Tag Archives: Status

Future Fears

People tend to act to help themselves. Sometimes that is good, and sometimes it is bad. We economists distinguish situations where such acts on net 1) help others, 2) hurt others less than they help oneself, and 3) hurt others more they help oneself. We see only type #3 acts as bad, and the others as good.

However, I’m coming to realize that most people actually use a different criteria; they care more about loyalty than efficiency. That is, they ask: are the acts subject to “our” prestige control? How well can “we”, by applying or changing our common notion of prestige, shame people to make them stop, or praise people to make them start?

We fear powerful people who feel free to defy us. When they can make big changes to the world, and put only minor weight on our prestige influence. We are afraid of this even when their actions have so far been of type #1, benefiting us. We fear that their inclination to be helpful could change after they accumulate enough power.

This is the standard attitude of foragers, as described by Boehm in Hierarchy in the Forest, where the main fear was individuals strong enough to defy the consensus of their local band. It is also echoed in the classic “illicit dominator” fictional villain. (A “dominator” needs only a source of power that can defy prestige.) In schoolyards, kids have long sought to ridicule nerds who submit to teachers, instead of joining other kids in resisting teacher dominance.

In the classic tv show Survivor, participants tended to vote off the island opponents strong enough to earn immunity from group votes, no matter what those people’s other virtues. Similarly, in office politics workers who feel productive enough to not need to make arbitrary displays of submission are often seen as “difficult”; putting them in their place becomes a priority.

In larger politics today, the main villains are powers who feel free to defy national or world culture’s regarding proper behavior. Criminals (and “terrorists”) and foreign powers, especially in war, obviously, but also one’s own government unless it uses democracy or something to show its submission to local prestige. In the past, when religion was stronger, churches demanded so much submission that they were vulnerable to being labelled illicit dominators. Politics has often been about gaining support for one power via seeing it as protecting us from other powers.

Today, our other main candidate for illicit dominators are for-profit firms. Bigness triggers forager suspicions all by itself, ordering employees about adds a vivid image of dominance, and a for-profit status declares the limited influence of prestige. So we are very suspicious of big organization choices, especially for-profits, and especially regarding employees. We want to regulate their prices and quality, and especially how they hire, fire, and promote. We mostly don’t trust competition between firms to induce them to benefit us; yeah that might work sometimes, but more direct control feels more reliable. (Even if it actually isn’t.)

All of this makes it pretty easy to predict our fears regarding the future. Foreign powers create the classic apocalyptic conflict, and criminals going wild is the classic post-apocalyptic fear. A foreign power winning over us is the classic alien war allegory. Governments being non-democratic, and acquiring new powers, describes most of the new young adult dystopias. Sometimes there’s a new church with too much power, defying reader prestige rankings.

But if you imagine religions, governments, and criminals not getting too far out of control, and a basically capitalist world, then your main future fears are probably going to be about for-profit firms, especially regarding how they treat workers. You’ll fear firms enslaving workers, or drugging them into submission, or just tricking them with ideology. In this way firms might make workers into hyper submissive “inhuman robots”, with no creativity, initiative, or leisure, possibly even no socializing, sex, music, or laughter, and maybe just maybe no consciousness at all.

And if you are one of the rare people who don’t even fear firms, because you see competition as disciplining them, well you can just fear technology itself being out of control. No one has been driving the technology train; tech mostly just appears and gets used when some find that in their interest, regardless of the opinions of larger communities of prestige. One can fear that this sort of competition and tech driven change will be the force that makes human workers into “inhuman robots.” Making you eager for a world government (or a super-intelligence) to take control of tech change.

This framework seems to successfully predict the main future fears raised early in the industrial revolution. And also the main concerns about the scenario of my book. Of course the fact that we may be primed to have such concerns, regardless of their actual relevance, doesn’t make them wrong. But it does mean we should look at them carefully.

