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Make Bets Where Decision Making Is Intuitive, and Market is Inefficient

Tuesday, October 11, 2016 6:57
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(Before It's News)

Last night before the Cubs game I went to an event sponsored by Origin Investments.  Author Michael Lewis was being interviewed.  It was a wide ranging conversation about many of the books he has written.  He has a new one coming out in December that talks about the advent of behavioral economics.

One of the things he talked about was how people get an edge.

The crux of what he said is that if you can find a marketplace that is inefficient and dominated by centralized decision makers that make decisions intuitively, you have a chance to disrupt it.  An example was the CDO market that he wrote about in The Big Short.  Markets were opaque.  A small cadre of decision makers moved the market.  There was little information.  The data that was informing the market was corrupted.  People in the market were very sure of their decision making prowess, and had zero doubt about their infallibility.  Lewis remarked that even after the market blew up, many bank traders said that it was just a bad trade and had nothing to do with them.

Another market that has been disrupted is baseball.  Billy Beane turned the market for talent on it’s head.  Here was an old industry that thought they were using data to make decisions.  The reality is they used data to account for things, but decisions were made by a centralized group of scouts.  Those scouts used rules of thumb and heuristics to analyze potential talent.  Beane and then Theo Epstein blew it up.  I am hoping it works for the Cubs this year.

Economist Mark Perry from the American Enterprise Institute says, “There are markets in everything.”  He’s right.  Markets are core to being human.  Markets are not perfect, but an unfettered free market is the best way to allocate resources than any centralized system.

There are plenty of places to utilize technological solutions to blow up different niches.  It just depends on if you think there is a market there or not.  For example, the US government allocates millions and millions of dollars for grants and research.  There are people that make their living simply applying for grant after grant and turning out research that doesn’t help anyone.  The late Wisconsin Senator William Proxmire used to give out a “Golden Fleece Award” for some of the crazy stuff that got funded.  It’s humorous but it’s your tax dollars that are funding the largesse.  That’s a market that can be disrupted.  One company I invested in, StreamLink Software is providing transparency to it.

If you start to do your homework, there are plenty of places to find places to disrupt.  If people are using a lot of rules of thumb to make decisions, there are probably inefficiencies.  Going forward, I think this will be a huge opportunity for technology like blockchain.

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