Tuesday, May 01, 2012

Risk taking and innovation: lawyers and art history majors

At least the incentives and cultural support for risk taking are better in the US than in other countries.
NYTimes ... In a competitive market, all that’s left are the truly hard puzzles. And they require extraordinary resources. While we often hear about the greatest successes — penicillin, the iPhone — we rarely hear about the countless failures and the people and companies who financed them. 
A central problem with the U.S. economy, he told me, is finding a way to get more people to look for solutions despite these terrible odds of success. Conard’s solution is simple. Society benefits if the successful risk takers get a lot of money. For proof, he looks to the market. At a nearby table we saw three young people with plaid shirts and floppy hair. For all we know, they may have been plotting the next generation’s Twitter, but Conard felt sure they were merely lounging on the sidelines. “What are they doing, sitting here, having a coffee at 2:30?” he asked. “I’m sure those guys are college-educated.” Conard, who occasionally flashed a mean streak during our talks, started calling the group “art-history majors,” his derisive term for pretty much anyone who was lucky enough to be born with the talent and opportunity to join the risk-taking, innovation-hunting mechanism but who chose instead a less competitive life. In Conard’s mind, this includes, surprisingly, people like lawyers, who opt for stable professions that don’t maximize their wealth-creating potential. He said the only way to persuade these “art-history majors” to join the fiercely competitive economic mechanism is to tempt them with extraordinary payoffs.


Curt said...

The way to persuade the risk adverse to take risks is to increase the riskiness of the behavior?


uair01 said...

I don't know what to think of the quote when I contrast this with text from another weblog I follow:

Eight years ago my mother went into a nursing home. When I began working on her house, I got calls almost every morning from one collection agency or another. Over a 5-year period at least, she had begun using credit cards to make ends meet and racked up about $8000 in debt. (...) About a year ago one of my oldest and closest friends, who is just a week younger than me, learned that he had Parkinson’s. After trying unsuccessfully for over two years to get a sales job, he was now part of the permanently unemployed. Tremors in both hands were bound to exclude him from a profession in which appearance counts for about 75 percent when closing a deal. Recently I learned from him that he is about $30,000 in debt from various credit cards. Like my mom, he uses them as a way to make ends meet. When I asked how he would be able to pay off the debt, he told me that he could only pay the monthly minimum. At this rate, he will be paying about $300 per month for the rest of his life.
And one of the reactions from this blog:
I read some months ago that the number one reason why people file chapter 7 is medical bills. I know personally this is true after being struck by a car in 2005 and suffering broken bones, a traumatic brain injury and 4 days in a coma. With no insurance, my bill was nearly a half million. The system of debt is painfully flawed in America.
I was a pedestrian struck by a car which is why my injuries were so severe. I have permanent impairments. I’ve been denied jobs. Once employers see my credit report, (a screening process that should be outlawed) they see the medical bills and won’t hire me because of risk. People don’t have choices. You may need medical treatment or are forced to use credit cards to get by. America is a paradise for so few.


Kevin Rose said...

What an asinine perspective. You invent something as vapid and trivial as twitter so that you can have the freedom to lead a life of leisured culture. That these men have found a way to lead such a life without a preceding period of sweat and toil is fantastic and a period in the evolution of society that all preceding ages would have envied.

Heck, even enjoying a fine afternoon in casual banter with good friends over good coffee has more value than inventing something like twitter! What exactly is the point of maximizing your wealth?

I can see if these guys were whiling away their times in cafes rather than writing the next great novel, coming up with the next great scientific theory, or painting the next great picture - but for some minor technological tweak like twitter?

Now there are some people for whom immersion in technology is a joy and a pleasure, the most satisfying thing they can do. But even for them it is about lifestyle satisfaction and the sheer joy of it, not "maximizing their wealth".

As an aside, this is a good example of what intelligent white guys do these days. As a culture gets more mature it mellows out and things like contemplation and self-cultivation through the study of art and such things becomes the main thing to do. The Chinese used to understand this very well, before they became re-barbarized in the past century.

5371 said...

Equating penicillin with the iphone - a technological breakthrough with a successful ripoff, a benefit to the whole species with the enrichment of a handful of people - is part of the real problem.

Pietrus said...

Not necessarily, it's just changing the incentives.

Pietrus said...

I feel bad for the guy but please explain to me how the system of debt is painfully flawed. He got life saving healthcare treatment that he couldn't afford and maintains his lifestyle through the use of credit (debt) that he will likely never be responsible for.

