Brett Romero

Data Inspired Insights

Category: Other

Questions of Race and Immigration

I recently came across a tweet from Sony Kapoor which had some interesting data on attitudes to interracial marriage across a range of countries. Surprised by some of the results, I went digging and found the full poll document, which I have provided below. The full results of the poll, to say the least, really challenged some of my preconceived notions of which countries are racially tolerant and which are not. The poll sampled around 1,000 people from each country, which is not a huge sample size, but still the findings are very interesting.

However, in a change of pace, instead of giving my thoughts on what I found surprising/disappointing, I thought I would turn this over to you, dear reader, and see what you thought. What surprised you? What confirmed what you already thought? Leave a comment

[embeddoc url=”http://brettromero.com/wordpress/wp-content/uploads/2016/04/BBC_GlobeScan_Identity_Season_Press_Release_April-26.pdf” download=”all”]

For those waiting for the next part in the Kaggle walkthrough series, it is still coming, I have just been a bit busy with some other work the past couple of weeks. If you haven’t already, save yourself some time and subscribe to receive an email notification when something new gets posted.

5 Things I Learned in 2015

2015 has been an interesting year in many respects. A new country[1], a new language, a new job, and plenty of new experiences – both at work and in life in general. To get into the year-end spirit, I thought I would list out 5 key things I learned this year.

1. I Love Pandas

Yes, those pandas as well, who doesn’t? But I knew that well before 2015. The pandas I learned to love this year is a data analysis library for the programming language Python. “Whoa, slow down egg head” I hear you say. For those that are not regular coders, what that means is that pandas provides a large range of ways for people writing Python code to interact with data that makes life very easy.

Reading from and writing to Excel, CSV files and JSON (see lesson number 2) is super easy and fast. Manipulating large datasets in table like structures (dataframes) – check. Slicing, dicing, aggregating – check, check and check. In fact, as a result of pandas, I have almost entirely stopped using R[2]. All the (mostly basic) data manipulation for which I used to use R, I now use Python. Of course R still has an important role to play, particularly when it comes to complex statistical analysis, but that does not tend to come up all that regularly.

2. JSON is Everywhere

JSON, JavaScript Object Notation for the uninitiated, is a data interchange format that has become the default way of transferring data online. Anytime you are seeing data displayed on a webpage, including all the visualizations on this website, JSON is the format the underlying data is in.

JSON has two big advantages that have led to its current state of dominance. The first is that, as the name suggests, it is native to JavaScript – the key programming language, alongside HTML, that is interpreted by the browser you are reading this on. The second is that JSON is an extremely flexible way of representing data.

However, as someone who comes from a statistics and data background, as opposed to a technology background, JSON can take a while to get used to. The way data is represented in JSON is very different to the traditional tables of data that most people are used to seeing. Gone are the columns and rows, replaced with key-value pairs and lots of curly brackets – “{“ and “}”. If you are interested in seeing what it looks like, there are numerous CSV to JSON convertors online. This one even has a sample dataset to play with.

If you do bother to take a look at some JSON, you will note that it is also much more verbose than your standard tabular format. A table containing 10 columns by 30 rows – something that could easily fit into one screen on a spreadsheet – runs to 300+ lines of JSON, depending on how it is structured. That does not make it easy to get an overview of the data for a human reader, but that overlooks what JSON is designed for – to be read by computers. The fact that a human can read it at all is seen as one of JSON’s strengths.

For those interested in working with data (or any web based technology), knowing how to read and manipulate JSON is becoming as important as knowing how to use a spreadsheet.

3. Free Tools are Great

There are some people working for software vendors who will read this and be happy I have a very small audience. Having worked in the public sector, for a large corporate and now for a small NGO, one thing I have been pleasantly surprised by in 2015 is the number and quality of free tools available online.

For general office administration there are office communicator applications (Slack), task management tools (Trello) and Google’s free replacements for Excel, Word and PowerPoint. For version control and code management there is GitHub. For data analysis, the aforementioned Python and R are both free and open source. For data storage, there is a huge range of free database technologies available, in both SQL (PostgreSQL, MySQL, SQLite3) and NoSQL (MongoDB, Redis, Cassandra) variations.

To be fair to my previous larger employers and my software-selling friends, most of these tools/applications do have significant catches. Many operate on a ‘freemium’ model. This means that for individuals and small organizations with relatively few users, the service is free (or next to free), but costs quickly rise when you need larger numbers of users and/or want access to additional features, typically the types of features larger organizations need. Many of the above also provide no tech support or guarantees, meaning that executives have no one to blame if the software blows up. If you are responsible for maintaining the personal data of millions of clients, that may not be a risk you are willing to take.

For small business owners and entrepreneurs however, these tools are great news. They bring down barriers to entry for small businesses and make their survival more dependent on the quality of the product rather than how much money they have. That is surely only a good thing.

4. Blogging is a Full Time Job

Speaking of starting a business, a common dream these days is semi-retiring somewhere warm and writing a blog. My realization this year from running a blog (if only part time) is just how difficult it is to get any traction. Aside from being able to write reasonably well, there are two main hurdles that anyone planning to become a full time blogger needs to overcome – note that I have not come close to accomplishing either of these:

  1. You have to generate large amounts of good quality content – at least 2-3 longer form pieces a week if you want to maintain a consistent audience. That may seem easy, but after you have quickly bashed out the 5-10 article ideas you have been mulling over, the grind begins. You will often be writing things that are not super interesting to you. You will often not be happy with what you have written. You will quickly realize that your favorite time is the time immediately after you have finished an article and your least favorite is when you need to start a new piece.
  2. You will spend more time marketing your blog than writing. Yep, if you want a big audience (big enough to generate cash to live on) you will need to spend an inordinate amount of time:
    • cold emailing other blogs and websites, asking them to link to your blog (‘generating back links’ in blogspeak)
    • ensuring everything on your blog is geared towards your blog showing up in peoples’ Google search results (Search Engine Optimization or SEO)
    • promoting yourself on Facebook
    • building a following on Twitter
    • contributing to discussions on Reddit and LinkedIn to show people you are someone worth listening to, and
    • writing guest blogs for other sites.

None of this is easy. Begging strangers for links, incorporating ‘focus words’ into your page titles and headings, posting links on Facebook to something you spend days writing, only to find you get one like (thanks Mum!). Meanwhile, some auto-generated, barely readable click-bait trash from ‘viralnova’ or ‘quandly’ (yes, I am deliberately not linking to those sites) is clocking up likes in the 5 figures. It can be downright depressing.

Of course, there are an almost infinite number of people out there offering their services to help with these things (I should know, they regularly comment on my articles telling me how one weird trick can improve my ‘on page SEO’). The problem is, the only real help they can give you is adding more things to the list above. On the other hand, if you are thinking about paid promotion (buying like’s or a similar strategy) I’d recommend watching this video:

Still want to be a blogger? You’re welcome.

5. Do not be Afraid to Try New Things

One of the things that struck me in 2015 is how attached people get to doing things a certain way. To a large degree this makes sense, the more often you use/do something, the better you get at it. I am very good at writing SQL and using Excel – I have spent most of the last 10 years using those two things. As a result, I will often try to use those tools to solve problems because I feel most comfortable using them.

Where this becomes a problem is when you start trying to shoehorn problems into tools not just because you are comfortable with the tool, but to avoid using something you are less comfortable with. As you have seen above, two of the best things I learned this year were two concepts that were completely foreign to a SQL/Excel guy like me. But that is part of what made learning them so rewarding. I gained a completely new perspective on how data can be structured and manipulated and, even though I am far from an expert in those new skills, I now know they are available and which sorts of problems they are useful for.

So, do not be afraid to try new things, even if the usefulness of that experience is not immediately apparent. You never know when that skill might come in handy.

 

Happy New Year to everyone, I hope you have a great 2016!

 

[1] Or ‘Autonomous Province’ depending on your political views

[2] R is another programming language designed specifically for statistical analysis, data manipulation and data mining.

Should the Wealthy be able to pay for Better Healthcare?

Commenting on an article on reddit.com, I recently got into an argument[1] with someone about healthcare and more specifically the role of private healthcare. The article was this NY times piece that talks about how US hospitals provide a range of benefits for wealthier ‘clients’ (at significant additional cost of course). These benefits can be anything from nicer rooms to gourmet food and access to business centers.

My first reaction to the piece was, what I expect, the desired response – indignation. In a country like the US where there are countless healthcare horror stories (the story of a carpenter having to choose which fingers to reattach as covered in Sicko is particularly famous), this seems outrageous. How can some people not afford access to healthcare at all, and yet others are paying huge sums to stay in private rooms and eat soft cheeses?

I believe in my case, this sense of indignation was particularly strong because I come from one of the many non-US developed countries in the world with a basic but functioning universal healthcare system. No one avoids going to hospital for fear of being bankrupted by the cost. No one has to make horrible decisions about which appendages to reattach. The only major drawback in most universal healthcare systems is procedures that are non-life threatening can have significant wait times.

