configuration of that item, from the external value of an item, as defined by qualities such as symbolic or emotional ones, like nostalgia.

In Pulp Fiction, Bruce Willis risks life and limb to recover a watch given to him by his father. There's no evidence it's a particularly rare watch, he could likely buy another just like it, but its symbolic value to him is extrinsic to the item yet tethered to it the way a genie is trapped in a magic lantern (and that special meaning is conveyed in the now immortal speech by Christopher Walken).

Even the most rational people I know own something that's not physically rare but emotionally rich, a talisman or totem that they use to summon whatever power it holds, whether it be nostalgia or regret or some other enchantment known only to themselves.

What Shannon teaches us is that the amount of information that is embodied in a tweet is equal to the minimum number of yes-or-no questions that Brian needs to ask to guess Abby’s tweet with 100 percent accuracy. But how many questions is that?
 
Shannon’s theory tells us that we need 700 bits, or yes-or-no questions, to communicate a tweet written using a thirty-two-character alphabet. Shannon’s theory is also the basis of modern communication systems.
 

One mathematical reason for the rising usage of emoji in Twitter and other forms of online communication may be that it increases the amount of information that can be encoded in 140 (and now 280) characters.

You'll recall from earlier that the third of the three conditions that allow information to grow is the ability of matter to compute.

To illustrate the prebiotic nature of the ability of matter to process information, we need to consider a more fundamental system. Here is where the chemical systems that fascinated Prigogine come in handy. Consider a set of chemical reactions that takes a set of compounds {I} and transforms them into a set of outputs {O} via a set of intermediate compounds {M}. Now consider feeding this system with a steady flow of {I}. If the flow of {I} is small, then the system will settle into a steady state where the intermediate inputs {M} will be produced and consumed in such a way that their numbers do not fluctuate much. The system will reach a state of equilibrium. In most chemical systems, however, once we crank up the flow of {I} this equilibrium will become unstable, meaning that the steady state of the system will be replaced by two or more stable steady states that are different from the original state of equilibrium.13 When these new steady states emerge, the system will need to “choose” among them, meaning that it will have to move to one or the other, breaking the symmetry of the system and developing a history that is marked by those choices. If we crank up the inflow of the input compounds {I} even further, these new steady states will become unstable and additional new steady states will emerge. This multiplication of steady states can lead these chemical reactions to highly organized states, such as those exhibited by molecular clocks, which are chemical oscillators, compounds that change periodically from one type to another. But does such a simple chemical system have the ability to process information? Now consider that we can push the system to one of these steady states by changing the concentration of inputs {I}. Such a system will be “computing,” since it will be generating outputs that are conditional on the inputs it is ingesting. It would be a chemical transistor. In an awfully crude way this chemical system models a primitive metabolism. In an even cruder way, it is a model of a cell differentiating from one cell type to another—the cell types can be viewed abstractly as the dynamic steady states of these systems, as the complex systems biologist Stuart Kauffman suggested decades ago. Highly interacting out-of-equilibrium systems, whether they are trees reacting to the change of seasons or chemical systems processing information about the inputs they receive, teach us that matter can compute. These systems tell us that computation precedes the origins of life just as much as information does. The chemical changes encoded by these systems are modifying the information encoded in these chemical compounds, and therefore they represent a fundamental form of computation. Life is a consequence of the ability of matter to compute.
 

What's lovely about all of these conditions that allow information to grow is their seeming relevance to individuals and groups of individuals, like corporations or societies or markets.

Humans are concentrated bundles of information with compute power, and when we push ourselves out of equilibrium, we accumulate information. When we crank up our inputs and force ourselves out of our own equilibrium, as we do when we become students, we grow as we restore ourselves to steady state. Whenever anyone complains that they're in a rut, I always counsel them to force themselves out of equilibrium.

***

That covers much of the first half of the book, all fascinating. However, the part of the book that's of broader interest to a business audience is Hidalgo's discussion of the economy as a creator of information.

It's easiest to understand the information creation capacity of an economy by examining its outputs, and the simplest outputs to understand are physical products.

Thinking about products as crystals of imagination tells us that products do not just embody information but also imagination. This is information that we have generated through mental computations and then disembodied by creating an object that mimics the one we had in our head. Edible apples existed before we had a name for them, a price for them, or a market for them. They were present in the world. As a concept, apples were simply imported into our minds. On the other hand, iPhones and iPads are mental exports rather than imports, since they are products that were begotten in our minds before they became part of our world. So the main difference between apples and Apples resides in the source of their physical order rather than in their embodiment of physical order. Both products are packets of information, but only one of them is a crystal of imagination.
 

Like many navel gazers in the tech industry, I'm guilty of stereotyping companies. Apple's strength is integrated hardware and software, Google is the king of machine learning and crunching large data sets, Facebook is the social network to end all social networks, and Amazon is the everything platform.

However, if you haven't worked or been inside any of those companies, it's fairest to judge them as black boxes into which inputs disappear and come out as various outputs, usually products and services like gadgets or websites or applications. Everything else is a mild form of fan fiction. 

By analyzing a company's outputs, one can deduce a great deal about its capabilities. Hidalgo does the same but at the country level.

The idea of crystallized imagination tells us that a country’s export structure carries information about more than just its abundance of capital and labor. A country’s export structure is a fingerprint that tells us about the ability of people in that country to create tangible instantiations of imaginary objects, such as automobiles, espresso machines, subway cars, and motorcycles, and of course about the myriad of specific factors that are needed to create these sophisticated products. In fact, the composition of a country’s exports informs us about the knowledge and knowhow that are embodied in that country’s population.
 

A country that can export a product like an iPhone generally has greater generative power than one that can only export raw materials like bananas. The telltale clues to the economic potential of a country lie not in its imports but its exports.

So what has any of this to do with Chile? The only connection between Chile and the history of electricity comes from the fact that the Atacama Desert is full of copper atoms, which, just like most Chileans, were utterly unaware of the electric dreams that powered the passion of Faraday and Tesla. As the inventions that made these atoms valuable were created, Chile retained the right to hold many of these atoms hostage. Now Chile can make a living out of them. This brings us back to the narrative of exploitation we described earlier. The idea of crystallized imagination should make it clear that Chile is the one exploiting the imagination of Faraday, Tesla, and others, since it was the inventors’ imagination that endowed copper atoms with economic value. But Chile is not the only country that exploits foreign creativity this way. Oil producers like Venezuela and Russia exploit the imagination of Henry Ford, Rudolf Diesel, Gottlieb Daimler, Nicolas Carnot, James Watt, and James Joule by being involved in the commerce of a dark gelatinous goo that was virtually useless until combustion engines were invented. Making a strong distinction between the generation of value and the appropriation of monetary compensation helps us understand the difference between wealth and economic development. In fact, the world has many countries that are rich but still have underdeveloped economies. This is a distinction that we will explore in detail in Part IV. But making this distinction, which comes directly from the idea of crystallized imagination, helps us see that economic development is based not on the ability of a pocket of the economy to consume but on the ability of people to turn their dreams into reality. Economic development is not the ability to buy but the ability to make.
 

At a corporate level, I can recall an age when Sony was the king of consumer electronics the world over. I first coveted a Walkman, then later a Discman. Our family spent its formative years huddled around a giant (at the time) Sony Trinitron TV, and we were the envy of all my friends for owning one. I looked forward to any trip to Japan for a chance to walk the electronics districts to purchase the coolest gadgets on the planet, and for years I owned a Minidisc player model that you couldn't find in the U.S.

And then the world shifted, and the gadget which subsumed all other gadgets was the computer, and as it shrank in size while growing in computational power, the way we interacted with such devices increasingly became software-based. In that competition, the vector which mattered more than anything became software design, a skill Sony had not mastered.

The company that understood both software and hardware design better than any company in the world happened to be located in Silicon Valley, not Japan, and, after a long Wintel interregnum, caused by a number of business factors covered comprehensively elsewhere, Apple's unique skills found themselves in a universe they could really dent. And dent they did.

Thanks especially to the market opportunity created by the smartphone, which it seized with the iPhone, Apple not only surpassed Sony and moved the balance of power in consumer technology across the Pacific Ocean to American shores but became the most valuable company in the entire world.

***

Not all information is easily embodied. For example, for a while I puzzled over what I'll call the Din Tai Fung Paradox.

