REPOST: Screening out the "social" entrepreneurs

Funding early stage ventures presents a HUGE adverse selection problem:  How do capitalists find the twenty-something entrepreneur committed to making money for his or her investors, and screen out those who want to be entrepreneurs because it supports their lifestyle?  Here are four different ways:

•  Mr Hommels employs a subtle test of character. During a chat about funding, he deliberately changes the subject. “The cool entrepreneur will immediately get back to the topic and not be a social talker,” he reckons. “The good ones are more focused.”

• Mr Lobato’s test is more direct. “I get edgy and unpleasant,” he says. “I want to see what their reaction is. For them, I’m a means to an end. It shouldn’t matter how unpleasant I get. I want to see that they behave rationally and understand they need to get what they need to succeed.”

• Danny Rimer, a partner at Index Ventures, a global tech fund, says an obvious turn off is an entrepreneur keen to discuss a quick “exit”. He doesn’t want to hear how they plan to sell out to Google or Facebook within a couple of years. Instead, he wants to hear how their company will be around for another decade.

• And sometimes, obnoxious overconfidence has the karmic effect it deserves. “I had a pitch from an entrepreneur once,” Mr Rimer recalls. “She said: ‘I am the American dream.’ That was a tell-tale sign.”

REPOST: New Harmony and the results of socialism

Each year, I begin teaching capitalism to our executive MBA's at the conference center in historic New Harmony, site of a failed socialist experiment.  The irony is funny (other posts on the topic seem convincing), but it is important to remember our history, lest we repeat it.

The term “socialism” was coined by followers of Robert Owen (1771-1858), whom Karl Marx would label a “utopian socialist.” In 1825 Owen founded New Harmony, an Indiana commune, to demonstrate the superiority of what was first called the “social system.” The same year, Owen explained his experiment to a joint session of Congress attended by Supreme Court justices, President James Monroe and President-elect John Quincy Adams. Although Owen poured his fortune into it, New Harmony collapsed in disarray and recrimination within two years.

Owen’s son Robert Dale Owen salvaged the community by implementing what he called “a policy the very reverse” of socialism: “giving each respectable citizen every facility and encouragement to become (what every adult ought to be) a landed proprietor.”

Undeterred, others founded some 40 to 50 similar communes during the 19th century, and all collapsed quickly. New Harmony’s two years proved to be their median lifespan.

Most telling is that the one socialist experiment which succeeded was abandoned because its people realized, collectively, that they could be much better off on on their own.

Successful socialism has been created in only one place on earth, the kibbutzim of Israel. They were democratic and egalitarian; sharing possessions, meals, even child rearing. But once the Jewish state was securely on its feet, kibbutzniks chose to switch to private enterprise. Socialism, they learned to their surprise, was not a happy way to live.

REPOST: Adverse selection vs. Moral Hazard

President Trump has overhauled private health insurance, allowing businesses to offer cheaper plans that do not have as many benefits.  The Republicans applaud the change because they think it will lead to more coverage, and address the issue of moral hazard; Democrats criticize it because they think it will lead to adverse selection, raising costs for less healthy people who need more coverage.

Proponents of the new rule argue that AHPs will provide lower cost coverage for an estimated 4 million small business workers over the next 5 years including approximately 400,000 individuals who currently do not have coverage. Critics counter that without regulations requiring the inclusion of essential health benefits, such as maternity care, mental health, or prescription drugs, new AHPs will exclude important benefits and ultimately create significant and costly gaps in health coverage. They further argue that young, healthy individuals will flee the individual market for lower-cost AHPs, thereby leaving the sickest in the individual and small-group market to further drive up premiums.

Is the stock market over-valued?

Historically (link), Shiller's P/E ratio (CAPE) looks high (Sept 24, 2019) but if I really knew I wouldn't be teaching school...and I probably wouldn't tell you.