A good example of this is getting surgery to repair an ACL. You can get it done through the public health system (Medicare in Australia), free of charge – or close to free. However, because you are not going to die from a ruptured ACL, you are likely to have to wait for 1-2 years to get that surgery done through Medicare. If, on the other hand, you have something like $5,000-$10,000 you can have it done next week[2].

As you may have observed from this example though, this sounds very close to what I was getting all indignant about in the first place – wealthy people buying access to better healthcare. In fact, in most universal healthcare systems, including Australia’s, the wealthy do have the option to pay more to receive access to better care and/or skip to the front of the queue. In reality, the NY Times article could easily have been talking about Australian hospitals. What is more, the ability of richer patients to pay for better service is often viewed as necessary for the system in Australia – the extra money paid by wealthy patients helps to fund the system for others. So why does it feel different?

After several days of mentally dissecting this issue I think I have come to a conclusion as to why the NY Times story got such a reaction out of me and yet I had a generally positive impression of the private health system in Australia. The key difference (at least in my mind) is the extent of the privatization of the healthcare system. In the US, healthcare has been privatized to such an extent that some people have been priced out of the market completely. When this is contrasted with the opposite end of the spectrum – private rooms, nicer robes, lobster stuffed with tacos – it highlights that the problem with the system is not an overall lack of resources, but that those resources are being allocated in such a way that some people do not get access.

Contrast this to the existence of private health systems in countries with universal healthcare. Even though some patients are able to access better facilities (and potentially doctors), everyone has access to a (generally) good level of healthcare, regardless of wealth or insurance policy. Because of this, the fact that some people can pay extra for nicer rooms seems much less important. The system has enough resources for everyone – so it is not perceived as resources being taken from poorer patients.

However, it is worth asking the question of whether this is right or simply a convenient piece of logic.

To assess the morality of the wealthy having the ability to purchase better healthcare services, we have to recognize the two main constraints on a healthcare system. The first constraint is the supply of personnel, equipment and medical supplies. The second constraint is the supply of money. These constraints are not unrelated. An endless supply of money will not help if there is a shortage in equipment/personnel at a given point in time. But money can help to increase the supply of these things in the future.

If we accept the premise that wealthy patients benefit healthcare systems by adding additional money into the system, going back to the constraints above, we can see that essentially this is a short term sacrifice for a longer term gain. Assuming that the demand for healthcare will always exceed supply, wealthy patients skipping to the front of the queue will take resources away from poorer patients in the present. They occupy beds, take time away from doctors and require access to equipment just like any other patient. However, they also pay money into the system that allows future patients to access treatment they might not otherwise have had access to.

Here is where it gets a bit murkier. If we are saying that payments from wealthy patients are needed for the system to function in the future, are we not then implying that the system is underfunded? Why can that money not come from other sources such as higher tax rates or lower spending in other areas of the budget? The problem with that line of thinking is that in any realistic government budget, there will always be room for additional healthcare funding. No government is ever likely to fund a healthcare system to the point that everyone gets the best possible treatment instantaneously[3]. So even in a much better funded public health system than currently exists in most countries, additional funds provided by wealthy patients will still allow for better treatment of other patients in the future.

All this does not mean we have to like the US model of healthcare where money plays far too big a role for the comfort of many. Denying patient access to healthcare (or bankrupting them for emergency care) in a modern developed country is a deplorable situation. But my overall conclusion is that it is best to focus your indignation on the real issues with the system – the excessive insurance premiums, the tying of affordable insurance to employment, the huge markups charged by many hospitals and the unnecessary expensive treatments added to patients bills.

As outrageous as it seems to picture wealthy patients receiving lavish treatment in private rooms while others are avoiding necessary treatment for fear of the cost, it is not the real issue. In fact it is probably providing a net benefit in a deeply flawed system.

 

[1] Those that know me will find this very unsurprising

[2] This cost, it should be noted, is still a fraction of the $55,000+ my health insurance company paid for that procedure in the US.

[3] If that was the case, you would also have idle resources for much of the year

The Darker Side of Meritocracy

Meritocracy. An ideal world where everyone is rewarded based on his or her individual qualities. The intelligent and the hardworking become the rock stars, the lazy and ignorant are doomed to a life of mediocrity. But would a true meritocracy be as idyllic as it sounds?

As was covered in Part I, there are a number of problems with defining and identifying merit. In Part II, we are going to overlook these issues and imagine what a real meritocracy might look like, and why, despite what they might say, the vast majority of people actively undermine meritocracy on a regular basis.

What Would a True Meritocracy Look Like?

Assuming we have some agreed upon way to define and identify merit, what would a true meritocracy look like? For a pure meritocracy (i.e. one in which the success of a given person is solely determined by their own actions and intelligence) to exist, each individual’s merit needs to be determined solely by his or her own individual quality.

The problem with this is, in the real world, parents have a huge influence on a child’s chances of success. This influence comes in an infinite number of forms, but includes intangible things like advice, help with homework, introductions to influential people, and being a positive role model, as well as tangible resources such as money and access to the best schools.

If parents have such a large influence on the success (or failure) of their children, how can a true meritocracy exist? Realistically, to achieve a true meritocracy, the government (or some independent body) needs to equalize parents’ influence on their child.

This equalization can take two forms. The first form is providing resources and assistance to less well off parents to try bring them up to level of parents in the upper classes. This typically includes things like welfare payments, subsidized/free health care and housing assistance, but also includes scholarships and other programs offered to help disadvantaged kids.

The second form of equalization is typically more controversial and involves reducing the ability of upper class parents to provide advantages to their children. These types of measures are far more rare, but they do exist – policies such as inheritances taxes and the removal or restriction of private schools[1] are two examples.

The reason this second type of measure is so rare is because it starts to reveal the underlying tradeoff. The tradeoff being that ensuring everyone gets the same quality upbringing means that, for some children, the quality of their upbringing has to decrease.

But even if we were willing to accept more extreme policies, they can only realistically go so far. No government can legislate to ensure every child is read to at night, and nor can they implement a ban on reading to children to make sure no child gets an advantage. No government can legislate away deadbeat Dads or Moms that get drunk in front of the kids. Which means that if you are going to create a true meritocracy, there is only really one option – take the parents out of the picture completely. This is where things start to get a little scary.

To guarantee every child receives the exact same upbringing and education, the government (or some independent body) would need to remove parents from their children’s lives. This could take various forms. A Logan’s Run style scenario where everyone is ‘terminated’ at age 30 – essentially creating a nation of orphans is one potential option. Another would be taking children at birth and raising them in industrial scale nurseries and boarding schools out of reach of parents, somewhat akin to Aldous Huxley’s Brave New World (without the presence of castes or the extreme social conditioning).

There a numerous ways that one can envisage removing a parents’ influence from their children, but the difficulty is imagining one that does not sound like a good premise for a movie about a dystopian future. In fact, the options are so unappealing that even the most repressive and extreme regimes in history have shied away from this kind of intervention.

If this is what a society would need to do to implement a true meritocracy, are there at least some upsides?

A Fairer System?

One of the key arguments made for meritocracy is that it is a ‘fairer’ system. But is it fairer (whatever that means), or are we simply replacing one lottery with another?

The current system is one in which your future success is dictated by some combination of who your parents and/or role models are (‘nurture’) and your own individual abilities (‘nature’). A true meritocracy, as we have been describing it, is simply a system in which the ‘nurture’ component has been standardized.

Is that actually fairer though? There will still be winners and losers, but now the people born with a dud genetic hand are probably worse off then in our current less meritocratic world. Unlike the current world we live in, there is no chance that a superior work ethic instilled by charmingly humble parents will get someone ahead. There are no inspiring stories of underdogs beating their better-credentialed rivals through pure determination. Rocky Balboa never even gets to fight against Apollo Creed. In a true meritocracy, the favorite always wins – that is the point of system.

A Better System?

By ensuring that the best and brightest are the ones that rise to the most influential positions, are we at least guaranteeing the fastest possible rate of progress for humanity? The answer to that question depends on how you believe progress is made.

Someone who believes that progress is only really made by rare transformative geniuses, like Einstein and Hawking, should be in favor of a more meritorious society. The risk is that a genius will be born to bad parents or in the wrong country, and as a result, that genius is wasted and substantial progress is forgone. To minimize the risk of this happening, a rational person should be willing to sacrifice certain freedoms (through more government intervention) to make sure that fewer geniuses are ‘wasted’.

On the other hand, if a person believes that progress is made by the cumulative effort of many, many intelligent (but not unique people), they should not be so worried about a true meritocracy. In this case, the loss of some geniuses to bad upbringings and poverty is much less consequential as they will be replaced by other equally or slightly less intelligent people. Maximizing the overall level of child welfare should be the priority, which, to most people, would mean allowing parents to raise their own children as far as possible.

Saying versus Doing

Stepping away from the theoretical, there is a lot that can be learned about people’s preferences in regard to meritocracy by simply looking at their actions in our world today. There is an Italian proverb that I enjoy reciting from time to time to make myself sound intelligent:

“Between saying and doing, many a pair of shoe is worn out”

Aside from the aforementioned reason, I bring this up now because people’s actions often reveal their true preferences much more accurately than their words. This is particularly true when it comes to meritocracy. In my experience, there are few people that do not actively attempt to give themselves (or those they care about) some advantage over others, and even fewer that would not take advantage of an opportunity that was presented to them.