Din Tai Fung is a restaurant chain, and I visited the original outlet in Taipei decades ago with my mother. They're known for their Shanghainese soup dumplings, made with a very delicate wrap that somehow never breaks and dumps its precious cargo of pork broth until the moment at which you prod it with your chopsticks just so. Some will argue whether Ding Tai Fung is all that and a bucket of chicken, but at a minimum I find the menu to be satisfying comfort food done consistently, in a setting that is usually cleaner and more well-kept than your average chain restaurant outlet. You'll find superior deals from a street vendor and more elaborate preparation at a higher-end restaurant, but Din Tai Fung industrializes and scales a Chinese staple. We don't pay enough attention to scale.

The mystery is why Din Tai Fung has opened so few outlets; they've only dropped locations in a handful of cities in about ten countries in the world, and every Din Tai Fung is packed solid from open to close with the type of ever-present line of humans snaked outside the front door that you so rarely see at any restaurant, let alone a chain.

For a few months, a new outlet was rumored to be opening in San Francisco soon, and among my friends it was as momentous a rumor as if a new Star Wars teaser trailer had dropped. Ultimately, one opened in the Bay Area, but in Santa Clara instead of San Francisco. 

Which leads to a further mystery: why haven't any competing chains opened up to make the same items to fill the market void? I would never open a restaurant, but my family knows I'd make an exception if I were granted the opportunity to open a branch of Din Tai Fung anywhere. I bring it up every family gathering, when there's a lull in the conversation. Forget cryptocurrency, I want to mint me some Din Tai Fung coin.

At every Din Tai Fung I've been to, they have a glass window so you can look into the kitchen to see the soup dumplings being wrapped, always by kitchen staff wearing white uniforms, almost like lab assistants, an impression magnified by the branches that require face masks. It's rumored that the branches in Asia try to hire the tallest, most attractive men to man the soup dumpling assembly line, but it sounds about as true as a lot of things my aunts and uncles tell me, which is to say it's more credible than I'd care to admit.

The hermetic vibe behind the glass is as far from the vendor selling goods from a street cart as possible; some find street food charming but if you're taking this food to a global audience it needs to be sanitized or sterilized, the same way movies for the Chinese market strip out any storylines that might offend. It's not just the front of the house that's immaculate, the show behind the glass display says they have nothing to hide. It's the equivalent of the blackjack dealer at a casino clapping and turning their hands one way and the other before moving to the next table.

More interesting to me was that Din Tai Fung even doesn't even bother to hide the process behind its staple dish, the evidence is on thousands of smart phones by this point, everyone seems to stop to take a photo or video of the assembly line while waiting for their table.

And yet any Chinese food fan knows it's notoriously hard to find a good soup dumpling. In this age where recipes for almost anything are available online for free, why can't you find a good soup dumpling in most major cities in the world? Or, for that matter, a good burrito, or any dish you love? Why are these crystals of imagination so unevenly distributed when the recipes for making them so broadly available?

The answer, as any home chef who has tried to make a dish from some highfalutin cookbook knows, is simple: you can have the most precise ingredient list and directions and still struggle to make anything approaching what you ate, whether it came from a $400 tasting menu or a mainstream cookbook. Cooking is not nearly as deterministic as the term recipe implies.

Slight variations in environment, weather, ingredients, and cookware can lead to massive differences in the final product. Your oven may say 400 degrees, but the actual temperature inside, at the precise spot where you've placed your baking dish, may be different. That celery you use for your mirepoix today may not be as fresh as the celery you used last week. The air pressure where you're cooking on a particular day may differ from that where you live, the bacteria in the air may also vary. Great chefs appear on Top Chef and flail making dishes they've made hundreds of times in their own restaurant kitchen because every bit of environmental variation matters.

We may glamorize the image of the genius, heroic chef, working magic to create a delicious and beautifully plated dish that a waiter places before us with a balletic flourish, but the true value creation in a restaurant comes from translating that moment of genius into a rote, repeatable cycle. The popularity of sous vide as a cooking technique, even at high end restaurants, comes down its repeatable precision and accuracy. Ask any chef and they'll tell you the value of a line chef who can cook dozens of proteins to the right level of doneness every time given the high cost of fish and meat.

In addition to all those conditionals, much of cooking skill comes down to learned muscle memory and pattern recognition that can only be encoded in a human being through repeated trial and error. I tried to learn some of my favorite of my mother and grandmother's dishes by writing down recipes they dictated to me, but much was lost in translation. Like so much maternal magic, it could only be learned, truly, at their side, with an apron on, watching, imitating, botching one dish after another, until some of it seeped into my bones.

In a memorable segment from the documentary Jiro Dreams of Sushi, apprentice Daisuke Nakazawa is assigned the job of making egg sushi, or tamago. He believes it will be simple, but again and again, Jiro rejects his work. Nakazawa ends up making over 200 rejected samples until finally, one day, Jiro approves. Nakazawa cries in relief and joy.

***

Hardware and software are not like cooking. When knowledge and instructions can be encoded in bits, a level of precision is possible that is effectively, for the purposes of this discussion, deterministic. Manufacturing a hundred million iPhones is like food production, but not the type done in high end or home kitchens. Instead, it is more like producing a hundred million Oreos.

There is one country in the world where that many iPhones can be manufactured for the cost that allows Apple to reap its insane profits: China. I can't think of any other country in the world, not India or Mexico or the United States, or all of Europe together that can make that many iPhones for that price to meet the market demand year after year. Some countries have the labor but not the skills, others have the skills but not enough labor, and others just can't do the work as cheaply as China can.

Recall that the potential of an economy can be judged by the complexity of its exports. Based on that, it's difficult to imagine an economy outside of the U.S. with more potential than China. Some of the most complex products in the world, and the iPhone deserves to be on that list, are made in China.

I've backed many a Kickstarter hardware project, and without fail, every one has been made in China, usually Shenzhen. Inevitably, when the products are delayed, the project's creators will send an update with some photos of a few of them in China, at some plant, examining some part that will get the project back on track, or with their arms around a few Chinese plant managers giving a thumbs up sign.

Kickstarter often feels like an industrial and software design and marketing operation layer grafted on top of the manufacturing capabilities of Shenzhen. It is an early warning indicator of China's economic potential, and the gap that remains to realizing it.

Here is another. Foxconn assembles iPhones for Apple, and for their efforts they make anywhere from $8 to $30 per iPhone, depending on what article you believe. Whatever the figure, we know it is not far off from that.

Apple, in contrast, makes hundreds of dollars per iPhone. They earn that premium, many multiples what Foxconn earns, by virtue of being the ones who designed every aspect of the phone, from the software to the hardware. China can supply labor and even sometimes components, but the crystal of imagination that is the iPhone, perhaps the most valuable such crystal in the history of the world, comes almost entirely from the imagination of employees of Apple. Foxconn is one cog in a long supply chain, and that link isn't the one made of gold.

However, to even have the capability of making an iPhone for less than the cost of a lunch in San Francisco is a skill, one China has shown again and again. Many another country wishes it had such a demonstrated skill. Were China ever able to gain some of the software and industrial design skills of a company like Apple, they would be even more of an economic powerhouse than they are now.

That's a massive conditional. It's not something that can be learned by mere handwaving or even sheer industriousness. After all, Sony could return to its former glory, or Samsung be even more dominant globally, if software design skills were so easily learned.

Someone someday will write a book of the history of software design and how it came to be that Apple built up that capability more than any other technology company, and I'll be among its most eager readers because it's an untold story that holds the key to one of the greatest value creation stories in the history of business.

...our world is one in which knowledge and knowhow are “heavier” than the atoms we use to embody their practical uses. Information can be moved around easily in the products that contain it, whether these are objects, books, or webpages, but knowledge and knowhow are trapped in the bodies of people and the networks that these people form. Knowledge and knowhow are so “heavy” that when it comes to a simple product such as a cellphone battery, it is infinitely easier to bring the lithium atoms that lie dormant in the Atacama Desert to Korea than to bring the knowledge of lithium batteries that resides in Korean scientists to the bodies of the miners who populate the Atacaman cities of Antofagasta and Calama. Our world is marked by great international differences in countries’ ability to crystallize imagination. These differences emerge because countries differ in the knowledge and knowhow that are embodied in their populations, and because accumulating knowledge and knowhow in people is difficult. But why is it hard for us to accumulate the knowledge and knowhow we need to transform our dreams into reality?
 

