Tag Archives: business

“Why don’t they only film the hits?”

There’s a joke from “That Mitchel and Webb Look” that I want to dissect like a frog for a moment. The video is just one minute long, but if you don’t want to watch it I can summarize it here:

  • “So for the sketches we’re filming, I’m thinking we’ll make them “hit, hit, miss, hit, miss, miss”
  • “Do we have to film all the misses as well as the hits? Why not only film the hits and use those for the show?”
  • “Well it’s a sketch comedy show, it has to be hit and miss.”

The joke doesn’t need to be explained, but I will anyway: why does a sketch comedy show have a lot of sketches that miss the mark, as well as ones that are laugh out loud funny? Isn’t it easier to just film the hits? Well obviously the writers didn’t think those misses would miss the mark, they thought those misses might be hits as well, that’s why they wrote them and filmed them. You don’t know for sure what will be a hit and what will be a miss before you release the show.

A similar pattern is discussed with venture capital investing. Venture capitalists invest in hundreds of startups on the assumption that around 90% of them will fail and make no money at all. The 10% that succeed are expected to pay for all the failures. Well then why don’t venture capitalists *only* invest in the successes and not waste money investing in the failures? Again: they don’t know for sure what will succeed or fail before investing. A huge amount of time and money goes into predicting the success or failure of startups so these VCs can try to invest wisely, but it isn’t a solved problem by any means.

And if you think this investing problem has an obvious solution, take out a personal loan and invest 50,000$ in a single startup that *you know for sure* is guaranteed to be successful. You’ll 1000x your money and be able to pay off the loan and interest easily.

But this pattern of “why not only go for the hits?” holds true in science as well. But here many people don’t seem to understand or believe it.

Governments, corporations, and charities invest billions into potentially lifesaving treatments every year. 90% of those scientific ventures will come to nothing, only a few will be successful. But you don’t know for sure which will succeed and which won’t before you try.

I think of this because I all too often see people complain about “why did we invest X number of dollars into researching such and such, when Y was invented with so much less?” A World War 2 version of this is the infamous refrain about how the project to develop a better bomb-sight for American planes costed more than the Manhattan Project which made nuclear bombs. A modern version of this complaint might be complaining that the Amyloid hypothesis in Alzheimer’s disease has received so much funding despite never curing Alzheimer’s.

In both cases though, our best foreknowledge seemed to indicate that this was the right path. Nuclear fission was completely unproven tech, the scientists themselves were pessimistic about their abilities to make a bomb out of it. When the first test of a real nuclear bomb took place, the scientists involved had a bet going for how much power the bomb would produce (with some predicting it would be a dud). *EVERY SINGLE ONE OF THEM* drastically underestimated the power of the bomb they had created, the most wildly optimistic predictions underestimated the bomb’s power by half.

By contrast air-power was a proven war winner when the USA started spending billions on bomb-sights. Germany’s blitzkrieg had used massive air power to help them overwhelm, surround, and destroy, other nations all across Europe. Air power could destroy the railroads and bridges that let troops move across modern battlefields, it could destroy the factories where the troop’s guns and tanks were made, and domination of the air allowed an army a far better picture of the battlefield then their enemies had. In this scenario, the allies looked at the success of German air power and believed that upping their own air power might similarly prove dividends. They never got the total success of the German blitzkrieg, but overwhelming air power was at least part of how the USA held on in the Korean war, so it wasn’t a complete waste.

Similarly, the evidence for Alzheimer’s disease has always seemed to point toward Amyloid Beta playing a key role. The evident failure of drugs targeting Amyloid Beta means there’s a lot more we have to learn, but just because the Amyloid Hypothesis is flawed doesn’t mean a competing hypothesis is automatically right. Putting billions towards the Tau or neurotransmitter hypotheses is not guaranteed to have brought success, in fact these hypotheses were studied even during the dominance of the Amyloid Hypothesis, and neither of them produced working drugs either.

People have a video-game understanding of research, as I’ve complained about before. They think that if we just put enough money towards the correct hypothesis, we’ll find what we’re looking for. But we don’t know what’s correct before we commit our money, and if our hypothesis fails, we don’t even know if we just haven’t thrown *enough* money at the problem, or if we’re chucking good money after bad. Which answer you lean to likely says more about your politics than about the quality of the research itself. Should we throw more and more money towards commercial nuclear fusion, even though that industry has never once succeed in even the most modest goals set for itself? Should we cut off the Amyloid Hypothesis, even though a century of research shows that Amyloid Beta does play a key role in Alzheimer’s disease? Everyone seems to think they already know the answer, but few are willing to prove it with evidence.