Pietrus said...

Are you saying twitter has no real value despite it's business being worth ~20B? In the context of current event, are you implying marginal tax rates should be higher (70% ?) and cap gains taxes should be higher (less payoff from successful business investment)? Is leisure so great that there should be radically progressive taxes to subsidize it?

Kevin Rose said...

My point is that twitter is a trivial and insignificant thing. It makes its inventor a tremendous amount of money because of economies of scale - and there is nothing wrong with that - but is not a significant intellectual achievement and thus figuring out stuff like that should not be a top life priority for talented young people.

It's a very perverted perspective, in my view, to sneer at smart people who actually pursue the worthwhile things in our brief life over "maximizing their wealth" to every last ounce. And yes, drinking coffee with friends on a nice day is infinitely more worthwhile than inventing twitter. So is studying art. I would rather do either than invent twitter, though I would like to have the money twitter brought its inventor.

Ene Dene said...

I'm not sure in which world Conard is living if he thinks that potential inventors are among art-history and law students.

Reducing the risk rises the amount of people willing to try to do something on their own.
The question is how do you reduce risk?
You reduce it by reducing the price of starting a business. The only way to do that is reducing regulations and licences needed, which all cost time and money. Starting a business is a hell, not lot of people have the energy to fight with all the legal stuff just to make something simple.
As for lot of people failing, that's a natural process in competitive environment but then we have quality results, we all like to talk how "sport is good", but for every NBA player there are lot of kids that risked not getting good education, countless hours of playing, their parents spent lot of money, but if that were not the case, we would be looking at completely different basketball.
What Conard is suggesting already exists, when people are buying stocks they choose to support companies that they think will be successful in the future. When people are trying to convince other people to start business with them, that's financing the projects.
If on the other hand he's suggesting that there should be some people who would decide what to finance by tax payers money, then he's talking about central planing and that is extremely dangerous as it leads to quite the opposite, an economy without innovation and other destructive social implications. Of course, people who read and write for NY times were not so unfortunate to live in countries where government chose winners and it was not possible to fail as taxpayers always finance the losses.
What I suggest to Conard, try to convince lot of people of your ideas, then get their money, select people (some "experts", for example Paul Krugman) who will select which products need financing and then use that money to finance those projects. If he's right everyone who invested in that idea will become richer.
I'm afraid that results will be devastating, but I'm sure they will say "it's not a wrong concept, it's just a poor implementation, let's try again, central planing really works"

Christopher Chang said...

- Twitter is not trivial or insignificant.  Opinions vary on whether the Arab Spring was ultimately a good thing or not, but it is generally accepted that Twitter was a key enabler.

You may be conflating intellectual complexity and difficulty with value.  Efficient harvesting of low-hanging fruit is important.

- It is useful to think about money like you think about karma--see http://meteuphoric.wordpress.com/2009/08/03/markets-marketed-better/ .  While there are ways to exploit the current system (and Steve has done his share of blogging about this), money is still the best existing technology for representing how much other existing members of society value your work.  Granted, future generations don't have their own voice in the market, so yes, an "efficient market" may underproduce e.g. lasting works of art.  But it's hard to correct this without introducing greater inefficiencies elsewhere.

Nobody is stopping you from making just enough money from a day job to fund a serious artistic hobby.  Yes, a few people may sneer.  But they have negligible actual power over you.

dwbudd said...

Many issues in the post above, and in this thread.

First, there is the subjective discussion of "value."  As Professor Hsu has written elsewhere, comparing finance with, e.g., tech work - "value" is not necessarily something that is intrinsic.  Another frequent poster here (Yan Shen) dismisses many industries and companies in Europe as being essentially overpriced luxury goods that lack actual value.  Expensive, designer hand bags and cars are on his list.  His point - I think partly correct - is that the "value" of a Prada hand bag may not be correctly reflected in its high price.  I think you allude to this in your comment on conflation of intellectual complexity versus value.

Second, the importance of Twitter (and FaceBook) in the so-called "Arab Spring" has, I think, been acknowledged to be widely exaggerated.  Cheerleaders like the NYT Nicholas Kristoff trumpeted the importance of Twitter in rallying folks to Tahrir Square.  A cold, hard look at the data belies these claims.  In a stufy commissioned by the Dubai Press Club in 2011, less than 0.2 per cent (two out of 1000 people) in Egypt have access to Twitter.  Numbers are even lower in Tunisia and Libya.  

