1) Why are intelligence tests divided up into neatly separated sections for math (reasoning) and verbal?  I can’t remember many times in my life (outside of taking a test) where I had to use only one of those skills without the other.

2) The notion that one test is suppose to accurately assess the intelligence for every living person is ridiculous.  Intelligence is a truly multifaceted characteristic that I have seen manifested in many different ways.

3) How can a test you take as a child accurately predict your intelligence for your whole life?  I don’t feel I that became “intelligent” until I was 19, during my freshman year of college.

4) Why are most tests timed and tightly restricted to only a few hours?  When I rush through thinking about something, I never make the best decisions.  Never in my working career have I ever been under similarly intense time pressure.

5) I’ve never scored particularly high on any standardized test, but I was able to improve my SAT score by roughly 300 points by studying and taking practice tests.  If the test is supposed to assess my underlying intelligence, why should it make a difference if I study or not?  I certainly became no smarter by drilling through practice tests.

6) IQ and SAT scores carry weight and can become a self-fulfilling prophecy of sorts.  Nothing fuels a fire of inadequacy like low standardized test scores.

7) At least half of success comes from execution, discipline and dedication.  I’d love to see a standardized test that can assess someone’s ability to execute on an idea and carry it through to completion.

For all these reasons (and more), standardized tests are a rotten way to assess intelligence.  Why do we rely on them so heavily in our educational system?  It’s true that for schools and universities standardized tests are the easiest way to assess intelligence, but like many other things – the easiest way is not nearly the best.

What are your thoughts?

In one example Taleb explains that basing mutual fund investing decisions on the historical performance of the fund manager can be very dangerous.  For example, in a scenario where 8,000 fund managers each have a 10% chance (by pure luck) of making $10MM in one year – chances are, based solely on chance, eight of those fund managers will make $10MM for three years in a row.

In this scenario if you invested with one of the eight fund managers who had made $10MM for three years straight – the following year the chance of that manager repeating their performance will be the same as every other fund manager: 1/10.

Of all the concepts that Taleb covers, my favorite is a short section about the “problem” of induction.

Fundamentally, induction is the process of taking lots of little bits of data and gluing them together into a cohesive story.  The main reason why induction exists is because as humans we are limited in the amount of disparate data points we can remember.  The average person’s short-term memory tops out at about seven pieces of information and, without context, there is a very small chance that any of those seven bits will be remembered for longer than a few minutes.  Induction is the magical process that allows us to remember bits of information for longer – but requires us to weave our information into a story.  The problem comes, of course, after we form the story and the underlying bits of information are forgotten.

As a demonstration of this problem, imagine you are conducting a lab study on the benefits of a new vitamin.  You work with 10 human subjects all of whom report feeling better and livelier after taking the vitamin.  From your data (the accounts of your 10 participants) you can induce that the new vitamin is a dietary supplement that will make everyone feel better and livelier.  What is lost here, after you form your story, are the details about your 10 participants.  Maybe one of your participants reported feeling great, but his hair started to fall out – or maybe your group of participants was not an accurate representation of the general public (maybe they were all men over the age of 60).

In a simpler and more prescient example, say you observe over the course of the past 25 years the housing market has gone up year over year.  Based on your data, you induce that the housing market always goes up.  What’s lost here is the fact that this story is based on a limited and specific pool of data.

All too often some important details get left out between the “data collection” phase and the “story” phase. That is why I have a strict policy about trusting research studies:  I trust every study that I read, except for the ones that I did not conduct myself.

This style of investing has always led me to invest in broad index funds looking for capital appreciation at a steady rate over time, or in individual companies that I think will go on to do great things in the future over the long term.

However, recently, I’ve been scrutinizing my approach.

The corner stone of the Efficient Market Theory is human rationality.  For the theory to work, all investors must purchase stocks for rational reasons – such as material information about a company that would influence the value of the company’s stock.  On average, a large enough pool of perfectly rational investors will price each equity in accordance to its true value.

