Possible Insight

Archive for the ‘Markets’ Category

Revolutionizing Angel Funding

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[EDITED 05/08/2009: see here] We are finally ready to go semi-public with our revolutionary new angel funding concept!  For the last year, Dave Lambert (the Tiltboy also known as Diceboy) and I have been working on an alternative mechanism for delivering seed funding to technology companies. [REDACTED 05/08/2009: see here].

Here’s the summary.  The market for seed capital is clearly broken. Most individual angels will only do about 1 deal per year, which means their portfolios lose money 40% of the time due to insufficient diversification. Even premier angel groups like the Band of Angels say they only do about 8 deals per year. Our math says you need to do 125 to achieve good diversification. On the other side of the table, only 14% of entrepreneurs who want angel funding will find it.  Those that do will spend about 6 months looking for money instead of building their businesses.

This is a sorry state of affairs for a market where the overall annual return is 25%+. Here’s a straightforward application of portfolio theory that can fix it.  Have a large enough pool of money so one entity can do 125-200 deals per year. Then use an online screening process to give founders a yes or no in two weeks. Obviously, there are a ton of details beyond this, but those are what we’ve spent the last year figuring out.  If you’re curious, let me know in a comment here and I will contact you privately.[Links to files REDACTED 05/08/2009: see here].

Written by Kevin

April 20, 2009 at 11:59 pm

Brilliant or Crazy? I Really Don't Know.

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Apropos of Rafe’s last post on Complexity Economics, I ran across an economic stability proposal that is either brilliant or crazy. I both haven’t thought it over enough and am probably not qualified to determine which.

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Written by Kevin

March 1, 2009 at 4:32 pm

Must Read Article on the Financial Meltdown

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Via Tyler Cowen at Marginal Revolution, an excellent article in Wired about how one formula, embodying one assumption, catalyzed the meltdown.  I recommend you read it and ponder it.  There are many useful lessons for modeling complex systems in general.

However, I will summarize for those of you short on time.  A fundamental problem in securitization is figuring out how different components of a security are related.  Think of it as measuring how well the components are diversified.  The more independent the components, the less risk embodied in the security.  Thus AAA rated tranches of mortgage-backed securities are supposed to be very safe because the components are supposed to be highly independent.

A Chinese mathematician named David X. Li had an insight.  You don’t have to analyze the dependencies directly, you just have to observe the correlations in the market prices of the components.  Then you can compute these really tight sounding confidence intervals on the correlations of various components because you have all this market data.  Of course, the market can’t take into account what it doesn’t understand.  So you see a bunch of 25-sigma events.  At least, your model says they are 25-sigma.  Oops!

Written by Kevin

February 24, 2009 at 10:16 am

Society According to Kevin: Part 1

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How Our Moral Compasses Fail Us

From the comments on my Introduction to this series, it appears I have discovered a controversial topic. Good. My first objective will be to illustrate why we cannot rely on  moral compasses to guide society. After some thought, I have decided to break the topic of moral compasses into two posts: how they fail and why they fail.

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Written by Kevin

January 15, 2009 at 8:30 pm

Society According to Kevin: Introduction

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I was recently having a conversation with a mutual friend of Rafe’s and mine.  Like the two of us, he’s quite smart, well educated, and socially aware.  I respect his thinking a lot. However, during the course of this conversation, it became clear to me that he holds what I think of as an overly moralistic view of human behavior.

From my perspective, it seemed like he thinks that people’s behavior is governed primarily by an internal moral compass rather than incentives. So if you want to change their behavior, you should redirect their moral compass rather than adjust their incentives. People who don’t adjust their behavior are defecting from society and should be sanctioned.

I encounter this view quite often in my social circle and this instance inspired me to write a series of posts to explain how I think things actually work.  You’re free to disagree with me, of course. In fact, I expect most people to disagree with me. But I’ve thought rather hard about this issue and I’ll put my model up against the moralistic view when it comes to predicting a population’s average behavior or choosing an effective policy prescription.

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Written by Kevin

January 2, 2009 at 8:22 pm

Poetic Justice in the Financial Crisis

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Bloomberg reports that Credit Suisse has decided to pay managing directors’ and directors’ bonuses in the form of an ownership interest in the bank’s toxic mortgage-backed assets. The value of these assets will emerge over the next eight years as the assets mature or default.  This is outstanding!  The executives have to lie in the bed they made. Of course, this would have been better if they did this prospectively back when the executives were the making decisions that created these securities.  But perhaps banks will adopt some sort of similar long term performance measurement mechanism going forward.

Via Volokh Conspiracy via Megan McArdle via ClusterStock.

Written by Kevin

December 19, 2008 at 10:15 pm

Posted in Markets

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Required Reading on Financial Crisis

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Remember Liar’s Poker by Michael Lewis about 80s Wall Street excess?  Well, he has a terrific article on some guys who saw the subprime meltdown coming and bet heavily on it.  It’s great narrative and a reminder that whenever someone’s model departs substantially from reality, there is an arbitrage opportunity.  Hey, maybe we should rename this blog “Reality Arbitrage”.

Written by Kevin

November 12, 2008 at 6:54 pm

Posted in Markets, Models

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