A common example is private schools. These schools, by definition, are unmeritorious. Their business model is that parents will pay money (often large amounts of it) to send their children to a certain school exactly because they believe it will provide their child with an advantage over other children that don’t go to that school. If they did not believe it provided their children with an advantage, no rational parent would pay to send their child there.

Inheritances, giving someone a job because you know them, private tutors, moving to a better (i.e. more expensive) school district, helping out the kids with homework or even reading to them at night are just some of the endless ways that everyone, myself included, undermines a true meritocracy.

Summary

Despite the platitudes and mainstream acceptance, a true meritocracy is not what we really want as a society. Any serious thought on the subject quickly reveals a true meritocracy it is all but impossible to implement, and if implemented, the reality would be a dystopian world worthy of a George Orwell novel.

However, once the realization is made that a true meritocracy is impossible and undesirable, the remaining conclusion is that no one is truly arguing for or against meritocracy, everyone is simply arguing for a different shade of grey. The introduction and removal of various policies simply makes that shade slightly darker or lighter.

This is an important conclusion because it changes the perspective of the argument. There is no right vs. left, haves vs. have nots, good vs. evil. There is just people arguing for incremental changes. Each country, with every election, is simply working out what shade of grey they prefer.

 

[1] Many countries in Europe do not have private school systems, including education pinup nation Finland.

The Dark Side of Meritocracy

In recent years, discussion about economic concepts like inequality and income mobility has been everywhere. Thrust into the spotlight by the global financial crisis, they have rarely left the front pages thanks to Thomas Piketty’s Capital in the Twenty-First Century and a series of rolling financial crises in Europe. These days you can’t even enjoy your artisanal quail egg omelet and fair trade coffee without some bearded, tweed wearing, artisanal whiskey distilling, overgrown trust fund baby complaining about how unfair it all is, in between cashing rent checks from his parents.

When it comes to discussions of inequality though, one of the underlying assumptions that few are willing to challenge is that the drivers of inequality largely boil down to nepotism and inherited wealth, while the answer to most inequality based problems comes down to one idea: meritocracy.

What is a Meritocracy?

Meritocracy is a system in which the people who hold power (through democratically elected means or otherwise) are those that are most deserving based on individual merit. In common use, it is usually taken to be slightly broader than that – a world in which money and success are allocated, perfectly, to those who are deemed to deserve it the most.

In an increasingly polarized political system in the US, meritocracy – or ‘the right to rise’ – is often the only thing that politicians on both sides of the aisle seem to agree on. The ideal of meritocracy is so ingrained in the US that Americans are famous for their belief that hard work will be rewarded with untold wealth and success. But this belief is far from unique to the US. In Australia meritocracy has long been considered part of the national identity with politicians of all stripes often talking in jingoistic terms about ‘the fair go’.

For all the talk of meritocracy though, how feasible is it in the real world? What would be some of the major hurdles to implementing a more meritocratic system?

Defining Merit

The first question that should arise whenever meritocracy is discussed is how is merit defined? There are 4 basic criteria that most commonly are thought of as contributing to merit:

  1. Qualifications
  2. Work ethic
  3. Intelligence
  4. Experience

For almost all competitions where there are winners and losers – jobs, university positions or other – some combination of these traits will generally be used to decide a winner. To keep things simpler, let’s focus on the job market for now.

The first thing to consider when defining merit for a given job is that to have an accurate measure of merit, the criteria need to be modified for every position. Jobs requiring manual labor place a higher value on work ethic but little value on qualifications. Jobs in tech often place higher value on intelligence, but less on formal qualifications and, depending on the role, large amounts of experience can be seen as detrimental. Most jobs will require applicants to possess experience in one or more specific areas.

For the most part, this customization of criteria for each job is already being done – a job advertisement is essentially a statement of the criteria that merit will be assessed by. But the question is, are those criteria actually the correct ones to identify the best possible person for a given job? I believe the answer to that question is a resounding “no”. Let me explain why.

Let’s look at a common example that anyone who has tried changing sector, industry or country in his or her career will be able to relate to.

Imagine you have been working for around 10-15 years and have spent all of that time in one industry[1]. During that time you have picked up a lot of useful workplace skills, spreadsheets, experience with various applications, writing skills, general how-not-to-piss-everyone-off skills and so on. Now you want a new challenge that will require a lot of the skills you have, but in a different industry. You approach a recruiter, bright eyed and excited by the possibilities, but despite your best efforts to sell your skills as relevant, the recruiter basically discards your experience as worthless and tries to push you towards a low level role or something in your old industry.

This experience is a simple example that reveals an underlying truth – if we were being truly meritorious, there could be no fixed criteria for merit for any job because there is no way to preemptively identify what combination of skills and experience will ultimately prove to be the most valuable.

The possibilities for what combination of skills and experience lead to the best performance in a role are endless. Many successful business owners do not have MBAs. Many of the best investors on Wall Street do not come from finance backgrounds. Some of the best NFL punters are ex-Australian Rules Football players. What people who excel tend to have in common is a combination of skills and experiences that allows them to bring a different perspective to a problem.

Yet, despite history proving time[2] and time again[3] that different perspectives are often vital to important insights, it is a rare employer or recruiter that will take a bet on a candidate with ‘unusual experience’ rather than a candidate who ticks all the boxes. The reason for that is simple – it is safer. Choosing the candidate that ticks the boxes provides cover (“I gave you what you asked for”) and it gives a better guarantee of an acceptable level of performance. The unusual candidate could be fantastic – but they could also be a complete flop who turns out to be way out of their depth.

Unfortunately, this is only the first hurdle for a true meritocracy – if merit is a difficult thing to define, it is an even more difficult thing to measure.

Measuring Merit

Once we get past the step of deciding what criteria will determine the most deserving applicant, the next step is deciding who best meets those criteria. A quick look at the application process for college admission or a technical job will give you an instant appreciation for the lengths that people will go to try and get an accurate assessment of an applicant’s true merit.

Tests, interviews and essays are probably the most common tools used to assess merit but all can be (and are) gamed by people who understand the system. Material for tests can be rote learned with little to no understanding necessary. Interviews are notorious for being poor predictors of talent, which makes sense when you consider that the most confident people are often delusional. Essays, aside from providing evidence of basic writing skills, are assessed subjectively.

Even if these tools for assessing merit were designed in such a way as to prevent gaming the system, these are still three very narrow tests of ability. As Megan McArdle explains, the experience in China shows that selecting for people who do well on exams gives you… a selection of people who do well on exams.

Assumptions and Prejudice

One interesting side effect of the difficulty in determining merit is it leads to people basing their assessment on completely superficial qualities (at least partially). A good dress sense, physical attractiveness, and being an eloquent speaker are just some examples of relatively superficial qualities people use to assess intelligence and merit. As frustrating as this can be for the unshapely, poorly dressed, mumblers out there, these are all things that can be improved and worked on (at least to some degree). Others are subject to prejudices that cannot be addressed – the impact of race on the ability to get interviews, for example, is well established.

Another concerning trend is the increasing use of someone’s current level of success/wealth as an indicator of merit. That is, if someone is wealthy and/or successful, they must be someone who is highly intelligent and works harder than everyone else. This line of thinking is dangerous for two reasons:

  1. Too much value is placed on the opinions of wealthy and successful people – particular on topics outside their domain. Anyone who has listened to Clive Palmer or Donald Trump speak should know that is a mistake.
  2. The implicit assumption made when you believe wealthy and successful people are fully deserving of their place in the world is that anyone who is poor and unsuccessful is also fully deserving of their situation.

Evidence of this thinking is present everywhere to some degree, but seems particularly prevalent in the US[4], where TV shows like Shark Tank are extremely popular and prominent CEOs are regularly asked for their opinions on public policy issues.

This belief system can largely be explained as the flip side of the optimistic view American’s have of their economic prospects. As this paper from the Brookings Institution highlights, American’s are far more likely to believe hard work and intelligence will be rewarded and yet are second only to the UK in terms of how closely correlated a son’s earnings are to his fathers (i.e. hard work has the least chance of improving your situation). If you truly believe that hard work and intelligence is all you need to be successful, you must also believe that people who are currently experiencing success have those attributes.

Best Person for the Job

Going back to our problems with creating a meritocracy, everything discussed so far has overlooked a key factor in this endless quest to find the most deserving – people are not cogs that can be simply transferred in and out of a machine seamlessly. The person who ‘deserves’ the job on merit (provided we can define it and measure it accurately) is often NOT the best person for the job. The best person for the job is often determined by qualities such as:

  • how that person fits in with the team culture,
  • their personality type, and
  • how they respond to authority (or the lack thereof).

These traits are all key factors in how well someone will perform in a given role and yet none would typically be thought of as meritorious qualities.

