#19 - Scientific Rigor vs Gut Feeling
On vaccine allocation, emotional branding, the American fear of TikTok and summary of Buffett's letter to shareholders (1983)
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Many successful entrepreneurs attribute their success to decisions they take on their intuition or gut feeling. They recall instances about how they were confounded between two seemingly difficult choices and how they proceeded with a choice that they just felt right. An interesting study explores an important question on startups and entrepreneurs’ decision making ability. What works better for entrepreneurs—intuition and heuristics (thumb rules) or a rigorous application of scientific method?
Arnaldo Camuffo conducted a randomised trial involving 116 early-stage Italian startups. Half of them were encouraged to use the scientific approach, that is, “frame, identify and validate the problem, formulate a hypothesis and test it with data and experiments and establish metrics for determining whether the hypothesis holds up.” The other half went by their intuition and heuristics.
After comparing results from several months, they found out that the entrepreneurs who followed the scientific method did better. They got more customers and higher revenues and more importantly, were more willing to pivot or even shut down their business if it didn’t work.
So, what is your preferred decision making style ?
In today’s edition, we look at -
An Ethical Framework for Covid Vaccine Allocation
Why America is Afraid of TikTok ?
The Importance of Emotional Branding - How Nestle hooked Japan to coffee
Key Ideas From Warren Buffett’s letter to Berkshire Hathaway Shareholders - 1983
Happy Reading.
An Ethical Framework For Vaccine Allocation
Read the article here (Read Time ~ 15 mins)
Considering the challenges in administering and vaccinating the entire population, there are debates about how to allocate and distribute them. In an essay in Science, Ezekiel J. Emanuel and his coauthors offer a framework for allocating vaccines.
Two schemes for the international distribution of Covid-19 vaccine have been proposed.
First, the WHO suggests that countries receive doses proportional to population in phase 1. Phase 1 begins with 3% of each country's population receiving vaccines, and population-proportional allocation continues until every country has vaccinated 20% of its population.
The second proposal distributes vaccines to countries according to the number of frontline health care workers, the proportion of population over 65, and the number of people with comorbidities in the country. This proposal seems to prioritize protecting those judged most likely to die and preventing health system collapse due to health care workers' illness.
To guide fair distribution of vaccines across countries, the authors propose the Fair Priority Model. Fair allocation must seek to mitigate future adverse effects of Covid-19.
The Fair Priority Model proceeds in three phases, preventing more urgent harms earlier.
Phase 1 aims at reducing premature deaths and other irreversible direct and indirect health impacts.
Phase 2 continues to address enduring health harms but additionally aims at reducing serious economic and social deprivations such as the closure of nonessential businesses and schools. Restoring these activities will lower unemployment, reduce poverty, and improve health.
Finally, phase 3 aims at reducing community transmission, which in turn reduces spread among countries and permits the restoration of pre-pandemic freedoms and economic and social activities.
The Fair Priority Model is the best embodiment of the ethical values of limiting harms, benefiting the disadvantaged, and recognizing equal concern. Ultimately, the model offers governments, international organizations, and vaccine producers a practical way to fulfill their pledges to distribute vaccine fairly and equitably, and make their words a reality.
Why America Is Afraid Of TikTok?
Read the article here (Read Time ~ 21 mins)
Michael Schuman explains how the app is playing an important role in the two superpowers’ relationship – its access to data on the lives of American citizens and potentially sharing it with the Chinese govt and more importantly also as a tool to influence public opinion. Schuman writes that TikTok has become a symbol of the new challenge a rising, tech-enabled China presents not simply to a free society, but to American dominance in the technology sector. The internet today is largely run—for better or worse—by American corporations such as Alphabet, Amazon, and Facebook, and TikTok is the first Chinese company to truly break through to the American, and global consciousness, something its compatriots, including Alibaba, Baidu, and Tencent, have yet to do.
Fears are percolating in the U.S. that Beijing, thanks to its growing technological might, may be amassing an immense storehouse of information that could be used to identify or blackmail American citizens—or for purposes we haven’t yet thought of. The worry is that TikTok could be a powerful vacuum, sucking up images of and details on unsuspecting Americans to feed Beijing’s voracious appetite. Washington’s concerns about data security in regards to China have been heightened by two recent hacks: of the credit-reporting firm Equifax in 2017, and of the federal government’s Office of Personnel Management in 2015. In both cases, security experts blame Beijing. The assumption is that Chinese authorities are compiling dossiers on U.S. citizens for unknown, but probably compromising, purposes. TikTok could be a handy device for stuffing the files with juicy new details. Even more, TikTok is in the business of content. It can just as readily act as a conduit for spreading information as collecting it—and therefore could be a propaganda tool for the Chinese state.
The Chinese dictatorship blocks Facebook, Twitter, and other foreign social media because its leadership doesn’t have the guts to allow its people to decide what they want to say, post, or watch. The motivation for blocking TikTok in the U.S. is much different, of course, but takes us to the same place—where the state determines what we can and cannot do on the internet. That puts the American government in the impossible position of defending our values by undermining them. That can’t be the best way to confront our fears.
