More on The Big Short

When I wrote that Michael Lewis had written an almost uplifting account of the financial crisis in "The Big Short" by concentrating on some of the winners, I did not consider that he was keeping something back. If you want to find out what he really thinks, read this interview on Bloomberg.com. He explains many of the choices that he made in the book, like for instance not including John Paulson who has been celebrated in other places for "The Greatest Trade Ever". He also expresses his outrage over what happened and suggests that part of the reason he left Wall Street in 1989 was because his job was basically "exploiting the idiocy of my customers". It is a long interview and well worth reading in its entirety.

One issue that Lewis touches on is the fact that shorting the market is supposed to dampen the market and perhaps bring sanity into it, but in this case the structured investment vehicles like synthetic CDOs had the opposite effect of amplifying the market and making the subsequent downfall much worse. The "This American Life" radio show and podcast has a recent segment where they discuss the role of the Magnetar Hedge Fund in creating many several subprime bonds and then making huge sums of money by shorting parts of them. Again well worth hearing.

Finally, Lewis discusses the poisonous interface between the big Wall Street firms and their customers. If Goldman Sachs is responsible for defrauding its customers as the recent lawsuit suggests, there is the question of why anyone would want to do business with them. The Big Money blog posits that Goldman Sachs is losing its "Social License" to operate in an interesting post. Given their behavior, this may be a good thing.

Business Rules OK!

Performance Management Systems collect the data to make decisions but they do not make decisions, they do not ensure that decisions get made or even track the results of the decision so made. James Taylor (no relation) called this the "over-instrumented" enterprise when he spoke to the the April meeting of the SDForum Business Intelligence SIG on "Performance Management and Agility". James is CEO of Decision Management Solutions where he consults on using technology to better effect decision making.

James divides the decisions that an organization makes into three levels: strategic, tactical and operational. He is interested in the operation decisions, the little decisions that are taken all the time. An example of an operational decision is what offer to make to a customer that has called a call center. Every enterprise has their own set of operational decisions, however they have the characteristic that is a large number of them that in aggregate they represent a lot of value, so they are well worth managing.

Many operational decisions are or should be automated, and there are a set of principles that need to be recognized when decision making is automated. The first principle is that no decision is going to be forever, so the logic for making the decision should not be locked up into something inflexible such as program code. Much better to use a rules based decision engine which allows everybody to see the rules in a language that they can understand. Another principle is that making a decision is a business process and as such should be managed. A good business rules engine allows rules to be tested, measured and perhaps even simulated in action to understand what they are doing and how they can be optimized.

According to James, the purpose of the information gathered for a Performance Management Systems is to make decisions, so it should be used to make decisions. Too many enterprises are over-instrumented. They have spent all their effort to get and present the data, however they have no measurable ability to turn that data into actions. You can read more about these ideas in the book Smart Enough Systems: How to Deliver Competitive Advantage by Automating Hidden Decisions by James Taylor and Neil Raden. You can also read my co-chair Paul O'Rorke's take on the meeting in his blog.

And the Future of Television is ...

Wait for it, wait for it ... Sports! The path to this conclusion requires a couple of steps, so bear with me. The Convergence Consulting Group just published their annual report on "The Battle for the North American Couch Potato", and several news sources and commentators immediately picked up on one element of their report. According to Convergence, by the end of 2009, 800,000 US households had cut the cable and that they expected this to double to 1.6 million households by 2011. Cutting cable means cutting subscription TV service like cable or satellite and getting all media content from the Internet, Netflix and over the air. I recently wrote about Television being in trouble because of increasing subscription fees and less content. There has been a trickle of cable cutters for some time and now Convergence Consulting tells us that the numbers are starting to swell.

So why should we not cut the cable? It turns out that sports is the only type of content where subscription television offers a compelling product that you cannot easily get if you cut the cable. I came to this conclusion after skimming through the comments on TechCrunch post on the cable cutting story. The majority of comments are either from people who have cut the cable and the only thing they miss is sports, or from people who say that they cannot cut the cable because they would not be able to get the sports that they want to see. The fact that sports is the only type of content mentioned is quite startling.

The Big Short

What is the best way to write an uplifting book about the recent financial crisis? In his new book, The Big Short, Michael Lewis has taken the approach of following the winners, the people who saw that the bubble would burst and made a huge sums of money by betting on it bursting. Along the way we also meet some of the people who took the other side of the bet and lost big. When you compare these two groups, the losers come across as your average every day kind of person while the winners area strange group of outsiders.

The book follows three groups of people. There is the Frontpoint Partners hedge fund led by Steve Eisman, who as a stock analyst had been best known for correctly trashing companies that he followed. Then there is Mike Burry, a one eyed doctor living in San Jose who took up investing because it allowed him to get away from having to interact with other people. Finally there are the guys at the garage band hedge fund who turn $100,000 in to more than $100 million and whose main problem is being taken seriously by the big Wall Street Firms.

Along the way we see scenes of madness from the financial machine that created the bubble. There is the explanation for why a Mexican strawberry picker with no English and an income of $14,000 per year could be loaned every penny he needed to buy a house for $724,000 in Bakersfield California. As it turns out, because he had no debt and no credit history, he has a relatively high credit rating, and that credit rating was needed to balance out the low credit rating of some deadbeat American when their home loans were packaged together with many others into a mortgage bond.

