The Poker Metaphor and Sunk Costs

Seth Godin had another brief, biting post about sunk costs, as the number one thing they teach you in business school that is ignored.  I always enjoy his terse posts to bring about maximum effect.

However, I found myself taking issues with this post.  The principle is sound: it doesn’t matter what you spent in the past, only your expectations for the future.

I think I took issue because psychologically effects from sunk costs affects most people, including myself.  But I couldn’t help but think first of all that sunk costs are spent in the first place because of an expectation of future return, rational or irrational.  Abandoning ship, as it were, or ignoring sunk costs ignores this expectation.

The principle does still stand, for this expectation would be part of your “future” calculation.  Given Mr. Godin’s succinct nature, I feel this was somewhat lost. So, I felt it enough to take some time off an extremely busy time to sound off with a quick blog post.  After all, this is also coming from the famous author who recently wrote The Dip, saying that those who are successful are those who can push those the dip (and quit the dips that are too deep and too long).

Later, I found myself thinking about poker metaphors.

1. Implied Odds.  Betting on a long-shot at LOWER than strict expected value, with the implication that if your card hits, you can take all your opponent’s chips.  The implication is that there is some likelihood that you will earn more than currently in the pot, which really raises your expected value.
2. Pot Committed.  You eventually reach a point of no return, where despite a possibly low possibility of winning, the amount required to see the bet through is so small that you must make it, according to the expected value calculation.
3. Defending Your Blinds.  Strictly according to ignoring sunk costs, this seems to make the least sense.  After all, money is money and it doesn’t matter who’s money is in there.  It may seem like an egotistical, psychological reason why you don’t want someone to take YOUR money.  However, you defend your blinds for the expected value of not being the sheep at the table that will get bullied over and over again simply because you don’t defend what you’ve invested.  Same basically as defending any bet (or any sunk cost).

The metaphor of poker applied towards business is not straightforward. I only mention these metaphors because “ignoring sunk costs” is just as convoluted.  Ignore sunk costs at your own peril, but make your calculations wisely.

One more poker metaphor, slightly unrelated: always sit down at the table with the drunk guy.  I’m not a fan of casino poker at times when the goal is to win the maximum possible, because it’s hard to beat the table rake (amount casino takes) with a table of comparably competent players.  With a drunk guy, I am, preferably two.  In other words, you win the game when you have a systemic advantage and it’s wise to heed this advice in business as well.

Gotta love those poker metaphors.

Get Rich Slow, Now

Great article in Time Magazine, Get Rich Slow, about the rise of the small startup that can cost nearly nothing and grow into something very valuable.  Paul Graham, Jason Calacanis, and many others have been preaching the rise of the zero-cost startup.

Not only is this my life right now, but it’s the basic basis of most every big Internet success in the 2.0 era: Google, YouTube, Twitter, Facebook, on and on.

I’m surprised I’d never heard the term “ramen profitability” before, but I love it!

If you’re unemployed, get something going now.  Time is your most valuable asset.  If you’re gainfully employed, do something on the side – costs you no more than a hobby, and I think it’s more fun (and creates more value for the world) than most hobbies.  If you don’t, someone else will.  Simple enough.

(via 37Signals)

Hometown Paper Goes Down… To Online

Seattle P-I goes online only (from Mashable’s Adam Ostrow) today, and the largest daily paper to go online only according the seattlepi.com homepage.

My first wage job was as a Seattle Times paperboy.  Bonus: online newspapers don’t get wet, don’t need to get plastic bagged, and don’t get chewed up by the dog.

Kindle App Brings Primetime eBooks to iPhone

I got the Kindle iPhone application this morning.  It’s basic seeming, which can be a good thing and it nicely gets the job done.  I was reading the first chapter (free sample) of Malcolm Gladwell’s Outliers within minutes.  You have to download eBooks from Safari – seems fine to me until closer integration for purchasing in the app becomes available.

Something is a little obnoxious about reading on the tiny iPhone screen.  Really all I need right now is more reason to stare at the damn thing more often.

In San Francisco, the San Francisco Chronicle is facing what looks like impending doom.  It’s just a matter of time before the paper portion goes down.  Mayor Gavin Newsom was on Real Time with Bill Maher, proclaiming that bloggers aren’t real journalists (or something to that effect) and that real news will suffer because if newspapers shut down.  Mayor Newson thinks that the Chronicle will probably find some way to rearrange its business.

