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Albert Wenger

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Tuesday, May 21, 2019 - 10:52am

I have been on a bit of a blogging break which is likely to go on for a few more weeks. The break has been the result of a confluence of several factors, starting with a lot of work. Historically, I would have reacted by cutting back on sleep and workouts but now I know better than to do that. I need 8 hours of sleep and when I don’t get those I can’t think well and, more importantly for the people around me, become irritable. Since I am on the topic of health, I am happy to report that my shoulder is fully restored. That’s due to having found an amazing physical therapist and a wonderful personal trainer (I feel incredibly fortunate that I can afford this level of personal attention).

I have also been on a bit of a reading bender. Some time ago I realized that I had read virtually no science fiction by women authors and so I set out to rectify this. Since then I have read great works by Ada Palmer (Terra Ignota Series), Nnedi Okorafur (Binti Series), Annalee Newitz (Autonomous), Ursula K. Le Guin (The Left Hand of Darkness) and NK Jemisin (Broken Earth Trilogy – currently halfway through first book). I highly recommend all of these.

I plan to return to blogging in a few weeks. During that time I will also look into how I can finally get off Tumblr for good. If you have any recommendations please let me know. Until then have a great break everyone!

Wednesday, May 8, 2019 - 2:03pm

Today’s Uncertainty Wednesday is about the risk of inflation. I spend much of my time thinking about company valuations, both as we make new investments and also as we try to mark valuations in existing companies. Of course valuations for private companies are influenced by available public comps and those have been trading at high multiples, including the current crop of IPOs. Now there are two countervailing views in the market. One view is that valuations will return to lower historical multiples and the other view is that current multiples are the new normal.


Why could multiples have expanded permanently? Well there are two possible explanations (which are not mutually exclusive). First, that due to pervasive network effects successful companies can grow faster and have stronger ultimate positions in their respective markets. This is to say the higher multiples are justified on fundamental grounds. Second, that there is so much money sloshing around causing low interest rates and thus driving up present value of growth companies. This is to say the higher multiples reflect a changed monetary landscape. The place to look here is the Fed’s balance sheet which expanded massively during the 2008 financial crisis and again in 2014 as can be seen on the following graph.


Now what that graph also shows is that for about a year now the Fed has had some success in bringing that money back in by shortening its balance sheet to the tune of a few hundred billion dollars. That’s a huge amount of money but still pales compared to the roughly $3.5 trillion expansion.

What does all of this have to do with inflation you may ask. Well, the multi trillion dollar question is where we go from here. Can the Fed successfully continue to shorten its balance sheet, or is the following projection from JP Morgan Asset Management correct?


This basically suggests settling in with an extra $3 trillion or so and growing from there. It reminds me of what someone said as the Fed started with quantitative easing: “The Fed’s balance sheet is like toothpaste – easy to squeeze out, impossible to put back in the tube.” (I can’t find the quote right now to attribute).

If that’s indeed the case then it is true that asset valuations may stay as high as they are (to the extent that the monetary explanation for high multiples applies), but it also means that there is the potential for an inflationary shock across all prices, including everyday consumption items. I have written a lot about inflation before where I keep making the point that technology is deflationary. But that doesn’t rule out inflation from a loss of faith in purchasing power.

There is a small but nonzero chance that’s where we could wind up, especially if the collective belief suddenly shifts to concluding that we will use inflation exclusively to finance government spending. Now I should be clear that I am actually a fan of using the money supply to finance a Universal Basic Income, but that requires a shift to full reserve banking and the addition of some kind of wealth tax to rebalance the system. It could all be done, but only if we are willing to change a lot of things instead of just printing more money.

Monday, May 6, 2019 - 11:57am

NOTE: I have been posting excerpts from World After Capital on Mondays. But because I am doing a more substantial rewrite of Part Four, today’s post describes what I am planning to cover.

I want Part Four to be more practical by pointing out ways we can take responsibility today for making the transition to the Knowledge Age. Here are areas I am planning to cover. I am curious if anyone has additional suggestions. First there are direct contributions to the three freedoms.

1. Mindfulness research and applications (Psychological Freedom)

There have been recent breakthroughs in understanding the physiological and neurological underpinnings of mindfulness practices. More work here is needed including ranging from foundational (such as mathematical models of the neural networks) to practical (such as treatment with Psilocybin and other psychedelic drugs). There are also great opportunities to contribute to mindfulness through computer applications, from practice apps such as Simple Habit to more elaborate ones based on reading brainwave activity. Finally, there is a ton of work to be done around embedding mindfulness in to our every day applications such as email, social media, etc.

2. UBI advocacy and politics (Economic Freedom)

For the first time with Andrew Yang there is a candidate running on a UBI platform for 2020 presidential elections. People can volunteer for his campaign. Even if that comes to an end there are other ways to engage in moving the idea of UBI forward. There are several ongoing research projects, such as the one in Kenya run by Give Directly. There is work on policies that can provide an onramp to UBI, such as the Economic Security Projects evaluation of an expanded Earned Income Tax Credit.

3. Creating open source and Creative Commons content, advancing protocols (Informational Freedom)

While reforming is copyright is hard (still someone should work on that) it is much easier to create reduce the restrictions of copyright for content by making it available as Creative Commons. Same goes for software that is made available under an open source license. Finally there is a lot of work these days on open protocols, particularly in the blockchain area. All of these can help advance informational freedom now. Of course it would also be great to have more people advocate for better policies.

