Now their feelings are hurt

From Felix Salmon:

If you want a great example of the kind of mean things that people are saying about Groupon in the run-up to its IPO, you could do a lot worse than Rocky Agrawal’s TechCrunch essay entitled “Why Groupon Is Poised For Collapse”. It’s a great example of overstretch and dubious logic, with a couple of moments of brilliance and genuine insight thrown in at the same time. Groupon, of course, being in its quiet period, can’t react. Except, it just can’t help itself, and has put up a whiny post, supposedly authored by the company cat, about how unfair the whole situation is.

The fact is that when Groupon made the decision to go public, it invited exactly this kind of attention — both before the IPO and forever more. When Groupon was private, no one really knew anything about its financials, and CEO Andrew Mason could happily declare that he’d much rather talk about building miniature dollhouses. Once it’s public, however, he’ll have a fiduciary responsibility to his shareholders, and will have to answer such questions at length. Will that make him happier than answering such questions with a death-ray stare? I doubt it, to be honest. Revenues and business models and profits and forecasts are serious things, and you can’t kid around with shareholders in the same way you can with journalists.

In other words, Mason will have to go from saying nothing, which can be fun, to saying something, which almost certainly won’t be. Rather than moan about his inability to say anything in the quiet period, he should enjoy it while it lasts. From now on in, the boring financial questions are going to be unavoidable — from analysts, from journalists, from shareholders, even probably from merchants and customers who wonder whether Groupon’s profitability is a sign that they’re being ripped off.

After reading the post in question, 'whiny' is probably the first adjective that will come to your mind as well. It's easy to understand how Mason, Lefkofsky and company might feel wounded. A few months ago, between the investor buzz and love letters from the Wall Street Journal, the people at Groupon could easily assume that they had a world full of friends. Now everyone's pointing out problems in your business model and asking why your marketing techniques seem twenty years out of date.

Those darned Canadians

The Daily Show - Canadian Oilverlords
Tags: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

If your BS detector isn't going off, you need to check your battery

When it comes to politics and journalism, the people at Talking Points Memo are about the best bullshit detectors you'll find. When it comes to the world of business, however, thye seem to fare no better than the typical New York Times reporter.

Take, for example, their positive review of this Economist piece on IBM's hundredth birthday. Here's the key observation from the Economist:

IBM’s secret is that it is built around an idea that transcends any particular product or technology. Its strategy is to package technology for use by businesses. At first this meant making punch-card tabulators, but IBM moved on to magnetic-tape systems, mainframes, PCs, and most recently services and consulting. Building a company around an idea, rather than a specific technology, makes it easier to adapt when industry “platform shifts” occur.

True, IBM’s longevity is also due, in part, to dumb luck. It almost came unstuck early on because its bosses were hesitant to abandon punch cards. And it had a near-death experience in 1993 before Lou Gerstner realised that the best way to package technology for use by businesses was to focus on services. An elegant organising idea is no use if a company cannot come up with good products or services, or if it has clueless bosses. But on the basis of this simple formula—that a company should focus on an idea, rather than a technology—which of today’s young tech giants look best placed to live to 100?

The article, which goes on to argue that Apple, Amazon and Facebook live up to this while Dell, Cisco and Microsoft do not, is a nearly perfect example of perhaps the most popular genre of business writing, the secret of success story.

Here's the template:

1. Come up with a positive-sounding platitude like "successful businesses are obsessed with quality" or "a company should focus on an idea, rather than a technology";

2. Make a short list of companies that are currently hot. You may also choose to make a list of not-hot companies for the purpose of contrast. It is not necessary for the hot companies actually to be more successful;

3. Claim that your platitude explains the success or failure of these companies. This will usually entail stepping over some rather deep holes. For example, the Economist explains IBM's 100 year run with an insight* the company's management supposedly had in 1993. (If you have the nagging feeling that you've heard this basic argument before, you're probably right).

