Archive for the Entrepreneurship Category

School: The worst job you will ever have

Posted in Antipatterns, Behavioral Economics, Business, College, Economics, Education, Entrepreneurship, Public Policy, Schooling on July 14, 2010 by livefreeordeinonychus

I would like to preface this argument by explaining a bit about the inspiration for the post and trying my best to avoid a straw man argument. Mr. Webber was an excellent teacher that I had in high school. He embraced technology (much of the homework was submitted on message boards), had creative assignments (including constant 3-5 minute impromptu speeches), and brought a curiously logical and objective approach to grading and grammar, which is rare in English departments. Mr. Webber’s trove of anecdotes was comparable to Abraham Lincoln’s, and one particular maxim has always been in the back of my mind:
School is the best job you will ever have*.
At first glance, it’s a pretty sound argument – basically, if you approached your collegiate career the same way you’d approach a desk job, you would ensure a spot on the dean’s list. About 15 hours a week is spent in class, readings and assignments supplement another 25 hours per week, and you have a standard 40 hour work week. If you can isolate yourself from distractions and put in a full week’s effort, you will still have plenty of free time on nights and weekends, and be an scholastic star. You don’t have to worry about bills or the mortgage, or other worries of adulthood – the life of a student is simple, straightforward and full of rewards, right?

I disagree. In fact, I think that school is the worst job you will ever have. To put this in context: I have had some terrible jobs. In High Fidelity fashion, here is the bottom five highlight reel:
1) Dunkin’ Donuts – Making coffee and egg sandwiches at 6am (3 days, $7.25/hour)
2) Old Navy – Unloading the 5:00am delivery truck (9 months, $6.25/hour)
3) Coupe’s – Cleaning the bathrooms at a college town dive bar at 3:00am (2 years, $6.50 + tips)
4) Wal-Mart – Unloading trucks and stacking yogurts from 10:00pm to 7:00am (6 months, $8.15/hour)
5) CBS Rentals – Painting houses for 12 hours a day in the Charlottesville summer heat (1 month, $10.00/hour + OT)

I could easily make this a bottom 10, but I don’t want to beat a dead horse. My point is, I have had some terrible jobs – so why in the world would I say that school is the worst? Well, three main reason: objective job characteristics, incentives, and career context.

In Malcolm Gladwell‘s bestselling Outliers, he describes three factors that make a job ideal. “…three things–autonomy, complexity, and a connection between effort and reward–are, most people agree, the three qualities work has to have if it is to be satisfying. It is not how much money we make that ultimately makes us happy between nine and five. It’s whether our work fulfills us. (pp 129)” So how does school stand up to this rubric?
At any time in your academic career, you have between four and eight teachers/professors that micromanage your work day. Sometimes a student can pick among a handful of theses, or choose an elective – but if you think that is autonomy, your low standards should be a red flag as to exactly how authoritarian (can I coin the phrase xenonomic?) curricula actually are. Compare the life of a student with, let’s say, a software programmer at Google or, heck, an entrepreneur or venture capitalist, or even a freelance photographer. I would argue that the best work of my K12 career was one where I had almost no directives at all – unfortunately, that sort of project is the very progressive exception, not the rule, even at a very progressive school. At the same school, we were assigned a major, semester-long group project, where we could choose between soil erosion and acid rain. Snoozeville, USA. College was often even less liberal, with very superficial autonomy – like Henry Ford’s model T’s, any colour that [you want,] so long as it is black. Once I went out on a limb and proposed an independent study on economic policies of post-Soviet states. It was a great proposal, and it was denied. I tried to get academic credit for my Russian blog, denied. Despite it’s lofty attitudes on liberalism and progressivism, the institution is very close-minded, and their narrow views of value and study crush autonomy and self learning (soon I will post on my favorite didactic philosophy, unschooling).
What about complexity? Well, it may be there. The idea behind liberal arts, as I experienced it, is to dip your toes in 100 things and move on, which makes me think that running through a subject in such a way is shallow and formulaic. However, I will err on the safe side and say that collegiate life has the possibility of being complex. Congrats, academia, you so far have a 33%.
This brings us to the connection between effort and reward. The more time and effort that a student puts into their work, the higher the reward. That sounds perfect, right? It would, but it’s a messy system. Within a course, this might be true – I remember specifically it being true in Mr. Webber’s class. However, he didn’t teach every subject, and not every subject was evaluated the same way. At every school I’ve attended (two high school and three colleges, before I graduated last year), there were easy classes and there were hard classes. The amount of effort to get an A+ in pottery might be x, and the amount of effort to get the same grade in Organic Chemistry may be 50x. When students choose careers in Media Studies over Engineering, it’s not because they’re lazy, it’s because they did a quick cost-benefit analysis, and, sorry Dean Kamen, the long way around loses. If you think that Engineering might have a higher long-term benefit, you might be right, but you’re ignoring hyperbolic discounting. If you don’t know what hyperbolic discounting is, you’re probably damn good at it. In Seth Godin’s The Dip, he writes, regarding academic fields, “The low hanging fruit is there to be taken, no sense wasting time trying to climb the tree.” This is a very bad sort of connection between effort and reward. If I had the freedom to drop courses at Maggie Walker like I did at The University of Virginia, I might’ve said goodbye to 10th grade English after I got a C+ on my summer reading essay. It would have, maybe, been in my best academic interest (to get the best grades/honors/stickers), but not my actual best interest – to learn and have valuable experiences.

