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See my featured interviews on Forbes.com, highlighting the ideas and accomplishments of famous inventor Dean Kamen and sharing insights on innovation from the wise Richard N. Foster. 

Ray Johnson: A Video Exclusive on Defending the Earth with Lockheed Martin's CTO

I recently had the great pleasure to interview Ray Johnson, CTO of Lockheed Martin.

Hear Ray talk science, technology, national defense and the future of a competitive US workforce

See the video: "Defending the Earth"

Spielberg, Shakespeare & Stemming the Crisis

Lots of big ideas in our upcoming issue and online at Forbes.com. Next week’s premium will have two serial entrepreneurs: Staph Bakali and Larry Fritz. Both have founded or run multiple companies that have individually or collectively sold for over a billion dollars and helped millions of lives. We’ll also sit down with serial killer-app-backer VC Steve Jurvetson on the areas he’s pursuing and his philosophies on life and investing.

Speaking of defending the planet, there’s a scene from Steven Spielberg’s sci-fi comedy “Men In Black” starring Will Smith and Tommy Lee Jones. Tommy Lee Jones’ character is revealing to Smith’s the truth that there are aliens living on earth. Smith asserts that public should know this. Smith says: people are smart, they can handle this. Tommy Lee Jones snaps back: “A person is smart. People are stupid.” Ah, the madness of crowds.

President Truman had it right that there’s nothing new, just history you don’t know, as did Mark Twain who said history doesn’t repeat but it sure rhymes. In the current financial upheaval, one can look back 400 years—to Shakespeare’s Merchant of Venice--for a practical solution to stem housing prices from dropping and devolving into a deflationary depression.

A hint: it’s all about collateral. Stop toying with interest rates. Change collateral levels. What follows are simple profound and must-read insights from Yale economist, Sante Fe Institute professor and hedge fund founder, John Geanakoplos, called” End the obsession with interest”.

“In standard economic theory, the interest rate has long been regarded as the most important variable. Whenever the economy slows, and asset prices fall, economists clamor for lower interest rates to encourage more spending, and the U.S. Federal Reserve usually obliges. It has recently obliged again, lowering the bank rate to nearly zero. But sometimes, especially in times of crisis, it's the collateral a borrower needs to post (or what economists call leverage) that is far more important.

Shakespeare got this right 400 years ago. In The Merchant of Venice, when Shylock grants a loan to Antonio, they negotiate not just the interest rate but a pound of flesh as collateral too. It is clear which Shakespeare thought was more important: nobody who sees the play ever remembers the interest rate, which was zero.

It is apparent from everyday life that the laws of supply and demand can determine both the interest rate and leverage of a loan: the more impatient borrowers are, the higher the interest rate; the more nervous the lenders become, the higher the collateral they demand. But standard economic theory fails to properly capture these effects, struggling to see how a single supply-equals-demand equation for a loan could determine two variables: the interest rate and the leverage. The theory typically ignores the possibility of default (and thus the need for collateral) or else fixes the leverage as a constant, allowing the equation to predict the interest rate.

Yet variation in leverage has a huge impact on the price of assets, contributing to economic bubbles and busts. This is because for many assets there is a class of buyer for whom the asset is more valuable than it is for the rest of the public (standard economic theory, in contrast, assumes that asset prices reflect some fundamental value). These buyers are willing to pay more, perhaps because they are more sophisticated and know better how to hedge their exposure to the assets, or they are more risk-tolerant, or they simply like the assets more. If they can get their hands on more money through more highly leveraged borrowing (that is, getting a loan with less collateral), they will spend it on the assets and drive those prices up.

In the absence of intervention, leverage becomes too high in boom times, and too low in bad times. As a result, in boom times asset prices are too high, and in crisis times they are too low. This is the leverage cycle.

Leverage dramatically increased in the United States from 1999 to 2006. A bank that in 2006 wanted to buy an AAA-rated mortgage security could borrow 98.4% of the purchase price, using the security as collateral, and pay only 1.6% in cash. The average leverage in 2006 across all of the US$2.5 trillion of 'toxic' mortgage securities was about 16 to 1, meaning that the buyers paid down only $150 billion and borrowed the other $2.35 trillion. Home-buyers could get a mortgage leveraged 20 to 1—a 5% deposit. Security and house prices soared.

