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There has been obvious concern with recent financial bubbles: the internet, private equity, housing, food, energy, the list goes on and on.  Indeed bubbles represent the communal manifestation of human thought processes.  As humans, we take a few data points and extrapolate them into the future, and create predictions predicated on these assumptions taken to their often illogical end.  This cognitive process probably arises from the need to avoid a sabre-toothed cat or to prepare shelter for the coming winter months.

But nature works on much more diffusive or mean-reverting processes.  After all vacuums get filled, temperatures equilibrate, and there are substantive effects that drive processes that are often occluded from our immediate view.  For example that sabre-toothed cat might arrive at the top of that hill everyday at sunset, because it’s being chased by a group of hunters from the village downstream, not because it’s hungry for you or me.

We are working on some cool technologies and products to help our world wean itself off of petroleum based energy (a carbonified form of solar energy).  This is a great space to be in: there is significant investor, customer, and political interest, it carries the banner of the environment, and seeks to provide new opportunities to billions of people around the world  But we need to remind ourselves that energy from our sun isn’t the only big deal in town.  We should not build energy into yet another bubble at the expense of other opportunities.   We need to think of our other precious natural resources: our water, land, our wind.  The ancient view of our world as earth, wind, water, and fire should serve to remind us that all these ‘forces’ work in concert, and we should nurture them even handedly.

The August 2008 issue of National Geographic reminds us that our soil needs care and constant attention.  We’ve become so far removed from the basic source of our food that the bulk of the population neglects the need to reinvest in our earth.  We are driven by our idealism, but we are assured by result.  Don’t get us wrong, there is serious opportunity here to make our world better for future generations, and to create powerful businesses serving this undertapped need.

I’ve been messing around with twitter for the past couple of months.  My network is relatively small, keeping small updates on my brother and twit-stalking a few of the VC guys that are big believers in this stuff.  So for me, I use it relatively infrequently.  For others though it’s huge, completely viral, and informative.

Fred Wilson, a VC at Union Square Ventures, has been a big proponent of twit-bots.   For example you can create a twit-bot on wine recommendation (@winetweets) .   This allows everyone interested in wine recommendations to post to the twit-bot and the bot published the recommendation to everyone who follows the twit-bot.  There is some real power of the masses at work here: if you get enough people, surely the wisdom of crowds should allow you to find the cream of the crop recommendations based on number of recommendations alone.  However there is oversaturation of information here as well: what happens when you get 1000, 10000, 1 million recommendations a month from the twitbot?  There is just no way of handling this information.

This leads me to the idea of ‘data-mining’ information from twitter (I’m sure someone is working on this already) . Because of the format, twits are limited to 140 characters, necessitating brevity.  In a comparison with yelp.com, there is no opportunity to supply context for the recommendation that a full review on yelp can provide.  Thus I think it will take some sweet statistical analysis along with some meta-data (some metric for how ‘good’ the recommender is) to really extract some value from this.

The Predictably Irrational blog brought up a revealing case study regarding organ donor rates across a range of European countries.  Ariely asserts that the discrepancy in organ donors (4.3% for Denmark vs. 85.9% for Sweden) originates from the way the forms are set up; Sweden having an opt-out choice and Denmark having a opt-in choice.  He continues to discuss the notion that indecision often arises when we are forced to make choices that are frightening.  In this case the frightening choice is what to do with our material remains once we pass away.  As we are pushed to consider our own mortality we seize up and select the default choice (i.e. leave the check box unchecked).

How many other scenarios can this be applied to?  Richard Dawkins in The God Delusion, essentially claims that religion is a default option and that we live in a world where no one wants to check the box.  In this situation, again there are quintessential dilemmas regarding life, death, our role in this universe and our purpose for existence, to which we wish to avert our eyes.  Though the fiery rhetoric or the synthesis of the book may not be agreeable to everyone (from the Amazon comments it seems to raise a ruckus with logicists, anthropologists, scientists, atheists, theologists, everyone), in conjunction with Ariely’s hypothesis, we really have to wonder why there are so few atheists out there.

OK, religion is probably a tough one to argue.  But how a grayer area, where we aren’t talking about 95-5 splits but something more akin to 65-35? What about doping in sports?  Are there really, as Jose Canseco said, 50% or some inordinate number of steroid users in the MLB?  Having heard testimonies of current and former users, albeit only a select few, it seems that the choice to do performance enhancing drugs is a difficult one.  On one hand, you want to stay in the league, make more money, or generally attain success.  On the other, you could get busted, suffer health consequences, or be libeled a cheater by people you care about.  We’re not talking life/death decisions here, but undoubtedly this would be a tough decision to make.

