Wanamaker waste

Saw a very interesting account of John Wanamaker's contribution to the department store phenomenon (with its price tags) and advertising on The Economist:
IN TERMS of efficiency, if not size, the advertising industry is only now starting to grow out of its century-long infancy, which might be called “the Wanamaker era”. It was John Wanamaker, a devoutly Christian merchant from Philadelphia, who in the 1870s not only invented department stores and price tags (to eliminate haggling, since everybody should be equal before God and price), but also became the first modern advertiser when he bought space in newspapers to promote his stores. He went about it in a Christian way, neither advertising on Sundays nor fibbing (thus minting the concept of “truth in advertising”). And, with his precise business mind, he expounded a witticism that has ever since seemed like an economic law: “Half the money I spend on advertising is wasted,” he said. “The trouble is, I don't know which half.”

And the same article provides some interesting insights on how the current medium (With AdWords' Pay-per-click and Snap.com's Pay-per-buy) try to eliminate the Wanamaker Waste:
Rishad Tobaccowala, the “chief innovation officer” of Publicis, one of the world's biggest advertising groups, and boss of Denuo, a Chicago-based unit within Publicis with the job of probing the limits of new advertising models, likens traditional Wanamaker-era advertising to “an atom bomb dropped on a big city.” The best example is the 30-second spot on broadcast television. An independent firm (such as Nielsen, in America) estimates how many television sets are tuned to a given channel at a given time. Advertisers then pay a rate, called CPM (cost per thousand), for the right to expose the implied audience to their spot. If Nielsen estimates that, say, 1m people (“the city”) are watching a show, an advertiser paying a CPM of $20 would fork out $20,000 for his commercial (“the atom bomb”).

By contrast, the new advertising models based on internet technologies amount to innovation. Instead of bombs, says Mr Tobaccowala, advertisers now “make lots of spearheads and then get people to impale themselves.” The idea is based on consumers themselves taking the initiative by showing up voluntarily and interacting with what they find online.

In its simplest form, this involves querying a search engine with keywords (“used cars”, say), then scanning the search results as well as the sponsored links from advertisers, and then clicking on one such link. In effect, the consumer has expressed an intention twice (first with his query, then with his click). The average cost to an advertiser from one such combination is 50 cents, which corresponds to a CPM of $500; by contrast, the average CPM in traditional (“exposure”) media is $20. A consumer's action, in other words, is 25 times as valuable as his exposure.

The person who deserves more credit than anybody else for this insight is Bill Gross, an internet entrepreneur with a kinetic mind and frenetic speech who in 1996 started Idealab, a sort of factory for inventions.

See the post on Bill Gross below.

The other Bill Gross i like

Found his story very interesting.
1981 - Graduates from CalTech
1996 - Founds Idealab.
1998 - Invents keyword-based pay-per-click and pioneers contextual advertising with GoTo.com (later renamed as Overture). The concept on which 99% of Google's revenue today revolves.
2001 - Pitches Goto to Google founders Sergey Brin and Larry Page
2001 - Launches Picasa, a photo-sharing service
2002 - Google launches its own AdWords service and shortly follows it by AdSense based on Bill Gross's ideas.
2003 - Yahoo! buys Bill Gross's Overture for $1.6bn
2004 - Google acquires Idealab's Picasa for an undisclosed amount
2004 - Launches Snap.com, a search engine that pioneers Pay-per-buy model - as opposed to Pay-per-click followed by the rest - for advertising.


2001 - Bill Gross also founds Energy Innovations
"It's a tricky problem to get solar energy to be cheaper than fossil fuels, because fossil fuels are like solar energy concentrated. They had a million years to bake. So they get the benefit of being heavily concentrated, whereas solar energy is striking the Earth in real time. I thought if we could come up with a solution to this, it could really be world-changing. And I felt this was the most important thing Idealab could be doing."
2004 - Oil hits $70+ and all eyes on Energy Innovations

PS:
If you are curious about the other Bill Gross, read all about the Bond-market guru's running of the largest bond-fund PIMCO here.

GOing mad

While its tempting to describe Go as the Chess of the Far-East (Chess being predominantly popular in the west, as mental games go), it is said to be far more demanding than Chess.

Ever since i saw an art on The Economist, wanted to post this snippets on Go for others who may not have read it there:
The game known in English as go—Igo in Japanese, Weiqi in Chinese, Baduk in Korean—is not just more difficult and subtle than chess. It may also be the world's oldest surviving game of pure mental skill. Devised in China at least 2,500 years ago, it had stirred enough interest by the time of the Han dynasty (206BC-220AD) to inspire poets, philosophers and strategic theorists.

