August 29, 2015

Who gets what and why by Alvin E Roth

Who gets what and why by Alvin E Roth
(Nobel prize winner in economics)

Matching is economist-speak for how we get the many things we choose in life that also must choose us.  Until recently, economists often passed quickly over matching and focused primarily on commodity markets, in which prices alone determine who gets what. But, in matching markets, prices don’t work that way. For example, going to college can be costly and not everyone can afford it and even if it is affordable for some, the choice is not mainly with price alone.

Decisions that depend on what others are doing are called strategic decisions and are the concern of the branch of economics called game theory. Strategic decision making plays a big role in determining who does well or badly in many selection process. Often when we game theorists study a matching process, we learn how participants ‘game the system’ Well-designed matching process try to take into account the fact that participants are making strategic decisions.  A good marketplace makes participation safe and simple. .

Repugnant transactions - transaction that some people don’t want others to engage in- don’t have to involve money. But addition of money makes an otherwise acceptable transaction seem repugnant. Repugnance shows with particular clarity what all markets reveal: people’s values, desires and beliefs.

In the late 1800s, the economist William Stanley Jevons pointed out that the invention of money was a market design solution that overcame a major problem that severely limited barter, namely the need to find someone who both has what you want and wants what you have. Money eases the need to find this ‘double coincidence:’ with money in the market, it’s enough to find someone who has what you want. You can buy what you want from that person without having to find someone with whom you can trade goods.

In building up new markets, the entrepreneurs building them have had to figure out the following:

  1. How to make the market thick by attracting lots of buyers and sellers
  2. How to overcome the potential congestion that could result - that is, how to make the market quick even when it was thick:
  3. How to make the market safe and trustworthy

Making market safe is one of the oldest problems of market design, going back to well before the invention of agriculture, when hunters traded the ax heads and arrowheads that archaeologists today find thousands of miles from where they were made.

When participants in a market are reluctant to reveal crucial information, the market may run inefficiently. On eBay, concealing bid information from other bidders by sniping makes prices unpredictable and when there a lot of sniping, not every auction is won by the person who is willing to pay the most. Covisint was started in 2000 by a consortium of the biggest car companies. It was intended to be a transparent online marketplace for automobile makers and their suppliers. But it turned out that auto parts suppliers weren’t wild about making their prices public to auto companies and competitors. In 2004, the automakers threw in the towel and sold Covisint for a tiny fraction of what they’d invested in it.

Marketplaces as varied as eBay, FreeMarkets and the New York City Public school system reveal a challenge that must be faced by virtually all markets: how to manage the flow of information. No matter how well a market is otherwise designed, it will have trouble giving people what they want if it doesn’t make it safe for them to try to get what they want.

The solutions to problems in market design are sometime invented, sometimes discovered, and often a bit of both. The designs for many markets have evolved, usually through trial and error, over the long span of human history. So we can sometimes discover a solution to a new market failure in a design pioneered in another market.

Markets can be dramatically improved when their design encourages people to communicate essential information they might otherwise have kept to themselves. But sometimes markets suffer from too much communication. It is a paradox of market design that as communication gets easier and cheaper, it sometimes also gets less informative.

In a congested market - one in which it is impossible to explore every opportunity - it helps to be able to signal not only how desirable you are but also how interested. That is why, while many of us might wish to marry a movie star, we devote most of our efforts to finding and courting more realistic mates who might also like to marry us (Mutual interest is what separates courting couples from stalker and prey).

Asking a person out on a date in person offers lots of opportunities to send both kinds of signals. By comparison, arranging a date on the internet, which makes the dating market thicker by making initial contacts easier, also makes it harder to send credible signals to cut through the congestion.

When other signals may be cheap talks (sending e-greeting cards), these signals (posting a physical card, sending flowers on birthday, etc.) indicate that you are interested enough to use scarce resources that you can’t just send to everyone. So a scarce signal isn’t cheap talk; it comes with an opportunity cost - you could have sent that signal to someone else instead. In labor market, a cover letter in a job application can provide a powerful signal of interest, esp. if it shows that the candidate has spent time to learn about the job for which he or she is applying, or even that the applicant has spent time carefully crafting a letter addresses specifically to the job in question.

