SOPHISTICATED FINANCE

Examples of Good Thinking

 

Yesterday's reading discovered some excellent articles:

1. Esko Klipi on Medium, "It is only a few network connections away". He points out that networking is growing increasingly important as the Internet shrinks the world. Makes one realize that networks created by people could be more powerful than 20th century forms of organization.
2. Evonomics.com on inequality, "The Science of Flow Says Extreme Inequality Causes Economic Collapse". What caught my attention was a quote from Robert Reich, "But in The Work of Nations (2010), Robert Reich also points out that the companies that are flourishing through globalization and technology are ones pursuing what he calls high-value capitalism, the high-quality customization of goods and services that can’t be duplicated by mass-produced uniformity at cheap places around the world." I rarely agree with Robert Reich, but I think he is correct this time. I think that corporate governance has enforced too narrow a set of objectives and the executives have opted for the easiest path. BTW, Evonomics is doing an excellent job of trying to redefine how we look at government economic policy with a particular emphasis on complexity economics.
3. Stanford Social Innovation Review on corporate social responsibility, "Corporate Social Responsibility for a Data Age". In managing disasters much valuable data is behind corporate firewalls and not normally available to the government. The article suggests that the data be made available after the disaster, but it appears more logical to me to pre-position the data.
4. At 25iq two great articles on entrepreneurship, "A Dozen Lessons on Growth" and "A Dozen Lessons About Product/Market Fit". Just simply one of the best blogs around on entrepreneurship. Step-by-step type detail on understanding subjects that most people misunderstand.
5. An interesting article about neuroscience, "Measures of Entropy and Complexity in altered states of consciousness". What could be more geeky than entropy, complexity and neuroscience. What caught my eye was the notion of plotting complexity vs entropy. 
6. In another of my favorite blogs on economics, Marginal Revolution, "Online Education and Personalized Learning". The article makes the point that in any class there are students performing at many different grade levels. Online learning provides one way for students to follow their own pace of learning. Pace of learning is a big issue that I see rarely addressed. (See image above.)
7. Aswath Damodaran on ValueWalk, "My Snap Story: Valuing Snap Ahead Of It’s IPO!". Damodaran is a leading academic authority on valuation and Snap will be one of the biggest IPOs of 2017, if it gets away. Sorry, got confused and included a finance article
    

Image credit: Marginal Revolution

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Demand-centric Growth and Personas

BCG Perspectives today had one of their usually excellent articles, "The Prerequisites of Profitable Adjacent Growth". The article states:

"There are five ways for companies to expand into adjacencies [nearby markets]:

1. by exploring demand-centric growth
2. by cultivating a new organization with new talent
3. by employing separate governance
4. by adopting an experimental approach
5. by building the right cultural enablers."

(reformatted by me for clarity)

What caught my attention was the concept of "demand-centric growth". BCG defines demand-centric growth as follows:

"World-class innovators are moving from industry- or demographic-based segmentation to what we call “demand centric” segmentation, which identifies the drivers of decision-making by looking at the intersection of context (who the customer is, how he or she thinks, and what he or she does) and emotional or functional needs. Using richer data than was ever available before, companies can construct a “demand map” that clusters consumer choices in a particular category into common need bundles—or “demand spaces.”" (emphasis is mine)

 This concept of "demand spaces" looks very similar to what some people call personas. An excellent definition of personas is on slide 17 of this Powerpoint, "The definitive guide to engaging content marketing 141111". My interpretation of what BCG is proposing is shown in the graphic below.

The male and female information is traditional demographic information. The four characteristics on the X axis show four different emotional reactions to a particular product. Definitions are shown below.

• Critical--life and death
• Habit--required and periodic
• Must Have--status, self-esteem
• Aspirational--makes the world a better place for me or others

The Xs indicate the proposed adjacent markets, as defined by the matrix. You might ask how you would develop such detailed information. Customer mapping is one technique. See this excellent article, "Adaptive Path's Guide: Customer Mapping", for more detail on customer mapping. If you think such detailed information is not possible, see the bold text above. The amount of data available to marketers is on an unprecedented scale. Think of how much data the marketers will have when neuroscience advances :-)

 

 

Networks, Organizations and Math

If you have not been paying attention, more and more of what was considered random behavior is now being explained by math. To satisfy this standard of explanation, the math must be able to accurately forecast behaviors. Several good examples of this evolution in math, or perhaps more precisely in the understanding of social behavior, are seen in Sandy Pentland's new book, "Social Physics: How Good Ideas Spread-The Lessons from a New Science". Interesting discussion of social networks, information flows and how to modify behavior. Anyone who appreciates "big data" should read the book. Pentland's proposed policies on privacy and transparency make the book worthwhile even if you do not care about big data. Implications for the nature and role of government are the best partof the book in my opinion. 