These findings were confirmed in studies done by Deloitte.

People like Kristoff - who operate largely in an echo chamber - saw that one of the "leaders" of the revolution in Egypt was a Google employee, and it made for a nice story line.  But like the "Gay Girl" story that made the rounds last year, they do not stand up to scrutiny.  It's "generally accepted" by the likes of Kristoff and Tom Friedman that Twitter was a "key enabler," but that does not make it so, and though Twitter connected some of those who (by no small coincidence) speak English and thus were findable by US news outlets, and played a role in the uprisings, its centrality is very much debatable.

Third, what I think Professor Hsu is getting at, and correct me if I am wrong, is what is the right role of risk and reward to push an economy (civilisation?) forward?  What is the most efficient, if not best, means to do that?  Does art have intrinsic value?  Does an iPhone, for that matter?  Professor Hsu, I think, is a pragmatic thinker, and sees the inherent value in movie the frontiers of technology forward.  Discoveries in physics, physical chemistry, medicine, etc. plainly can benefit society in ways that, I would argue, tinkering with the ergonomics and customer experience with an MP3 player cannot.  

Is a cure for Parkinson's disease a better "value" than the nth iteration of the iPad?  

That is somewhat a value call in an of itself, but I would tend to say "yes," even if the financial rewards are much larger for the latter.  

Kevin Rose said...

Revolutions have somehow happened before the invention of twitter, so I wonder how essential it was for this particular revolution. Of course revolutionaries will turn to the available technology, but that can sometimes lead to the distorted perception that the available technology was an essential technology (a key enabler), when it was merely an available technology.

If I make a product that no one is willing to pay more than 1 cent for, but a hundred million people are willing to pay that cent, I will become very rich, but what I made is probably not a huge deal in anyone's life. The point is not that these kinds of products should not be made, or that the people who make them should not get rich off their inventions, but what our priorities should be.

I am not claiming that anyone is preventing me from sacrificing wealth in order to pursue artistic hobby. I am merely sneering at the sneerers, that's all.

Generations have worked and toiled and sweated so that we can achieve a society of such wealth that intelligent people can indulge in projects of self-cultivation, or just enjoy intelligent leisure, and some people sneer because not everyone is interested in extracting every last penny from whatever talents they have. I find that perspective absurd.

Kevin Rose said...

Another frequent poster here (Yan Shen) dismisses many industries and
companies in Europe as being essentially overpriced luxury goods that
lack actual value.  Expensive, designer hand bags and cars are on his
list.  His point - I think partly correct - is that the "value" of a
Prada hand bag may not be correctly reflected in its high price.  I
think you allude to this in your comment on conflation of intellectual
complexity versus value.

Technical people often have a hard time understanding that anything non-functional can have "value". Aesthetic and intellectual values mean very little to them. As I facetiously made the point once before, to such people the marble quarriers who extracted the marble for Michaelangelos statues represent the real achievement; the statue of David is after all being mere "slick marketing".

Christopher Chang said...

Okay, I stand corrected on Twitter.

Price does not perfectly correspond to value, but it provides better first-order approximations than any other single system I know of.  There are a decent number of philanthropists, patrons of the arts, etc. who try their best to correct for future generations' lack of voice.  The fact that a first-generation philanthropist has to understand human nature and reality well enough to make lots of money in the first place increases the chance that they will donate their money in a promising way.

As for risk vs. reward, there's a (mostly male, for well-known evolutionary reasons) subset of the population that is interested in +EV huge risk-huge reward scenarios, but there are lots of highly creative and intelligent people outside that subset.  Part of a great manager's job is to slice up the risk and reward in a way that takes advantage of otherwise neglected human capital.

BlackRoseML said...

I don't know if those goods are primarily valued for their aesthetic appeal, but rather their ability to signal high social status.  

Kevin Rose said...

Yes, but the ability of these goods to signal high status is a function of their aesthetic appeal amongst the discerning. It's like when wealthy philistines buy expensive art to signal status, but the only reason that expensive art signals status is because its considered to be an indication of "culture".

Although I don't think Prada is the best example of this. 

Kevin Rose said...

At best, the market can tell us what the masses value. I see no reason why I should adopt an indicator of mass thought (market price) as my personal standard of value.

Perhaps that was implicit in the article quoted by Steve, the idea that market price determines value, and thus mass opinion determines value, and anyone who did not gear his life towards satisfying mass opinion of value was a fool to be sneered at.