This realization is not new. Employers and hiring firms have been pushing the idea of the ‘beer test’ (asking yourself which of the candidates would you most like to go for an after-work beer with) for some time now. But it does beg the question – what would happen if a company simply hired the ‘best’ candidates for each position without considering whether these people will work well together? Would that team be more productive than a team that hired less ‘deserving’ candidates but aimed to build a harmonious work place? The entire body of management knowledge (and every buddy cop movie ever made) would tell us otherwise.

Summary

One thing that becomes obvious when you start thinking about how a true meritocracy would actually work is how difficult it would be to implement:

  • Many of the criteria we associate with someone being deserving of a role or position are subjective or exclude applicants who would in fact be far superior.
  • Our methods of assessment are often deeply flawed, subject to gaming and our own prejudices.
  • Selecting the most objectively deserving candidates is not guaranteed to provide the best results anyway.

Yet, despite the reasons above hopefully being enough to give pause the next time someone begins expressing frustration with the current lack of meritocracy, all of these issues are only really logistical problems.

There is a good argument to be made that we can and should try to improve on all of these things – that we should aim to get better at identifying the right people and refine our methods of assessing skills. We should pay more attention to team fit and personalities when selecting the best candidate. It is hard to imagine the world being a worse place if employers were more open minded about what skills might be valuable to their company and sociopaths were less likely to impress during an interview.

However, the next question is how far should we take this. What does a truly meritocratic society look like and is it something we really want? That is the subject of discussion in Part II in this series on meritocracy.

 

[1] You can easily replace ‘industry’ in this story with ‘company’, ‘field’ or ‘country’.

[2] Einstein famously worked at a patent office where his work often exposed him to the transmission of electric signals and electrical-mechanical synchronization of time. Exposure to these topics helped him to arrive at his conclusions about the nature of light and the connection between space and time.

[3] Steve Jobs often talked about the importance of a calligraphy class he took in shaping what fonts were best used in operating systems.

[4] Australia’s proclivity to tall poppy syndrome does have some positive side effects

Climbing Mount Delusion – The Path from Beginner to Expert

In our careers there are various skillsets that we will be required to develop over time. Whether that is carrying multiple plates at a time, while working in a restaurant, or something more technically challenging, such as learning a programming language or learning to write good. Regardless of the skillset, there is always a learning curve that must be conquered.

It is tempting to think of this learning curve as a steady slope where knowledge is accumulated over time, or perhaps a steep initial slope that flattens out. In my experience though, this is rarely the case. I believe there is a reoccurring pattern in the way most people move from beginner to expert in a given subject, with distinct phases. What’s more, I believe many others will identify with these phases.

If you do identify with these phases, you will also realize there are risks that emerge at different times, and that being aware of those risks can help you avoid them. These risks typically occur where a persons’ belief in their mastery of a given subject diverges from their actual abilities. Sometimes it will be a lack of confidence that causes more experienced people to not speak up when they should. Other times, the person will exhibit there far too much confidence relative to their knowledge. The latter case is so common it has become cliché: A little bit of knowledge is a dangerous thing.

To help illustrate the various phases of the journey from beginner to expert, I am going to tell the story through a fictional character, Fred, who is learning Economics.

1. Initial Optimism

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When Fred first begins to learn economics, he has a large burst of excitement. Everything is new and interesting, he is learning new ways to think about problems, and he can’t seem to get enough. He knows very little about the subject but is enthralled with how quickly he is absorbing all this new information, and how quickly the pieces seem to be fitting together.

For Fred though, the best part is that he can clearly see the point at which he believes he will be an expert.

2. The Summit of Mount Delusion

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Finally, after months/years of working hard, Fred reaches the peak of Mount Delusion. He finishes his degree and he can feel the knowledge coursing through him. Fred loves spending hours enlightening his friends and family about the intricacies of interest rate policy and why minimum wage increases are wrong headed. He feels great. He set out to master something and did it. Already his mind is turning to what is next on the list of topics to master.

The problem with standing on the summit of Mount Delusion is the fog often blocks the view.

Fred, like many who have stood on the summit of Mount Delusion, espouses advice without realizing the risks of that advice. He provides clear, unambiguous recommendations because he lacks the experience and/or knowledge to realize what caveats are needed. Ironically, this often makes Fred all the more convincing to his colleagues. While the true experts are hedging their responses, Fred is completely convinced option 1 is the best. People like decisiveness and, as a result, they like and trust Fred.

3. The Clearing of the Fog of Ignorance

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For Fred (and most people), a moment comes when the fog clears. Someone who is much further along this journey than Fred clears the fog completely unintentionally. With an innocuous comment and a simple question, this person – who does not even regard themselves as an expert – completely shakes Fred’s confidence to the core. For a horrible moment, Fred is left looking out over the vast expanse of knowledge and concepts he had not even known existed until 30 seconds ago. All the knowledge and experience accumulated to that point only seems to highlight how little he really knows. From here, it is a long way down …

It should be noted at this point that, for some people, the fog never clears. They simply lack the level of self-reflection required to ever critically review their performance and continue their development. They will go through life claiming they are an advanced user of X or an expert on Y without ever realizing just how misguided they are. To be frank, these people are often some of the most dangerous in the workplace.

4. The Valley of Self-Pity

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After that horrifying moment when the fog cleared, our former expert Fred was left in a depressed state. His mind continually racing through all the times he fearlessly dispensed his advice, advice he now realizes was off base or often just completely wrong. What’s worse, he now realizes that anyone with any real knowledge could have identified him as a fraud based purely on that misguided advice. In short, he feels amazingly stupid.

He revises his resume, removes all words like “advanced” and “expert” and prays his ill formed advice doesn’t come back to haunt him. People who used to rely on Fred for unambiguous advice are completely mystified as to what happened. Where did his confidence go? They will speculate about what happened but most will never really realize the truth.

At this point in the learning process, there are two main risks. The first is that Fred gives up on economics altogether. In his depressed state, he feels like he is back at square one. He views his own skills as trivial and meaningless, while over valuing the skills of others. Many people will never exit the valley of self-pity for this reason.

The second risk is that, in this state, Fred (and people like him) begins to significantly undersell his expertise. He defers decision making to those around him, even though in many instances he will be much better placed to make decisions.

5. Exiting the Valley

After what feels like the world’s longest meal of humble pie, some strange things start happening to Fred.

Firstly, he will start bumping into people who are still standing on the peak of Mount Delusion. He will identify them, because, despite their claims of being experts, he knows significantly more than them. He will realize that they do not even realize what they do not know yet, exactly like he did, not so long ago. This provides comfort because he realizes he is unlikely to be the first or last person to fall from the top of Mount Delusion. In fact, compared to some of the people he is now meeting, he was amazingly restrained.

Secondly, Fred will meet people who didn’t study economics and realize that skills and knowledge that, in the Valley of Self-Pity, he assumed everyone had are, in fact, exceedingly rare. Fred will realize that many of the basic skills he has are actually not so basic and are quite valuable.

With each of these encounters, Fred’s confidence begins to recover. He will remain painfully conscious of how much he still has to learn, but for the first time since this journey began, his actual knowledge level and his assumed knowledge level will come into alignment.

6. The Never-ending Slope of True Mastery

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Fred is finally on a sustainable path. He has acquired a large amount of knowledge and experience, but is fully aware of the limits of his knowledge. He has revised his resume again to include words like “advanced” and “expert”, but now seeks to play these down.

He continues to run into many people standing on the summit of Mount Delusion, but mostly just feels sorry for them – most have a large and embarrassing fall coming, and many will not recover from it. He attempts to coach these people where possible, to help lessen the pain from their fall. Some take his advice, some do not.

How I Can Relate to Fred

In my own life, I have taken the journey to the summit of Mount Delusion several times. With each subsequent visit I have learned to be more cautious, to pay more attention to people who have more experience than I do, but the scars of previous falls remain.

From SQL to Excel, writing blogs to learning Spanish, there has always been a specific depressing moment when the illusion of expertise disappeared and only a sense of inadequacy remained. I would always recover and continue to build knowledge (I have a reputation for being a little stubborn), but to this day, the words “expert” and “advanced user” continue to stick in the throat, the fear of being exposed as a fraud (again) always present.

So far I have been fortunate. Even my most reckless declarations and advice have only served to cause personal embarrassment rather than any significant damage to my career. It could have been so much worse.

To those that are beginning the journey, my only advice is to remain humble. To those that have already endured a fall or two, don’t give up. The world will be a better place for your continued contributions.

4 Reasons Working Long Hours is Crazy

I recently read an article in the Harvard Business Review about why working long hours is bad for business. This article resonated with me for several reasons, but mainly because over the past 2-3 years, I have been concerned with, and viewed first hand, the growing cult of working long hours.

Unfortunately, there are an increasing number of people who equate productivity and working hard with spending long hours at work. Consulting and Legal are arguably the worst culprits, but finance, tech, and various other sectors can be just as bad. Many in the tech startup world in particular seem to consider it a badge of honor to work excessive hours and sleep as little as possible.

In a lot of cases, companies have been making genuine attempts to improve work-life balance with various initiatives. These range from sending corporate communications to shutting down the office for a period each year to force people to take leave. Yet despite this, unused vacation leave reached a 40-year high in 2014.