The default decision here is to not use performance enhancing drugs right?  Do we see fewer users of performance enhancing drugs than expected?  And why is the onus on the athletes to prove their innocence even before they are labeled guilty?  Obviously there are many more effects at play in this environment (the current PED witchhunt in MLB, BALCO scandal, etc.) but overall it seems that we are paralyzed by indecision when it comes to difficult choices.  Shouldn’t we assume innocence and test for guilt?

I am not qualified to make any economic forecasts. But I have a gut feeling that over the next decade or so, we will see a substantial movement of left-ish moderates begin to embrace the financial modus operandi of the right. I think there will be a nationwide push to reduce tax burdens. Times are tough right now. If you consider some major factors such as inflation, devaluation of the dollar, the ineffectual fed rate cuts, and toss in a some foreclosures, it looks like you’re gonna have a witch’s brew of stagflation for the upcoming years. And if the belt gets squeezed beyond the last belt-hole, you might get this.

So we’re stuck right? Can’t tax more, yet we’re mortgaging our nation away. I think the way we get outta here is to reinvest in innovation, talent and education before we get to the point that we’re Europe. Let’s get the core of the US excellent again.

I recently revisited an idea I’ve been playing with for some time - the wedding seating optimizer. The idea is that everyone spends an inordinate amount of time planning the seating chart for their wedding - Aunt Bea and Uncle Joe are divorced and can’t sit together, we want our best college friends to meet, etc. - and couldn’t a computer do this for you instead? At the core of the wedding seating optimizer is an equation that calculates how good or bad a particular seating arrangement is, which I’ll call the cost function. Like golf scores, lower cost function scores are better. The program implements an algorithm that seeks to minimize the cost function with an optimum arrangement of guests.

To test the wedding seating optimizer, I created a fake wedding with 100 guests, added the aforementioned Aunt Bea and Uncle Joe to the mix, and started the thing running. I set out 10 tables, and I got the following results:

Table Number of Guests
1 99
2 1
3 0
4 0
5 0
6 0
7 0
8 0
9 0
10 0

Oops.

What happened here? Quite simply, I neglected to incorporate any information about the optimum number of guests per table into my cost function. And since everyone at the wedding (save for Aunt Bea and Uncle Joe) gets along, we ended up with one big table (and Uncle Joe crying alone over his wedding cake). More generally, the problem was a case of “Too Much of a Good Thing.” When I first wrote an equation for the cost function, it never occurred to my limited human brain that one could try and seat so many people around a single table. I was limited by my mental image of a wedding table with 8-10 people around it, and I assumed from that vantage point, that adding one more friend to a table of college buddies would be a good thing. Clearly, the computer is not so mentally limited (or, if you prefer, is too stupid to know that 99 people can’t sit at a single table), and so it found the best possible solution to the seating problem I laid out.

“Too Much of a Good Thing” is a common and insidious problem in any numerical optimization scheme, and arises simply because the cost functions we propose are frequently too simplistic. It’s so prevalant in fact, that I would propose the following law:

If you fail to account for “Too Much of a Good Thing”, you will inevitably receive “Too Much of a Good Thing”.

More importantly, “Too Much of a Good Thing” is also the cause of many real life problems, frequently in the form of bubbles. Economists are fond of calling this “The Law of Unintended Consequences”. Take for example, the recent housing boom and bust. It’s tough to spell out society’s housing cost function, since the cost function would incorporate our collective opinions on housing. But, a simple version of our cost function might be described by the conventional wisdom “Home Ownership is a sound investment promotes positive social effects”. The U.S. Government promotes home ownership though tax breaks. Social norms promote home ownership as a positive good. And in the down stock market of 2000-2002, a real asset such as a home seemed like a good idea. The state of the U.S. in 2001-2005 conspired to create a situation in which “Too Much of a Good Thing” (in this case, home ownership) was ignored, and a bubble was the result.

I have been itching to read Dan Ariely’s Predictably Irrational for weeks now.  I haven’t ordered it on Amazon because my wife has put me on book-buying hiatus, suggesting that I should support my local public library (that’s another story).  It sounds like great fun and an interesting look inside our own CPUs.

So with the book in mind I came across this article earlier today.  Apparently UT researchers have demonstrated that the more attractive a woman is communally regarded as, the more selective she is about that attributes of her mate (which include earning power, physical pulchritude, familial skills and loyalty).

This is in stark contrast compared to men.  Erik reminded me that Professor Ariely was one of the co-authors of What Makes You Click? Mate Preferences and Matching Outcomes in Online Dating.  In the paper (which discusses women and men through the veil of online dating), their study isolates a particular parameter for the male criteria as a potential mate.  It’s pretty heady stuff: apparently dudes prefer hot women.

I’m really excited for two potential collaborations that are brewing up now.  One involves potentially working with a professor at MIT (my little sister) and a professor at Stanford (buddy from Stanford).  This is the sort of thing I dreamed about when I was in college - working with friends and family.  As we all started working/going to graduate school/doing research and saw our fields start to intertwine, the possibility began to solidify.  So we’re giving it a shot and we’ll see if this project can come together.  The project should involve energy distribution.  More on that later.

