The Facebook economy

Friday, August 31st, 2007

The Facebook economy has grown from nothing to spawning entire venture capital funds devoted to it. How quickly things change:

Talk about a killer app. Two years ago Jia Shen and Lance Tokuda wrote, just for fun, a goofy Web application for MySpace that could turn anyone’s photos into live-action slide shows. It succeeded — horribly. Within days of its launch, hordes of users at the then-superhot social network discovered the app, added it to their profiles, and communicated it to their friends. It spread like a case of Ebola at the Super Bowl. Within a month Shen and Tokuda had 100,000 users, and traffic was doubling every 24 hours.

The servers — those digital canaries in the mine shaft — crashed, and crashed again. “It was crazy,” Shen says. “We were down 17 of the first 30 days.” Then it got worse. With traffic peaking at 1.5 million users, server costs topped $20,000 a month. And there was no way to monetize their creation.

Still, they soldiered on for more than a year, keeping afloat with tens of thousands of dollars in loans while hoping to figure out a way to turn their enormous fan base into a brilliant business. It never happened — at least not on MySpace.

This spring, however, Shen and Tokuda spent a few days porting their MySpace hit over to Facebook. The upstart social network began as a hangout for high school and college students and last September allowed anyone to join.

Eight months later, Facebook did something MySpace still hasn’t done: It opened up its network to developers and made it easy for them to make money from their applications. Which is exactly what Shen and Tokuda did when they rewrote their app and let it loose on Facebook.

Two months later, the duo had generated more than $200,000 in ad revenue. By late July they had 14 other apps up and running, with more than 22 million users. “When we started, we had no idea what we were doing,” Shen says. “Now we have a whole suite of applications, and that’s where our power is.”

It’s an increasingly common tale as the Facebook economy picks up steam. In just 10 weeks, hundreds of developers launched more than 2,500 new applications, triggering 139 million downloads. While a possible Facebook IPO or acquisition could change things overnight, for the moment it’s a free-for-all.

Irish Slave Trade

Friday, August 31st, 2007

Today, slavery is strongly associated with racism, not religious intolerance, and most people aren’t even aware of the Irish slave trade that provided the Indies with cheap labor:

Although the Africans and Irish were housed together and were the property of the planter owners, the Africans received much better treatment, food and housing. In the British West Indies the planters routinely tortured white slaves for any infraction. Owners would hang Irish slaves by their hands and set their hands or feet afire as a means of punishment. To end this barbarity, Colonel William Brayne wrote to English authorities in 1656 urging the importation of Negro slaves on the grounds that, “as the planters would have to pay much more for them, they would have an interest in preserving their lives, which was wanting in the case of (Irish)….” many of whom, he charged, were killed by overwork and cruel treatment. African Negroes cost generally about 20 to 50 pounds Sterling, compared to 900 pounds of cotton (about 5 pounds Sterling) for an Irish. They were also more durable in the hot climate, and caused fewer problems. The biggest bonus with the Africans though, was they were NOT Catholic, and any heathen pagan was better than an Irish Papist. Irish prisoners were commonly sentenced to a term of service, so theoretically they would eventually be free. In practice, many of the slavers sold the Irish on the same terms as prisoners for servitude of 7 to 10 years.

Job interview brainteasers

Friday, August 31st, 2007

From job interview brainteasers:

You are shrunk to the height of a nickel and your mass is proportionally reduced so as to maintain your original density. You are then thrown into an empty glass blender. The blades will start moving in 60 seconds. What do you do?

Think about that for a minute or two before reading on.

No peaking.

OK, my first thought goes to the square-cube law beloved by sci-fi geeks. My inch-high counterpart should be dramatically stronger for his weight, like an insect, so he should be able simply to jump out of the blender.

Anyway, here are some quasi-official responses mentioned in the article:

  1. Use the measurement marks to climb out
  2. Try to unscrew the glass
  3. Risk riding out the air current

One-Month-Old Leopard Cub

Friday, August 31st, 2007

Today’s dose of cute comes from this one-month-old leopard cub at Jordan Zoo, near Amman.

The World in 1900: Poverty

Thursday, August 30th, 2007

Brad DeLong shares a tremendous amount of fascinating economic history in The World in 1900: Poverty:

A quarter of American households in 1900 had boarders or lodgers (compared to two percent today). Half of American households in 1900 had fewer rooms than persons (compared to five percent today). A quarter of American households in 1900 had running water (compared to ninety-nine percent today). An eighth of American households in 1900 had flush toilets (compared to ninety-eight percent today). Less than a fifth had refrigerators, less than one-twelfth had gas or electric lights, less than one-twentieth had telephones or washing machines, and of course there were no radios or televisions or vacuum cleaners or central heating, to list just those major appliances that have greater than ninety percent coverage today.