A rant on why this is a little off would be a whole thing itself.  Writing is writing is writing, and there’s no reason why “real” journalism can’t exist on the web just as easily as on paper – is that not simple enough?  A workable business model is a different story – that’s the piece that’s being worked through.

Marc Andreessen thinks the New York Times needs to kill the paper portion now, as (paraphrase) acute pain is better than years of chronic pain.  Yet he admits that he owns something like 6,000 CDs – quite the counter-argument to the death of media.

Just because a book or newspaper “feels better” doesn’t really mean anything, nor does the fact that staring at a screen so much seems just wrong.  Everyone can have their preferences.  It does not mean that the newspaper, books or CD will go on.  Technology changes things, and hopefully and generally for the better.  Amazon does print books on demand, as do a number of start-ups.  If I want a book to read on the beach, I’ll buy it – plain and simple.  Wasting a tree everytime I want to read the latest marketing guru no latter seems sane though.

My point being – don’t confuse a gut reaction with what way of doing things is really better.  Then, you too can be a futurist and see why paper isn’t dead – it’s just a mostly unnecessary remnant of media delivery.

Mashable gets the credit for breaking this, for me at least.

Wisdom & When Rules Aren’t Enough

I’m planning something around some of Barry Schwartz’s recommendations, but thought I’d start by sharing an amazing talk everyone should take to heart:

more about “Barry Schwartz on our loss of wisdom …“, posted with vodpod

On a Blogging Break…

Wow, how time flies.  It’s been a crazy, reflective, interesting number of months since my last post.

Been juggling too many things, so the blog has been the neglected child.  So I guess I’m officially on a blogging break.  Instead of leaving the blog to drown, I figured I should at least post some notice.  I do intend to return, hopefully sooner rather than later, maybe with some special surprises in store.

See you soon .

Investor Protection Association for America: Don’t Do It

I received a direct mail piece today from Investor Protection Association for America.  As a concerned citizen, it didn’t seem quite as obvious a ploy as other “claim your prize” mailings.

It is indeed a mailing list collection ploy (from NextMark):

Investor Protection Association for America responders are affluent investors with a vested interest in tax reform, protection of investors’ rights, the effect of high energy cost on the economy and increased political awareness. They are concerned with pending legislation and how Congressional decisions will impact their financial future. More importantly they are willing to tell Congress what they feel their priorities should be. IPAA responders subscribe to investment newsletters, financial publications, business publications, they are donors as well as financial and economic book buyers. They have the discretionary income to invest in stocks, bonds, annuities, commodities, mutual funds, oil and gas, and hedge funds as well as subscribe to publications, books and fundraising offers.

I won’t patronize you with phony outrage.  Magazine, catalog, and who-knows-what mailing lists are regular practice.  But they make no qualms about how their model works.  I accept advertising and marketing with open arms.

In these times, people are hurting and our government hasn’t yet taken the right steps to fully reassure us.  Armed with the promise of public service, they’ve given us more junk mail instead.   As such, I feel this is pretty despicable right now.

This has apparently been going on since at least 1997 (via Dave).  Now, their salespeople probably thought this might be a good time to ratchet up the mailings, given their newly propped appropriateness of their name.  Send in a blank envelope as Dave suggests, or just destroy the mailing.

Next thing is, without Google, I probably would never been able to discover this fact.  If this post stops one person from sending their information in and saves one tree, the time to write it was worthwhile.  Pass it on.

Staples 2.0: When Online Resembles Offline

Sarah Tavel of Bessemer Partners has a great post about The Staples 2.0 effect, how large e-commerce retailers are leading to the closure of mom-and-pop stores.  I highly recommend it.

The conclusion that e-commerce will come to more closely resemble physical retail in the long run always struck me as a largely underrepresented one. The seismic drop in consumer spending seems to be the catalyst to put this reality front and center.

The post got me thinking. Search Engine Ranking is the key ingredient here.

Many direct comparisons can be made between online retail and physical retail: branding, repeat customers, customer acquisition cost, economies of scale, etc. Many insurmountable benefits to scale.

With Search Ranking, it’s as if once you’ve “earned” your spot, you’ve not only got a flagship store in Times Square, but also in London Square, Union Square, Mall of America, and so on… for FREE. The land grab for this space spawned Web 1.0, Web 2.0, and on.

The existence of Search Ranking, based on popularity (links), makes it even more insurmountable to dethrone a market leader. It’s not the only benefit to scale, but my gut says that it’s the straw that breaks the camel’s back for new entrants.