Surge Pricing and Dirty Deals

I’m sorry I haven’t been posting weekly like I promised to. February has not been kind to me. But I wanted to quickly fire off a post relating to two topics I’ve recently seen in the news.

The first has to do with the infamous Wendy’s “surge pricing” announcement which the company has already walked back on. As I know not all my readers are American, I’ll explain both Wendy’s and surge pricing.

Wendy’s is a fast food burger chain just like any other American chain. Surge pricing meanwhile is what Uber and Lyft do when there is a very high demand all of a sudden, prices shoot up during that time, leaving customers to balk at paying 50$ for a ride home from a baseball game, when getting into downtown may have costed just 30$. Many Wendy’s customers likewise were furious at the price of a burger going up and down during the day, possibly meaning they’d pay for their food than someone who’d walked in just a few minutes earlier.

The story got so much traction that Senator Elizabeth Warren even tweeted about it, trying to play up her corporate greed narrative. Little does Warren know that we’re now living in the era of Corporate Generosity.

Nevertheless I’m always surprised that someone with the credentials of Warren is so economically illiterate. Surge pricing has been going on for decades, perhaps centuries even. The earliest examples I can think of are matinees, theatre productions (or movies) that are shown during the daytime for a cheaper cost than the evening. It costs exactly the same to run the shown at either time, so why is the daytime show cheaper? And if you’ve ever seen a bar with a “happy hour” or a restaurant with an “early bird special,” or Halloween candy sold half-off in November, you’ve also seen surge pricing in action.

What’s going in here is simple supply and demand. The price of a good or service is *not* based on the cost to make it, the price comes from the interplay of supply and demand. The price fluctuates even if the cost does not because sellers are trying to clear the market. Lower demand? Lower price.

But a restaurant also has service and shifts. Any server serving one customer must necessarily be not serving another. Yet at the same time, servers paid for 8 hour shifts, and few people would work a job where they’re only paid minimum wage for 2 hours. The cost of transport alone would eat into your wage. What this means is that if everyone only comes to eat during dinner (let’s say a 2 hour period from 4-6pm), then the servers are sitting around for 6 hours doing nothing, then madly scrambling for 2 hours. During those 2 hours, many customers might come in only to find the line is too long, or they might be able to eat but find the service poor due to overworked servers.

Thus, for decades restaurants have lowered prices during the “slow” parts of the day to entice people to eat at those times instead of during the rush. This is exactly the same mechanism as Wendy’s “surge pricing,” only it’s framed differently. But it’s still the case that they’re charging more at dinnertime even though their costs are the same.

Surge pricing like this is actually a very good thing. It evens out demand in service industries, allowing more people to be served during a day while still letting the wait staff work full 8-hour jobs. And certain customers can take advantage of this, getting a lower price at the cost of not eating during a “normal” time. Warren (and other outraged twitterati) are simply jumping on a poorly framed policy to score very stupid political points. In fact, Burger King decided to dunk on Wendy’s poorly framed surge pricing policy by highlighting their own better-framed surge pricing policy. Every restaurant is like this, and it’s actually A Good Thing.

Speaking of restaurants but not about Good Things, Gavin Newsom is quite nakedly corrupt. I had only heard mild criticisms of Gavin before, but there were some Democrats I know claiming he was basically the candidate-in-waiting should Biden not run. He is Governor of America’s largest and wealthiest state, and would surely win election because the only thing Republicans could ever say against him were tired tropes about “Commiefornia.” But actually it turns out here’s corrupt.

I know this because he handed a political kickback to his buddy who owns at least two dozen Panera Bread restaurants. California is set to raise the minimum wage to 20$/hr, except at restaurants that serve freshly bread baked. No, bagels and pastries do not count as “bread.” Panera is one of the very few restaurants that does this, and so they will still be allowed to pay their employees just 16$/hr.

You might think this would cause many restaurants to start opening up bakeries, but it gets even more corrupt: the restaurant must have been serving freshly baked bread in September 2023 to qualify. So only Panera is grandfathered in. Essentially, Gavin Newsom decided to directly use a government law to enrich his friend and confidant, and no one seems to really care.

Now of course he wasn’t handing his friend state money. But he was writing legislation that imposes costs on every single one of his friend’s rival businesses, while shielding his friend. That will allow his friend (whose name I just looked up is “Greg Flynn”) to profit much more than anyone else from fast food, since he can keep the same prices while paying his staff 80% less than the competition.