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Prestige is Political

Imagine an ancient forager band had a conflict. For example, imagine some were eating foods that induced stinky farts which bothered others who slept nearby. There are several generic ways to deal with such a conflict:

  1. Force – someone strong might destroy the stinky foods, or threaten to beat up those who eat them.
  2. Deal – those bothered by the smell might compensate others for not eating stinky foods.
  3. Exit – those bothered by the smell might leave and find or form another band.
  4. Prestige – prestigious folks could push the idea that eating stinky foods is low prestige, to shame people into not eating them.

I think foragers had a strong preference for this last type of solution. But note that prestige is not available as a solution to conflicts unless prestige is in part political. If prestige were a fixed thing, say some fixed weighting of smart, strong, tall, etc., then it couldn’t be changed to solve problems. But if prestige is somewhat flexible, a dominant political coalition can try to flex it to encourage desired outcomes.

Now consider an analogous global conflict today, such as global warming. It seems to me that people also intuitively prefer a prestige solution. Instead of forming a world government powerful enough to impose its will, or making a deal where rich nations pay poor ones whatever it takes to get them to sign, what elite nations actually seem to be doing is visibly cutting back on carbon, and trying to shame other nations into following their lead. They’d rather risk failing to solve the problem than having to resort to a non-prestige solution. Arguably prestige is in part how world elites actually pushed for changes such as more democracy, less slavery, and better protected environments.

I’m also reminded of how people seem to prefer to choose their lawyers, doctors, investment advisors, etc. via prestige, instead of via track records or incentive contracts. And how people want to change who succeeds in the world via pushing elite colleges and institutions to change their admissions process, instead of reducing barriers to competition to make success more meritocratic.

There are two kinds of status, sometimes called “prestige” vs. “dominance.” Both exist, but on the surface at least we want the former to matter more than the latter. And we often seem to categorize gaining via trade or personal effort as gaining via dominance. Which is in part why we often dislike market based solutions. But note that these two kinds of status could also be called “politics” vs. “non-political reality”. We prefer social outcomes to be determined by prestige that can be influenced by dominant political coalitions, and fear and suspect social outcomes determined by nature, personal effort, or social competition, even when such competition is peaceful.

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Star Trek As Fantasy

Frustrated that science fiction rarely makes economic sense, I just wrote a whole book trying to show how much consistent social detail one can offer, given key defining assumptions on a future scenario. Imagine my surprise then to learn that another book, Trekonomics, published exactly one day before mine, promises to make detailed economic sense out of the popular Star Trek shows. It seems endorsed by top economists Paul Krugman and Brad Delong, and has lots of MSM praise. From the jacket:

Manu Saadia takes a deep dive into the show’s most radical and provocative aspect: its detailed and consistent economic wisdom. .. looks at the hard economics that underpin the series’ ideal society.

Now Saadia does admit the space stuff is “hogwash”:

There will not be faster-than-light interstellar travel or matter-anti-matter reactors. Star Trek will not come to pass as seen on TV. .. There is no economic rationale for interstellar exploration, maned or unmanned. .. Settling a minuscule outpost on a faraway  world, sounds like complete idiocy. .. Interstellar exploration … cannot happen until society is so wealthy that not a single person has to waste his or her time on base economic pursuits. .. For a long while, there is no future but on Earth, in the cities of Earth. (pp. 215-221)

He says Trek is instead a sermon promoting social democracy: Continue reading "Star Trek As Fantasy" »

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Rating Ems vs AIs

Everyone without exception believes his own native customs, and the religion he was brought up in, to be the best (Herodotus 440BC).

I’ve given about sixty talks so far on the subject of my book The Age of Em. A common response is to compare my scenario to one where instead of ems, it is non-emulation-based software that can first replace humans on most all jobs. While some want to argue about which tech may come first, most prefer to evaluate which tech they want to come first.

Most who compare to ems to non-em-AI seem to prefer the latter. Some say they are concerned because they see ems as having a lower quality of life than we do today (more on that below). But honestly I mostly hear about humans losing status. Even though both meat humans and ems can both be seen as our descendants, people identify more with meat as “us” and see ems as “them.” So they lament meat no longer being the top dog in-charge center-of-attention.

