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Escaping College and Commodity Competition

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When one product is similar to another there is competition. Businesses which compete on price lead to low-cost-high-volume winners. Thankfully, being dissimilar isn’t difficult. Many brands (Advil, Coca-Cola, Harvard) differentiate commodities by framing the context.

Differentiation avoids the market mechanism. But that doesn’t mean things will be easy. Being the low-cost provider or being different both take extreme amounts of work. That said, jobs-to-be-done thinking may lead to a slightly easier slog

The JTBD idea is updated on Twitter, but Michael Horn’s TAG brought up an easy idea for escaping competition. Instead of asking who are your customers, ask what do customers want?

Typically businesses count things. This is easy data. Plus, the more math the less career risk: a bit of math in itself.

Through their book, Choosing College, Horn and Bob Moesta encourage people to think about new categories. To count less and consider more. Get past demographics (high school graduate) and to demands (level-up).

What is the demographic profile of someone who eats at Panera Bread? That’s a hard question. However, what’s the JTBD of someone who eats at Panera Bread? That’s easier. Ron Shaich explained that Panera is “the kind of space where you want to sit and do an interview, a place for a bible study group, for a team meeting.” 

People hire Panera for group space and bagel spreads. That’s the JTBD. That’s the differentiation.

Being different is easier—though not easy—because it offers many directions. If a business competes on price, that’s it. If a business finds a new JTBD they might have that market all to themselves, temporarily.

Is Jack Reacher a Bayesian?

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We’ve covered why Jack Reacher would be a good financial advisor. In A Wanted Man, Reacher once again proves his mettle. To set the scene, we’ve got two bad guys (we think) on the run from our two heroes (we think). It’s rural Iowa and Reacher and Hero Two need to figure out which way the troublemakers fled.

Reacher, a man of action, says they have to act fast.

“Now? They could be in a million different places.”

“So it’s time to gamble. Before I get taken off this thing. Or supervised. One or the other is sure to happen first thing in the morning. That’s what maximum effort means. So suppose the two guys are still on the road?”

“But which road? There are a million roads.”

“Suppose they stayed on the Interstate?”

“Would they?”

“They’re probably not local. They’re probably running home right now, which could be a big distance.”

“In which direction?”

“Either one.”

“You said they might be traveling separately.”

“It’s a possibility, but a small one. Statistics show most paired perpetrators stick together after the commission of a serious crime. Human nature. They don’t necessarily trust each other to deal with the aftermath.”

“Statistics?”

“We find them to be a useful guide.”

Part-of-what-makes the Reacher books so popular is his fists the size of supermarket chickens. Part is his modern day sleuthing. Reacher is curious and he notices things. If he took the stairs at 22B Baker Street—two at a time, of course—he’d know how many there were. Part of the reason is Reacher’s knowledge of base rates.

Julia Galef explained Bayesian thinking this ways: “It’s important to pay attention to these snowflakes of evidence that maybe weigh very little on their own but if you pay attention to them and notice how they accumulate, their collective weight becomes enough to break a tree branch.”

Median and Average Meanings

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There’s a story about Bill Gates’s wealth and height you’ve probably heard. If not, let’s quickly share it here. If Gates were to walk into a room of you and twenty-five friends, the difference in average height and median height would be small.

However, the difference in average income and median income would be large. Gates’s wealth raises the mean because it’s relatively ginormous. Even in a room of millionaires, Gate’s presence changes the average from one-million to four-billion. That’s a lot.

This story is helpful to keep in mind because averages hide nuances.

In 2016, the average student loan debt was $37,000. However, the median figure was $17,000 and one-fourth of all borrowers owed less than $7,000. Part-of-the-reason the average is so far from the median is because of graduate school, one-in-four post-graduation debt-holders had more than one-hundred thousand dollars in debt. My wife attended medical school, and I can attest to the amount.

This median approach might paint a rosier picture.

Retirement accounts show the same point, only in the opposite direction. The average balances is $100K whereas the median is $24K.

“Often an average is such an oversimplification that it is worse than useless.”

How to Lie…

Average can become an If/Then word. If the average is presented, then we can attempt to find the median as well. Bill Gates will be our patron saint here. Imagine him, staning with a Diet Coke in hand, reminding you to find the median too.