As in China, go in Japan remained for centuries a mere aristocratic pastime, until a sudden flowering under the shoguns of the Edo period (1603-1867).

Proper patronage, professionalisation and the rivalry between schools certainly elevated the standard of play in Japan far above that in China.

The new phenomenon in go is the meteoric rise of South Korea, a country long regarded by its neighbours as a backwater. Korea is go-mad. With less than half Japan's population, it has almost three times as many active players.

Some further pointers from The Economist on Go below:
Sensei's Library offers information and discussions about go for aficionados and novices alike. A glossary of go terms is here. Google hosts a go discussion board; Go4Go has news about recent games. Go Game World lists famous games.

the two books (2005)

If anyone asked me - i know no one is going to ask me really, so let me just ask myself that - to pick the two books that made me think in recent times i would list James Surowiecki's The Wisdom of Crowds and Malcolm Gladwell's Blink.

talks of recession

I don't why so many economist-s enjoy the thought of recession so much. Sample these...

(Aug-05) NYT quotes:
David A. Rosenberg, an economist at Merrill Lynch, puts the chance of a recession at up to 40 percent, twice his estimate at the start of the year. He, too, mentioned the housing market — toward the end of a long list.

“We have an inverted yield curve, a negative savings rate, six-year-high industry operating rate, multiyear-high commodity prices, cycle-high profit margins, uncomfortably high unsold inventories of both homes and autos, and a peaking-out in housing starts — all classic late-cycle developments,” he said in a note to investors.

While, on the other hand:
John K. Lynch, chief market analyst at Evergreen Investments, plays down some of the risk factors. For instance, he finds the inversion of the yield curve less critical than the fact that inflation-adjusted short-term interest rates, close to 3 percent, are roughly two percentage points below the level that often prevails when recessions start.

He is banking on the Fed’s ability to hit the brakes gently enough to keep the economy moving ahead, but Mr. Rosenberg is skeptical.

“Be wary of the pundits telling you how great soft landings are,” he wrote. “They hardly ever happen. The odds of a soft landing after a Fed tightening cycle inverted the entire yield curve are slim.”

(Aug - 07) But, the One handed Economist, Paul Krugman, brings his own set of statistics:
These are the dog days of summer, but there’s a chill in the air. Suddenly — really just in the last few weeks — people have starting talking seriously about a possible recession. And it’s not just economists who seem worried. Goldman Sachs recently reported that the confidence of chief executives at major corporations has plunged; a clear majority of C.E.O.’s now say that conditions in the world economy, and the U.S. economy in particular, are worsening rather than improving.

Signs of a deflating housing bubble began appearing a year ago, but for a while it was possible to argue that eliminating a bit of “froth” in the housing market wouldn’t do the overall economy much harm. Now, for the first time, problems in the housing market are starting to seriously reduce economic growth: the latest G.D.P. data show real residential investment falling at an accelerating pace. The latest job numbers show falling employment in home construction, and retail employment has fallen over the past year, suggesting that consumer spending is running out of steam. (Gas at $3 a gallon doesn’t help, either.)

US rate watch

The key rates as of Aug 08, 2006 after the Fed's pause:

I guess thats a bad news for the emerging markets.
After the 17th increase, with interest rates hitting 5.25, maybe its time the easy money blows the other way.

coffee (below six cups) is (not) evil?

Saw a couple of good articles - atleast good enough to worth blogging about - on this recently.

Coffee - 1 (NYT, April 2004):
How, you might wonder, could such a ubiquitous substance be toxic? With an average of one to three cups of coffee a day, most people get 100 to 300 milligrams of caffeine. With chronic exposure, though, people become accustomed to the stimulant effects of caffeine. In contrast, a sudden increase in caffeine consumption can easily produce caffeine intoxication.

In general, more than 1.5 grams of caffeine a day can cause the typical symptoms of caffeinism: anxiety, insomnia, irritability and palpitations.

Caffeine is far and away the most widely used stimulant in the world. It is actually a member of a class of compounds called xanthines that includes theobromine, which is abundant in chocolate and theophylline, the major xanthine in tea.

Caffeine works by blocking the calming and analgesic effects of the neurotransmitter adenosine in the brain. In moderate doses, caffeine enhances arousal and performance. At higher doses, caffeine blocks a majority of adenosine receptors and can produce anxiety and hypersensitivity to pain.

Judging from the sheer number of consumer products spiked with caffeine, one would think we were a nation of narcoleptics, desperately trying to stay awake. From ''enhanced'' water to sports drinks to dietary supplements, caffeine is a common additive. And as the food and supplement industries search for new stimulants following the recent ban on ephedra, it would hardly be surprising to find caffeine use on the rise.