The two scenarios have many similarities. In both scenarios, meat humans must all retire, and robots take over managing the complex details of this new world, which humans are too slow, distant, and stupid to manage. The world economy can grow very fast, letting meat get collectively very rich, and which meat soon starves depends mostly on how well meat insures and shares among themselves. But it is hard to offer much assurance of long run stability, as the world can plausibly change so fast.

Ems, however, seem more threatening to status than other kinds of sophisticated capable machinery. You can more vividly imagine ems more clearly winning the traditional contests whereby humans compete for status, and then afterward acting superior, such as by laughing at meat humans. In contrast, other machines can be so alien that we may not be tempted to make status comparisons with them.

If, in contrast, your complaint about the em world is that ems have a lower quality of life, then you have to either care about something more like an average quality of life, or you have to argue that the em quality of life is below some sort of “zero”, i.e., the minimum required for a life to be worth living (or having existed). And this seems to me a hard case to make.

Oh I can see you thinking that em lives aren’t as good as yours; pretty much all cultures find ways to see their culture as superior. But unless you argue that em lives are much worse than the typical human life in history, then either you must say the typical human life was not worth living, or you must accept em lives as worth living. And if you claim that the main human lives that have been worth living are those in your culture, I’ll shake my head at your incredible cultural arrogance.

(Yes, some like Nick Bostrom in Superintelligence, focus on which scenario reduces existential risk. But even he at one point says “On balance, it looks like the risk of an AI transition would be reduced if whole brain emulation comes before AI,” and in the end he can’t seem to rank these choices.)

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Sycophantry Masquerading As Bargains

The Catholic Church used to sell “indulgences”; you gave them cash and they gave you the assurance that God would let you sin without punishment. If you are at all suspicious about whether this church can actually deliver on their claim, this seems a bad deal. You give them something tangible and clearly valuable, and they give you a vague promise on something you can’t see, and can’t even check if anyone has ever received.

We make similar bad “bargains” with a few kinds of workers, to whom we grant extraordinary privileges of “self-regulation.” That is, we let certain “professionals” run their own organizations which tell us how their job their job is to be done, and who can do it. In some areas, such as with doctors, these judgements are enforced by law: you can only buy medical services approved by doctors, and can only buy such services from those who the official medical organizations labels “doctors.” In other areas, such as with academics, these judgements are more enforced by our strong eagerness to associate with high prestige professionals: most everyone just accepts the word of key academic organizations on who is a good academic.

There is a literature which frames this as a “grand bargain”. The philosopher Donald Schön says:

In return for access to their extraordinary knowledge in matters of great human importance, society has granted them [professionals] a mandate for social control in their fields of specialization, a high degree of autonomy in their practice, and a license to determine who shall assume the mantle of professional authority.

In their book The Future of the Professions: How Technology Will Transform the Work of Human Experts, Richard and Daniel Susskind elaborate:

In acknowledgement of and in return for their expertise, experience, and judgement, which they are expected to apply in delivering affordable, accessible, up-to-date, reassuring, and reliable services, and on the understanding that they will curate and update their knowledge and methods, train their members, set and enforce standards for the quality of their work, and that they will only admit appropriately qualified individuals into their ranks, and that they will always act honestly, in good faith, putting the interests of clients ahead of their own, we (society) place our trust in the professions in granting them exclusivity over a wide range of socially significant services and activities, by paying them a fair wage, by conferring upon them independence, autonomy, rights of self-determination, and by according them respect and status.

Notice how in this supposed bargain, what we give the professionals is concrete and clearly valuable, while what they give us (over what we’d get without the deal) is vague and very hard for us to check. Like an indulgence. The Susskinds claim that while this bargain has been a good deal so far, we will soon cancel it:

We predict that increasingly capable machines, operating on their own or with non-specialist users, will take on many of the tasks that have been the historic preserve of the professions. We anticipate an ‘incremental transformation’ in the way that we produce and distribute expertise in society. This will lead eventually to a dismantling of the traditional professions.

