Monthly Archives: May 2015

A new kind of advertising

Creating a successful business involves three steps:

  1. Create a product that people may want to use.
  2. Find people that may want to use it.
  3. Convince them to start using it.

If you live in a tribe, you pretty much know everyone who lives there. So #2 is not an issue for you. You already know everyone who could possibly want to use your product. And if this number is too low, you wouldn’t build the product to begin with. Thus tribal advertising is all about #3.

But once you have access to a bigger audience, such as the one that the internet provides, #2 starts playing an important role and might even share a huge percentage of #3’s responsibilities. If you have modest goals—for example, if you just want to find 1,000 true fans—it’s probably mainly about doing #2 right. If you have a decent product, what are the chances that out of a population of a billion, not even 1000 want to buy it?

Interestingly, advertising is not just about building businesses. Building a career, making friends, and dating, all depend on how well you advertise yourself, and the process can once again be broken down into three steps:

  1. Work on yourself to make yourself awesome.
  2. Find people who may think you are awesome.
  3. Convince them that you are awesome.

The definition of awesome will depend on the context. Once again, the internet might be responsible for a gradual shift from #3 to #2. If you live in a tribe, then becoming the cool person of the tribe will mostly involve moulding yourself to fit into the social customs dictated by the tribe. But with access to a much bigger audience, it may be possible to become a celebrity by aggressively looking for people who already value the qualities you have.

The Nash equilibrium of online dating

(I got the idea for this post while listening to Tim Ferriss’ podcast with Samy Kamkar.)

Following in the footsteps of Hollywood, let me put together John Nash and dating once again, although in a much less romanticized way.

I used to think that guys are the ones who have a horrible time on online dating websites while girls simply sit back and enjoy the overwhelming attention. But it turns out, I was wrong. Members of both genders are generally utterly disappointed by the outcome of their online dating experiments. So then why isn’t anyone doing something about it? I think it’s because the online dating market has simply settled into a shitty Nash equilibrium. Let me explain. But first, here’s some quick background on Nash equilibrium for you.

Nash equilibrium is an abstract mathematical concept that captures a pattern seen in many social situations. Often people in a society will behave in a way that’s bad for each individual (including themselves), even though, in principle, if they all got together and collectively chose to behave differently, every member of the society would be better off. A modern example is global warming. A simpler but more abstract example is prisoner’s dilemma. In all these cases, a Nash equilibrium is the equilibrium towards which society converges. It is interesting whenever the equilibrium towards which society converges leaves its members much worse off than a state that could have been reached by a collective decision (or an external intervention such as that by a government).

The rule to spot a Nash equilibrium is easy. For each individual in the society under investigation, you need to check the following: assuming every other person’s behaviour remains unchanged, is changing this individual’s behaviour in any way going to make him worse off than what he is now? If the answer is yes for each individual, the present state is a Nash equilibrium.

Next, some background on online dating. In case you don’t know what happens on online dating websites, here’s a quick summary. Guys spam girls with hundreds of average or low quality messages, and girls sift through the deluge of “hey”s and “wanna fuck”s mining for some semblance of attraction. Since this process is frustrating, most messages get ignored. End result: guys frustrated about spamming and not getting replies, and girls frustrated about receiving spam and not having time or patience to reply.

Is this a Nash equilibrium? Consider some guy named Bob trying online dating. Considering that every other guy is sending out hundreds of messages per week, Bob can’t afford to send out the more natural 5-6 per week, unless, of course, he comes up with the magic message that makes every woman swoon. Assuming such messages do not exist, Bob must participate in the spam race to keep a decent standing. Or in other words, if he chooses to deviate from the strategy of spamming a hundred women per week, he will be worse off, implying this is a Nash equilibrium indeed.

Things could be improved if all guys got together and promised each other to only send out 5-6 well thought out messages per week. The girls would be happy to see a neater inbox and would feel motivated to reply to a higher percentage of the messages. This would make both guys and girls happy.

But since such a collective decision is impossible, a better approach is external intervention. If the dating website itself constrained its users to send not more than 10 messages per week, or if it charged money for sending messages, things could improve.