The problem here is that humans are not perfectly rational.  This certainly shouldn’t be a surprise; irrationality is all around us.  From smoking cigarettes to gambling, it’s clear that people will act irrationally when presented with an immediate and short-term benefit.

How does this irrationality present itself when it comes to investing?

The more I think about it, the more it seems that the concept of “perfect rationality” is an oxymoron.  If any investor were perfectly rational, they would sit around all day trying to decide what to do.  Such a rational individual would be crippled, unable to act at all.  How could you possibly ensure 100% maximization of utility in the face of so many possible trades?

Recognizing the problem with perfect rationality – it now seems somewhat attractive to act irrationally when making investing decisions.  If you know that it will take you an infinite amount of time to make the absolute rational decision (and hence be rendered action-less), it then seems logical to short-cut rationality.  That is, consider an investment option for a limited amount of time and then make a decision.  In this scenario, I would argue that it is actually rational for us each to act irrationally – and make decisions before we have pegged down the absolute 100% rational choice.

Because, I argue, it is actually rational for investors to act irrationally – it seems that there may be a few cracks in the Efficient Market Theory after all.

Thoughts?

Prior to this weekend, I knew very little about Vincent Van Gogh.  My knowledge was pretty much limited to Starry Night and that self-portrait of him with a cut-off ear. Saturday afternoon, I was happy to learn more about Van Gogh’s interesting life.  Here are some tid-bits for background:

1)   His entire painting career lasted only 10 years

2)   He died at the age of 37 from a gunshot wound (believed to be self-inflicted)

3)   Van Gogh died poor and sold only one painting during his lifetime

4)   In 1889, one year before his death Van Gogh committed himself to an asylum, where he painted many of his most famous works

Beyond these facts – the exhibit promoted a narrative on Van Gogh’s tortured psyche.  Throughout his life he suffered from mental problems, which manifested themselves interestingly in his paintings.  The one theme I enjoyed most was Van Gogh’s treatment of the horizon line.  Toward the beginning of his career Van Gogh painted pictures where the horizon was about half way down the canvas – the composition consisting of half sky and half land.  As he plunged into the depth of mental illness, the horizon line in his paintings crept higher and higher, as if the artist’s view paned downward as he hunched over with depression.  Around 1887, the paintings of many garden scenes saw the horizon disappear altogether – the subject of the painting focused squarely on the ground with no sky in sight.

Aside from the symbolic rising horizon line, Van Gogh’s paintings remarkably showed few signs of his mental illness.  In fact – Van Gogh frequently depicted visibly upbeat and happy scenes.  Hay bails set out in a field that appear to waltz like ballroom dancers, still life paintings that stir with bursts life, beautiful orderly gardens and landscapes depicted with dreamy swirls of paint.  Upset and tortured in the physical world, it was as if Van Gogh tried to paint himself a dream-world where he could live happily and escape his troubles.

Shortly before he died, Van Gogh painted an unusual scene.  Tree branches and blossoms on a light blue sky.  The perspective puts the viewer lying on the grass – staring up into the sky on a clear spring day.  Van Gogh painted the picture for his Brother Theo, on the occasion of the birth of Theo’s first son – named Vincent in his honor.

Looking at the painting you have to wonder – did Van Gogh know his death was near?  Had he resigned his battle with the world and painted himself an escape?  Perhaps we’ll never know for sure.

To log into the ING Direct website (the custodian of my savings account), I entered my nine digit customer ID number.  That ID number took me to a page where I was asked to recognize a unique “Site ID” photo that I had chosen from over 1000 images when I created my account.  After positively recognizing my unique site ID photo, I was then asked to enter my PIN (at least six digits) by clicking on the numbers of a visual on-screen keypad.  After clicking on the correct sequence of numbers and hitting “Submit,” I was finally taken to a screen where I could review my account information.