If knowledge were so easy to transfer, I'd be a three-star Michelin Chef because someone gifted me a copy of the Eleven Madison Park cookbook.

Getting knowledge inside a human’s nervous system is not easy because learning is both experiential and social.5 To say that learning is social means that people learn from people: children learn from their parents and employees learn from their coworkers (I hope). The social nature of learning makes the accumulation of knowledge and knowhow geographically biased. People learn from people, and it is easier for people to learn from others who are experienced in the tasks they want to learn than from people with no relevant experience in that task. For instance, it is difficult to become an air traffic controller without learning the trade from other air traffic controllers, just as it is difficult to become a surgeon without having ever been an intern or a resident at a hospital. By the same token, it is hard to accumulate the knowhow needed to manufacture rubber tires or an electric circuit without interacting with people who have made tires or circuits.6 Ultimately, the experiential and social nature of learning not only limits the knowledge and knowhow that individuals can achieve but also biases the accumulation of knowledge and knowhow toward what is already available in the places where these individuals reside. This implies that the accumulation of knowledge and knowhow is geographically biased.
 

What governs the information production capacity of a country? Hidalgo coins two terms to analyze this problem. One is the personbyte.

We can simplify this discussion by defining the maximum amount of knowledge and knowhow that a human nervous system can accumulate as a fundamental unit of measurement. We call this unit a personbyte, and define it as the maximum knowledge and knowhow carrying capacity of a human.
 

The other term is firmbyte.

The limited proliferation of megafactories like the Rouge implies that there must be mechanisms that limit the size of the networks we call firms and make it preferable to disaggregate production into networks of firms. This also suggests the existence of a second quantization limit, which we will call the firmbyte. It is analogous to the personbyte, but instead of requiring the distribution of knowledge and knowhow among people, it requires them to be distributed among a network of firms.
 

Hidalgo then delves a bit into Coase's transaction cost theory of the firm. Traditionally, Coase's theory is used as a way to explain why firms are fundamentally limited in their size, the idea being that at some size, external transactions become cheaper than internal coordination costs and so it's more efficient to just transact externally rather than produce internally.

I'm not interested in examining that topic now. Instead, let's assume that firms all do have some asymptote in size beyond which Coase's anchor becomes too heavy. The interesting implication is that given the existence of a ceiling on the size of the firmbyte, if some chunk of knowledge exceeds that capacity then it can only be carried by a network of firms.

It's long been said that the center of the technology universe shifted from Boston's route 128 to Silicon Valley because California banned non-competes (here's one study). Hidalgo's theory of the finite compute ability of a network of humans and firms explains how this works. The free movement of employees in Silicon Valley allows the region's knowledge-carrying capacity to increase at the expense of any single firm's benefit. Per Coase, the cost of information movement in Silicon Valley, as embodied by an employee carrying a personbyte from one firm to the next, is lower than it was in the route 128 corridor.

Let's telescope back out to the country level. What applies at the regional or industry level holds at the country level. A country's knowledge carrying capacity, and thus its information production power, is influenced in part by the size of networks it can form.

In his 1995 book Trust, he [Francis Fukuyama] argues that the ability of a society to form large networks is largely a reflection of that society’s level of trust. Fukuyama makes a strong distinction between what he calls “familial” societies, like those of southern Europe and Latin America, and “high-trust” societies, like those of Germany, the United States, and Japan.
 
Familial societies are societies where people don’t trust strangers but do trust deeply the individuals in their own families (the Italian Mafia being a cartoon example of a familial society). In familial societies family networks are the dominant form of social organization where economic activity is embedded, and are therefore societies where businesses are more likely to be ventures among relatives. By contrast, in high-trust societies people don’t have a strong preference for trusting their kin and are more likely to develop firms that are professionally run. Familial societies and high-trust societies differ not only in the composition of the networks they form—as in kin and non-kin—but also in the size of the networks they can form. This is because the professionally run businesses that evolve in high-trust societies are more likely to result in networks of all sizes, including large ones. In contrast, familial societies are characterized by a large number of small businesses and a few dominant families controlling a few large conglomerates.
 
Yet, as we have argued before, the size of networks matters, since it helps determine the economic activities that take place in a location. Larger networks are needed to produce products of higher complexity and, in turn, for societies to achieve higher levels of prosperity. So according to Fukuyama, the presence of industries of different sizes indicates the presence of trust. In his own words: “Industrial structure tells an intriguing story about a country’s culture. Societies that have very strong families but relatively weak bonds of trust among people unrelated to one another will tend to be dominated by small, family-owned and managed business. On the other hand, countries that have vigorous private nonprofit organizations like schools, hospitals, churches, and charities, are also likely to develop strong private economic institutions that go beyond the family.”
 

In Tyler Cowen's conversation with economist Luigi Zingales, the latter hints at the limitations of familial economies in humorous fashion:

One friend of mine was saying that the demise of the Italian firm family structure is the demise of the Italian family. In essence, when you used to have seven kids, one out of seven in the family was smart. You could find him. You could transfer the business within the family with a little bit of meritocracy and selection.
 
When you’re down to one or two kids, the chance that one is an idiot is pretty large. The result is that you can’t really transfer the business within the family. The biggest problem of Italy is actually fertility, in my view, because we don’t have enough kids. If you don’t have enough kids, you don’t have enough people to transfer. You don’t have enough young people to be dynamic.
 
The Italian culture has a lot of defects, but the entrepreneurship culture was there, has been there, and it still is there, but we don’t have enough young people.
 

Low fertility's impact on economies is an issue globally, for example in Japan, but low trust outside of family is an even broader constraint on the knowledge carrying capacity of an economy. If you can't form as large a firm as another country, you can't compete in some businesses and the information producing capability of your economy has a lower ceiling.

If you run a company, you're no doubt familiar with the efficiency gains that arise when different employees and departments operate with high trust. Links form easily given an assumption of low risk, and knowledge moves more quickly, fluidly. Networks then facilitate trust in a virtuous cycle, an example being the military as an integrating institution in a multi-ethnic society.

Trust based on family has its own advantages, but for now I'm focused on an economy's ceiling, and networks that throw off the shackles of family-based firms can scale more. China not only has the population to supply a workforce that can assemble 100 million iPhones in a year, it has an economy that has moved beyond any roots in family-based trust.

Hidalgo's theory also explains why we don't see geographic leakage in industry know-how. Why aren't there Silicon Valleys everywhere?

The personbyte theory can also help us explain why large chunks of knowledge and knowhow are hard to accumulate and transfer, and why knowledge and knowhow are organized in the hierarchical pattern that is expressed in the nestedness of the industry-location data. This is because large chunks of knowledge and knowhow need large networks of people to be embodied in, and transferring or duplicating large networks is not as easy as transferring a small group of people. As a result, industry-location networks are nested, and countries move to products that are close by in the product space.
 

When the knowledge required to create something like an iPhone or a Hollywood film require the interaction of multiple people, with all their accumulated knowledge, seizing it for yourself isn't as easy as poaching one employee or sprinting off with a burning branch to give fire to mankind like Prometheus. Thus we understand why, besides its weather, LA has such a grip on filmmaking for the global market, why any handset manufacturers can't just reverse engineer an iPhone, and why, despite having hundreds of millions of users for iMessages, Apple isn't a credible threat in social networking.

When I study the Chinese tech market, I see an incredibly high ceiling. In fact, the Chinese consumer market in tech is more dynamic now than its counterpart in Silicon Valley. Once, China was belittled for simply copying all the US tech companies. It's true, there is a Chinese Bizarro instance of all successful U.S. tech companies, a Chinese Google, Facebook, Amazon, Twitter, Instagram, YouTube, and so on.

Thanks to that complex interaction of culture and technology, however, China now creates companies with no real American equivalents, and that extends beyond WeChat. China also has more dense cities than America, and density creates its own unique consumer technology opportunities. You'll run out of fingers and toes before you come to a Chinese city as small as New York City, and that matters when many social products piggyback and rely on metropolitan densities as dry kindling.

The competition between tech companies in the U.S. draws scandalized chatter from the peanut gallery, but the pace at which something like Snapchat Stories was copied in the U.S. would be seen as laughably slow in China. Not only are features of competitors routinely copied within a week or two in China, employees are poached all the time in what is closer to a true approximation of a free labor market than even Silicon Valley. Knowledge moves quickly, freely.

