Continuous Productivity

America Leads in Bankruptcy

Very good article by Megan McArdle explaining how the generous American bankruptcy laws actually facilitate risk-taking, entrepreneurship, and innovation:

Our leniency toward those with unsustainable debts helps not only profligate debtors, but the rest of us as well. Less onerous bankruptcy procedures boost rates of entrepreneurship: reduce the cost of failure, and people become more willing to take risks. America’s business environment is much more dynamic than that of Europe or Japan, for many reasons—and our generosity to capitalism’s losers is one of them.

The issue, as is often the case, is the perception of the general public versus what benefits society as a whole:

Americans’ public attitude toward the bankrupt, however, is not nearly as generous as our law. Every move to make things easier for debtors meets with fierce resistance, not merely from creditors, but from ordinary people who are making payments on time. As this article went to press, the Senate was scrambling to find a compromise on a long-stalled House proposal that would allow bankruptcy judges to reduce the principal of home loans where the value of the property has fallen below the mortgage’s outstanding balance. Known as a “cramdown,” the idea was popular with most congressional Democrats, but apparently not with the voting public, which was telling pollsters in ever higher numbers that they thought the whole housing-bailout package was unfair.

And isn’t it? Most people didn’t take out giant loans with tiny down payments or do repeated cash-out refinancings. Yet the cramdown plan would make the sober, steady majority foot the bill for other people’s mistakes. First they would pay as taxpayers by helping to subsidize troubled loans. Then, the next time they needed a mortgage, they’d be charged a higher interest rate to compensate for the risk that they might declare bankruptcy and ask a judge to cram down their loan. And maybe they’d have to pay a third time, again as taxpayers, by bailing out banks that got too many of their loans crammed down. Meanwhile, the guy down the street who took out a second mortgage he couldn’t afford, to remodel, would be sitting pretty in his $60,000 kitchen.

It isn’t fair. But by the time someone is in bankruptcy, the time for fairness is already long past. Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations. Our system works so well precisely because it mostly sets aside our instinct for just deserts, and instead focuses on minimizing the costs to everyone. It lays out clear and predictable rules for lenders and borrowers, so that they can plan for disaster, and escape as quickly as possible if it arrives. Still, it’s plain as day that, in the current crisis, a whole lot of people are getting help they haven’t earned. As a result, commentators, academics, and legislators presiding over hearings have diverted much time and energy away from hashing out the ugly details of rescue efforts and toward making the one point on which we can all agree: these relief measures don’t seem fair.

McArdle goes on to explain why being harder on both companies and individuals when they get into debt they can't afford is actually worse on society:

Let’s start with the corporate side. Receivership, even as practiced in a relatively forgiving country like Britain, often results in liquidation, not reorganization. Sudden changes of the entire management are hard enough in normal times, but when they take place in bankruptcy, the difficulties are multiplied. Very few people want to go to work for a company that may be terminal, particularly if a tightfisted receiver refuses to pay a premium for their efforts.

Liquidations are very costly. Workers get fired, of course; suppliers lose business; local governments lose tax revenue. But they’re costly even for creditors. Picture what would happen if a receiver shut down GM’s assembly lines until they could be sold. The workers would scatter, and with them, painstakingly accumulated human capital. The value of the inventory would plummet. Who wants to buy a car with no warranty and no pipeline for replacement parts? The residual value that GM has built up over decades in marques like Cadillac would vanish. Thus, creditors are often better off accepting partial debt payments from a going concern than selling off the assets piecemeal.

But if corporate liquidation, Euro-pean-style, is so punitive, why does America encourage individuals to liquidate—letting them trade the assets they have on hand for a full discharge—rather than making them work off as much of their debt as possible? In theory, making bankruptcy harder should make us all better off: by discouraging people from taking on too much debt, by paying creditors as much as possible, and by delivering a little just retribution to debtors for their profligacy.

That was the reasoning behind the 2005 bankruptcy reform. Although filings spiked before the law took effect, immediately thereafter they fell off a cliff. In 2006, just 598,000 people filed for bankruptcy, the fewest since Ronald Reagan was president. Filings have increased since but are still well below the rates that prevailed in the relatively sunny economic climate of 2004.

Harsher bankruptcy rules are seemingly doing what we wanted them to do: discouraging excessive risk taking. The question, though, is Which risks?