After dealing with my savings account, I then navigated to the homepage of my credit card provider (fiacardservices.com).  To access my credit card information, I entered my username (six digits long, numbers and letters) on the homepage and hit “Submit.”  That took me to a page where I was asked one “Security Question” which was selected at random from five security questions that I had answered when setting up my account.  This time, I was asked where I held my first job.  After correctly answering that question, I was then taken to a page where I was asked to identify my unique “Site ID” photo (again, selected from over 1000 images when I set up my account) and enter my password (at least 6 digits, case sensitive and must include numbers, letters and at least one symbol).  After correctly entering my password, I was then allowed to see the details of my account.

Having successfully completed my financial housekeeping for the day, I went out to get some lunch and enjoy the day with Miranda.  We dropped into a new French bakery in the neighborhood.  To pay for the sandwiches I used my credit card and to authorize my purchase, I scribbled my name on a tiny piece of paper, which the barista (without looking) stuffed into a drawer behind the counter.

Walking out of the sandwich shop I thought to myself, what a ridiculous tradition it is to sign credit card receipts.   Compared to the security precautions required for online banking, signatures are a laughable form of identity protection.  I could have written Mickey Mouse on that receipt and the barista would have still accepted it.

In addition to identity protection, I suppose another reason why we sign things is to signify that we will do something in the future (e.g. pay the credit card company for the sandwiches they just purchased for me).  However since credit card transactions can happen over the internet in real time, this is outdated as well.

It just feels a little silly to sign-off on payment for a sandwich using the same method of commitment that our founding fathers used on the Declaration of Independence.

What do you think?

The majority of my slide deck focused on the evolution of display advertising over the last 10 years.

Inspired by Ari Paparo’s recent post on Internet Advertising for Kindergartners and on recommendation by my girlfriend, Miranda, I had the students act out the evolution of the ecosystem as I tabbed through my slides. Miranda and I gave each student a different “Hello My Name Is” tag, labeling them a Publisher, Advertiser, Network, Exchange, SSP, DSP, ATD, or ITD. Additionally, we used poker chips to represent advertising impressions, which the Publishers traded for “Insertion Orders” with the Advertisers. It was a fun, interactive way for the students to better understand this ever-changing, multi-pronged ecosystem.

Throughout the presentation I focused on the themes of efficiency, intermediation, and “me too” companies that came onto the scene to compete with stand-alone intermediary companies (ultimately creating inefficiency). For example, I explained to the students that Ad Exchanges were originally meant to create efficiency by helping Networks deal with the inevitable imbalance between supply and demand. However, other Exchanges sprouted up to copy the idea of the first exchange, and a business model that was originally meant to create efficiencies did just the opposite. To solve for the inefficiency of multiple Exchanges, opportunists started DSPs and SSPs to serve as one point of contact for advertisers and publishers, respectively dealing with multiple exchanges. But then multiple DSPs jumped in as “me too” companies, then came ATDs and ITDs – and so on… The full slide deck is included below (note/disclaimer – the content of the slides do not necessarily represent the opinions or positions of AppNexus Inc).

The students responded to the presentation with insightful comments and questions about industry consolidation. A few highlights include:

Comments in favor of consolidation:

Why don’t Marketers and Advertisers band together and force a consolidation of all of the intermediaries in the landscape?

Why doesn’t the government step in and help organize this industry better?

Why don’t ATDs build their own bidders and bypass using DSPs?

Why don’t Agencies build their own bidders and bypass using ATDs, ITDs and DSPs?

Why haven’t DSPs, Exchanges and SSPs partnered together or merged to form a cohesive platform to compete with Google and AppNexus?

How can private consumer data be safe with so many intermediaries?

Comments in favor of more intermediation:

Why doesn’t someone start a Trade Desk Aggregator that serves as a single point of contact for Marketers/Advertisers and allocates funds to different ATDs/ITDs (one additional layer of intermediation)?

Why don’t large publisher consortiums start their own Trade Desks (Publisher Trade Desks?) – to serve the inverse role as ATDs?