The CEO paradox

This post is half-baked, and is perhaps just non-sense, but hear me out for a bit.

If there is a useful skill that can be defined precisely, then any competitive economy will converge to a point where that skill can be outsourced. This means the highest paid employees will always be the ones with the most vaguely defined skills.

People go on and on about why CEO’s get so much money even though what they do is not even very clear. The ambiguity of their skillset is perhaps the reason why they get paid so much.

Economics 101: Types of assets

(Disclaimer: I know nothing about economics.)

In the last post, I defined assets as anything that can be owned. Interestingly, this concept needs examples to be fully understood. In this post I will provide some examples.

Cars, houses, food, clothes etc. are obvious examples. These are all tangible objects you can hold in your hands. A vacation package to Hawaii is less tangible but no one will have problems accepting it as an asset. Let’s move quickly to the non-obvious.

A loan is an asset. Let me explain why. If you give out a $1,000 loan to your friend Bob at a 10% interest rate, you now own the right to receive $1,000 + interest back from Bob. This right is an asset, and therefore, you can do things with it that you can do with other assets. For example, you can sell it. Whoever buys it will get the right to receive $1,000 + interest from Bob. What value should the asset be priced at? That depends on many things including how reliable Bob is, what interest rate are the banks giving out loans for, and how good of a deal you can negotiate in your trade.

Similarly, many other contracts you sign with people can be considered an asset. A share of a stock is another slightly non-trivial kind of asset. If you own 1% of the shares of a company, you essentially own 1% of the company. Once again, you can exchange this asset with other kinds of assets and the price will depend on many factors including how valuable the company itself is.

The idea of treating contracts as assets has been used extensively in recent years in the form of something called derivatives. Derivatives are assets that are derived from other assets. For example, now that we have seen that a share of a stock is an asset, one can define a new asset called a “call option” which is the right to buy a share at a certain price at a specific future date. A call option is a derivative that’s derived from a stock. Being an asset, this contract can be bought and sold in exchange of other assets and its price is determined by several different market parameters interacting in complex ways. Similarly, for any kind of asset, you can sell the promise to buy or sell the asset at a future date at a specified price and that will be an asset of its own.

Next, we turn our attention to a unique kind of asset: money. Money is simply an asset whose role is to make trades easier to execute. Any object that a large community has collectively agreed to value can be considered money. Imagine you live in a society where money has not been invented yet. If you own lots of horses and you need some rice, in order to exchange horses for rice you will need to find someone who has extra rice and is in need of horses. Or if you are good at sales, you can sell your horses for rice to someone who doesn’t care for horses using the following sales pitch: “Why don’t you take my horses, give me your rice, and then sell these horses to someone else who has the thing you want? And since horses are in demand these days, selling them shouldn’t be a problem.”

This might work if horses were truly in demand (or if you were excellent at sales). This is where money comes in. This is what distinguishes money from other kinds of assets. There is some sort of probabilistic guarantee that money will always be in demand in the sense that anyone you talk to will be willing to accept your money in exchange for something else. How such a guarantee comes into existence is an interesting issue that will require a blogpost of its own. But for now, we will use this as our working definition for money: an asset that a large community has collectively agreed to value.

Finally, another interesting and often ignored asset is time. Everyone owns a certain amount of time and the thing that distinguishes time from other kinds of assets is the property that you cannot choose to not spend it. In fact, it is constantly being spent at a rate of one second per second and you can only choose what you are going to spend it on. Unlike money, for example, you cannot save it in a bank.

Once again, being an asset, it can be exchanged for other assets. The most explicit way of doing that is to take up a contractual job that pays you an hourly wage. But more indirectly, you are always converting time into other kinds of assets. If you spend four years at university getting a degree in computer science that later lands you a $100k job, you have in some way converted those four years into some sort of wealth.

At this high a level of abstraction, things become confusing and it’s not always clear exactly what trade is being executed, but I think there is a certain advantage in thinking of everything as an asset and every activity as a trade. Hopefully this will become clearer in a future post.