Near the beginning of his long essay ‘The Protestant Ethic and the spirit of Capitalism, Max Weber quotes Benjamin Franklin on the virtues of responsible lending and borrowing. Franklin’s view was the opposite of Polonius's: he felt that responsible borrowing and lending were Puritan virtues and he offered advice about how to use credit responsibly.

Economists have long been accustomed to the fact that cash payments can fill such gaps by providing incentives to increase supply: Adam Smith, in his book ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, famously observed, “It is not from the benevolence of the butcher, the brewer, or the banker, that we respect our dinner, but from their regard to their own interest”.

The markets we try to ban, repugnant markets, are precisely that some people willingly take part in despite other’ opposition. People wanting to transact with one another is a powerful force. The same force that has made markets an ancient and pervasive human activity also leads to black markets springing up when legal ones are prevented. America's Prohibition period shows, sometimes banning a market leads to widespread lawbreaking. Let us consider one other example in which repugnant transactions are common: sex. People want to have sex with each other in circumstances that society disapproves of.Instead of a ban, we will more nearly achieve our goals if we try to channel behavior or offer alternatives (for this reason, we sometimes try to promote ‘safe sex’ rather than abstinence). In short, when we deal with sex, we need to recognize that we are dealing with powerful attractions. Markets are like that, too.

We encounter markets through marketplaces, just as we experience language through speeches, conversations, books, essays and tweets. And market are like languages. Both are ancient human inventions. Both are tools we use to organize ourselves, to cooperate and coordinate and compete with one another, and ultimately to figure out who gets what. These two fundamental human artifacts play a role in all the things we do and in everything we make (we cannot make love, let alone war, without them).

Markets, like languages, come in many varieties. Commodity markets are impersonal, but matching markets can be deeply personal, as personal as a job offer or a marriage proposal. And once you observe that matching is one of the major things that markets do, you realize that matching markets - markets in which prices don’t do all the work, and in which you care about whom you deal with - are everywhere and at many of the most important junctures of our lives.

As we start to understand better how markets and marketplaces work, we realize that we can intervene in them, redesign them, fix them when they are broker and start new ones where they will be useful. The growing ability in recent years of economists to be engineers is a bit like the epochal transformation that farming or medicine have experienced over the millennia. Markets are human artifacts, not natural phenomena. Markets design gives us a chance to maintain and improve some of humanity’s more ancient essential inventions.

August 8, 2015

Linchpin by Seth Godin

Linchpin by Seth Godin
Are you indispensable?

The old American dream:
·         Keep your head down
·         Follow instructions
·         Show up on time
·         Work hard
·         Suck it up

The new American dream:
·         Be remarkable
·         Be generous
·         Creative art
·         Make judgement call
·         Connect people and ideas

There are three situations where an organization will reward and embrace someone with extraordinary depth of knowledge:

  1. When the knowledge is needed on a moment’s notice and bringing in an outside source is too risky or time consuming

  1. When the knowledge is needed on a constant basis and the cost of bringing in an outside source is too high

  1. When depth of knowledge is also involved in decision making and internal credibility and organizational knowledge goes hand in hand with knowing the right answer.

Well-paying employment requires that workers possess unique skills, abilities and knowledge.

Marissa Mayer (ex Google and current Yahoo CEO), while at Google,  was not the key brain in the programming department nor is she responsible for finance or even public relations. She applied artistic judgement combined with emotional labor. She makes the interface work and lead the people who get things done. If you could write Marissa’s duties into a manual, you wouldn’t need her. But the minute you wrote it down, it wouldn’t be accurate anyway.

Why do so many handmade luxury goods come from France?

It is not an accident. It is the work of one man, Jean-Baptiste Colbert. He served under Louis XIV of France in the 1600s and devised plan to counter the imperialist success of the countries surrounding France. Most of the European countries were colonizing the world, and France was being left behind. So Colbert organized, regulated and promoted the luxury-goods industry.  He understood what wealthy consumers around the world wanted and he helped French companies deliver it. Let other countries find the raw materials, the French would fashion it, brand it and sell it back to nation as high-priced goods.