Today, leverage has been drastically curtailed by nervous lenders wanting more collateral for every dollar loaned. Those toxic mortgage securities are now leveraged on average only about 2 to 1. Home buyers can now leverage themselves at only 5 to 1 if they can get a government loan, and less if they need a private loan. De-leveraging is the main reason the prices of both securities and homes are still falling.

The leverage cycle is a recurring phenomenon. The financial derivatives crisis in 1994 that bankrupted Orange County in California was the tail end of a leverage cycle. So was the 1998 emerging markets/mortgage crisis.

I have spent the past 10 years mapping out the leverage cycle, and although some aspects of it are now well understood, others are not. What signs reveal when the crisis is about to begin, and how best should the government intervene? I am now working on these and other questions, in part under the auspices of the Santa Fe Institute in New Mexico with physicist Doyne Farmer.

It is clear that the leverage cycle cannot be stopped by blaming or shaming greedy Wall Street investors or by exhortations not to panic. The cycle emerges even if — in fact precisely because — every agent is acting rationally. But this individual rationality leads to collective disaster. The government must intervene.

What the Federal Reserve should do is manage leverage, curtailing it in ebullient times and propping it up in anxious times — especially in a crisis like now. Instead, it remains obsessed with managing the economy by lending money to banks at lower and lower interest rates, hoping, for no good reason, that the banks will turn around and lower the collateral requirements they impose on borrowers.

The upshot of The Merchant of Venice is that the regulatory authority (the court) intervenes, not by changing the interest rate, but by imposing a collateral level different from what Shylock and Antonio freely negotiated: a pound of flesh, but not a drop of blood. The Federal Reserve should follow Shakespeare's lead.”

Genocea, B-ball & Hayek

Big news I alluded to last week from vaccine breakthrough company Genocea co-founded by my venture firm Lux Capital. Led by my brilliant and tenaciously tireless partner Robert Paull, Genocea just publicly announced a $23 million first round. A remarkable feat in this environment! Especially as vaccines as global health take the center stage of attention they deserve.

Also: we just wrapped a Forbes TV interview with friend and CTO of Lockheed Martin, Ray Johnson. Stay tuned to watch it early next week. Ray oversees nearly 150,000 people and 4,000 projects, as part of the $40 billion technology and security giant, which helps keep us--and our allies--safe around the world. What’s more: with layoffs looming at other firms, Lockheed is one of the few growing and hiring top engineering talent. You’ll hear what Ray is focusing on and who he’s looking for.

Meanwhile, money culture chronicler, Michael Lewis bounced his moneyball onto the hardwood in last week’s New York Times magazine. Basketball is the next sport to get the better-strategy-by-statistics treatment. Shane Battier is the protagonist. He’s remarkable for being unremarkable: his stats stink. But he makes the opponents play worse and his teammates play better.

Analogies to investing are even more powerful with basketball than in Lewis’s penned Moneyball (baseball) and The Blind Side (football). Baseball is a game of serial events. Pitch. Hit. Run. Catch. Throw. It’s more like a series of one-on-one competitions. The outcomes are less chaotic than basketball.

Consider: Battier divides up the basketball court into discrete squares analyzing which zones all-star players like Kobe Bryant miss more shots. Then he’ll try to push Kobe there. It’s like baseball great Ted Williams, who divided his strike zone into 77 little squares (11 x 7) and only swung at “fat pitches”. And in investing .Warren Buffett has done the same thing: only waiting for fat pitches, companies that fit his sweet spot, since as he’s fond of saying, there are no called strikes in investing.

Also noteworthy: Battier and his coaches have a strong belief in the value of process over outcome. Like poker and investing, you have to play the odds and make the most rational decision possible under conditions of uncertainty. Luck plays a huge role in outcomes, but it’s maximized in your favor if you focus on your process.

Time value and optionality in investing have analogies n basketball too. For example: there’s a rough rule of thumb that if your point lead exceeds the minutes left in the game, then you’ve got an 80% chance of winning. (Say: you’re up by 4 point with 3:26 left). Like investing the further out an event is, the cone shape of uncertainty expands. You can think of it like an open zipper.

Science tries to zip the uncertainty (invent the future, not predict it), with each new discovery laying down teeth to close the zipper. It’s like rails upon which to advance forward through time.