Look at entrepreneurs. All of the business literature indicates that starting a business is a phenomenally stupid thing to do. Most new businesses fail, and not simply because most would-be entrepreneurs are actually no-hopers. Even people who have founded successful companies in the past still have a 70 percent chance of failing. All those business failures are costly—but the successes are the difference between us and Tanzania. We want people to take these kinds of risks, even if that means we write off a lot of bad debt.

Tougher bankruptcy laws don’t necessarily curb the kind of behavior we want to discourage: borrowing money you have no way to repay, in order to buy unnecessary consumer goods. The amount that households put on their credit cards didn’t fall after the 2005 reform; over the next two years, it rose 12 percent. According to Michelle J. White, an economist at the University of California at San Diego, many bankrupts are what economists call hyperbolic discounters—people who pay a lot of attention to current pleasures, and very little to future costs. That’s why a person’s debt, not unemployment or divorce, may be the best predictor of bankruptcy.

If you’re the kind of person who buys now and worries later, the idea that government is making your inevitable bankruptcy filing slightly more annoying won’t discourage you. Actually, a higher hurdle to bankruptcy will make things worse, because banks will offer to lend you more money if getting the debt discharged is harder for you—money that you will happily, and irresponsibly, borrow and spend. The people who are most likely to be deterred from borrowing are the people who are taking the rationally contemplated risk of starting a company or buying their first home.

Great stuff - read the whole thing.

Church Business Succession Planning

Even churches have the same succession planning issues as do family-owned businesses. When the patriarch withers away, the children often foil the life's work:

The Crystal Cathedral blames the recession for its woes. But it's clear that the elder Schuller's carefully orchestrated leadership transition, planned over a decade, has stumbled badly.

It's a problem common to personality driven ministries. Most have collapsed or been greatly diminished after their founders left the pulpit or died.

Members often tie their donations to the pastor, not the institution, said Nancy Ammerman, a sociologist of religion at Boston University. Schuller, with a style that blends pop psychology and theology, has a particularly devoted following, she said.

"Viewers are probably much less likely to give when it's not their preacher they're giving to," she said. "There's something about these televised programs where people develop a certain loyalty."

Even in a religious setting, the stories are similar to many charisma-driven co-founders of the world's biggest companies:

The elder Schuller, who called his weekly show "America's Television Church," founded his ministry in a drive-in theater after moving to Southern California in 1955.

He studied marketing strategies to attract worshippers and preached a feel-good Christianity, describing himself as a "possibility thinker" and spinning his upbeat style into a 10,000-member church and a broadcast watched by millions worldwide.

The church's main sanctuary, the Crystal Cathedral, is a landmark designed by renowned architect Philip Johnson, with a spire visible from afar amid Orange County's suburban sprawl. Thousands make the pilgrimage to see where the broadcast is filmed before a live congregation.

Billers and Players at EconLog

A very interesting post by Arnold Kling at the EconLog.  He very concisely defines the economic differences between entrepreneurs and workers:

As Taleb points out, there are safe professions where you charge by the hour, so I might call them Billers. As a Biller, your earnings tend to have a high floor but a low ceiling. Think of an accountant.

What Taleb calls scalable professions are ones where you are not limited by what you can charge for an hour. Recording artists, professional baseball players, entrepreneurs, corporate CEO's, and financial speculators enjoy scalability. But, as Taleb points out, they have to compete in tournaments where there are a few winners and many losers. So we can call these sorts of people Players.

Both Wallstreet and the technology industries have done an amazing job in not only delineating between "players" and "billers", but also rewarding "billers" (via outsized bonuses and stock options).  That is not the case in the healthcare industry.  Although, there are certain specialty physicians that garner tremendous compensation, the bulk of the "billers" just get a standard salary that is not tied to performance.  IThat leads to tremendous inefficiencies because compensation focused "billers" are constantly jumping around for the highest paying job.  Also, "billers" not so focused on money are stagnated, never realizing the potential rewards had they been rewarded like "billers" on Wallstreet and Silicon Valley.  I can see that structure leading to "billers" looking at their profession as "just a job" and not really being motivated to innovate and foster change.  Just look at the (lack of) progress in the healthcare industry as it lags significantly behind finance and technology in the last decade. 

Once You Leave Home...

Gupta, 38, moved to this gated enclave after 15 years spent studying and later working as a Goldman Sachs banker in New York and London. 'Ten years ago, if I had considered moving back, people would have questioned my sanity, and assumed I couldn't hack it in the US,' he said. 'Now everyone recognises that India is a very exciting place. There are tens of thousands of people like me making the decision to return.'