Above and beyond working on these three freedoms, there are other foundational areas that require work if we are to transition successfully into the Knowledge Age. These include

1. Fighting Climate Change

Climate change is a clear and present danger. Much of the current way of living including where on the world people are, how they are fed, where water comes from are on the brink of changing dramatically. We are not prepared for the degree of change that’s ahead and if we don’t intervene now there is a high likelihood of cataclysmic change with massive loss of human lives ahead. There is a multi prong approach that’s required. We need to aggressively work on non carbon based energy sources (not just solar and renewables but also nuclear, including further work on fusion), we must have some kind of carbon tax style regulation and because we are late we need to research ways of delaying the big change such as solar radiation management. If you are looking for a model of what to do,

2. Defending Democracy

It is sometimes argued that democracy cannot successfully make big transitions and that we should look to different models for the change we need. People point to China as an example of a technocratic government that they claim is doing a better job coping with change. And it is entirely true that many democracies are struggling today. Nonetheless I believe it is essential that we redouble our efforts to defend democracy. This is a rich field of engagement including working on the campaigns of new candidates, fighting gerrymandering at the state level, innovating on voting methods with rank choice voting and experimental techniques such as quadratic voting.

3. Advancing Humanism

This may strike some as the least important of the areas I have mentioned for engagement so far. And while it may have the least short term impact it strikes me as the most important in the long run. What does it even mean to engage here? For starters I think it is about advancing the thinking around what a revived modern humanism needs to look like. I have taken a stab at that but much remains to be done, such as a deeper exploration of the moral consequences. Then there is the need to package humanism as memes that can spread online. Of starting a movement that can grow.

There are of course many other important ways people can contribute to the Knowledge Loop today and in the future that will also help move us forward towards the Knowledge Age.

As I am reworking this, I would love to hear whether people think of these suggestions and what other areas of engagement I absolutely should cover.

Saturday, May 4, 2019 - 11:51am

I wrote a post a few years ago titled “Some Things I Have Learned About Email” which among other things advocates for double opt-in introductions. These have by now thankfully become fairly standard and when people don’t follow the protocol it now stands out. There is one more thing though that is worth emphasizing even though it should be obvious (but apparently is not): if you asked for an introduction and now someone makes that introduction for you over email, it is your job to send the next email!

At a rate of roughly one out of ten the following happens. Somebody writes me that an entrepreneur is looking for an introduction. I write back to go ahead (note: I don’t always say go ahead, it depends of course on if I actually want the introduction). The introduction email is sent. And then crickets. The entrepreneur does not actually pick up the thread.

Now it is of course possible that they got busy or that the reason for the introduction is no longer relevant (eg they got a term sheet from someone else). But if there is no compelling reason, if the entrepreneur who asked for the introduction is simply waiting for me to reply they will wait forever.

Admittedly once in a while they will pick up the thread and I will not get to a reply because I didn’t see it (my email volume is challenging). Whenever I discover that I feel bad about it. Good entrepreneurs will send at least a second follow up email. It is very rare that I don’t reply at that point.

So: if someone introduces, make sure to pick up the thread. And if you don’t hear back, don’t hesitate to ping again (and possibly even a third time). Of course keep in mind: this only applies to double opt-in introductions.

Friday, April 26, 2019 - 5:18pm

It is the season of mega tech IPOs including the recent offerings by Pinterest and the upcoming one by Uber. A key question to be answered is how well will these companies perform in the public markets over time? So far Pinterest has traded up nicely in the first few days, but I am asking about long term performance. We are in new territory here because of how much money these companies have been able to raise previously in private markets.

To unpack the question and its implications further: will most of the gains in these investments be among the private investors who invested early or will there still be meaningful returns in the public markets? We will only know the answer to this in a year or so from now (and possibly not even then), but it will matter a lot for both future IPOs and for late stage financings.

Because so much private money has been available for such a long time, the sorting between companies that truly have sustainable long term growth and those that have bought their growth will happen in the public markets. My sense is that when some of these companies inevitably struggle, there will be a broad and indiscriminate sell off among tech stocks as a result with potentially the IPO window closing entirely. Anyone thinking of going public should probably do so sooner rather than later.

2020 will likely be a bumpy year as this sorting starts to take place. Plus there is the added complication of the ongoing tech backlash which has been building momentum for some time now. All of that is to say IPO buyer beware!

Friday, April 26, 2019 - 12:18pm

It is the season of mega tech IPOs including the recent offerings by Pinterest and the upcoming one by Uber. A key question to be answered is how well will these companies perform in the public markets over time? So far Pinterest has traded up nicely in the first few days, but I am asking about long term performance. We are in new territory here because of how much money these companies have been able to raise previously in private markets.

To unpack the question and its implications further: will most of the gains in these investments be among the private investors who invested early or will there still be meaningful returns in the public markets? We will only know the answer to this in a year or so from now (and possibly not even then), but it will matter a lot for both future IPOs and for late stage financings.

Because so much private money has been available for such a long time, the sorting between companies that truly have sustainable long term growth and those that have bought their growth will happen in the public markets. My sense is that when some of these companies inevitably struggle, there will be a broad and indiscriminate sell off among tech stocks as a result with potentially the IPO window closing entirely. Anyone thinking of going public should probably do so sooner rather than later.

2020 will likely be a bumpy year as this sorting starts to take place. Plus there is the added complication of the ongoing tech backlash which has been building momentum for some time now. All of that is to say IPO buyer beware!