Three things, in my observation, hold Chinese companies back from capturing more share in the international market, outside Chinese borders. Two are related, and those are an internationally appealing industrial and software design aesthetic.

It's true, people who find many Chinese software UI's to be busy and crowded can't read Chinese and thus don't understand their localized appeal to the Chinese market. As eye-tracking studies have shown (example), Chinese users scan pages differently, and why shouldn't they considering the fundamental differences between an alphabetic language like English and a pictographic one like Chinese?

Still, most of the international market can't read Chinese. In my past work with UI designers in China, I find it takes more prompting to arrive at something more broadly intuitive for, say, an American market.

The same goes for industrial design, where, akin to the denser informational aesthetic of Chinese software, a somewhat more maximalist impulse takes hold. It's still quite common to walk into an Asian electronics superstore and see display signage that lists dozens of bullet points of features in selling a product. Contrast that to the almost non-existent signage in an Apple store for the extreme opposite.

A more tangible example is something like the user interface of everyone's favorite cooking gadget, the Instant Pot. I received one as a gift last year, and no doubt, I think it's a real value at $80 or so for the base model. For how harried we all feel, a pressure cooker is way more useful a kitchen gadget than most.

However, this is the instrument panel on the front of the Instant Pot.

In practice, it's even more confusing than it appears on first glance. I won't delve into it here, but given a simple design pass, the entire UI could be made much less intimidating, much more intuitive. Given the functionality of any pressure cooker, the functionality can be reduced to a much simpler instrumentation.

These two skill gaps in software and industrial design allow for a continued Kickstarter arbitrage opportunity that slaps a more internationally appealing software and industrial design, along with the more internationally appealing marketing, on top of Shenzhen's manufacturing capabilities.

The last thing holding back more Chinese startups, in my experience, is a shortage in the professional management class. I know, I know, MBA's get a bad rap in the domestic market, but having many CEO's with engineering background at so many Chinese tech companies comes with its own drawbacks.

This management gap may be related to the style of org structure and management which others have mentioned to me as less conducive to certain types of innovation, though it's harder for me to assess without having worked inside a Chinese company.

None of this needs to matter since the Chinese market is so massive. Chinese startups can succeed wildly without ever making a peep outside their home territory. Besides, how a design aesthetic and process can seep into a country's soul remains a mystery to me, but my guess is it's about as slow-moving as trying to produce a high quality soup dumpling in a new market.

Still, I love to muse on the potential of China. In fact, there is one Chinese company that best exemplifies the potential of the country's tech market on the international stage. Last summer, a friend of mine who had worked at this company heard I was in the market for a drone and referred me to a friend who was selling an extra, lightly used Mavic Pro which he'd purchased after he thought he'd lost his original.

I don't know the first thing about flying drones, but it took me all of fifteen minutes or so to get the thing up and flying around in the air, capturing 4K video. It is an fantastic feat of engineering, probably still the single drone I'd recommend to anyone looking to get into drone photography (though I recommend getting a bundle with some extra batteries and a carrying case).

DJI had a few advantages in surging to its undisputed leadership position in the global drone market. First, this is a product category where how well the product actually works is more complex a task than in others. Many drones just don't fly that well. Being an engineering-led company is a strength here, and as long as the industrial design is optimized for flight, it doesn't really matter if your product isn't the sleekest. You won't care what it looks like when it's several hundred feet up in the air.

Second, from a software design perspective, drone UI design can piggyback on flight UI templates that have been worked out over the years. One reason I was up and running so quickly with my Mavic Pro is that the flight sticks imitate video game flight controls. The UI isn't quite as simple as I'd like, but I was fluent much more quickly than the hefty page count of the instruction manual implied.

Estimates of DJI's market share vary, but they are all well north of 50%, and most of its competitors have either left the market entirely or are struggling to stay aloft, so to speak. Here is a vertically integrated Chinese company that most definitely makes more than the cost of cheap SF lunch that Foxconn makes for each iPhone it assembles.

Now, making drones and building smartphones or writing apps are not the same skills. Drones, as exciting as they are, still aren't the type of thing I'd recommend except to photography enthusiasts. And China is a long way from dominating the consumer electronics market internationally with a massive portfolio of products from domestic, vertically integrated companies.

But the ceiling at least exists. it's not theoretical. It's more than any other country outside the U.S. can say, and how China answers it is one of the questions which will determine the relative economic power of China versus the United States in this century.

***

That China can export drones more easily than it can import, say, the software and industrial design know-how of a company like Apple is, at a higher level, a fundamental question of how we can pass along knowledge of any sort. Why are we not better at transferring know-how to industrial workers who are out of a job, why hasn't the internet produced a global leveling of industrial know-how at the country level?

Hidalgo notes:

At a finer scale, economies still lack the intimate connection between knowhow and information that is embodied in DNA and which allows biological organisms to pack knowhow so tightly. A book on engineering, art, or music can help develop an engineer, artist, or musician, but it can hardly do so with the elegance, grace, and efficiency with which a giraffe embryo unpacks its DNA to build a giraffe. The ability of economies to pack and unpack knowhow by physically embodying instructions and templates as written information is much more limited than the equivalent ability in biological organisms.
 

We are nowhere near our maximum throughput for passing on our knowledge to our fellow man, let alone across the membrane between companies and economies. In The Matrix, with a few seconds of fluttering eyelids, Keanu Reeves downloads an entire martial art into his self.

Give a man a kung-fu, you making him Neo. Teach a man to kung-fu, you make him John Wick. 

That is the dream. Asky any parent who is in the midst of trying to get a three-year-old to eat their dinner without throwing half of it on the ground and they'll nod in agreement. What is our version of nature's DNA and cell school of knowledge compression and decompression?

One of the reality TV shows which I wish existed would be one in which a variety of masters in their field compete to take absolute novices from a standing start as far as possible in a finite period of time. Instead of Top Chef, in which contestants are all successful chefs already, I want three master chefs to have to each train a handful of complete cooking dunces over a several month process, and the teacher and winning student share the pot.

Each season could have variant skills. In another, maybe the world's top three piano teachers have to train people who've never played the piano in their lives to sight-reading Chopin. Bill Belichick and Nick Saban coach two youth league football teams to see which wins a season finale scrimmage. I'm sure some of you will write me to tell me some version of a show like this exists already, but I've seen some that come close, but almost all the ones I've seen spend much too little time on the actual instruction methodology and process, and that's where all the mystery and interest lies.

In future posts, I'll delve into some of the limitations I've observed in how we pass information among people, companies, and economies, and from one generation to the next. For now, I recommend picking up Hidalgo's book, and I hope to hear from you about some of the ways you've found to help grow information around you in more efficient ways.

1 personal update and 10 browser tabs

I haven't spent much time on personal updates here the past several years, but it matters on some topics to know what my personal affiliations are, so I wanted to share that I've left Oculus as of mid July. I'm not sure what's next yet, but I've enjoyed having some time to travel to see friends and family, catch up on reading, and get outside on my bike the past few weeks.

It's also been great to have the chance to connect with some of the smart people of the Bay Area, many of whom I've never met before except online. Bouncing ideas around with some of the interesting thinkers here is something I wish I did more of sooner, and I'm trying to make up for lost time. It has certainly helped me to refine my thinking about many topics, including my next venture, whatever that turns out to be.

Please ping me if you'd like to grab a coffee.

***

One of my goals during this break is to clear out a lot of things I've accumulated over the years. I donated six massive boxes of books to the local library the other week, and I've been running to a Goodwill dropoff center every few days. 

The other cruft I've accumulated is of a digital nature, mostly an embarrassing number of browser tabs, some of which have been open since before an orange president became the new black. Such digital cruft is no less a mental burden than its physical counterparts, so I'm going to start to zap them, ten at a time. I have to; my Macbook Pro can no longer handle the sheer volume of tabs open, the fan is always on full throttle like a jet engine.

Here are the first ten to go.

1. The War Against Chinese Restaurants

Startlingly, however, there was once a national movement to eliminate Chinese restaurants, using innovative legal methods to drive them out. Chinese restaurants were objectionable for two reasons. First, they threatened white women, who were subject to seduction by Chinese men, through intrinsic female weakness, or employment of nefarious techniques such as opium addiction. In addition, Chinese restaurants competed with “American” restaurants, thus threatening the livelihoods of white owners, cooks and servers; unions were the driving force behind the movement. 