Coffee - 2 (NYT, Aug 2006):
Coffee is not usually thought of as health food, but a number of recent studies suggest that it can be a highly beneficial drink. Researchers have found strong evidence that coffee reduces the risk of several serious ailments, including diabetes, heart disease and cirrhosis of the liver.

Coffee contains antioxidants that help control the cell damage that can contribute to the development of the disease. It is also a source of chlorogenic acid, which has been shown in animal experiments to reduce glucose concentrations.

Caffeine, perhaps coffee’s most famous component, seems to have little to do with it; studies that looked at decaffeinated coffee alone found the same degree of risk reduction.

Larger quantities of coffee seem to be especially helpful in diabetes prevention. In a report that combined statistical data from many studies, researchers found that people who drank four to six cups of coffee a day had a 28 percent reduced risk compared with people who drank two or fewer. Those who drank more than six had a 35 percent risk reduction.


... researchers found that women who drank one to three cups a day reduced their risk of cardiovascular disease by 24 percent compared with those drinking no coffee at all.

But as the quantity increased, the benefit decreased. At more than six cups a day, the risk was not significantly reduced. Still, after controlling for age, smoking and alcohol consumption, women who drank one to five cups a day — caffeinated or decaffeinated — reduced their risk of death from all causes during the study by 15 to 19 percent compared with those who drank none.

Several compounds in coffee may contribute to its antioxidant capacity, including phenols, volatile aroma compounds and oxazoles that are efficiently absorbed.


“I wouldn’t advise people to increase their consumption of coffee in order to lower their risk of disease,” Dr. van Dam said, “but the evidence is that for most people without specific conditions, coffee is not detrimental to health. If people enjoy drinking it, it’s comforting to know that they don’t have to be afraid of negative health effects.”




Do you think van Dam is an Economist?

value investing

NYT's Dealbook blog picks up an unusual interest in a book on Value Investing: Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

Update - 1: Saw a very impressive bit on one Mr Einhorn of Greenlight, in NYT recently (Aug 11, 2006):
Mr. Einhorn is held in high esteem in the world of value investing, an almost cultlike world steeped in the philosophy and investing style of Warren E. Buffett, Charles T. Munger and more recently, investors like Edward S. Lampert.

Most value investors espouse a simple philosophy: buy good companies at cheap prices. Value investors seek to determine what a company is worth rather than guessing what price it could be: they boast that they avoid hot ideas, companies or sectors.

Mr. Einhorn has a slight variation on those tactics. Instead of finding things that are cheap and then seeing if they are good investments, he finds things that are misunderstood and then determines whether they are cheap.

Mr. Einhorn’s inscrutable manner has worked out well for him and his investors. Over the last 10 years, he has built a $1 million fund, Greenlight Capital, into a $4 billion behemoth, delivering outsize returns. Through July, Greenlight Capital’s flagship fund was up about 9.5 percent, compared with a 3.1 percent return for the Standard & Poor’s 500-stock index. He has delivered double-digit returns in all but two of the last 10 years.

“Both poker and investing are games of incomplete information,” Mr. Einhorn said. “You have a certain set of facts and you are looking for situations where you have an edge, whether the edge is psychological or statistical.”

global macro? what is that

Saw this review on FT recently:
With Inside the House of Money, Steven Drobny, co-founder of Drobny Global Advisors, a macroeconomic research advisory company that counts several of the world’s largest hedge funds among its clients, attempts to address this problem for one particular strategy – the so-called “global macro funds”. He has done a good job, and the book could be very useful for anyone who has entrusted money to funds in the sector.
...
The book highlights the key points in the evolution of global macro hedge funds in more recent times, from the stock market crash of 1987, 1992’s Black Wednesday – when sterling was forced to leave the European Union’s exchange rate mechanism under a speculative attack led by Soros – and the financial crises in Asia in 1997 and Russia in 1998, which nearly led to the collapse of Long Term Capital Management, then one of the biggest macro funds.
...
When asked about the characteristics he rates most highly when hiring, Siva Jothy seems to bear out the observation that macro traders are not arrogant. “Passion and humility are the main qualities I look for but first and foremost – it sounds a bit cheesy – I ask myself: is this a good person? Is this someone I want to sit next to me that I trust and want to work with? Integrity is the single most important thing to me in hiring,” he says.

options volumes as trading strategy

A nice bit on NYT talks of options volumes foretelling stock price trends:
A new study has found that a portfolio based on the preferences of options traders has consistently beaten the overall stock market. In reaching that conclusion, the study paves the way for what may be a very profitable stock-picking strategy.

