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The Madison Avenue Effect

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Imagine a unique creature.

Now, imagine another unique creature. Make this one larger, like an elephant. Make it colorful, like a toucan. Make it smooth, like a frog. Give it a beak.

Imagining the second is a lot easier than the first because the second is familiar. About this big, about this color, etc. Familiarity changes the way we think. Familiar things are ‘more right’.

Here’s how to spot it: “I didn’t know that…”. People have to see it to believe it: Alton Brown in Italy, Richard Thaler saw value theory, Ezra Klein read a blog, and for Marc Andreessen it was Night Rider. For ‘Madison’ it was the movie Splash.

For, The Boy Who Played with Fusion, it was the C.L. Strong and Jearl Walker DIY articles. “When I got a hold of a secondhand CD-ROM collection of those columns, my life changed,” Taylor says. “I realized there were these world-class experiments that cost millions in top laboratories that you could replicate at home.”

The familiar is more accessible. Connections aren’t divine so much as they are historic. Exposure creates creativity seeds. For now we can call this the Madison Avenue Effect.

Words hiding value

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Patrick O’Shaughnessy asks Gaurav Kapadia what makes a great business. It’s all the basic stuff, “but really when you go down to it, if you look at a lot of the great businesses, they’ve created niche monopoly things. No one likes to say it because you’re not allowed to say it.” Kapadia lists at least four monopolies: cable companies, software companies, aircraft engine manufacturers, and medical device companies – but the real insight is no one is allowed to say it.

Names mean competition. If something is unaddressed with words it’s less available as thought and underpriced in cost (the market mechanism).

Our new dictionary series highlights the opposite end of Kapadia’s point. New words new thoughts.

Later Kapadia talks about diversity and inclusion in the investing industry. “I don’t think anyone’s heart is in the wrong place, I think everyone’s heart is in the right place. So we have to stipulate that, people really care, but so many decisions are made by the network. And so the only way you can break down existing network effects is with data.”

For words like monopoly the network has agreed on one meaning, and it’s mispricing. For words like diversity, the network has agreed on one meaning, and again it is mispriced.

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The same week Mike Prada joined Wharton Moneyball and was asked a kind of ‘what’s next in basketball?’ question. One thing Prada pondered was what if Memphis is playing the next form of basketball? There’s no fast break or half court offense, only running. Types of offense thinking, like monopoly and diversity, hides value.

Humans and ratings

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How do we understand a thing? One way is price. More expensive = better mostly works so we use it. But other quantifications aren’t so clear. Temperature, for one. Avalanches too. Calories as well. There’s ‘the thing’ and the challenge is conveying information (and hopefully action!) about it. Here’s two quick examples then an idea.

At Airbnb ‘the thing’ is rating a guest or host. Rather than only stars, they use words too. “With each star,” Jiaona Zhang said “there is a word that accompanies that star, for example, five stars is great and four stars is good. What’s interesting is that something like three stars varies by culture.”

And.

“Predicting something is 3.2 stars is kind of fun if you have an engineering sensibility,” said Todd Yellin of Netflix, “but it would be more useful to talk about dysfunctional families and viral plagues. We wanted to put in more language. We wanted to highlight our personalization because we pride ourselves on putting the right title in front of the right person at the right time.”

Both Airbnb and Netflix use numbers and words to convey information which leads to better matches.

But I feel weird not assigning perfectly fine a perfect score. Like a Keynesian beauty pageant, I don’t want our server-driver-rep to score less relative to their peers! So a perfect score they get.

But what if there was an option for an 11? Besides Spinal Tap who else uses 11 on a 10 point scale? No one. That’s good. There’s no social norm. But sometimes something is an 11 out 10. Sometimes something is above and beyond. Restaurants have easy solution, tip more. But when it comes to rankings maybe humans actually need a way to turn it up to 11.

Thinking fast, associations

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We think fast to understand the world. One form of fast thinking is associations.

One association is the person-institution. A Harvard epidemiologists, an Oxford trained economist, a board certified physician. It’s only through the association that we get the meaning. It’s all short hand. And we need it.

If I check to see if Marc Lipsitch knows what he’s talking about (he does) I’d read his journal articles, and study organic chemistry, and well, that’s the point.

These association are asymmetrical. There is the new thing (Marc) which we are associating with the old thing (Harvard). The new thing is relatively not understood and the old thing is relatively understood. People know a lot more about Harvard than about so-and-so epidemiologists.