Friday, April 26, 2019 - 10:18am

Last week’s Uncertainty Wednesday was titled “Fooled by Small Numbers” and discussed why drawing conclusions from small samples is dangerous. A reader asked how that relates to grounding the Boeing 737 Max 8 airplane after two crashes? Isn’t that also drawing a conclusion from a small sample? No. Because here we are actually looking not at a sample but at the population of all flights.

Globally there are nearly 40 million commercial flights annually. That is over 100,000 flights every day! Each and everyone one of those flights is tracked. And in an amazing accomplishment of engineering, process and public safety regulations we have had years with zero  crashes. When people complain that we are going backwards on commercial flight because we used to have supersonic flight with the Concorde, what they are ignoring is that the real demand was not for speed but for safety.

With such a large number of successful flights, a crash is a strong indicator that something went wrong. At a high level there are two possible explanations: equipment failure or operator error (of course the two can interact with each other and compound). On any single crash it would be hard to have two much of a view as to which one caused it and one might rightly suggest that grounding a whole fleet of planes is an overreaction. But two crashes with the same type of equipment point strongly at the aircraft itself.

That argument is of course further strengthened when there is significant additional evidence pointing at the plane, such as complaints by pilots along with known changes to the plane. In summary then: when something normally goes right more than 100,000 times a day every day, and then goes wrong twice in a row with the same equipment, that’s a very strong signal.

Friday, April 26, 2019 - 10:18am

NOTE: Today’s excerpt from my book World After Capital continues the discussion of Psychological Freedom by examining how we can make ourselves free to learn.

Freedom to Learn

Young kids ask upwards of three hundred questions a day. [122] Humans are naturally curious, and it’s precisely this curiosity that has driven so much of our progress. At the same time, our curiosity in some ways didn’t match well with the Industrial Age. If you want to employ people in a factory job that has them performing the same action all day every day, then curiosity doesn’t help; on the contrary, it hurts. The same goes for many service jobs today, such as say operating a cash register or delivering packages on time.

The present-day educational system was built to support the Job Loop of the industrial economy. No surprise then, that it generally tends to suppress rather than encourage curiosity. While educators hardly ever state “suppressing curiosity” as an overt goal, many of our educational practices do exactly that. For instance, forcing every eight year old to learn the same things in math discourages curiosity. Teaching to a test discourages curiosity. Inadequate funding resulting in cutbacks to music and art classes discourages curiosity.

A critical way that we undermine curiosity is by evaluating many domains of knowledge according to whether we think they will help kids get a “good job.” If your child expressed an interest in learning Swahili or wanting to play the mandolin, would you as a parent support that? Or would you say something like, “But how will you earn a living with that”? What about yourself? What were you excited to learn but did not because it does not pay? The latest iteration of this thinking is that everyone should learn how to code because there are high paying jobs in software. Instead of encouraging curiosity about coding, either for its own sake or as a tool in science or art, we force it into the Industrial Age logic of the Job Loop. This will not end well, as software development too is subject to automation.

We need to free ourselves from this instrumental view of knowledge and embrace learning for its own sake as part of the Knowledge Loop. Again, a Universal Basic Income (UBI) can go a long way to making more people overcome their fears that they won’t be able to support themselves if they let their curiosity guide their learning. But will we have enough engineers and scientists in such a world? Historic evidence suggests so. For instance, we accomplished the Apollo program and moon landing at a time when Math was not mandatory in high school. If anything it is likely that we will have more engineers and scientists than under the current system. Forcing kids to study something is a surefire way to squelch their natural curiosity.

The digitally accelerated Knowledge Loop brings to the fore other limits to learning that we must also overcome. The first of these is confirmation bias. As humans we find it much easier to process and accept information that confirms what we already believe to be true. Today, we can access a huge amount of content online, confirming any of our pre-existing beliefs instead of learning something new. Collectively, we risk becoming ever more entrenched in these views, fracturing into groups that hold and perpetually reinforce strong beliefs. This phenomenon of the “Cyber Balkans” [123] becomes even more pronounced given the automatic personalization of many Internet systems, with people living inside a “filter bubble” that screens out conflicting information [124].

Another limit to learning is the human tendency to jump to conclusions on the basis of limited data, another well documented and understood cognitive bias. After a study came out suggesting that smaller schools tended to produce better student performance than larger schools, educators set about creating a lot of smaller schools. A subsequent study found that a lot of smaller schools were also doing exceptionally poorly. It turns out that this finding in part amounted to a statistical effect: The more students a school has, the more likely that school is to approximate the overall distribution of students. A small school is much more likely to have students who perform predominantly well or poorly.

Daniel Kahnemann in his book, “Thinking, Fast and Slow,” discusses the fundamental problem underlying these biases. We employ heuristics that result in confirmation bias and storytelling because many of the older systems in the human brain are optimized for speed and effortlessness. In a world with an analog Knowledge Loop, more time exists to correct for these biases. But in a high velocity, low cost digital Knowledge Loop, we must work far more deliberately to slow ourselves down. Otherwise, we run the risk of passing along incorrect stories without taking the time to verify them resulting in an information cascade. In fact, a recent study showed that at the moment rumors spread online at many times the speed of truths [125].

The bulk of the systems we currently interact with online are designed on purpose to appeal to our cognitive biases instead of helping us overcome them. Companies such as Facebook and Twitter become more valuable the more attention they capture, as they then resell some part of that attention in what is known as advertising. Capturing attention is easier through appealing to what Kahenmann calls System 1, the parts of our brain that require no effort and are responsible for our cognitive biases. You are much more likely to look at a sequence of cute animal pictures or status updates from your friends than to read through an in-depth analysis of a proposal for a carbon tax. Fake news and propaganda efforts have understood this inherent flaw in the existing systems, making large scale manipulation possible.

