Closing words on Facebook (in handy audio form)

Marketplace's Heidi Moore sums things up nicely. There's no transcript but it's worth taking a few minutes to listen to the story.

If I weren't on a business and technology kick

I'd probably be blogging about this fascinating example of modern journalism's ability to be both obsessively self-absorbed and incapable of self-examination.

(I'd also be saying mean things about MM, arguably my least favorite journalist, period.)

The continuing war on science part 46

We're back on the census beat thanks to another piece of news from Menzie Chinn:

From the National Association for Business Economics (NABE):
[t]he U.S. House of Representatives was considering an appropriations bill for Commerce, Justice, Science, and Related Agencies (H.R. 5326) that would drastically reduce funding for the Census Bureau and make participation in the American Community Survey voluntary.
... Regrettably, the legislation ultimately passed the House along party lines and was much more damaging than originally proposed. In its current form, H.R. 5326 will "devastate" the nation's economic statistics.
Specifically, the legislation will:

• Terminate the American Community Survey;

• Cancel the 2012 Economic Census; and

• Halt development of cost-saving measures for the decennial census.

Chinn points out that this would be devastating for researchers such as himself. It would also be a hell of a blow to business analytics people like me who use this data on a daily basis all to save a trivial sliver of the federal budget.

Yet another view on plagiarism

Quoted on Cheap Talk:

Oh, dear me, how unspeakably funny and owlishly idiotic and grotesque was that “plagiarism” farce! As if there was much of anything in any human utterance, oral or written, except plagiarism! The kernel, the soul—let us go further and say the substance, the bulk, the actual and valuable material of all human utterances—is plagiarism. For substantially all ideas are second-hand, consciously and unconsciously drawn from a million outside sources, and daily use by the garnerer with a pride and satisfaction born of the superstition that he originated them; whereas there is not a rag of originality about them anywhere except the little discoloration they get from his mental and moral calibre and his temperament, and which is revealed in characteristics of phrasing.

Though I'm not sure how far I'd trust this guy; I'm pretty sure he's using a fake name.

How about a virtual social network?

This is a thought experiment, not a business plan, so don't expect too much here, but how hard would it be to set up something that worked along these lines?:

It would allow users to set up circles of contacts and permit different levels of access determined by user-assigned rank ("casual" contacts could see some pages while "close" contacts could see more), degrees of separation and visitor attributes ("let all visitors who list Justified on their favorites see this page);

The pages could be of any format and would be hosted by whoever the user chose as long as it used standard access protocols and had a few standard features like a favorites section; Adding friends and updating settings would be done through a central site;

If run on a for-profit basis, revenue could come in through the central site with advertising and surveys (both targeted on user information), mining user data and selling apps for mobile access.

I'm not saying this is a good idea for a business (you'll notice I put it here and not on Kickstarter) but it certainly seems to fall in the realm of the possible and virtual social networks did start popping up they could conceivably eat away at the potential user base for Facebook. You can (and probably should) object at this point that this is a somewhat farfetched scenario. You'd be right. You could also point out that Facebook is a good company with a sound business plan, loads of technical talent and a huge first mover advantage.

If we were talking about Facebook's chances of having a nice, profitable run those points would end this conversation, but the buyers in tomorrow's IPO are betting that the company will have a flawless, even unprecedented run. Under those circumstances, it's worthwhile to take a moment to think about the possibilities.

Money and government

It is worth remembering that capitalism requires some form of currency:

Trade is important because, without it, it would be pretty difficult for some of us to survive only consuming what we produce well, especially those of us who haven’t figured out how to eat economics lessons yet. Technically, however, trade only gets us part of the way to what we would consider capitalism, since direct trade (i.e. barter) still requires a double coincidence of wants. 

 The problem with money is that it needs to be guarenteed or to have value independent of social contracts.  The second is the whole idea behind a gold standard.  But even with small and valuable items, it is hard to imagine the vast levels of wealth we see in the modern world existing if you had to store tonnes of gold in vaults.  It would be too simple to be robbed and options for recourse would be quite limited. 

So even the very well off require government to function in order to live in a modern society.  It think that we should remember this when we wonder whether or not we benefit from the existence of governing bodies. 

Reality vs. the Facebook valuation -- part 46

As mentioned before, in order to justify the numbers being discussed in the upcoming IPO, Facebook will not only have to add to its huge base of users; it will also have to bring in considerably more revenue per user. For this to happen, Facebook will have to keep advertisers convinced that the data and targeting algorithms are worth the expense.

