Managerial Econ
Economic Analysis of Business Practice
Friday, July 18, 2025
“𝗜 𝘄𝗮𝗻𝘁 𝘆𝗼𝘂 𝘁𝗼 𝗰𝗹𝗼𝘀𝗲 𝘆𝗼𝘂𝗿 𝗰𝗼𝗺𝗽𝘂𝘁𝗲𝗿, 𝗰𝗼𝗺𝗲 𝘀𝗶𝘁 𝗯𝘆 𝗺𝗲, 𝗮𝗻𝗱 𝘁𝗲𝗹𝗹 𝗺𝗲 𝘄𝗵𝘆 𝗜 𝘀𝗵𝗼𝘂𝗹𝗱 𝗶𝗻𝘃𝗲𝘀𝘁 𝗶𝗻 𝘆𝗼𝘂.”
I was 31 - a farm kid from Mississippi, sweating through my suit jacket at Rockefeller Center in New York. I’d already been rejected by Nashville investors: “Too young, too risky, too small to compete.” This felt like my last shot.
Ten minutes into my polished pitch, Ted McCourtney, Senior Partner at Venrock, asked his team to leave. Then he told me, “I'm already an investor in your biggest competitor. Why should I bet on you?”
I knew the deck wouldn’t save me. So I just told the truth.
I shared how I grew up on a rural farm. Joined the Army to pay for college. And then I said:
“Mr. McCourtney, I’ve mortgaged my home and my family farm to start this. If I fail, I lose everything. If I fail, you lose a fraction of a percent of your holdings. I’m all in. This cannot fail.”
He listened quietly. Then he brought his assistant back in and said, “We’re going to back Michael.”
Years later, after we’d successfully sold the company, I asked him why.
He said “Michael, I rarely see such naive honesty in New York. Given your story and what you had on the line, I knew you were a good bet.”
LESSON: Venture Capital investing is inherently uncertain. Investors like Ted McCourtney have to guard against moral hazard (will the entrepreneur act in the best interests of the investor) and adverse selection (if other investors turned him down, I must be missing something). But the entrepreneur's revelation that if he failed, he would lose everything, assured the investor that his goals were aligned with those of the investor.
CREDIT: Professor Michael Burcham
Mowing Your Own Lawn
Roland Fryer has a nice opinion piece in the WSJ about "The Economics of DIY." He points out that even wealthy people tend to do household chores that they could affordably outsource. He relates an incident:
When a friend invited me to play golf and I declined because the yard needed mowing, he didn’t hide his disbelief. “You can pay someone to cut your lawn,” he said, “but you can’t pay someone to have fun for you.”
At first blush, it seems as though the tenured Harvard economics professor mowing his own grass needs a refresher in cost-benefit analysis. But he points out that many of the benefits of DIY are often hidden and ill-defined while the costs are fixed and precise. Three economic concepts help to better understand some hidden benefits.
Diminishing Marginal Utility - The value of an activity falls as you do more. In his example, when time with his kids is short, he frees up time by outsourcing more - cooking, cleaning, ride-sharing, etc. The cost of the meal, the maid, or the ride is fully observable. The value of the time shared is less amenable to an accounting ledger.
Experiential Utility - There is often pride in doing. We value our ability to do things and we recognize these talents in others.We admire the craftsmanship in DIY car restoration, woodworking, quilting, or calligraphy. Hobbies can be fun. Moreover, there can be joy in seeing yourself improve. And the nostalgia of learning from an elder can bring back fond memories.
Signaling - Cutting the lawn sends a signal to your neighbors and yourself. You are the kind of person who takes care of things, who others can look on with admiration for the care you take. You provide positive externalities.