And even if you did have a four room house, could you afford to heat more than one room of it? Many Homestead four-room houses became two-room houses — the kitchen and the bedroom — in the depths of the western Pennsylvania winter.
Almost always the first luxury that a working-class family moving up would purchase would be the services of a laundress: since laundry was expensive and difficult, few working-class families could maintain upper-middle-class standards of cleanliness. How often would you take baths if the water had to brought in from an outside pump, and then heated on the stove? How often would you wash your clothes if everything had to be washed out in the sink, if the fabrics were three times as heavy and the detergents one-third as powerful as the ones available today, and if as a result the laundry was a full day’s chore? Hand laundry was not a two hour a week task. Those who could afford the resources to maintain bourgeois styles of cleanliness flaunted it. White shirts, white dresses, white gloves are all powerful indications of wealth in turn of the century America. They said “I don’t have to do my own laundry and ,” and they said it loudly.

I’ve been saying this an awful lot lately, but read the whole thing.

Return of the "Elephant Gun"

Thursday, August 30th, 2007

In Return of the “Elephant Gun”, Eric Daniel notes that many modern militaries are fielding big-bore rifles again — but first he looks back at the good old days:

I was introduced to big bore anti-tank (anti-material) rifles back in the 80’s when I became an ardent follower of the board game Advanced Squad Leader (ASL was originally produced by the Avalon Hill Game Company, which was purchased by Hasbro, who discontinued production of the game. ASL is now published by MLB pitcher Curt Schilling and his Multi-Man Publishing company.) For those of you unfamiliar with the game, ASL was arguably the most accurate and detailed squad level tactical board game ever developed, with counters representing individual squads, leaders, tanks and support weapons.

Anyway, the one support weapon that caught my eye was the L-39 Lahti 20mm AT rifle. In game terms the Lahti was heavy (5 portage points) and it fired off of the AVF kill table under the “20L” column (the only squad portable weapon capable of doing so.) In real life terms the L-39 was heavy, (109 pounds, necessatating its transport by reindeer) and possessed such savage recoil (its cartridge, the 20 mm x 138 mm Solothurn Long, was the largest ever fired by a shoulder fired weapon in the war) that the Finns dubbed it the “Norsupyssy” (“Elephant Gun”), but it was also capable of reaching out 1,000m and penetrating 10mm of armor plate. Rendered obsolete by advanced Soviet tank designs by 1941, the incrediable accuracy of the L-39 enabled it to remain in service as a long range sniper rifle.

Funding the X-Prize

Thursday, August 30th, 2007

Alex Tabarrok discusses Funding the X-Prize:

Yesterday, Tyler and I met with Tom Vander Ark, the president of the X-Prize Foundation, to discuss and debate the future of prizes. One interesting bit of trivia that Tom mentioned was that the X-Prize was funded with an insurance contract. The funders paid the premium and the insurance company agreed to pay if the prize conditions were met.

To figure out how to price the contract the insurance company called ‘the experts’ at Boeing and McDonnell-Douglas. According to the experts the conditions for the X-Prize to be won (carrying three people to 100 kilometers above the earth’s surface, twice within two weeks) were so unrealistic as to be basically impossible within any reasonable time frame. Thus, the funders got lucky. The insurance company offered the contract at a very low premium and the rest is history!

Insurance companies don’t seem to understand risk all that well.

Thomas Sowell

Thursday, August 30th, 2007

Michael Blowhard looks at black economist Thomas Sowell and cites some interesting points from his Civil Rights: Rhetoric or Reality:

  • How to account for the many ways in which blacks were making more progress before passage of the Civil Rights Act than they were after? An impressive example: College-educated black women were out-earning college-educated white women by 1960, four years before the Civil Rights Act.
  • If the U.S. is so racist, how have Asians been able to do so well? Despite being mistreated during WWII, Japanese Americans by 1959 were earning the same money whites were, and by 1969 were earning considerably more.
  • If America’s racism has only to do with black-skinned people, how to account for the way that West Indian immigrants have done so well in this country? By 1980, despite having been in this country in any kind of numbers for a relatively short period, black West Indians were making 94% of what whites were. (Here’s a brief Time magazine article about the successes of black West Indians in the U.S.)
  • If political action is such a terrific way to help a group advance, why is it that the groups that have been most prone to embrace politics — the Irish are a prominent example here — took so much longer to advance than did similar groups (Italians, say) who avoided politics?