Michael Scott: Ugh… who’s ahead in points?
Pam Beesly: Well, I think they’re even. At various times you gave Jim 10 points, Dwight a gold star, and Stanley a thumbs up. And I don’t really know how to compare those to…
Michael Scott: Check to see if there’s a conversion chart.
Pam Beesly: …I really doubt it Michael.
Michael Scott: Please just check.
The Office, “Beach Games” (Season 3, Episode 23)

At City Arts & Lecture, Gladwell said, “We thought we were erecting a meritocracy, but we’re not. We define a meritocracy arbitrarily.” He was speaking about Canadian Hockey leagues, but schooling is a comparable example. School, I think, has the world’s worst incentive system. Sure, you may be churning out essays on To Kill A Mockingbird or building a candy model of a cell, but those products are basically worthless. At work, I’ve been rewarded with higher pay, cash or gift certificates, time off, more responsibilities, etc, at school, I’ve mostly been rewarded, inconsistently, in gold stars. In first grade, Ms. Melendy told me that homework was mandatory, but did not effect our grades. Guess what I didn’t do? Crappy system of efforts and rewards.
The most important lesson you could draw from this discussion is that, in the context of your life, school will not be your best job. If it is, your life really sucks. I’ll call this the Glory Days fallacy:

I hope when I get old I don’t sit around thinking about it
But I probably will
Yeah, just sitting back trying to recapture
A little of the glory of, well time slips away
And leaves you with nothing mister but
Boring stories of glory days

This is just one example of a wider school of thought that you somehow peak around age 18-21, and that your best days are ones with few responsibilities and plenty of free time. On a recent trip to New York, my cousin summarized this idea quite well:

People say that your college years are the best years of your life, but really, every year should be better than the last. Each year you’ll make more money and be able to try different things. What’s most important is to find a company that can grow with you.

