Healthcare and the tragedy of the commons

Posted on October 2, 2019

Land grab

In more pastoral times, town layouts might include a designated area of public land on which anyone was free to let their livestock graze. An early example of this was Boston Common, originally a pasture for cows before its transformation into a prime urban park, whose name still echoes its original shared purpose.

Bostonians soon realized that unfettered access by those with larger herds would overwhelm the land. Some restrictions were needed to ensure a few wealthier neighbors didn’t ruin the ground for everyone, because the incentive for any individual would be to add animals to their flock regardless of the broader effects. Crowding would make finding suitable forage harder for all, but most of the incremental burden would be borne by the other owners.

If this bovine arms race reached its natural conclusion the result would be nothing but an unsightly dirt patch. Although societies grasped this intuitively, the process was first formally described in the 1800s by a British economist, and in a seminal journal article a century later received the memorable descriptor of “tragedy of the commons”.1 The concept has gone on to enduring explanatory fame in economics and ecology, among other disciplines.

In a subtle way, this phenomenon underpins one of the most dysfunctional parts of the American economy: the healthcare sector. Read more…

Written in the 1960s during the peak neo-Malthusian panic over global overpopulation, the article’s thesis that family size needed to be regulated, presumably by diktat, has not aged very well. ↩
All numbers have been indexed to 2019 values using the Consumer Price Index, because if Economics 101 taught us anything it’s that a dollar today isn’t the same as a dollar yesterday. ↩
Some of those advances have certainly extended life, like the discovery that bloodletting wasn’t the way to cure diseases, which came unfortunately too late for George Washington. ↩
In recent times demonstrated most dramatically, and tragically, in the opioid crisis. ↩
As a management consultant who works in healthcare, I suppose I must include myself in this parade. ↩
And some of the former too, and they can figure out a way to monetize that later. ↩
One of the buzziest initiatives is a joint venture of Amazon, Berkshire Hathway, and JP Morgan Chase named Haven, which is still in an early stage and whose initiatives remain unknown to the public. ↩

Competing when you can’t compete

Playing a new game

Posted on September 25, 2019

Divided loyalties

In the early 1980s, a swirl of deregulation was upending the cozy and profitable arrangements U.S. airlines had enjoyed for years. Routes had previously been tightly restricted, and fares were regulated to ensure a comfortable return for owners.

These market constraints were comprehensively eliminated in 1978, leaving companies to figure out how to compete in the new, less predictable environment. Some enterprising executives realized they would need different tools to stand out against a slew of others offering what were broadly indistinguishable products.

It was in this milieu that a regional carrier named Texas International Airlines introduced the first modern version of something that today dominates the industry: a frequent flyer program. Instead of simply selling individual flights and competing primarily on price, the move shifted transactions into the framework of a longer-term relationship. Scoring credit in a loyalty scheme induced travelers to book their next flight with the same airline to maintain progress towards some defined reward. Read more…

Even though nearly the whole world is metric, many airlines around the world still use miles as the name of their currency. Frequent flyer kilometers just doesn’t have the same ring to it. ↩
These pioneering hotel loyalty programs rewarded their guests with airline miles redeemable in the programs that had arisen a few years earlier. ↩
A huge part of their success is due to the IRS ruling that points are not taxable, even though they have value and function very much like a currency. This has supported the creation of a parallel, tax-free travel economy outside the purview of government regulations. ↩
None of these innovations were able to forestall the bloodbath that ensued, as dozens of airlines merged and were bankrupted until the industry reached its present configuration. ↩
With consolidation many airline markets are approaching oligopoly, so by maintaining stable prices and avoiding price wars they are sometimes just carving up the market among themselves. ↩

The benefits of limiting your freedom

Fewer possibilities, more potential

Posted on September 18, 2019

A tale of two cities

Detroit was a uniquely American success story. Originally a strategically situated trading post, it rose to its greatest prominence in tandem with the booming automotive industry. The city was home to several pioneering industrialists whose names still appear on car badges. Drawn by the thriving economy, the population swelled nearly tenfold from the late 1880s until it peaked not far from the two million mark in the 1950s.

That would unfortunately be the high point of the city’s arc. Social unrest and economic dislocations soon led to a dramatic exodus of jobs and people, which triggered a steady downward spiral. Increasingly drained of resources, the city was unable to provide basic services and blight began to consume whole neighborhoods. Many with the means to leave did so, amplifying the burden on remaining taxpayers. In 2013 the process hit its natural endpoint, when Detroit filed for the largest municipal bankruptcy in American history. Read more…