In Nature’s Casino

Thursday, August 30th, 2007

Michael Lewis (Moneyball and The Blind Side) explains that Americans are making a lot of bad bets In Nature’s Casino:

From Miami to San Francisco, the nation’s priciest real estate now faced beaches and straddled fault lines; its most vibrant cities occupied its most hazardous land. If, after World War II, you had set out to redistribute wealth to maximize the sums that might be lost to nature, you couldn’t have done much better than Americans had done. And virtually no one — not even the weather bookies — fully understood the true odds.

Slowly the finance world has caught on, and hedge funds have sprung up to buy and sell cat bonds:

The buyer of a catastrophe bond is effectively selling catastrophe insurance. He puts down his money and will lose it all if some specified bad thing happens within a predetermined number of years: a big hurricane hitting Miami, say, or some insurance company losing more than $1 billion on any single natural disaster. In exchange, the cat-bond seller — an insurance company looking to insure itself against extreme losses — pays the buyer a high rate of interest.

I naively assumed that insurance companies understood their own line of business:

An insurance company could function only if it was able to control its exposure to loss. Geico sells auto insurance to more than seven million Americans. No individual car accident can be foreseen, obviously, but the total number of accidents over a large population is amazingly predictable. The company knows from past experience what percentage of the drivers it insures will file claims and how much those claims will cost. The logic of catastrophe is very different: either no one is affected or vast numbers of people are. After an earthquake flattens Tokyo, a Japanese earthquake insurer is in deep trouble: millions of customers file claims. If there were a great number of rich cities scattered across the planet that might plausibly be destroyed by an earthquake, the insurer could spread its exposure to the losses by selling earthquake insurance to all of them. The losses it suffered in Tokyo would be offset by the gains it made from the cities not destroyed by an earthquake. But the financial risk from earthquakes — and hurricanes — is highly concentrated in a few places.

There were insurance problems that were beyond the insurance industry’s means. Yet insurers continued to cover them, sometimes unenthusiastically, sometimes recklessly. Why didn’t insurance companies see this? Seo wondered, and then found the answer: They hadn’t listened closely enough to Karen Clark.

What Karen Clark did was obvious, yet no one else was doing it:

To better judge the potential cost of catastrophe, Clark gathered very long-term historical data on hurricanes. “There was all this data that wasn’t being used,” she says. “You could take it, and take all the science that also wasn’t being used, and you could package it in a model that could spit out numbers companies could use to make decisions. It just seemed like such an obvious thing to do.” She combined the long-term hurricane record with new data on property exposure — building-replacement costs by ZIP code, engineering reports, local building codes, etc. — and wound up with a crude but powerful tool, both for judging the probability of a catastrophe striking any one area and for predicting the losses it might inflict. Then she wrote her paper about it.

The attention Clark’s paper attracted was mostly polite. Two years later, she visited Lloyd’s — pregnant with her first child, hauling a Stone Age laptop — and gave a speech to actual risk-takers. In nature’s casino, they had set themselves up as the house, and yet they didn’t know the odds. They assumed that even the worst catastrophe could generate no more than a few billion dollars in losses, but her model was generating insured losses of more than $30 billion for a single storm — and these losses were far more likely to occur than they had been in the previous few decades. She projected catastrophic storms from the distant past onto the present-day population and storms from the more recent past onto richer and more populated areas than they had actually hit. (If you reran today the hurricane that struck Miami in 1926, for instance, it would take out not the few hundred million dollars of property it destroyed at the time but $60 billion to $100 billion.) “But,” she says, “from their point of view, all of this was just in this computer.”

She spoke for 45 minutes but had no sense that she had been heard. “The room was very quiet,” she says. “No one got up and left. But no one asked questions either. People thought they had already figured it out. They were comfortable with their own subjective judgment.” Of course they were; they had made pots of money the past 20 years insuring against catastrophic storms. But — and this was her real point — there hadn’t been any catastrophic storms! The insurers hadn’t been smart. They had been lucky.