The effort was creative; Chicago used anti-Chinese zoning, Los Angeles restricted restaurant jobs to citizens, Boston authorities decreed Chinese restaurants would be denied licenses, the New York Police Department simply ordered whites out of Chinatown. Perhaps the most interesting technique was a law, endorsed by the American Federation of Labor for adoption in all jurisdictions, prohibiting white women from working in Asian restaurants. Most measures failed or were struck down. However, Asians still lost; the unions did not eliminate Chinese restaurants, but they achieved their more important goal, extending the federal policy of racial exclusion in immigration from Chinese to all Asians. The campaign is of more than historical interest. As current anti-immigration sentiments and efforts show, even today the idea that white Americans should have a privileged place in the economy, or that non-whites are culturally incongruous, persists among some.
 

The core of the story of America is its deep seated struggle with race, not surprising for a country founded on the ideal of the equality of all even as it could not live up to that itself, in its founding moment. That continual grasping at resolving that paradox and hypocrisy is at the heart of what makes the U.S. the most fascinating social experiment in the world, and one reason I struggle to imagine living elsewhere right now.

2. Two related pieces: The revolt of the public and the “age of post-truth” and In Defense of Hierarchy 

From the former:

A complex society can’t dispense with elites.  That is the hard reality of our condition, and it involves much more than a demand for scarce technical skills.  In all human history, across continents and cultures, the way to get things done has been command and control within a formal hierarchy.  The pyramid can be made flatter or steeper, and an informal network is invariably overlaid on it:  but the structural necessity holds.  Only a tiny minority can be bishops of the church.  This may seem trivially apparent when it comes to running a government or managing a corporation, but it applies with equal strength to the dispensation of truth.
 
So here is the heart of the matter.  The sociopolitical disorders that torment our moment in history, including the fragmentation of truth into “post-truth,” flow primarily from a failure of legitimacy, of the bond of trust between rulers and ruled.  Everything begins with the public’s conviction that elites have lost their authorizing magic.  Those at the top have forsaken their function yet cling, illicitly, to their privileged perches.  Only in this context do we come to questions of equality or democracy.
 
If my analysis is correct, the re-formation of the system, and the recovery of truth, must depend on the emergence of a legitimate elite class.
 

From the latter:

To protect against abuse by those with higher status, hierarchies should also be domain-specific: hierarchies become problematic when they become generalised, so that people who have power, authority or respect in one domain command it in others too. Most obviously, we see this when holders of political power wield disproportionate legal power, being if not completely above the law then at least subject to less legal accountability than ordinary citizens. Hence, we need to guard against what we might call hierarchical drift: the extension of power from a specific, legitimate domain to other, illegitimate ones. 
 
This hierarchical drift occurs not only in politics, but in other complex human arenas. It’s tempting to think that the best people to make decisions are experts. But the complexity of most real-world problems means that this would often be a mistake. With complicated issues, general-purpose competences such as open-mindedness and, especially, reasonableness are essential for successful deliberation.
 
Expertise can actually get in the way of these competences. Because there is a trade-off between width and depth of expertise, the greater the expert, the narrower the area of competence. Hence the best role for experts is often not as decision-makers, but as external resources to be consulted by a panel of non-specialist generalists selected for general-purpose competences. These generalists should interrogate the experts and integrate their answers from a range of specialised aspects into a coherent decision. So, for example, parole boards cannot defer to one type of expert but must draw on the expertise of psychologists, social workers, prison guards, those who know the community into which a specific prisoner might be released, and so on. This is a kind of collective, democratic decision-making that makes use of hierarchies of expertise without slavishly deferring to them.  
 

What would constitute a new legitimate elite class? It's a mystery, and a grave one. When truth is largely socially and politically constructed, it weighs nothing. The whole psychology replication crisis couldn't have hit at a worse time. With the internet, you can Google and find a study to back up just about any of your views, yet it's not clear which of the studies are actually sound.

At the same time, we can't all be expected to be experts on everything, even if, with the internet, everyone pretends to be.

3. Why Men Don't Live As Long As Women

Evidence points at testosterone, which is useful for mating but costly in many other ways. I maintain there is nothing more frightening in the world than a bunch of single young men full of testosterone.

This does not mean, however, that men cannot evolve other reproductive strategies. Despite their propensity to engage in risky behavior and exhibit expensive, life-shortening physical traits, men have evolved an alternative form of reproductive effort in the form of paternal investment—something very rare in primates (and mammals in general). For paternal investment to evolve, males have to make sure they are around to take care of their offspring. Risky behavior and expensive tissue have to take a backseat to investment that reflects better health and perhaps prolongs lifespan. Indeed, men can exhibit declines in testosterone and put on a bit of weight when they become fathers and engage in paternal care.10, 11 Perhaps, then, fatherhood is good for health.
 

Perhaps we should be extolling the virtuous signal that is dadbod to a much greater degree than we have. And, on the flipside, we should look with a skeptical eye on fathers with chiseled abs. How does one get a six pack from attending imaginary tea parties with one's daughter for hours on end?

4. Increasing consumer well-being: risk as potential driver of happiness

We show that, even if, ex ante, consumers fear high risk and do not associate it to a high level of happiness, their ex post evaluation of well-being is generally higher when identical consequences result from a high-risk situation than from a low-risk situation. Control over risk-taking reinforces the gap between ex ante and ex post measures of happiness. Thus, our article provides empirical evidence about a positive relation between risk and individual well-being, suggesting that risky experiences have the potential to increase consumer well-being.
 

While I'm not certain what I'm going to do next, I would like to increase my risk profile. It seems a shame not to when I'm fortunate enough to live with very little downside risk.

5. “When the student is ready the teacher will appear. When the student is truly ready, the teacher will disappear.”  —  Lao Tzu

There is some debate over the provenance of this quote but I have rarely read the second sentence, the first part is the one which has had the more enduring life, and for good reason. It's a rhetorical gem.

The second half is underrated. The best coaches know when stepping aside and pushing the student to new challenges is the only path to greater heights. Rather than becoming some Girardian rival like Bill Murray in Rushmore, the best teachers disappear. In the case of Yoda in Return of the Jedi, he literally disappears, though not until giving Luke his next homework assignment: to face Darth Vader.

6. The third wave of globalisation may be the hardest

First we enabled the movement of goods across borders. Then the internet unleashed the movement of ideas. Free movement of people, though? Recent nationalist backlashes aren't a promising sign. Maybe it will happen in its fullest online, maybe in virtual reality.

I am pro-immigration; my life is in so many ways the result of my parents coming to America in college. For decades, the United States has had essentially first pick of the world's hungriest, most talented dreamers, like a sports team that gets to pick at the top of the draft year after year despite winning the championship the year before. Trust the process, as Sam Hinkie might say.

On the other hand, taking off my American goggles, the diversity in the world's cultures, political and social systems, and ideologies is a source of global health. It feels like everyone should be encouraged (and supported) to spend a year abroad before, during, or after college, prior to entering the world, just to understand just how much socially acquired knowledge is path dependent and essentially arbitrary. 

7. Tyler Cowen's Reddit AMA

What is the most underrated city in the US? In the world?
TylerCowen
Los Angeles is my favorite city in the whole world, just love driving around it, seeing the scenery, eating there. I still miss living in the area.

I don't know if I have a favorite city in the world, but I'd agree Los Angeles is the most underrated city in the U.S. considering how many people spit on its very mention. Best dining destination of the major U.S. cities.

8. What are the hardest and easiest languages to learn?

Language Log offers a concise scale as a shorthand answer.