In real life, it's next to impossible to find a secret-to-success that is both widely applicable and pretty. This isn't to say that you can't learn something useful by studying successful companies, but those lessons tend to be complicated and difficult to apply in other settings. When you do find one that is simple and general, it's usual something like 'you can overcharge customers if you keep your pricing opaque.'

Somehow, though, "you can fool some of the people enough of the time" doesn't have the inspirational quality for a good business slogan.


* If at all possible, work a visionary CEO's brilliant insight into the story somewhere.

Some confusion with the concept of future tense

McKinsey continues to deal with the fall out from its recent health care report:

Even as it issued the disclaimer that its report was not intended to be predictive, McKinsey linked to the report with the following teaser in its new statement: "The shift away from employer-provided health insurance will be vastly greater than expected and will make sense for many companies and lower-income workers alike."

Weekend Blogging -- Free TV edition

As you might have noticed, broadcast TV is a recurring topic at OE (for reasons too involved to pursue at the moment). Weigel Broadcasting is shaping up to be the Turner of this new media world. Here are some thoughts on Weigel's ThisTV:

ThisTV has caught on to the fact that the most interesting films are often on the far ends of the spectrum and has responded with a wonderful mixture of art house and grind house. Among the former, you can see films like Persona, the Music Lovers and Paths of Glory. Among the latter you'll find American International quickies and action pictures with titles like Pray for Death. You can even find films that fit into both categories like Corman's Poe films or Milius' Dillinger.

"Just when I thought I was out... they pull me back in." -- another Groupon post (merchant relations edition)

I keep meaning to move on from this subject, but Groupon keeps giving us new reasons to suspect that they aren't that interested in the interests of their merchant partners.


For the latest nail in this coffin, Felix Salmon sends us to this extraordinary post by Benjamin Edelman and Paul Kominers:

Voucher services typically seek to cast themselves as mere marketing vendors that are not responsible for the conduct of the corresponding merchants. For example, Groupon’s Terms of Sale claim that “The Merchant, not Groupon, is the seller of the Voucher and the goods and services and is solely responsible for redeeming any Voucher you purchase.” On this view, a voucher service avoids liability for merchants’ shortfalls.

But a voucher service is the merchant of record for the charge to the customer’s credit card. As the entity officially responsible for charging the consumer, the voucher service thus faces increased responsibility to see that the consumer receives what was promised. Furthermore, the voucher service, not the merchant, writes the promotional text touting the merchant’s offering. As Rakesh Agrawal points out, Groupon’s financial disclosures even count the entirety of the consumer’s purchase price as revenue to Groupon. In this context, a consumer naturally looks to a voucher service for assistance if a merchant fails to perform. We think it is probably an unfair and deceptive practice, under the FTC Act and state equivalents, for voucher vendors to attempt to disclaim liability in such circumstances.

More generally, we are struck by Groupon’s attempts to push all responsibility to merchants. On every relevant question — discounting alcohol, honoring expiration dates, providing cashback — Groupon’s historic contract and current Merchant Terms of Service claim merchants are responsible. In our view, this approach invites confusion and non-compliance. Voucher services are far better positioned than merchants to determine what the legal system requires: Voucher services can research regulations centrally, once for each state in which they operate, then notify affiliated merchants of applicable requirements. In contrast, Groupon’s current approach asks each individual merchant to conduct its own research. If merchants actually conducted such research, it would be duplicative and potentially wasteful — thousands of small businesses re-researching the same questions. But in fact merchants typically ignore the questions, rationally concluding that these questions are too difficult for them to address on their own. Thus, by pushing merchants do to the work individually, voucher services virtually assure that the work is not done at all.

Importantly, the legal and regulatory questions flagged in this article are questions that arise distinctively in the context of discount vouchers: a merchant would never confront such questions were it not for discount vouchers. Having created the transactions giving rise to this regulatory complexity, we think discount voucher services should be expected to achieve compliance.