Thursday, July 17, 2025
The zero-sum fallacy: trade, immigration
MarginalRevolution explains much of our current political conflict as a mistaken belief in the zero-sum fallacy:
Zero sum thinking fuels support for trade protection: if other countries gain, we must be losing. It drives opposition to immigration: if immigrants benefit, natives must suffer. And it even helps explain hostility toward universities and the desire to cut science funding. For the zero-sum thinker, there’s no such thing as a public good or even a shared national interest—only “us” versus “them.” In this framework, funding top universities isn’t investing in cancer research; it’s enriching elites at everyone else’s expense. ...
Monday, July 7, 2025
Technologies that Drastically Alter Costs Could also Drastically Alter Processes
Austin Vernon has posted an amazing analysis of how AI is transforming logistics. Even before he get to the implications of AI, there is lots of information about current cost structures.
Autonomous trucks and last mile delivery by drone don't need drivers, which reduces the costs. They also don't need systems to sustain drivers, e.g., climate control, rest periods, meals, etc. which reduces costs further. To fully appreciate the savings, the way that things get from manufacturer to consumer may drastically change.
- Truck drivers are a fixed cost meaning you want defray these costs with big shipments often with agglomerations of items. Without the fixed costs of drivers, the efficient vehicle size could be smaller and agglomerating packages into shipments is no longer necessary. This means there may be much less need for warehousing as smaller robot vehicles can ship directly from producer to retailer.
- Likewise, last mile delivery is currently drone by trucks with many packages to many customers, a logistical challenge. Smaller drones are quickly becoming cost effective alternatives that deliver to a single location and return, representing simpler logistical processes.
Vernon claims that both the direct costs reductions and the indirect cost savings from re-engineering the delivery process could eventually reduce logistics costs as much as 90%.
Tuesday, June 24, 2025
Middling professor opines on deregulation, wealth creation, benefit-cost analysis
https://www.youtube.com/watch?v=wOFPggYsKfc
Saturday, June 21, 2025
Anchor Shock Pricing: How Vail makes most of its money
In 2008, 65% of skiers at Vail Resorts bought single-day lift tickets. Today, 75% of their customers purchase season passes, committing thousands of dollars months before the first snowfall.
Wednesday, June 18, 2025
PolyMarket.com predicts outcomes of Israel-Iran conflict
Probability Event
66% US Military action against Iran by July?
59% Khameni out as Supreme Leader of Iran by 2025?
59% Fordow nuclear facility destroyed before July?
--------UPDATED Jun 18, 2025 (link)---------
Saturday, June 14, 2025
Weaker incentives in unionized plants make them more likely to close
- 26% less likely to offer performance-based bonuses.
- 11% less likely to promote based on performance
- 13% less likely to dismiss workers for poor performance.
- Higher rates of business closures,
- lower investment
- slower employment growth
Thursday, June 12, 2025
Monday, June 9, 2025
President Trump's deregulation
President Trump must have read Chapter Two:
- Voluntary Transactions create wealth by moving assets to higher-valued uses;
- Taxes, price controls, subsidies, and regualtion destroy wealth by preventing assets from moving to higher-valued uses.
[The deregulatory] plank of the Trump agenda has been eclipsed by drama over tariffs and the Republican tax bill, though it is economically as important and moving far faster. ...
Alaska has become the symbol of the effort, in part because, as ... Mr. Biden infamously directed more than 70 orders and actions at killing development in the state ...
Whereas it normally takes an agency years to repeal a few rules, the Energy Department had taken 47 deregulatory actions by mid-May, axing rules governing appliances, motors and heating and power equipment—saving consumers and business $11 billion. ...
Mr. Biden is estimated to have added more than $2 trillion in regulatory burdens to the economy over his four years. ... the Trump deregulation effort is going to be as central to any economic revival. Inside Alaska, and out.
I hope that Ms. Strassel writes about the President's deregulatory moves in other areas:
- Making it easier to develop nuclear power (link)
- Deregulating supersonic flight (we should be flying to London in two hours) (link)
- Deregulating Financial Technology (Fin Tech) that will increase innovation in banking services. (link)