New systems can help here. We might imagine, for instance, an online reader that always gives you opposing viewpoints to a given story or perspective. For each topic, you could explore both “similar” and “opposing” views. Such a reader could be presented as a browser plug in, so that when you’ ve already ventured beyond the confines of a social media platform and are perusing content you could still bring that exploration with you [126].

Fundamentally though, each and everyone of us has to actively work on engaging what Kahnemann calls System 2, which is the part of our brain that requires real effort but lets us think independently and rationally. Having some kind of mindfulness practice is a key enabler for overcoming biases and freeing ourselves to learn.

Friday, April 26, 2019 - 10:18am

The last couple of Uncertainty Wednesdays examined fallacies based on statistical phenomena such as imperfect correlation and the base rate. Another one of these has to do with small numbers. A famous example of this fallacy occurred when a study showed that among the best performing schools in the country there was a high percentage of small schools. This resulted in a push for making schools smaller.

A lot of money and effort was expended on this push for smaller schools. That is, until someone decided to also study the worst performing schools. And again, it turned out that there was a high percentage of small schools among them. Ouch! So apparently being a small school either gives you really good or really bad performance.

In reality much of this is simply was the result of small numbers. When you have a small number of students, you have an even smaller number of teachers. And so it is much easier to wind up either with really bad teachers or with really good teachers. As a school gets larger, it is much more likely to have some good and some bad teachers. Hence it is much more likely to be of average performance.

This small numbers effect is, like the previous fallacies, incredibly widespread. In companies think about the performance of departments (small ones versus large ones). For governments consider small cities or countries compared to large ones. And so on.

Friday, April 26, 2019 - 10:18am

NOTE: Today’s excerpt from my book World After Capital starts the fourth and final section. I am embarking on a significant rewrite of that section to make it more action oriented, so expect some rough reading ahead.

Suppose that I have convinced you of the importance of the Knowledge Loop and of the scarcity of attention in the digital age. Suppose further that you find my suggestions for increasing economic, informational and psychological freedom interesting. That still leaves a huge question: Can it be done?

Throughout the prior sections you may have occasionally thought that I am mad for proposing so many fundamental changes, ranging from how money is created in the economy to who controls computation. One reaction is to dismiss the ideas as utopian. To argue that we simply cannot change everything about how we live. Yet that ignores the historical fact that we have changed nearly everything in how humanity lives twice already. In an earlier section I argued that we had two big prior shifts in scarcity: from food in the Forager Age to land in the Agrarian Age and from land to capital in the Industrial Age. Each of these shifts was accompanied by extraordinary transformations.

From the Forager Age to the Agrarian Age we went from nomadic to sedentary, from flat tribes to extreme hierarchies, from promiscuous to (at least nominally) monogamous, and from animistic religions to theistic ones. From the Agrarian Age to the Industrial Age we went from living in the country to living in cities, from large extended families to nuclear (or no) families, from the commons to private property (including private intellectual property), and from great chain of being theologies to the Protestant work ethic. And yes the first of these transitions took place over thousands of years and the second one over hundreds. Still they show that everything changes when the binding scarcity shifts.

With scarcity shifting once more, this time from capital to attention, we will have to change everything once more. No matter how daunting that may seem and how long it will take. This fourth and last section sets forth a series of ideas for how each and everyone of us can take responsibility for change, starting today.

Friday, April 26, 2019 - 10:18am

NOTE: Today’s excerpt from World After Capital is the first subsection in the chapter on psychological freedom. It deals with freeing ourselves from wanting as a crucial part of exiting the Job Loop.

Freedom from Wanting

With the extraordinary success of capitalism built on the Job Loop, we have become deeply confused about work and consumption, seeing them today as integral goals of our lives instead of as means to an end. Working harder and consuming more allows the economy to grow, so that we can work harder and consume more. Put this way it sounds crazy and yet that has become the default position. We in fact went so far as to rework religion to deeply ingrain this view by moving away from a great chain of being theology to a protestant ethic, which actively encourages earning more. [118]. Similar changes have taken place not just in the Western world but throughout Asia where Confucianism and other religions have undergone similar changes.

Worse yet, we frequently find ourselves trapped in so-called positional consumption. If our neighbor has bought a new car, we want to buy an even newer and more expensive model. Such positional consumption behavior has emerged not just with respect to goods but also to services—think of the $1,000 haircut [119] or the $595 per-person dinner at a Michelin starred restaurant in Manhattan [121]. Of course, much of this confusion was fueled by trillions of dollars of advertising spend aimed at convincing us to buy more and more and more by showing us images of how cool or happy we will be. Between economic policy, advertising and religion it is no wonder that many people are by now convinced that wanting ever more material things is simply part of human nature.

But that is not so. Instead our addiction to consumption is exactly that: an addiction that exploits a basic mechanism in the brain. When you desire something like a new car, your brain gets a hit of dopamine based on your anticipated happiness from having it, making you feel good. Yet once you actually get the car, you compare this to to your prior expectations. If the reward from having the car turns out to be less than what you expected, your dopamine levels will decrease and this can cause extreme disappointment. If your expectations are met, dopamine levels will stay basically constant. But only if your expectations are greatly exceeded will you get another big hit of dopamine. The unfortunate result of this is known as the “hedonic treadmill.” That is, when your brain gets accustomed to certain levels of dopamine (having a new car), you inadvertently boost the levels of dopamine required in the future to produce the same feeling of happiness. You’ll have to raise your expectations for an even more expensive or faster car to get that initial kick of dopamine again [120].

