Byrne Hobart
Longreads
- A fun time capsule: a 2005 NYT column about the alumni network of Drexel Burnham Lambert, written a decade and a half after Drexel's collapse. Business mafias are rare because they require two things: a concentration of talent, and then some catalyst for all the talent leaving at the same time (without the bad blood that would make them reluctant to do business with one another). In Drexel's case, the catalyst was an indictment that simultaneously killed the firm and helped highlight just how much money the people there were making.
Via Matt Levine. - Jon Askonas in Mere Orthodoxy on how conservatives should think about technology. This is especially worth reading if you do not consider yourself conservative—technological changes disrupt social equilibria, so if you're broadly happy with social norms today, and technology keeps improving, then you’ll inevitably become very worried about The Way Things Are Going Nowadays. The essay also has some good thoughts on the question of preserving versus recreating traditions; some things that screen as "traditional" are actually quite new (the viral example of this is the claim that Chicken Tikka Masala was invented in Britain in the 1960s; another fun one is that the fez, banned by Atatürk in 1925, had only been traditional Turkish attire since the reign of Mahmud II, roughly 100 years before).
- Jay Caspian Kang writes about the career arc of Nate Silver in The New Yorker. There's a wonderful irony to Silver's career: he's been successful at thinking rigorously about probability. (If you viscerally disagree with that, please include a link to a prediction calibration graph like this one! Thanks!). But he got famous for an improbably successful record in 2012, when he successfully called every state. His audience wanted certainty, particularly certainty about what they hoped would happen, but Silver doesn't sell what they're looking to buy.
- Niels Joachim Gormsen and Kilian Huber have an important paper on corporate discount rates. Financial theory assumes that companies invest in projects whose returns exceed their cost of capital. This is value-creating, even when both rates are low: if a company can invest for a 6% return, but its cost of capital is 5%, then raising money and investing it makes the business more valuable. The paper looks at companies' statements from conference calls (they manually reviewed 74,000 paragraphs of company communications) and finds that companies will often explicitly call out the fact that their threshold for investments is higher than their cost of capital, and that these required rates of return are insensitive to changes in interest rates: a one-point rate drop in the cost of capital leads to a 0.3 point drop in discount rate. And the result is that companies invest less than financial theory says they should—which leads to slower growth, and thus lower rates, further compounding the problem! (It would be politically untenable to do this, but one solution would be to replace or enhance changes to discount rates with subsidies for investment—or, more palatably, with variable surtaxes on dividends, buybacks, and acquisitions.) Of course, any claim that companies focus too much on buybacks and not enough on reinvesting in their business is equivalent to a claim that the problem with big business today is that it isn't nearly big enough. Tradeoffs abound, as always.
Via Marginal Revolution. - Cormac McCarthy (RIP) writes about "Kekulé Problem," or why we sometimes know things subconsciously and then figure them out metaphorically. It's a piece that happens to be relevant today not just because of McCarthy's death but because of his insight into where thinking happens: "Language can be used to sum up some point at which one has arrived—a sort of milepost—so as to gain a fresh starting point. But if you believe that you actually use language in the solving of problems I wish that you would write to me and tell me how you go about it."
- And in this week's Capital Gains, we look at what an analyst's job really is, and how investors use them.
Books
- Technological Revolutions and Financial Capital is a classic work on how new technologies go from prototype to ubiquity. It's a holistic view, starting with more concrete applications, broadening to how new businesses affect incumbents, and ultimately to how laws change in response to both the new technology and the downsides to the boom it creates. Fueling all of this is feedback effects with financial markets. Multiple feedback loops at different frequencies make these very hard to analyze, but the general outline of big technological transitions has been consistent over time.
Open Thread
- Drop in any links or comments of interest to Diff readers.
- What are some underrated alumni networks today? And which organizations are likely to produce them?
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