EASY
1. Mandarin (spoken)
2. Nepali
3. Russian
4. Japanese
5. Sanskrit
6. Chinese (written)
HARD
 

9. Under mentioned side effect of global warming

Time was, the cold and remoteness of the far north kept its freezer door closed to a lot of contagion. Now the north is neither so cold nor so remote. About four million people live in the circumpolar north, sometimes in sizable cities (Murmansk and ­Norilsk, Russia; Tromso, Norway). Oil rigs drill. Tourist ships cruise the Northwest Passage. And as new animals and pathogens arrive and thrive in the warmer, more crowded north, some human sickness is on the rise, too. Sweden saw a record number of tick-borne encephalitis cases in 2011, and again in 2012, as roe deer expanded their range northward with ticks in tow. Researchers think the virus the ticks carry may increase its concentrations in warmer weather. The bacterium Francisella tularensis, which at its worst is so lethal that both the U.S. and the USSR weaponized it during the Cold War, is also on the increase in Sweden. Spread by mosquitoes there, the milder form can cause months of flu-like symptoms. Last summer in Russia’s far north, anthrax reportedly killed a grandmother and a boy after melting permafrost released spores from epidemic-killed deer that had been buried for decades in the once frozen ground.
 

Because we don't already have enough sobering news in the world.

10. Why do our musical tastes ossify in our twenties?

It’s simply not realistic to expect someone to respond to music with such life-defining fervour more than once. And it’s not realistic, either, to expect someone comfortable with his personality to be flailing about for new sensibilities to adopt. I’ve always been somewhat suspicious of those who truly do, as the overused phrase has it, listen to everything. Such schizophrenic tastes seem not so much a symptom of well-roundedness as of an unstable sense of self. Liking everything means loving nothing. If you’re so quick to adopt new sentiments and their expression, then how serious were you about the ones you pushed aside to accommodate them?
 
Oh yeah, and one more thing: music today fucking sucks.
 

I still pursue new music, despite being past my twenties, driven mostly, I suspect, by a hunger for novelty that still seems to be kicking. At some point, I can't really recall when, the signaling function of my musical tastes lost most of its value. Once most of your friends have kids, you can seem cultured merely by having seen a movie that's released in the last year.

My most popular posts

I recently started collecting email addresses using MailChimp for those readers who want to receive email updates when I post here. Given my relatively low frequency of posts these days, especially compared to my heyday when I posted almost daily, and given the death of RSS, such an email list may have more value than it once did. You can sign up for that list from my About page.

I've yet to send an email to the list successfully yet, but let's hope this post will be the first to go out that route. Given this would be the first post to that list, with perhaps some new readers, I thought it would be worth compiling some of my more popular posts in one place.

Determining what those are proved difficult, however. I never checked my analytics before, since this is just a hobby, and I realized when I went to the popular content panel on Squarespace that their data only goes back a month. I also don't have data from the Blogger or Movable Type eras of my blog stashed anywhere, and I never hooked up Google Analytics here.

A month's worth of data was better than nothing, as some of the more popular posts still get a noticeable flow of traffic each month, at least by my modest standards. I also ran a search on Twitter for my URL and used that as a proxy for social media popularity of my posts (and in the process, found some mentions I'd never seen before since they didn't include my Twitter handle; is there a way on Twitter to get a notification every time your domain is referenced?).

In compiling the list, I went back and reread these posts for the first time in ages added a few thoughts on each.

  • Compress to Impress — my most recent post is the one that probably attracted most of the recent subscribers to my mailing list. I regret not including one of the most famous cinematic examples of rhetorical compression, from The Social Network, when Justin Timberlake's Sean Parker tells Jesse Eisenberg, "Drop the "The." Just Facebook. It's cleaner." Like much of the movie, probably made up (and also, why wasn't the movie titled just Social Network?), but still a good example how movies almost always compress the information to be visually compact scenes. The reason people tend to like the book better than the movie adaptation in almost every case is that, like Jeff Bezos and his dislike of Powerpoint, people who see both original and compressed information flows feel condescended and lied to by the latter. On the other hand, I could only make it through one and a half of the Game of Thrones novels so I much prefer the TV show's compression of that story, even as I watch every episode with super fans who can spend hours explaining what I've missed, so it feels like I have read the books after all.
  • Amazon, Apple, and the beauty of low margins — one of the great things about Apple is it attracts many strong, independent critics online (one of my favorites being John Siracusa). The other of the FAMGA tech giants (Facebook, Amazon, Microsoft, Google) don't seem to have as many dedicated fans/analysts/critics online. Perhaps it was that void that helped this post on Amazon from 2012 to go broad (again, by my modest standards). Being able to operate with low margins is not, in and of itself, enough to be a moat. Anyone can lower their prices, and more generally, any company should be wary of imitating any company's high variance strategy, lest they forget all the others who did and went extinct (i.e., a unicorn is a unicorn because it's a unicorn, right?). Being able to operate with low margins with unparalleled operational efficiency, at massive scale globally, while delivering more SKUs in more shipments with more reliability and greater speed than any other retailer is a competitive moat. Not much has changed, by the way. Apple just entered the home voice-controlled speaker market with its announcement of the HomePod and is coming in from above, as expected, at $349, as the room under Amazon's price umbrella isn't attractive.
  • Amazon and the profitless business model fallacy — the second of my posts on Amazon to get a traffic spike. It's amusing to read some of the user comments on this piece and recall a time when every time I said anything positive about Amazon I'd be inundated with comments from Amazon shorts and haters. Which is the point of the post, that people outside of Amazon really misunderstood the business model. The skeptics have largely quieted down nowadays, and maybe the shorts lost so much money that they finally went in search of weaker prey, but in some ways I don't blame the naysayers. Much of their misreading of Amazon is the result of GAAP rules which really don't reveal enough to discern how much of a company's losses are due to investments in future businesses or just aggressive depreciation of assets. GAAP rules leave a lot of wiggle room to manipulate your numbers to mask underlying profitability, especially when you have a broad portfolio of businesses munged together into single line items on the income statement and balance sheet. This doesn't absolve professional analysts who should know better than to ignore unit economics, however. Deep economic analysis isn't a strength of your typical tech beat reporter, which may explain the rise of tech pundits who can fill that gap. I concluded the post by saying that Amazon's string of quarterly losses at the time should worry its competitors more than it should assure them. That seems to have come to fruition. Amazon went through a long transition period from having a few very large fulfillment centers to having many many more smaller ones distributed more broadly, but generally located near major metropolitan areas, to improve its ability to ship to customers more quickly and cheaply. Now that the shift has been completed for much of the U.S., you're seeing the power of the fully operational Death Star, or many tiny ones, so to speak.
  • Facebook hosting doesn't change things, the world already changed — the title feels clunky, but the analysis still holds up. I got beat up by some journalists over this piece for offering a banal recommendation for their malady (focus on offering differentiated content), but if the problem were so tractable it wouldn't be a problem.
  • The network's the thing — this is from 2015, and two things come to mind since I wrote it.
    • As back then, Instagram has continued to evolve and grow, and Twitter largely has not and has not. Twitter did stop counting user handles against character limits and tried to alter its conversation UI to be more comprehensible, but the UI's still inscrutable to most. The biggest change, to an algorithmic rather than reverse chronological timeline, was an improvement, but of course Instagram had beat them to that move as well. The broader point is still that the strength of any network lies most in the composition of its network, and in that, Twitter and other networks that have seened flattening growth, like Snapchat or Pinterest, can take solace. Twitter is the social network for infovores like journalists, technorati, academics, and intellectual introverts, and that's a unique and influential group. Snapchat has great market share among U.S. millennials and teens, Pinterest among women. It may be hard for them to break out of those audiences, but those are wonderfully differentiated audiences, and it's also not easy for a giant like Facebook to cater to particular audiences when its network is so massive. Network scaling requires that a network reduce the surface area of its network to each individual user using strategies like algorithmic timelines, graph subdivision (e.g., subreddits), and personalization, otherwise networks run into reverse economies of scale in their user experience.
    • The other point that this post recalls is the danger of relying on any feature as a network moat. People give Instagram, Messenger, FB, and WhatsApp grief for copying Stories from Snapchat, but if any social network has to pin its future on any single feature, all of which are trivial to replicate in this software age, that company has a dim future. The differentiator for a network is how its network uses a features to strengthen the bonds of that network, not the feature itself. Be wary of hanging your hat on an overnight success of a feature the same way predators should be wary of mutations that offer temporary advantages over their prey. The Red Queen effect is real and relentless.
  • Tower of Babel — From earlier this year, and written at a time when I was quite depressed about a reversal in the quality of discourse online, and how the promise of connecting everyone via the internet had quickly seemed to lead us all into a local maximum (minimum?) of public interaction. I'm still bullish on the future, but when the utopian dreams of global connection run into the reality of human's coalitional instincts and the resentment from global inequality, we've seen which is the more immovable object. Perhaps nothing expresses the state of modern discourse like waking up to see so many of my followers posting snarky responses to one of Trump's tweets. Feels good, accomplishes nothing, let's all settle for the catharsis of value signaling. I've been guilty of this, and we can do better.
  • Thermodynamic theory of evolution — actually, this isn't one of my most popular posts, but I'm obsessed with the second law of thermodynamics and exceptions to it in the universe. Modeling the world as information feels like something from the Matrix but it has reinvigorated my interest in the physical universe.
  • Cuisine and empire — on the elevation of food as scarce cultural signal over music. I'll always remember this post because Tyler Cowen linked to it from Marginal Revolution. Signalling theory is perhaps one of the three most influential ideas to have changed my thinking in the past decade. I would not underestimate its explanatory power in the rise of Tesla. Elon Musk and team made the first car that allowed wealthy people to signal their environmental values without having to also send a conflicting signal about their taste in cars. It's one example where actually driving one of the uglier, less expensive EV's probably would send the stronger signal, whereas generally the more expensive and useless a signal the more effective it is.
  • Your site has a self-describing cadence — I'm fond of this one, though Hunter Walk has done so much more to point to this post than anyone that I feel like I should grant him a perpetual license to call it his own. It still holds true, almost every service and product I use online trains me how often to return. The only unpleasant part of rereading this is realizing how my low posting frequency has likely trained my readers to never visit my blog anymore.
  • Learning curves sloping up and down — probably ranks highly only because I have such a short window of data from Squarespace to examine, but I do think that companies built for the long run have to come to maintain a sense of the slope of their organization's learning curve all the time, especially in technology where the pace of evolution and thus the frequency of existential decisions is heightened.
  • The paradox of loss aversion — more tech markets than ever are winner-take-all because the internet is the most powerful and scalable multiplier of network effects in the history of the world. Optimal strategy in winner-take-all contests differs quite a bit from much conventional business strategy, so best recognize when you're playing in one.
  • Federer and the Paradox of Skill — the paradox of skill is a term I first learned from Michael Mauboussin's great book The Success Equation. This post applied it to Roger Federer, and if he seems more at peace recently, now that he's older and more evenly matched in skill to other top players, it may be that he no longer feels subject to the outsized influence of luck as he did when he was a better player. In Silicon Valley, with all its high achieving, brilliant people, understanding the paradox of skill may be essential to feeling jealous of every random person around you who fell into a pool of money. The Paradox of Skill is a cousin to The Red Queen effect, which I referenced above and which tech workers of the Bay Area should familiarize themselves with. It explains so much of the tech sector but also just living in the Bay Area. Every week I get a Curbed newsletter, and it always has a post titled "What $X will get you in San Francisco" with a walkthrough of a recent listing that you could afford on that amount of monthly rent. Over time they've had to elevate the dollar amount just to keep things interesting, or perhaps because what $2900 can rent in you in SF was depressing its readers.