Another fun part of you and twenty-five friends is “the birthday bet”.

Argue Zell

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One trait of great business leaders (seems to be) a willingness to hear dissenting opinions. It takes a seed of humility that will sprout a culture where ‘arguing well’ can survive.

Michigan Dean, Scott DeRue told Sam Zell: “I’ve met a number of your employees and one of the things that’s universal when they talk about what it’s like to work with, and for, Sam is that it’s not always easy. You will challenge them but they know that you believe in them.” To which Zell replied:

“You don’t kill the messenger. As I say to my people all the time, take me on. I’m not afraid to defend my position and neither should you.”

Sam Zell

This has been important, Zell explained, because he’s been “business agnostic.” Investments in twenty different industries (“it could have been forty”) means that Zell has to think on the fly. As such, “No one is quicker to admit they’re wrong than I am.”

Yet, as people this is hard. It’s difficult to separate I was dumb from That was dumb. In th wrong culture it’s impossible

As Zell put it, “I’m not afraid to defend my position and neither should you.” I think it was Kara Swisher who said that when she hears someone say, ‘I like to be challenged’ they really don’t. To her it’s a red flag. Partly because, good arguments are difficult to do well. Yet in the right place, it’s possible and as Zell proves, profitable, to argue well.

Other quotes from Zell:

  • On Risk, “If my watch has one moving part then it has a very small probability of not working. If my watch has fifty moving parts then there would be another forty-nine potential reasons it didn’t work.“
  • Risk, again. “I only want to be right seventy percent of the time. The real key is how wrong are you on the thirty percent.”
  • Leaving money on the table, “I think that a great deal of my financial success is directly related to the fact that we’ve been long-term players.”
  • Being different, “Look at everyone the Forbes 400 who didn’t inheret money. Everybody went left when conventional wisdom said to go right.” & “There are very few examples of high margin businesses that are done by everybody.”
  • Skill and luck, “I think ninety percent of success is accidental. Accidental in terms of the opportunity arising, not accidental in terms of people’s understanding and willingness to take it up.”
  • Action, “My advice to everyone is to become a profesional opportunist.”

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Made up Start up: FinLit Deposit

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No one is happy with financial literacy. Maybe it’s the questions researchers ask, maybe it’s a generational thing, maybe it’s soft skills. It’s probably a lot of things.

Part-of-the-reason we don’t have a great idea is because we don’t have a great way to test it. A lot of FinLit research follows these steps:

  1. A natural experiment occurs. Sometimes it’s in time. One cohort has no mandate, another has the mandate. Alternatively it could be a law in one state, but not a neighbor.
  2. Students get some combination of classes, videos, etc. To me the treatment seems weak, but you be the judge.
  3. Students answer questions about what they learned.

This structure suffers because it measures what’s easy rather than what’s meaningful. What if we reversed this? What if instead of prioritizing measurement, we prioritizied meaningfulness?

For our start up FinLit Deposit, we’d give every student $100 the first week. If they have at least $100 in the account each subsequent week, they get $25 more. If the account dips below that amount, no deposit. If it recovers, the deposits begin again.

This systems offers students real choices with real money. Save or spend. Invest or rest. Investors often note that paper trading is not the same emotional ballpark as real money. That should apply here too.

We could partially fund this with a grant that studies decision making. What if some kids got physical bills–good day Mr. Franklin- and others direct deposit. Dollars to doughnuts, I’d wager that the mentally accounting will differ.

If grants aren’t available to kickstart this start-up, let’s get some public money. Athletic scholarship total almost $3B. Academic and need scholarships are in the tens of billions. There’s already (!!) $630M spent on financial education. That’s already $200 for each senior. What’s wild is we already do these these kinds of things.

Young people tend to not be great decision makers. So what. No one is fully optimal. If our hypothetical students spend their semester of savings on a concert is that much different than their parents tax-refund choices?

The only problem I see in this is how FinLit Deposit actually makes money. Maybe some financial literacy program actually teaches that.

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Update 2/6/2020

Special Numbers for Special People

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Brent Beshore says that people are messy. They’re weird too.

Part of the fun of social science research is putting people in situations and seeing what they do. We think people are weird because these experimental conditions have logical rigidity. It’s a world where A < B and B < C and no-way-Jose can C > A.

