January 13, 2013 § Leave a comment
July 9, 2012 § 1 Comment
There has been a flurry of news about the Libor Scandle, JP Morgan trading losses and the whole banking industry once again starting to slide down the slippery slope of moral failure. I have worked for a bank and I feel I have seen the belly of the beast. I am also a student of economics and the first law of economics is that Incentives influence people’s behavior a lot. I was reading a very interesting article by the New Yorker Magazine with the title “The Money Empathy Gap“, this one statement resonated with me:
Putting someone in a role where they’re more privileged and have more power in a game makes them behave like people who actually do have more power, more money, and more status.
I have seen this behavior with employees within the bank, they suddenly inflate and act like they are superior to everyone else when they have to influence a decision to lend money or when the client needs to renegotiate terms of a loan. It has nothing to do with their ability to really assess the true risk of the situation, but just the fact they have the power to influence a decision the banking executives acted way superior to anyone. These are decent, honest, hardworking people who would not act that way in their homes or with their friends. Incentives matter and influences behavior. I also feel and know that the incentives i.e Salary, Bonuses, Stock Options, Perks and Benefits given to banking executives is disproportionately higher than other industries. It actually makes those working for the banks feel they somehow are superior to the rest of the community. I am not trying to say that we need to make the compensation for everyone the same on the contrary I think the financial services firms because they control flow of capital seem to be disproportionately rewarded for all the wrong reasons. The trading loss incurred by the JP Morgan trader occurred because he obviously has a bonus that is tied to this net return at the end of the day so he had an incentive to take disproportionate risk on the trading floor. This is easier for a trader working for the bank because he is not playing with his own money, it is a balance sheet actually already inflated because of the privilege that banks have i.e they can multiply their balance sheets 10 to 12 times the actual equity they have in the business. I think both of these things drive the risky behavior in banks. I think we need to rethink the incentives we give to traders, banking executives and the board of banks. In addition, banks should be barred from having the privilege to bet their balance sheet on the stock market. It provides for perverse incentives.
- Lie-More As A Business Model (baselinescenario.com)
- JPMorgan’s debacle: It’s time to talk exec pay (management.fortune.cnn.com)
- The rotten heart of finance (economist.com)
- British Government Getting Tough on Bankers (livinglies.wordpress.com)
- VC – Value Creator (startupiceland.com)
June 15, 2012 § 1 Comment
The post is direct quote from Nicholas Nassim Taleb‘s writings at Fooled By Randomness
There is no need to write a complicated model (precise but stupid, the kind of stuff complexity idiots write to get academic credit), simple rigorous arguments can prove with minimal words and no mathematics how fat tails emerge from some attributes of complex systems. This argument is a Dynamic Hedging-style (Taleb, 1997) argument.
A- Why fat tails emerge from leverage and feedback loops, single agent simplified case.
A1 [leverage]- If an agent with some leverage L buys securities in response to increase in his wealth (from the increase of the value of these securities held), and sells them in response to decrease in their value, in an attempt to maintain a certain level of leverage L,
A2 [feedback effects]- If securities rise in value in response to purchasers and decline in value in response to sales,
then, by the violation of the independence between the variations of securities, CLT [the central limit theorem] no longer holds (no convergence to the Gaussian basin). So fat tails are an immediate result of feedback and leverage, exacerbated by the level of leverage L.
A3 – If feedback effects are convex to size (it costs more per unit to sell 10 than to sell 1), then negative skewness of the security and the wealth process will emerge. (Simply, like the “negative gamma” of portfolio insurance, the agent has an option in buying, but no option in selling, hence negative skewness. The forced selling is like a short option.)
Note on Path dependence exacerbating skewness: More specifically, if wealth increases first, this causes more risk and skew. Squeezes and forced selling on the way down: the market drops more (but less frequently) than it rises on the way up.
B- Multi-agents: if, furthermore, more than one agent are involved, then the effect is compounded by the dynamic adjustment (hedging) of one agent causing the adjustment of another.
C- One can generalize to anything, such as home prices rising in response to home purchases from the Greenspan liquidity, etc.
- Nassim Taleb Compares ‘Incompetent’ JPM to the Mafia (silverdoctors.com)
- Nassim Taleb’s New Comments On Europe Are Causing People’s Heads To Explode (businessinsider.com)
- BBC Interview with Nassim Taleb on JPMorgan (jessescrossroadscafe.blogspot.com)
- NASSIM TALEB EXPLODES: JP Morgan’s Ina Drew Was Paid More Money Than Mob Boss John Gotti For Taking Risks With Our Money (faktensucher.wordpress.com)
February 25, 2012 § Leave a comment
|Bill Gross (Photo credit: jdlasica)|
To get a thumbs up for innovation from Bill Gates is nothing to sneeze about. Bill Gross has done just that. Bill Gates just wrote a note about Bill Gross in his Gates Notes. I have been following Bill Gross for as long time now. He is the quintessential ideas guy, he has been doing this since he was a teenager. I wish we had role models like him in India. We were taught that working for the Government was the best job one could get. I still remember my mother urging me to take up a job with the Indian Railways and how that would secure my future with at easy 9 to 4 job! what a concept! anyways, I digress. This post is about Innovation and how to make it sustainable and solve big problems because that is what Bill Gross has created in Idea Labs. There are 5 key things that he outlines in the video and so does Bill Gates. How can we create an environment that fosters these things?
