politics

Matt Taibbi on Obama’s JOBS Act

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Matt Taibbi has a strong opinion on Obama’s JOBS Act:

Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind its passage) to attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.

The law also rolls back rules designed to prevent bank analysts from talking up a stock just to win business, a practice that was so pervasive in the tech-boom years as to be almost industry standard.

This is where I become less convinced. Are there really investors who pay attention to PowerPoint presentations and don’t do independent research before investing? 

Even worse, the JOBS Act, incredibly, will allow executives to give “pre-prospectus” presentations to investors using PowerPoint and other tools in which they will not be held liable for misrepresentations. These firms will still be obligated to submit prospectuses before their IPOs, and they’ll still be held liable for what’s in those. But it’ll be up to the investor to check and make sure that the prospectus matches the “pre-presentation.”

The JOBS Act also loosens a whole range of other reporting requirements, and expands stock investment beyond “accredited investors,” giving official sanction to the internet-based fundraising activity known as “crowdfunding.”

But the big one, to me, is the bit about exempting firms from real independent tests of internal controls for five years.

When I first read this, I asked myself: how does a law exempting a Silicon Valley startup from independent accounting actually encourage investment? If American companies have to have their internal processes independently verified before and after they go public, doesn’t that give investors all around the world a big reason to put their money here, instead of investing in, say, Mobbed-Up Siberian Aluminum LLC, or Bangalore Sweatshop Inc.?  

In other words, how does letting http://www.investonawhim.com go to market (and stay on the market for five years!) without publishing real numbers actually help the industry attract more financing in general, when the whole point of all of these controls is to make investment a less risky experience for the investor?

Get ready for the ostensible answer, because you won’t believe it. Here’s how CNN explained the reasoning behind that exemption:

Having 500 investors or raising $5 million previously forced a company to register with the SEC — a costly endeavor. Filling out stacks of legal forms and undergoing independent accounting audits can cost hundreds of thousands of dollars. The law loosens requirements for most companies by raising several thresholds.

We needed Barack Obama and the congress to compromise the entire U.S. stock market because it’s too expensive for a publicly-listed company with billion-dollar ambitions to hire an accountant?

There are multiple provisions of the bill, but it seems Taibbi is focusing on a sub-set of them. Still worth reading, however.

Mitt Romney: A Quantum Leap Forward

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A recent remark by Mitt Romney’s senior adviser Eric Fehrnstrom, that upon clinching the Republican nomination Mr. Romney could change his political views “like an Etch A Sketch,” has become a national sensation. David Javerbaum seizes upon the opportunity to write this awesome piece on the quantum theory of Mitt Romney. As you’ll see, the Romney candidacy represents (literally) a quantum leap forward. It is governed by rules that are bizarre and appear to go against everyday experience and common sense, which can be narrowed down as follows:

Complementarity. In much the same way that light is both a particle and a wave, Mitt Romney is both a moderate and a conservative, depending on the situation. It isnot that he is one or the other; it is not that he is one and then the other. He is both at the same time.

Probability. Mitt Romney’s political viewpoints can be expressed only in terms oflikelihood, not certainty. While some views are obviously far less likely than others, no view can be thought of as absolutely impossible. Thus, for instance, there is at any given moment a nonzero chance that Mitt Romney supports child slavery.

Uncertainty. Frustrating as it may be, the rules of quantum campaigning dictate that no human being can ever simultaneously know both what Mitt Romney’s current position is and where that position will be at some future date. This is known as the “principle uncertainty principle.”

Entanglement. It doesn’t matter whether it’s a proton, neutron or Mormon: the act of observing cannot be separated from the outcome of the observation. By asking Mitt Romney how he feels about an issue, you unavoidably affect how he feels about it. More precisely, Mitt Romney will feel every possible way about an issue until the moment he is asked about it, at which point the many feelings decohere into the single answer most likely to please the asker.

Noncausality. The Romney campaign often violates, and even reverses, the law of cause and effect. For example, ordinarily the cause of getting the most votes leads to the effect of being considered the most electable candidate. But in the case of Mitt Romney, the cause of being considered the most electable candidate actually produces the effect of getting the most votes.

Duality. Many conservatives believe the existence of Mitt Romney allows for the possibility of the spontaneous creation of an “anti-Romney” that leaps into existence and annihilates Mitt Romney. (However, the science behind this is somewhat suspect, as it is financed by Rick Santorum, for whom science itself is suspect.)

As a huge physics nerd, I love this.