Anyway, in an effort to fight this rising tide, I thought I would put together 4 good reasons why working long hours is detrimental and a waste of time.

1. Longer Hours Means Reduced Output

When I say reduced output, I don’t mean that each extra hour worked is less productive then the previous one (although that is also true). I mean your actual total output falls – you work longer and produce less. And the longer you work long hours, the less productive you become.

There is an exception here of course. Working longer hours for a short period (e.g. a couple of weeks to meet a deadline) can boost productivity – but this boost quickly erodes and then reverses. A good illustration of this was provided by a report from the Business Roundtable Report from 1980. The report detailed how the initial gains from extra hours were quickly eaten up by increasingly poor productivity. From the Executive Summary:

“Where a work schedule of 60 or more hours per week is continued longer than about two months, the cumulative effect of decreased productivity will cause a delay in the completion date beyond that which could have been realized with the same crew size on a 40-hour week.”

For physical workers this is one thing (the report was based on construction projects), but what about office workers? Unfortunately the story only gets worse. Shifting concrete mix or laying bricks when you are tired is one thing, but problem solving, complex reasoning and the intricacies of office politics require a higher level of focus.

Think about managing a software development project and having a team that is mentally exhausted after working long hours for months. It is not hard to imagine a scenario where the productivity of the team actually becomes negative as important files are mistakenly deleted or code is committed with catastrophic errors that then require significant time and effort to fix.

There are many reasons for this drop in productivity including mental exhaustion, depression and declining health. However the biggest driver of lost productivity is sleep deprivation.

2. Sleep Deprivation Is the Silent Killer

In addition to being a serious productivity killer, the biggest issue with sleep deprivation is that, as Dr. Charles A. Czeisler [1] explains in this interview with Havard Business Review, people consistently underestimate its impact. He goes on to explain that a person averaging four hours of sleep a night for four or five days has the same level of cognitive impairment as someone who has been awake for 24 hours – equivalent to legal drunkenness. Within 10 days, the level of impairment is the same as someone who has gone 48 hours without sleep.

The problem is, in many cases, very few people are taking this productivity loss as seriously as they should be. Consider how your boss would react if you decided to start dropping Jaeger bombs in the morning before coming to work. They are likely to be pretty unhappy, and not just because of your juvenile choice of drink. In fact, you would probably be lucky to keep your job. Yet, work long hours for an extended period, which has a similar impact on your productivity (and is a lot less fun), and you are more likely to be promoted than get a reprimand.

Again, there is a caveat here. An estimated 1-3% of people can function at a normal level on 5-6 hours sleep a night. But before you start reassuring yourself you are that person – research also shows that of 100 people who think they can function with 5-6 hours sleep, only 5 actually can. The rest have no idea they are even impaired. Which takes us to reason number 3.

3. People Do Not Realize When They Are Not Productive

A simple mistake that many people make is confusing being busy with being productive. Anyone who has spent any decent amount of time working in an office will know at least one person who seems to be perpetually busy, but never seems to get anything done[2].

The fact is that ‘busy’ and ‘productive’ are often very different things. Frantically sending emails, multitasking, scheduling pointless meetings or just doing a bunch of work that is completely unnecessary are not productive activities, but they are often the hallmarks of busy people.

But it is not just the frantically busy people who are not being productive. There is a limited amount of time that everyone is productive during a day. Consider the following scenario, which I am sure many people will recognize.

You are working late at night on a problem. You are spending hours trying to fix a seemingly intractable problem (for example, searching for the source of a bug, or trying to identify why the numbers do not add up). Eventually you give up, resolving to get in early the next day and fix it. Then something amazing happens. You get in the next morning, and within 10 minutes you have fixed the problem. In fact, you are amazed you spent so long worrying about something that was so simple to fix.

When you were trying to solve the problem the night before, did you feel impaired or less productive? Tired, frustrated, sure, but did you believe you were any less capable of solving the problem?

Here is where the downward cycle can start. People who consistently work 60-80 hours a week are (with some exceptions) mentally exhausted, but are not aware this is the case. All they see is that they have a significant amount of work that needs to get done and not enough hours to finish it. What is the first solution that comes to a weary mind in that scenario? Put in a couple of late ones and get over the hump. Maybe spend Saturday working and try get ahead a little bit.

Unfortunately, this is unlikely to work, and as they continue to increase their sleep deficit, they are increasingly likely to make mistakes and/or fall further behind.

4. We Have Already Learnt This Lesson

“We learn from history that we do not learn from history.” ― Georg Wilhelm Friedrich Hegel

The tragedy of this move towards longer hours is that we have been down this path before. The conclusion that shorter hours actually boost absolute productivity is not new, or even controversial. Ernst Abbe as early as 1900 moved his workers from a 9 hour to an 8 hour work day and noted that overall output increased. Henry Ford is another famous example. In 1926, he moved his workers from a 6-day to a 5-day workweek and again saw output increase.

These are not one-off cases. Although this push initially came from the union movement, business after business found that the overall output per worker actually increased with shorter hours.

What Can You Do?

It is easy to blame a highly competitive labor market and/or evil corporations for this trend towards ever-increasing hours. The fact is we all have some power to change the culture of our workplaces through our own actions.

As an employee, you are somewhat limited by your surroundings, particularly if you work somewhere that judges your performance on hours rather than productivity. However, assuming you do not work in a place that thinks work life balance is a list of priorities in descending order[3], there is still a lot you can do to improve your situation:

  1. Get your rest. If you want to get back to a 40-hour week, you need to be well rested and switched on when you arrive at the office.
  2. Be prepared to actually work. Working does not include reading blogs, regularly checking Facebook/Twitter, getting into pointless arguments, or wondering the hallways. If you turn up to work and are focused on work, you will be amazed how much you can get done in 8 hours[4].
  3. Be organized. Making the most of your 8 hours means being organized. Make lists, prioritize, plan well ahead and finish tasks early to get them off your plate. Whatever method(s) works for you, ensure when you turn up to work, you already know exactly what you need to do.
  4. Know when to leave. It is hard to understate the importance of this. Spending hours and hours late at night trying to solve a problem is possibly the single biggest time suck in the modern workplace. If it is not due that night, leave it for the morning. Go home, relax and have dinner. You will be doing everyone a favor.

Employers and managers obviously also have a key role to play. If you really want to encourage better habits in your employees (and you really, really should want to), you need to lead by example. This means:

  1. Cut down your own hours. At the very least, work from home outside business hours. If you say one thing and do another, your staff will choose to follow actions over instructions every time.
  2. Schedule emails for business hours. If you find yourself writing emails after hours or on weekends and you do not need a response immediately, schedule the emails to go out during business hours.
  3. Push for realistic deadlines. If you repeatedly provide unrealistic deadlines for tasks and projects, staff will be forced to put in extra hours to meet them, and will often fail anyway. Set generous deadlines and aim to finish early.
  4. Tell people to go home. If you see staff repeatedly staying late and you know there is no real reason they should be staying late, send them home. Every hour they stay working late is decreasing what you will get out of them the next day.
  5. Address poor time management. Consulting, for example, is littered with examples of people being praised for pulling all-nighters to finish off a piece of work. Sure, they met the deadline. Congratulations. Now let us talk about the weeks of poor time and resource management that led to that situation in the first place.

 

[1] Dr. Czeisler is the incumbent of an endowed professorship donated to Harvard by Cephalon and consults for a number of companies, including Actelion, Cephalon, Coca-Cola, Hypnion, Pfizer, Respironics, Sanofi-Aventis, Takeda, and Vanda.

[2] If you work in an office and do not know anyone like this, it is probably you.

[3] If this is your case, consider an alternative job. Or alternatively, start planning for your Eat Pray Love moment to strike in a few years time.

[4] A side effect of this is you are likely to become a lot less tolerant of long pointless meetings. Be wary of anyone who doesn’t mind long pointless meetings

 

 

Uber vs Taxis – The Taxi Perspective

Previously, in Part I, we looked at some of the major ways that Uber had improved the market for people who use taxis and/or ride sharing[1]. This week we are going to look at the less rosy side of ride sharing services.

When you consider the main player in ride sharing, Uber, there seems to be a general agreement that they are improving the situation for everyone. The customer is happier because they are getting better service than they were from a taxi. The drivers (who in the Uber model are also the owners) are happier because they are making all this extra cash. How can this be? If the reason taxi services are so intolerable is because taxi owners are squeezing all the profit they can out of the business, how can Uber drivers be making more money and offering a better service?

As we saw last week, part of the answer lies in some genuine innovations that Uber brought to the market. These innovations help their drivers to be more efficient and maximize the time spent with a customer in the car. But, as we also saw, most of these advantages have already been replicated by taxi services[2]. If taxis are replicating most of Uber’s technology based advantages, what advantages are left to explain the seemingly unstoppable spread of Uber?

Unfair Advantages

The taxi industry in most countries and cities is a highly regulated industry. Although it varies by location, the rules and regulations that are in place typically include requiring drivers to carry a commercial drivers license, more expensive insurance policies, more regular vehicle checks, regular health checks for drivers, as well as various fees and taxes. As this article from the Boston Globe highlights, all this results in a significant overhead for the taxi owners and their drivers.

