Greedy capitalists save lives in Africa

Venture backed Zipline.com is saving lives in Africa by using Unmanned Aerial Vehicles (UAVs) to deliver blood to African hospitals that can’t stock all the necessary blood types. They have two bases which cover a 100 mile flight range and a drop zone the size of only two parking spots. The drones are pre-programmed, and fly 65 mph which results in 15-20 minute average delivery times.

If Lectures and books don't work; try this instead

Books and lectures are remarkably bad at conveying information.  Try this instead:

If pressed, many lecturers would offer a more plausible cognitive model: understanding actually comes after the lecture, when attendees solve problem sets, write essays, etc. ... Listeners’ attention wanders after a few minutes, so wouldn’t we want to interleave the problem-solving sessions with the lecture?... to understand something, you must actively engage with it.

Can't Even Trust Man's Best Friend

Principal/Agent Problem: Your "employees" can be bribed by those they are supposed to protect you against.

Concentration Increasing?

There have been reports that industry concentration has been rising in the US. If so, firms will tend to have more market power that allows them to set higher margins. If so, those lazy antitrusters need to wake up and protect competition.

But it all turns out how you define the market. As my students all know, markets can be defined in relation to three dimensions: product characteristics, level of geography, and unit of time. A new paper by Rossi-Hansberg, Sarte, and Trachter examines the data at a more local level. While national concentration measures are rising slightly, more local measures are declining. This is consistent with ever more competition (although there have been claims that product differentiation is increasing). 

Perhaps the antitrust bureaucrats can go back to their naps.

Hat tip: The Grumpy Economist

Addicts respond to incentives

Great post from MarginalRevolution.com:

I always get excited when people surprise me by acting against their self interest.  In this case, when Purdue Pharma replaced their OxyContin drug with a new, anti-abuse version that was more difficult to turn into an injectable, demand fell precipitously.

The addicts whose demand fell were aided and abetted by about 40% of physicians, who switched patients to more easily abused opiates.

BRAVO to Purdue Pharma!
 

Self promotion

Why don't insurers try to mitigate risk?

Allison Shrager's terrific book, An Economist Walks into a Brothel, contains all sorts of innovative risk mitigation strategies pursued by people in all walks of life (see earlier blog post, How are Jet Skis like Financial Derivatives).  So why don't insurance companies spend more time figuring out how to mitigate risk?

The answer is simple:  Risk mitigation is not a source of "sustainable competitive advantage:"

Argument #4: mitigation is easy to copy. Underwriting risk selection is much less tangible and secrets can be a protected source of advantage. People can reverse engineer a dongle but not underwriting strategy. Once copied mitigation provides a one-off benefit to the market, changing the rate level but not the profit level (bit of a negative inventive because lower claims means lower premium and so less float!).

 Instead, insurers spend most of their time classifying risks (classification strategies are proprietary) which offers the benefits of diversification:

Argument #3: Improved classification allows for stratification and so diversification. Insurers are diversifiers. If you can segregate genuinely distinct classes of risk, portfolio volatility will drop.

How Uber economists create value

Marketing in China is different [updated]

Article documenting US/Chinese differences in marketing:

• China merchants have access to consumers over many different media:

... most notably, Baidu, Alibaba, and Tencent, which together are known by the acronym BAT. To put this in a Western context, imagine if Amazon, Bank of America, Google, Facebook, Activision Blizzard, CNN, and ESPN were all owned by one company. That’s essentially how the big conglomerates work in China, with the BAT companies controlling most of the digital content across industries. 

[This kind of consolidation allows for data collection that most westerners would find objectionable; but consolidation makes it possible for cross-platform programs to engage consumers seamlessly on a variety of media.]

• Chinese companies have low discount rates

“Chinese companies have a growth mindset,” explained Hai Ye, a partner at McKinsey & Company. “Many of them can tolerate relatively low profitability in order to scale up quickly. This difference—driving market share versus bottom-line profit—gives the Chinese companies an advantage because they are willing to make big investments and take short-term losses to achieve long-term dominance.”



• Speed-to-market is a huge priority:

Danielle Jin of Visa recalled how she approached her job when she worked as a marketer in the U.S. consumer packaged goods industry. “We would sit down with Walmart one to two years in advance and think about what seasonal promotion we would want to have,” she said. “We would have a thought-out calendar that centered primarily on price promotions—a system and process created over decades that was based on a somewhat rigid planning process.” By contrast, she explained, “a marketer with a Chinese mindset would talk about creating seamless content that cut across multiple platforms and was temporally relevant" [weeks, not years].



• Bottom Line: Certainly US marketers could learn a lot from China.  But it is not clear that these techniques would work in the US, for at least three reasons
1. Privacy concerns would prevent much of the data collection and sharing that is prevalent in China.  
2. Antitrust Laws would likely prevent the kind of media consolidation that makes much of this possible 
3. Older (mature) firms in the US where the struggle is to steal share rather than grow the market, mean that speed and growth may not be as important as profit [think Prisoners' Pricing Dilemma] 

UPDATE FROM JUSTIN:

• Up until the last few years, the cost of capital/ loans was low.  Competitors that couldn’t beat you on quality and profit margins would go for scale and top line numbers. This results in everyone going opting for the top line. Contributing to this are state owned enterprises who are in every industry and tasked with top line growth, not profit margins.

• China is also really new at marketing. Most of the big sales companies are distributors who have only sold existing, western brands so they don’t have experience building brands themselves. If you think about the biggest Chinese brands, they are known for their size, not their crafty branding. 

• There is also a thing in China about “face.”  You can call it honor, prestige, or ego. Whatever it is, the biggest is seen as the strongest. I am working on launching a brand in China right now and I just had dinner two nights ago with my friend / distributor. We both agree that we would prefer to launch in tier 2 & 3 cities and get a bigger margin than fight it out in the more competitive tier 1 cities and lose money. As a Chinese guy once told my dad, “Sometimes we save face, but lose ass.”

What do jet skis have in common with financial derivatives?

They are both safety devices:  just as jet ski's make it possible for surfers to ride 80-foot waves in relative safety, so too can financial derivatives make it possible for investors to make big investments by offloading some of the downside risk.

This analogy was taken from An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk. The best part about the book are the interviews with people like prostitutes, big wave surfers and professional photographers who discuss ways they manage risk:

In An Economist Walks into a Brothel, Schrager equips readers with five principles for dealing with risk, principles used by some of the world's most interesting risk takers. For instance, she interviews a professional poker player about how to stay rational when the stakes are high, a paparazzo in Manhattan about how to spot different kinds of risk, horse breeders in Kentucky about how to diversify risk and minimize losses, and a war general who led troops in Iraq about how to prepare for what we don't see coming.

It starts off slowly, but stick with it.  Highly recommended, and not just for finance students.

Reason podcast discussing book