Her big win came with Hurricane Andrew:

Hurricane Andrew made landfall at 5 on a Monday morning. By 9 she knew only the path of the storm and its intensity, but the information enabled her to estimate the losses: $13 billion, give or take. If builders in South Florida had ignored the building codes and built houses to lower standards, the losses might come in even higher. [...] The scuttlebutt from Lloyd’s already had it that losses couldn’t possibly exceed $6 billion, and some thought they were looking at a loss of just a few hundred million. “No one believed it,” she says of her estimate. “No one thought it was right. No one said, ‘Yeah, $13 billion sounds like a reasonable number.’ ” As she ate, she wondered what $13 billion in losses looked like. [...] It took months for the insurers to tote up their losses: $15.5 billion. (Building codes in South Florida had not been strictly enforced.) Fifteen and a half billion dollars exceeded all of the insurance premiums ever collected in Dade County. Eleven insurance companies went bust. And this wasn’t anything like the perfect storm. If it had gone into Miami, it could have bankrupted the whole industry. Clark had been right: the potential financial losses from various catastrophes were too great, and too complicated, to be judged by human intuition. “No one ever called to congratulate me,” Clark says, laughing. “But I had a lot of people call and ask to buy the model.”

One last quote:

Wall Street is a machine for turning information nobody cares about into information people can get rich from.

Go read the whole article.

Heretical Thoughts About Science and Society

Wednesday, August 29th, 2007

Freeman Dyson shares his Heretical Thoughts About Science and Society:

My first heresy says that all the fuss about global warming is grossly exaggerated. Here I am opposing the holy brotherhood of climate model experts and the crowd of deluded citizens who believe the numbers predicted by the computer models. Of course, they say, I have no degree in meteorology and I am therefore not qualified to speak. But I have studied the climate models and I know what they can do. The models solve the equations of fluid dynamics, and they do a very good job of describing the fluid motions of the atmosphere and the oceans. They do a very poor job of describing the clouds, the dust, the chemistry and the biology of fields and farms and forests. They do not begin to describe the real world that we live in. The real world is muddy and messy and full of things that we do not yet understand. It is much easier for a scientist to sit in an air-conditioned building and run computer models, than to put on winter clothes and measure what is really happening outside in the swamps and the clouds. That is why the climate model experts end up believing their own models.

Read the whole article.

Growing into growth

Wednesday, August 29th, 2007

Growing into growth notes that people are notoriously bad at judging what compounding can do:

The fact that we systematically underestimate even the medium-term effect of compounding growth I think severely hobbles our moral judgment about the importance of economic growth relative to other social desiderata. I used to puzzle a great deal over the fact that moral philosophers (as opposed to economists, who are the vanguard) have devoted so little attention to economic growth given the immense, swift improvements in well-being that high rates of growth have delivered wherever they have occurred. The now-well-documented historical record suggests that economic growth has done more for the welfare of humanity than any moral creed or non-economic initiative meant to improve the dignity and quality of human life. So why is there no treatise required of all undergraduates singing growth’s praises and setting it out as a moral imperative for all decent peoples?

"Stupid" investors, rejoice!

Wednesday, August 29th, 2007

Ben Stein says, “Stupid” investors, rejoice! in his recent efficient-markets piece:

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

To make money, at least in the postwar world, all you have to do is buy the broad indexes domestically — both in the emerging world and in the developed world–and, to throw in a little certainty about your old age, maybe buy some annuities.

To lose money, pretend you’re really, really clever, and that by reading financial journalism and watching CNBC, you can outguess the market day by day. Along with that, you must have absolutely no sense of proportion about money and the world at large.

Affirmative Action Backfires

Wednesday, August 29th, 2007

Gail Heriot, professor of law at the University of San Diego and a member of the U.S. Commission on Civil Rights, notes that Affirmative Action Backfires when law schools admit less-qualified black applicants:

Easily the most startling conclusion of his research: [UCLA law professor Richard] Sander calculated that there are fewer black attorneys today than there would have been if law schools had practiced color-blind admissions — about 7.9% fewer by his reckoning. He identified the culprit as the practice of admitting minority students to schools for which they are inadequately prepared. In essence, they have been “matched” to the wrong school.
While some students will outperform their entering academic credentials, just as some students will underperform theirs, most students will perform in the range that their academic credentials predict. As a result, in elite law schools, 51.6% of black students had first-year grade point averages in the bottom 10% of their class as opposed to only 5.6% of white students. Nearly identical performance gaps existed at law schools at all levels. This much is uncontroversial.
The Sander study argued that the most plausible explanation is that, as a result of affirmative action, black and white students with similar credentials are not attending the same schools. The white students are more likely to be attending a school that takes things a little more slowly and spends more time on matters that are covered on the bar exam. They are learning, while their minority peers are struggling at more elite schools.