The only larger government wealth funds are either based on oil resources or are owned by China, which has 250 times Singapore’s population. ↩
The U.S. Constitution is often considered to be an exemplar of inflexibility, as changing it is extremely difficult, requiring the coordination of so many diverse stakeholders that it is very rarely done. That’s either a feature or a bug, depending on your point of view. ↩
Echoed in Jesus’s admonition to “enter by the narrow gate, for wide is the gate and broad is the way that leads to destruction.” ↩
A fifth-grade classmate once forced me to hold a ten-dollar bill of his the weekend before a class trip, as he knew he wouldn’t be able to resist spending it if it was in his pocket. As it wasn’t mine I couldn’t spend it either, so Brian had his $10 safe and sound the next week. ↩

Why you’re not as smart as you think

The pitfalls of experience

Posted on September 11, 2019

The Midas touch

Imagine you’ve been wildly successful in a highly visible role, celebrated for your genius in introducing innovations to a market not traditionally known for them. On the strength of that track record you vault into another space with untapped potential, and once again everything you touch becomes gold. You have already exceeded expectations twice when a new opportunity beckons.

It would be natural to extrapolate from experience and assume your vision will translate smoothly to this new situation. After all, those instincts are what made you so effective. Apply more of the same magic, and what could go wrong?

In the case of one prominent retail executive, the answer was almost everything. Along the way a company with a storied heritage was nearly driven off a cliff. But rewind to the beginning of the story, when there was far more promise.

Ron Johnson got his start at Mervyn’s, a solidly middle-of-the-road department store owned by a retail conglomerate with a portfolio of brands. Among these was Target, at the time an unremarkable concept that happened to be headquartered in Johnson’s hometown. He moved over to that chain, arriving in time to help shape Target’s ascent from undifferentiated retailer to mass-market tastemaker. Read more…

Earning it the nickname “Tar-ZHAY”, pronounced in the French style, as the associations between elan and Frenchiness are obvious to all. ↩
This was the era of the “Dude, you’re getting a Dell” guy advertising computers available through their website. Dell then was all about direct-to-consumer and as of 2019 still has no dedicated retail stores. They had a plan and they’re sticking to it. ↩
The Apple Store on Fifth Avenue in Manhattan beneath the iconic glass cube is open 24 hours a day, for those who for some reason need to make large financial outlays on premium tech at three in the morning. ↩
These stores also turned out to be the perfect place to hawk iPhones, although they didn’t come out until 2007. ↩
Literally, as in he kept his residence in California and flew in to the office near Dallas on a private jet. ↩
As per the usual conventions of corporate politics, Johnson was technically told by the board that his resignation would be accepted. And he ended up losing the $50 million, but don’t feel too bad for him—his Apple wealth means he won’t be hustling on LinkedIn to find a job.↩
Perhaps, but history will not record any alternate outcomes. ↩
Evoking James Baldwin’s related quote on the matter: “If the relationship of father to son could really be reduced to biology, the whole earth would blaze with the glory of fathers and sons.” ↩
And in the aggregate always will be, this side of paradise. ↩
As the saying goes, it’s better to be lucky than smart. ↩

Two simple ways to make better decisions

Crowd management

Posted on August 28, 2019

Step right up

Community gatherings and carnivals have long entertained attendees with guessing games, in which a glass jar containing some vast quantity of small objects is kept on display, with a prize going to the person whose entry is closest to the actual number. Counting the items directly is impossible, so these attractions might feel like a casual exercise in estimation. They can seem random but intriguingly they tend not to be.

A variation on this theme is a contest to guess the weight of something, perhaps an agricultural product or livestock.1 This approach was the one taken by the early 1900s British country fair attended by statistician Francis Galton, which featured an ox as the subject.2

As you might expect, those who entered the competition submitted guesses that covered a wide range.3 Some with poor bovine sense were absurdly high or low, which would have amused the farmers in the crowd who surely knew better from their years handling livestock.

The guesses by themselves weren’t remarkable, but when Galton averaged them together an astonishing finding emerged. The resulting figure was 1,197 pounds, just one away from the actual total. Although the ox’s weight was difficult for any one person to gauge, a crowd of attendees with varying expertise was able to determine it essentially perfectly. Read more…

At a childhood picnic I very carefully considered the weight of a watermelon, deliberating intensely and going back and forth before settling on the comically precise guess of 2 ½ pounds. The actual weight was 25 lbs. ↩
Actually its post-slaughter weight, for which some knowledge of butchery would be valuable. ↩
In an inexplicable streak of luck I have thrice won such guessing competitions, coming home with jars of pennies, popcorn kernels, and candy corn, the last of which was far too much sugar for anyone to eat. ↩
Galton was a polymath and one of the first to fervently advocate for eugenics, a part of his reputation that isn’t looked on as favorably as his statistical prowess. ↩
He was also the force behind planned obsolescence, in which perfectly serviceable products are rendered unappealing by the introduction of slightly tweaked new models every year, so yeah maybe not all great. ↩
In practice, exercising this well is easier said than done, even in a place like McKinsey. ↩
And if you are, you’re probably not that genius. ↩

How to create a culture that lasts

Lessons from the fall

Posted on August 21, 2019

House of cards

When the accountants have no idea what’s going on, leaders struggle to explain the choices they’re making, and even savvy Wall Street-types who dig into this stuff for a living are thoroughly baffled, you can bet something bad is about to happen.

