Tim Westergren

Tim Westergren, founder of Pandora spoke at Stanford yesterday about how the company was founded, and how it grew.

It was a great talk. Tim told us about how the Music Genome Project was initially founded to help musicians find their audience. Tim wanted to create (and still wants to create) a "musicians middle class" where you can make a living making music, but don't have to become a star. The Genome Project originally was a recommendation engine for other sites, but now is essentially an online radio station.

Tim also spoke about how many of the artists listed on Pandora today are not backed by a big label, and how they see a spike in sales once they begin being played in rotation.

People thought that, by lowering distribution costs, the Internet would reduce the power of the big labels. This has not happened -- because the promotion aspect turned out to be critical as well. I don't know if Pandora will ever become big enough to act as a promotion engine that eclipses the labels' marketing muscle.

Happy Thanksgiving

I hope all US readers had a great Thanksgiving.

I smoked two turkeys using this. A winner.

What are you maximizing?

This article on American football argues that managers are not rational because they too often pick famous has-beens, instead of obscure (but highly talented) rookies.

The Washington Redskins are perhaps the leading exemplar of this tendency toward irrationality. Last spring, for example, the Redskins gave up key draft picks for high-priced veteran players. An especially silly trade gave the Jets three RedskinsÂ? picks: in the second and sixth rounds this year and in the second round next year. The trade left the Redskins with only one pick in the first three rounds this year.

To compound this error, the Redskins filled their roster with mediocre, high-priced veterans, dropping $35 million on safety Adam Archuleta, $32.5 million on defensive lineman Andre Carter, $31 million on wide receiver Antwaan Randle El, and $25 million on wide receiver Brandon LloydÂ?none of whom has ever been in the Pro Bowl.

The article claims that bad management is an output of irrationality combined with a lack of competition. Yes, the Redskins are poorly managed, but what does it matter since no competitive team can come to take their place.

A more robust treatment of economic rationality would at least explore the idea that the managers are maximizing something other than having a winning team. What about having famous names on the roster? That may bring in fans as well, or at least, make the coaches and managers happy. It may be rational to spend (other people's) $$$ on big name players who are not worth it if you then get to hang out with big name players.

Philippine American War

I highly recommend reading this post from the Belmont Club about the Philippine American war, and how it was finally conclusively won, almost a century later, by Globalization. Poor Philippinos worked abroad, and returned with more money, better English, and the ability to queue. The old feudal heirarchy was upended.

What can you do when your young people look over the border and find something they like better?

DRM DOA

This good article lists all of the digital rights management that Microsoft has built into its new Vista operating system. And the copyright police aren't just sitting in the software layer, they live in the hardware, and even in the cables that connect one beige box to the other.

I don't know how much of an impact DRM will make to the average Microsoft user. Most people probably will not know what's on their system, and probably won't care until they find they cannot do something that seems like common sense to them.

I think that Microsoft's bigger problem with Vista is that it's not obviously better than their last release. And since it gives remote users *more* power over what your system can and cannot do (thanks to DRM), I don't think it will be more robust against viruses either.

Markets in everything

A girl, who according to her has no real job, waits in line for hours for a PS3 even though she knows nothing about the product. Why? "If it's good, someone will buy it off me for more".

Someone who claims they will have a PS3 sells it for $10,000 on eBay.

RIP, Uncle Miltie

Milton Friedman, Nobel Prize Winner, U Chicago Economist, died today (age 94).

He will be missed. He was, without a doubt, the Yoda of Economics.

(Update: Nice write up by one of my favorite U Chicago Economist profs - Austan Goolsbee).

Econlog on Orwell

Econlog posts on an Orwell quote

What this war has demonstrated is that private capitalism, that is, an economic system in which land, factories, mines and transport are owned privately and operated solely for profit, does not work...War, for all its evil, is at any rate an unanswerable test of strength, like a try-your-grip machine. Great strength returns the penny, and there is no way of faking the result.

and asks "The real problem with Orwell's quote is that he seems to be judging economic systems purely by their military strength. Don't wretched living standards, loss of lives, and the end of individual freedom count for anything? Strange indeed from the author of 1984!"

Many moons ago, I read the complete works of George Orwell, in order, up until the start of the Second World War. This included essays, book reviews, and of course the books that we are all familiar with.

It was a very illuminating experience, and I am familiar with the quote that's referred to above. Orwell began his life as a socialist. After the first Great War, there was natural antipathy towards the elites, particularly in England, and the socialist solidarity that communism offered seemed like a really good idea. Orwell went to fight for the socialist cause in Spain, which he cataloged in Homage to Catalonia. While he was out there, he saw the face of socialism up close -- the totalitarianism, the corruption -- and changed his position on the ideology (which is quite remarkable).

