I have a Chapters gift card for $25. On the back is the presumably unique bar-code for the card, and the numeric equivalent for the bar-code written underneath. The number is 31 digits long. That makes possible roughly a nonillion (thanks wikipedia!) unique gift cards. If Chapters sells a million gift cards a year, they won’t run out of numbers until roughly septillion years from now. This puts my credit card, with its mere 16 digits, to shame.

So, what’s the big deal? Who cares? They will just scan the card through the cash register anyway. You don’t care about the numbers on the back. Well, it turns out that you do if you want to buy The Black Swan and Use of Weapons using the Chapters website. To use your gift card on the web you have to type in the 31 digit code by hand, and then when it turns out to be incorrect you have to type it in again, and then a 3rd time. And then eventually, after typing in 31*n (n depending on your tolerance for repetitive tasks) numbers, you give up and swear at Chapters.

So, what’s the lesson? First: 31 digits is a few too many. Second: there should be a mechanism for using gift cards on the web that doesn’t involve typing in numbers at all.

I’ve never been a big fan of the whole “crowdsourcing” theory as it relates to the wisdom of crowds. I am rather a believer in the power of the individual, a single person’s ability to achieve great things. This may reflect my own hope that some day I will emerge as being one of these great people (I’m still waiting), but I think there is also a fair amount of evidence pointing towards the over-hyping of crowdsourcing as an approach towards accomplishing great things that are not achievable by small talented groups.

My favourite example comes from a talk at a CHI conference (2007 or 2008), where some guy was giving a talk on the subject. His best example of successful crowdsourcing involved three composers who collaborated in writing an opera. First of all, three is not a crowd. Second, these three were not members of “the masses,” but were rather expert composers. This example is a big fail in my book.

This leads me on a bit of a tangent to thoughts on online communities, where discussion forums serve as collections of wisdom created in real time by crowds of collaborators. The two examples I will use are www.digg.com and www.fark.com. Both of these communities are centered around the discussion of news items, but I have observed that the “collected wisdom” produced by the two communities differ vastly in quality. In my opinion the discussion on digg tends to be simplistic, poorly thought out, and often of little value. In contrast, the discussion on fark is often sarcastic and silly, but it is at least clever, and this sarcastic content is intermixed with a good deal of intelligent commentary (at least in comparison to digg). Why are digg and fark so different?

I believe the quality of discussion on digg and fark differ so dramatically because of the reward structure in place on the two sites. digg has a complex system for allowing users to vote for comments and stories they like. Higher scored (more popular) comments receive more exposure, and lower scored comments are hidden. This is meant as a mechanism for encouraging quality content. On the other hand fark is egalitarian, in the sense that a comment written by any one user is given exactly the same weight as a comment written by any other user. I believe that the digg approach works exactly opposite to its intended purpose, and the fark approach that would seem to invite abuse instead encourages quality. The problem with the digg approach is that many users are driven primarily by the need for the approval implied by high scored comments. Instead of writing what they think to be interesting and of value, they write what they think will be voted up. These two things are not the same. On the other hand there is no reward structure on fark. There is only the discussion. There is no secondary market of “approval points” to worry about, and I believe this keeps the discussion honest and interesting.

Is there a take-home lesson to this somewhat meandering post? First, I don’t think a crowdsourcing approach will ever be effective at producing breakthroughs, but it can be effective at achieving less grand goals. Second, when constructing a crowdsource-based community one has to be very careful designing the reward structure, because the results you achieve will be optimized for that reward structure.

One of my hobbies over the last decade has been reading everything I can find about investing and economics. I am not a serious academic in this sense, but I do spend a large number of lunch hours reading the Globe and Mail or National Post. As everybody knows, the last 4 months or so have been a very difficult time. Stock markets worldwide have tanked, investment banks have collapsed, the US housing market continues to tank, and my local Vancouver housing market has started (finally!) to turn. Based on my readings none of this has surprised me terribly, but recent events have served to reinforce some theories that I have developed over time. These are as follows:

The experts on TV are anything but

News channels from CNN to CBC are very fond of trotting out wise men and women to give us some insight into what has happened and what will be happening. Almost without exception these people were unable to predict all the bad things that have happened in the last year. The fact that housing prices were at clearly untenable levels didn’t give them a hint, nor were they aware of the trillions of dollars in bad derivatives floating around. It should be noted that a very small number of them did know what was going on, and successfully predicted the crash. However these knowledgeable ones, before being proven right, were consistently mocked by the perma-bull guests. A perfect example of this is the appearance by Peter Schiff where he accurately spelled out everything that was going to happen, end got lambasted by the other guests (this video with Ben Stein is also amusing). The lesson? Unless you have done some serious homework on who you are watching and are able to determine they know what they are talking about it is best to completely ignore them.

Large banks will never predict an economic downturn

I’ve invested through 2 recessions now, and neither of them have been predicted by the major banks who hand out advice to clients. After some thought, the reasons for this seem clear. First, banks rely for income on clients being invested. If they tell me “oh, things are looking pretty bad, you should take your money out” then they lose income. They obviously don’t want to do that. Perhaps more importantly, however, is that big banks make markets. By this I mean that if Royal Bank comes out and predicts a collapse then people will listen, and the prediction will hasten and perhaps deepen that collapse. Royal Bank will then be accused of having been partly responsible. So, for the sake of their business I think big banks will never predict a downtown. To clarify this point, I don’t think that the big banks consciously mislead. My theory is that, because of the reasons I outlined, big bank culture encourages employees who are eternally optimistic and discourages employees who have a more realistic outlook. The realistic employees will either leave the bank themselves or be driven out for their non-conformist attitudes. The bank is then left with nothing but eternal optimists.

Politicians will not solve the problem

I have a fairly low opinion of politicians to begin with. They appear on the whole to be of very average intelligence, and typically act in an entirely self-interested manner, focused solely on achieving either election or re-election. So, when faced with something as complex as the economic crisis, which professional economists don’t even understand, I think that there is pretty much zero chance that the politicians will be able to solve anything. It is hard to defend this argument, as in this case with the economic crisis we can’t even confidently define what the problem is. I would nevertheless venture to say that a history of misguided government intervention in the markets has been at least a contributing factor to the current problems, examples being the setting of low interest rates at the beginning of this decade which inflated the housing bubble, and the setting of low reserve ratios.

Being half right can be as bad as being entirely wrong

I mentioned Peter Schiff earlier, and from the mention you might conclude that he must have made a lot of money from his predictions. Well, he didn’t. In fact he probably lost at least as much as most people. Another bright guy, Eric Sprott, who made similar predictions, also lost a lot of money, some of which was mine. Why did this happen, when they made such accurate predictions? They were only half right. They both predicted the housing downturn and the derivatives crisis, but they incorrectly predicted the outcome. Peter Schiff thought that international companies with solid balance sheets would perform well, but they didn’t. Eric Sprott thought that the oil prices would stay at lofty heights, even in the face of a recession, but they didn’t. Both of them predicted a US dollar collapse, and the dollar has soared. The lesson? It is not enough to be mostly right. Mostly right can kill you. And I don’t know of anybody who has been entirely right, which means that the last year has been brutal to almost everybody.