Such was the situation faced by a dominant company focused on energy trading, with the trendy made-up name of Enron.1 It had ridden the wave of deregulation to shake up a staid industry, in the process becoming a favorite of both the media and investors. Its executives lived lifestyles commensurate with their success, with access to a fleet of no less than six corporate jets used indiscriminately for both business and pleasure.

Several top leaders amassed paper fortunes in the tens if not hundreds of millions of dollars, using their new wealth to rise in political and social prominence. Ambitious university graduates were choosing the company over more traditional, stable options. A business magazine named it “most innovative” several years in a row. Read more…

It was originally going to be called Enteron, until someone realized this is a term for the digestive tract. ↩
As it turns out, for Enron this was a feature and not a bug. ↩
The destruction of Arthur Andersen created a free-for-all for the remaining accounting firms as they sought to snag their former competitor’s clients. ↩
This reasoning was similar to that behind the regulation on U.S. political advertising requiring candidates to state directly that they approve the message during the ad itself. Presumably politicians would hesitate to associate so openly with unsavory messages. ↩
Another executive committed suicide as the situation was unravelling. ↩

Extend your horizons and do what others can’t

Longer term thinking

Posted on August 14, 2019

Sounds good

It started with a disappointing audio system.

A diligent MIT engineering student was nearing the end of his doctoral studies, and as a classical music fan he decided to purchase the best stereo he could find as a reward for his hard work. He had been taking apart and repairing radios since he was a child, so he knew far more than the average consumer about what made them work.

Despite researching the best options available, the quality of the resulting purchase was underwhelming.1 This triggered in Amar Bose an obsessive interest in figuring out how to reproduce sound in ways that were more pleasing, even if they defied conventional wisdom. So began decades of scientific research into acoustics, which came naturally given his later status as one of MIT’s most popular professors.

His work soon reached a point where commercialization was the right next step, leading to the founding of the Bose Corporation. It would go on to make significant advances in audio technology, including noise-cancelling headphones and custom systems for luxury cars and large public spaces.2

When embarking on this path Bose did one thing very differently: he chose to maintain it as a closely-held, private entity. It grew slowly and deliberately instead of taking in external investment that would instantly ratchet up the pressure to grow. Even after his speakers started capturing significant market share he resisted the lure of IPO riches. Read more…

One can only imagine how time-consuming this research was without an internet to browse audiophile review sites. ↩
The next time you board a plane peek into the cockpit, you might notice your pilot wearing a Bose aviation headset. ↩
As a holder of said MBA degree, I hope that if the situation ever arises I will have the perspicacity to not fire the next Amar Bose. ↩
In case you were wondering the cold fusion thing proved to be a bust, but the fact that world’s power plants aren’t out of business should have tipped you off. ↩
This problem of course varies greatly depending on the cost of your whip. That Geo Metro probably won’t handle it like a Bentley Mulsanne. ↩
Or as smooth as a German or Japanese bullet train, for those wanting a more earthbound analogy. ↩
Probably not coincidentally, this company also has MIT founders. ↩
Apparently his was the kind of mathematical genius that involved being able to figure out the necessary equations for noise-cancellation before the flight even landed. ↩
Amar Bose did end up comfortably in the billionaire class, so the additional wealth he forewent through his lavish spending would have had zero impact on his life, while the company’s health made a big difference. ↩

The singularity isn’t real, people

Hype springs eternal

Posted on August 7, 2019

You, robot

Ray Kurzweil was a precocious child, to put it mildly.

His fascination with robotics and programming began early, and by the time he was a teenager he was already demonstrating the technological brilliance that would come to characterize his career. His pioneering approach to machine learning led to a television appearance at 17 where he demonstrated his new musical composition tool. Software he coded was included on computers sold by IBM. While in college he created a program that matched students to their ideal universities, which was sold for several hundred thousand dollars.1

His inveterate tinkering would later produce breakthroughs in areas as diverse as character recognition, optical scanning, and music synthesizers. Kurzweil founded multiple companies to capitalize on these inventions and went on to establish himself as one of the world’s most prominent advisors and speakers on technology and society.