Many Uber and Lyft drivers on the other hand avoid most or all of these extra costs. This allows drivers to operate at a lower cost than traditional taxis and still be profitable – which is the main complaint of most existing taxi owners and drivers. There is a strong argument to be made that the rules and regulations in many cities are overly onerous and should be reformed, but that doesn’t change the fact that people who are following those rules are at a significant disadvantage. It is also hard to think of another example where a company operating outside existing laws has such popular support. Imagine for a second if this was a finance company flouting the rules[3] to build market share – what would people’s reaction be?

Lack of Insurance

Of biggest concern in these avoided expenses is the lack of appropriate insurance. In a survey conducted on the therideshareguy.com, almost 90% of the 500+ respondents didn’t currently have insurance that would cover them as a commercial driver. This is hardly a representative sample[4], but it does suggest a significant number of drivers are driving uninsured.

It should be noted that in many cases this isn’t just a case of people not purchasing insurance. In many states (and countries), there is no legitimate insurance available for ride share drivers. Additionally, even in places where it is available, there is often a lack of clarity as to when the driver is and isn’t covered. However, none of this negates the fact that a major expense, one that taxi owners are forced to wear, is being avoided.

Subsidies

Aside from avoiding costs, there is another slightly underhanded tactic that Uber and Lyft are using to undermine taxis and attract new drivers to their service – providing subsidies to drivers.

How this typically works is that Uber/Lyft will provide a guarantee to their drivers that they will make $X per hour driving for the service[5]. When the drivers don’t (or can’t) make that much through driving alone, Uber/Lyft provides a top up. This account of driving for Lyft reveals just how big those subsidies can be worth – in this case the driver received $1,500 in pay for a period in which he only made $600 in actual fares.

In many cases, these subsidies are required to help offset the reductions in fares that Uber and Lyft use to attract more customers to the service. Chart 1 and Chart 2 show recent reductions in average fares in Chicago and New York City. It should be noted that in both cases, the drivers’ earnings per hour increased on average, but at the expense of significantly more trips taken.

Chart 1 – Reductions in Uber Fares Chicago 2013 to 2014

chicago_fare_reduction

Source: http://newsroom.uber.com/2015/01/beating-the-winter-slump-price-cuts-for-riders-with-guaranteed-earnings-for-drivers/

Chart 2 – Reductions in Uber Fares in New York City 2012 to 2014

nyc_fare_reduction

Source: http://newsroom.uber.com/nyc/2014/10/three-septembers-of-uberx-in-new-york-city/

Chart 3 – Increase in Uber Driver Earnings in New York City 2012 to 2014

nyc_gross_earnings

Source: http://newsroom.uber.com/nyc/2014/10/three-septembers-of-uberx-in-new-york-city/

As great as this sounds for drivers and customers, the problem is that this clearly isn’t a sustainable business model for ridesharing services. It is being used to attract new drivers and grow the business. But the impact of this is that it very difficult for any incumbents in the marketplace to remain competitive.

Think about an analogous scenario that most people in the US or Australia will be familiar with – supermarkets. A big chain (Walmart in the US, Coles or Woolies in Australia) moves into a small town, opens up a big new supermarket, and starts selling products at a loss. Great for consumers right? In this case, most people recognize this for what it is – predatory pricing designed to drive the incumbents out of business.

So what is the difference with Uber and Lyft doing this and driving the taxi services out of business? If you are about to argue that Uber is a start up competing against a rich, well-funded and protected taxi industry, let’s just remember who the competitors are. On one side we have Uber, a company recently valued at $50 billion and that has now raised almost $10 billion in funding. On the other side, there is a group of mostly small business owners, many of whom have probably borrowed against their house to buy their taxi license.

Bad Accounting

The final unfair advantage is one that is more incidental than a deliberate strategy. This advantage specifically benefits Uber and Lyft, rather than their drivers and arises from rideshare drivers’ lack of experience in the commercial driving business. Basically, many Uber and Lyft drivers simply aren’t accounting for all their costs correctly and, as a result, there is an oversupply of drivers.

The mistake many drivers are making is that they aren’t properly taking into account the long-term costs of the service they are providing. In addition to the cost of the gas/petrol, significant costs are incurred through the increased maintenance requirements for the car. These include the extra: sets of tires; oil changes; brake pads; timing belt replacements; and so on.

On top of increased maintenance costs, arguably the biggest expense being ignored by many drivers is the increased depreciation of their vehicles worth. By some estimates, a taxi doing 60 hours of driving a week in NYC (which probably has shorter average rides than most cities) does just over 46,000 miles (75,000 kms) a year. At that rate, just one or two years of driving for Uber or Lyft is going to put a serious dent in the resale value of your new Camry. And let’s not even start on how that shiny 5 year/100,000 mile warranty ran out after year 2 and your gearbox just threw a cog.

Finally, going back to the lack of appropriate insurance held by many rideshare drivers, there is a risk of large expenses incurred through an accident. If we assume the probability of an accident is greater than zero for any given drive, uninsured drivers should be factoring in an expected cost of an accident[6] into the costs of their business.

Once these costs are properly accounted for, many drivers are reporting incomes below or at minimum wage level. To make things worse, as this piece from uberdriverdiaries.com points out, this is a minimum wage job where you have to supply a $20,000+ piece of equipment.

Unfortunately, many drivers will learn the hard way that driving wasn’t as profitable as they thought it was. In some cases it is possible that driving will actually cost the driver more than they made. At some point though, probably after the subsidies end, there is going to be a major consolidation in the number of drivers working for these services as they arrive at this realization.

What Happens Next?

At the moment, rideshare companies Uber and Lyft are in extreme expansion mode and there is a huge amount of excitement around them. Unfortunately for taxi owners and drivers, this is not likely to end soon, and relying on regulators to enforce caps seems misguided. Even in cites where rideshare services have been banned, Uber has already shown it is willing to undermine those attempts to take its drivers off the road by paying drivers fines. You could argue that paying all their drivers fines may not be sustainable business model in the long term, but a company last valued at $50 billion probably figures they can keep paying fines longer than taxi owners can go without getting rides.

At some point, there will probably be some changes to align regulations for taxi drivers and rideshare services. This will probably make life more difficult (read: expensive) for rideshare drivers, but also life easier for taxi owners. But at least it should put everyone on an equal playing field.

What is likely to happen after that is a big consolidation. As mentioned above, once ride share drivers are brought back into the regulatory regime, and are forced to face the reality of the full costs of the service they provide, one of two outcomes are likely:

  1. They stop driving altogether, or
  2. They cut costs to stay profitable (cheaper and older cars, maintenance short cuts, no more chocolates and water bottles).

In short, the rideshare drivers that do stay in the market start to look and feel a lot more like taxis. There are already complaints in some more established markets that this is starting to happen.

Ultimately, the market will reach an equilibrium. For consumers, that is likely to be a world with a better, technology assisted, experience than was available 5 years ago. It probably also means slightly cheaper rides than the old taxi monopoly was providing, simply because the number of cars on the road is no longer capped. Thanks to the concept of surge pricing, you are also likely to spend far less time waiting in lines at taxi ranks, even at peak times – but you will pay extra for the convenience.

For the drivers and owners, driving is likely to become less profitable. In the future, driving probably becomes the equivalent of a minimum wage job[7]. Maybe the idea of working for something like minimum wage, but with the flexibility to choose your hours and work from your own car is not such a bad deal, but it is very different from the experience many rideshare drivers are having today.

Taxi Visualizations

Finally, I wanted to leave you with a couple of very cool visualizations of data obtained from taxi drivers.

The first is an app that tracks a taxi driver in New York City as they pick up and drop of passengers over a 24 hour period:

http://nyctaxi.herokuapp.com

The second shows all taxi pick ups and drop offs in New York City over the course of 24 hours in a hypnotic visualization. The fascinating thing is seeing the peak times at different times of the day, with midtown particularly busy during the day, while the Lower East Side and the Meatpacking district peak in the early hours of the morning. This visualization (and many more) can be accessed here:

http://www.nyctaxiviz.com

 

[1] “Ride sharing” is a bit of a misnomer – you have to pay after all – but this is the commonly used name for these services.

[2] Whether they are being used is a separate question.

[3] Let’s face it, rules and regulations in the financial industry are an order of magnitude more onerous than for taxi services.

[4] The people reading that article are probably doing so because they are looking for insurance. But there are also plenty of people who wouldn’t even be conscientious enough to look in the first place.

[5] Typically, there are various conditions applied that lock the driver in, such as a minimum number of hours worked in a week, 90%+ of rides accepted and so on.

[6] The probability of an accident occurring on that drive multiplied by the expected cost to the driver of that accident.

[7] As individual contractors, Uber and Lyft drivers aren’t subject to minimum wage requirements, but drivers will only continue to drive if they can make more than they could bussing tables or flipping burgers.

