Longreads + Open Thread
Biased Coins; Baby Booms; McKinsey; Collusion-by-Software; Boards; Chips
Victor Haghani and Richard Dewey offered a group of financial professionals a chance to play a simple gambling game where the player had an edge, and observed the results, which were... not great! Players got a $25 stake and had the opportunity to bet on coin tosses that would show heads 60% of the time. A third of players lost money, and 28% lost more than 90%. (As the paper notes, in theory doing ten coin tosses a minute for 30 minutes shows an expected value of over $3m from this game—understandably given the background of one of the experiment's authors, this potentially unbounded loss was capped by the rules of the game.) This is a microcosm of reality: there are games where the median player loses even though the expected value of playing well is making 128,000x your initial investment. Usually reality is not so kind as to constrain outcomes so much that you're literally betting on an unfair coin toss, but if you can find yourself in a situation where you can compound the benefits of a metaphorical unfair coin toss, you really ought to take advantage. And separately, there's still significant edge in being the first person to recognize one of those complicated word problems life throws at people as an instance of a simple formula you've already memorized.
(Via the always excellent Moontower.)
Martha Bailey, Janet Currie, and Hannes Schwandt have a paper arguing that Covid produced an increase in birthrates, not a decrease. Overall births declined, but the big driver of this was lower births from recent immigrants, i.e. the measured decline in US fertility in 2020 reflected a change in what country people were having kids, and not how many they were having. Among US-born parents, births actually rose 6.2% above trend in 2021. Birth rates rose for college-educated mothers, and the effect was strongest for firstborns. This is all consistent with the pandemic allowing white-collar workers to participate in big cities' labor markets while living in cheaper places, which lowers the cost of family formation and leads to more births.
For an earlier Diff look at Covid's impact on fertility, this piece from November 2020 ($) argued that mortgage data and Google search trends indicated that birthrates would be higher following the pandemic.
Adam Braff has a fun review of the book When McKinsey Came to Town taking the form of an interview with the frozen head of McKinsey founder Marvin Bower. There's a funny symmetry to criticism of consulting companies from within the business community and outside it. There's often a perception—sometimes true!—that big consulting companies are in the business of charging executives lots of money to be able to say "McKinsey says we should..." instead of "I think we should..." If firms are rubber-stamping decisions that don't get waved through easily, then they'll always be around when companies do something risky, whether that means taking a business risk or a moral one. So it will be straightforward to write a book pulling together lots of case studies of their involvement in bad behavior. But it will be just as easy to put together examples of great behavior instead. In a sense, a McKinsey pitch deck touting the firm's amazing achievements for clients and a book highlighting their mistakes are both the expected result of a firm that does the kind of work McKinsey does, and neither of those truncated distributions tells the whole story.
Heather Vogel of Propublica profiles RealPage, a real estate data company whose rental algorithms have pushed landlords to raise rents. A good rule of thumb is that when there's a business with market pricing, smaller operators underperform larger ones because they have worse data and don't have the financing to tolerate waiting for the right price. A software product can't do much about the latter problem1, but it can give everyone access to the same data, and give them confidence that a higher price than they expect is what the market can bear. The fact that landlords can profitably use these pricing algorithms is interesting—it implies that historically, rents were artificially low and is closing that inefficiency. This is obviously of no comfort to anyone renewing a lease right now, though as with many other real estate issues the core problem usually comes down to a shortage of housing in the most desirable areas. Pro Publica raises concerns about software leading to accidental or intentional price-fixing—if every landlord gets told to raise rents 10%, then rents go up 10% and tenants either have to pay more or move to a different city. On the other hand, RealPage customers might worry about the opposite: if they pay for software that tells them to raise rents, and competitors raise rents a little less and don't pay for any software, RealPage usage ends up subsidizing the landlords who don't pay for the software at the expense of the ones who do.
This kind of situation will get more common over time: vertical-specific software gives fragmented industries the same data opportunities that concentrated industries have. If every restaurant has access to the same pricing data that McDonald's uses to adjust menus, or if every part-time crafts seller can skim Etsy to determine exactly what the market value of their work is, it redistributes some wealth away from consumers and towards small businesses and the software companies that sell to them.
Where do boards of directors come from? This 2004 paper from Franklin A. Gevurtz starts by asking this question in a modern context and then veers through hundreds of years of institutional history, tracing the modern board of directors' responsibilities, and in fact the modern corporate form, to thirteenth century legal developments. The problem addressed by a board is the same problem addressed by medieval parliaments and town councils: there are some choices that have an impact on a large number of people, and those people can't and shouldn't individually monitor every single decision (a 15th century merchants' guild announced that "it was 'odious and grievous' to hold many meetings of the membership, especially 'for matters of no great effect'"). But it's also hard to run an effective organization by committee. So the design pattern that's persisted over time is to have leadership by individual executives and oversight by a committee representing the collective interest of everyone affected by that leader's decisions. It's amazing to see that a model invented almost a millennium ago to address this problem still remains the default way to organize economic activity for a company with outside investors.
Via Jason Crawford
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Chip Wars: A good up-to-date history on the chip industry's growth and globalization. There are other books that cover bits of this story, like The Chip for general history and Tiger Technology on the early shift to Asia. This book catches readers up to the current situation, in which TSMC is a few steps ahead of everyone else, and other companies are considering how (and whether or not) to catch up. Lots of good background on things like the Soviet chip program, how guided munitions affect war, and—obligatory for any good chip industry book—stories about the extreme lengths chip manufacturers go to in order to avoid manufacturing defects.
Drop in any links or comments of interest to Diff readers.
One thing AI improvements have done is to provide better interfaces between the digital world and the messier real world, whether that's through art and text or by designing physical products. What are some of the interesting applications of this? And what are the non-obvious consequences?
Re: resets -- Amazon’s deliberate slowdown and focus on profitability in 2001 seems like the canonical example for bigtech. Perhaps Uber will fit that pattern one day too.
Goldman Sachs significantly slowing down mortgage originations in 2007
Semiconductor companies getting market timing right (I think Intel got this right a few times)
Similar to above -- lots of oil companies have timed market expansion/contraction correctly or, at least, responded extremely quickly when the environment changed.
Timing cycles is hard, but in some industries it's essential.
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Or can it? If RealPage is working with smaller landlords who will rent a unit out for 10% less than what they could get away with because they need the money this month rather than next, the short-term high-interest loans would be good for landlords and for RealPage, at the expense of tenants.