Pretty good comments, right?

Descending into the subway at 34^th street for my one-stop trip on the F train, I always walk by two young gentlemen trying to give away newspapers.  There seems to be a new set of them each week (high turnover), but there is always one representing AM New York and one representing Metro (for those of you not familiar, these two newspapers are competitors in the decidedly unglamorous free newspaper market in NYC).  Having traveled this trip nearly every day for 3 years, I can confidently say that I have a read on the predominant strategies used to move these newspapers from a lonely stack behind a phone booth into soon-to-be ink stained hands.

1) The “Here ya go”

Stemming from a misconception among newspaper handlers that a key barrier to selling free newspapers is people’s inability to reach them, the “Here ya go” is a basic technique that involves indiscriminatingly holding a newspaper directly in front of every person who walks past.  Generally seen as the lowest viable effort on the part of a newspaper handler, this method gets few incremental sales.

2) Announcing the Name of the Newspaper

A clear signal of misalignment between strategic goals and tactics, a startling number of newspapers handlers will furiously announce the name of their newspaper in an endless loop (either AM, or Metro).  For New Yorkers who commute on the subway every day, this certainly provides no new information and likely scares away as many customers as it attracts.

3) The “Good Morning”

Often combined with tactic #2, the “Good Morning” is a slightly more advanced technique to attract new customers.  Unlike tactics #1 and #2, the “Good Morning” actually speaks directly to the customer and acknowledges their existence, albeit somewhat impersonally.  Where this tactic frequently falls apart is when a handler feels compelled to say good morning to every individual person who walks by.  It’s a kind gesture, but at a rate of 10 “Good Mornings” per second – the rapid-fire outburst of greetings probably does more harm than good.

4) The Reciprocity Play

Related to the “Good Morning” – the Reciprocity Play involves the newspaper handler complimenting customers and, in exchange, expecting them to take a free newspaper.  I personally like this tactic – it hasn’t led me to accept any free newspapers, but it does boost my confidence when newspaper handler refers to me as “young sir” – or comments that I’m looking sharp.

5) Going Negative

My personal favorite – this tactic involves two dueling newspaper handlers each making empty assertions that their newspaper is superior.  For example: “AM New York – Better than Metro!”

6) Appeal to Economics

Practiced by fewer than 5% of all handlers, this higher-level strategy is the first that involves touting the contents of the newspaper.  This announcement usually manifests itself in the form of “Macy’s Coupon!” or “JCPenny Coupon!” – which in itself is clever, as the subway stop I enter is directly between Macy’s and JCPenny.  Kudos to newspaper handlers that employ this advanced tactic.

7) Appeal to Curiosity

In my five years in New York, I’ve seen fewer than a handful of newspaper handlers actually attempt to sell the textual content of the newspaper.  Granted, the content isn’t great, but isn’t this theoretically the reason why these newspapers exist?  They’re all too frequently used as make-shift umbrellas, bedding for the homeless, and packing paper for people who are moving – but when there were originally conceived, wasn’t the goal to inform people?  Why don’t we see more newspaper handlers shouting “Read all about it!” the way that their 1940’s counterparts do when we see them portrayed in movies?

How would you sell free newspapers?  And what do you think these tactics say about the times we live in?

Editor’s note (added by my girlfriend, Miranda):

8) Optimism and Excitement

The newspaper handler at the Bowling Green stop always yells, “Happy [insert day of the week here] everyone! Happy —-day!” He then references whatever is on the cover with an excited tone in his voice. I rarely ever grabbed one because my old office was only a block away and I wouldn’t have had time to read it (I also hate inky hands), but it always put a smile on my face. I think that’s a better way to start the day than by reading the contents of the dusty free newspapers (that really all say the same thing). Sometimes, though, I would grab one – knowing I wouldn’t actually read it – simply because he was a likeable guy.