Why Presidents Fail

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From this extensive piece on Barack Obama and his presidency, James Fallows considers why presidents fail:

We judge presidents by the specific expectations they ask to be measured against: inspiration (Kennedy, Reagan, Obama), competence and experience (Eisenhower, the first George Bush), strategic cunning (Johnson, Nixon), integrity and personal probity (Carter), inclusiveness and empathy (Clinton), unshakable resolve (the second Bush). But eventually each is judged against his predecessors, a process that properly starts with a reminder that all begin their terms ill-equipped, in ways that hindsight tends to obscure.

The sobering realities of the modern White House are: All presidents are unsuited to office, and therefore all presidents fail in certain crucial aspects of the job. All betray their supporters and provoke bitter criticism from their own side at some point in their term. And all are mis-assessed while in office, for reasons that typically depend more on luck and historical accident than on factors within their control. These realities do not excuse Obama’s failings, but they do put his evolution in perspective.

Presidents fail because not to fail would require, in the age of modern communications and global responsibilities, a range of native talents and learned skills no real person has ever possessed. These include “smarts” in the normal sense—the analytical ability to cope with the stream of short- and long-term decisions that come at a president nonstop. (How serious is the latest provocation out of North Korea? What are the “out year” budget implications of a change in Medicaid repayment formulas?) A president needs rhetorical clarity and eloquence, so that he can explain to publics at home and around the world the intent behind his actions and—at least as important—so that everyone inside the administration understands his priorities clearly enough that he does not have to wade into every little policy fight to enforce his preferences.

A president needs empathy and emotional intelligence, so that he can prevail in political dealings with his own party and the opposition in Washington, and in face-to-face negotiations with foreign leaders, who otherwise will go away saying that this president is “weak” and that the country’s leadership role is suspect. He needs to be confident but not arrogant; open-minded but not a weather vane; resolute but still adaptable; historically minded but highly alert to the present; visionary but practical; personally disciplined but not a prig or martinet. He should be physically fit, disease-resistant, and capable of being fully alert at a moment’s notice when the phone rings at 3 a.m.—yet also able to sleep each night, despite unremitting tension and without chemical aids.

Regardless of your political stance, I suggest setting aside an hour to read this piece by James Fallows.

Who Runs America? The Top 0.1 Percent

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I’ve read some interesting factoids about the 1% of the American population, but this post by a money manager who works with ultra-wealthy individuals has a perspective on the upper echelons of the top 1%:

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement but they are rare. Those in the top 0.5% have incomes over $500k if working and a net worth over $1.8M if retired. The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money than from personally selling goods or services or labor as do most in the bottom 99.5%. They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.

Recently, I spoke with a younger client who retired from a major investment bank in her early thirties, net worth around $8M. We can estimate that she had to earn somewhere around twice that, or $14M-$16M, in order to keep $8M after taxes and live well along the way, an impressive accomplishment by such an early age. Since I knew she held a critical view of investment banking, I asked if her colleagues talked about or understood how much damage was created in the broader economy from their activities. Her answer was that no one talks about it in public but almost all understood and were unbelievably cynical, hoping to exit the system when they became rich enough.

Folks in the top 0.1% come from many backgrounds but it’s infrequent to meet one whose wealth wasn’t acquired through direct or indirect participation in the financial and banking industries. One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a “paper” asset. Another client, CEO of a medium-cap tech company, retired with a net worth in the $70M range. The bulk of any CEO’s wealth comes from stock, not income, and incomes are also very high. Last year, the average S&P 500 CEO made $9M in all forms of compensation. One client runs a division of a major international investment bank, net worth in the $30M range and most of the profits from his division flow directly or indirectly from the public sector, the taxpayer. Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company. The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them. They are, of course, doing nothing illegal.

So who runs America? The author’s conclusion is damning:

A highly complex set of laws and exemptions from laws and taxes has been put in place by those in the uppermost reaches of the U.S. financial system. It allows them to protect and increase their wealth and significantly affect the U.S. political and legislative processes. They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules.

Full post here.

Thinking Strategically: Book Review

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I finished reading Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff in March 2010. Subtitled “The Competitive Edge in Business, Politics, and Everyday Life,” Thinking Strategically is an international bestseller and a classic, having been published in 1993. My motivation to read it was because I saw this book listed on numerous forums which listed excellent business books.

The book is organized into three parts, with a total of thirteen chapters. After reading the preface (with the moniker: “Thinking Strategically—Don’t Compete Without It”), the authors explain in the Introduction that the aim of the book is to improve the reader’s “strategy I.Q” while not promising to “solve every question you might have.”