The nearer the event, the more predictable, the more actionable, the more immediately falsifiable (and thus the more quickly the predictor can be held accountable). Predictions a century hence (like those being made 100 years into the future about emergencies from climate change) say more about adherents and believers than the espousers improbable to be exposed. Longer than lifetime timeframe are hard to collect bets on.

It may sound cynically libertarian of me, but Nobel economist Friedrich von Hayek had it right that “emergencies” have always been the pretext on which the safeguards of individual liberty have been eroded. He was a respectably a quick apologist for his profession, economics, saying both: “we shall not grow wiser before we learn that much that we have done was very foolish” and “we have indeed at the moment little cause for pride: as a profession we have made a mess of things.

Here’s Hayek’s Nobel Prize acceptance speech on the nature of uncertainty in complex systems, the physics envy that defines so much of economics and finance and the futile search for precision that more often leads, invoking Keynes, to being precisely wrong rather than roughly right. Pay special attention to his ball game example:

“…The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables - either particular facts or relative frequencies of events.

This may even be the ultimate reason why we single out these realms as "physical" in contrast to those more highly organized structures which I have here called essentially complex phenomena. There is no reason why the position must be the same in the latter as in the former fields. The difficulties which we encounter in the latter are not, as one might at first suspect, difficulties about formulating theories for the explanation of the observed events - although they cause also special difficulties about testing proposed explanations and therefore about eliminating bad theories.

They are due to the chief problem which arises when we apply our theories to any particular situation in the real world. A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts. Once we succeeded in this there should be no particular difficulty about deriving testable predictions - with the help of modern computers it should be easy enough to insert these data into the appropriate blanks of the theoretical formulae and to derive a prediction. The real difficulty, to the solution of which science has little to contribute, and which is sometimes indeed insoluble, consists in the ascertainment of the particular facts.

A simple example will show the nature of this difficulty. Consider some ball game played by a few people of approximately equal skill. If we knew a few particular facts in addition to our general knowledge of the ability of the individual players, such as their state of attention, their perceptions and the state of their hearts, lungs, muscles etc. at each moment of the game, we could probably predict the outcome. Indeed, if we were familiar both with the game and the teams we should probably have a fairly shrewd idea on what the outcome will depend. But we shall of course not be able to ascertain those facts and in consequence the result of the game will be outside the range of the scientifically predictable, however well we may know what effects particular events would have on the result of the game. This does not mean that we can make no predictions at all about the course of such a game. If we know the rules of the different games we shall, in watching one, very soon know which game is being played and what kinds of actions we can expect and what kind not. But our capacity to predict will be confined to such general characteristics of the events to be expected and not include the capacity of predicting particular individual events.

This corresponds to what I have called earlier the mere pattern predictions to which we are increasingly confined as we penetrate from the realm in which relatively simple laws prevail into the range of phenomena where organized complexity rules. As we advance we find more and more frequently that we can in fact ascertain only some but not all the particular circumstances which determine the outcome of a given process; and in consequence we are able to predict only some but not all the properties of the result we have to expect. Often all that we shall be able to predict will be some abstract characteristic of the pattern that will appear - relations between kinds of elements about which individually we know very little. Yet, as I am anxious to repeat, we will still achieve predictions which can be falsified and which therefore are of empirical significance.

Of course, compared with the precise predictions we have learnt to expect in the physical sciences, this sort of mere pattern predictions is a second best with which one does not like to have to be content. Yet the danger of which I want to warn is precisely the belief that in order to have a claim to be accepted as scientific it is necessary to achieve more. This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.

Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based - a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, "dizzy with success", to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.”

Entrepreneurs, Moat Neuroscience & Charlie Munger on Coke

In a moment, I’ll share a brilliant talk from Charlie Munger, Warren Buffett’s business partner—about how to turn $2 million into $2 trillion. By the way, if you haven’t already read his rare editorial written this week in the Washington Post, do so.

But first: if you analyze the top stories from WSJ, FT, Bloomberg, and CNBC, you’ll find that the most common words are: crisis, layoffs, recession, downturn, plummet, deleveraging, bankruptcy, loss, fear, uncertainty, bailout, collapse, failure, declines.

Surround yourself with scientist entrepreneurs (especially those recently funded by VCs) and the most common words in their pitches and business plans: opportunity, invention, optimism, future, hope, winners, returns, disruptive, vision, technology, premium, breakthrough, growth, profit, create, discovery, new.