Perhaps I disagree with that. Although that is surely the standard opinion of our newly barbarized times.

Robert Rota said...

I think this thread has some illusory predicates. My advice would be to put effort into being the best person you can be, internal effort instead of chasing profit. What manifests from internal effort is a natural energy and motivation to help others, one that does not seek reward, one that is not perceived as risk. A pursuit that succeeds because it aligns with the fabric of our existence, not from the exploitation of ignorance. 

tc_2 said...

Bad news, then: most of today's ambitious young startup founders/hackers are trying to come up with the next Twitter.

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Robert Sykes said...

Risk takers, research stars, inventors like Jobs represent very, very much less than 1% of the population. While the minuscule minority drives progress, society as a whole and university faculties function only because the average person  or professor does his job. Someone has to collect the garbage and read the stupid freshman essays.

Societies and faculties can actually function quite well for very long time periods without much innovation. The Roman Empire lastes 2200 years using a few tricks they inherited. They did develop excellent concrete and the true arch, and they did build excellent roads, but their overall technology wasn't much in advance of the Hittites.

And who is a star? The Nobel prizes, even in the hard sciences like physics, have been radically corrupted over the years and nowadays are suspect.

dwbudd said...


I think humanity is largely plagued by a sort of solipsism; it's not just "technical people."  You've not said this explicitly, and perhaps you do not even imply or mean it, but as a race, we (human beings) tend to place higher value on those skills and talents we possess, and lower relative value on those that we lack.

The problem in this discussion is defining what is "value."  As someone who works in economics, I would offer that one of the few, quasi-objective measures of value is what someone is willing to exchange to obtain it.  Not necessarily money, which is a crude surrogate for "value," but some standard of what we thing is valuable.

For example, my time has "value" to me.  My abilities as well.  I trade both to my employer in exchange for money.  Not because the paper and ink is particularly appealing, but because money is the currency by which I may obtain those things I need/want.  

If I want to pay $75,000 for a Mercedes-Benz, when a vehicle of equal functionality - and perhaps even superior reliability - like a Toyota is less than half the price, then I implicitly am placing a value of some sort.  I must work longer hours, and sacrifice other positional goods in order to obtain the Mercedes and not the Toyota.  Thus, to me, I am by my choice demonstrating that I "value" the Mercedes - whether for aesthetics or perhaps status it may provide - at a level above Toyota.

Artistic sorts frequently dismiss "the masses" condescendingly.  Perhaps their norms are different from the larger society.  I would not say that they are "right" or "wrong."  But absent "better" metrics, I would opine that nothing more accurately defines "value" from a societal standpoint than how we allocate our money, which itself is a metric of how we value our own time and skills.

Martin Morgan said...

Every revolutionary and reformer is a fugitive from reality. Any honest man of just sensibility, if he finds himself concerned about about evil and injustice in the world, will naturally try to repair it, beginning with its nearest manifestation: in his own person. The task will take his entire life...

from The Book of Disquietude by Fernando Pessoa

Yan Shen said...

 "Risk takers, research stars, inventors like Jobs represent very, very much less than 1% of the population."

I'm on page 380 or so of the new Steve Jobs biography by Walter Issacson. From what I've read so far, Steve Jobs was much more of a salesman than an actual inventor.

Robert Rota said...

I think a thought related to this is that the many famous people and those that make a lot of money aren't necessarily the most talented or "best" at what they do. I think in a Utopian society each individual should use their effort to better themselves. What this means is that you will spend the majority of your time working on your weaknesses and not your strengths. Thus you will not be recognized for your strengths. There is a quote that I read from the Tao Te Ching or Art of War or similar that said that the best war horses should be used for their dung. I interpret this as to mean something similar to what I stated. Madonna was not the best vocalist, she had enough insecurity to crave reassurance to an extreme scale. Recently I have found martial artists who would put my childhood idol Bruce Lee to shame. Bruce Lee along with Jet Li, Jackie Chan, etc are probably not the best martial artists alive in the world but they are the most widely known. The one that has the answer to your question, the one with the most skill in any discipline is not typically the most well known. I thought about this when I considered my professors in school, if they were the most knowledgeable about this topic, why would this topic interest them? Interest to me comes from a challenge.   

Kevin Rose said...

I think you're right about human solipsism, but part of becoming a sophisticated adult is learning to be less one-sided in one perspectives and more aware of one's egotistical biases. It's a constant struggle.