This seems seriously mistaken to me. There is actually no bargain, there is just the rest of us submitting to professionals’ prestige. Cheaper yet outcome-effective substitutes to expensive professionals have long been physically available, and yet we have mostly not chosen those substitutes due to our eagerness to affiliate with prestigious professionals. We don’t choose nurses who can do primary care as well as doctors, and we don’t watch videos of the best professors from which we could learn as much as from attending typical lectures in person. And we aren’t interested in outcome track records for our lawyers. The existence of even more such future substitutes won’t change this situation much.

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Super-Factor Scenario

A man always has two reasons for doing anything: a good reason and the real reason. J. P. Morgan

In economics today, as in many related fields, data analysis is king, and theory takes a back seat, at least as far as status goes. When people celebrate particular exemplary data analyses, they usually point to a use of difficult statistical techniques, or more commonly to some clever idea for how certain data could speak to an important question. They point far less often to what is more often the real limiting factor: access to relevant data, and to resources (such as time and student assistance) to process that data. Organizations with data are far more willing to show them to academics from prestigious institutions.

This is part of a more general pattern: when we give people status, the criteria we claim to use to choose who gets status often differs substantially from our real criteria. Let’s see how that might play out regarding the strong claim I posted on Saturday:

If we put together a huge super-dataset describing many individual people in as many ways as possible, a factor analysis of this dataset may find important new super-factors that span many of these features domains. Such super-factors would be promising candidates to use in a wide range of social research, and social policy. (more)

When someone finally does this data analysis that I’ve proposed, and finds some super-factors, they will be rightly celebrated. But what will they be celebrated for? Their main actual contribution will have been to get some organization to pony up enough resources to look for super-factors. But that’s not the sort of thing for which we like to celebrate intellectuals. So I predict that such people will instead be celebrated for the very idea of looking for super factors, for looking for a certain kind of super-factor, or for a clever computational or statistical technique used in the search.

There isn’t much risk of people finding my post and using that to undercut this celebration. I know of many cases where prestigious academics were celebrated for “insights” that others had expressed beforehand. As long as those others and/or their venues were of sufficiently lower status, academics see no conflict. Should anyone make an issue of it, there are always differing details that can be seized on to explain why the two ideas were really quite different.

If we had prediction markets on such things, and used them as the main way we allocated credit on such claims, well then in that case I might be able to lock in great rewards now, rewards that others couldn’t steal later. But that is one of the reasons we don’t want prediction-market-based rewards. In the end we like most of our hypocrisies, including those involving giving people status for different reasons than we claim.

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Life’s Laminar Endgame

I turn 56 in a week, and I’ve been thinking about how life changes with age. I’ve come up with a view expressed in terms of two key distinctions:

Foregame vs. Endgame Actions in games often have both direct local immediate consequences, and also more indirect global delayed consequences, such as those that result from how other players react to your actions, then more others react to those actions, and so on. The longer a game that stretches ahead, and the more other players who interact, the more that these indirect consequences can matter. In contrast, at the end of a game there are fewer moves others make after you, and fewer other players that your moves might influence. So endgame play focuses more on direct local immediate consequences. Cooperation often breaks down in endgames, as it often depends on threats of future and wider reprisals against uncooperative behaviors.

Turbulent vs. Laminar When fluids like water flow slowly, their flow patterns tend to be simple, stable, predictable, and efficient. As one increases the pressure pushing a fluid while holding constant its environment, the flow velocity also increases, and at some point the fluid switches to flowing in complex, unstable, and unpredictable ways. Turbulent flows are less efficient; if you must pay to push fluids then you want to keep your flow laminar. But turbulent flows also mix fluids much better. Each part of a turbulent flow could end up in far more possible future locations, and next to far more other parts, than can similar parts of a laminar flow.

My view is: Young life is a turbulent foregame, while old life is a laminar endgame. That is, when young we are in the foregame of life, where our life paths are more turbulent, and when older we transition into the endgame of life, where our life paths are more laminar.

In youth, the main consequences of our actions tend to be indirect, global, and delayed. Especially important are social consequences such as what others think of us, and who allies with us. We can end up with very different reputations, mates, communities, occupations, industries, and so on. The life paths of young people also tend to be complex, unstable, unpredictable, and inefficient. For any one young person, it is hard to guess their future mates, jobs, communities, and status, and they may inefficiently change directions and paths many times.