The Importance of Emotional Branding - How Nestle Influenced Japan To Consume Coffee
Read the article here ( Read Time ~ 3 mins)
Marketing professionals often look for a ‘hook’ to connect with the consumer, so as to build that trust about the brand that triggers repeat purchase. Nestle’s use of a psychoanalyst to assess the Japanese mindset is intriguing enough but the ability to think and work with such long term plays, even at the product level is particularly inspiring.
Clotaire had been a foremost researcher on the emotional bonds we form with objects in our culture. They offered Clotaire a handsome fee and flew him out to meet with Nestle’s Japanese marketing team. Clotaire, in his research, assembled several large groups of participants and did a number of eccentric experiments. In one, he had all participants lie on the ground. He played calming music and had them talk back through their earliest childhood memories. He then asked them to describe experiences with different products and what emotions they associated with them.
Then, when he had these participants do that with coffee— he got no response. Most had no memories of coffee. They’d never drank it and thus had no emotional bond to it. Why? Because in Japan they drank tea, as they had for thousands of years. Coffee existed only in small reaches of their culture.
Rather than throw endless advertising dollars at converting the Japanese public to coffee, they pivoted and took a more long term strategy. They focused on coffee-flavored candies that were marketed to children. As per Clotaire’s guidance, they needed to get children to love Nestle’s flavor from an early age. Not only would this condition them to the taste, it would also imprint the flavor. They would associate coffee with positive emotions. This imprinting strategy was also a good idea because Nestle happened to be very good at making candy. The Swiss company had proven itself dominant in markets all over the world.
Years later, Nestle reentered the Japanese market with a new wave of coffee products. This time, the outcome would be very different. Many of their candy customers were now of working age. They were already consumers of caffeine and worked long hours. Nestle released instant baristas that were easy for home and work spaces. Their instant coffee was a monster that quickly took hold of the market. Today, Nestle is one of the top brands in a market that imports 500 million tons of coffee per year. Decades prior, they could barely sell a cup. It all began with a desperate experiment that required a bit of patience. But they proved, yet again, that the path to sales is built through strong emotional bonds with customers.
Key Ideas from Buffett’s letter to shareholders - 1983
Last week, we summarized the letter written in the year 1982. While we summarize the key ideas in the letter, we encourage the readers to read the entire letter to capture the context in which the thoughts were expressed by Warren Buffett.
Long term economic goals: Our long-term economic goal (subject to some qualifications mentioned later) is to maximize the average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish in the future - a greatly enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that of the average large American corporation.
Find hidden treasure: Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable. This is precisely the choice that often faces us since entire businesses (whose earnings will be fully reportable) frequently sell for double the pro-rata price of small portions (whose earnings will be largely unreportable). In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.
On book value vs intrinsic value: Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out. An analogy will suggest the difference. Assume you spend identical amounts putting each of two children through college. The book value (measured by financial input) of each child’s education would be the same. But the present value of the future payoff (the intrinsic business value) might vary enormously - from zero to many times the cost of the education. So, also, do businesses having equal financial input end up with wide variations in value.
On not splitting shares: Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers. At $1300, there are very few investors who can’t afford a Berkshire share. Would a potential one-share purchaser be better off if we split 100 for 1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group. (Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?) People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will accentuate erratic price swings unrelated to underlying business developments.
On broker behavior: One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as “marketability” and “liquidity”, sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise.
On intangible assets: We believe managers and investors alike should view intangible assets from two perspectives:
In analysis of operating results – that is, in evaluating the underlying economics of a business unit – amortization charges should be ignored. What a business can be expected to earn on unleveraged net tangible assets, excluding any charges against earnings for amortization of Goodwill, is the best guide to the economic attractiveness of the operation. It is also the best guide to the current value of the operation’s economic Goodwill.
In evaluating the wisdom of business acquisitions, amortization charges should be ignored also. They should be deducted neither from earnings nor from the cost of the business. This means forever viewing purchased Goodwill at its full cost, before any amortization. Furthermore, cost should be defined as including the full intrinsic business value – not just the recorded accounting value – of all consideration given, irrespective of market prices of the securities involved at the time of merger and irrespective of whether pooling treatment was allowed.
Interesting Reads For The Week
We decided to publish few links to interesting articles that we have found across the Internet. We hope you find them interesting.
Demystifying Palantir : The Most Controversial Company To Go Public [Medium]
The Dark Side Of Smart [Nautilus magazine]
Can You Be A Good Person If You Don't Consume News [The Outline]
What Should Corporations Do? [Project Syndicate]
What Is Cloud ? [Substack]
The Race To Redesign Sugar [New Yorker]
There Is No Such Thing As A Self Made Billionaire [The Correspondent]
An Interview With Daniel Ek - the CEO of Spotify [The Observer Effect]
Facts vs Feelings : How To Stop Our Feelings From Misleading Us? [The Guardian]
Where ESG Ratings Fail? The Case For New Metrics [Institutional Investor]
Afterthought
Insight is not a light-bulb that goes off inside our heads. It is a flickering candle that can easily be snuffed out.
-Malcolm Gladwell
And that is a wrap for the week. We hope you enjoyed binge reading this edition. If you found this newsletter useful and worth your time, do share it with your friends.
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