What a contrast and entrepreneurs are living on the sunny side of the street. Stay tuned because in the next week, I’ll be able to share lots of exciting investment news from my venture firm Lux Capital. It is an incredible time to be an entrepreneur that can attract capital, begin building a castle, recruiting top talent that has been displaced, seeking acquirable assets and technologies on the cheap and building competitive advantages that, when the markets turn, will seem unfair and in many cases unassailable.

Moats matter. Both Charlie Munger and Warren Buffett love moats around the businesses they invest in or own. Moats are the sustainable competitive advantages that allow companies to earn excess return for long periods of time. It’s what prevents profit margins from being chased away by competition. It allows for longer predictability of a stream of earnings into the future. A strong moat means the competition can’t assail the castle.

Now: a neuro note before turning it to Charlie. A WSJ book review of Buyology noted: "Some consumers who prefer Pepsi to Coke when they take a blind taste test-prefer Coke to Pepsi when they know that they're drinking. A recent MRI test of 67 subjects explains why. Drinking Coke more significantly increases blood flow in the medial prefrontal cortex because its ad campaigns, over the years, have so effectively associated Coke with sensations of warmth, security and childhood innocence. "

Now hear from Charlie the psychology of turning $2 million into $2 trillion:

It is 1884 in Atlanta. You are brought, along with twenty others like you, before a rich and eccentric Atlanta citizen named Glotz. Both you and Glotz share two characteristics: first, you routinely use in problem solving the five helpful notions, and, second, you know all the elementary ideas in all the basic college courses, as taught in 1996. However, all discoverers and all examples demonstrating these elementary ideas come from dates transposed back before 1884. Neither you nor Glotz knows anything about anything that has happened after 1884.

Glotz offers to invest $2 million, yet take only half the equity, for a Glotz charitable foundation, in a new corporation organized to go into the non-alcoholic beverage business and remain in that business only, forever. Glotz wants to use a name that has somehow charmed him: Coca-Cola.

The other half of the new corporation’s equity will go to the man who most plausibly demonstrates that his business plan will cause Glotz’s foundation to be worth a trillion dollars 150 years later, in the money of that later time, 2034, despite paying out a large part of its earnings each year as a dividend. This will make the whole new corporation worth $2 trillion, even after paying out many billions of dollars in dividends.

You have fifteen minutes to make your pitch. What do you say to Glotz?

And here is my solution, my pitch to Glotz, using only the helpful notions and what every bright college sophomore should know.

Well Glotz, the big “no-brainer” decisions that, to simplify our problem, should be made first are as follows: first, we are never going to create something worth $2 trillion by selling some generic beverage. Therefore we must make your name, “Coca-Cola,” into a strong, legally protected trademark. Second, we can get to $2 trillion only by starting in Atlanta, then succeeding in the rest of the United States, then rapidly succeeding with our new beverage all over the world. This will require developing a product having universal appeal because it harnesses powerful elemental forces. And the right place to find such powerful elemental forces is in the subject matter of elementary academic courses.

We will next use numerical fluency to ascertain what our target implies. We can guess reasonably that by 2034 there will be about eight billion beverage consumers around the world. On average, each of these consumers will be much more prosperous in real terms than the average consumer of 1884. Each consumer is composed mostly of water and must ingest about 64 ounces of water per day. This is eight eight-ounce servings. Thus, if our new beverage, and other imitative beverages in our new market, can flavor and otherwise improve only 25 percent of ingested water worldwide, and we can occupy half of the new world market, we can sell 2.92 trillion eight-ounce servings in 2034. And if we can then net four cents per serving, we will earn $117 billion. This will be enough, if our business is still growing at a good rate, to make it easily worth two trillion dollars.

A big question, of course, is whether four cents per serving is a reasonable profit target for 2034. And the answer is yes, if we can create a beverage with strong universal appeal. One hundred fifty years is a long time. The dollar, like the roman drachma, will almost surely suffer monetary depreciation. Concurrently, real purchasing power of the average beverage consumer in the world will go way up. His proclivity to inexpensively improve his experience while ingesting water will go up considerably faster. Meanwhile, as technology improves, the cost of our simple product, in units of constant purchasing power, will go down. All four factors will work together in favor of our four-cents-per-serving profit target. Worldwide beverage-purchasing power in dollars will probably multiply by a factor of at least forty over 150 years. Thinking in reverse, this makes our profit-per-serving target, under 1884 conditions, a mere one fortieth of four cents or one tenth of a cent per serving. This is an easy-to-exceed target as we start out if our new product has universal appeal.