So much for maintaining a light tone over the weekend

From the AP:

Americans are living longer, but not in every corner of the country. A new study shows that in hundreds of U.S. counties — mostly in the South — life expectancy has fallen.

The researchers believe problems like smoking and obesity are partly to blame.

"There are enormous variations within the country" said Dr. Christopher Murray, a University of Washington researcher. He's a study author and an editor of the online journal, Population Health Metrics, which released the study Wednesday.

Overall, life expectancy in the U.S. is at an all-time high. The Centers for Disease Control and Prevention recently estimated that a baby born in 2009 could expect to live 78 years and 2 months.

The CDC doesn't calculate estimates by county; Murray's research covers 2000 through 2007 when U.S. life expectancy grew a year to nearly 78.

A federal expert in these kinds of statistics said Murray's methods were sound, but the findings aren't terribly surprising.

The U.S. estimate actually dropped from 2004 to 2005, noted Bob Anderson of the CDC's National Center for Health Statistics. Given that downward blip — and the fact that statistics fluctuate more when you're dealing with smaller populations __ it's not unexpected to see some declines at the local level, he said.

The study found that life expectancy for women fell significantly in 702 of the nation's more than 3,100 counties. The largest declines — by nearly 2 years — were in Mississippi's Madison County, near Jackson, and the adjacent Hughes and Okfuskee counties in eastern Oklahoma.

"How To Party Your Way Into a Multi-Million Dollar Facebook Job" -- the sad state of business journalism

Andrew Gelman (before his virtual sabbatical) linked to this fascinating Gawker article by Ryan Tate:

If you want Facebook to spend millions of dollars hiring you, it helps to be a talented engineer, as the New York Times today [18 May 2011] suggests. But it also helps to carouse with Facebook honchos, invite them to your dad's Mediterranean party palace, and get them introduced to your father's venture capital pals, like Sam Lessin did.

Lessin is the poster boy for today's Times story on Facebook "talent acquisitions." Facebook spent several million dollars to buy Lessin's drop.io, only to shut it down and put Lessin to work on internal projects. To the Times, Lessin is an example of how "the best talent" fetches tons of money these days. "Engineers are worth half a million to one million," a Facebook executive told the paper.

We'll let you in on a few things the Times left out: Lessin is not an engineer, but a Harvard social studies major and a former Bain consultant. His file-sharing startup drop.io was an also-ran competitor to the much more popular Dropbox, and was funded by a chum from Lessin's very rich childhood. Lessin's wealthy investment banker dad provided Facebook founder Mark Zuckerberg crucial access to venture capitalists in Facebook's early days. And Lessin had made a habit of wining and dining with Facebook executives for years before he finally scored a deal, including at a famous party he threw at his father's vacation home in Cyprus with girlfriend and Wall Street Journal tech reporter Jessica Vascellaro. (Lessin is well connected in media, too.) . . .

To get the full impact, you have to read the original New York Times piece by Miguel Helft. It's an almost perfect example modern business reporting, gushing and wide-eyed, eager to repeat conventional narratives about the next big thing, and showing no interest in digging for the truth.

It is not just that Helft failed to do even the most rudimentary of fact-checking (twenty minutes on Google would have uncovered a number of major holes); it is that he failed to check an unconvincing story that blatantly served the interests of the people telling it.

Let's start with the credibility of the story. While computer science may well be the top deck of the Titanic in this economy, has the industry really been driven to cannibalization by the dearth of talented people? There are certainly plenty of people in related fields with overlapping skill sets who are looking for work and there's no sign that the companies like Facebook are making a big push to mine these rich pools of labor. Nor have I seen any extraordinary efforts to go beyond the standard recruiting practices in comp sci departments.

How about self-interest? From a PR standpoint, this is the kind of story these companies want told. It depicts the people behind these companies as strong and decisive, the kind of leaders you'd want when you expect to encounter a large number of Gordian Knots. When the NYT quotes Zuckerberg saying “Someone who is exceptional in their role is not just a little better than someone who is pretty good. They are 100 times better,” they are helping him build a do-what-it-takes-to-be-the-best image.