Some of the commenters here - and to a much lesser extent even Steve - are absurd in their crude zeal for the perspective from which they or their group look best. I like to gently poke fun at this kind of blind silliness. I like to show how easy it is to devise plausible opposite perspectives. It is a fun little game.

What people are willing to spend money on shows what they value, sure, but it is quite legitimate to criticize what people value. You and others seem to be suggesting that we must lie prostrate before this brute little fact - what people value. To you it seems the final word and the end of the conversation. To me it seems like a mere data point and the beginning of the conversation.

There is no need to search for any "better" metrics than the market for what people value - it is quite accurate. The question is simply are there perspectives from which what people value makes no sense and appear silly.

As an aside, market value is a complex indicator; consider the company that makes a product that everyone is
willing to pay a cent for. It provides something of negligible value,
just to a lot of people. Your product barely helps anyone, but your
company is worth billions. The market value of your company gives some indication of the value of your product to people, but in a non-linear way.


David said...

Risk/reward implies risk.  Most people are risk averse.  Eliminating the downside risk would do as much for risk taking as increasing the reward.

The times I've been most adventerous in my life where those where my family and myself were in secure positions (savings account, health insurance).  The times I've spent engaged in corporate BS and rent seeking were those when I was least secure (no savings, no health insurance).  If I knew early on that failing at a risky venture wouldn't mean I'd risk sickness and poverty I wouldn't have spent so much of my 20s acquiring a cushion before venturing out.

As for taxes, I've never seen someone with a great idea not do it because the tax rate is 35% instead of 30%.  That's the kind of thing people trying to get an extra 3% yearly raise at a donkey job think about.  People thinking they are inventing the next big thing don't care about taxes.

Kevin Rose said...

I suspect that a population significantly more skewed towards M and S
and away from V would value technical competency much more so than
verbal sophistication

And yet, as everyone knows, China traditionally valued learning of an overwhelmingly verbal sort - mastery of the Confucian canon- and had almost a contempt for technical proficiency. That a people who supposedly are so skewed towards M and S would develop such a veneration for mere verbal proficiency always struck me as somehow very significant.

And of course, a people with no notable skew towards M or S did the most historically in the technological line. No doubt there are all sorts of sound explanations for these anomalies, but I do find it interesting how insultingly indifferent history can be in the face of our explanations.

I have always been struck how people imagine that the the Asia of today represents some timeless reality. A broad historical perspective saves one from many a silly hypothesis.

dwbudd said...


no; I would never advocate that we lie prostrate, prone, or even reclining in a somewhat-supine position before the fact that money is a proxy for value.  As I said, it is a crude means of assessment.  "Value" is something that means something somewhat different to each of us - something I said explicitly.  The cost of something, as you say, IS a mere data point.  As Oscar Wilde famously said, a cynic is someone who knows the cost of everything and the value of nothing.  I am of course open to others.

Ironically, I work in an industry (pharmaceutical research) whose products are deemed so "valuable" that their prices should not be left to the free market.  One hears calls for price controls rising slowly to a crescendo every day.  The economist Joseph Stiglitz recently published a screed about the breakdown of the market, and actually put in black and white that drug companies use "monopoly" power (sic) to charge prices for their products far higher than the cost of production.

What he means by "cost of production" is not stated, but I would offer that the prices charged for, say, software are FAR higher, as a multiple of their cost of production than pharmaceuticals are.  

Implicit is the idea that one "needs" medicine; one does not "need" Angry Birds, v3.0  

In what rational world where money is equated to value would one argue that the value of a commodity, like medicine, is inversely proportional to the price that can be charged?  

I frequently try to tell peers that value is NOT the same thing as price.  They're related of course (no one is willing to pay for something that has zero value to them), but that's at best a shadow on the wall.

Kevin Rose said...

I think we agree more than not. I even go a bit further than you in thinking the market an excellent assessor of how much a person values a particular thing.

I guess my only point is, what other particular people value is not a guide with what I should do with my life, as the sneerer in the quoted excerpt seems to implicitly think.

What other people value should not necessarily be the standpoint from which to judge all activities, so that the person who fails to maximize his talents such that he is producing the best he can what others value most is a fit object of a sneer. 

Ken Condon said...

Literally--a Dimon in the rough. Take me back to a certain small Minnesota town where all the women are strong, all the men are good-looking, and all the children are above average. And I will indeed make any one of you lot’s of money. No risk involved whatsoever.
I’m smart. That’s all it takes. Although due to short attention spans I would assume this thread is dead:

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