I borrowed the Evernote idea from a prominent VP at my company.  Every week, each of my teammates uses Evernote to make a bulleted list of their top priorities for the week along with any other appropriate client updates, team updates, upcoming PTO’s, etc.  I can then go in and make comments and add additional points.

What makes Evernote so useful is its simplicity.  The functionality is exactly like a notepad that can be shared and edited by multiple people.  It’s really easy.  The client interface instantly makes sense to anyone viewing it for the first time and there is very little complexity to the program.  In the past few weeks, many of my office mates have also picked up the program and have been using it for a variety of functions from organizing their personal to-do lists to keeping notes on client meetings.

Ironically coinciding with the proliferation of Evernote, Google has decided to “sunset” it’s product Google Wave.  I originally signed up for Google Wave when it was released several years ago, but never really understood what it did.  Reading about it last week, I realized that Google Wave was extremely similar to Evernote – except for one thing: it was much, much more complicated.

One of the things I continue to find interesting is the way that human limitations affect business success.  In the case of Evernote vs. Google Wave – the fact that Wave was too complicated for the average person to understand ultimately led to it’s demise – even though it was a much more technologically advanced product.

For a new digital application to be successful, it needs to pass the “:30 second” test.  In :30 seconds or less, an average person needs to be able to understand exactly what the program does, how it works, and why they would need it.  Dropbox, Evernote and Quora are all examples of products that pass this test – and they’re all simple versions of products that already existed.

It goes to show – when creating something novel, the most important thing is to keep it simple.

Presumably nothing significant has changed in the DNA or genetic makeup of humans in the last 30 years. If that is true, why are football players, baseball players and soccer players so much better at their sports today than their antique counterparties? Why couldn’t a 1970’s football player train himself to be as psychically dominant as football players today? Certainly if any running back from the NFL today were transported to the 1970’s he would be an unfairly dominant player – they’re simply bigger, faster, and more agile.

It seems that there is a weird rule that it is only possible to be a little bit better than everyone you see around you. Looking at the below chart of mile-record times by year – you can see that there is a relatively straight line regression of mile times from 1860 to today. Each year people get just a little bit faster. But why does it have to be just a little bit? Could the runner who set the 1980 world record of 3 minutes and 50 seconds have run that same time if he were alive in 1910? Are the improvements over time due to better training methods, or is there something hard coded into humans that really only allow us to be marginally better than everyone else around us?

http://en.wikipedia.org/wiki/Mile_run_world_record_progression

As I was forming this thought in my head like a ball of clay, I noticed a middle aged female runner wearing a florescent purple shirt pass me on the running path. From her bright shirt, I instantly recognized her as the runner who I had just passed a mile or so back. She was now running significantly faster than she was running when I passed her earlier. It was as if her pace quickened to catch up with me.

As she strode past me my body instantly reacted. A shot of adrenaline surged into my muscles and my pace quickened to keep up with her. Without even thinking about it I continued to pace with her past my street down toward Red Hook pushing a 7-minute pace to eventually pass her as we approached the entrance to the Battery Tunnel. As I passed her, I turned off onto a side street to run home. One half block after I turned, my muscles tightened, my breaths became shallow and the wind that had propelled me down through Carroll Gardens had gone completely out of my sails. I ended up walking home.

This episode makes me wonder. What are humans truly capable of? It seems to me that there are all sorts of secret pockets of human potential closed tightly inside each of us behind locked doors. The only key that’s needed to unlock this potential is seeing someone in a florescent purple shirt do it first.

In evaluating all of these fancy gyms, one thing has stuck out to me more than anything else: it’s not the towel service, or the machines, or the free weights, or the classes.  The thing that has stuck out to me most is that they all have the same pricing model – and it makes no sense.

The typical gym pricing model is to have people pay a fixed initiation fee (let’s say $120), and then pay a fixed monthly fee for unlimited use of the gym (let’s say this is $100).  This means, fundamentally speaking, the people that come to the gym the most are the gym’s “worst” customers and the people that continue to pay and never visit the gym are the “best” customers.  Let me break it down into an example to explain what I mean.