The dude-throws-awesome-parties criteria for hiring tends to undermine that image, as does the quid pro quo aspect of Facebook's deals with Lessin's father.

Of course, there's more at stake here than corporate vanity. Tech companies have spent a great deal of time and money trying to persuade Congress that the country must increase the number of H-1Bs we issue in order to have a viable Tech industry. Without getting into the merits of the case (for that you can check out my reply to Noah Smith on the subject), this article proves once again that one easily impressed NYT reporter is worth any number of highly paid K Street lobbyists.

The New York Times is still, for many people, the paper. I've argued before that I didn't feel the paper deserved its reputation, that you can find better journalism and better newspapers out there, but there's no denying that the paper does have a tremendous brand. People believe things they read in the New York Times. It would be nice if the paper looked at this as an obligation to live up to rather than laurels to rest on.

More bad statistics from Freakonomics

[Caveat: It is difficult to distinguish between bad and badly presented statistics. The reader should always allow for the possibility of a sound process terribly explained. It is possible that Dr. Sacerdote made some attempt to control for the factors mentioned below, but, just to put things in context, researchers in numerous fields (including epidemiology) are currently struggling with this problem with limited success. If Sacerdote has actually cracked this nut, Freakonomics is certainly burying the lede.]

Freakonomics Radio is not helping Marketplace's average.

Dubner: Let me let you hear from a different economist, his name is Bruce Sacerdote, he's at Dartmouth. He wanted to know how much this kind of activist-parenting -- if you want to call it that -- actually pays off. And one way to measure this, especially if you're talking about educational achievement -- which is what parents probably care about the most -- is to look at adoption studies, where you can actually measure the impact that a family, that the parents, will have on a kid.

Ryssdal: So what's his thesis, that kids adopted into, I guess, high-education homes will be more likely to go to college, is that the deal?

Dubner: Exactly right. If parents are so important, then parents can take an adopted kid who might otherwise not have gone to college, and that kid will become college material. So Sacerdote sliced and diced a lot of good data and he did find parental influence.

Bruce Sacerdote: But it's not quite as big as I expected to find.

Ryssdal: All right, so quantify for me: how big is not so big?

Dubner: If you're a child who's adopted into a high-education family -- that is where the parents both went to college -- you are about 16 percentage points more likely to go to college than a kid who gets adopted into a low-education family. So that sounds pretty good, OK?

Until you compare that to the rate for biological kids from high-education families, who are about 75 percentage points more likely to go to college than biological kids from low-education families. So on the one hand, this is a little dispiriting for parents. We don't seem to have as much influence as we might think. On the other hand, in a weird way, it kind of takes some of the pressure off, right? At least it did for Bruce Sacerdote.

Sacerdote: This notion that genes are really important and that kids are hard-wired to do certain things, I think understanding that did help me relax and not worry so much that I was going "screw them up" in some terrible way.

One of the concerns I have about sending an economist to do a statistician's job is that economists, by training, have a tendency to make things simpler.* This works reasonably well in economics where the problems are generally too complex to tackle without making some simplifying assumptions about linearity and additive effects and independence and where (perhaps more importantly) the economists have a pretty good idea of which corners can be safely cut. Unfortunately, when they move outside of familiar ground, you often get something like this.

Unless something important has been left out (always a possibility when something is presented to a general audience), Sacerdote has made the common but serious mistake of treating a select group as a random sample. People who choose to adopt are not a random sample of parents, particularly given the difficulties in the process, and those who do self-select have to go a difficult approval process.

Think for a moment about how unrepresentative the resulting sample is. Now consider traits that are likely to be correlated to both parents' and children's education levels and which the process is likely to select for or select out. Here are a few that come immediately to mind:

Teen parenthood;

Unplanned parenthood;

Poverty;

Drug abuse;

Career level (high income may not be a requirement but financial stability is and these days that represents a significant career accomplishment);

Encouragement and support**;

Educational expectations for their children (I can't imagine that all that many prospective parents who don't give a damn about their kid's education make it to the end of the process).