So, if you’re still suffering through school, don’t let it weigh you down. In The Dip, Godin also writes, “Just about everything you learn in school, about life, is wrong.” To concern yourself with the arbitrary system of incentives and the endless hamster wheels of schooling is to ignore what really matters. As Mark Twain put it, “I have never let my schooling interfere with my education.” Don’t allow schooling to replace the education value that can be absorbed through your extracurricular experiences. In a similar spirit, Rory Sutherland described modern our modern system as ‘Placebo Education’. You pay around $100,000 for a sheet of paper and a handshake, and you feel better afterwards. Maybe you actually try harder because of this, or maybe you would’ve been equally successful without spending four years doing the world’s worst job (maybe you would’ve been more successful with four more years experience). Self-selection bias in college education is very well documented – so I theorize that we are giving this ‘job’ more credit than it is worth. Because we overvalue this system, people are more likely to ignore its’ faults, most notably deadweight loss, and we don’t recognize it for what it actually is: the worst job you will ever have. Why? Because of its’ characteristics, incentives, and value relative to the rest of your career.

*Full disclosure: Mr. Webber might have said it was the easiest job you’ll ever have, and not the best. Also, I think he might have simply been sharing this idea, which was told to him by his dad, or another teacher, so I don’t mean to attribute a theory to him incorrectly. I will share this post with him, and see if he might have any corrections. I’m fairly certain that he is not an adherent to the Glory Days Fallacy, but it is a sentiment which I hear far too often. I will update this post or write a sequel if new information becomes available.


Is Ticket Scalping Bad? Part 2

Posted in Behavioral Economics, Business, Economics, Entrepreneurship, Music on July 12, 2010 by sicsempertyrannosaurusrex

So, I was told that my last entry is a little bland. Looking back over it, I suppose that’s true, but I still think it is interesting. So what do you do when your audience gets bored with your subject matter? You beat that dead horse until the sky falls down.
I want to explain, graphically, one more aspect of buying a scarce good (before I propose what I think is a better way to distribute concert tickets). Whether you are standing in line for a free show, or paying a premium for seats at an expensive venue, you are forfeiting capital (time, money, and energy). How much you are willing to forfeit is based on tons of stuff – too many things to address (how much you have, what day of the week it is on, how many times you’ve seen them before, what your friends are doing that night), blah blah blah. But essentially, it’s how bad you want to see she show.
Here’s where problems arise: if you would pay $37 to see, let’s say, Julian Casablancas, and tickets go on sale for $25, you might not get one because they are scarce. So wouldn’t it be better if the ticket went on sale at your maximum? That would be better than missing the concert, but not as good as seeing the concert for less than your maximum. The following is a perfect distribution of tickets:

Another thing worth pointing out is that your maximum forfeit is only your maximum – you would probably prefer to pay much less. That’s where feelings get hurt, and probably why my friend gets mad at scalpers. So when you look at the above chart, these are only potential customers’ maxima (ie.. everyone would pay $10 to see The Beatles, but the $10 line would only measure those that would, at most, pay $10 to see The Beatles).
So here is my proposal. This strategy would maximize the total revenue of the show, almost guarantee that every show is sold out, and ensure that everyone at least had the chance to buy a ticket. I would like to see a theater distribute tickets in the following way: On the first day, tickets go on sale for an exorbitant price that no one would pay, then they drop a little everyday until they run out, or the tickets reach a price that only covers the marginal cost.

This would be the perfect real world example of first degree price discrimination – maximizing the revenue by turning consumer surplus into revenue. It’s entirely efficient with no deadweight loss. The ‘problem’ with this, if there is one, is that you, the consumer, want to keep as much of your surplus (as far below your reservation price) as possible – you would have to balance your ticket price with the risk of missing the show, not to mention opportunity cost (what other show could you see for this price?).

I’m interested to hear if any of you have objections to this model.

Is Ticket Scalping Bad?

