#10 - From Robber Barons To Cyber Barons
On SPACs, Light Triad of Personality, GDP as a flawed measure, Prediction Markets and Goodhart's Law
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Hello,
Welcome to the tenth edition of The Curious Cat.
The past week was a milestone week for the Big Tech companies (Google, Facebook, Amazon and Apple). The US legislators questioned Sundar Pichai, Mark Zuckerberg, Jeff Bezos, and Tim Cook for more than five hours over the tremendous power wielded by their respective companies and their potential to abuse that power over vendors, suppliers, employees, customers and all relevant stakeholders, which eventually also included the Government. A few of them did ask questions on influencing political opinions, shaping news, ideological views and manipulating electoral results to Pichai and Zuckerberg.
Image: Video capture of The Big Tech CEOs appearing before the antitrust legislators
From Robber Barons to Cyber Barons
The Chairman of the Committee called the Big Tech companies as “emperors of the online economy” who “enjoy the power to pick winners and losers, shake down small businesses and enrich themselves while choking off competitors”. All the CEOs, obviously, denied all the allegations respectfully.
Some of the key moments that stood out in the hearing were -
Sundar Pichai of Google faced several questions on Google’s dominance in advertising. The Chairman mentioned that the intent of the tech giant based on the findings showed that they intended to create a walled garden which keeps users within its sites to which Mr Pichai responded, “I am really focussed on giving users what they want” - a customer centric response to a question on a clear attempt to build a monopoly.
Jeff Bezos of Amazon was questioned on his company’s relationships with third-party sellers. When Rep. Pramila Jayapal asked him whether Amazon misused sales data to develop products that competed with those merchants, Bezos who seemed rattled and baffled responded, “I can’t answer that question yes or no" - an evasive response to a simple question.
Mark Zuckerberg of Facebook was presented with few emails that he sent in 2012 to Facebook’s CFO on Instagram acqusition where he remarked, “One way of looking at this is that what we are really buying is time”, after which Zuckerberg sent another mail writing “I did not mean to imply that we’d be buying them to prevent them from competing with us in any way”. If Time is Money, Facebook acquired it for $1 billion dollars.
Tim Cook of Apple was questioned on his company’s ferocious control of the App store and whether the demands of other developers were unfair and were there any discriminatory practices used by Apple for its developers. When Cook was asked whether Apple squeezing Airbnb for additional commissions from sales through their apps (pandemic profiteering), Cook replied that Apple would never do that but also mentioned that some cases do require additional payouts to Apple.
You can watch the entire proceedings here.
Few questions that arise from the hearings - how do we look at the practice of these companies cloning their competition and capturing the ecosystem for themselves? What are its implications? How do we resolve them without stifling innovation ?
The answers to these questions will shape our collective technological future like the actions of the past in the 19th century shaped the manufacturing boom of the 20th century. Like Rep. Jamie Raskin, the Democrat representative on the antitrust panel, mentioned that the 19th century had robber barons (Ford, Carnegie, Rockefeller, Vanderbilt) and the 21st century has cyber barons.
Any guesses on the cyber barons?
In today’s edition we look at -
SPACs vs IPOs
GDP - A Flawed Measure?
Prediction Markets
The Light Triad of Personality
Let's dive in.
SPACs vs IPOs
Read the article here
A SPAC (Special Purpose Acquisition Vehicle) is an empty shell that raises money from investors in a public offering and uses that money to find a target company (usually private) and merge with the target company. This merger results in the target company raising money and becoming public. Some believe that SPACs are cheaper than IPOs which has been argued against successfully by Matt Levine. Some believe that the SPAC boom is accelerating due to COVID-19 because IPO roadshows are hard to do, time-consuming and don’t work remotely. The most compelling explanation for the SPAC boom is not that the IPO process is costly but that it takes a long time.
Byrne Hobart writes that finance tends to find ways to work around restrictions. Some companies have preference for speed and some traders have specific and urgent needs that cannot be satisfied in time by the usual way of going public.
Is It Time To Dethrone GDP?
Read the article here
The GDP measures market output: the monetary value of all the goods and services produced in an economy during a given period, usually a year. The number does not measure health, education, equality of opportunity, the state of the environment or many other indicators of the quality of life including sustainability.