Author Richard Florida polled twenty thousand creative professionals and gave them a choice of 38 factors that motivated them to do their best at work. The top ten ranked in order:

  1. Challenge and responsibility
  2. Flexibility
  3. A stable work environment
  4. Money
  5. Professional development
  6. Peer recognition
  7. Stimulating colleagues and bosses
  8. Exciting job content
  9. Organizational culture
10.         Location and community

The digitization of work makes typical MBAs very happy. This is the sort of thing you can put in a spreadsheet. The challenge is that all your competitors are using the same spreadsheet, so your opportunity for quantum growth and significant market advantages is tiny:

The easier it is to quantify, the less it’s worth.

Artists are optimists: Optimism is for artists, change agents, linchpins and winners. Whining and fear, on the other hand, is largely self-fulfilling prophecies in organization under stress.

Passion cares enough about your art that you will do almost anything to give it away, to make it a gift, to change people.

The reason that startups almost always defeat large companies in the rush to market is simple: startups have fewer people to coordinate, less thrashing, and more linchpins per square foot. They can’t afford anything less and they have less to lose. There are two solutions to the coordination problem, and both of them make people uncomfortable, because both challenge our resistance:

  1. Relentlessly limit the number of people allowed to thrash. That means you need formal procedures for excluding people, even well-meaning people with authority. And you need secrecy.
  2. Appoint one person (a linchpin) to run it. Not to co-run or to lead a task force or to be on the committee. One person, a human being, runs it. Her name on it. Her decisions.

Five elements of personality: Openness, conscientiousness, extraversion, agreeableness, and emotional stability.

Linchpin does two things for the organization. They exert emotional labor and they make a map. Those contributions take many forms. Here is one way to think about the list of what makes you indispensable:

  1. Providing a unique interface between members of the organization
  2. Delivering unique creativity
  3. Managing a situation or organization of great complexity
  4. Leading customers
  5. Inspiring staff
  6. Providing deep domain knowledge
  7. Possessing a unique talent.

Unique creativity requires domain knowledge, a position of trust and the generosity to actually contribute. Delivering unique creativity is hardest of all, because not only do you have to have insight, but you also need to be passionate enough to risk the rejection that delivering a solution can bring. When the situation gets too complex, it is impossible to follow a manual.

If you are not the best in the world at your unique talent, then it is not a unique talent. Which means you have only two choices”:

  1. Develop the other attributes that make you a linchpin
  2. Get a lot better at your unique talent

Organizations rarely give linchpins all the support and encouragement they observe. Which means that your efforts won’t always get what they need to succeed. There are two tactics can help.

  1. Understand that there is a difference between the right answer and the answer you can sell. Too often, heretical ideas in the organization are shot down. They are not refused because they are wrong: they are refused because the person doing the selling doesn’t have the stature or a track record to sell it. When you propose something that triggers his resistance.

  1. Focus on making changes that work down, not up. Interacting with customers and employees is often easier than influencing bosses and investors. Over time, as you create an environment where your insight and generosity pay off, the people above you will notice, and you will get more freedom and authority.

Book referenced in the book
The art of possibility by Roz and Ben Zander
TED of Elizabeth Gilbert (based on Lewis Hyde’s book - The Gift)
Elizabeth Gilbert’s Eat, Pray and Love.
Leo Babauta’s Zen Habits

August 2, 2015

The power of others by Michael Bond

The power of others by Michael Bond
Peer pressure, groupthink, and how the people around us shape everything we do.

In almost every area of our lives, we are steered by others. They influence what we wear, the music we like, the food we eat and how much of it, our voting habits, how we invest our money.

On Wednesday, 10 Dec 1930, a New York merchant walked into the branch of the privately held Bank of United States and asked a teller to dispose of the stock he held in the bank. When the manager tried to discourage him, insisting it was a sound investment, the merchant left and spread the story among his business colleagues that the bank was in trouble. By the end of the day, three thousand customers had taken out some $2 million, including a man who queued for two hours to remove his measly two bucks.

The Bank of United States never re-opened. The rumors had resulted in run at other branches and by early on Thursday, they closed down the entire operations and handed over the remaining assets to the New York State Superintendent of Banks for safe keeping. Its collapse was a considerable blow to the public confidence in the economy, coming as it did just 13 months after the Wall Street crash known as Black Tuesday. The economist Milton Friedman and others have argued that it accelerated a crisis in banking that helped transform what had been an ordinary cyclical recession into the Great Depression.