That same mechanism though works for many other forms of anticipation or seeking that are aimed at creation or experience, instead of consumption. As an artist or scientist you can forever seek out new subjects. As a traveler you can forever seek out new destinations. As a surfer you can forever seek the perfect wave. And so on. Freedom from wanting is possible by recognizing that we can all point our brain away from consumption and towards other pursuits, many of which are part of the Knowledge Loop. Redirecting our reward mechanism does not mean giving up on all consumption. It simply re-establishes the lost difference between needs and wants: You need to eat; you may want to eat at a Michelin starred restaurant. You need to drink water; you may want to drink an expensive wine.

This is why Universal Basic Income (UBI) is focused on meeting needs, not wants. Once you are economically free to meet your needs and have psychologically freed yourself from wanting, you can direct your attention into the Knowledge Loop or other activities that allow for endless seeking.

Suppose your passion is skiing. You grew up with it, and as an adult you know that no activity helps you feel as alive as skiing. You want to keep seeking the perfect powder day. But skiing is expensive, is it not? How would a UBI ever let you focus your attention on it? On a UBI alone, without additional income, you definitely wouldn’t be able to afford an annual ski trip to the Swiss alps, including a stay at a luxurious lodge. But ski equipment is actually not very expensive when you consider that it can last for twenty years or more and can be shared with others. And if you’re willing to hike up a mountain, you can ski as much as you want without buying a lift ticket at an expensive resort.

Psychological freedom in this instance means freeing yourself of assumptions you might have about how to go skiing. In this it helps of course to remind yourself that many of these assumptions are formed by companies that have a commercial interest in portraying skiing that way. If you can learn to re-frame skiing as an outdoor adventure, a chance to be in nature, it isn’t expensive at all and is very much accessible under a basic income. A similar logic holds for any number of other activities a person might both wish to pursue.

To free ourselves from wanting, we should frequently remind ourselves of the difference between needs and wants, learn how our brain works and point our seeking away from consumption to (creative) activities. For many of us, myself included, that also means letting go of existing attachments to wants that we have developed over a long life of consumption. In that regard it is encouraging to see the current popularity of Marie Kondo’s critical examination of the stuff that we tend to accumulate. Finally, we should always cast a critical eye on the advertising and marketing we encounter, understanding how it often perpetuates illusions about needs and wants, keeping us trapped in the Job Loop.

Friday, April 26, 2019 - 10:18am

It was upsetting to see Notre Dame burn on Monday, as the building is a beloved landmark to the many millions who have visited Paris and enjoyed a stroll near its majestic presence. In addition it is also a major symbol for many French and an ongoing place of religious worship. It now appears that reconstruction is not only possible but will also be well funded (prompting some interesting debates about fairness).

In today’s Uncertainty Wednesday, I want to focus on an important lesson from the disaster. The apparent cause for the fire was an ongoing renovation project. Notre Dame was in pretty good shape for a building of such an advanced age. That means interventions have limited upside (marginal improvement) but, as we have seen, dramatic downside. Whenever the payoff structure of any activity has this asymmetry of limited upside, unlimited downside it is advisable considering not engaging in it at all, or proceeding with extreme caution.

As it turns out, this structure is pervasive and yet we don’t pay nearly enough attention to it. For a second example, one need look no further than the recent crashes of two Boeing aircraft (see post from a few weeks ago). Any modification to a working aircraft has limited upside and massive downside. In the case of the Boeing 737 MAX 8, the improvement was supposed to provide better fuel efficiency. That’s a worthy goal for sure, but a marginal improvement. Given the downside potential it means either not to do it at all or to be incredibly cautious.

And here is a quick example from the startup world. Adding debt to the financing mix can improve your cost of capital. But it also increases the risk of going out of business entirely. So again we encounter the structure of marginal improvement combined with existential downside risk.

Teaser: next Uncertainty Wednesday we will look at how the nearly same intervention can have a very different payoff structure when the circumstances are different.

Friday, April 26, 2019 - 10:18am

Last Uncertainty Wednesday considered how imperfect correlation is related to the narrative fallacy which in turn underlies observations such as the extravagant headquarters effect. Today I will examine why hiring is so ridiculously hard and even organizations which are very good at it will make their fair share of mistakes.

The underlying reason for why hiring is hard is the base rate fallacy, which occurs when you update your beliefs too much on the basis of flimsy information. What do I mean by that? The classic example that Kahneman provides in Thinking Fast and Thinking Slow is guessing which job someone has based on a description of their characteristics: “Steven wears glasses and has a meek demeanor. Is Steven more likely to be a librarian or a truck driver?”

Our story telling brain wants to jump to the conclusion that Steven seems to fit our stereotype of a librarian much more than that of a truck driver. But in the US there are 3.5 million truck drivers and only 170 thousand librarians. So the base rate is that Steven is 20x as likely to be a truck driver than a librarian! It is therefore quite unlikely that the information about glasses and his demeanor is enough to suggest that Steven is actually more likely to be a librarian.

How does this relate to hiring? When I first got into business, I used to think that most people are good at their jobs and it was just a question of avoiding people who are outright bad. Now several decades in, I am convinced it is the exact opposite. The base rate heavily tilts towards people *not* being good at their job! This may seem overly dramatic but if you look at the realm of sports for a moment and ask yourself the following: if I randomly pick someone who knows how to play soccer, how likely are they to be a good soccer player? The answer quite obviously is: not likely at all (soccer is the most popular sport globally).

