PicoBusiness

An editorial by a rich guy, about what separates rich people from everyone else.   Very informative, and uncomfortably likely to be true in most respects.

Some highlights:

Consider carefully this shortlist:

If you are unwilling to fail, sometimes publicly, and even catastrophically, you stand little chance of ever getting rich.

If you care what the neighbours think, you will never get rich.

If you cannot bear the thought of causing worry to your family, spouse or lover while you plough a lonely, dangerous road rather than taking the safe option of a regular job, you will never get rich.

If you have artistic inclinations and fear that the search for wealth will coarsen such talents, you will never get rich. (Because your fear, in this instance, is well justified.)

If you are not prepared to work longer hours than almost anyone you know, despite the jibes of colleagues and friends, you are unlikely to get rich.

If you cannot convince yourself that you are “good enough” to be rich, you will never get rich.

If you cannot treat your quest to get rich as a game, you will never be rich.

If you cannot face up to your fear of failure, you will never be rich.

Warning: Local politics for North Georgia. 

John Linder (My congressman) is co-author with Neal Boortz of the Fair Tax book and initiative, a desire to see the complicated IRS forms and schedules replaced with a much simpler form, while still retaining a significant progressitivity.  Reasonable people can disagree about the Fair Tax, but that’s not the purpose of this post.

On the Club for Growth blog, all of our Congresspeople are ranked based on their votes on Jeff Flake’s 19 anti-pork spending amendments.  John Linder scored a decent, but disappointing 74%

So I call on  you, Representative Linder, to do better - if you’re committed to making government better, more efficient and less of an intrusion in our everyday lives, I want to see you support more of these anti-pork initiatives!

I’ve seen a number of anti-market pundits make the claim that since people are irrational, they can’t be trusted to make optimal decisions about how to invest their money. Therefore, governments should control that allocation of funds, to avoid deadweight loss (that is to say, the waste that occurs because individuals have imperfect information).

There are only two problems with this:
1) Individuals have all sorts of reasons for what they do that go beyond pure monentary interests, and governments have no ability to capture that.
2) The government is made of people… who are… irrational! So why should they be making decisions about how others allocate their funds?

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Greg Mankiw got me thinking about death…

Over all, each hour spent exercising (up to 30 hours a week) adds about two hours to a person’s life expectancy, according to the Harvard Alumni Study, which has tracked deaths among 17,000 men for more than two decades.

This sounds like a good deal. But there are two problem with this information, both of which are familiar to economists.

The first problem is discounting. The cost of exercise is paid today. The benefit of a longer life is obtained at the end of life–at my age, about 30 or 40 years from now. Even with a discount rate of 3 percent, that two hours of future benefit is worth less in present value than the one hour of present cost.

But as I wrote in his comments:

I’m definitely confused, because I see death as a very large “debt that comes due” when I die, but with no interest. Shouldn’t that debt be factored into your equation, thus creating a cost that you would want to postpone? Maybe the direct cost is to your family and friends, and not to you, but there is an emotional cost to you, knowing that they will be sad in the future.

So, more generally:

• Unlike traditional economics, Emotional costs and benefits often accrue to other people directly.
• The impact of those costs and benefits “trickle down” back to you

For example - when you die, that will create an economic cost to your friends and family.  While you will not be there to directly suffer, you can certainly foresee that cost, and, in most cases that future cost causes you emotional distress now.

Thought experiment:

Right now, if you die, you’ll create an emotional cost of $5,000,000 Emotibucks, representing the grief suffered by your family and friends

But you are a nice person, you are thoughtful with your friends and family, and every hour that you are alive, you reduce that emotional debt by, say, $5 Emotibucks.    Which means that if you live for another 114 years, you will have paid off the cost completely - in essence “He/She lived a good, full life and we should not weep, blah blah blah”

Now, an assumption: You want to minimize the emotional debt you incur in your friends and family?  Why?  Prisoner’s dilemma - you don’t want them to die and incur emotional debt in you.  Kinda morbid, I know.  But run with it for a bit.  (interestingly, the “optimal case” is for every single human to die at the same time to absolutely ensure no emotional debt is incurred)
So, recognizing that you have an incentive to live long enough to pay off that debt, some interesting thoughts apply:

• You want to live as long as you can, up to the point where you pay off the emotional debt
• You want to maximize your “hourly payment” against the debt, so it will get paid off as soon as possible.

How do you pay off the debt?

Well, we know from real world experience that if one lives a life full of adventure and good deeds, people seem to feel that the deceased “lived a full life, and should not be mourned”, thus generally minimizing the debt.  And for certain, the longer you live, the less people seem to be sad when you pass, for generally the same reason.  see: Secondhand Lions.

Which suggests that a life of adventure and good deeds pays better than $5 Emotibucks/hour.

The problem, of course, is how much more?  I don’t know.  But I do know that there are people who die in their 70s who are generally considered to have lived a full life.  So if you lived for 70 years, and paid $5 million emotibucks, you’ve been paying it down at $8 emotibucks/hour on average.