- Embrace failure as learning: Employees don’t fear loosing their job if an idea does not work – it allows them to take risk
- Bold Ideas are important, but they can fail: Try bold things that have a high chance of not working, its still learning
- The market place is not always ready for a new idea: Old ideas that are shelved can come back if a market has changed
- Go places where others are too afraid to venture: Get excited about things that are in the white space of what others won’t do – the best ideas come at this intersection
- Analyze, Assess and Move on: It takes a dissection of the strengths and weaknesses of all systems, coupled with statistical analysis, to quickly cancel out the ideas that won’t work, in order to land on a completely new idea.
February 25, 2012 § Leave a comment
I jumped in a car with bunch of Entrepreneurs yesterday and drove to Akureyri. I am participating in the Startup Weekend in Akureyri. This is the 8th Startup Weekend run by Innovit, Kristján Freyr Kristjánsson, the CEO of Innovit and I have been talking and working through a number of things including the Conference in May Startup Iceland – Building Sustainable Startup Ecosystem. I wanted to volunteer and observe this event and also to test my own hypothesis.
Brad Feld, has the theory that there needs to be Entrepreneurial Density in a community to enable a sustainable startup ecosystem to form and function:
Entrepreneurial density = ((# entrepreneurs + # people working for startups or high growth companies)) / adult population
February 24, 2012 § Leave a comment
We had our 6th Meetup @Cafe Solon last evening. We once again had a very good turn up, around 30 people. The topic of the discussion was Strategies to Test Business Hypothesis, which was a follow up from last week’s meet topic “Business as a Hypothesis”, here are the Notes to that meetup and follow up write up. Björn Brynjar Jónsson, give a 5 minute brief talk about a topic of interest that he wanted to share with the group. The topic that he talked about was from the book “Start with Why” by Simon Sinek. It was very interesting and inspiring. Björn talked about the Golden Circle from the book. The premise is that we tend to focus our effort our vision etc on the “What”, whereas great leaders who inspire us usually start with the “Why”, which refers to the Purpose of why we do the things we do. When we understand the purpose and communicate the purpose we can inspire people to action. He gave the example of Apple. Here is the Video of Simon talking in Tedx.http://video.ted.com/assets/player/swf/EmbedPlayer.swf
- We talked about Strategies that were used in Clara to test their business model through the product Vaktarinn. Originally, Clara had not created the software that automatically sources all the digital content and provides the visualization that they do on Textual information. Gunnar explained how they got 10 of their friends to manually enter all the text from different sources into Excel Spreadsheets and then manually created the visualization look and feel on the data to validate if anyone would be interested to buy the product. Their first revenue was in selling that manual work, once they validated that idea they went on to build all the software that powers Clara Insight and Vaktarinn now. This was a quick and dirty way to see if there is a market for what you want to build.
- The second example was from the company Buuteeq, how the team there validated their hypothesis that Independent Hotel Owners are willing to share their contact details and everything about their hotels to a third party and host their solution on a third party platform. They validated that by creating a Hotel Directory Service for Independent Hotel Owners called Wandari.com. Not only were they able to validate that business hypothesis they also created their customer funnel which they could target and convert into actual paying customers.
- There was a discussion on a new business hypothesis that Safe Drivers would be willing to save money on their car insurance by allowing a tracking device to be installed in the car. We talked about how this hypothesis can be validated by just creating a web page with a simple button that says “Are you a Safe Driver? If you answered Yes, You can save 30% on your Car Insurance!” Sign up to be the First of the Safe Drivers to take advantage of the offer.” Ok, I made the actual sentences up but that is where the discussion was going!
- The 4th business hypothesis was about non-availability of Icelandic Candy on Souvenir shops. One of the participants wanted to create a business on creating an attractive wrapper around the traditional Icelandic Candy and sell it to the Souvenir shops. The group guided her to actually pre-sell the candy to the stores with just using Digital images and depending on the demand she could build up her business. I was so happy to see how excited she was about being able to launch her business by this weekend! Entrepreneurs find the way!
- Kristján Freyr Kristjánsson shared the story of how they created a business to sell the Eyafjalljokul’s volcanic ash. They sold this idea while they were stranded in the airport in London, they just used digital images to create a visualization of a fancy bottle with the Ash in it and they sold it even before the product was ready. Overall a fantastic meetup and the next meetup is going to be on Pivot Stories.
February 22, 2012 § Leave a comment
|Marorka (Photo credit: Finnur)|
It is not fair to do a Startup Profile on Marorka as it is technically not a startup because the company has sailed the rough waters of the Valley of Death and it is well on the way of becoming one of the stars of the Icelandic startup story. The company was formed in 2002 so it has been a 10 year journey… However, there is a story behind the story, it took the company a while to break into the Shipping industry I am told. It is only in the last 3 years that the company has really taken off and I believe the reason is because of their focus on the software side of the data that they gather from the ships and opening access to that data through the internet. In their own words “Marorka offers onboard and onshore Fuel Management and Energy Management solutions equipped with real time monitoring and decision support, an essential part of operational optimization. With Marorka’s energy management solutions for voyage tracking, inventory recording, reporting and data analysis, your business will be well on its way to maximized efficiency.”
I was rather surprised to hear that Ship builders do not provide the necessary information to optimize energy usage in the vehicles, it actually makes sense, no car manufacturer tells you how best to drive your car i.e when to step on the gas and when to step on the brakes. It is quite interesting that the founders of this company saw the opportunity and built a business. What was very interesting for me to understand was the sheer volume of time series data that they capture transport to a central server process it and make it available on a portal for the Fleet or Ship manager on shore to see. There are a number of challenges one has to factor, connectivity to the Internet is not continuous and the amount of data that can be transmitted is limited so I see algorithms that were used in the early days of the internet data transfer protocol should serve them well. I don’t know their software architecture but it should be an interesting problem to solve or improve on.