A trend that has been gaining momentum for at least the last 5 years is highlighted in a recent Guardian article. I remember that even when I was completing grad school back in 2003, many of my classmates that had come to the US for education and work purposes were planning to go back to either China or India to start their own ventures.

Some Thoughts on Entrepreneurs

Fred Wilson recently gave some thoughts on entrepreneurs on his blog.  I found the following thoughts to be most interesting:

Can entrepreneurship be taught/learned? I don't think so. It's like a personality disorder. You are born with it.

When I was younger, I would have argued that entrepreneurship can be taught.  Now that I am managing more people and interacting with both entrepreneurs and employees, I have to completely agree that it is innate. 

I often get asked, "How did you start this or acquire that?"  I used to try and answer the question, but I learned that it was an unanswerable question.  The best answer is, "I just do."  Just like I just had the cojones to leave larger companies, take risks, and execute on a constantly changing vision.  There is no formula.  It's a yearning for risk and understanding that being an entrepreneur, like much else in life, is a effectively managing constantly changing risk.  If you have to think about how to become an entrepreneur, you aren't meant to be one. 

Are entrepreneurs "control freaks"? Yes.

What he said.  Yes and yes.

What do you look for in entrepreneurs? First and foremost, they need to be magnets. For talent. For money. For attention. And for much more.

This comment was interesting in that "magnets" to me implies messianic, larger than life characters that garner a following because of whom they are.  I wanted to argue that, although, there are many entrepreneurs that are magnets, there are just as many  reserved, underwhelming figures.   The more I thought about it, though, the more I realized a "following" is a critical entrepreneurial trait.  The most successful entrepreneurs have to be contrarians that must have a magnetic personality to convey what isn't natural to most people. 

Condo Economics

Developers usually put up their own money for a project first, then spend borrowed funds. Once developers have spent their money and have commitments from lenders, they have a strong incentive to keep building to finish the project.

"These developers had millions of dollars tied up and they had them financed so they just moved forward," says J. Ronald Terwilliger, chief executive of Trammell Crow Residential, which builds many rental apartment buildings and also a few condos. "What they hope is that by the time the project is finished the market comes back."

For those of us wondering why the cranes are still out in full force despite the fact that we are in the midst of a housing bust.  Another interesting quote from a mortgage broker who was looking to sell her condo:

"When the world goes to hell in a handbasket, the last thing anyone wants to buy is a condo," says Cathy Schlegel, a mortgage-loan broker in Fort Worth, Texas, whose condo in a high-rise called The Tower sat on the market for 14 months before she finally sold it at a loss in February.

Being Famous Helps

Romeo Miller is a 5-foot-10 point guard with a bad knee. He has never played a full season of high-school basketball. This season, he averaged 8.6 points a game for Beverly Hills High School, which finished last in its league.

But next fall, the 18-year-old will suit up for the University of Southern California, a program in the tough Pac-10 conference. And he will receive a full basketball scholarship valued at $44,400 a year.

Romeo Miller is Lil' Romeo, the son of music mogul Percy Miller better known as Master P.  The controversy behind the scholarship offer is that there are a limited number of scholarships a school can offer.  Given Romeo's (lack of) talent, some are concerned whether it is taking away from a more deserving (and underprivileged) athlete.

The reality is that there should be no controversy given the scholarship market.  It's such a limited supply with such a high demand that a kid that gets overlooked at USC will easily get a scholarship elsewhere.  That is, it's not really taking away from a deserving kid, but rather the argument can be made that USC is "wasting" a scholarship on a player that won't provide much "utility". 

Ah, but Tim Floyd, USC's coach, ever a savvy businessman, has already thought that through and will extract a different utility from Lil' Romeo:

Yet the school broke no rules, and Tim Floyd, USC's basketball coach, makes no apologies about Mr. Miller's potential to sell tickets. "We may have more 11- to 17-year-old girls in the stands than we've had in the past," he says.

Andreessen AND Obama

It has been a while since Marc Andreessen has posted.  So, this morning when my feeds indicated that my Andreessen folder had a new post, I clicked right away.

Marc was kind enough to recap a meeting he had with Barack Obama prior to the start of the campaign season in early 2007.  He recaps the meeting and his perceptions of Senator Obama.  Again, anyone who knows me well, knows how I feel about each of these gentlemen- as inspirations, as leaders, and most importantly as men that break molds.  So, I was excited as I have been in a while to read Marc's perception of Senator Obama.  The salient points:

First, this is a normal guy.