The genetic component of this question is confounded with all these things and more. As a result, (at least as presented here) Sacerdote actually succeeds in proving the opposite of his conclusion. His example doesn't show what, if any, role genetics plays in how likely a kid is to go to college. That 75 could be mainly the result of poverty (which is highly correlated to parent's education levels). I'm not saying that it is but there is no way of ruling out that and other explanations.

What Sacerdote has shown is that even when you control not only for genetics but also for most obvious environmental factors, you still got a 16 point bump just from having adoptive parents who both went to college. Under any circumstances this would be a substantial improvement but in the context of this natural experiment it's huge.

At the risk of over-sharpening the blade, we have here a natural experiment that shows nothing about the role of genetics in academic achievement. What it does show is that even when you greatly reduce most of the obvious parenting-related environmental sources of variability, you still get a substantial effect from the remaining factors. A highly respected researcher then uses this example to argue publicly that genetic factors far outweigh the impact of parenting.

We really need to do something about Freakonomics.

(I'm also not comfortable with the way Sacerdote gives a percentage difference rather than the ranges but that's a subject for another post)


* There are, of course exceptions. Most notably Nate Silver.

** I'm pretty sure in most low education adoptive homes you won't see this relationship:

Hart and Risley also found that, in the first four years after birth, the average child from a professional family receives 560,000 more instances of encouraging feedback than discouraging feedback; a working- class child receives merely 100,000 more encouragements than discouragements; a welfare child receives 125,000 more discouragements than encouragements.

Is Megan McArdle abandoning the Chicago School?

In the previous post, Joseph directed us to this piece by Megan McArdle. As with almost everything McArdle writes, there was much that was worthy of comment, but this passage struck me as especially interesting:

People really underweight the role that norms play in sustaining a modern economy. I suspect that if the "default option" folks got their way and people started regarding default as a commercial decision with no more moral weight than changing cable vendors, the advocates of this position would be unpleasantly surprised to find that the only thing less fun than being young and burdened with student loans is being young and completely unable to access any form of credit at all.

My first corporate job was building models to decide who got unsecured loans and, based on that experience, I'm pretty sure she's wrong in the particulars. A change in attitudes would affect default rates somewhat but there are a number of powerful external incentives here that would limit the impact of a new set of norms.

I agree, however, with McArdle's larger point, which is strange, since I don't believe that McArdle agrees with it herself.

As noted before, freshwater economics is essentially a reductionist approach that relies heavily on a number of simplifying assumptions. If you claim that social norming plays a significant role in the economy, then you have to allow for local optima and plateaus and collective action problems and all sorts of behavior that is not rational in the economic sense and which will not average out when you look at things in the aggregate. That way lies madness and perhaps even Keynesianism.

It's possible that McArdle is starting to question what she learned at the feet of her Booth School professors, but I think it's more likely that she's willing to engage in a bit of intellectual inconsistency to reach her desired conclusion.

Some reflections on student loan debt

I have a mixed set of feelings about Megan McArdle's Atlantic column. Sometimes I could not disagree with her viewpoints more (mostly when she rails against government spending without a good discussion of what a "public good" really is). Other times I think she does a very good job of thinking through the issues. A recent case in point is her posts on student debt. In these posts she does a really commendable job of pointing out two things that are important:

1) It is very hard to settle student loan debt and the lenders have ruthless policies to singificnatly increase what you owe

2) There is a problem with a social norm that makes default a trivial event

That being said, I must admit that the elephant in the room is probably the increasingly draconian state of US debt law. The stories of police raids over student loans (actually not owed by the person being put in handcuffs) may be missing important facts but the general picture is not pleasant.