One way to think about this is the Illusion of Control. One paper is the Irwin and Goodwin, Special Random Numbers.

Here’s an experiment. Ask one group of individuals to choose three numbers for a lottery. Assign another group of individuals three numbers for the same lottery. Then announce to both groups that there was a such-and-such mistake. Note: a such-and-such mistake is a sign that you may be in a social science experiment.

To remedy the mistake, everyone can switch to a new set of numbers. (But wait, there’s more). The kind researchers are offering a new lottery, for those that choose new numbers, with even better odds of winning.

The punchline is that the people who choose their numbers tend to keep their numbers.

If that weren’t enough, people will bet more if they are given random numbers with meaning. “We establish that numbers generated randomly by certain systems (e.g., dates and names) are preferred to gambles of equal expected values and equal (lack of) control.”

The author’s guess, “It is possible that propensity (and associated enjoyment) underlies other types of decisions as well. For instance, very old brand names are preferred by many consumers, and enjoy a price premium. This premium holds even for commodities.”

People like what we like. People like repetition over logic. People are weird.

However, this environment is kinda weird. Normally we choose things for a reason, and if it’s because numbers represent our cat’s birthday then so-be-it.

People are weird, so let’s deal with it. Business owners, investors, and entrepreneurs alike should remember that people are messy and people are weird. We’ll give Irwin and Goodwin the final word: “our results suggest that, in general, trying to educate people away from these types of decisions will be difficult and not easily accomplished via logical arguments aimed at beliefs.”

Instead, try stories. It works for vino don’t you know.

$5.00 Contribution

Big Game Gambling

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On Bet The Process, Rufus Peabody, Jeff Ma, and John Murray of the Westgate Casino talk honestly about betting. The podcast reminds me of Econtalk. Rather than simple narrative answers, the true answer is some version of, well, it depends. The Big Football Game offers a chance to think about decision making and our bias to thinking that something specific will happen.

People are pretty terrible at weighing opportunity cost. Deciding on this or that is much easier than coming up with a list of options. Walk into any high school and you’ll hear students protest a fill-in-the-blank test when they expected a multiple choice version.

With the upcoming Big Football Game, recreational bettors in Las Vegas and other states will start to make prop-bets. Props, Murray said, were invented to make blowouts interesting. The 2020 Big Game, for example, offers a chance to bet if a fumble is lost in the second half (No, -150).

Make it interesting and immediate thinking lead to a tendency of people to bet for something to happen. Murray said, “The public will bet yes, yes, yes on everything in the prop markets.”

Rufus Peabody, former-prop-bet-gambler-extraordinaire, said that the bet of ‘no safety’ always has positive value. It’s easy for people to remember a past safety, envision a future one, or construct a narrative about someone’s defense chasing down someone else’s quarterback.

We remember the somethings that did happen rather than the one thing that didn’t.

With that in mind, let me give you a sure thing. The best over bet, will be to bet on overeating.

Solve for the Equilibrium: Facebook

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One of Tyler Cowen’s most powerful ideas is to have a little person that sits on your shoulder. In one talk he explained it this way:

“Carrying around phantoms and daemons is advice I typically give to my students. When I teach them, I’m trying to teach them some content but most of all I’m trying to teach them to have a phantom Tyler Cowen on their shoulder so when they go through life they can consult with the phantom Tyler Cowen because the real Tyler Cowen won’t be there…It’s very useful to have a phantom of someone on your shoulder to respond to what ideas you might have.”

Tyler Cowen

One way we can all have a phantom Tyler with us is to solve for the equilibrium. This common prompt on his blog, Marginal Revolution, is a shorthand (as I read it) for asking and then what? Cowen is exceptional at this. When Brendan Wallace asks Tyler about Facebook addressing the misinformation problem, Cowens says that’s a very difficult question. Then he solves for the equilibrium:

“Here’s how I think of the world we live in. Due to the Internet every possible thing that can be said, will be said. Every video that can be made, whether it’s real or fake, will be made. Every charge that can be leveled. Every conspiracy theory that can be imagined. It will be out there.