Joseph Stiglitz argues that during the pandemic, GDP thinking and the relentless drive to maximize short-term GDP worsened health care, caused financial and physical insecurity, and reduced economic sustainability and resilience, leaving Americans more vulnerable to shocks than the citizens of other countries.
Stiglitz proposes that GDP should be dethroned and replaced by a dashboard by every nation which should include metrics for health, sustainability and any other values that the people of a nation aspired to, as well as for inequality, insecurity and other harms that they sought to diminish, in addition to GDP which measures market activity.
Are Prediction Markets Accurate?
Read the article here
Our poor ability to predict future events is why we turn to prediction experts. But Philip Tetlock believes that experts tend to be wedded to one particular big idea, which causes them to fail to see the full picture. Tetlock found that people with a reasonable level of intelligence who search for information, change their minds when the evidence changes, and think of possibilities rather than certainties predict the future pretty well.
Prediction markets hinges on the idea that a group might be better than an individual. The idea is to create a group of people who will make a testable prediction about an event in the future.
Prediction markets don’t work well in all the cases.. There are plenty of examples of small groups reinforcing each other’s moderate views to reach an extreme position known as groupthink. The weakness of prediction markets is that no one knows if the participants are simply gambling on a hunch or if they have solid reasoning for their trade, and although thoughtful traders should ultimately drive the price, that doesn’t always happen.
A better technique to forecast events is by combining the prediction markets with the hard intelligence of the Delphi technique.
Light Triad vs Dark Triad Of Personality
Read the article here
The Dark Triad of personality comprises of narcissism (entitled self-importance), Machiavellianism (strategic exploitation and deceit) and psychopathy (callousness and cynicism). We are all at least a little bit narcissistic, Machiavellian and psychopathic. According to research conducted, three distinct yet opposing factors emerged - Kantianism (treating people as ends unto themselves, not mere means), Humanism (valuing the dignity and worth of each individual) and Faith in Humanity (believing in the fundamental goodness of humans) termed as the Light Triad.
It was found that the dark triad was positively correlated with being younger, being male, being motivated by power, instrumental sex, achievement and affiliation (but not intimacy), having self-enhancement values, immature defense styles, conspicuous consumption, selfishness and viewing their creative work and religious immortality as routes to death transcendence.
The light triad was associated with being older, being female, less childhood unpredictability, as well as higher levels of religiosity, spirituality, life satisfaction, acceptance of others, belief that others are good, belief that one’s self is good, compassion, empathy, openness to experience, conscientiousness, positive enthusiasm, having a quiet ego and a belief that one can live on through nature and biosociality (having children) after one’s personal death.
This research highlights that it is also important to focus on the innate goodness in the world and in individuals.
Research Paper Of The Week - Kill Zone for Startups
We started this edition with a brief introduction on the antitrust hearing of the Big Tech companies. We would like to end this edition by presenting an interesting hypothesis by Raghuram Rajan, Luigi Zingales and Sai Krishna Kamepalli. Their research suggests that high priced acquisitions of entrants by an incumbent does not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and enjoy network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a “kill zone” in startups where new ventures are not worth funding. This also reduces their incentive to innovate.
This research has important implications on antitrust law, data ownership, patent protection and keeping out foreign incumbents.
It leaves you with a few questions - should large mergers and acquisitions be looked at with a different set of policy rules given the current nature of businesses to ensure competition in the marketplace? What does that mean about the acquisitions made by the Big Tech in recent times?
You may read the paper here.
Mental Model For The Week - Goodhart’s Law
When Soviet factories were given targets on the basis of numbers of nails, they produced many tiny useless nails. When they were given targets on basis of weight, they produced a few giant nails. Both the times they failed to produce an optimum quantity.
When a measure becomes a target, it ceases to be a good measure. When we set a specific goal, people will tend to optimize for that objective regardless of the consequences.
Measurement sometimes becomes a substitute for good judgement and an excuse to have fun with numbers instead of dealing with complicated, messy and hard to rationalize human interactions. Measures can summarize but they don’t reduce the complexity.
If you are not careful with your measures, you are not careful with your decisions.
Has GDP become a victim of this law?
Afterthought
All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.
-Peter Thiel (Zero To One)
And that is a wrap for the week. We hope you enjoyed reading this edition. If you found this newsletter worth your time, do share it with your friends.
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Take care, stay safe and have a nice weekend. We shall see you next Saturday