He was horrified by World War II. It was clear to him that centrally planned economies could build a war machine faster than free markets, and therefore would always be able to defeat free markets. Note that Orwell was not a Friedman-esque capitalist, he hated central planning because of the tyranny that comes along with it, but in the mid 40s it was hard for anyone to deny the power and speed of Hitler's war machine.

It's also worth noting that to a British writer in 1941, things did not look good for the Allies.

I never read anything Orwell wrote about the conclusion of the War. He died in 1950, and wrote 1984 in 48, but I have not seen any writings that talk about the atomic bombs the US dropped on Japan. The atomic bomb changed the economic calculus that put planned economies ahead of market economies -- countries could not protect themselves from invasion without having to be on a permanent, centrally planned war footing. He may have come to the conclusion that nuclear weapons, for all their horror, made the world safe for capitalism.

Barriers to entry

The Gap, which owns Banana Republic, the Gap, and Old Navy, has just launched a new online only venture called Piper Lime. I have no doubt they started this because Zappos sells almost a billion dollars worth of shoes a year, and Gap thought they could do it too.

The Zappos site is kind of ugly, while Piper Lime is pretty. I have no doubt that Gap thought the better personality, design etc. of their service will trounce Zappos.

They both have free standard shipping, both ways, they both have good product image shots (a Zappo speciality for many years). But the Gap is pretty and Zappos is ugly.

Online companies seem to think that prettyness=a good experience. I'll bet that Zappos customer ratings (focused on fit) and wide selection will do a better job of selling shoes that the pretty Piper Lime.

On the subject of barriers to entry, franchise wine stores are popping up all over (Best Cellars, Vino 100, Wine Styles). I had such a good experience with Best Cellars in Boston (after being initially skeeved out) that I'm looking forward to trying Vino100 in Los Altos (although I'm currently skeeved out). There seems to be nothing that distinguishes these stores from each other.

More on risk and driving

There were some comments on my recent post on risk and driving. Reader TC wrote in to say:

I noticed you've posted a couple of times on how a lack of traffic controls actually improves safety. My wife grew up in a small town in northern Michigan and there was only one traffic light in the entire county. I once asked the police chief which stretch of road in the county had the most traffic accidents. Can you guess his answer?

Heh! Note that the causality may be in reverse though -- the most dangerous stretch of town gets the traffic light. Also, Winterspeak reader MA dissents:

Greater risk of death doesn't always make people more cautious drivers. That's why people still drink and drive.

This is true -- people do drink and drive even though this makes them more dangerous to themselves and to others. I'm not sure this invalidates the assertion that increasing risk makes for more cautious drivers though, you can always say it makes a difference at the margin, but it does highlight some key issues with reckless driving.

1) If you drive carelessly, you bear some of the risk, but people around you bear the rest. This means that you may be more careful if you take on more risk, but not careful enough as you do not bear all of the risk. Mechanism to help amplify the risk to the driver may correct this -- ideas include banning seat belts on the drivers side, and affixing a spike in the steering column, pointing to the heart. Better yet, do both.

2) The article mentioned how there were still accidents, maybe more, but they were smaller and less dangerous. I cannot keep straight how behavioral economics says people respond to risk, but it's screwy. Possibly, increasing low level risk prevents people from taking on catastrophic risk.

People respond to incentives

A town in Holland has removed its traffic lights. Drivers are now more cautious, since they are at greater risk. Accidents have gone down.

Den Beste is back?

And he seems to be posting at ChicagoBoyz.

Why vote?

It's almost midterm elections, so I here are some thoughts on voting.

Reasons to not vote
1) Any one individual's vote makes no difference, so why bother?

Even close elections, like 2000 in Florida, aren't that close from an individual votor's perspective. Maybe Bush edges out Gore by 2000 votes. Even if I was in that final 2000, my vote is still just 0.05% of the deciding total. I'd want it to be 5% or 10%, which means margins need to be 10 or 20 votes -- simply not going to happen.

2) People overestimate the impact one person has, and underestimate the environmental factors they operate within. The US faces structural fiscal shortfalls, and a world of weak states, rogue groups, and nuclear proliferation. This will be true no matter what.

3) The outcome is fundamentally arbitrary (see Arrow's Paradox)

Reasons to vote

1) Good for the soul.

Voting is one of those things where the cumulative benefits are large, even though the individual benefits are small.