Stories like this don't help (from NPR):

CHACE: Welcome to the warehouse district of Little Ferry, New Jersey. Right above the loading dock, I found Alex Melen. He runs Melen LLC. It's an internet marketing company. And he provides Facebook likes to people and companies for about $75 per 1,000 likes.
HENN: Liking something on Facebook means you're a fan. It lets a company talk to you. So clicking that little blue thumbs up actually has value. This company supplies likes for cash. It sells them. So I go in and I say, I want 200 likes. How much?
CHACE: Right. And when you go in, it's exactly what you'd expect. About 10 guys, computers, beer cans, Red Bull, iced coffees. The oldest one there is Melen. He's 28.

...

MELEN: And once we find a supplier that says OK, I have the--2,000 likes or 5,000 likes or whatever the client ordered, we just place the order with that network, and then they fulfill it.CHACE: So who is it that's actually clicking the like button for cash?
PREPIS: Danny Longshanks, Camel Love, Vida, Elvis Adon, Bruce Buffalo...
CHACE: Well, it's people from all over the world who are found on work-from-home sites.
PREPIS: And if they get paid 10 cents per like, then they like it. You know, even 500, the over month total. You're making $50 a month that probably took them, in total, maybe 20 minutes to do.
HENN: Or these Likers might not be people at all. Ben Zhao is a computer science professor at UC, Santa Barbara. He says there are much cheaper ways to get a supply of likes - social bots. These are fake people controlled by a computer. Or you can buy compromised accounts.
BEN ZHAO: Right now on the black market, you can actually buy and sell bundles of Facebook account credentials, tens of dollars or hundreds of dollars for hundreds of thousands of Facebook accounts.

I wonder if someone's researching this

The dual currency story reminded of a research question I thought might be potentially interesting (assuming it's not an old, mined out topic). Way outside my field but it might be worth passing along.

Some friends of mine are serious shellac collectors, the kind of people who spend hundreds of dollars for a hundred year old record. It's a big, well established market with the occasional natural experiment that ought to stand up to some analysis, but what caught my eye was the fact that though mainly cash-based, there's a significant barter aspect. what's more, the cash barter mix has been in place for a long time and seems relatively stable.

Seems like there ought to be some fun questions you could ask about a market like that. 

Dual currencies

NPR's the World has an interesting story on the Roman Empire's practice of letting conquered nations use both their own and the official Roman currency. It's a cool piece of history and it suggests some intriguing questions (particularly during the decline and fall of the Euro).

"Implicit Association Tests"

I hadn't heard of this technique before but this interview got my attention. Here's the Wiki version:

A typical IAT procedure involves a series of seven tasks.^[6] In the first task, an individual is asked to categorize stimuli into two categories. For example, a person might be presented with a computer screen on which the word "Black" appears in the top left-hand corner and the word "White" appears in the top right-hand corner. In the middle of the screen a word, such as a first name, that is typically associated with either the categories of "Black" or "White." For each word that appears in the middle of the screen, the person is asked to sort the word into the appropriate category by pressing the appropriate left-hand or right-hand key. On the second task, the person would complete a similar sorting procedure with an attribute of some kind. For example, the word "Pleasant" might now appear in the top left-hand corner of the screen and the word "Unpleasant" in the top right-hand corner. In the middle of the screen would appear a word that is either pleasant or unpleasant. Once again, the person would be asked to sort each word as being either pleasant or unpleasant by pressing the appropriate key. On the third task, individuals are asked to complete a combined task that includes both the categories and attributes from the first two tasks. In this example, the words "Black/Pleasant" might appear in the top left-hand corner while the words "White/Unpleasant" would appear in the top right-hand corner. Individuals would then see a series of stimuli in the center of the screen consisting of either a name or word. They would be asked to press the left-hand key if the name or word belongs to the "Black/Pleasant" category or the right-hand key if it belongs to the "White/Unpleasant" category. The fourth task is a repeat of the third task but with more repetitions of the names, words, or images.
The fifth task is a repeat of the first task with the exception that the position of the two target words would be reversed. For example, "Black" would now appear in the top right-hand corner of the screen and "White" in the top left-hand corner. The sixth task would be a repeat of the third, except that the objects and subjects of study would be in opposite pairings from previous trials. In this case, "Black/Unpleasant" would now appear in the top right-hand corner and "White/Pleasant" would now appear in the top left-hand corner. The seventh task is a repeat of the sixth task but with more repetitions of the names, words, or images. If the categories under study (e.g. Black or White) are differently associated with the presented attributes (e.g. Pleasant/Unpleasant), you would expect that the pairing that a participant associates with or believes would be considerably easier for the participant.^[1] In this example a participant may perform better when White and Pleasant are paired together than when Black and Pleasant are paired.