Some of the thinking is very obvious. Commodities will be bought from the low-cost producer. Long tail wise, there can be a healthy long tail serving infinite small-scale interests given removal of geographical barriers. Today’s basically zero cost of real estate means these niches have a lot of room to thrive.

Hence an Etsy, Zazzle or such can thrive as well.

You’ll basically see large e-commerce retailers, with niche retailers competing on a specific niche service, which sure looks a lot like physical retail.

There’s still of lot of room to grow and create value to build a brand and your base of loyal users/customers/followers: aggregation, customization, community, socialization.

It’s just unoriginality that will go unrewarded… it’s no different on the Wild Wild Web.

(via GigaOM)

Why Americans Should Be More Thankful Than Ever

I’ve resisted writing much about the economy, but since it’s a rainy day in San Francisco as people start taking off for the long weekend, here it goes…

Last night, I watched Magic Johnson, Steve Wynn and Eric Schmidt on Larry King Live.

It was a surprisingly thoughtful (not that I didn’t expect it but sometimes these interviews are broken records) treatise of what’s ailing now and what to do next. They identified their focus now:

• People
• Innovation

Again, it’s called adding value- and these are the key ingredients.

They identified top priorities in getting the economy moving again:

• Unfreezing credit markets, in a direct fashion
• Infrastructure Investment. Green technology, physical infrastructure- roads, transportation, etc.

I would also add Leveling The Playing Field to the list, such as Net Neutrality. Steve Wynn mentioned that government is good as some things, such as regulation, and bad at others. I agree wholeheartedly, set the right regulations and rules in place (which is a fluid process) then get out of the way. I believe fundamentally the new administration agrees, no matter what the rhetoric being thrown out there may say.

Steve Wynn also suggested it’s a good time to save money and hunker down a bit. Eric Schmidt continued to focus on the Google mantra of creating innovations and value-adds that people delight in.

All three men were remarkably optimistic. Granted, I would find it hard not to be optimistic but you also have to remember all three are self-made men.

Sage advice is not to ignore the realities of today. I hold that this is healthy for America.

Americans should be more thankful than ever because this is the richest country in the world, by far. Americans should be thankful because we’re free. We can have an open debate about free market capitalism, dangers of greed, and how to best cure the spreading divide between rich and poor without harming the very economic system that got us to where we are today.  Be thankful because amidst the chaos, we live in a place that allows us to strive for a better tomorrow.

Have a wonderful and joy-filled Thanksgiving!

Simple Idea. Add Execution.

In today’s economy, there’s no financial room for error. Get your cash flow straighted up, or get out.

That doesn’t mean that IDEA error, or trial-and-error, is not alive and well. The zero-cost startup is absolutely a reality, birthed both Six Apart and Google during the post-dotcom downturn. (Please don’t argue the exact timing – Google was born during the bubble, but benefited from a zero/low-cost basis to build something great. Scaling search is a different story.)

There’s never been a better time to start with a simple idea (but it should be big – huge distinction), but do it well. I thought it’d be fun on Friday to comb over a handful of startups I’ve looked at on my blog to see how they are doing.

Startups I’ve commented that have marginally (or more than marginally) improved an existing business model or technology:

Jellyfish: Perfectly elastic cash rebates. Acquired by Microsoft, now powers its Live Search Cashback system.

Farecast: Predictive airfares – buy or wait predictions. I’ve mentioned them on several occasion; I’ve linked to a previous post about the web needing applications that solve real problems. Acquired by Microsoft.

RetailMeNot: Social coupons and deals. Mentioned in an inquiry about gwallet (still yet to launch), but re-reading a TechCrunch post a while back mentioning RetailMeNot as a 3 person operation reminds me how far great execution on a simple idea can go. They just launched BeatMyPrice. Seems mostly like a price comparison wrapper on RetailMeNot. May not be acquired soon, but no doubt they’re making a boatload of cash from the deal/price/coupon model.

Startups that haven’t rocketed upward:

Genietown: Local services marketplace. I liked the concept, but rightly saw a few things mis-executed. If they have cleaned them up, it might not have been enough as they haven’t yet helped Genietown make its growth spurt in a tough, tough market.

Stagr: Apparel startup by Nick Swirnmum (founder of Zappos). Stagr looks like it’s given up on its broad, ambitious model and looks like it’s only selling Stagr branded apparel on their web site. When both the idea and execution go away, we know what happens.

Moral: Building a company is hard. So start simple, and execute every single day.