Mr. Sander calculated that if law schools were to use color-blind admissions policies, fewer black law students would be admitted to law schools (3,182 students instead of 3,706), but since those who were admitted would be attending schools where they have a substantial likelihood of doing well, fewer would fail or drop out (403 vs. 670). In the end, more would pass the bar on their first try (1,859 vs. 1,567) and more would eventually pass the bar (2,150 vs. 1,981) than under the current system of race preferences. Obviously, these figures are just approximations, but they are troubling nonetheless.

David Friedman adds his comments:

After reading the op-ed, I told my wife about it. She pointed out that the argument was not original with Sanders. Almost twenty years ago, in his very interesting Choosing a College: A Guide for Parents and Students, Thomas Sowell made precisely the same point in the context of colleges rather than law schools. Black students at MIT had math scores well above the national average but far below the average for white students at MIT; they would have gotten a better education at a less elite engineering school.

Farewell to Alms, pp.112-192

Wednesday, August 29th, 2007

Tyler Cowen discusses Farewell to Alms, pp.112-192 and again spawns some fascinating discussion. Read the previous installment, if you haven’t already.

Most successful pirate was beautiful and tough

Wednesday, August 29th, 2007

Evidently the most successful pirate was beautiful and tough:

You can keep your Bluebeards and your Blackbeards. The most successful pirate of all time controlled a fleet of more than 1,500 ships and upwards of 80,000 sailors — and she did it all without the help of facial hair.

When a Chinese pirate captain named Cheng married a beautiful prostitute in 1801, he wasn’t just getting the girl of his dreams; he was making the best financial investment of his career. His new bride, known to history as Cheng I Sao, or “Wife of Cheng,” agreed to the marriage on one condition — that she would share equally in his power and would be given the opportunity to help him secure more wealth.

Sounded like a deal to Cheng, and for the next six years, the husband and wife teamed up to grow their piracy business along the coast of the South China Sea, as far south as Malaysia. But then, in 1807, Cheng passed away. Instead of stepping aside like a “proper” widow, Cheng I Sao promptly took the reins.

Although clearly ahead of her time, Cheng I Sao was shrewd enough to realize that the pirate masses weren’t likely as enlightened. So, her first act as leader was to make her husband’s second-in-command, Chang Pao, official captain of the fleet.

While Chang Pao led the men into battle, Cheng I Sao focused her attention on business, military strategy, and the enormous task of governing a growing body of ruffians. In the years following her husband’s death, she steadily brought more and more outlaws under the banner of her Red Flag Fleet.

In fact, Cheng I Sao was eventually responsible for nearly all the piracy in the region and her fleet exceeded the size of many countries’ navies. She also expanded the scope of the business, branching out from simple attack-and-pillage jobs to protection schemes, blackmail, and extortion. Cheng I Sao’s reach also extended to the mainland, where she set up an extensive spy network and developed economic ties with farmers who would supply her men with food.

If Cheng I Sao’s business practices were exemplary, then her system of pirate law was nothing short of revolutionary. The code of conduct she wrote for her men prescribed much harsher punishments than previous pirate laws had. A disobeyed order was cause for beheading (as was stealing from the common plunder), and deserters stood to lose their ears.

Ironically, Cheng I Sao’s most famous laws applied to the taking of female prisoners. Ugly women were returned to shore, free of charge. Attractive captives were auctioned off to the crew, unless a pirate personally purchased the captive, in which case they were considered married. Of course, if that pirate cheated on his new bride, Cheng I Sao had him killed.

Murder, thievery, and intricate crime syndicates will eventually garner the full attention of the law, and Cheng I Sao certainly had the authorities on her tail. But, here again, she proved more successful than her male counterparts.

Cheng I Sao repelled attack after attack by both the Chinese navy and the many Portuguese and British bounty hunters brought in to help capture her. Then, in 1810, the Chinese government tried a different tactic — they offered her universal pirate amnesty in exchange for peace.

Cheng I Sao jumped at the opportunity and headed for the negotiating table. There, the pirate queen arranged what was, all told, a killer deal. Fewer than 400 of her men received any punishment, and a mere 126 were executed. The remaining pirates got to keep their booty and were offered military jobs.

As for Cheng I Sao, she retired with her loot and her new husband (former righthand man, Chang Pao) and opened a gambling house. She died peacefully in 1844, a 69-year-old grandmother.