Explaining the principal-agent problem

I thought I posted this years ago.

The Butler and the Maid from The Carol Burnett Show

Urban suburbs

My first corporate job also led to my first big move. I'd bounced around before that, between teaching and going off to grad school, but the moves had, at most, entailed crossing only one state line. The corporate position took me from just west of the Mississippi to the East Coast, with no social contacts or experience of the area to draw on.

I did what seemed like the sensible thing and got an apartment a few minutes from work. The company's campus was on the outskirts of town deep in the suburbs. Before that, I had lived in the country, small towns, and a couple of urban areas. Each of those three options had some strong pluses and, under the right conditions, could be quite appealing. By comparison, suburban living, at least without kids, had nothing to recommend it as far as I was concerned. I realized quickly but still too late that I should have picked an interesting neighborhood closer to the center of town, even though that would've meant an extra 20 or 30 minutes of commuting per day.

I did not repeat that mistake for my next job. Before moving, I scouted the area and ask around before deciding on a very cool neighborhood featuring lots of restaurants, bars, and the city's best art-house movie theater within easy walking distance. My daily commute was 45 minutes to an hour, but the traffic wasn't bad and much of it skirted around (and at one point across) the Chesapeake Bay making for a relaxing and scenic beginning and in to each workday.

That neighborhood was, for me, functioning as a de facto suburb. I was trading a longer commute for more desirable living conditions. The fact that these more desirable conditions were found in an area of higher density, rather than lower, does not affect the underlying dynamic.

One of the primary tenets of faith among utopian urbanists is that making it dense areas more dense will have a range of tremendously beneficial effects starting with great reductions in commuting and suburban sprawl. The existence of urban suburbs raises serious questions about that argument.

How big a deal is this? A good urban researcher could probably provide us with fairly reliable numbers, but we can say with some confidence that it's having a sizable effect in at least isolated cases. San Francisco has clearly become an urban suburb for Silicon Valley and, to a degree, Santa Monica and the rapidly gentrifying Venice Beach often fill the same role for much of Los Angeles.

It is worth noting that San Francisco followed by Santa Monica are probably the two cities that density proponents are most passionate about. This raises a disturbing question (and one which, I suspect, researchers will find more difficult to answer): if you greatly increase the density of cities that are already largely functioning as urban suburbs, will you in effect simply be producing more suburban sprawl?

"A space engine that could make flying into orbit commonplace"

Obviously, you can't compare a piece of technology in development to one that's up and working. The Falcon Heavy isn't a proposal or a prototype; it's a viable vehicle currently in use. The engineers at SpaceX deserve a great deal of credit for solving daunting technical challenges, but it's important to note that it took them much longer than they anticipated and, more to the point, there's nothing revolutionary about the technology. For that, you'd have to look someplace like this.

Sabre: the ‘Holy Grail’ in space technology

Researchers have spent decades trying to crack the problem of how to fly from earth to space and back again, writes Peggy Hollinger.

But it took a combination of rocket and nuclear science to make the breakthrough that is now drawing interest from around the world in Reaction Engines’ Sabre technology.

“It was pretty clear that the rocket needed a bit of a leg up and the only place to get that was from the Earth’s atmosphere,” says Alan Bond, one of Reaction Engines’ three founders.

“But the [speed] you get out of conventional jet engines isn’t enough. Somewhere in 1982 . . . I realised that a bit of theory I had used on nuclear engines 10 years before could actually help. So the hybrid air-breathing rocket engine came into existence.”

The engine combines jet and rocket technologies thanks to its unique pre-cooler, which extracts heat from air flowing in at high speeds of up to Mach 5 — several times the speed of sound.

This enables it to be used by the engine, which then uses the heat energy to power a turbocompressor. When at the edge of the atmosphere, the engine switches into rocket mode, using liquid oxygen to break through into orbit.

Unlike partially re-usable launchers being developed by the likes of SpaceX of the US, Sabre does not need to carry large quantities of liquid oxygen, and will not have to discard stages of the craft during flight.

It could be what the industry describes as the “Holy Grail” — a single stage to orbit system.

   

Another one from the turn-of-the-century Scientific American – – I can't decide between the Far Side or the Planet of the Apes joke here

This is an interesting piece from a 1907 issue of Scientific American, but what really caught my eye and the reason I'm sharing it with you is that I was under the impression that speculation about animals' problem-solving and tool-building ability was something that scientists first started seriously discussing in the mid-20th century. This account from the generally sober journal shows that the notion was at least considered suitable for serious discussion.