Another scene is the American Securitization Forum, the annual conference of the of the subprime mortgage industry. In early 2007 the conference takes place in the Venetian Hotel in Las Vegas. The Frontpoint Partners and the garage band hedge fund are both there trying to get more information to substantiate their huge bets against the subprime mortgage market. By this time the cracks were beginning to show. For example, the CEO of the Option One mortgage corporation gave a reassuring speech even although Option One was in trouble because they had made loans to people who could not afford to make even the first payment on the loan. When his partner asks "Who takes out a home loan and doesn't make the the first payment?" Steve Eisman responds "Who the #$%^ lends money to people who can't make the first payment?"

Michael Lewis knows what he is talking about in writing about Wall Street because he started his career as a bond salesman for Salomon Brothers as hilariously told in his first book, Liar's Poker. In The Big Short he successfully continues that tradition. The Big Short is full of interesting characters, amusing insights, clear explanations and some genuine tension as towards the end you wonder whether the hero's will get their big payoff or whether Wall Street will totally collapse taking down everybody with them. Like of his other books, The Big Short is highly recommended.

Web Analytics 2.0

Web analytics is changing fast as we discovered at the March meeting of the SDForum Business Intelligence SIG. Avinash Kaushik, Analytics Evangelist for Google, spoke on 'Web Analytics 2.0: Rethinking Decision Making in a "2.0" World'. Avinash started off by telling us how he became well known as a web analytics guru. A few years ago he started writing his blog "Occam's Razor". It soon gathered a large readership and a publisher approached him to write a book. His first book "Web Analytics: An Hour a Day" was a distillation of his blog posts. The book is a best seller even although much of its contents is available for free on the web. His second book "Web Analytics 2.0" came out recently.

Avinash is an excellent communicator with a strong personal style. One aspect of that style, quite obvious from his blog posts, is the urge to create lists of ideas. For his presentation, Avinash offered us a list of simple ideas on web sites metrics and analytics. Here are some of the ideas that he presented.

The first idea is simple and direct - Don't Suck. The suckage of a web page can be measured by a metric called Bounce. This is a relatively new metric that we had not previously heard discussed at the Business Intelligence SIG. Bounce measures the users whose experience of the web page and site is, as Avinash put it "I came. I puked. I left." and he showed us some pretty pukey pages that might back up this behavior. A typical analysis is to look at the pages with the highest bounce rate, determine why they cause that behavior and what can be done about it.

His next idea is Segment or Die. Analytics is about aggregating data to make sense of large datasets, however over-aggregation results in a single number and nothing to compare it with. Segmenting the data gives us a number of data items that we can compare. Avinash showed us a simple example where he took a hospital web site and classified the content into 8 segments and then compared the amount of content against the number of page views in each segment. It was immediately apparent where the effort should go into adding and improving content.

Analyzing your web logs only tells a part of the story, you also have to worry about what the analytics cannot tell you. Ex Defense Secretary Donald Rumsfeld is infamous for having talked about "the known knowns, the known unknowns, and the unknown unknowns". The unknown unknowns are the things that you don't even know that you don't know and therefore the thing you should be most worried about. You can start to get a handle on what you do not know by looking at your performance relative to your competitors. This is known as Benchmarking, or in the case of a deep study as Competitive Intelligence. For an example of what can be done, a recent post on the Occam's Razor blog discusses 8 sources for Competitive Intelligence data.

Most web site analytics only looks for the one big conversion from a web site, however there are many other small conversions that are tracked and worth evaluating because there may be hidden value lurking in the long tail. For example, recently Avinash wanted to know what his blog was worth so that he could defend taking time away from the family to write it. After determining a value for each reader, he started adding up all the other micro-conversion like people who subscribe to the RSS feed and advertisements for his books and the non-profit organizations that he supports. Overall he came up with a figure of about $26000 per month. Now Avinash does not make a penny from his blog, so this is notional money that adds to his personal brand value, but that value seems to make the effort of writing the blog well worth the time spent.

The next idea is Fail Faster. By this Avinash means do lots of different experiment, many of which will fail, to find out what works. He led us through an example from the Obama Presidential campaign. President Obama raised huge amounts of money from many small donations on his web site. The initial web page worked well. The experiments were to try some variations on the theme. Pages with video, and stirring video at that, did very badly. A simple picture of Obama with his family did a little better than the initial picture, so that one was chosen.

Avinash showed us this example to make a number of points. The Obama analytics team was tiny. Often the best work is done by a small agile team that has the freedom to experiment. The team used free tools. Avinash believes that that good people are much more important than good tools. His suggestion for dividing up the analytics budget is to spend 90% on people and 10% on tools. Sometimes, a web site design feature starts from a HiPPO (Highest Paid Persons Opinion), which can be destructively bad, and difficult to get around because in all organizations the highest paid persons opinion is taken very seriously. The best way to counter a HiPPO is to show that other ideas work better through the results of experiments that produce hard evidence.

While some may think that web analytics is a mostly solved problem, Avinash believes we are just starting to figure out what can be done, and that there is plenty of room for more innovation. I will continue to read Occam's Razor to find out where he takes us next.