Investopedia reports what Shiller (bubble-ologist) says:

The developer of the CAPE ratio, Nobel Laureate in economics Robert Shiller of Yale University, has been warning that current market valuations are unsustainable for the long run, as discussed in another Investopedia report. He is particularly concerned about "the public's lack of healthy skepticism about corporate earnings, together with an absence of popular narratives that tie the increase in earnings to transient factors," as he has written in an essay republished by MarketWatch.

Training Crows

I love this screenshot I recently came across. Even crows respond to incentives.

Are house prices over valued?

Not as bad as in 2008, but historically high relative to renting.  In the long run the prices should be close (Chapter 9).

Housing prices differ by city, so check the affordability vs. the wages in your area, a measure of the "real price" of a house.

QUESTION:  based on the real prices below, do you think these wages and housing prices are in long run equilibrium?

HT:  Calculated Risk

1980-2018, US Dollar strengthens against Chinese Yuan

The strengthening dollar could represent Chinese buying dollars to invest in US, to either make sure that Chinese exports stay cheap, or make sure Chinese owned US assets are outside of the reach of the Chinese government. 

Can Price Discrimination Against Students Survive Competition?

In an earlier post, Can Price Discrimination Survive Competition, we showed that airline price discrimination was dramatically reduced following entry by Southwest.

Twenty-five years ago, the Ivy League Schools were sued by the Justice Department (my old employer) for conspiring to fix out-of-pocket costs faced by students:

The suit claimed that the Overlap members compared family contributions for financial aid applicants admitted to more than one of their schools and eliminated sizable differences to make the family contributions comparable. 

``Students and their families are entitled to the full benefits of price competition when they choose a college,`` Thornburgh said at a Department of Justice news conference announcing the suit and consent decree. ``This collegiate cartel denied them the right to compare prices and discounts among schools, just as they would in shopping for any other service.`` 

``The defendants conspired to eliminate cost competition as a factor in choosing a college,`` Thornburgh said. ``The choice of whether to consider price when picking a school belongs to parents and students, not the college or university.``

The collusion was necessary to maintain the price discrimination scheme.  Without it, the scheme probably would have collapsed:

Schools had defended the sharing of scholarship information as a way to prevent bidding wars for top students. Peter Smith, a spokesman for the Association of American Universities, said on Wednesday: ``If that`s right, I suppose you`ll get some of that (bidding) now. But I don`t have a feel for how many kids that may involve.``

Daniel Steiner, vice present and general counsel of Harvard, said he was concerned that Wednesday`s action might lead to student financial awards in excess of need. ``We have already seen in other parts of the U.S. too much evidence of bidding contests for students,`` he said.

So the Ivy's said it was OK to fix prices as long as the proceeds of the conspiracy were used for good.  

Is competition among colleges becoming fiercer?

The NY Times Magazine outlines the tradeoffs that make it difficult for college admissions departments to admit deserving students and pay the bills:  the high costs of college and the link between income and test scores.  Indeed when Trinity made standardized testing optional, it fell six places in the rankings.

But I think the article may have missed a bigger issue:  the intensifying competition among colleges for students driven individualized pricing, i.e., price discrimination.  If you set a single price, competition is limited to consumers whose reservation values are near the price.  But when you offer individualized pricing, which is a by-product of financial aid, you start competing for every single student.  In essence you turn relatively mild price competition into an auction--for every single consumer!

See Cooper et al. (2007), Does price discrimination intensify competition?  Antitrust Law Journal,  (also available on SSRN).

If colleges could figure out how to quit offering individualized financial aid--without colluding to do so--I suspect it would soften competition to the point where they could stop losing money.

How do politicians promote policies with a straight face?

...by ignoring their costs.

On Thursday evening, The Washington Post reported that some members of Sanders' campaign have been lobbying to raise their wages. Field organizers say they make a salary of $36,000 annually but work 60 hours per week, which is an average of $13 per hour.

Instead of upping their pay, Senator Sanders reduced the number of hours he will pay for from 60 to 40.  As Greg Mankiw notes, "Demand curves slope downwards, even for socialists."