Another example of math being applied to social organizations is the work of Geoffrey B. West, “Why Cities Keep on Growing, Corporations Always Die, and Life Gets Faster”. West trained as a physicist and late in his career turned to studying the growth pattern of cities. Regardless of location around the world, culture, type of government, etc, cities behave according to certain mathematical rules. Cities also exhibit certain properties that insure they last forever, whereas companies and people have properties which explain a definite lifetime. Maybe we should encourage the return of city states. Maybe Shanghai has already reached that status.

One should not overlook the irony that computers are crunching the numbers to explain more and more of our lives by numbers. The pace at which we approach the world of Ray Kurweil is perhaps accelerating. "How to Create a Mind, the Secret of Human Thought Revealed" by Ray Kurzweil. Fascinating book.

 

 

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AI, Jobs and Government

Lately I have been reading Ray Kurzweil's "How to create a mind: the secret of human thought revealed". The book deals with the history of neuroscience, AI and thinking, with a dash of epistemology and meta-ethics thrown in for completeness. One of those rare books where you read for twenty minutes, go away and think about what you read for several days and then read some more. Kurzweil's book provides much of the intellectual underpinning for an article in The Economist,"Technology and jobs: Coming to an office near you". 

The Economist chronicles the upcoming dislocation in jobs, with computer technology replacing up to 47 percent of jobs in the next 20 years (numbers very similar to other sources I have seen). Basically artificial intelligence and their devices, what you call robots, have advanced to the point where many traditional jobs can be done by devices of one type or another. You have been following Google's driverless cars and contact lenses to measure sugar levels for diabetes patients?

Back to Kurzweil, who along with Marvin Minsky and Herbert Simon (founders of AI), point out that AI and neuroscience advances are teaching each other about their subjects. AI teaches us about neuroscience and neuroscience helps us to improve AI, all with the outcome of computers increasingly approaching the abilities of the human mind. I think Kurweil might be saying that critical thinking may be the only function of the brain/mind that cannot yet be duplicated through a computer. 

This increasing sophistication in AI suggests that the disruption to jobs may be underestimated significantly and especially by the governments in developed countries such as the U.S. While certain governments talk about wealth concentration, this is just a number of no consequences. Popular politically but of no consequence in the lives of ordinary people. Jobs might be the better issue but the government does not have a solution, which is why they are distracting us with the speciousness of wealth concentration.

Actually, the issue the government needs to address is how do people need to be educated and trained to live productively (economically) in a world where computers and robots will be able to do 90-95% of all the work performed in 1900.  Governments are not designed to handle environmental change of such consequence. Governments manage status quo adequately but do not shine in rapidly and dramatically changing environments they have not seen before. Governments can barely handle a hurricane let alone the complete disruption of the labor force...in the U.S. Perhaps the days of government as "Big Brother" are numbered. Perhaps the private sector will need to take more responsibility. I guess organized religion is another alternative. Probably does not matter where the solution comes from, but someone needs to prepare people for this new world where AI plays a bigger role.

Sounds like a business opportunity to me. Maybe the charter schools were just practice for a declining role for government.

Neuroscientists Link Economic Value and Emotion

In my last post, "The Secret to Marketing", I discussed the importance of generating an emotional reaction in the prospective customer. The Journal of Neuroscience has an article in the July 3 edition that discusses research at Duke University that shows:

"that your feelings about something and the value you put on it are calculated similarly in a specific area of the brain."

The research also appears to indicate that economic value increases with a stronger positive emotional response.

If this research holds up, I think we would have scientific proof of utility theory as defined by the Austrian School of economics. I will refrain from discussing F.A. Hayek's research in psychology.

I found this story at FinanceProfessor.com. The July 3 Table of Contents for The Journal of Neuroscience is here, but I do not see the article that was referenced in that blog

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