Having had this blog going off and on since 2001, I only skimmed through through a fraction of the archives, but perhaps at some point I'll cringe and crawl back further to find other pieces that still seem relevant.

Buying shares of people

Fantex, Inc. announced today that it has entered into brand contracts with five Major Leaguers: Phillies third baseman Maikel Franco, Astros right-hander Collin McHugh, Orioles second baseman Jonathan Schoop, Twins right-hander Tyler Duffey and Padres third baseman Yangervis Solarte (as noted on BusinessWire.com).
 
Fantex offers professional athletes an up-front, one-time payment in exchange for a portion of that player’s future earnings both on and off the field. Fantex then sells “shares” of that player to public investors for a set price (thus covering the up-front payment to the player), allowing those investors to turn a profit if said player crosses a certain threshold in his career earnings. Obviously, that creates risk for the investors, who stand to take a financial loss if the player fails to earn enough money in his career to justify the shareholders’ investment. Angels left-hander Andrew Heaney became the first player to enter into an agreement with Fantex last September, taking a $3.34MM up-front payment in exchange for 10 percent of his future earnings. (Notably, the league and the MLBPA each approved that agreement, and Fantex’s announcement seemingly suggests that the same is true of these five agreements.)
 

Hmm. I wonder if this becomes more widespread. I'd heard this idea proposed before but never heard of Fantex. Purchasing shares of Jennifer Lawrence just after you'd seen her in Winter's Bone might feel like scoring a Mantle rookie card, back when baseball cards still had real scarcity (and thus value).

Mistress dispellers

Mistress-dispelling services, increasingly common in China’s larger cities, specialize in ending affairs between married men and their extramarital lovers.
 
Typically hired by a scorned wife, they coach women on how to save their marriages, while inducing the mistress to disappear. For a fee that can start in the tens of thousands of dollars, they will subtly infiltrate the mistress’s life, winning her friendship and trust in an attempt to break up the affair. The services have emerged as China’s economy has opened up in recent decades, and as extramarital affairs grew more common.
 

(h/t Ken)

Well this is something. Coming this fall to ABC, the explosive new series from Shonda Rhimes: The Dispeller, starring Halle Berry.

Mistress dispelling typically begins with research on the targeted woman, said Shu Xin, Weiqing’s director. An investigation team — often including a psychotherapist and, to keep on the safe side, a lawyer — analyzes her family, friends, education and job before sending in an employee whom Weiqing calls a counselor.
 
“Once we figure out what type of mistress she is — in it for money, love or sex — we draw up a plan,” Mr. Shu said.
 
The counselor might move into the mistress’s apartment building or start working out at her gym, getting to know her, becoming her confidante and eventually turning her feelings against her partner. Sometimes, the counselor finds her a new lover, a job opening in another city or otherwise persuades her to leave the married man. Weiqing and other agencies said their counselors were prohibited from becoming intimately involved with the mistresses or from using or threatening violence.
 

Even the term is spectacular—mistress-dispelling—like some overly literal translation of a Chinese phrase.

At first blush, this seems like a ridiculous solution, but understand the social context and there is a Coasean efficiency, an almost ingenious elegance, at work.

 

Interview with Matthew Gentzkow

Due to this work, we now know that newspaper media slant is driven mostly by the preferences of readers, not newspaper owners. And by examining browser data, he discovered that people don’t largely live in internet “echo chambers”—that is, they don’t exclusively visit sites that align with their political bent. Product brand preferences, he found, are established early in life and endure long after exposure to essentially identical, less expensive alternatives.
 

That's from the introduction to this interview of 2014 Clark Medal winner Matthew Gentzkow. This immediately caught my eye because it echoes some ideas I have (which is perhaps ironic considering one of those points is about the over-estimation of Internet echo chambers).

I think the Internet has expanded, on balance, the volume of ideas on all sides that most people are exposed to, offsetting the echo chamber effect. What should concern us is how people have reacted to that broadened exposure; instead of pushing people to the center, it has increased polarization. That may say more about how we receive ideas that threaten our worldviews and tribal affiliations than it does about the inherent nature of the internet. 

Like Gentzkow, I also believe the reason so much advertising targets young people, even though it's the adults that have money, is to lock in consumer preference for life. In that respect much of that advertising is more efficient than it appears.

Frankly, this interview contains so much high quality material I can excerpt all day and still barely make a dent, so do read the whole thing.

Good news for parents who, on occasion, let their kids watch a bit of TV just to get a respite from care-taking duties.

This reflects what I think is an important conceptual point—that took a while to really sink in for us—which is that you can’t talk about the effect of TV without thinking about what it’s crowding out. TV viewing is shifting time around. And, really, for any new technology, any change that is shifting the allocation of time, its effect is the effect of that technology relative to whatever you would have been doing otherwise. 
 
That has pretty important implications for this question because if you think about children of different backgrounds and what else they might be doing with their time, it’s easy to imagine that for some kids, watching television is a much richer source of input than a lot of what it might be crowding out. TV has lots of language; it exposes them to lots of different people and ideas. 
 
It’s also easy to imagine kids for whom it could be a lot worse than whatever else they would have been doing. Educated, wealthy parents or parents with a lot of time to invest in their kids might be taking them to museums and doing math problems with them and so forth. I think part of the reason so many people writing about this assume TV is bad is that they themselves are in the latter group.
 

We have a strong norm in America about the corrupting influence of TV on children. I'm not sure how it arose or where it came from, but I'd love to know the history of that meme.

