Monthly Archives: March 2010

Tragedy of the Modern Commons and 90 9 1

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The Tragedy of the Commons is an old and still insightful parable of the incompatibility of human self-interest and shared resources.

90 9 1 is a so-called “law of social media” and  as such didn’t exist for all intents and purposes even a decade ago.

These two elements provide a powerful combination for the new broadband providers in South Africa shaking up the market with relatively affordable uncapped internet access.

Tragedy of the Commons

This story is rooted in feudal times, but applies in many situations today. It is taught in introductory Game Theory courses and in some economics courses. The insight is simple and obvious.

Some farmers would have a piece of land to which they were entitled sole use. This could be used for crops and also some grazing.  An additional piece of land was available for “common” usage by a group of farmers. Farmers would graze their cattle on the common. If one farmer had more cattle than another, that farmer would get greater benefit from the common. If a farmer chose to graze his cattle on the common rather than his (practically probably not “her” in these days) own land, he would get more value from the common and keep his own land available for more crops.

Self-interested, rational farmers would use the common as much as possible since there was no additional cost to using it over their own land. Without restrictions, the land would be very likely be overgrazed. Once the overgrazing become extreme, the land would be damaged and could take several seasons  to be useful again. Collectively, the group of farmers gained less value from the common through the self-interested choice of individual farmers making decisions in isolation and without a mechanism to enforce fairness.

The Tragedy is that individuals making rational, utility-maximising decisions result in a suboptimal result for everyone. Further, it only takes a few farmers to overgraze the common to damage the prospects of all farmers, even those practising self-restraint in order to preserve the common.

The Tragedy of  Uncapped Broadband

Uncapped broadband relies on cross-subsidies. Since data transfer has a marginal cost, it is not possible for all users of a service to use truly unlimited  data for a fixed price. The economics are not viable for an ISP to survive.

Light users subsidise heavier users. Users who are very active one month are subsidised by users who are relatively inactive that month. The users are, in effect, in it together. Continue reading →

Fourth Floor Tails

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I blogged recently about why I park on the fourth floor of the Cape Town airport parkade, and also about understanding and utilising unlikely but extreme events to your advantage. There is actually a link between these two posts.

Parking on the top floor does have a cost. It takes longer to drive up all the ramps and does, perhaps, on average take longer than parking on the most convenient floor every time. This extra time is a premium I pay to reduce the potential for really bad outcomes and thus optimising the parking problem. For example:

  • I avoid the situation of attempting to park on a lower floor (trusting the untrustworthy electronic vehicle counter) and, after driving around for a while trying to find parking, having to give up and try a different floor. This much longer time, even if it only happens rarely, is a much worse outcome than 30 seconds on every flight. It can easily be the difference between making and missing a flight.
  • I don’t have to worry about remembering where I parked my car. I don’t know that I am more forgetful than the average traveller, but travelling almost every week makes each trip blur into the next. I don’t waste headspace on trying to remember where I parked my car, and I don’t worry about forgetting. I have the peace of mind from having purchased a time of insurance against the risk of forgetting where I parked.

I get no value out of successfully memorising my car location, but gain from removing this risk and this worry from my routine.

If your company has a foreign currency exposure due to imported input components, this is a risk and a worry over which you have no control. Your energies are better expended elsewhere, on the operational and sales issues that you can effectively change. Get rid of these risks and get on with your real business.

Nasty or nice – playing the tail

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Insurance and gambling have much in common. They both involve uncertainty and money and the rational consumer will, on average, lose money through the interaction. Both business models involve leveraging the tail of probability distributions (one nasty and one nice).

The tail of a distribution includes the very bad and very good possible outcomes, that typically have a very low frequency of occurring. Having your house burn down is a very bad outcome, but fortunately happens very infrequently. Winning the lottery is very good, but unfortunately in this case is also very unlikely for any particular individual.