So now consider hiring someone in say marketing. How likely is someone, even someone who has done a lot of marketing, to be good at marketing? The answer is: quite unlikely. Very few people are actually good at marketing. Very few people are really good at anything. So in trying to find these people, the base rate works heavily against you! This means that you need to massively dial up your level of skepticism and the information required to move someone from the base rate to the “this person is good at marketing” needs to be incredibly strong.

There is tons of great advice out today on what kind of interview questions to ask. Unfortunately that is of course a bit like a game of spy versus spy because as the questions become known, people tend to be better prepared for them. At the end of the day there is no substitute for meeting a lot of people to fill any one role, to really dig into what they have actually done and if at all possible to have them do some of what they will be doing as part of the process (and of course talk to people who have worked with them). Throughout it all always consider that the base rate is working against you in hiring.

Friday, April 26, 2019 - 10:18am

From time to time, I see people online posting how they simply talked about something only to be presented an ad about that very thing soon thereafter. This quickly leads into speculation that some software on the phone was using the microphone to listen in on conversations and used that information for ad targeting. There has been extensive discussion online of the technical feasibility and the likely legal consequences. The rough consensus appears to be that it is theoretically possible, has not actually been observed using tools that listen in on traffic and would be a huge legal risk for whoever does it.

In today’s Uncertainty Wednesday I want to take a different approach though. And that’s asking if we should necessarily be surprised by such seemingly eerie ad targeting. Consider a similar coincidence: you meet a stranger, say on an airplane flight (writing this in the air) and you discover after some conversation that you both really like a rather obscure arthouse movie. “What a coincidence” you both say. But is it?

Here we are in one of the weirder aspects of probability that has to do with the frame of reference. Something can be simultaneously highly unlikely and certain. Come again? This seems like a perfect contradiction. Well, consider the type of lottery that one person wins every time there is a drawing. If millions of people participate in a drawing, then your chances of winning are super low (1 in, well, millions). But the chances of someone winning are 100%. For a lottery the distinction between the frame of reference of you, the individual (a sample of size 1), and the lottery as a whole (the population) is self evident.

But your conversation with the stranger on the airplane is similarly just one of tens of millions of people are having with a stranger today. And among that larger number there are bound to be people who discover that they share some obscure interest with the person they are talking. So once you zoom out to the level of all people it is not clear that anything has been learned. Just like there is no information in someone winning the lottery of the kind I described above. We already knew before the drawing that this would be true.

Now let’s come back to internet advertising. Billions of ads are served to hundreds of millions of people every day. Even if there were no targeting of any kind, we should, at the population level expect to see quite a few dead on hits, such as hearing aids being advertised to someone who never before searched for hearing aids but recently mentioned them in conversation. Put differently, the base rate of coincidences in the population is meaningfully above zero. But you only observe what is happening to you. And so for you it feels like an incredible coincidence. Too incredible in fact, which is why you search for some kind of explanation.

Just to be clear: please don’t take this as my saying that “phones listening” is definitively a tin foil hat paranoia. It may well be real. All I am saying is that there are statistical reasons for why people may feel like they have been targeted even though they have not.

PS Apologies for the lack of links, but I wrote this on a flight with super slow internet connection

Friday, April 26, 2019 - 10:18am

Google formed and then within a week dissolved an AI Ethics board, in the corporate equivalent of many celebrity weddings: ill conceived, but quickly ended. The calls for ethics in AI have been strong and understandable. AI is powerful technology that can and already has gone terribly wrong, as in the advertising and recommendation algorithms used by Facebook and Youtube.

Now some of this stuff is obvious and there has been no lack of people pointing out the problems. If you train an algorithm on engagement for example, it will surface more content that confirms users’ existing beliefs and skews towards emotional content that appeals to our instincts (rather than requiring us to engage our rationality which requires effort). Because it is obvious, you don’t need an ethics board to point it out and more importantly that wouldn’t make a difference unless the companies in question would be willing to fundamentally change their business model (or if sticking with the same model would be willing to take a huge revenue hit).

And then some things are incredibly hard. Such as face and object recognition. There are tons of amazing positive applications for such technology. And yet they could also be used to bring about a dystopian future of autonomous killer weapons chasing citizens in the streets. Does that mean we should not develop these capabilities? Should we restrict who has access to them? Is it OK for corporations to have them but not the military? What about the police? What about citizens themselves? Those are hard questions and anyone who thinks they have obvious answers I submit hasn’t thought long enough about them.

So what is to be done? A good start is personal responsibility. Think about what you are working and don’t work on it if you are not comfortable with it (or fund it or lead it). Different people will wind up being comfortable with different things because the answers to the questions above do not have a single obviously right answer. Do not assume that because someone is working on autonomous weapons they are evil and have not thought about ethics (conversely, if at this point you are still working on a recommendation algorithm that puts engagement above everything else, you should revisit that).

A second crucial element is protecting and improving democracy and associated institutions, such as an independent judiciary. This is our only real bulwark against the abuse of any and all technology. We have nothing else nearly as powerful, and certainly not more technology (which is always where most technologists go first). For instance, on the related topic of surveillance, a good reminder is that East Germany constructed a low tech surveillance state by turning half the population on the other half. No technology required.

As with all prior technology, going back to fire, humanity’s earliest technology, we will need to figure out how to use AI for good. That will be a long process. Let’s make sure to engage vigorously in that process and with the necessary intellectual honesty.