Small improvements

This is Joseph

I hope that this argument is a straw man:

Someone will say that mass shooting are rare. Moreover, if a future schoolyard shooter can’t get an AI rifle, he will use an only marginally less lethal weapon. Thus, preventing civilians from legally owning AI rifles would save only a few lives and only trivially reduce the total of gun deaths. So, really, aren’t you just virtue-signalling?

Because, if it is serious, it misunderstands technological advances, public health, and legal systems all at once.

1) Technology is incremental.  No one tweak is likely to have a 100% success rate.  The modern cell phone is the product of a thousand small tweaks over decades improving efficiency.  We did not go from huge analog radios to cell phones in one step. 

2) Medical and public health advances are never 100% effective.  Vaccines reduce infectious disease but they rarely eliminate it (smallpox being a nice exception).  Tactics like hand washing do not drop the rate of disease transmission to zero.  Seat belts do not eliminate auto fatalities, even if they reduce them.  Josh Marshall is good on this point. 

3) Laws reduce risks they do not eliminate them.  We have a lot of laws that reduce risks but don;t drop them to zero.  We have screeners for airplanes; nobody thinks that they are 100% effective but they are thought to reduce risk.  We require people to be licensed to drive not because it drops the rate of accidents to zero but because it reduces the rate.

I mean one could argue that particular guns are important for some reason or another, or that a specific law is bad.  But it is the balance between cost and effectiveness -- the effectiveness of a specific intervention may be low but so might the cost.  It isn't "virtue signaling" to note that a small improvement in a battery is better, even if it took hundreds of them to make a big difference.

And if we want to make these types of arguments (total benefit is small) then I have an idea for making airports more efficient.

I just realized that we haven't made fun of Gwyneth Paltrow for a long time.

Fortunately, Stephen Colbert's staff has been keeping up with goop for us.

Non-sarcastic praise for Elon Musk (no, really)

This is a big deal. Not as big as some of the hype would lead you to believe and not big in the way most people think, but it is a big deal.

The thing to focus on here is cost. I have seen various estimates and, while evaluating them is well beyond my expertise, if you're looking for a nice round number, 50% seems quite reasonable. We will have to see how reliable the system proves (when your payloads are valued in the billions of dollars, reliability is a major consideration) and will have to see how reusable the reusable boosters are, but at this point it certainly looks like Elon Musk has greatly reduced the cost of getting things into orbit.

This is an extraordinary advance, but it is more an accomplishment of determination then innovation. It is important to note just how mainstream the Falcon Heavy approach is. Most of the basic technology goes back to the Apollo program. This is not, in any way, meant to diminish the exceptional work done by the engineers of SpaceX. Getting this system to work on this scale is incredibly challenging, but it's the kind of challenge that probably could've been done by any number of other major players had they expanded the resources and maintained the focus. Musk does not seem to have shown any interest in radical approaches with even greater potential cost savings such as spaceplanes or railguns and that's not necessarily a bad thing. Both here and with Tesla, Musk has a history of making daring business bets but playing it relatively conservative with the technology. It's an approach with a lot to recommend it (though Tesla investors may not feel that way a year from now – – more on that later).

With so many people out to deify Elon Musk (in the case of the notorious Rolling Stone profile, almost literally), there is an enormous temptation to default to the iconoclastic, but it's important to remember that while Musk may not be the person (and certainly not the engineer) he and his accolades would like you to think he is, the man still has extraordinary gifts for promotion, organization, and motivation, and those gifts sometimes produce some worthwhile, even important benefits.

And, yes, watching those boosters land under their own power is really cool.

The stocks “couldn't be valued according to traditional methods because they represented a whole new era of the economy that was nothing like the past.” – Déjà vu all over again

I just finished a recent post on how companies try to get some investor love by associating themselves with sexy, overhyped sectors of the economy. This Forbes piece by Marius Meland nicely illustrates the point.

It's also of interest for a few other reasons. It fits in with our ongoing thread about the technological innovations spikes around the late 19th/early 20th centuries and in the postwar era. The subject of the interview, Burton  Malkiel, is possibly the best person you could talk to about market efficiency versus investor irrationality and the timing (a 1999 comparison of the internet boom to previous stock bubbles) makes the observations look particularly prescient in retrospect.