Managing the nasty tail

A rational person who wants to avoid the unlikely but catastrophic risk of  losing their house to fire will be prepared to pay more than just the average cost of the loss of the house in order to avoid the risk. Typically, we humans are risk averse (a wild generalisation given the research into utility and decision making that has led to behavioural finance and behavioural economics, but probably good enough for now). Insurance provides:

  • genuine decrease in risk and indemnification of losses against the loss event happening
  • peace of mind even if no loss is ever experienced, which has real value in terms of clearing the mind to think about other more important and more controllable personal and business matters
  • reduction in the amount of capital / liquid assets individuals and businesses need to keep against unforeseen events. This capital can be better used and invested elsewhere

Contrary to the popular view, insurance has value even if you never claim.

Gearing to the nice tail

Gambling can be dangerous and addictive. It can also be entirely rational to gamble within certain parameters. Continue reading →

Interconnecting confusion

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Interconnect fees and the reasons for their reduction are possibly the most misunderstood “big” news story over the last twelve months.

The hype and hoopla around this topic is fueled by our feelings as consumers of being charged too much big big monopoly companies. So I should start by saying that I’m not saying that we are paying too much. I’m not saying that because I don’t know enough about the costs of providing cellular services in South Africa. Maybe we are, maybe we’re not. Also, I’m not saying there aren’t monopolistic practices in the market – again I simply don’t know. Given the other stories torn from inside companies by the sharp teeth and salivating jaws of the Competition Commission, it’s understandable that many suspect consumer-unfriendly play by most large South African companies, particularly those in industries with a small number of players.

What I am saying is that most of what you read in the news about interconnect is horribly misguided.

The biggest misconception is that interconnect fees are an expense for cellular providers, and that the removal of this expense would allow them to reduce tariffs to consumers. Well, it is an expense, but it is also a source of revenue. Every time one company pays an interconnect fee, another company is receiving it.

Interconnect does not change the total amount of profit within the cellular industry. It may redistribute it a little, and there may be negative medium term competitive implications arising from interconnect, but lower interconnect won’t automatically increase profits that could allow competitive price lowering for the benefit of consumers.

TechCentral has an interesting article: Bain warns consumers not to expect cellular price cuts.  Of course, it also include some done-to-death flawed statements (whether from Bain or inserted by the zealous staff writer) such as:

Because new players have few customers at first, most calls on their networks will be to networks of other operators. High interconnection fees make it difficult for them to enter the market.

It’s not that this statement is incorrect (it is in fact correct) it’s just that it is horribly misleading because it only presents one side of the story. I’ve reworded it to provide the stunning insight: Continue reading →

I park on the fourth floor

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192 bays available on the 4th floor

192 bays available on the 4th floor

I always park on the fourth floor.

Whenever I leave my car at the Cape Town airport, I always leave it on the fourth floor, right at the top of the parkade. I think you should too, but I hope you don’t.

The police park several blue and white cars and grizzly blue-lighted bakkies on the fourth floor. I don’t know how well I channel the criminal mind, but I suspect my car is less likely to be stolen within sight of such a police presence.

More importantly though, and this is where you come in, it seems that the fourth floor is the least popular floor on which to park. It almost always has a few empty parking spaces when the other floors are absolutely full. I don’t really understand the rationale behind my fellow parking-seekers turning into the first floor that alledgedly has a few open spots; finding a space near the lifts on the fourth floor is a much better prize than the second-last bay on the first.

(Incidentally, don’t place too much trust in the electronic system that counts vehicles. It has the mathematical ability of a six year old – can count to 300 in theory, but in practice expect some humorous variations and giggling.)

It is actually the shunned nature of the fourth floor that makes it such a great deal. While everyone fights over floors one and two, and a few enlightened souls haul themselves up to the third, the fourth remains a pristine stretch of white lines, numbered bays and police-watched lodging. It’s a secret parking paradise known only to a few.

So, you should join me in automatically driving up to the fourth floor to find the best parking spaces. It’s just that I hope you don’t, and I hope really hope you don’t bring your friends.