In old age, in contrast, we tend to make fewer and smaller changes to our mates, jobs, communities, and status. We don’t adapt as much to changing opportunities as when young, but this is mostly reasonable given our many investments. We are mostly stuck with existing associates and allies, and wider communities involve themselves with us less. So while we need to worry about how our immediate associates will react soon to things we do, we don’t need to concern ourselves as much with wider more delayed circles. And even our immediate associates can do less to help or hurt us. So we focus more on direct, local, immediate consequences of our actions.

When young, we collect and explore many options, including in associates. We meet many people, and while we don’t want to commit to strong relationships with most of them, we like the option of exploring those possibilities more later, especially if these people should become powerful and high status. The mean value of a future association may be much larger than its median value. That is, we can sometimes mostly care about the chance that they will later become especially powerful or high status.

The young should be especially wary of creating enemies with powerful allies. So when young we tend more to endorse and adopt the standard social norms of our world, including those that say everyone that meets certain criteria should be treated with minimal respect, as if they might become high status someday. As a result, younger people acquire thicker longer distance networks of associations, which can create powerful incentives to seem and act cooperative on larger social scales. The future weighs heavily, and a wide social circle matters more. Also, since when young we understand the social world less, and a wider social world is more complex, we are then more worried about unexpected consequences.

When older, in contrast, we are less worried about wider social punishment of our behaviors. Fewer people matter to us, their and our life paths are more predictable, and we understand our smaller social world much better. So we can more directly calculate the consequences of what we do to people. Thus we are more willing to betray distant allies of allies, as we less fear their future reprisal. So when older we are more in a laminar endgame, where our actions are less guided by generic social norms on how to uniformly treat a wide circle, and more guided by calculating the personal consequences of doing particular things to particular people. For example, we need less to pretend that everyone might become high status, as it becomes safer to treat associates differently by their now stable status.

In many job promotion ladders, and also many other kinds of status ladders, previous status sets a rough lower bound on current status. Thus people tend to rise in status over time until a point in time when they stop rising and then mostly stay near the same status. In such cases, those who are still rising have a more turbulent life path, while those who have stopped have a more laminar path. This creates a correlation between status and turbulence. Thus high status people tend to have more turbulent lives, more like the lives of the young, helping to make the turbulent lives of the young seem higher status. And high status people can less see the age pattern I’m describing.

If you are young, you might wonder how much people do things because they are good people who really believe in the morality of the standard norms, as opposed to doing things out of fear of social reprisal. You might wonder in particular what your associates would do to you if they less feared such reprisal. Good news: when older you will have much clearer data on this. And typical older people around you also have data now, if you will ask them. Haven’t asked? Perhaps you don’t like the answer you think they will tell. Or maybe you don’t trust them to tell you the truth. (And if they’d lie, which theory does that support?)

In the above, I have told a functional story about how behavior should reasonably change with age. However, I should admit that human behavior has not adapted very much to big changes that appeared only in the last few centuries. One of those big changes is that young lives are far more turbulent than those of our forager or farmer ancestors. So turbulent in fact as to call into question the plausibility of social reprisal. For example, high school students often invest greatly in their social reputation, an investment that is mostly lost when they go off to separate colleges and jobs. A more adaptive response to the modern world would be to more ignore wider social reprisal when very young and turbulent, then pay it more attention at a middle age of moderate turbulence, and then less attention again when old.

Let me also note that for some kinds of behavior young people can be at an endgame. Warring drug dealers who don’t expect to live more than a decade longer may feel they are in a local endgame. Also, evolution might have primed young men trying to impregnate young women while they are still promiscuous and fertile to treat that part of their lives as an endgame, since the consequences can be so huge there compared to later opportunities.

This whole perspective suggests another explanation for the puzzle of why we express more interest in people who have the potential to achieve X, relative to people who have already achieved X. Perhaps we presume that someone with the potential to X is younger with a wider social network that we might join by affiliating with them. In contrast, we presume that a person who has already achieved X is older, more tied to their key social network, and less open to new alliances with us.