Four decades of research into how people decide to do what they do has shown that we are highly susceptible to the winds of social influence. “In food as in death, we feel the essential brotherhood of man’ runs a Vietnamese proverb, a notion that recently has acquired scientific credibility. People have less control over their eating than they like to imagine. To be fully mindful about our eating - to savor every flavor to the exclusion of all else, we’d have to dine alone.

Mimicry is the breadth of social interaction. Most people will not be surprised that people with more friends are happier, but what really matters is whether those friends are happy. The idea that people can pass on emotions and moods such as anger or anxiety or even more enduring states of mind such as contentment or sadness, is hardly new to science.  For instance, if you are sharing a living space of becoming progressively more depressed the longer you live with them, you pick up their negative vibes. When customers respond in kind, which they usually do that rubs off on the staff. Recent studies have shown that such feelings can transmit not just from one person to another, but across entire local worlds of friends and work of colleagues.

When we emulate the look on someone’s face, we begin to experience the emotion behind the expression - a phenomenon observed by Charles Darwin. Darwin notes that manipulating our facial muscles profoundly affects they way we feel. Neuroscientist Antonio Damasio argues that the physical sensations of an emotion - racing pulse, contracting muscles, dilated pupils, for example - precedes their representation in the brain. In other words, physiology determines feelings.

Engineers designing evacuations procedures used to assume that people respond immediately they hear an alarm, smell smoke or feel their building shake. But that is not what happens. Often challenge is getting them to move quickly enough. No doubts more people would have escaped from the World trade Center had they acted more quickly. Likewise, many have died in stricken aircraft burning on the ground because they sat in their seats too long before trying to escape. In their state of bewilderment makes it harder for them to process new information. They cannot think properly about what they should do. Here is some advice if you are caught in an emergency and unsure what to do.: move! Except that if you are in a crowd it is likely to be a bit more complicated. Once the sense of collective unity kicks in, you will feel less disposed to going it alone and you may be unwise to do so: one of the conclusions of Drury’s research is that acting individually in an emergency can lead to competitive and disruptive behavior, which reduces everyone's chances of survival. So take bull by its horns: make it clear to those around you that you are heading for an exit and that you want them to come with you. Then hasten ye all.

How to survive a crowd emergency

  1. Remember that your natural response to an emergency is likely to be a shock and bewilderment and that this can cause you to freeze. Do your best to override this: engage your brain and look for a way out.
  2. Cooperate with those around you, don’t compete with them. Altruistic behavior is very common during disasters and will increase your chances of survival
  3. Rehearse on an exit strategy in your head beforehand. You should do this whenever you enter an unfamiliar place or situation. You’ll far less likely to dawdle when something goes wrong if you have mentally gone through the motions.

Le Bone was not the first to articulate the madness of crowds, but he was first to popularize this idea. He believed, for example, that the size of the skull was a reliable indicator of intelligence; that's because Caucasians had bigger heads than other races in their brains were consequently more developed. (His book - Le Psychologie des foules - was printed 25 times in France in the 25 years following its publications). Sigmund Freud used Le Bon’s analysis as a starting point for his own thinking on the subject, kicking off his book “group psychology and the analysis of the ego”. “Look at a crowd when it roars down a street in anger. You have the impression of a beast majestic in its courage, terrible in its ferocity, but with something evil about its cruelty and determination” says Hilaire Belloc.

It was only a matter of time before a manipulative leader tried to appropriate Le Bonian theory for his own dark ends. In the early 20th century, Le psychologie des foules became something of a bible of totalitarianism. Lenin, Stalin, Mussolini and Hitler all embraced its concepts of hypnotic action, anonymity and the collective mind. Le Bon went to suggest three tools a leader might use to persuade the masses to adopt an idea: affirmation, repetition and contagion. In other words, if you stated something clearly enough and repeated it enough times it would spread of its own record. Add to that the charismatic administration-inducing quality that he called ‘prestige’ and the people are yours.

Most people are convinced that they can resist peer pressure. But remaining independent in the face of a majority is a great deal harder than you might think. Standing alone can invite ridicule or ostracism, something all of us are keen to avoid.  Better to swallow your convictions than be laughed at or cold-shouldered.