I've spent time with a lot of politicians in the last 15 years.  Most of them talk at you.  Listening is not their strong suit -- in fact, many of them aren't even very good at faking it.

Senator Obama, in contrast, comes across as a normal human being, with a normal interaction style, and a normal level of interest in the people he's with and the world around him.

Normal and Smart:

Second, this is a smart guy.

I bring this up for two reasons. One, Senator Obama's political opponents tend to try to paint him as some kind of lightweight, which he most definitely is not. Two, I think he's at or near the top of the scale of intelligence of anyone in political life today.

You can see how smart he is in his background -- for example, lecturer in constitutional law at University of Chicago; before that, president of the Harvard Law Review.

But it's also apparent when you interact with him that you're dealing with one of the intellectually smartest national politicians in recent times, at least since Bill Clinton. He's crisp, lucid, analytical, and clearly assimilates and synthesizes a very large amount of information -- smart.

Please go read the entire post, it will be well worth your time.

Netscape Time Has Run Out

Anyone who knows me well, knows my great affection for Netscape, Mark Andreessen, Jim Clark, and Netscape Time.  I can go on and on about how Andreeson and the gang, the book, the browser, and their journey changed my perception of entrepreneurship and technology.  So, of course, I was severely pained to read that AOL is retiring Netscape Navigator:

Netscape was created by Marc Andreessen who as a student had co-authored Mosaic, the first popular web browser.

His company Netscape Communications Corporation released the first version in 1994.

According to Shawn Hardin, President and CEO of Flock, Netscape played an important role in making the internet "a relevant mass market phenomenon".

"Netscape had a critical role in taking all of these zeros and ones - this very academic and technical environment - and giving it a graphical user interface where an average person could come online and consume information," he told BBC News.

"During its halcyon days it really felt like the internet and Netscape were really the same thing," he said.

Good-bye, Netscape. 

Vegas Economics

I knew that getting into anything in Las Vegas was expensive.  I just never really went through the revenue model in my head.  Had I done that, I would have realized that cash is exchanged at an unimaginable rate in Vegas:

Sources have been telling me that doormen at several clubs are clearing $8,000 to $10,000 a night before they share tips. So much cash is pouring in that some doormen are making $400,000 to $500,000 a year, several nightclub executives told me.

Honey Trapping

Interesting Reuters article on the field of "honey trapping":

Martinez is a "honey trapper" -- or as he likes to call himself, an "integrity tester" -- one of a growing team of private detectives who are hired by wives, husbands or partners to test the loyalty of their loved ones.

The private detective agencies are hired when a spouse or significant other suspects a partner of cheating.  The idea is to use "honey trappers" to test the person and see if he/she will succumb to temptation.  But, there is etiquette even within the "honey trapping" industry:

And Martinez has "rules of engagement": The target must not be drunk, there must be no touching, and the relative attractiveness of the trapper to the target must be equal.

"It's got to be a fair test," he explains. "So we make sure that we don't set a very attractive honey trapper on a not so attractive target, and vice versa."

Country as Business

An interesting article passed along by good friend, Dipen Desai, regarding the expansion aspirations of Dubai World.  Dubai has developed a very unique business model which has led to substantial growth in the past decade.  The country is now investing in and advising other countries hoping to replicate the model:

So while petroleum-rich Persian Gulf states like Saudi Arabia, Kuwait, and Abu Dhabi acquire chunks of companies like Citigroup (C, Fortune 500), Dubai is on an international building spree. And it's not just hotels and tall buildings - the emirate's companies are selling the developing world nothing less than promises of Dubai-style economic success. Its developers are building a $27 billion city in Saudi Arabia, $20 billion worth of luxury projects in Algeria, resorts in Morocco, housing in Vietnam, ports in Indonesia, free-trade zones in Senegal, and game parks in South Africa. "Dubai is seemingly so successful that it has become a brand to these countries," says Christopher Davidson, a professor at Durham University in England who just published his second book on the United Arab Emirates. "Governments want to have a little bit of what Dubai's been able to do at home, and Dubai needs to find places to keep growing."

The question, of course, is whether these countries can replicate the model without Dubai's deep sovereign pockets.

Irrationally Rational

An excellent article at The New Yorker reviewing a couple of books on behavioral economics:

From the perspective of neoclassical economics, self-punishing decisions are difficult to explain. Rational calculators are supposed to consider their options, then pick the one that maximizes the benefit to them. Yet actual economic life, as opposed to the theoretical version, is full of miscalculations, from the gallon jar of mayonnaise purchased at spectacular savings to the billions of dollars Americans will spend this year to service their credit-card debt. The real mystery, it could be argued, isn’t why we make so many poor economic choices but why we persist in accepting economic theory.