The first chapter sets an excellent tone for the rest of this book; this chapter profiles ten interesting “tales” of strategy. The book leads of with the phenomenon of the “hot hand,” commonly observed by sports fans and sports analysts. In fact, hot hands in such sports as basketball are actually a fallacy, most likely observed because we (humans) have a tendency to focus on streaks of occurrence rather than non-occurrence…

In the first chapter, the authors also explain so-called zero-sum games: one person’s gain is another person’s loss (basketball, football, poker all fit this description). So what isn’t a zero-sum game? The most inviting example is that of the prisoner’s dilemma, where the payoffs of the two participants do not necessarily offset. In part II of the book, the authors have a lengthy chapter entitled “Resolving the Prisoner’s Dilemma” in which they elucidate a few excellent examples (they use OPEC to build the case). The authors explain that participants of a prisoner’s dilemma may try to achieve cooperation, but that there is a large underlying incentive to cheat even if an agreement is made.

The examples in this book are interesting. For example, in Chapter 2 (“Anticipating Your Rival’s Response”), the authors feature the recurring theme in the cartoon strip Peanuts, in which Lucy holds the football and invites Charlie Brown to run up to the ball and kick it. Of course, we all know Lucy’s intentions, but it’s worthwhile to create a decision tree and deduce what Charlie Brown should do (the authors do admit that the story of Charlie Brown is “absurdly simple,” but that this example allows the reader to become familiar with decision trees for more complex situations). Another example in this chapter is the game of chess, in which the players try to envision how their opponent will play a few moves into the future. I found it interesting that the authors pondered about solving chess, something I wrote about when I linked to the Garry Kasparov article, “The Chess and the Computer.”

In the chapter “Strategic Moves,” you’ll learn about unconditional moves (an example of a TV race between United States and Japan is presented), threats and promises (while an unconditional move gives a strategic advantage to a player able to seize the initiative and move first, you can establish a similar strategic advantage through a response rule—either a threat or a promise), warnings and assurances (a warning is when it is in your interest to carry out a threat while an assurance is when it is in your interest to carry out a promise).

Other chapters in the book include “Credible Commitments” (in which you will learn about “apparent irrationality,” contracts, and why it would make sense to burn bridges), “Unpredictability” (in which you will learn about the min-max theorem and the usefulness of surprising others by surprising yourself), “Brinkmanship” (please note that “brinksmanship” is not a word), “Cooperation and Coordination” (with a most interesting case about stock markets and beauty contests: how do they relate?),”The Strategy of Voting” (with considerations about median voting, the so-called “naive voter,” and how it may occasionally behoove to vote for an enemy to see a result you desire), “Bargaining” (with a discussion of handicap system in negotiations), and “Incentives” (an excellent chapter which sets the case for merit-based bonuses in jobs).

I think the best part of this book are the number of examples and the cases at the end of the chapter which reinforce the ideas discussed. Each case has a thorough solution, and so you can definitely learn a lot by reading through these cases. Speaking of cases, the last chapter of the book is entirely devoted to them; there are a total of twenty-three additional cases to go through which further reinforce the concepts covered in the book (again, solutions to the cases are also provided).

Quotes

Some interesting quotes from the book follow.

Setting the tone for the book:

You must recognize that your business rivals, prospective spouse, and even your child are intelligent and purposive people. Their aims often conflict with yours, but they include some potential allies. Your own choice must allow for the conflict, and utilize the cooperation. Such interactive decisions are called strategic, and the plan of action appropriate to them is called a strategy. This book aims to help you think strategically, and then translate these thoughts into action.

On threats and promises:

Is is never advantageous to allow others to threaten you. You could always do what they wanted you to do without the threat. The fact that they can make you worse off if you do not cooperate cannot help, because it limits your available options. But this maxim applies only to allowing threats alone. If the other side can make both promises and threats, then you can both be better off.

How do I know this book is dated? Reference to the Cold War on page 3 of the book:

As the cold war winds won and the world is generally perceived to be a safer place, we hope that the game-theoretic aspects of the arms race and the Cuban missile crisis can be examined for their strategic logic in some detachment from their emotional content.

On De Gaulle’s rejection of friendship:

A compromise in the short term may prove a better strategy over the long haul.

On Khrushchev’s silence:

Khrushchev first denounced Stalin’s purges at the Soviet Communist Party’s 20th Congress. After his dramatic speech, someone in the audience shouted out, asking what Khrushchev had been doing at the time. Khrushchev responded by asking the questioner to please stand up and identify himself. The audience remained silent. Khrushchev replied: “That is what I did, too.”