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Doing Good ≠ Being Good

Most of us like to be associated with “idealistic” groups that claim that they are doing good, i.e., making the world better. However, this is usually not our strongest motive in choosing to associate with such groups. Instead, we more strongly want to make ourselves look good, and gain good-looking associations. Most idealistic groups quickly learn to cater to this demand by:

  • Making meetings where people can visibly show off their affiliation with the group, form ties with like-minded others, and affiliate with impressive speakers/leaders.
  • Making ladders of extra recognition, such as awards, and offices.
  • Offering training to develop and credential related skills.
  • Advocating for the world to put more value on the features that this group’s members have, and less value on other features.
  • Advocating to others to join this and related groups, via arguing the virtues of it and its members.

Of course such groups try to frame these activities in terms of making the world better. And yes, groups that really were trying to make the world better might in fact do some of these. The tipoff, however, is their relative neglect of everything else required to actually make the world better. Groups tend to be far clearer on how to tell who is good than on how exactly good individuals make the world better, on what else exactly is required, and on how they are going to manage that.

Let me give some examples:

  • Christianity presents itself as good for the world, but its main activity is meetings centered on impressive people, and at meetings most people are mostly thinking about how good or bad they are or have been. They talk a lot about what is good vs bad behavior, but are pretty thin on how more good behavior will help the world.
  • I recently talked at a conference of ecological spiritual consciousness raising folks. They had impressive speakers who celebrated features of attendees. Some presented an explicit ladder of higher consciousness, ranked famous people on it, and talked in detail about how to move to higher levels. They want a more egalitarian and ecologically sustainable world, but are fuzzy on how exactly spiritual consciousness helps there.
  • The recent movie Tomorrowland seemed on the surface to be about having hope for and working for a better tomorrow. But in fact a secret society was obsessed with finding the few best people in the world, even though it already had enough secret tech to save the world. Most superhero stories are on the surface about heros struggling to help the world against an opposing villain, but actually more about how cool and impressive it would be to have certain abilities.
  • Political disputes seem to easily get distracted by issues of who is better. Immigration becomes all about what immigrants are worthy. School becomes all about how it can makes you better and who deserves a chance to get better. Charity debates become ways to show who has enough empathy, or enough toughness. How to promote innovation quickly becomes celebrating particular innovators.
  • When discussing how to get better predictions, there is far more interest in finding correlates of who personally is a super-forecaster, than in finding better institutions like prediction markets to promote good predictions. Similarly for rationality, there is far more interest in how to spot rational folks, and in rationality training, than in institutions to promote rationality.

Look, yes the world is full of people, and yes the qualities of those people make some different to world outcomes. But a great many other things also matter for outcomes. So if you were really focused on doing good, you’d pay lots of attention to things other than being good. Doing good isn’t just being good, not by a long shot.

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Elite Evaluator Rents

The elite evaluator story discussed in my last post is this: evaluators vary in the perceived average quality of the applicants they endorse. So applicants seek the highest ranked evaluator willing to endorse them. To keep their reputation, evaluators can’t consistently lie about the quality of those they evaluate. But evaluators can charge a price for their evaluations, and higher ranked evaluators can charge more. So evaluators who, for whatever reason, end up with a better pool of applicants can sustain that advantage and extract continued rents from it.

This is a concrete plausible story to explain the continued advantage of top schools, journals, and venture capitalists. On reflection, it is also a nice concrete story to help explain who resists prediction markets and why.

For example, within each organization, some “elites” are more respected and sought after as endorsers of organization projects. The better projects look first to get endorsement of elites, allowing those elites to sustain a consistently higher quality of projects that they endorse. And to extract higher rents from those who apply to them. If such an organization were instead to use prediction markets to rate projects, elite evaluators would lose such rents. So such elites naturally oppose prediction markets.