In our fictional gym, where the enrollment fee is $120 and the monthly fee is $100, let’s say there are three customers named: “Light User”, “Medium User” and “Heavy User”.  Light User wants to get in shape and thought she would come to the gym every day, but work has gotten in the way and she really only uses the gym once per month.  Medium User has been a bit better about her gym visiting, she comes once per week – still not as much as she had originally intended on coming.  Heavy User really loves the gym and visits four times per week.  After one full year, the “cost per visit” of our three users would look something like this:

Light User: ($120 enrollment + $1200 monthly fees) / 12 visits = $110 per visit ($1320 total fees)

Medium User: ($120 enrollment + $1200 monthly fees) / 52 visits = $25.38 per visit ($1320 total fees)

Heavy User: ($120 enrollment + $1200 monthly fees) / 208 visits = $6.35 per visit ($1320 total fees)

Looking at these three users we can see that Heavy User is getting a deal that is about 17 times better than Light User.  Now let’s look at things from the gym’s perspective.  Let’s say the gym has 1,000 members with a fixed monthly cost (rent + upkeep + staff) of $80,000.  That means that each member is responsible for covering $80 in fixed cost per month (their fair share of the total fixed cost).  The gym also has a marginal cost of $3 per visit for towels, water, soap and electricity used by one person on the average visit.  From the Gym’s perspective here is how much it costs to support each of our three sample users above after one year (we can call this “cost of goods sold”).

Light User: ($80 fixed cost per month x 12 months is $960) + (12 visits x $3 per visit is $36) = $996 total cost of goods sold.  $1320 total fees paid by Light User – $996 cost of goods sold = $324 profit for the Gym

Medium User: ($80 fixed cost per month x 12 months is $960) + (52 visits x $3 per visit is $156) = $1,116 total cost of goods sold.  $1320 total fees paid by Light User – $1,116 cost of goods sold = $204 profit for the Gym

Heavy User: ($80 fixed cost per month x 12 months is $960) + (208 visits x $3 per visit is $624) = $1,584 total cost of goods sold.  $1320 total fees paid by Light User – $1,584 cost of goods sold = $-264 profit (loss) for the Gym

Here you can see that our gym makes a good bit of money on Light User (the person who never uses their service), but actually loses a lot of money on Heavy User, the person who uses their service the most.

Assuming our three users are representative of the overall 1,000 members at the gym at a distribution of 20%/70%/10% (20% of gym users act exactly like Light User above, 70% like Medium User, 10% like Heavy User).  Our gym would make (200 x $324) + (700 x $204) + (100 x $-264) = $64,800 + 142,800 + -26,400 = $181,200 profit per year (assuming all 1,000 members joined the gym at the beginning of the year).

What if we were to structure the cost of the gym differently?  What if we charged each person per visit rather than a fixed monthly fee?  In order to continue to make $181,200 profit per year, our gym would have to charge an average “per visit” fees of about $19.15 (((80,000/month upkeep x 12 months = $960,000) + $181,200 profit) / 59,600 total visits across all users = $19.15 per visit).  This number seems high, and may scare people away – but to incentivize people to come to the gym more, we could build in discounts that apply to your per visit price if you satisfy a variety of conditions.  Those conditions could include: if you come to the gym more than once per week for a month, if you use a personal trainer, if you refer a friend, if you come to the gym 3 days in a row, if you come twice in one day, if you bring a friend who’s not yet a member, etc…  These price discounts can effectively lead to the same end pricing structure as above (where Heavy Users pay less and Light Users pay more) – but with this model we are rewarding our best users for engaging in activities that correlate with good behavior (they’ve been coming to the gym) and add value to the gym community (they use other gym services and get new members to join).  With this new model the goals of the gym are aligned with the goals of the individual – which is currently the exact opposite of how it works.

I wonder if anyone has already tried something like this – seems pretty easy, right?