On rules of the game:

There are two general features of bargaining that we must first take into account. We have to know who gets to make an offer to whom, i.e., the rules of the game. And then we have to know what happens if the parties fail to reach an agreement.

On taking risks (this conclusion follows after a case study of the 1984 Orange Bowl game between the Nebraska Cornhuskers and the Miami Hurricanes):

If you have to take some risks, it is often better to do this as quickly as possible. This is obvious to those who play tennis: everyone knows to take risks on the first serve and hit the second serve more cautiously.

An explanation of a dominant strategy with a baseball analogy (situation: one or more players on base, there are two outs in the inning, and a batter is facing a 3-2 count):

We say that running on the pitch is the dominant strategy in this situation; it is better in some eventualities, and not worse in any. In general, a player has a dominant strategy when he has one course of action that outperforms all others no matter what the other players do. If a player has such a strategy, his decision becomes very simple; he can choose the dominant strategy without worrying about the rival’s moves.

What is the dominance in a “dominant strategy”?

The dominance in “dominant strategy” is a dominance of one of your strategies over your other strategies, not of you over your opponent. A dominant strategy is one that makes a player better off than he would be if he used any other strategy, no matter what strategy the opponent uses.

Another revelation of the age of this book:

As we write this, the Iraqi invasion of Kuwait has shot the price of oil up to $35 per barrel and experts are divided about the future of OPEC.

On an interesting police tactic:

Police have been known to scare drug dealers into confessing by threatening to release them. The threat is that if they are released, their supplies will assume they have squealed.

How to deter cheating with punishment (you have to read the book to find out the problem with the approach listed below; alternatively, respond with your thoughts in the comments, and I will make note of the correct response):

Next we ask how severe a punishment should be. Most people’s instinctive feeling is that it should “fit the crime.” But that may not be big enough to deter cheating. The surest way to deter cheating is to make the punishment as big as possible. Since the punishment threat succeeds in sustaining cooperation, it should not matter how dire it is. The fear keeps everyone from defecting, hence the breakdown never actually occurs and its cost is irrelevant.

Threats and promises versus warnings and assurances:

Threats and promises are truly strategic moves, whereas warnings and assurances play more of an informational role. Warnings or assurances do not change your response rule in order to influence another party. Instead, you are simply informing them of how you will want to respond based on their actions. In stark contrast, the sole purpose of a threat or promise is to change your response rule away from what will be best when the time comes. This is done not to inform but to manipulate. Because threats and promises indicate that you will act against your own interest, there is an issue of credibility. After others have moved, you have an incentive to break your threat or promise. A commitment is needed to ensure credibility.

On burning bridges:

Armies often achieve commitment by denying themselves an opportunity to retreat. This strategy goes back at least to 1066, when William the Conqueror’s invading army burned its own ships, thus making an unconditional commitment to fight rather than retreat.

On the element of surprise:

If you choose a definite course of action, and the enemy discovers what you are going to do, he will adapt his course of action to your maximum disadvantage. You want to surprise him; the surest way to do so is to surprise yourself. You should keep the options open as long as possible, and at the last moment choose between them by an unpredictable and therefore espionage-proof device.

The essence of brinkmanship:

The essence of brinkmanship is the deliberate creation of risk. This risk should be sufficiently intolerable to your opponent to induce him to eliminate the risk by following your wishes. This makes brinkmanship a strategic move. Like any strategic move, it aims to influence the other’s action by altering his expectations. [Question for the reader: is brinkmanship a threat?]

On inferior technologies:

Our greater experience with gasoline engines, QWERTY keyboards, and light-water nuclear reactors may lock us in to continued used of these inferior technologies.

Final Thoughts

Most books on strategy and game theory can be dry and/or inaccessible to the general reader with overwhelming mathematics. This book is excellent (and interesting to read) because it has an amazing diversity of illustrative examples drawn from political campaigns, corporate relations, sports, OPEC, the military draft, the Cuban Missile Crisis, the Cold War (especially the Cold War, if I may so myself), speed limits, and other interesting topics. The book is mostly self-contained but it does require multiple sittings to go through it (I spent over a week reading this book), especially if you’re careful to go through the cases and work through some of the solutions to verify the authors’ findings. Do keep in mind that this book was published in 1993, so some of the topics are dated. Nevertheless, if you’re at all interested in strategy, game theory, and are comfortable with basic mathematical concepts, this book is definitely worth a read.