Saturday, October 30, 2010

Quantum Mechanics

I haven't studied physics in years, and when I had studied physics, I only took a few introductory classes in it. I am hoping someone more knowledgeable will be able to answer my questions.

In quantum mechanics, electrons aren't in a specific location around an atom's nucleus. Instead, there is a probably density function that provides the location. There are places that the electron is likely to be, namely close to the nucleus, but there are places that the electron could be, like very far from the nucleus, but is actually very unlikely to be. Given the overwhelming number of electrons that exist, an extremely improbable event like the electron being very far from the nucleus is likely to occur occasionally.
How often do these events occur? What is the effect of it when it occurs?

The great Douglas Adams used these concepts in the Hitchhiker's Guide to the Galaxy books. I was hoping the popularity of his books would spur some research into the topic, but I haven't found anything useful yet.

Monday, October 25, 2010


Recently the Federal Reserve announced plans to perform more quantitative easing. The details of the plan, dupped QE2, have not been revealed, but analysts expect it to involve purchases of Treasuries. These purchases should drive down interest rates. The Federal Reserve's hope is that lower interest rates will lead to more growth in the economy and a reduction in the unemployment rate.

The Federal Reserve's hope seems misplaced. Interest rates are very low right now, and the economy is still not growing very much. Unemployment is also still at very high levels. The only outcome seems to be that it is easy for companies to raise money.

Companies have been taking advantage of the low interest rate environment to issue debt. The Wall Street Journal describes how Wal-Mart has issued bonds that pay very little interest. There's no evidence that this easy access to capital has spurred companies to increase their hiring in America. In fact, the companies are likely using this money to expand abroad. The Wall Street Journal article about Wal-Mart closes by observing of Wal-Mart's sales, "fastest growth coming from China and Brazil". This makes sense since economies like China and Brazil have been growing faster than America. By making money easy to get, the Federal Reserve is probably making it easier to chase growth abroad.

Meanwhile, states, counties, and cities across America have been cutting back. These cutbacks which include layoffs are rippling through the American economy. Many economists have noted that the benefits of federal stimulus spending has been undercut by cutbacks at the local level. If the Federal Reserve wants to improve the American economy by spreading money around, it should reduce the burden on local government. One seemingly straightforward thing would be to purchase municipal bonds with the money that would be spent on Treasuries. That would give local governments money to ride out the current recession.

It is still important for local governments to reach the right size. If that means shrinking, then they should shrink. By helping local governments in their current predicament, the Federal Reserve runs the risk of impeding needed corrections. The moral hazard of a bailout of local governments is a serious threat. However, QE2 is going to create moral hazard. In fact, there is evidence that QE1 is already creating moral hazard. If the Federal Reserve wants to embark on QE2, it is better for it to help local governments instead of helping inflate another bubble due to weak lending practices.

Tuesday, October 19, 2010

Opportunities in Car Insurance

Actuaries are the stereotypical boring people. There's no glamor or flash associated with their work, which is one reason why car insurance seems like such a prosaic business. However, in the last few years, there has been an epic wave of advertising by car insurance companies.

I am amazed by how many different ad campaigns have been launched by just one company. GEICO has run ads featuring cavemen, talking geckos, money with eyes, random celebrities, and at least one other theme that I am not remembering at the moment. The cavemen ads were so popular that a TV show spun out of them.

The other car insurance companies have not been sitting idle. While their ads are generally not as good, they have plastered our TVs, radios, magazines with their own gimmicks and celebrity spokespeople. I have not done any formal analysis, but it feels like the car insurance industry advertises far more than other industries.

It's interesting to think about the causes of this behavior. Do insurance companies lack other ways to acquire customers? Are customers so profitable that the costs of so much advertising are outweighed by the benefits of acquiring customers? How readily do customers switch car insurance companies? Is the advertising onslaught needed because consumers need many nudges before they switch companies? Or, is it needed to retain existing customers because customers switch easily? Does this advertising blitz help more with customers getting insurance for the first time?

It's also interesting to think about the implications of this both for the insurance companies as well as for consumers.

Could car insurance companies increase referrals or other word of mouth approaches? Social media is very popular right now. Does it offer any interesting ways to let potential customers know about an insurance company? Should an insurance company try to get its name mentioned in the news for example, e.g. by publishing research or advice? How do car insurance companies know their advertising is working? More specifically, how does GEICO know which of its many campaigns is effective?

Some of the biggest implications for consumers come from realizing that the spending on advertising is not flowing to them. How does a consumer capture some of the value that is being spent on advertising? For example, should consumers ask for a policy with a longer term and ask the company to return to them the advertising money the company does not have to spend anymore? Does it make sense for consumers to pool together and join in bulk, again asking the company for a rebate on the advertising?