Friday, April 26, 2019 - 10:18am

I got the idea for today’s Uncertainty Wednesday from seeing quite a few tweets in my timeline to the effect that startups don’t really have meaningful upside for employees. Tracing these tweets back, led me to this post titled “working for a startups makes increasingly less sense” which has the following quote in it

That startup sold for 200 million dollars and, as the 10th engineer, I made … 15000 dollars from that exit.

First, let me do some math here: 0.015 / 200 = 0.000075 which is 0.0075%. So one of two things have to be true. Either this person got a terrible equity package, or the company had a ton of preferred overhang so that very little of the exit value went to the employees (this can and does happen).

The 10th engineer at a startup might have 0.1% (possibly more, I have seen 0,25% or more). Let’s assume a bunch of dilution along the way to 0.05% at exit. That would still be 200 * 0.0005 = 0.1 million. Now 100,000 dollars isn’t a fortune but it is certainly more meaningful than 15,000 dollars. 

Now you can easily see that these numbers of course move around a lot with the size of the grant, the amount of dilution along the way and the value of the exit. We had a very capital efficient company in our portfolio which only ever raised $5 million of primary capital and exited for $1 billion. So here the math for an early engineer would be 0.001 * 1000 = 1, or $1 million and could be as much as $2.5 million or more (if the initial grant was say 0.25%).

With that out of the way, let me still suggest though that the right way to approach early stage startup equity is to assume that it is worthless. You should not take a job at an early stage startup for any reason other than that you are excited about (1) what the company is working on and (2) the people you will be working with and (3) anything else, such as the specific technologies being used, the opportunity to take a lot of responsibility and so on.

I do a lot of recruiting for the companies that we have invested in at USV. And this point comes up a lot. Especially when people have competing offers. Engineers in particular will try to compare the offers based on some estimate of NPV. I always tell them that this fundamentally the wrong way to think about this choice. We spend the bulk of our waking hours with work, and to make this about the financial upside is ignoring the factors that matter most to long term personal satisfaction.

In the most extreme form people have some kind of scoring system where they assign values to different aspects of a startup, including the potential for financial upside, so that they can rank order their choices. This too is futile. I recently was talking to somebody who was considering an opportunity at one of our portfolio companies and at Facebook who had come up with such a system. Whenever I encounter this now, I point people at this wonderful talk by Ruth Chang, who is a philosopher at Rutgers:

I highly recommend Ruth’s perspective on making the decision whether or not to work for a startup. You are the author of your life: what do you want the next chapter to be about.

Friday, April 26, 2019 - 10:18am

In the last few Uncertainty Wednesdays, we have been looking at various fallacies arising from our lack of appreciation of uncertainty, such as imperfect correlation (narrative fallacy) and the baserate fallacy. Today we will look at hindsight bias, for which the Mueller Report provides as perfect example. Hindsight bias is the tendency after an event occurs to conclude that we knew the event would occur all along. It is an ex-post reduction of the uncertainty that actually existed prior to the event.

Leaving aside the pretty important fact that very few people have actually read the Mueller report, it is clear that at a headline level it did not find sufficient evidence for a criminal charge of collusion. This has led lots of pundits to loudly proclaim how they were right all along and some of them to go further by saying that this proves the investigation wasn’t needed. These statement are of course fueled by political motives but they are also hindsight bias at work.

Consider a different situation for a moment. You are buying a house that you really like. It is from a time period in which asbestos was used a lot and your spouse pushes for an asbestos inspection, but you are reluctant to spend the money. After a contentious debate you go ahead with the asbestos inspection. The inspection finds no asbestos. You: “I told you all along this is a great house and this inspection was a total waste of money.”

This example, because it is not political, makes the hindsight bias fallacy quite obvious. There was real uncertainty about whether there is asbestos or not in the house. When your opinion of “no asbestos” was confirmed in hindsight you take this as evidence that you were definitely right, that there was no uncertainty to begin with and hence the inspection was a waste. I have a feeling that the comments on this post will be full of hindsight bias on the Mueller report, presented even after having read this post.

The arguments will go something like, “Albert, in your example there was real reason to suspect asbestos based on when the house was built, but there was no reason to suspect collusion.” For this, I simply leave you with 

And the meeting at Trump tower. And the pro Russia change in the GOP platform following Trump’s nomination. But please do go ahead, because I will be happy to have the comments confirm the point of the post.

Friday, April 26, 2019 - 10:18am

NOTE: Today’s excerpt from my book World After Capital continues the chapter on psychological freedom.

Freedom to Create

The next step in the Knowledge Loop after learning is creating. Here too we need to work on our freedom. Picasso once said: “we all start out as artists, the challenge is to remain one.” My personal experience bears that out. I created many paintings growing up (some thankfully kept by my mother) that I doubt I would be able to create today. As adults we self-censor, inhibiting the natural creativity we enjoyed as children. We’ve been told that we aren’t creative or we’ve seen people reject or mock work we have created. The educational system, with its focus on preparing for standardized tests, further squelches our creative impulses. Eventually, we come to believe that creativity is something that other people do, not us.

Job Loop thinking further solidifies and even institutionalizes these beliefs about creativity. Society affirms a categorization of people into amateurs and professionals based on whether or not someone gets paid. We venerate the professional guitar player, artist, or sculptor and denigrate the amateur, talking about the latter’s work as “amateurish” or “amateur hour.” Ironically, the word “amateur” derives from the Latin root amator, which means “lover of.” When we start to measure creativity by how much money an artist or musician is making, rather than the passion they feel for a pursuit, there is no wonder that many people are afraid that they will never measure up.