The study, “The Information in Option Volume for Future Stock Prices,” appears in the fall 2006 issue of the Review of Financial Studies. Its authors are two associate professors of finance: Jun Pan of the Sloan School of Management at the Massachusetts Institute of Technology and Allen M. Poteshman of the University of Illinois at Urbana-Champaign.

Using a private database provided by the Chicago Board Options Exchange, the two professors were able to deconstruct an option’s total trading volume into various categories. They excluded trades by market makers, for example — dealers at the options exchange who buy and sell securities for the general purpose of maintaining liquidity. They narrowed the database further to focus on just that portion of an option’s daily trading volume that reflected new positions by other traders, on the assumption that these transactions offered a clearer signal of what traders actually thought of the underlying stock. The database covered the dozen years from the beginning of 1990 through the end of 2001.

For each option in this database, the professors calculated a daily volume ratio of newly acquired put options to newly acquired call options. A high ratio meant a strong consensus among options traders that the price of the option’s underlying stock would fall, while a low ratio showed a widely shared expectation that the stock would rise. The professors found that the stocks whose options had the lowest ratios consistently outperformed the stocks whose options had the highest ratios.

on valley boys

BW's coverage on Valley Boys listed some interesting personalities - all very inspiring.

Some snippets for thos who missed it...


The corporate giant's failure to gain inroads so far shows that simply copying Digg won't work. It also spells out why Old Media types are so afraid of being eaten alive by the creative destruction these young new players are delivering. The barriers to entry are now so low that all it takes is a laptop and a $50-a-month Internet hookup to make a kid the next mogul.

Rose hints that there's going to be more to Digg than just democratizing the news. "Why would you sell unless you feel you've played your hand?" he asks.


The thought of selling all or even a large piece of his venture brings back some bad memories. Rose and all the other geeks know someone from the last boom who was worth millions one month, only to move into his parents' basement the next. Indeed, Valley-wide, guys like Rose, his entourage of buddies, and many others are haunted by the years when the weekly rooftop parties died, the traffic thinned, and no one needed restaurant reservations. This time around, the entrepreneurs worry that, within a moment, the money -- and their projects -- could vanish.


But for now, Rose is the "It" boy among a new wave of entrepreneurs running the hottest of the top 100 Web 2.0 companies sprinkled around the Bay Area. Together, this network of mostly Valley boys -- Six Apart Ltd. co-founder Mena Trott is a rare female among them -- fill SF bars like Anu and Wish and Cav and parties at their sparsely furnished lofts.


Clearly much has changed since 1999, and Rose and his fellow wealth punks have little in common with the sharp-talking MBAs in crisp khakis and blue button-downs who rushed the Valley as the NASDAQ climbed. In the late 1990s, entrepreneurs were the supplicants, and Sand Hill Road, dotted with venture-capital firms, was the mecca. Dot-commers relied on VCs for the millions needed to buy hardware, rent servers, hire designers, and advertise like crazy to bring in the eyeballs. For their big stakes of, say, $15 million for 20% of a company, venture capitalists received board seats, control of the management levers, and most of the equity.


Now, it's more like: Maybe we'll let you throw a few bucks our way -- if you get it. Otherwise, get lost. That's possible because the cost of jump-starting a good idea has plummeted. At the same time, the sources of money have multiplied, swirling in from new VC shops, angel investors, and strategic partners galore. The awash-in-capital environment has flipped the power dynamic. Sure, they'll take money from the "sweater vests," as Digg CEO Jay Adelson calls the VCs, but they'll do it on their own terms. "It's a good time now for the entrepreneur," says John Freeman, a professor at University of California at Berkeley's Haas School of Business. "There are lots of different pots of money. It gives them the ability to modify when they take it, [and] how much they take, and leaves them with more control."

blogs by famous economists

The Economist lists some of the famous economists who blog their thoughts in an article titled The invisible hand on the keyboard:

“CLEARLY there is here a problem of the division of knowledge, which is quite analogous to, and at least as important as, the problem of the division of labour,” Friedrich Hayek told the London Economic Club in 1936. What Mr Hayek could not have known about knowledge was that 70 years later weblogs, or blogs, would be pooling it into a vast, virtual conversation. That economists are typing as prolifically as anyone speaks both to the value of the medium and to the worth they put on their time.

Like millions of others, economists from circles of academia and public policy spend hours each day writing for nothing. The concept seems at odds with the notion of economists as intellectual instruments trained in the maximisation of utility or profit. Yet the demand is there: some of their blogs get thousands of visitors daily, often from people at influential institutions like the IMF and the Federal Reserve.

UPDATE: Moved all the links over to graffiti central

wowstreet

Things that i get wowed about. Or links to things i like to track.