The bold above is mine to emphasize what every business person already knows.  People, in fact, are far from rational actors.  Whether it's "investing" in tech stocks in the late '90's to the recent real-estate "flipping" boom, people have shown their inability to act rationally.  So, it shouldn't really be a surprise that we will add books to our purchase at Amazon to get free shipping.  The interesting part is that we seem to be systematic about our irrationality.  That is, we seem to make the same mistakes over and over:

“Our irrational behaviors are neither random nor senseless—they are systematic,” he writes. “We all make the same types of mistakes over and over.” So attached are we to certain kinds of errors, he contends, that we are incapable even of recognizing them as errors. Offered FREE shipping, we take it, even when it costs us.

In fact, smart business people have already exploited our inherent biases in their pricing strategies:

This effect is called “anchoring,” and, as Ariely points out, it punches a pretty big hole in microeconomics. When you walk into Starbucks, the prices on the board are supposed to have been determined by the supply of, say, Double Chocolaty Frappuccinos, on the one hand, and the demand for them, on the other. But what if the numbers on the board are influencing your sense of what a Double Chocolaty Frappuccino is worth? In that case, price is not being determined by the interplay of supply and demand; price is, in a sense, determining itself.

To conclude:

“If I were to distill one main lesson from the research described in this book, it is that we are all pawns in a game whose forces we largely fail to comprehend,” he writes.

Rupert the Ruthless

Vintage Rupert Murdoch in this Portfolio profile.  He didn't seem to have a second thought about naming an aspiring opera singer to his board of directors at News Corp after the Dow Jones acquisition:

The appointment [of Natalie Bancroft to the News Corp. board] looked like a classic last-minute end run by Murdoch around the Bancrofts. The family had owned Dow Jones since 1928, when Hugh Bancroft, Natalie's great-grandfather, inherited the Journal from his father-in-law, Clarence Walker Barron. (The former Boston-based correspondent had bought the company from its founders in 1902.) Although Murdoch's bid represented a 65 percent premium over Dow Jones stock, the family spent months bickering and soul-searching before it agreed to sell. One factor that gave the Bancrofts comfort was Murdoch's offer to create a News Corp. board position for a family representative. The Bancrofts thought it would be a way to help them keep a hand in the business, and they believed that they would have a say in the board-selection process. Instead, Murdoch didn't even interview their nominees; he simply handed the job to Natalie. Not only did she lack support from her relatives, she had little history of involvement with Dow Jones and no business or professional journalism experience.

This wouldn't be the first time that Murdoch has been ruthless in his business decisions.  It just strikes me as ironic that the Bancroft family (assuming that they really wanted to keep a hand in the business) wouldn't include a clause about whom from the family could be named.  It's also quite amusing that Murdoch seems to have gone out of his way to name the least qualified Bancroft to the position:

"I know that me as a choice was kind of scandalous—this 27-year-old opera singer that no one knows anything about," Bancroft says. While bloggers and newspaper journalists were debating her qualifications, Bancroft, who lives in London, declined all interview requests. Now she wants to set the record straight. "There's been people saying, 'She's going to be a potted plant and a pushover.' The last thing I am is a pushover," she says. "I'm not just some idiotic girl in piggytails yodeling."

The irony of the follow-up quote can't be overlooked:

She also says she is multilingual and routinely reads foreign-language newspapers. Instead of being intimidated by the accomplished men who will be her colleagues, she says the prospect thrills her: "I have a much easier time understanding men. I was a tomboy. I love camping. I love sailing. I love doing boy stuff."

Is she planning to get an M.B.A. to help prepare for the position? "In journalism?" she asks.

Valentine and Vice

The always wonderful Marginal Revolution pointed me to this CNN article:

Because of the ban on red roses, a black market has flowered ahead of Valentine's Day. Roses that normally go for five Saudi riyal ($1.30) fetch up to 30 riyal ($8) on February 14, the Saudi Gazette said.

"Sometimes we deliver the bouquets in the middle of the night or early morning, to avoid suspicion," one florist told the paper.

In the words of MR, markets in everything, indeed.