“The question is, do you want to regulate Facebook heavily and push it into more obscure corners of the internet? I would say in the short run that decision will look pretty good, people will find it harder to get to, but over the medium term there will arise websites. One of them might be called ‘all the really good stuff you can’t get on Facebook’ and it will be very popular. So I actually favor some continued version of the status quo.”

Tyler Cowen

To solve for the equilibrium means to think like Hans Rosling, who reminded people the world can be not-great but also getting better. Too often we conserve mental energies. If X is bad then not-X is good. Well, maybe not.

Diet contrasts this clearly. If eating meat is bad, that means vegan foods like Oreos, Doritos, and Coca-Cola must be good. Well, maybe not.

Facebook clearly has a problem, but how to react isn’t. Instead of reacting, we can consult our phantom Tyler. What will happen immediately? What will happen in the mid-term? These questions may not have lead us to change our mind but we will be wiser for doing it.

Sometimes it’s difficult not to act. However there are many cases when we should don’t just do something, sit there. That and a few other helpful ideas are in my Idea Trails book.

Netflix’s Two Customers

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‘Who is my customer?’ is a key business question and the ways a company looks at that question influences its approach. For Reed Hastings the question is oriented around media consumers and media producers.

The consumers.

These two stakeholders influence the strategy. About the 1.5X speed feature that so many railed against, Hastings said, “it’s an experiment, we’re always doing experiments to see if consumers even care about that. If consumers cared a lot we would go and talk with creators and see the use cases.”

The future of competition will be measured, Hastings said, in, “How do consumers vote with their evenings?” And there will be a lot of voters. Hastings gets this, When host Andrew Ross Sorkin addresses the international market Hastings notes that “It’s not one market.”

Population tailwinds have built many great business: Coca-Cola and Hershey. As people move from the land of linear TV to on-demand the number of consumers will grow and Netflix wants to serve some of them.

The producers.

One of the early advantages Netflix offered producers of content was control. Ted Sarandos said that part-of-the-reason they won the House of Cards bid was because they ordered a full-season and promised not to interfere. This is part of Jason Blum’s advantage too.

When asked why somoene can’t just copy what he does, Blum replied, “It’s very hard for producers and executives in Hollywood to get out of their own way.”

It almost sounds as-if the Netflix strategy is out of a movie: if you build it they will come.

A few other quotes I liked:

  • “A bubble has to go down again…linear TV is both a huge revenue and time source that’s declining and that’s fueling the growth of all the internet services.”
  • “We’ll continue to push the edge in entertainment (and have content) that people feel is unusual, something they haven’t seen before.”
  • “The original quote was that we compete more with Fortnite than HBO meaning that Fortnite gets a lot more hours of viewing…but we don’t compete with Fortnite by doing something like that because we’re not very good at that. We compete by doing the most amazing TV shows you’ve ever seen.”

A New POV

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A new perspective can be invaluable. One expression is that a change in point-of-view is worth forty IQ.

In her Masters in Business podcast with Barry Ritholtz, Barbara Tversky highlighted research about design and creativity. She said:

“In order to design we have to get rid of old ways and think in new ways. We just finished an experiment asking people to think of new ways to use old things. The good answers come at about the ninth answer. The way we got people to generate these new ideas—how to use an umbrella in a creative way—was to ask them to think of differing roles of people. How would a doctor use this? How would a gardener?”

Barbara Tversky

Host Barry Ritholtz said it reminded him of the props portion of Whose Line is it Anyway.

A new perspective tends to help because it’s a new way to look at an issue. Even though we may be well versed in an area, we also may be on a blocked trail. Our familiarity with one path could be our hinderance.

When Bill Gates was asked why he could contribute to something like polio research, besides just dollars, he said that sunk costs and biases seep in along with the work. Instead there has to be an outside perspective that asks, have you considered this?

Part of the reason comedy, like Whose Line, works so well is because it offers a contrast from a different point of view. Ricky Gervais’s joke about guitar lessons is just that. He reframes Twitter into a physical message board. He reframes followers as passersby.

It’s great to hear about Tversky research because it provides a framework for how this can happen. Think of ten jobs, pretend you’re that person, come up with one answer for each. That’s it.

Other quotes from Tversky I liked:

  • “We have to learn routines to get through the day. If everything is a new problem it’s going to take too long.”
  • “Memories start getting distorted the minute you use language because they don’t happen in language.”