Of course just coping with the advertising has implications for consumers. How can consumers choose between the various options? Unless all the advertising cancels out, consumers need to worry about the advertising introducing a bias into their decisions. A good guide to choosing between the myriad of options could be important, especially to avoid mistakes due to framing. While some of the advertising is amusing, it can also be overwhelming. Are there ways of avoiding the advertising that are specific to car insurance?

None of the above ideas may be valuable, but every time I see another advertisement on TV, on the radio, or in my mail, I wonder if there is an opportunity in car insurance.

Monday, August 03, 2009

Social media is the same as everything else

The partisans of social media, e.g. blogs, facebook, twitter, speak of it fundamentally changing how we interact, ushering in a new age of transparency and direct connections
But, it ends up being like everything else. Consider two examples.

Jim Jubak used to write for MSN Money. While at MSN Money, he started a presence on Facebook. People could become his Facebook friend and receive updates from him. Then one day, Jim Jubak stopped writing for MSN Money. The editors of MSN Money said that he was on haitus. Their note was brief and had few details. Readers of Jubak had many questions, even concern for his health and well-being. The Facebook page should have shed some light on what happened, but there were no updates. It turned out that there was some kind of dispute, and Jim Jubak started a new site. Until the new site was launched, there was very little communication between Jubak and his fans about his status. It was as if he had disappeared from the landscape.

Another example involves The Onion's weekly newspapers. There used to be one for San Francisco, but it stopped being published. While there was coverage in other media, The Onion hardly made a statement about it.
They had (and still have) a vehicle for making annoucements, I don't recall seeing a message there about the shutdown of the San Francisco edition of the newspaper. This url now redirects to There is no mention that the San Francisco edition existed and is now shut.

What do these two examples prove? Nothing really, except that we have not arrived in Utopia. Social media, or just the relative ease of publishing content on the Internet, has enabled more openness and easier communication. But, when there are things that are uncomfortable or require some discretion, better tools aren't enough for full transparency.

Saturday, July 25, 2009

Oracle and Sun

Sun recently agreed to sell itself to Oracle. There has been much speculation about how Oracle can make money from Sun. My guess is that Oracle will start charging for Java. Java has become entrenched in enterprise software development, so there are no worries that cost will slow down the adoption of Java. Additionally, the enterprise market is used to paying for software and services, so Oracle would not have to break new ground to get that market to pay for Java.

Oracle has managed to extract money for database products even though there are several free (and open source) databases that are popular. It uses the feature richness and performance of its database product to compete against the free offerings. It also takes advantage of its incumbency to charge for a product because free competitors are not free due to switching costs.
It could use the same model for Java and probably with the same customers too.

Sunday, May 10, 2009

amazon and the importance of core competency

How importance is core competency? I first knew about as online bookseller. Then it expanded into other categories like music and electronics. Eventually, it started to sell all kinds of products. It dabbled in other kinds of retail endeavors like auctions, but it seemed to be sticking to selling products to consumers.

Then Amazon introduced EC2 and AWS. Suddenly, it was selling computing resources to developers which seemed far afield from selling books on the web. Then, it developed and sold the Kindle, an e-book reader with wireless access.

These seem like separate lines of business that are not very connected. What happened to the idea of core competency? It's an important concept that businesses need to consider when choosing what to do. Now, it may be possible to come up with a core competency for Amazon that encompasses all these businesses, but I would expect that explanation would cover almost any other business too. Such an all-encompassing purview seems to defeat the point of articulating a core competency.

Friday, May 01, 2009

The demise of Conde Nast Portfolio

Conde Nast's decision to shut down its business magazine Portfolio received a lot of attention. One common viewpoint was that the magazine's monthly publication schedule was not appropriate for a business magazine. BusinessWeek wrote, "It came at a time when business is a moment-by-moment bloodsport uniquely unsuited to being chronicled by a leisurely monthly frequency."

I understand that things move quickly in the finance world. For example, the day I started writing this, the stock market opened with big gains only to close with a small loss.

However, many of the important business stories of the past few years developed much more slowly. The housing boom lasted for years. And, the housing bust that followed took years to manifest itself too. There is plenty of room for a monthly publication to explore important developments.

In fact, a monthly publication has an advantage in that it can ignore the hour-to-hour, day-to-day fluctuations that the cable news and weekly magazines drown the viewer/reader in. It is too easy to lose the forest for the trees. The thinking that "a moment-by-moment bloodsport" can not be covered by a monthly frequency is not right and should be changed.