"Tronics boom" of 1959-1962

With the dawn of the space age, every electronics stock suddenly took off like a rocket on Wall Street, reaching valuation levels not unlike Internet stocks today. And just like a "dot com" can help an obscure offering surge into the stratosphere today, the key to a stocks success could often be found in its name in the 1960s as well.

"I call it the tronics boom because these soaring stocks usually had some form of tron or tronics in their name," says Malkiel, citing such "trons" as Astron, Dutron, Vulcatron and Transitron and "onics" like Circuitronics, Supronics and Videotronics, as well as one company that, for good measure, put together the winning combination Powertron Ultrasonics.

Then, like now, the demand was huge but the IPOs were relatively thin, so that stock prices would soar at the launch.

Investors argued that "tronics" stocks couldn't be valued according to traditional methods because they represented a whole new era of the economy that was nothing like the past. Promoters entered the stage to talk the stocks up further. As a result, stocks soared to multiples of 50, 100 or even 200 times earnings.

But in late 1962, "tronics" stocks and other growth issues came crashing down in a massive sell-off.

More memorable ads from the turn of the century Scientific American

More on the medicinal powers of Coke. 1907

Electricity meant push button control which, if you think about it, was a pretty big deal. 1903

The more things change...     1908

I keep thinking of jokes I shouldn't make. 1903

And from JUNE 10, 1905

From that same issue.

Not all that different from the pitch phone companies make to businesses today. 1908

Profit laundering

[I need to come back to this in more detail later, but just so it doesn't sit in the queue forever, here's a quick rundown of the concept.]

It's not always rational, but investors care a great deal about where the money comes from. Two companies with exactly the same cost and revenue numbers will often be valued very differently. Sometimes, the preferences are based on perceived possibilities for growth or fears about the future of a particular business or market. Other times, it comes down to the sexiness of the industry and/or the buzz and halo effect surrounding the company.

Obviously, management will do everything it can to put their businesses in the hot category. When a company has multiple sources of revenue of varying attractiveness, it will do its best to maximize the perceived portion of the money coming from the cool streams and minimize the perceived amount coming from the uncool.

We saw some really blatant examples of this in the 90s Internet boom – – companies using brick-and-mortar profits to create the impression of online success – – but it certainly preceded that and it's never gone away since.

The lesson that many investors and most business/financial journalists need to take away from this is that, whenever you have a company with multiple revenue streams, one or more of which is particularly sexy, you should always assume you are being to some degree misled about which stream is actually bringing in the profits.

Alec Guinness was George Smiley

If you can think of a piece of video, be it an old TV show, a musical performance, a stand-up routine, it's probably on YouTube. I've started making a note whenever I think of something I'd like to see (or see again), like this definitive adaptation of Tinker, Tailor, Soldier, Spy...



And of Smiley's People.

Of course, modern researchers tried talking to plants so who are we to judge?

I'd never heard of electro-culture before coming across this article from a turn-of-the-century issue of Scientific American, but, based on some quick googling, it seems to have been one of those scientific theories (like N-rays and, to a lesser extent, Martian canals) that had a brief run of acceptance and respectability before being dismissed by the scientific community and drifting into the area of fringe beliefs.

The big question reading this today is whether or not the original researchers were frauds or simply incompetence who did a bad job setting up their experiments.

The cover of the issue, depicting Russian battleships, has nothing to do with this article but it's too cool to leave out.

Tech Boosterism

[More notes for the upcoming book]

Journalists have a natural tendency to be supportive of efforts to serve some public good. There is undoubtedly an element of self-interest here – – philanthropists and local heroes make for good copy – – but I suspect of main driver is a sincere desire to advance worthwhile causes. This is completely understandable and even, to some degree, praiseworthy, but it can also be dangerous.

Accounts of volunteers cleaning seabirds after an oil spill can create a false sense of having addressed a massive problem. Feel-good stories about imaginative school fundraising projects (disproportionately found in relatively wealthy districts) seldom mention the ways that funding by community can exacerbate educational inequality. Press releases on hedge fund managers always omit the tax benefits, the strings that often accompanied the gifts, and the reputation laundering bought with what is frequently very dirty money (see the Sacklers and the opioid crisis for example).