But Kurzweil’s story wasn’t entirely without adversity. The early deaths of his father and grandfather impressed on him the frailty of the body and its inevitable decline. He responded to this genetic inheritance in proto-Silicon Valley hacker fashion, formulating a regimen involving a pharmacy’s worth of unregulated supplements and experimental treatments of dubious efficacy in an effort to stay young.2 Read more…

It was bought for $100,000 in 1968, which due to inflation is the equivalent of $750,000 in 2019, reminding us of the economic principle that a dollar today is not the same as a dollar yesterday.
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Life hacking isn’t exactly new, but the one thing its proponents have in common through the ages is that they end up equally as dead as the rest of us.
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Most commonly used for the beginning of the universe, when everything instantly began to exist. ↩
This physical world is known by the charming appellation “meatspace”. ↩
AI is becoming the new “Uber for X” in trendiness, as in “Our company will use AI to transform hamburgers”. ↩
Ironically, Kurzweil himself is among these very smartest of the smart. ↩
And these folks are compensated very handsomely given how difficult the work is, which is having some complicating effects on the housing markets of the San Francisco Bay Area.
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Take an input, perform an operation, produce an output, which is what the Casio calculator watch I so proudly sported in elementary school could do. ↩
Not to mention the horses that were previously used to power mills by walking in circles around a driveshaft. ↩
The desire for salvation is intrinsic, and when one religion is jettisoned another will rise to fill the void. Singularitarianism locates the idea of a transcendent God within humanity’s own creative power, and that pretty much never ends well. There’s a reason why utopias don’t last.
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Mortality remains implacable, something that has been known since Genesis: for dust we are, and to dust we shall return. ↩

Bigger and bingier: the business of more

Sometimes more is less

Posted on July 31, 2019

Happy meals

Before it became the colossus of fast food with outposts in nearly every country, McDonald’s was a novel hamburger chain with a limited menu and an emphasis on low prices. A distinguishing feature was its rapid service, which hinted at the operational efficiency that would soon become a trademark of the concept.1

Ingredients were delivered fresh, including whole potatoes that were laboriously transformed in store into the brand’s signature French fries.2 The initial menu was almost quaint in its simplicity. Beverages came in just one size and contained seven ounces (200 ml), a little over half of a modern aluminum can. Fry portions were 2.4 ounces (68 g), less than the smallest option on today’s menu. The hamburger that was the main attraction wouldn’t look out of place in a current child’s meal—though the marquee did encourage diners to buy them by the bagful.

The combination proved to be very compelling, as customers flocked to the new restaurants. Signage out front touted the overall number of hamburgers served, ticking up steadily into the millions and then billions until management finally decided to stop keeping track. The implication of these figures was clear: the massive quantities sold showed that McDonald’s was worthy of a visit. Read more…

Its ubiquity led to a geopolitical theory known as the Golden Arches doctrine, which stated that no countries with McDonald’s locations would go to war with each other. The theory plausibly held for a while, but sadly there are recent examples that run counter to it. ↩
Originally fried in beef tallow, the recipe was changed in the 1990s to employ vegetable oil due to anti-fat sentiment, now considered by many to have been misplaced, and causing those old enough to remember to pine for the fries they can no longer buy. ↩
It’s hard to imagine how much larger a soda could be, unless you want it delivered through an IV.
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This happened shortly after the widespread publicity generated by the documentary “Super Size Me”, in which the creator ate solely at McDonald’s for 30 days but also consumed twice his daily caloric needs and didn’t exercise, with predictable results. ↩
Despite all the original programming, Netflix’s most streamed show is the U.S. version of The Office, which ended in 2013. ↩
And their friends and family members who share their passwords. ↩
An expedition doesn’t really require a Range Rover if the only stop is a suburban Whole Foods. ↩
In the meantime, some people get extremely rich, so there will always be an incentive to test these short-term limits. ↩
That’s not to suggest that the Texas barbecue joint referenced in the linked article provides health food—fatty brisket is far from it. But the hours-long lines serve a gating function, making this a rare meal for all except the most intrepid fans. ↩
Sadly in the case of the opioid epidemic it appears this model was literally true, with manufacturers now receiving intense scrutiny regarding their role in over-prescribing and the resulting deaths. ↩

Continuous change versus the big bang approach

Smooth the learning curve

Posted on July 24, 2019

Start me up

The digital economy of 1995 hadn’t reached anywhere near today’s all-encompassing levels of cultural saturation, but that year still featured one of the splashiest consumer technology rollouts in history. This one wasn’t orchestrated by Apple though, as Steve Jobs had only recently returned to a company that was barely clinging to life.1

No, this product launch costing hundreds of millions of dollars and generating several multiples of that in return was pulled off by Microsoft, led by Bill Gates and crew.2 The company unleashed a major transformation of personal computing through an operating system with the utilitarian name of Windows 95.3 The event was a phenomenon, with shoppers lining up outside of computer stores like sneakerheads waiting for a fresh drop of Yeezys.4

An operating system was the unglamorous backbone of computing, making it a strange candidate for such intense fandom. But it had been several years since the last Windows iteration, and the new version marked a radical change in usability, flexing the potential of the graphical interface and introducing elements like the Start button that persist to this day.5 Read more…