For a more concrete example, consider that in 2010 the movie industry successfully lobbied the US congress to outlaw the Hollywood Stock Exchange, a real money market just then approved by the CFTC for predicting movie success, and about to go live. Hollywood is dominated by a few big studios. People with movie ideas go to these studios first with proposals, to gain a big studio endorsement, to be seen as higher quality. So top studios can skim the best ideas, and leave the rest to marginal studios. If people were instead to look to prediction markets to estimate movie quality, the value of a big studio endorsement would fall, as would the rents that big studios can extract for their endorsements. So studios have a reason to oppose prediction markets.

While I find this story as stated pretty persuasive, most economists won’t take it seriously until there is a precise formal model to illustrate it. So without further ado, let me present such a model. Math follows. Continue reading "Elite Evaluator Rents" »

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What Does Harvard Do Right?

Is Harvard the top rated college because it is the most clever in deciding who to admit? Not obviously. Instead, in the short run Harvard can gain plenty from a positive feedback loop: the best people apply and prefer to go there, which adds a glow to those who graduate from there, which makes the best want to apply, and so on.

While this seems an obvious and simple story, I must admit I haven’t been thinking enough in such terms, probably in part because I haven’t seen formal economic models that capture this story well. I thank venture capital (VC) titan Marc Andreessen for clarifying. Here is part of a 14 May twitter chat between him (MA) and myself (RH):

RH: VC is dominated by a few firms. What is the scale economy? Few geniuses? Info of seeing most pitches? Ability to create new fashions? Other?

MA: Core dynamic: A few firms have positive selection on their side; the other firms have adverse selection working against them.

The battle among VC firms is less “who is smarter?” than “who do the best founders approach first?”.

RH: OK, but why approach the top few first? What is more attractive about being funded by them vs others?

MA: Founders care about the VC brand halo because potential employees, potential customers, and other potential investors care.

RH: Is it just that top VC get first pick, so they are better picks, so their picks get halo by being in that pool, rinse & repeat?

MA: Yes, that’s the core positive feedback loop. How it starts is less meaningful than how it perpetuates.

Core dynamic: A few firms have positive selection on their side; the other firms have adverse selection working against them.

The battle among VC firms is less “who is smarter?” than “who do the best founders approach first?”.

The main historical driver of positive selection is prior success: a halo branding effect that new startups seek.

In essence, a new startup uses its VC’s brand as a credibility bridge until the startup establishes its own brand.

RH: Sure, but the question is why some VC brands shine brighter. Their money isn’t any more green.

MA: They have an aura of success as a consequence of having previously funded successful startups.

Arguably these dynamics are changing in real time in some interesting ways:

RH: Is there a prediction on if VC industry will become more or less concentrated as result of these changes?

MA: My belief is that VC is restructuring the same way retail stores, law firms, accounting firms, and investment banking did:

This seems to be the hallmark of a professionalizing industry being run properly. You either go big or you go specialist.

RH: I guess the key idea is that there are big scale economies with doing standard tasks, but big diseconomies for specialized tasks.

MA: Yes, but with the subtlety that the well-run scale players are also excellent at many of the specialized tasks.

RH: Many, but not most, or the specialized shops couldn’t exist long.

MA: This is exactly what happened in the talent agency business in the 1980s and 1990s. The big agencies got great at many things.

The specialized shops have to stay small and stay laser-focused on particular areas of specialized advanced competency.

But of course similarly, a scaled franchise firm that gets sloppy runs the same risk, can degrade itself into the middle tier.

RH: Summary: long trend is to scale given tasks, but also task specialization. Overall scale rises, but falls locally when specialize.

MA: Right, exactly. And this explains the size distribution — the scaled players have to be big; the boutiques have to stay small.

You see this in investment banking. You either work with Goldman Sachs or you work with a small boutique specialist bank.

RH: This makes sense, but I’m not sure we have any formal models that predict this correlation nicely.

This same sort of story also seems to work in the short run to explain why some journals have higher prestige. It is not so much that top journal editors are more clever, or use a smarter system to review submissions. It is just that the best papers are submitted there first, which makes the average quality of their publications higher, and so on.

In the long run, we see changes in the prestige rankings of these colleges, journals, investment banks, and venture capital funds. The key question is: what determines those long run changes? Do competitors with slightly better ways to evaluate or help submissions slowly win out over others? Or do other factors dominate?

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