Some of the twitterati have tried to defend Gavin indirectly, saying that it’s obviously corrupt but that this carve-out won’t actually do anything. They say that since every other restaurant will have to abide by the 20$/hr minimum wage, it means no one will ever work for Panera for less than 20$/hr either. But that ignores that people take jobs based on more than just the wage. Maybe the Panera is closer to you than the Taco Bell, maybe you hate the smell of fried foods and are loathe to work at McDonald’s, maybe you don’t own a car and the Panera is the only restaurant in walking distance. Or maybe you have classes and Panera can offer you hours that better fit your schedule.

And Greg Flynn knows this. He knows that he will likely be able to find at least some workers willing to work for just 16$/hr, that’s why he asked Gavin to put that in the bill. But corruption and friend-dealing has never been punished too strongly in America, no matter how much partisans rage about how “the other side” is corrupt. Still, the naked corruption on display may have hurt Gavin in a national election, so Democrats are probably happier he didn’t decide to challenge Biden.

Is it culture? Or is it incentives?

The Internet in general is US-centric. So even on the European parts of the Internet it’s common for countries (or the entire continent) to compare themselves to America. There are thousands of things you could compare, but the most contentious is probably the economic comparisons. America has recently grown much more strongly than Europe, and it doesn’t take an economist to realize that nearly all of the world’s top companies and startups are located in America. San Fransisco alone has more billion-dollar startups than entire countries, and before you say “that’s just silicon valley,” New York and Boston aren’t far behind.

There are a million ways to explain this discrepancy and plenty of reasons why Europeans may even think it’s good. We could talk all day about whether worker’s rights are fundamentally incompatible with cut-throat capitalism, and if Europe has therefore chosen the better path. But the most flawed reason I see bandied about is that Europe just has the wrong culture for this kind of stuff.

Europe is more laid back, less aggressive. Their investors prefer same, consistent gains. The European mindset isn’t focused on innovation, and culturally Europeans aren’t focused on business the way Americans are.

I think these explanations are wrong and dumb, and I’d use more expletive words if I hadn’t made a New Year’s Resolution not to do so in my writing. I don’t think Europeans are culturally less attuned to startups and Big Business, I think the legal framework prevents it.

Not long ago, Europe was seen as the beating heart of innovation and technology. Industrial progress, scientific progress, just go to any chemistry or physics class and see how many formulas are named for Germans. But now America dominates the industries, and I think it’s because of government, not culture.

The American business framework provides significant bankruptcy protection. People mocked Trump for his many bankruptcies, but most investors know that 90% of good ideas fail and the last 10% have to cover those loses. Bankruptcy is a way for investors to mitigate their downside, and thus allows for bigger risks to be taken.

The American financial system also gives significant benefits to investors, giving them greater flexibility in buying and selling their company to whomever they wish. Until Biden and Trump brought protectionism back to the fore, it was not uncommon to see American companies sold to foreign investors with little fanfare. Nativists and racists may complain about *gasp* Chinese people owning an American company, but from the investor’s perspective selling the company is a good way to cash out his winnings from the investment. Foreign buyers compete with American buyers, and this increase in demand means prices go up. This means the sale price of companies goes up, and that increases the returns on an investor’s investment.

But long before Trump, Europe was made famous in the tech world for blocking foreign buyers from its companies. Again, nativists wrongly think that this strengthens the European tech industry by “keeping it in European hands.” But when an investor sells out, they get cash in return. What do you think they do with that cash? They don’t hoard it like Smaug the Dragon, they reinvest it. Because they’re investors. By blocking foreign buyers, you reduce buying pressure, you reduce how much money investors can get out of their investment, and you therefore reduce their upside potential. Is it any wonder then they’d prefer a safer investment, when Europe is happy to cap the gains on any risky tech investment they make?

And Europe prides itself on fining big tech companies for any reason whatsoever. But surely it’s obvious that a government hostile to profitable tech companies would scare off anyone wanting to make a profitable tech company near them. Better to start in America or get out of Europe ASAP. Microsoft and Apple can afford billion dollar fines, but such sanctions could be lethal to a smaller European tech company. So again investors are scared off, entrepreneurs are scared off, and Europe wonders why it doesn’t have a tech sector.

“But what about ASML and Spotify!” And what about them? For every single, solitary European company that manages to rise above the hostile governing environment, there are 10 American companies that rose under easier circumstances. Spotify started in 2006, and since then Massachusetts alone has started Draft Kings, Moderna and Intellia Therapeutics, all of comparable value to Spotify. And Massachusetts has half the population of Sweden.

People respond to incentives, and the incentives for risky tech investment are very poor in Europe. Bankruptcy is easier in America, returns are (or were before Biden and Trump) less likely to be capped by protectionist policies, and (before Biden) the government generally has taken a more lax approach to dealing with corporations. You can debate if these things are good or bad, but I find them far more likely reasons for America’s tech dominance than “culture” or “attitude.”