Posted in Behavioral Economics, Business, Economics, Entrepreneurship, Music on July 4, 2010 by sicsempertyrannosaurusrex

Happy Fourth of July! Here’s a microeconomics entry to celebrate the day:

Yesterday one of my friends commented, “Scalpers are obnoxious and I hate them,” and it really got me thinking… are they? The more I thought about it, the more I realized that ticket scalping isn’t a result of market failure – it’s a organic example of market correction. Here’s what I’m thinking: in a perfect market-clearing situation, every show sells out and everyone who wanted to see the event gets to go. But what happens when way more people want to go, but there are only so many seats? This:

Here’s what’s going on in this graph: D1 is a situation where the demand at face value perfectly fits the amount of people who want to see the show for that price. D2 is a situation where more people want to see the show at face value than there are tickets. D3, of course, is the the Mighty Ducks. Because the amount of tickets is absolute (the 9:30 Club can’t double in size for a popular show), the tickets become scarce when more people are willing to buy them than can fit.

Reselling the tickets at a higher price lowers the demand, narrowing the pool of customers until it equals the maximum number of attendees.

Shouldn’t that money go to the concert venue or the performer?

Well… if they could forecast the market more accurately, they could perfectly price the tickets. Keep in mind that the scalper is absorbing risks – if the show is less popular than he expected, he has to take a loss. Not to mention, buying and reselling tickets is work.

My friend said, “The price on the website is the price I want to pay, and if a scalper is charging three time that, that blows.” If I’m paying $50 for a ticket that says $35, I’m getting ripped off, right? Not really, the venue determined their operating costs to be $35. For $35, everyone gets paid (the cleaning crews, the performer, the electricity bill, etc.). As a patron, you pay all that amount and now your paying $15 for the option to attend. The scalper is, in essence, providing you with the opportunity that you might not have had. “I’ve missed a lot of concerts because of this. And I’m not going to pay anything over ticket price. I’m not going to pay $100 when I’m supposed to pay $15.” My good friend is making several errors here. First of all, what the price is “supposed” to be is actually the venue taking a calculated risk to charge an amount that they think will maximize their utility. Venues will probably err on the side of undercharging you if they risk losing revenue for not selling out. Secondly, yes, you were willing to see the concert (about $15 worth), but other people were more willing to see the concert. Most importantly, by externalizing the clearing price, you avoid having to ask yourself the difficult question: how much am I really willing to lose to see this show?

In some situations, the market can clear without increasing the cash price. This would occur if there was some other forfeit. For example, standing in line. By law, all publicly broadcasted shows, like Saturday Night Live, have to be free to the audience. The way the market widdles down the number of possible attendees is to reward those who are willing to stand in line the longest. Voila, market clearing. This was probably more common in the days before you could buy tickets over the phone or online. The problem now (and the reason we need scalpers) is that overloaded phone lines and maxed-out website bandwidth essentially distribute the tickets by lottery. I remember once I tried to buy a ticket for a Dispatch show, which were to go on sale at 10:00am on a particular day. I went to the website in advance, and hit refresh at exactly 10:00am, and they were sold out. Some folks hit refresh and were able to buy the tickets, but they probably didn’t do anything differently, they just got lucky. Scalpers correct for luck.

Building a Brand

Posted in Business, Entrepreneurship, Wine on July 2, 2010 by sicsempertyrannosaurusrex

I suppose it is worth mentioning another inspiration for this blog, a Web 2.0 Expo speech by Gary Vaynerchuk.

Vaynerchuk discusses 1) doing what you love; and 2) the importance of building a brand. Time and effort put into building your brand is never wasted, because no one can take it away, and it’s vital to marketing yourself online.

I always say: legacy is greater than currency. Has everyone completely grasped that your great great great grandchildren are going to watch and see everything you’ve ever done? I think about that every single day. – Gary Vaynerchuk

I’ve never been a big oenophile, but lately wine has been growing on me. I guess one thing that’s always bothered me about wine is that it is so often about conspicuous consumption, and we all know that just because something’s expensive, doesn’t mean it’s good. But wine can be great, and it’s always about context – which is why it’s important that I mention his blog. Winelibrarytv is a fascinating webshow that does away with the affectations of traditional wine reviews, and is mostly about a New Jersey guy that just likes wine. It’s entertaining, too – in one episode, for example, he pairs wine with cereal.