An interesting version of this idea came up on NPR. It was about this sound:

This sonic logo was created via an association. HBO (new) wanted to associate itself with television (old). It did that through static. But, as times change so do associations. That old static, though totally irrelevant to modern-digital-cord-cutting-viewers, became associated with HBO.

“It’s become this incredible ritual of sitting down and watching something,” explained head of brand marketing for HBO, Jason Mulderig, “and having this powerful emotional trigger that sets you in this emotional space of anticipation and waiting for what’s going to come next.”

I’ve always disliked the term human biases. They feel more like tendencies. Sometimes those tendencies optimize for short term gains, sometimes not.

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One example of the long term hacking of our tendencies is the Credit Karma program.

May 2022 update, Dan Carlin on this angle but for historical figures.

This time is different: housing

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Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. Warren Buffett 2014

The follow up to “this time is different” is to ask “Why?” Sometimes it is technology, the iPhone allowed location based apps. Sometimes it is the rules, like regulations. Sometimes it is the conditions of the system.

Conor Sen considered if the 202X housing market was like 2006 or if ‘this time is different’.

“The underwriting is so much better. We aren’t seeing the same construction as 2006 because of the supply chain issues. Builders are more conservative. The demographics are stronger. We have broader inflation. It’s harder to see what’s worse now versus then if you’re worried about a bubble situation. I don’t see it, yet. Maybe in a couple of years.”

Sen’s suggestion is that once the demographics change and there’s fewer people then the housing demand will change. The right framing for housing might be: what other ways is there a housing market collapse? We saw the 2006-2010 version:

“It’s impossible”

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Kris surfaced this work and had some excellent notes.

“Impossible things happen fairly often. That doesn’t mean things are actually impossible just that we thought they were impossible. There’s a corollary to this: enough people relying on something being impossible makes that thing more likely in a perverse feedback kind of way.”

Agustin Lebron

We’ve covered this idea: something is always happening. But Agustin furthers the thought. If many people think something is impossible then it is underpriced. Agustin gives the example of the housing crash of 2008. Home values don’t go down, was one impossible pillar. Another was that home values don’t crash across the country. These two impossibles fed certain incentives.

Sports offer a good view on ‘impossible’. There’s always an inevitable team. It’s impossible they lose. Yet the better bettor ‘shorts the narrative‘. The Wharton Moneyball hosts regularly pillory “once in a generation talent” that arrives every other year.

Agustin is a trader but like with Bayesianism, we can adopt the philosophy. Impossible/Inevitable comments are signals of confidence not accuracy, and should be priced accordingly.

Three problem-solving prompts

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1/ What is the asymptotic limit? To be a multi-planet species, says Elon Musk, people will need to design, build, and use reusable rockets. Okay. Is that possible? One way is to think to the limit. “Look at the raw materials of a rocket: aluminum, steel, titanium, Inconel, speciality alloys, copper. Now ask the weight and raw material value. That sets the asymptotic limit for how low the cost and weight can be unless you change the materials.” Musk calls this the magic wand number. What’s the cost if you had a magic wand to rearrange the atoms?

Another way Musk uses limits is to think about scale. Making many versions of a thing is much much harder than one version. This too is a problem for Disney imagineers, writes Kevin Rafferty. Coming up with attractions is fun but the hard work is what Rafferty calls ‘day two problems’. What happens when this thing has to be open for ten hours a day 365 days a year?

2/ Is this a money problem? Starting the cable channel Discovery, John Hendricks had a lot of challenges. One was content, but that was easy. The BBC was willing to sell their documentaries to Hendricks and enjoy the found money. Later Netflix would take this to detrimental consequences to the content providers, but in 1985 Ted Sarandos was managing eight video rental stores in Arizona.

But there was cable regulation working against Hendricks. The deregulation of cable (like with airlines) wasn’t a money problem. Host Guy Raz analogizes it to having a new iced tea and having to call every convenience store operator in America to get on the shelves. Hendricks then had one problem that was a money problem but another that was a political one.

3/ Is this a branding problem? One of the covid lessons ‘we clearly haven’t learned‘ according to Zeynep Tufekci is to follow best practice. “We have everything we need,” she told Ezra Klein, “not a day goes by that I don’t get a pitch for some gimmick, some new mask that is blah blah blah. Thank you, but I just need an N95. I don’t need your new potentially miraculous science.”

This, says Rory Sutherland, is a marketing mistake. Good marketing changes the perceived value without changing the thing. Good marketing is ‘being better than Superman‘. To Tufekci, we’ve not figured this out – yet.