The other collaboration is coming together with a couple buddies from graduate school.  We’re putting some tools together to address some health related problems and I think this could have a strong potential impact in improving the distribution of information and health care.

Scientific debate should be exactly that - a debate. Correspondingly there should be sufficient room in the discussion for both proponents and opponents of the global warming thesis. Indeed many of the major points offered by the counterpoint seem valid - for example why risk economic prosperity for reasons unproven in real scenarios?

Underlying the scientific process is belief. You have a hypothesis that you believe in and then, as a scientist, you attempt to observe the event in a controlled manner, in the absence of interfering effects. Theoretically, if you can isolate the dominant factors for an observation in a logical manner, your belief is validated and accepted by the scientific community.

The difficulty in analyzing the phenomenon of global warming in the context of human  generated carbon dioxide is that the Earth’s climate is indeed complex. The data is often fuzzy because the timescale for effects to manifest typically outlast generations. Thus changes in temperature from year to year may lie within the noise. Climate change skeptics have hopped on this, in addition to the notion that predictive climate model prediction have not adequately reproduced reality, to assert that climate change is merely a blip in the road. This is what they believe and what could be true. I disagree, but it may be true.

However we must be careful of what the noise tells us. As scientists, we should aggregate what we know from controlled experiments, extend them to their logical conclusion, and assign probabilities for those events to occur. In the case of global warming the probability is reasonable that there maybe cataclysmic consequences for the environment - not just global warming but changes in oceanic conditions.  We should prepare for those consequences. Just because earthquakes occur _unpredictably_ does not mean that we don’t store extra water and food here in southern California. And sure the current physics in our models have not told us everything about climate change. But can’t the same can be said for our econometric models which now all corporations, governments, and populations treat as beacons of light during recessions?

After all scientists, as all humans, make mistakes of belief all the time. Galileo was the right voice dissenting against the beliefs of the geocentrists. But so was Einstein when he argued against the quantum mechanical model.  Beliefs have been proven and disproven through experiment and logic.  But while we could dawdle and enjoy the ivory towers in those situations, it seems we must move to counteract global warming.  While the notion that the world was the center of the universe was important for belief, its impact on the world was slight.. not so with global warming.

[disclaimer: I (Ben) believe that human generated carbon dioxide poses a huge risk for our world and environment: it has been in demonstrated in the lab to be a heat trapping gas and a factor in the acidification of the oceans (anyone getting milliQ DI water will attest to that, noting a pH of 4.7 after a few minutes in air).

Chris Anderson, of The Long Tail fame, has written an article in Wired regarding the economics and value-add in markets of free products.  The article provides an excellent framework for tearing down the notion that free = no value and is a must read for those transacting in information products (web, media, etc.).

The introductory anecdote regarding King Gillette and resulting discussion of “giving away the razor to sell the blade”  inevitably lead me to think about the byproduct of massive ‘free’ distribution: waste!  Clearly this is an issue that the physical world deals with (billions of razors indeed = trash and recycling) but it is worthwhile to consider the parallel along information products.  For example: when a specific event occurs, hundreds of media outlets, bloggers, and journalists sprint to cover this event leading to informational clutter, albeit with some differences perspective and opinion.  Where is the ‘trash and recycling’ industry for the information world?  Where are the tools to help organize all this data and information?  How do we eliminate redundancy?

My guess is that there is an extant market for these tools whose growth will only accelerate, both in physical and informational worlds.  One’s trash is another’s treasure.

My beloved alma mater, with its college hoops programs ranked #7 (women’s) and #9 (men’s), decided to increase their endowment disbursement to increase the amount of financial aid to middle class families of undergraduate students. While I would argue that even more should be done to make education and access to private universities even more affordable (as they sit upon huge piles of endowment green), I think it is awesome that Stanford is leading the way.

Umair Haque writes that many political, economic, and social systems are in place to provide a direct transfer of wealth from those with less to those with more . Stanford sits on over 15 billion , owns thousands of acres of sprawling Bay Area landscape and real estate, engenders lasting and successful symbiotic relationships with local companies, and has a vibrant and productive research community. Stanford is the archetype of ‘have more.’ However by recognizing that the direct deployment of financial resources towards enhancing educational access to a more economically diverse population, the University has taken a step to reverse the sign in the wealth-flow equation and close the wealth gap. While this may seem altruistic to some, I think there is a clear economic benefit for the school: Stanford is investing in assets that have the best risk-adjusted rate of return… its people!

Only time will tell, but I’ll venture a guess that Stanford will benefit significantly more than the the near term loss in its endowment from continuing along such directions. I hope that other universities will follow suit.