Don't Believe the Hype

Don't get Duncan Watts started on the Hush Puppies. "Oh, God," he groans when the subject comes up. "Not them." The Hush Puppies in question are the ones that kick off The Tipping Point, Malcolm Gladwell's best-seller about how trends work. As Gladwell tells it, the fuzzy footwear was a dying brand by late 1994--until a few New York hipsters brought it back from the brink. Other fashionistas followed suit, whereupon the cool kids copied them, the less-cool kids copied them, and so on, until, voilà! Within two years, sales of Hush Puppies had exploded by a stunning 5,000%, without a penny spent on advertising. All because, as Gladwell puts it, a tiny number of superinfluential types ("Twenty? Fifty? One hundred--at the most?") began wearing the shoes.

An excellent piece deconstructing the very popular "Influentials" idea.  Although, I am a huge fan of Malcolm Gladwell's writing at the New Yorker, I haven't been nearly as impressed with his books.  I am always skeptical of the need to attribute exceeding human influence on strictly random events.  Obviously, we are all guilty of this, not just marketers.  Duncan Watts is researching the actual influence of Influentials:

In the past few years, Watts--a network-theory scientist who recently took a sabbatical from Columbia University and is now working for Yahoo --has performed a series of controversial, barn-burning experiments challenging the whole Influentials thesis. He has analyzed email patterns and found that highly connected people are not, in fact, crucial social hubs. He has written computer models of rumor spreading and found that your average slob is just as likely as a well-connected person to start a huge new trend. And last year, Watts demonstrated that even the breakout success of a hot new pop band might be nearly random. Any attempt to engineer success through Influentials, he argues, is almost certainly doomed to failure.

"It just doesn't work," Watts says, when I meet him at his gray cubicle at Yahoo Research in midtown Manhattan, which is unadorned except for a whiteboard crammed with equations. "A rare bunch of cool people just don't have that power. And when you test the way marketers say the world works, it falls apart. There's no there there."

So he began programming the first computer models of how influence spreads. Like a kid experimenting with The Sims, Watts created a virtual community of individuals, then "infected" one with a "virus"--a virtual disease, or contagious idea--to see how far it would spread. He fiddled with his models, varying the degree and frequency of "exposure" needed to pass along the virus. He noticed that the success of an epidemic varied dramatically with seemingly tiny changes in his virtual society.

The bold above is mine to emphasize that Watts is essentially saying that marketing, just like much else in life, is a stochastic process.  The buzzwords that Gladwell invented in The Tipping Point are just that - words:

Gladwell's book laid out many other factors that can "tip" a trend. He described other influential types: Mavens, who love to collect information and help others make decisions, and suave Salesmen of ideas. In order to spread, an idea or product had to be "sticky," and appear in a fertile social context. But as The Tipping Point climbed the charts, marketers fixated on Gladwell's Law of the Few, his suggestion that rare, highly connected people shape the world. For anyone involved in pitchmanship, it was an electrifying notion, one that took a highly complex phenomenon--the spread of memes through society--and made it simple. Reach the gatekeepers, and you reach the world.

Marketers seized on Malcolm Gladwell's "Law of the Few," his suggestion That rare, highly connected people shape the world.

But Watts, for one, didn't think the gatekeeper model was true. It certainly didn't match what he'd found studying networks. So he decided to test it in the real world by remounting the Milgram experiment on a massive scale. In 2001, Watts used a Web site to recruit about 61,000 people, then asked them to ferry messages to 18 targets worldwide. Sure enough, he found that Milgram was right: The average length of the chain was roughly six links. But when he examined these pathways, he found that "hubs"--highly connected people--weren't crucial. Sure, they existed. But only 5% of the email messages passed through one of these superconnectors. The rest of the messages moved through society in much more democratic paths, zipping from one weakly connected individual to another, until they arrived at the target.

So what was the issue with one of the most cited studies in marketing? Sample size:

Why did Milgram get it wrong? Watts thinks it's simply because his sample was so small--only a few dozen letters reached their mark. The dominance of the three friends could have been a statistical accident. "And since Milgram's finding sort of made sense, nobody even bothered to redo the experiment," Watts shrugs. But when you perform the experiment with hundreds of successfully completed letters, a different picture emerges: Influentials don't govern person-to-person communication. We all do.

The more Watts examined the theory of Influentials, the less sense it made to him. The problem, he explains over lunch in a Midtown restaurant, is that it's incredibly vague. None of its proponents ever clearly explain how an Influential actually influences.