 I don't have an opinion on this research, but I can think of all sorts of interesting applications for something like this both in the social sciences and in business if the technique performs as advertised.

Has anyone out there played around with this?

Ddulite Alert I (II to follow shortly)

NPR's Steve Henn  has an excellent story here about Facebook and Yahoo. Lots of good points but a couple struck me as particularly relevant to the ongoing ddulite thread.

Today, Facebook CEO Mark Zuckerberg turns 28 and gets the ultimate birthday gift: His popular social networking site is expected to go public later this week. The IPO could be valued at nearly $100 billion. Meanwhile, Yahoo, another company that also once had a bright future, continues to undergo upheaval as it struggles to define its mission.

Facebook is expected to start selling stock to the public and begin trading on the Nasdaq Stock Market on Friday. One of the things that are remarkable is how quickly Facebook became so valuable. Can a company started less than a decade ago in a college dorm really be worth that much?

To put this in perspective, when Facebook goes public it will probably be valued at more than Boeing and Ford combined. But Facebook's profits are relatively minuscule.

So to justify its sky-high stock price, Facebook will need to grow like a weed for the next few years. The amount of money it brings in will have to double and then double again for this deal to make sense for long-term investors.

Right now, more than 80 percent of the money Facebook makes comes from advertising. So that piece of its business needs to expand really quickly. But Facebook doesn't want to clutter up its site with too many ads and annoy its users.

Late last week Facebook gave us one hint about where it might be headed. The company has huge amounts of data about each of its users. It knows your likes, your friends — and where you went to school. Right now it uses those data to sell ads aimed at you, but those ads only appear on its own website.

Friday Facebook tweaked its privacy policy, allowing it to use that information to place ads aimed at its users anywhere on the Web.

...

So Facebook has to walk this line, while at the same time adding members, selling ads and figuring out how to collect even more information about us.

If Facebook doesn't figure all of this out, it will be very bad news for investors.

Investors who buy Facebook this week and plan to own this stock for the long haul are betting on a kind of crazy, almost unprecedented growth. Because without that, Facebook begins to look a lot like another Silicon Valley company — Yahoo.

Right now, Yahoo and Facebook sell just about the same number of ads. They both have audience measure in the hundreds of millions. But Yahoo stock is worth one-fifth of Facebook's projected value.

...

So this week as Facebook goes public, it's worth remembering that Yahoo was once valued by Wall Street at more than $100 billion too.

First a fairly technical point about marketing. Let's say you're on Facebook and you're in the market for a car and, as luck would have, I own an area dealership that sells the make of car you prefer. Though it doesn't entirely replace the need for untargeted marketing for things like brand building, being able to get my ad to you is quite valuable, but that value drops quite a bit if I find out that some other local dealership hit you with a similar ad when you went to another site. The value probably doesn't drop by half (you're still a good prospect even if I have some competition), but the expected return on the ad has dropped.

Assuming rational players and reasonable efficiency, doubling the number of ads per user should increase Facebook's revenue, but by a factor of less than two.

This brings us to some more basic points. Facebook is a well established company with respectable revenue and a huge user base. If you were worried about Facebook going under, these would be wonderful attributes. If you're worried about Facebook not justifying its stock price, these are causes for concern.

In order for it to be a good deal, Facebook has to grow at a fantastic rate over the next few years. Unfortunately there is a limited pool of potential users and each of those users has a finite amount of disposable income. Of course, those are both very big numbers, but not so big that Facebook wouldn't have to command a significant share of both. That's not impossible but as a general rule, the closer those upper bounds get, the more difficult growth becomes.

And that's assuming almost complete market dominance. Facebook does have substantial first mover advantages but we're talking about a volatile segment of the economy that could be turned on its head by a major technological innovation. There's also the possibility of some other deep pocketed companies making a play for FB's marketshare (already happening with Google), or of small niche competitors getting a foothold or even a major open source alternative. Then, there are the potential regulatory issues Henn mentioned in one of the sections I didn't quote.

None of these things threaten the existence of Facebook but any one or two of them could prevent the company from justifying its price.

The comparison to Yahoo is especially interesting.Yahoo has recently become a bit of a whipping boy for the financial press, despite the fact that it's a company with some pretty good fundamentals (hundreds of millions of visitors and billions in revenue according to Wikipedia), more threatened by management hysteria than by any flaw in its business plan.

There are differences between the two companies and good reasons to value Facebook higher than Yahoo, but to get the gap we see here you have to start considering bad reasons as well, and ddulite investors are high on that list. At the height of the tech bubble a dozen years ago, Yahoo had the aura of being the next big thing in technology and its stock broke $118. Now the aura's faded, it's trading for more than a hundred dollars less and it can't get any respect.