Distractions also inhibit our impulses to create. We now live in an always on, interrupt driven world. There is always another video to watch on YouTube. Always another email message or chat to read. Always another game to play. Our brains are very poorly adapted to such an information overload environment. We evolved in a world where obtaining a bit of information—for instance, the sound of an approaching animal—was potentially a matter of life or death. It’s still very easy to distract our brains with new information.

In order to be able to create, we need to disconnect ourselves from many of those stimuli at least for some time period. That requires effort. Again, a mindfulness practice will be be helpful here by allowing us to tune out interruptions. Of course there are also many hacks we can use to have fewer interruptions in the first place. For instance, I have my phone set to “Do Not Disturb” at all times.

Friday, April 26, 2019 - 10:17am

At dinner last night a friend in his mid 50s asked, quite genuinely: so what exactly is a meme? Our teenage son laughed about this apparent ignorance but the confusion is well founded given that many people today use the word to mean a short lived fad on the internet, as compared to the original usage as a unit of meaning that is culturally transmitted and self-replicating (hence the coinage which is based on “gene”). The two usages are obviously related and yet also different. In particular, the former connotes something frivolous and harmlessness, whereas the latter appears more like an academic concept. Much of the failure to reach audiences by mainstream politicians arises from underestimating just how powerful memes are and how effective they are used to spread ideas.

A wider discussion and understanding of memes and their power in the age of the internet is absolutely crucial if we want to make progress. Right now, for example, there is a debate online about whether or not to link to the manifesto of the Christchurch terrorist. On the one side are arguments that giving it any media distribution will just help to spread the hateful ideas in it further. On the other side one of the key ideas behind many dangerous memes at the moment is that there is a secret truth that’s suppressed by media. So it would appear that we are caught between a rock and a hard place on how to approach this. This is in fact part of the nature of memes, they are antifragile. They benefit from (nearly) all counter strategies and the more those counter strategies are deployed, the stronger the meme gets.

So what is to be done? I believe we need a two pronged counter. The first prong is to publish and refute in the same go. That is always provide context, always point out what’s wrong, always surround by a message of humanism and anti-violence. Never give the impression that this is secret knowledge that is being suppressed. The appearance of suppression has been one of the key drivers in the success of these memes at convincing people that they have merit. 

The second prong is to spread positive memes. There is a future in which we transcend many of the current evils and we need to create memes pointing to that future. I plan to write more about this in the coming weeks.

Friday, April 26, 2019 - 10:17am

I have been enjoying writing about current events as part of Uncertainty Wednesdays, such as the Notre Dame fire and the Boeing crashes. Today’s edition is about impeachment following the Mueller report. One of the great early thinkers about uncertainty was Blaise Pascal who made many important contributions to mathematics (among them Pascal’s triangle which is a staple of learning math).

In a posthumously published work Pascal sets out a simple argument for believing in God which has become known as Pascal’s wager: a belief in God imposes a finite cost during one’s lifetime but with some small probability offers an infinite benefit of an eternal heavenly afterlife (he was thinking of a Christian God but the argument applies to many other religions that have a similar concept). Conversely if you do not belief in God you have a finite gain versus a small probability of an infinite loss from an eternity in hell. With this setup the rational choice is to believe in God.

Pascal’s wager is an important contribution to thinking about living under uncertainty because it separates out the probability of states of the world (God exists, God does not exist) from the payoffs of different decisions when those states are realized. In doing so it makes clear that when payoffs can be very large in either direction (here infinite gain or infinite loss), then even small probabilities have a huge impact on decisions. Importantly no amount of prior research or forecasting can meaningfully resolve this analysis. Pascal’s wager can thus be seen as an early (maybe the earliest?) contribution to a line of thinking about the importance of extreme payoffs that today is being carried on prominently by Nassim Taleb.

What does any of this have to do with the question of impeachment? Well, one analysis of whether or not the Democrats should move to impeach Trump in the wake of the Mueller report has centered around the impact on the 2020 presidential elections. Some make the argument that impeaching now reduces the Democrats chances of winning in 2020. But if you look at Pascal’s wager, let’s say you find some evidence that give you a small reduction in the probability that God exists, that still does not change the decision because the payoff is so extreme.

I believe a similar logic applies here if you consider the payoffs to be the longterm consequences for limits on the behavior of all future presidents. You can either impeach or not and then the president either wins re-election or does not. If you impeach there is a small cost if Trump is reelected but a massive gain if he is not. Conversely if you do not impeach there is a massive cost if Trump is reelected and a small gain if he is not. Why? Because impeachment is about congressional oversight of the behavior of a president. It is a crucial part of the checks and balances of the system of government in the United States.

The crucial part here is that this logic is independent of whether you think impeachment will succeed in removing the president. In fact, I assumed that it will not succeed and that Trump will be able to run in 2020 in any case. Another way of phrasing the analysis is as follows: do not give up on a fundamental principle for tactical gain (here the fundamental principle being congressional oversight). The fundamental principle has huge (infinite) upside/downside whereas tactical gains are always small by comparison.

Albert Wenger is a partner at Union Square Ventures (USV), a New York-based early stage VC firm focused on investing in disruptive networks. USV portfolio companies include: Twitter, Tumblr, Foursquare, Etsy, Kickstarter and Shapeways. Before joining USV, Albert was the president of through the company’s sale to Yahoo. He previously founded or co-founded five companies, including a management consulting firm (in Germany), a hosted data analytics company, a technology subsidiary for Telebanc (now E*Tradebank), an early stage investment firm, and most recently (with his wife), DailyLit, a service for reading books by email or RSS.