Uber vs Taxi – The Uber Perspective

Inspired by a recent piece by Oliver Blanchard I was put onto by a friend[1] (warning: it is a very long piece and gets very ranty), I thought I would put together some thoughts on the “Sharing Economy”, and in particular Uber. As there is a bit of ground to cover, I’ll split this into two parts. This first part will look at how Uber has improved taxi services and why taxi services may never be able to close that gap. The second part will look at some of the unfair advantages Uber has and why those advantages probably won’t last.

Before we dive into it though, I first want to say the economist in me loves the idea behind Uber and similar services such as Airbnb. They take some of the most valuable assets that most people will own (e.g. houses and cars) and helps their owners to derive economic value from them when they would otherwise be sitting idle. From the perspective of the wider economy, this is undoubtedly a good thing. Cars in particular are something that we spend a lot of money purchasing and maintaining, yet, end up sitting in a garage or parking lot for close to 90% of their existence.

How Uber Changed the Market

Since its founding in March 2009, there has always been a lot of hype around Uber. From their official launch in San Francisco in early 2011, they rapidly expanded to numerous other cities around the US and made their first move internationally to Paris in December 2011. As of today, Uber is available in 58 countries worldwide, and at a recent capital raising the company was valued in the ballpark of $50 billion. If publicly listed at that value, Uber would be among the largest 100 companies in the S&P500. Charts 1 and 2 show some of the explosive growth in driver numbers from a recent Uber paper.

Chart 1 – Total Active Drivers

total_driver_numbers

Chart 2 – Active Drivers by City

drivers_by_city

Aside from the rapid growth, one of the more impressive things about Uber is the amount of good will there seems to be towards Uber. Despite ‘disrupting’ an industry that has been around for decades and taking an aggressive approach to protecting its drivers and business model, the only people who seem to have anything bad to say about Uber are taxi drivers. Outside that obviously vested interest, there seems to be the general consensus that Uber is improving the situation for everyone. The customer is happier because they are getting much better service than they were from a taxi, and the drivers are happier because they are making all this extra cash. To work out why that is, let’s take a look at some of the key ways Uber has improved the taxi experience.

1. Getting a ride is now easy

Having an app that allows people to request a car at the tap of a button and know exactly when it will turn up is a big improvement for customers. No more automated phones services forcing you to scream “OPERATOR!” into the phone. No waiting on the side of the road trying to flag down a cab. No waiting for 2 hours in line at the taxi rank at 2am on a Saturday night. And finally, no sitting in silence in your home waiting for the honk of the horn to make sure you don’t miss the taxi you ordered.

2. So is getting to your destination

The app also allows you to enter a destination, which is then used to determine the best route and guides the driver. This again is a big improvement over the taxi experience in most countries. No waiting for the driver to type the address into his circa-1996 dashboard GPS – if he has one at all. No missing the freeway exit because you weren’t paying attention. No more risk of been taken on ‘the scenic route’ because you are from out of town.

3. Bad drivers and passengers get penalized

As a customer, think about the things you dislike about taxis. Now consider how many of those things are as a result of taxi drivers having to deal with bad passengers. Clunky plastic screens separating drivers from passengers. Inability to sit in the front seat of the cab at all in some cases. Cars that haven’t been cleaned in the past 6 months. The overall surliness of drivers.

Having a system where drivers rate their passengers and have the ability to refuse rides to people with low ratings, creates a lot of positive incentives for both driver and passenger. Passengers can no longer act like douche bags towards the driver or trash the cab without affecting their ability to get a taxi in the future. Drivers can maintain nicer cabs knowing their passengers are likely to be well behaved.

On the flip side, passengers rating their drivers also creates positives incentives for drivers to be much more helpful to their customers. As a result, Uber drivers are generally much more pleasant, cheerful, helpful and generous towards their customers. In my own personal Uber experience we have had drivers provide free water bottles, chocolates and other goodies.

4. Surge pricing means you rarely have to wait long

This is a controversial one, but I firmly believe this is positive, and anyone who has spent hours waiting for a taxi should as well.

The reason you had to wait so long for a taxi is because there are spikes in demand for taxi services and little to no increase in supply to meet that demand. There are two main reasons for that:

  1. In almost all cities, the number of taxi licenses available is capped
  2. If there are any taxis currently off duty, there is no incentive for the driver/owner to clock back on

Uber avoids both these problems. By not capping the number of drivers in a given city, Uber ensures there are plenty of spare drivers around when needed. By significantly increasing the rates drivers can charge in periods of peak demand, Uber also provides a strong incentive for drivers to get in their cars and start picking up passengers at 2am on a cold morning.

Surge pricing has drawn criticism and negative press in some parts, but reading the details of some of these stories, it really is difficult to have too much sympathy. Some will argue surge pricing is taking advantage of desperate people, but they are misunderstanding the options. The two options available in that moment are not an expensive ride at surge prices and a normal priced ride. The two options are an expensive ride at surge prices or no ride at all.

Now, that said, there is an argument to be made for stopping surge prices in disaster situations. But the best way to do that is not to stop providing drivers with higher prices to pick up people in those situations, but to change who is paying for it. Whether this is the government, Uber or some third party is a separate discussion.

Playing Catchup

If we look at the four advantages that Uber has (as listed above), and add in the fact that in many cities Uber is significantly cheaper than the taxi services, it makes a pretty compelling case that taxi services are in big trouble. Following the news and seeing taxi driver strikes[2], taxi lobbyists pushing for cities to outlaw Uber and police spending significant resources pulling over and fining Uber drivers, it can look like the last desperate throws of the dice for a dying industry.

However, in the face of this threat to their business, there has been some positive outcomes for taxi owners. Apps (Hailo and myTaxi) are now available that put taxis on par with Uber for 3 of the 4 advantages listed above. You can now order a taxi easily from an app, provide a destination and have access to a ratings system.

It is also not difficult to picture a world where taxi services start using some form of surge pricing to encourage drivers to be on the road at peak hours. To some degree this is already in place with many services charging higher rates at different times and days. But the problem is surge pricing only really works if you have a bunch of drivers off duty at any given time that can be, through monetary incentive, convinced to clock on and start picking up passengers.

This gets us to the underlying problem facing taxi services – the capping of the number of available taxi licenses. Capping taxi licenses has led to a situation where each taxi license is extremely valuable because of the amount of cash it can generate. In New York City for example, the cost of a single license peaked at over $1 million in recent years. Because of the cost of a license, and its consistent appreciation in value over the past few decades, for many taxi owners, their taxi license represents their retirement savings. Now, due to competition from Uber, many cities (Sydney, Toronto and many others) are seeing the cost of taxi licenses falling. 

You could argue taxi owners should have been smarter and diversified their investment. However, the fact is they made an investment decision on the basis of the rules as they stood at the time, and have since been severely undermined. Besides, they would hardly be the first people to invest all their savings in one overpriced asset class

Leaving aside judgements on investment decisions though, it is difficult to see a scenario where taxi owners end up the winners in this battle. Now that people have experienced the higher level of service that can be provided by services like Uber, they will be very reluctant to go back to the old way of doing business. Taxi services can (and have) improved as a response to Uber, but unfortunately, as long as taxi services want to cling to the idea of a capped number of taxi licenses, customers will continue to be frustrated by a lack of availability at key times.

All that isn’t to say Uber has everything worked out or that shouldn’t be criticized for their own failings and dodgy practices. In fact Uber faces several large problems of its own. To find out more about those, tune in next week.

 

[1] Thank you Bek Chew

[2] Seriously, it’s like they want everyone to hate them

Why Australians Love Foster’s and Other Beer Related Stories

Sports. Hot summer days. Manly men. Attractive women. Whether beer is your go-to drink or not, it’s hard to not be impressed with how beer manufacturers have ensured their product is strongly associated with a range of desirable situations and topics for the average male consumer. But, despite being a common theme across countries, there are two in particular that have really taken this message to heart, to the point of being comical: Australia and the US.

Australia and the US are two countries where beer has become almost synonymous with the notion of being a “man”. Our sporting heroes appear in ads selling beer, our favorite sports teams are sponsored by beer, and when it’s not sports, it’s scantily clad women, beaches, blokes being blokes, or all three together.

But perhaps the most interesting aspect of the beer culture in these two countries is that, despite the similarities, there is an amazing mutual lack of understanding between the two. Australians for the most part have nothing but disdain for American beer – which from their perspective consists only of Bud, Miller and Coors (someone particularly familiar with international beer might venture “oh, but I don’t mind that Sierra Nevada”). Meanwhile most Americans’ knowledge of Australian beer starts and ends with a Foster’s at the Outback Steakhouse.

Both are woefully uninformed views. Hopefully, the following 1800-odd words can help clear up a few of the myths and misunderstandings – and add some mutual appreciation.

Australian Perceptions of American Beer

Mention American beer to an average Australian and you are likely to hear the words “tasteless”, “weak”, “watery” and “yellow fizzy water”, among other things not suitable for a professional blog. And let’s be honest, looking at a list of the top 10 beers in the US (see Table 1), it is hard to argue with those sentiments – the list is full of light (light carb for Australian readers) and relatively flavorless American style lagers[1].