2a March 24 update, winter wheat is the largest wheat crop in the world and that has to be planted in certain places at certain times. Russia’s invasion of Ukraine is going to influence how much the planted wheat can be harvested. This is not a money problem.

Alchemy in the office then at the pump

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“The tricky part of incentive design is that there are noisy signals about what could work and what may not work. For example, when given a hypothetical choice between cash and non-cash incentives, people overwhelming choose the cash incentives but studies consistently show that giving additional compensation in the form of non-cash rewards can be more motivating than cash.”

Kristen Berman, The Science of Change podcast

The basis of Alchemy is to create a lot of of value for a small cost. Alchemy happens for donations, for interest payments, and even for paying for a Peloton. Non-cash incentives are another form of Alchemy: the value of the item is greater than the cost to produce it.

On March 9, 2022 gas in Florida cost $4.19 per gallon. A friend noticed this and stumbled into a bit of Alchemy. His company is creating a mileage reimbursement program for the employees.

A “mileage reimbursement program” moves past a basic cash benefit and into the realm of alchemy because it uses our availability tendency: what’s top of mind is most important. Gas prices are often top of mind thanks to their frequency (and SIZE), but with Russia’s invasion of Ukraine the availability is even greater. And that’s not all! Thanks to our mental accounting we perceive pain at the pump.

A “mileage reimbursement program” is a great idea. It delivers more value than it costs. Here’s a few more:

  • Mother’s Day. There’s no holiday that deserves status elevation more. What if an organization had flowers for moms (or husbands to take home to moms) or bulk ordered a delivery. Hey everyone, at lunch today there’s a signup form if you want to order flowers for your mom. This is kinda tricky because if gifts are too easy they lose some impact.
  • Annual bonus. There’s alchemy calling it a “Christmas” rather than “end of year” bonus.
  • Four day workweeks. Businesses have some quantity of work that’s divided into some number of days. Divide those two for a rate. Reducing the number of days means the rate must rise, but many employees find this a fair trade as evidenced by the work-from-home success.

The original advertising alchemist, Rory Sutherland, noted that organizations often optimize the wrong metrics. Don’t make the trains run faster, which is very costly, Sutherland said, if you can make them more enjoyable for much less. A place to sit, a plug to use, and a coffee to drink go a long way for a small cost. That’s alchemy. Find something to provide that has an outsized impact.

An Acquisition Anonymous Amoeba

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This post is best viewed on a tablet or computer window.

There is a business. It sells things. From the outside it looks just like a business should.

But.

This business has something.

This business has potential.

Who notices the potential?

Maybe the current owner. Maybe she knows that some parts are humming along and some parts need some work. Maybe she’s up for it.

Maybe she’s not.

The gap between the business and the potential is the acquisition appeal. Another person sees this. Another person wants to buy the business from the owner and grow the business.

They want the business to reach its potential.

They have ideas.

Even better, they have cash.

Hopefully they have experience too.

Experience matters because some parts of the business are at their potential. “Do not change these things” the buyer’s silent voice says. “Just because you can doesn’t mean you should. Don’t just do something, sit there.”

“Look here” says the silent voice, “work on this.” The buyer looks. Over there the business has not reached its potential. Over there is the success gap. “Work there,” says the silent voice.

This post came about after listening to a lot of the Acquisitions Anonymous podcast. Businesses truly are unique opportunities and success seems to come from someone having the time, space, and skills to notice where a business can grow and where it cannot. Technology sometimes helps a lot and sometimes doesn’t (though behind the scenes it seems like it always helps). Hire sales and scale sometimes works, and sometimes doesn’t. E-commerce best practices sometimes help a lot, but sometimes a business is at its potential.

And sadly, my favorite brunch place no longer has the digital queue. Servers slinging names is the potential.

An hour wait at Disney

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You are at Disney. You planned ahead. You open Touring Plans (theme park visit optimizing software). Here’s how the creator thinks about what you see.

“Let’s say we were trying to predict what (wait time) Disney is posting for Rock ‘n’ Roller Coaster at Disney’s Hollywood Studios. We have to do two things. We have to predict the number Disney is going to show on the wait time sign in front of the ride, and then we have to predict the actual wait time. We have to predict both because if we showed only our expected wait time and you walk up to the ride and see the posted wait time is sixty minutes and we are predicting five minutes, then you won’t believe our number.” – Len Testa, Causal Inference, October 2021

Like weather reports or repair times, Testa and his team generate more value by being less accurate.

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In the fall of 2021 Disney released a similar feature to what Testa created: Genie. It will be an interesting TiVo problem .