One of the best way to find deals in life is to find things where people have attached the wrong proxy metric.
- In baseball, Billy Beane noted that walks are better than hits.
- In economics, Tyler Cowen wonders if math GRE scores have become too powerful.
- In retirement, people need to think about their chronological and biological age.
In any systems where we count things (scores, hits, years, etc.) we optimize. People buy more fuel efficient cars rather than consider riding a bike, carpooling to work, or calling an Uber. If it’s counted, it’s prioritized. “Personally, I feel it has gone too far in that direction, and economics has overinvested in one very particular kind of intelligence,” laments Cowen.
How do people find new metrics?
Creativity. It takes a certain worldview to see that there might be a better way. Like the vertical-horizon illusion but for our worldview.
New counting techniques. Sports changed, and is changing, when data collection (e.g. cameras) changed. Math ability is easy to quantify, so we do.
Career capital. Jason Blum outfitted a van as a mobile office because he spent so much time in Los Angeles traffic. From there he made calls to directors who had recently flopped and asked if they wanted to make movies for his company, Blumhouse Productions. In an industry where ego rules too many decisions, Blum only had to answer to himself.
Ties to history. Since 1987, the NFL combine has been held in Indianapolis. With activities like the 40-yard dash, 20-yard shuffle, and 3-cone drill it’s an annual tradition for fans and front-offices. But those tests have less predictive power than collegiate performance. Yet the show goes on.
First principles. Of the many flaws highlighted in Bad Blood, was a lack of scientific understanding from the Theranos investors. “Since he didn’t have the expertise to vet her scientific claims,” John Carreyrou wrote, “Parloff interviewed the prominent members of her board of directors and effectively relied on them as character witnesses.”
Front lines. Proxies exist to make things easy, but business doesn’t exist on a spreadsheet. Alain Bertaud said ” By living in the cities, and confronted very early, I learned the difference between the theory about a city which you read books and what it means to live in a city.”
Perhaps Rory Sutherland, of course, put it best. Too many people, Rory reasoned, think of art as something you hang on a wall. It’s something famed and famous. It’s by a so-and-so from a certain era. It’s recognizable. That. Is. Art.
Unless it’s not. Architecture is also art, and because people don’t think of homes that way, they may be undervalued. Sutherland thinks so:
“Human decision making is also pretty path-dependent. In one case in my life I’ve been able to profit from this. I live in a house, which in the UK is something called Grade 1 listed. It’s by the great eighteenth century Robert Adam, and the grounds are by Capability Brown. I’m in a four bedroom flat on the roof of a house built for the doctor of George III in about 1785. For a time it was the home of Napoleon III.”
Want more? Check out this pay-what-you-want placebo prescription pdf.
5 thoughts on “Appropriate Proxies”
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[…] Appropriate Proxies (Mike Dariano, The Waiter’s Pad) – One of the best ways to find a good deal or a great business opportunity is to identify situations where people have attached the wrong “proxy metric” to measure success and come up with not just a way to do it better but a better metric to measure what is really meaningful. For instance, Billy Beane transformed baseball coaching by recognizing how walks can be better than hits, economics professor Tyler Cowen has raised the question of whether math GRE scores have become too overweighted in business schools, or in the context of financial advisors, most people think in terms of their chronological age of when to retire but not necessarily their ‘biological’ age based on the current health of their body. At its core is the simple recognition that wherever we can “count” something, we then begin to measure it, and optimize in an effort to improve that “score”. In the context of the advisory industry, there is perhaps no greater example than the AUM metric, which is both widely cited as not only a measurement of a firm’s size but also its implied significance/relevance/prowess and also widely criticized as actually being a poor measure of quality for what clients actually receive. Which raises the question: what metrics do you use to measure success or determine where to focus in your advisory business, is that really the right and best measure of success, what to prioritize, and where to focus, and if not, what would be a better proxy to measure? […]
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