That decided, we must next solve the problem of invention to create universal appeal. There are two intertwined challenges of large scale: first, over 150 years we must cause a new-beverage market to assimilate about one fourth of the world’s water ingestion. Second, we must so operate that half the new market is ours, while all our competitors combined are left to share the remaining half. These results are lollapalooza results. Accordingly, we must attack our problem by causing every favorable factor we can think of to work for us. Plainly, only a powerful combination of many factors is likely to cause the lollapalooza consequences we desire. Fortunately, the solution to these intertwined problems turns out to be fairly easy, if one has stayed awake in all the freshman courses.

Let us start by exploring the consequences of our simplifying “no-brainer” decision that we must rely on a strong trademark. This conclusion automatically leads to an understanding of the essence of our business in proper elementary academic terms. We can see from the introductory course in psychology that, in essence, we are going into the business of creating and maintaining conditioned reflexes. The “Coca-Cola” trade name and trade dress will act as the stimuli, and the purchase and ingestion of our beverage will be the desired responses.

And how does one create and maintain conditioned reflexes? Well, the psychology text gives two answers: by operant conditioning, and (2) by classical conditioning, often called Pavlovian conditioning to honor the great Russian scientist. And, since we want a lollapalooza result, we must use both conditioning techniques - and all we can invent to enhance effects from each technique.

The operant-conditioning part of our problem is easy to solve. We need only (1) maximize rewards of our beverage’s ingestion, and (2) minimize possibilities that desired reflexes, once created by us, will be extinguished through operant conditioning by proprietors of competing products.

For operant conditioning rewards, there are only a few categories we will find practical:

1. Food value in calories or other inputs;

2. Flavor, texture, and aroma acting as stimuli to consumption under neural preprogramming of a man through Darwinian natural selection;

3. Stimulus, as by sugar or caffeine;

4. Cooling effect when man is too hot or warming effect when man is too cool.

Wanting a lollapalooza result, we will naturally include rewards in all the categories.

To start out, it is easy to decide to design our beverage for consumption cold. There is much less opportunity, without ingesting beverage, to counteract excessive heat, compared with excessive cold. Moreover, with excessive heat, much liquid must be consumed, and the reverse is not true. It is also easy to decide to include both sugar and caffeine. After all, tea, coffee, and lemonade are already widely consumed. And it is also clear that we must be fanatic about determining, through trial and error, flavor and other characteristics that will maximize human pleasure while taking in the sugared water and caffeine we will provide. And, to counteract possibilities that desired operant-conditioned reflexes, once created by us will be extinguished by operant conditioning employing competing products, there is also an obvious answer: we will make it a permanent obsession in our company that our beverage, as fast as practicable, will at all times be available everywhere throughout the world. After all, a competing product, if it is never tried, can’t act as a reward creating a conflicting habit. Every spouse knows that.

We must next consider the Pavlovian conditioning we must also use. In Pavlovian conditioning powerful effects come from mere association. The neural system of Pavlov’s dog causes it to salivate at the bell it can’t eat. And the brain of man yearns for the type of beverage held by the pretty woman he can’t have. And so, Glotz, we must use every sort of decent, honorable Pavlovian conditioning we can think of. For as long as we are in business, our beverage and its promotion must be associated in consumer minds with all other thing consumers like or admire.

Such extensive Pavlovian conditioning will cost a lot of money, particularly for advertising. We will spend big money as far ahead as we can imagine. But the money will be effectively spent. As we expand fast in our new-beverage market, our competitors will face gross disadvantages of scale in buying advertising to create the Pavlovian conditioning they need. And this outcome, along with other volume-creates-power effects, should help us gain and hold at least 50 percent of the new market everywhere. Indeed, provided buyers are scattered, our higher volumes will give us very extreme cost advantages in distribution.