So, at this point, if you live a life of adventure and good deeds, and exercise, you are both maximizing your payments, and simultaneously increasing the amount of time you have available to make payments. And, most importantly, knowing that you are doing those things should create a sense of emotional goodwill in yourself, which at the end of the day, is the most concrete aspect of this entire thought experiment.

Fairly accurate, too.

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Glenn Reynolds writes about the robustness of a small-business economy.   I think he’s exactly right - a hundred small businesses employing 100 people each are much more resilient than 1 large business employing 10,000 people.

• The small businesses can (should) have better relationships with their customers
• The small businesses can diversify in a number of different ways
• The small businesses can experiment with different techniques
• The small businesses spot trends earlier

Admittedly larger busineses have some advantages too:

• They are usually more efficient
• They can leverage their size to make bigger bets

Having said that, the big bets often fail, and the efficiency almost always (if not always) comes at a cost to flexibility.   And they are far too often blindsided by changes in the world around them.  Efficiency, in my opinion, is generally overrated as a key principle of business, because the long term costs are so very, very high.

Via Digg - a set of Ruby on Rails Tutorials.

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(Ack.. I was updating this post to remove some spelling errors, and the first half of it got nuked.  I’m going to reproduce it as best I can)

Rajesh Setty disagrees with the lesson of the story of the Goose and the Golden Egg.

(Note that I’m not trying to disparage Mr. Setty.  I’m politely disagreeing with him)

Here are his thoughts:

Think about it - if he didn’t kill the goose, he is making a couple of assumptions

a. the goose will continue to lay golden eggs

b. the goose won’t die of other causes

If he had not killed the goose, he would have taken care of his long-term needs?

I thought about this for a bit, and decided to run through some thought experiments.

Actual Gold Mine

First - what’s the most precise real-world equivalent to a goose that lays golden eggs?  Probably a gold mine.   So now let’s pretend you own a gold mine.   Based on Mr. Setty’s approach, you should run the gold mine for a couple of days and then blow it up, because a) the mine might run out or b) an earthquake might shut the mine down.  Otherwise, you’ll get complacent, and won’t take care of your long term needs.

Already, I feel that the guy is just plain stupid.  Who would blow up a perfectly good gold mine?  Even if its production was falling every month, it’s still a gold mine!   And there are other ways to avoid complacency and take care of your long term needs.   A clever person would have taken some of the income from the mine and used it to diversify his holdings, so the eventual failure of the mine would not have ruined him.

Service/Tech Business

Given Mr. Setty’s background, a gold mine is probably not what he was thinking about.  He was probably thinking about a service business, or a new technology business, where changes in technology can render you out-of-date with frightening speed.   So let’s use that.  Imagine that you are a consulting business, and you get a long term contract with Merck pharmaceuticals.    You “milk” it for years, growing prosperous and successful. And then you get greedy, and start demanding that Merck pay you more money. Instead, they cancel the account on you.

According to Mr. Setty’s approach, what you have done is very forward thinking and wise, forcing you to confront reality and prepare for the inevitable.

But is it really wise? I mean, it would be wise to expect that the contract would end, and it would be wise to have contingencies in place. It would be wise to use your incomes and your talents to diversify your business, find other clients and protect yourself and your company from single-contract vulnerability. If you did those things, and then cancelled the account with Merck, you might have a leg to stand on.

On the other hand, cancelling the account with no contingency is just stupid.

The Hand of Fate 

Another thought experiment - let’s say you have this account with Merck, and you piss them off and it is cancelled. Later on that day, you find out that your contract was going to be cancelled within the next month anyways.

Are you wise now? Certainly you are pretty much “break even” in terms of money (If the man had killed the goose, but fate decreed that a fox would have killed the goose later that day). So from that perspective, you don’t look completely bone-headed. But did you do contingency planning? Did you diversify your portfolio? In short, did you do all of the “common sense” things one would do when dealing with a long term income stream… If you didn’t, you’re just dumb.

Back to the Goose
Let’s take it all the way back to the goose - I own the goose, the goose produces one egg a day, and one day I get greedy and want more. So I grab my axe and head out to the barn. I stand in front of the goose. “What if there aren’t more eggs in there?” I ask myself. “What do I do if I’m cutting off my income stream permanently by killing it?”

And at that point, I put the axe back on the wall, go back inside and call my accountant to help me prepare myself for an “unprofitable” demise of my goose.

In Summary

Mr. Setty made some very accurate and pointed comments in this particular discussion:

• People grow complacent when they have success handed to them, day after day
• People let greed get in the way of common sense
• Not letting yourself get greedy or grow complacent is a wise thing to do

Having said that, I don’t think the man in the parable was wise.  He was an idiot who let himself grow complacent and got greedy.   In the end, he has to find a new way to live because he made a bad, poorly thought-out decision, not because of competitive pressure.

(Mr. Setty and I talked on the phone yesterday afternoon, and I added the summary section to describe some of the thoughts that came out of that discussion)

Ready or not, an IT talent crunch is coming. Here’s how to prepare. Like global warming, the reality of the looming talent shortage is pretty well established, but that hasn’t induced many IT managers to prepare for it. Now there are no more excuses.

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Very Cool!

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