Regardless, what it means is that TV is often underrated for its positive aspects. I saw a paper once, though I can't seem to track it down, that showed that the introduction of TV in different countries and societies correlated with a strong rise in equality for a variety of groups including women and minorities.

That's not so surprising when you consider just how efficient television is at transmitting cultural norms. Humans love stories, and in this age those stories travel most efficiently to more people when encoded in the form of television and film narratives.

On the other hand, TV has had a negative effect on political turnout.

On the other hand, TV isn’t just political information; it’s also a lot of entertainment. And in that research, I found that what seemed to be true is that the more important effect of TV is to substitute for—crowd out—a lot of other media like newspapers and radio that on net had more political content. Although there was some political content on TV, it was much smaller, and particularly much smaller for local or state level politics, which obviously the national TV networks are not going to cover. 
 
So, we see that when television is introduced, indeed, voter turnout starts to decline. We can use this variation across different places and see that that sharp drop in voter turnout coincides with the timing of when TV came in.
 

This reminds me of an idea I've written about before, that in this age of near infinite content, we now gravitate towards an information diet that is much more reflective of our daily preferences than in the past. Newspapers of old started with the front page and included editorially prescribed sections in equal volume: World, Business, Sports, Entertainment, Autos, and so on.

I was always skeptical those sections merited equal surface area, but it wasn't until readers could actually consume anything they wanted that we had a true view of their preferences. The internet is perhaps history's great lab on consumer choice, and what it shows is that most people generally only want small doses of the main entree of hard news, and a lot more appetizers and dessert: sports, entertainment, celebrity gossip, clickbait self-help, pornography. 

That's why the addition of The Ringer is valuable for Medium. There are only so many tech confessional pieces even the most ardent tech enthusiast can handle in the Silicon Valley bubble chamber; scatter a few copies of US Weekly on the coffee table, and hang a flatscreen TV tuned into ESPN, and more people will visit more often.

My co-authors, Bart and JP, along with Sanjay Dhar, another co-author of theirs, had written a really important paper in the Journal of Political Economy a couple of years earlier that documented huge differences across U.S. cities in which brands are popular. They showed that that actually is correlated with the timing of which brands were introduced first in those cities, even though all of those introductions happened, for the most part, 50 or 100 years ago and few people remember a time when you couldn’t buy both. Say, for example, that we have two brands that have both been in a particular city for 50 years. If one was introduced 70 years ago and the other 50 years ago, you can predict that the one that’s been there for 70 years is going to have a much bigger market share.
 

We often think of first-mover advantage in sectors with network effects, perhaps none more clearly so than in messaging, with the odd geographically clustered favorites around the world. What Gentzkow notes here is that first-mover advantage can apply in consumer packaged goods, too. 

It's not that surprising, though I point it out for those who are always questioning why brands target unemployed millennials or kids without any income with advertising. Think about the loyalty fans have to sports teams from their childhood hometowns, long after they've moved elsewhere.

Our research results push back on that and say that, at least in this particular context, ownership is not really the key driver of slant and, in fact, a lot of the driver is actually coming from consumer demand. Not only does that say that you might not need to be as worried about ownership, but it also says that the welfare implications of this are a little more complicated because now consumers are getting what they want. 
 
We might think from a political, democratic point of view that it would be better if the public got different, more diverse information. But there’s going to be a welfare trade-off because we would be giving them content they would prefer less. If we want to give people diverse content that we think is good for democracy, then we have to get them to actually read, watch or consume it. And, you know, giving a bunch of people in conservative places some liberal newspaper—well, our results would suggest they’re not going to read it. So, that seems to have important implications for policy. 
 
But it comes with a really important caveat. The finding that ownership doesn’t matter in terms of a newspaper’s political slant is not a universal result. It doesn’t apply everywhere. It’s a statement about newspaper markets in the United States—a highly commercialized, relatively competitive setting, and a place where the political returns to manipulating the average content of a newspaper might not be all that big.
 

The chicken and egg question: did Fox News come along and satisfy a market need that conservatives weren't aware of, or did the market need summon Fox News out of nothingness?

If the filter bubble is not the internet's creation, but inherent to human nature, that argues for a much different solution than just exposing people to more ideas. Perhaps it's how the ideas are framed? How people are educated? Do we need to instill different mental models?

I'm fairly certain that taking an angry Trump supporter, cuffing them in a chair, locking their eyes open like Alex undergoing the Ludovico technique in A Clockwork Orange, and forcing them to watch Rachel Maddow for days on end isn't going to have the salutary effect one might suppose (and neither would force feeding a liberal Fox News).

Optimal pricing for bread and circuses

A survey (pdf) by Anthony Krautmann and David Berri has found that most fans in many popular sports pay less for their tickets than conventional economic theory would predict.
 
Which poses the question: are team owners therefore irrational?
 
Not necessarily. There are (at least?) four justifications for such apparent under-pricing.
 

Lots of things in the real world are underpriced. Most popular concerts and sporting contests lose some volume of revenue to aftermarket transactions on sites like StubHub and SeatGeek. It's nearly impossible to get a reservation at some of the most popular restaurants in San Francisco like State Bird Provisions. There's a waiting list for NOMA Sydney that's 27,000 people long.

If you were pricing to maximize revenue, to match supply and demand exactly, you'd boost prices or perhaps auction off all the seats. What would NOMA Sydney have to charge until its waiting list dropped to zero? I can't even begin toguess, but would it surprise you if it was well north of $2,000 a head for dinner?

Given all of that, I was curious to see what this author thought might explain football ticket underpricing.

The first argument is that underpricing tickets leaves more revenue to be gathered through ancillary sales like souvenirs or overpriced concessions. Without data, I'm skeptical. My instinct is that concession and souvenir sales are less elastic with ticket prices than hypothesized.

The second point is that it's better to have a full stadium for team morale and to influence the officiating. But again, you could sell tickets via a mechanism like a Dutch Auction and maximize revenue while still filling the stadium.

The other two arguments are more convincing.

Thirdly, higher ticket prices can have adverse compositional effects: they might price out younger and poorer fans but replace them with tourists – the sort who buy those half-and-half scarves and should, therefore be shot on sight. This increases uncertainty about longer-term revenues: a potentially life-long loyal young supporter is lost and a more fickle one is gained. It also diminishes home advantage: refs are more likely to give dodgy decisions in front of thousands of screaming Scousers than in front quiet Japanese tourists.
 

I went to a couple games at the old Chicago Stadium, during Jordan's early years with the Bulls, and that place was loud. When they moved to the United Center and the ticket prices went way up, the crowd felt different. More wealthy, and definitely not as loud. It could just be the acoustics of the new space, but anecdotally, I saw fewer fans standing and screaming. Also, the rise of the smartphone means more of the dead moments in a game are filled with people scrolling on their phones, quietly.

Fourthly, high ticket prices can make life harder for owners. They raise fans’ expectations: if you’re spending £50 to see a game you’ll expect better football than if you spend just £10: I suspect that a big reason why Arsene Wenger has been criticised so much in recent years is not so much that Arsenal’s performances have been poor but because high prices have raised expectations. 
 

It's hard to lower prices. Some sports teams may have done it at some point, but I've never seen it. You can raise prices when the team is good and on the rise, but those prices tend to stick when the team declines, and that's when stadiums start to empty out.

Saison is the restaurant in San Francisco that feels closest to pricing to match supply and demand. When I first moved to San Francisco, I had a meal there for $79. The next time there, the meal price had jumped over $100. Then the next time, it was up to $149. Later I heard the tasting menu had risen yet again to $248. The last time I went, thankfully on some banker's expense account, the price was $398 for dinner.

The dining room is usually full, but it's usually possible to get a table the same week. It feels like they've finally reached a price that about as close as you can get to where the supply and demand curves meet. Since the number of seats and turns is limited each night, perhaps this is revenue maximizing pricing, but the margin of error is razor thin.

My guess is that optimal pricing is somewhere below the price that matches supply and demand perfectly. Always being sold out adds a feeling of exclusivity, and no one knows how sold out you are, so being just sold out may be as good from a perception standpoint as being having a massive waiting list.

At the same time, I have a sneaking suspicion continuing to raise the price of a dinner would actually raise demand at some high end restaurants. There may be some Veblen-like qualities to restaurant pricing.