Moreover, Pavlovian effects from mere association will help us choose the flavor, texture, and color of our new beverage. Considering Pavlovian effects, we will have wisely chosen the exotic and expensive-sounding name “Coca-Cola,” instead of a pedestrian name like “Glotz’s sugared, caffeinated water.” For similar Pavlovian reasons, it will be wise to have our beverage look pretty much like wine, instead of sugared water. And so we will artificially color our beverage if it comes out clear. And we will carbonate our water, making our product seem like champagne, or some other expensive beverage, while also making its flavor better and imitation harder to arrange for competing products. And, because we are going to attach so many expensive psychological effects to our flavor, that flavor should be different from any other standard flavor so that we maximize difficulties for competitors and give no accidental same-flavor benefit to any existing product.

What else, from the psychology textbook, can help our new business? Well, there is that powerful “monkey-see, monkey-do” aspect of human nature that psychologists often call “social proof.” Social proof, imitative consumption triggered by mere sight of consumption, will not only help induce trial of our beverage. It will also bolster perceived rewards from consumption. We will always take this powerful social-proof factor into account as we design advertising and sales promotion and as we forego present profit to enhance present and future consumption. More than with most other products, increased selling power will come from each increase in sales.

We can now see, Glotz, that by combining (1) much Pavlovian conditioning, (2) powerful social-proof effects, and (3) wonderful-tasting, energy-giving, stimulating and desirably-cold beverage that causes much operant conditioning, we are going to get sales that speed up for a long time by reason of the huge mixture of factors we have chosen. Therefore, we are going to start something like an autocatalytic reaction in chemistry, precisely the sort of multi-factor-triggered lollapalooza effect we need.

The logistics and the distribution strategy of our business will be simple. There are only two practical ways to sell our beverage: (1) as a syrup to fountains and restaurants, and (2) as a complete carbonated-water product in containers. Wanting lollapalooza results, we will naturally do it both ways. And, wanting huge Pavlovian and social-proof effects we will always spend on advertising and sales promotion, per serving, over 40 percent of the fountain price for syrup needed to make the serving.

A few syrup-making plants can serve the world. However, to avoid needless shipping of mere space and water, we will need many bottling plants scattered over the world. We will maximize profits if (like early General Electric with light bulbs) we always set the first-sale price, either (1) for fountain syrup, or (2) for any container of our complete product. The best way to arrange this desirable profit-maximizing control is to make any independent bottler we need a subcontractor, not a vendee of syrup, and certainly not a vendee of syrup under a perpetual franchise specifying a syrup price frozen forever at its starting level.

Being unable to get a patent or copyright on our super important flavor, we will work obsessively to keep our formula secret. We will make a big hoopla over our secrecy, which will enhance Pavlovian effects. Eventually food-chemical engineering will advance so that our flavor can be copied with near exactitude. But, by that time, we will be so far ahead, with such strong trademarks and complete, “always available” worldwide distribution, that good flavor copying won’t bar us from our objective. Moreover, the advances in food chemistry that help competitors will almost surely be accompanied by technological advances that will help us, including refrigeration, better transportation, and, for dieters, ability to insert a sugar taste without inserting sugar’s calories. Also, there will be related beverage opportunities we will seize.

This brings us to a final reality check for our business plan. We will, once more, think in reverse like Jacobi. What must we avoid because we don’t want it? Four answers seem clear:

First, we must avoid the protective, cloying, stop-consumption effects of aftertaste that are a standard part of physiology, developed through Darwinian evolution to enhance the replication of man’s genes by forcing a generally helpful moderation on the gene carrier. To serve our ends, on hot days a consumer must be able to drink container after container of our product with almost no impediment from aftertaste. We will find a wonderful no-aftertaste flavor by trial and error and will thereby solve this problem.

Second, we must avoid ever losing even half of our powerful trademarked name. It will cost us mightily, for instance, if our sloppiness should ever allow sale of any other kind of “cola,” for instance, a “peppy cola.” If there is ever a “peppy cola,” we will be the proprietor of the brand.

Third, with so much success coming, we must avoid bad effects from envy, given a prominent place in the Ten Commandments because envy is so much a part of human nature. The best way to avoid envy, recognized by Aristotle, is to plainly deserve the success we get. We will be fanatic about product quality, quality of product presentation, and reasonableness of prices, considering the harmless pleasure it will provide.