Table 1 – Top 10 US Beers by Volume

Label ABV Type Producer
1 Bud Light 4.2% Light Lager Anheuser–Busch InBev
2 Coors Light 4.2% Light Lager Molson Coors
3 Budweiser 5.0% American Adjunct Lager Anheuser–Busch InBev
4 Miller Light 4.2% Light Lager SABMiller
5 Corona Extra 4.6% American Adjunct Lager Anheuser–Busch InBev
6 Natural Light 4.2% Light Lager Anheuser–Busch InBev
7 Busch Light 4.1% Light Lager Anheuser–Busch InBev
8 Michelob Ultra Light 4.2% Light Lager Anheuser–Busch InBev
9 Busch 4.3% American Adjunct Lager Anheuser–Busch InBev
10 Heineken 5.0% Euro Pale Lager Heineken International

Unfortunately, it is these top 10 mass produced beers that come to mind when Australians (and most people outside the US) think about American beer. That is a shame because what many Australians are completely missing out on is the absolutely massive and amazing craft beer scene that is thriving in the US.

Craft Beer in the US

Despite appearing to be a recent phenomenon, the American craft beer scene has been making its mark since the mid-90s. After declining for much of the 20th century, the craft beer scene exploded from 446 breweries in 1993 to 1,514 by 1998. After a lull through the early and mid 2000’s, the numbers again took off in 2008 and 2009. By 2014, there were 3,464 breweries in the US.

By comparison, in Australia (depending on who you ask) there are between 100 and 200 breweries. There are at least 4 states in the US that have more breweries than the whole of Australia[2]. Craft beer also has a significantly larger proportion of the US beer market than in Australia (11% vs. 2-3%). In fact, when you look at just how big craft brewing has already become in the US (and it is still growing at a rapid pace), it makes headlines in Australian papers like “Has the craft beer machine reached saturation point?” seem a little ridiculous.

Asides from the pure numbers though, arguably the most admirable aspect of the craft brewing scene in the US is the way small breweries and brewpubs become a point of reference for the local area. In Australia, craft beer is still largely seen as the domain of inner city hipsters and beer snobs. In the US, bars and pubs will often take pride in ensuring they have the offerings from the local brewery on tap. For beer lovers, this means travelling the US provides a veritable smorgasbord of different craft beers that change with every town and season.

American Perceptions of Australian Beer

Mention Australian beer to an American, and you are likely to hear exactly one word: “Foster’s”. More knowledgeable Americans might venture that they have heard Foster’s isn’t actually that popular in Australia, which is both true and untrue. Let me explain.

Foster’s Lager, the beer most Americans (and basically everyone not from Australia) associate with Australia is a beer produced by the Foster’s Group. What many don’t know is that the Foster’s Group actually produces a large range of beers under different labels in Australia, most of which make no mention of the name “Foster’s”. Looking at the top 10 Australian beers (see Table 2), you will notice that 5 of the top 10 beers in Australia are produced by Foster’s, and in particular their largest brewery – Carlton & United Breweries[3].

Table 2 – Top 10 Australian Beers by Volume

Label ABV Type Producer
1 XXXX Gold 3.5% American Adjunct Lager Lion Nathan
2 VB 4.9% American Adjunct Lager Foster’s
3 Carlton Draught 4.6% American Adjunct Lager Foster’s
4 Tooheys New 4.6% American Adjunct Lager Lion Nathan
5 Tooheys Extra Dry 4.6% American Adjunct Lager Lion Nathan
6 Carlton Mid 3.5% Light Lager Foster’s
7 Carlton Dry 4.5% American Adjunct Lager Foster’s
8 Corona Extra 4.6% American Adjunct Lager Anheuser–Busch InBev
9 Pure Blonde 4.6% Light Lager Foster’s
10 Hahn Premium Light 2.6% Light Lager Lion Nathan

However, despite the popularity of Foster’s beer, it is actually very rare to find Foster’s Lager in Australia anymore. In fact, the only place many Australians are likely to find it is in the imported beer section of the local supermarket or bottle-o.

But this wasn’t always the case – up until the mid 80s Foster’s Lager was actually a very popular beer in Australia and was sold as a premium label amongst Foster’s other offerings. It wasn’t sold with the ubiquitous “Australian for Beer” branding, but it did have some pretty classic advertising – take a minute to relive 1980s Australia through this classic Foster’s TV spot from 1984:

So how did Foster’s Lager go from a mainstream beer to the imported section? In the mid 80s, due to changes in the Australian beer market and how Foster’s was marketing their various beers, Foster’s Lager started to lose popularity domestically as the company focused on promoting other labels such as Carlton Draught and Victoria Bitter (VB). As the then Foster’s CEO Trevor O’Hoy explains in an interview in 2006 (emphasis mine):

“Foster’s Lager had grown up as a mainstream Australian beer, punching at equal weight with VB in our portfolio. When we took it overseas, however, we took the brand slightly up-market and played heavily on ‘brand Australia’ – with international advertising featuring Paul Hogan, iconic Australian imagery and the ‘Australia’s famous beer’ tagline. That turned Foster’s into a top 10 international beer brand.

The flipside to this success was that Foster’s became the beer Australians drank overseas, not at home. Our Australian sales teams focused on the mainstream brands such as Carlton and VB, as well as innovating in cold filtered, craft brewing, dry, low carb and the light and mid categories. Foster’s Lager really didn’t have a champion or new positioning in Australia and its volumes slipped from the late 80s onwards.”

One final footnote to the Foster’s story, in December 2011, Foster’s became a subsidiary in the world’s second largest brewer by revenues, SABMiller[4]. Sadly, this means that the vast bulk of the beer being drunk by Australians is now owned by non-Australian multinationals.

Why isn’t Craft Beer Big in Australia?

As mentioned earlier, the craft beer scene in Australia is relatively small and under developed when compared to the US, even accounting for population differences. Yet Australia is a wealthy country with a healthy love for beer, so why hasn’t craft beer taken off in Australia like it has in the US?

A big part of the problem is the huge market share of the two biggest beer producers in Australia, Lion Nathan and Foster’s, and how aggressively they protect that market share.

A key weapon used by the big two to maintain market share is the tap or pourage contract, something that would be illegal in the US. When negotiating to supply beer to a bar, hotel or pub, a contract will be agreed to that sees the brewer provide rebates and other benefits[5] to the venue owner in exchange for securing exclusive access to most, if not all, of the taps. As an end consumer, this often means that Foster’s or Lion Nathan will own every beer (and cider) on tap at your regular watering hole.

A second key to maintaining market share is the willingness of Lion Nathan and Foster’s to buy out smaller brewers that are proving popular. Even many Australians will be surprised to learn that beers they thought were coming from small independent breweries (White Rabbit, Little Creatures, Bees Knees, Fat Yak, Knappstein, Matilda Bay) are in fact owned by Lion Nathan and Foster’s.

Competing against these two giants, craft breweries fighting to get access to taps, with typically more expensive small batch products, are often left with the choice of continuing to scrape out a living selling by the bottle, or selling out altogether. Even when a craft brewery does manage to get access to a tap, venue owners are often made generous offers to boot them in favor of another label from the big brewery that has locked up the other taps.

An example of how difficult it can be for craft brewers to get and maintain access to taps was provided in an excellent article by Adele Ferguson in the Sydney Morning Herald last year. The following is an excerpt from that article detailing the experience of a pub owner in Melbourne:

Sitting down to his computer, a Melbourne publican discovered an email waiting for him. Sent by an executive from Carlton & United Breweries (CUB), it contained an offer that left him gobsmacked.

One of CUB’s specialty brews had been ”selling very well” in other pubs, the email explained. It then suggested the publican sell that brew on tap – at the expense of a specific competing craft beer that the publican was already offering. ”I’ll donate the first keg,” the CUB executive offered.

Positive Changes Brewing?

Despite the duopoly in the Australian beer market, craft brewers are having some impact on the Australian beer market. The presence of viable craft breweries with a wider range of beers available has forced the big breweries to significantly diversify their offerings. As a result, even though all the beers on tap may be from the same company, there is typically a much wider range of offerings today then there was even 10 years ago.

And things could be about to get significantly better for craft brewers. The Australian Competition and Consumer Commission (ACCC) is rumored to be investigating whether tap contracts and other anti-competitive practices are legal under the Competition and Consumer Act. Even if they are found to be legal under the current law, the fact that these practices have been exposed is likely to create pressure for new regulations to be developed to help craft brewers survive and thrive.

For those that have seen the diversity and creativity on display in the US craft beer market, any change that gives craft brewers in Australia a better chance would be very welcome.

Classic Beer Adverts

Finally, for those looking for some light entertainment, I spent some time digging around YouTube for some classic Australian beer commercials. Unfortunately the older ads are few and far between, but I did find a top 10 from the last 10 or so years. Enjoy:

 

[1] Before Australian readers get too smug, they may want to sneak a look at their own top 10 (see Table 2) – it makes for equally dismal reading

[2] California – 431, Washington – 256, Colorado – 235, Oregon – 216

[3] See, the title wasn’t lying to you, Australian’s do love Foster’s

[4] Yes, that Miller

[5] Business development allowances, tickets to sporting events, promotional gear etc

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