So, what's the upshot to Watts' research?  It's something that many an entrepreneur that has dared to try and create a market has learned:

"If society is ready to embrace a trend, almost anyone can start one--and if it isn't, then almost no one can," Watts concludes. To succeed with a new product, it's less a matter of finding the perfect hipster to infect and more a matter of gauging the public's mood. Sure, there'll always be a first mover in a trend. But since she generally stumbles into that role by chance, she is, in Watts's terminology, an "accidental Influential."

As Watts points out, viral thinkers analyze trends after they've broken out. "They start with an existing trend, like Hush Puppies, and they go backward until they've identified the people who did it first, and then they go, 'Okay, these are the Influentials!'" But who's to say those aren't just Watts's accidental Influentials, random smokers who walked, unwittingly, into a dry forest? East Village hipsters were wearing lots of cool things in the fall of 1994. But, as Watts wondered, why did only Hush Puppies take off? Why didn't their other clothing choices reach a tipping point too?

Walk-in Clinics

Wal-Mart is adding an interesting twist to the nascent walk-in clinic model founded by MinuteClinic (I believe).  They are branding their clinics with hospitals and medical groups.  The logic being that patients are more apt to use these clinics inside of Wal-Mart if there is a trusted name behind the facility.  It will be interesting to see if the hospital/medical group branding will actually increase patient volume.  It seems to me that the typical patient would be uninsured, lower-income, and not really focused on the "brand" of the clinic.  There is obviously a huge need for these types of facilities, as evidenced by Wal-Mart's patient profile:

The typical customer is a mother with runny-nosed children in tow. About one in five customers pay cash. Wal-Mart says 55 percent of patients at its store clinics do not have health insurance, like 47 million other Americans.

But, I wonder if the branding is just more pandering to hospitals, physician groups, and physicians rather than a real business need.  I don't believe any Walgreen's or CVS pharmacies are affiliated with hospitals,  nor should they be. 

Microhoo or YahooSoft?

This could be big:

Microsoft has offered to buy the search engine company Yahoo for $44.6bn (£22.4bn) in cash and shares.

The offer, contained in a letter to Yahoo's board, is 62% above Yahoo's closing share price on Thursday.

The most ironic aspect (and very fulfilling I'm sure for a lot of technophiles) is that Microsoft is making this offer to prevent domination by a single company.

In a conference call, Microsoft's Kevin Johnson said that the combination of the two companies would create an entity that could better compete with Google.

"Today the market [for online search and advertising] is increasingly dominated by one player," he said. 

Sugar Mommas? About Time

An entrepreneur by the name of Jeremy Abelson is putting together an event that seeks to unite rich, older women and younger, attractive males: 

That's the basis of a speed-dating event organized by a New York entrepreneur bringing together 20 "sugar mamas" and 20 "boy toys" vetted by an elite New York matchmaker.

"Symbiosis has allowed ugly rich men to attract young, gorgeous, money-hungry women for centuries; it's now the women's turn," proclaims pocketchangenyc.com, the Web site that Jeremy Abelson is using to promote the event.

I would suspect that the odds of landing a sugar daddy might be greater than landing a sugar momma:

More than 5,000 men applied for a place in this year's event. Twenty finalists were selected.

Baseball Player IPO

Via the always awesome Marginal Revolution:

Randy Newsom, relief pitcher for the Cleveland Indians, is selling 4% of his future major league salary.  There are 2,500 shares in the IPO so each share gets you a claim to 0.0016% of his future salary including bonuses.  Shares sell for $20 each.

Makes perfect sense.  I'd imagine that if MLB actually allows this, the market would be huge.  Look at the sheer size of fantasy sports and think of this as fantasy sports on steroids (or rather HGH).

One Dude Lost $7.16 Billion

This is awesome on so many levels - the magnitude of the trades (he had positions totaling over $70 billion) to the potential ramifications for his employer.  What amazes me was how low on the totem pole this man was and that he was still able to perpetrate the largest trading loss ever:

Mr. Kerviel is no trading legend who let a transaction get out of hand. He was a low-level trader in the bank's "Delta One" desk in western Paris, earning about €100,000 ($145,000) a year. His job was to make bets on how large European stock indexes would move, according to bank officials. His expertise was trading baskets of stocks such as the Euro Stoxx 50.

Free Trade Republicans

Excellent post by Andreessen.  Read the whole thing.

We Need to Pay for Things We Don't Use

Thanks to the always wonderful Kedrosky blog, I was led to this article about us delusional humans.  One short paragraph sums it up:

The economics of health clubs are simple: you need thousands of members who never come. The gym could never accommodate them all if they did.