The damage caused by uncritical and unthinking supportive journalism really kicks into high gear when you combine it with other biases and corrupting factors. This problem is particularly acute with technology. Most journalists quite reasonably see technological progress as being good for society on the whole. Therefore, the default setting of a report of some demonstration or new development is "isn't that great?".

Unfortunately, this default approach is generally combined with a weak grasp of how technology works and progresses, particularly when it comes to things like proposals, prototypes, and producing viable products. Add to that the tremendous role of hype, the enthusiasm for conventional narratives (in this case frequently involving Silicon Valley messiahs, often with what can only be described as magical powers -- see magical heuristics), and the occasional flat out scam. The result is a press corps that ranges from a mainstream that is strongly inclined to believe what they're told to converts with a cultlike faith in Elon Musk and company.

Keep in mind that back then $600 million was quite a bit of money

To provide a bit of historical context for our recent posts on infrastructure costs (see here and here), check out this piece from Scientific American in 1907.

The cover of the issue (comparing the NYC skyline to Niagara and Victoria Falls ) has nothing to do with this, but it's still pretty cool.

“I’m almost afraid not to take the chance,” – This is when it becomes a bubble.

It's that moment when risk aversion flips and the thought of not making money starts to feel like losing it. I'm not talking about opportunity costs in any kind of rational sense. Instead, I'm referring to having the visceral emotional reaction associated with a deep, costly loss because you didn't buy into the skyrocketing market the day before. People become afraid not to invest in what should obviously be highly risky ventures.

Truly crazy bubbles are driven by this paradoxical combination of greed and fear. They both desire instant wealth and dread the sense of regret that would go with missing it. Individually, either of these emotions can drive otherwise sensible people into irrational behavior. Together, they can spur investment in some laughably bad ideas.

This Washington Post piece by Chico Harlan on a group of Bitcoin investors perfectly illustrates the point.

“Us little guys working our butts off, we can’t get ahead,” Cedric Knight, 35, told Melin. “This is a once-in-a-lifetime opportunity to change my life.”

Knight and others visiting Melin were pinning their hopes on a new form of currency whose potential value the world was only beginning to recognize. Millions of people around the world are chasing after fortune by investing in bitcoin — which has soared by more than 2,500 percent in value in the past two years — and other digital instruments known as cryptocurrencies.

...

“What crypto allows is for the masses to be venture capitalists,” Melin said.

“And guys like me, I’m not in the loop,” Knight said. “This is my chance.”

…

Knight, meantime, went home, cooked dinner and then decided to reopen one of the eight cryptocurrency apps he had downloaded. His account had fallen nearly $500 on the day — his initial $1,500 was below $900 — and he said he was “freaking out.” But then, he thought about what it meant to be a cryptocurrency investor. There would be days such as this. But there might be better days, too — much better days. If there were, he did not want to miss out.

“I’m almost afraid not to take the chance,” he said, and soon, he added $260 to his cryptocurrency account.

Some historical perspective from the archives.

"A company for carrying on an undertaking of great advantage, but nobody to know what it is."

Another except from Charles Mackay's  Extraordinary Popular Delusions and the Madness of Crowds. I believe "a company for carrying on an undertaking of great advantage, but nobody to know what it is" was an initial business plan for Groupon.

Some of these schemes were plausible enough, and, had they been undertaken at a time when the public mind was unexcited, might have been pursued with advantage to all concerned. But they were established merely with the view of raising the shares in the market. The projectors took the first opportunity of a rise to sell out, and next morning the scheme was at an end. Maitland, in his History of London, gravely informs us, that one of the projects which received great encouragement, was for the establishment of a company "to make deal-boards out of saw-dust." This is, no doubt, intended as a joke; but there is abundance of evidence to show that dozens of schemes hardly a whir more reasonable, lived their little day, ruining hundreds ere they fell. One of them was for a wheel for perpetual motion—capital, one million; another was "for encouraging the breed of horses in England, and improving of glebe and church lands, and repairing and rebuilding parsonage and vicarage houses." Why the clergy, who were so mainly interested in the latter clause, should have taken so much interest in the first, is only to be explained on the supposition that the scheme was projected by a knot of the foxhunting parsons, once so common in England. The shares of this company were rapidly subscribed for. But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one, started by an unknown adventurer, entitled "company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project. The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of 100 pounds each, deposit 2 pounds per share. Each subscriber, paying his deposit, would be entitled to 100 pounds per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised, that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds of the subscription. Next morning, at nine o'clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o'clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again