My Content List #12, Tues 10/22

8 min readOct 22, 2019

Opening Rant: Perverse Incentives

Been a little longer than I intended here between entries; in the interim, Summer ended / Fall came on strong, and I closed on my second portfolio company — which is great. And I turned a quarter century old — which freaks me out. Time really is accelerating, as I’ve written about before.

Choosing a topic to write about here almost always [knocks on wood] happens naturally; a theme will arise from a few pieces I read or conversations I have, and boom — I have subject matter. The etiology of this week’s topic was as follows:

I read Mark Benioff’s op-ed that criticizes capitalism and calls for more of a balance between “doing well and doing good” among corporations, seeing the two paradigms as mutually exclusive in today’s model. It’s a bit extreme and sanctimonious; he apologizes a bit too much for being a major winner (6.3 billion times over) in the de-facto socioeconomic model.
Bloomberg published a piece calling Juul the new big tobacco, which illuminated the “epidemic” of vaping and the “health crisis” of youth usage, etc.
I learned of Michael Porter’s (the HBS professor with “5 Forces” as his major claim to fame) study about environmental-social-governance (ESG) impact on investment returns, which stated: “Investors who seek alpha, as well as those who genuinely care about social issues, have clearly missed the boat by overlooking the significant drivers of economic value arising from the power of social impact that improves shareholder returns.”
Lastly… Immersed in conversation at work centered around substance abuse clinics and the changing dynamics around federal/commercial reimbursement rates, I learned that those insurance providers prefer quicker cures / shorter length-of-stays because (obviously) it’s less cash outlay for them.

Then I thought: whoa, those clinics may have an incentive to keep patients around longer / not cure them as quickly as they could, so they could (bluntly) milk the as much cash reimbursement as possible from the addicts they’re trying to treat.

Then, in a Jimmy Neutron-esque brain blast, it all hit me: there are a TON of perverse incentives in the broadly defined ‘marketplace’ today.

I immediately scribbled down some notes, a few representative examples of this phenomenon. I’ve reproduced those notes below (they’re shorthand / all over the place, but indicative of the breadth of incentive perversion):

Juul/Tobacco… Knowingly selling addiction/health hazards
Drug companies / opioid overuse / are hospitals happier with more patients to treat? Healthier bottom line = unhealthier population
Lawyer with more or longer-burn lawsuits, deals → higher fees → no incentive to close case/deal quickly
Test prep tutors: don’t want students who improve *quickly*, would rather it take a while…. same w/ personal trainers + psychiatrists + etc.
Money mgrs used to want you to trade more just so they could collect 2% fees on each trade, didn’t matter as much (in short run) how trades did→ until Robinhood disrupted with 0-commission trading
Investment banks bake analyst attrition into their model b/c all they need is ENERGY, which they knowingly deplete → // sell companies for the sake of generating fees when it may not make business sense

Each of those bullets easily could’ve been expounded upon as their own independent Opening Rant (I’ll probably regret splurging all that at once), and each has serious ramifications in their respective domain/industry.

From a behavioral economic perspective, this perverse incentive trade-off is also one between short- and long-run. For example, an SAT tutor wants students whose scores don’t improve immediately (so they can bill more hours in the short-term), but if there isn’t any improvement to speak of in the long-term, the tutor’s referral base will run dry as his services are deemed useless. The same logic applies to lawyers, addiction treatment clinics, deal-hungry investment bankers, and so on. And maybe in some parallel universe, profits and welfare aren’t as juxtaposed in these circumstances. I have little doubt that capitalism is the best scaffolding for a economic system to be built on, but there’s a significant negative externality/market inefficiency that results from the situations I noted above (and all the others I didn’t list).

This is all a long-winded way of saying I don’t know exactly how we can (/whether it’s even worth spending time trying to) better align incentives in the “marketplace.” I just wanted to illustrate that those misaligned incentives aren’t just a few here and a few there; the perversion is pervasive, and the more you think about different market niches the more you’ll be able to uncover, thus ever-larger market inefficiencies, and so on… Thus, an Opening Rant was ranted.

Got something to contribute? Think my reasoning is flawed?

Drop me a note; I’d love to hear from you!

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My Content List #12, Tues 10/22

Articles

How TikTok Holds Our Attention | New Yorker

It’s actually crazy to see my Gen-Z nieces and nephews absorbed in TikTok for HOURS… were we Millenials that engulfed in technology at their age?

Loneliness is Instagram’s hottest trend | The Atlantic

Neither, and New: Lessons from Uber and Vision Fund | Stratechery

‘Nerd,’ ‘Nonsmoker,’ ‘Wrongdoer’: How Might A.I. Label You? | NYTimes

Nike’s future as a DTC company is in full swing | Thinknum

Why Everything Is Getting Louder | The Atlantic

Mapping the world’s growing plastic mountain, one bottle at a time | Reuters

Thanks to Duffy for sharing the above 2 articles — keep sending ’em along man!

What Did I Learn From the First VC Check I Ever Wrote? | Mark Suster

The Cult of Rich-Kid Sports | The Atlantic

Why Reverse Mentoring Works and How to Do It Right | HBR

Reverse mentoring pairs younger employees with executive team members to mentor them on various topics of strategic and cultural relevance → hugely important to figure out how to stay relevant to younger consumers of your product/service AND for retention of younger employees

What Really Happens When You Become an Overnight Millionaire? | Marker / Stephanie Clifford

This story profiles Peter Rahal, founder of RXBar which exited for $600M a few years ago
Still young and still hungry, this piece touches on Peter’s search for purpose/meaning having already “made it”

Shoot Migrants’ Legs, Build Alligator Moat: Behind Trump’s Ideas for Border | NYTimes

The Style-Quantifying Astrophysicists of Silicon Valley | Wired

Alex Taussig commented: “ It’s not every day that two of my personal passions — physics and commerce — appear in the same article. Wired interviewed fellow physicist “deserters” who have left academia to apply their deductive thinking and data models to consumer behavior.”

Everything is Private Equity Now | Bloomberg

Juul Is the New Big Tobacco | Bloomberg

Do-It-Yourself Sabbaticals | NYTimes

Why Time Management Is Ruining Our Lives | The Guardian

The American Dream Mall Is The Next Step In The Evolution Of Retail | Forbes

A mall that contains the world’s biggest wavepool, a man-made ski hill that can hold 500 people at once, an aquarium, and not one but TWO mini golf courses?!? I’m intrigued.

[INFOGRAPHIC] The Game of Life: Visualizing China’s Social Credit System | VisualCapitalist

Beyond Endorsing: How Veggie Burgers Became the NBA’s New Gatorade | SI