But, at a more prosaic level, the inability to fail has a lot of serious issues. I have little sympathy for Elie Mystal , per se, but I do see a broad culture of making things worse when one experiences adverse life events. If one should end up unemployed they may well have no health insurance, limited access to bankruptcy for large debts (student loans), and have issues with basic necessities.

I am all for civic virtue and personal responsibility. These are both things that I wish we had more of. But I worry that we are creating a culture of cascading failures where one thing going wrong can set off a series of disasters. In a world with long term unemployment, is this really a good direction to be going?

What fun is it firing people if you don't get to humiliate them too?

I am at a loss to find any other explanation for this.

Rhode Island does, however, offer a bright side for educators and job security. If you can make it past principal, you seem to be safe. Take Frances Gallo and Victor Capellán, two administrators overseeing a school district so small it only includes one high school, one middle school and a few elementary schools. Despite this high administrator to school ratio, even the most basic aspects of administration (such as scheduling substitutes) are routinely screwed up.

Gallo and Capellán admit the schools that they are responsible for are terrible, but they don't hold themselves responsible. If you can't guess who they do blame, you haven't following the education reform movement.

Some products simply demand a targeted approach

From Yahoo:

Even the most die-hard users admit to having bought some turkeys. Kris Kendall, a marketing manager in Freemont, Calif., has been labeled a "Groupon pimp" by her buddies, since she buys several offers every week and is constantly emailing her friends about terrific deals. But the occasional missteps have cost her serious money.

... "I've also let a few expire because I just never had the mojo to go -- namely, a pole-dancing workout class which I bought for a bunch of my friends, and then we never actually went."

Weekend Gaming -- in memoriam/elegant games

[It does not bode well when you need to make time Monday to catch up on things you were supposed to do over the weekend.]

Toy Designer Ned Strongin Dies at 91

Strongin was known for designing and licensing several award-winning toys, including Connect Four, Weebles, Giggle Wiggle and the Wiggly Giggly ball. Connect Four, his most commercially successful invention, remains one of Hasbro's best-selling games.

"Ned was regarded in the toy and game industry as one of the three post-World War II 'fathers' of external toy and game inventions, along with Marvin Glass and Eddy Goldfarb," said Phil Orbanes, president of Winning Moves Games. Orbanes worked with Strongin to license Giggle Wiggle to Hasbro Games.

If you're not familiar with the Connect Four, here's the introduction from Wikipedia:

Connect Four (also known as Four Up, Plot Four, Find Four, Four in a Row, and Four in a Line) is a two-player game in which the players first choose a color and then take turns dropping their colored discs from the top into a seven-column, six-row vertically-suspended grid. The pieces fall straight down, occupying the next available space within the column. The object of the game is to connect four of one's own discs of the same color next to each other vertically, horizontally, or diagonally before one's opponent can do so.

It's an entertaining and genuinely challenging game and it illustrates the most fascinating attributes of what I've called elegant games: a simple rule or condition (in this case, that each column must be filled from the bottom up) can greatly increase the complexity and subtlety of a game.

A Groupon postscript

Felix Salmon directs us to Kevin Kelleher's memorable profile of Groupon's co-founder and chairman.

FORTUNE -- "Lets start having fun... lets get funky... let's announce everything... let's be WILDLY positive in our forecasts... lets take this thing to the extreme... if we get wacked [sic] on the ride down-who gives a shit... THE TIME TO GET RADICAL IS NOW... WE HAVE NOTHING TO LOSE..."

This is a quote from the dot-com era. It's pretty much what you'd expect a novice executive to say back then, when it was all about money and not at all about creating something good. It was written in an email by the co-founder of a company called Starbelly.com, which labeled itself a B2B provider -- back when people greeted that phrase with a straight face.

In early 2000, Starbelly sold itself to another company called Ha-Lo Industries for $240 million, much of which went to the author of those words, a man named Eric Lefkofsky. Not long after that transaction, Ha-Lo declared bankruptcy. Shareholders and others blamed the Starbelly deal, and a series of lawsuits ensued.

After that, it gets even more interesting.