Today that aura surrounds Facebook and people are once again failing to price in potential problems and limitations. Perhaps things will work out better this time (but I don't think that's how the smart money will bet).

A good point on J.P. Morgan

(If you're still getting caught up on the JP Morgan story, you should probably go by Marketplace and check out Heidi Moore's explanation of the fiasco.)

I don't have a direct source for this other than that I heard it on either Marketplace or All Things Considered, but a financial reporter made an observation I've been waiting to hear put concisely since this story broke.

The reporter explained that the group that had the huge recent loss had been given a dual mandate: hedge against losses and make lots of money. The reporter then wondered if assigning those two mandates to the same team was a good idea.

I wonder if this is an example of something I've seen before or at least if something I've seen before might have contributed to it. One of the recurring themes in these bad-finance stories is the arrogant dismissal of seemingly obvious points, things like "it's hard for a hedge to provide protection against big, risky bets going bad when it's also a big, risky bet." Part of this arrogance may come from people's mistaken belief in their own sophistication.

There's a common fallacy often encountered by people who build models and handle data. It's the belief that complication implies sophistication. The truth is largely the opposite: complication amplifies naivety. When people use complicated, impressive-sounding systems they tend to be less concerned with common sense questions like, "is my sample representative?" or "Are the relationships we're assuming stable? Are they likely to break down under extreme conditions?"

In the period leading up to the crash, we heard a great deal about how sophisticated Wall street and the financial sector had become, particularly with respect to risk. I wonder if we, in fact, saw just the opposite. Did the rise of the quants and the reliance on elaborate models simply enable naivety and wishful thinking?

I'm not claiming that this was the (or even a) primary cause of the crisis. I would put before it, in no particular order, greed, misaligned incentives, deregulation, the growth fetish and possibly a few other candidates. Still, I think it's fair to say that things were made worse by the belief that having complicated formulas to deal with risk somehow meant you were safe from it.

Update -- I took advantage of the ten minute blogging rule (you have ten minutes after posting to change things) and added the third paragraph.

For the weekend -- five words with something in common

Project
Record
Produce
Conduct
Progress

UPDATE: I noticed no one had a guess yet so I'll put some clues in the comment section.

"Ar go"

Unlike NPR's Planet Money, which started out with one of the best debuts in in recent journalism then faded rapidly, American Public Media's Marketplace has managed to maintain its exceptional quality for better than two decades.

Here are a couple of examples from today's show (I'll blog about them later if I get a chance):

A beautifully done story on a program to help teen mothers in Cincinnati (*and the source of the title of this post). **

And a good account of the pros and the cons of the coupon business.

This show is definitely worth setting aside a half hour of you afternoon.


** While listening to Rayana and Liyah's story, keep this in mind:

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 discouragementsthan encouragements.

A response to a response -- honest libertarians

Following up on Joseph's follow up to this post, there's an important distinction I'd like to make with regard to this argument from the Cato Institute (as reported to Business Week):.

Some believe the Census Bureau does too much already. “They waste a share of their budget on studies that no one actually uses,” says Chris Edwards, an economist with the Cato Institute, who cites periodic surveys on such items as the total hog count in the U.S. to prove his point. “A lot of that could be done by the private sector.”

As I pointed out before, Edwards is basically saying (in reverse order) that:

1. the private sector could perform major functions of the Census (which is demonstrably wrong since, as I pointed out before, the private sector has tried to do this repeatedly without ever coming close to matching the quality of government data) ;

2. no one uses reliable data about American agriculture (which is too laughable to waste any time addressing).

What's interesting and depressing here is not just the bad arguments that Edwards made but the valid ones that he didn't (or at least that he didn't make forcefully enough to be quoted). To understand these other arguments, it's useful to think of a simple value function for evaluating government projects

V = Returns - Traditional Costs - Libertarian Costs

Traditional costs are what you normally think of for a project, direct expense, opportunity costs, negative impact on other economic activities. Libertarian costs are the losses of liberty that go with any action where the majority forces the rest of society to take collective action.

Most of us don't give a lot of thought to LC but it's not zero and libertarians are performing a valuable service when they bring it up. In this case Edwards could have made the following valid arguments:

We're financing the census by taxing people who in some cases object to it.

The census is an invasion of privacy by the government.

A relatively small group gets a disproportionate share of the benefits.

I don't happen to agree with those arguments but they are valid and it's worth noting that Edwards chose to use invalid ones instead. We've seen this sort of thing before -- libertarian groups like Cato pushing flawed reasoning rather than make the honest but difficult-to-argue libertarian case. It's a practice that undermines their credibility.

Or it would if anyone cared about credibility anymore.