Philip George Zimbardo is a psychologist and a professor emeritus at Stanford University set up the heroic Imagination project, which aim to reach managers, employees, school children and others the psychological skills required to resist conformity, bullying and mindless obedience. Advice includes: be mindful of what you are saying or doing rather than just going with the flow (don’t hesitate to fire a wake-up shot to your cortex), always maintain a sense of personal responsibility for your actions (following orders is never a justification), distinguish between legitimate authority figures, whose wisdom or expertise justifies their position and pseudo-leaders whose claim to power have no substance; develop a ‘heroic imagination’ by imagining physically or socially risky situation and how you might behave in them.

Polarization happens for two reasons: first, when you are surrounded by like-minded people you hear only arguments that support your own viewpoint, which are bound to reinforce it; second, we are always comparing ourselves with others and will shift out positions so as not to appear out of line. The same kind of thinking is behind the phenomenon known as ‘risky shift’ in which adolescents, already prone to risky behaviour, become even more inclined to throw caution to the wind when they are with their peers. Adolescents are esp. vulnerable to this because they put a very high value on social network rewards, such as the respect of their friends and are often blind to the negative consequences.

Cohesion can give a team the edge even in pursuits such as cycling whereas with mountaineering, the personal pursuit of excellence appears to be the prime motivator. Competitive road cycling requires spectacular individual effort, because of the huge physical advantages of sheltering in a teammate’s wake. Power and velocity share a cubic relationship, which means that for a cyclist to double his or her velocity requires an eight fold increase in power. The faster you are going, the more effort you need to up your speed. But a rider who follows in the slipstream of another can exert around forty per cent less power yet still maintain the same speed. When top cyclists ride in a capsule, with teammates in front, behind and on either side, the wind drag on his/her body is minimal and his power advantages can reach sixty percent. Thus when his moment comes to make his move for the front he should have energy in reserve. The most successful teams are those that coordinate their riders to make the most of this basic law of physics.

When resources and opportunities are limited, as in a recession, we tend to pull in further, our communities become more polarized and mistrust turns to hostility. Far easier to gain control over a chaotic environment by finding a scapegoat (immigration? Jews? Muslims? benefit claimants? bankers?) than taking aim at the entire system level. Co-operation requires a level of solidarity, If the diverse groups fail to integrate, you can bet that when the wheels off the wagon the divisions between them will be exploited by all sides. Ashutosh Varshney wanted to know why violence between Muslims and Hindus in India was more prevalent in some places than in others. After conducting field research in six Indian cities - three peaceful ( Calicut, Lucknow and Surat) and three violent (Aligarh, Hyderabad and Ahmadabad) - he concluded that the key to ethnic harmony was inter-communal engagement at a deep-level. it was not enough for two groups merely to know each other as neighbors or for their children to attend the same schools. They should be mixing in business associations, sports clubs, trade unions, political parties, community organizations, student unions, reading groups and so on. Integration at this level acts as a constraint on the polarizing strategies of political elites.

Group tendencies bring satisfaction and also much strife. Still, they can be vulnerable to reason, and thus it is profitable to be aware of them, even when conditions they create are hard to stomach. Consider three cases:

  1. Much evil is committed by people who are not psychopathic but who confirm unthinkingly  to the norms of their group, or who obey authority without questioning. Knowing that humans are wired to conform and how easily this can lead anyone astray., would potential evil doers behave differently? Possibly.
  2. Decades of research by social psychologists have demonstrated that fear drivers us closer to our in-groups and inflames prejudices against our-group.s. Would the world be a safer place if political leaders, public figures, pundits, commentators and the media took this on board and refrained from using fear to motivate voters and sell news? Unquestionably.
  3. Our fondness for mixing with others of our ilk - those who share our political and cultural values - is pushing disparate communities further apart (multiculturalism is divisive unless the different cultures interact). Would society be more harmonious if the various groups engaged more with each other? Highly likely, though hard to achieve.

Perhaps the most profound aspect of our groupishness is that it helps determines our sense of self. Identity is built not only on memories, but also on how people interact with us, a notion the neuroscientist Antonio Damasio dubs ‘ the social me’. In collective societies in East Asia, personal narratives dwell in the context and social significance of events, while Europeans and Americans are more concerned with personal achievement. The ‘terrible twos’ when children start to assert their independence, are less histrionic and sometimes completely absent in some non-Western cultures.

The group identifies before self identity and cooperation before autonomy. We are pulled by many currents, but it is the people we swim with who make us who we are.