The article also has a link to a study that basically says that we are overconfident about the amount of self-control we have.  Even when we think we will go to the gym regularly, we don't.  Beyond that, we refuse the cancel our membership even when it would be much cheaper to pay by the day:

Two Californian academics, Stefano DellaVigna and Ulrike Malmendier, studied three US health clubs and discovered that 80 per cent of members used the gym so infrequently that they would have been better off paying the $10 fee for each individual visit. Many also left substantial gaps between their last visit and cancelling their membership.

How Rich is He?

Interesting New York Times profile on Sheldon Adelson, the third richest man in America.  What struck me was just how fast he became so wealthy:

The Las Vegas Sands went public in December 2004, and over the next two years his net worth soared by $17.5 billion. That works out to almost $1 million an hour, weekends, holidays and nights included. “He got richer faster than anyone else in history,” said Peter W. Bernstein, co-author of “All the Money in the World,” a book about the people on the Forbes 400 list.

Also, it's interesting to note, like many entrepreneurs, Adelson tried his hand at multiple businesses before finding one that paved the way to his current wealth:

Mr. Adelson started a business selling toiletry kits to motels, tried his hand at the mortgage broker business, and in the 1960s he joined Mr. Chafetz and another friend from the old neighborhood, Ted Cutler, in a charter tours start-up.

But it was not until he founded Comdex, the premier computer trade show through much of the 1980s and 1990s, that he hit on an idea that propelled him into the upper reaches of the wealthy.

Their growing trade show business led him into the casino business:

“The Sands had enough land to build a convention center,” Mr. Chafetz said. “That’s why we got into the casino business.” When it was completed, at the start of the 1990s, the Sands Expo and Convention Center stood as the largest privately owned exhibition center in the country.

In 1995, Mr. Adelson sold Comdex to Softbank of Japan for $862 million – giving him a personal payoff of just over $500 million. He and his partners were all in their 60s, but where the three other ‘‘boys” chose to semi-retire, Mr. Adelson made even bigger bets.

He demolished the Sands in a spectacular implosion (replete with an anticipatory fireworks show), borrowed hundreds of millions of dollars and in its place built the Venetian, which cost $1.5 billion and opened in 1999.

Make Me Fat Technology

This seems too easy.  You mean I can sit on my ass and text in an order of pizza?  I can't quite figure out if the goal is ambitious or undershooting:

Within five years, Pizza Hut aims to earn half its revenue from orders placed via computers and mobile phones, [Bernard Acoca, Pizza Hut's director of digital marketing] said.

My gut tells me that they should be able to generate 50% of revenues from technology very easily and quickly.  The statement, more likely, shows Pizza Hut's (or rather Acoca's) lack of understanding of the ubiquity of technology. 

Sex and Business (Again)

It seems that Steve Levitt and Sudhir Venkatesh have been keeping themselves busy studying prostitutes in Chicago:

The study found full-time prostitutes made on average less than $20,000 a year. If they had a pimp, the women made a little more, even after giving up a 25 percent cut of their earnings. The women reported being beaten about once a month on average.

According to the study, Fridays were the sex trade's busiest days, Mondays the slowest.

The study also found white and Hispanic men were charged more, while blacks and repeat customers paid less. Seasonal spikes in demand drove up prices, bringing more women into the market.

Yes, it seems that business is business no matter what the industry.  Here's a link to the preliminary paper.

This snippet from another Tribune article on the same subject was very disturbing:

The study found that condoms were used in just 25 percent or fewer acts -- unprotected sex seemed to be the starting point for negotiations -- and there was a small price increase for unprotected sex.

So, it seems that the men who frequent this sort of market prefer that the sex be unprotected.  That's a little scary.  Just as interesting would be a psychosocial paper on the men who pay for sex.

Reality Sex TV is Good Business

Via Bloomberg, it seems that some innovative entrepreneurs have melded the world's oldest profession with the recent reality TV craze:

If you want to watch Nick having sex with a prostitute, he's happy to let you.           

The 36-year-old bank-security technician drove eight hours from his home in Metz, France, to Big Sister, a Prague brothel where customers peruse a touch-screen menu of blondes, brunettes and redheads available for free. The catch is clients have to let their exploits be filmed and posted on the Internet.

Good for Big Sister, I suppose.  It's always enlightening to see an innovative business model, no matter the industry.  FYI - in case you're into that sort of thing, the company web site is www.bigsister.net.