Fourth, after our trademarked flavor dominates our new market, we must avoid making any huge and sudden change in our flavor. Even if a new flavor performs better in blind taste tests, changing to that new flavor would be a foolish thing to do. This follows because, under such conditions, our old flavor will be so entrenched in consumer preference by psychological effects that a big flavor change would do us little good. And it would do immense harm by triggering in consumers the standard deprival super-reaction syndrome that makes “take-aways” so hard to get in any type of negotiation and helps make most gamblers so irrational. Moreover, such a large flavor change would allow a competitor, by copying our old flavor, to take advantage of both (1) the hostile consumer super-reaction to deprival and (2) the huge love of our original flavor created by our previous work.

Well, that is my solution to my own problem of turning $2 million into $2 trillion, even after paying out billions of dollars in dividends. I think it would have won with Glotz in 1884 and should convince you more than you expected at the outset. After all, the correct strategies are clear after being related to elementary academic ideas brought into play by the helpful notions.

How consistent is my solution with the history of the real Coca-Cola company? Well, as late as 1896, twelve years after the fictional Glotz was to start vigorously with $2 million, the real Coca-Cola company had a net worth under $150 thousand and earnings of about zero. And thereafter the real Coca-Cola company did lose half its trademark and did grant perpetual bottling franchises at fixed syrup prices. And some of the bottlers were not very effective and couldn’t easily be changed. And the real Coca-Cola company, with this system, did lose much pricing control that would have improved results, had it been retained. Yet, even so, the real Coca-Cola company followed so much of the plan given to Glotz that it is now worth about $125 billion and will have to increase its value at only 8 percent per year until 2034 to reach a value of $2 trillion. And it can hit an annual physical volume target of 2.92 trillion servings if servings grow until 2034 at only 6 percent per year, a result consistent with much past experience and leaving plenty of plain-water ingestion for Coca-Cola to replace after 2034. So I would guess that the fictional Glotz, starting earlier and stronger and avoiding the worst errors, would have easily hit his $2 trillion target. And he would have done it well before 2034.

This brings me, at last, to the main purpose of my talk. Large educational implications exist, if my answer to Glotz’s problem is roughly right and you make one more assumption I believe true - that most Ph.D. educators, even psychology professors and business school deans, would not have given the same simple answer I did. And, if I am right in these two ways, this would indicate that our civilization now keeps in place a great many educators who can’t satisfactorily explain Coca-Cola, even in retrospect, and even after watching it closely all their lives. This is not a satisfactory state of affairs.

Moreover - and this result is even more extreme - the brilliant and effect executives who, surrounded by business school and law school graduates, have run the Coca-Cola company with glorious success in recent years, also did not understand elementary psychology well enough to predict and avoid the “New Coke” fiasco, which dangerously threatened their company. That people so talented, surrounded by professional advisers from the best universities, should thus demonstrate a huge gap in their education is also not a satisfactory state of affairs.

Such extreme ignorance, in both the high reaches of academia and the high reaches of business, is a lollapalooza effect of a negative sort, demonstrating grave defects in academia. Because the bad effect is a lollapalooza, we should expect to find intertwined, multiple academic causes. I suspect at least two such causes.

First, academic psychology, while it is admirable and useful as a list of ingenious and important experiments, lacks intradisciplinary synthesis. In particular, not enough attention is given to lollapalooza effects coming from combinations of psychological tendencies. This creates a situation reminding one of a rustic teacher who tries to simplify school work by rounding pi to an even three. And it violates Einstein’s injunction that “everything should be made as simple as possible - but no more simple.” In general, psychology is laid out and misunderstood as electromagnetism would now be misunderstood if physics had produced many brilliant experimenters like Michael Faraday and no grand synthesizer like James Clerk Maxwell.

And, second, there is a truly horrible lack of synthesis blending psychology and other academic subjects. But only an interdisciplinary approach will correctly deal with reality - in academia as with the Coca-Cola company.

In short, academic psychology departments are immensely more important and useful than other academic departments think. And, at the same time, the psychology departments are immensely worse than more of their inhabitants think. It is, of course, normal for self-appraisal to be more positive than external appraisal. Indeed, a problem of this sort may have given you your speaker today. But the size of this psychology-department gap is preposterously large. In fact, the gap is so enormous that one very eminent university (Chicago) simply abolished its psychology department, perhaps with an undisclosed hope of later creating a better vision.

In such a state of affairs, many years ago and with much that was plainly wrong already present, the “New Coke” fiasco occurred, wherein Coke’s executives came to the brink of destroying the most valuable trademark in the world. The academically correct reaction to this immense and well-publicized fiasco would have been the sort of reaction Boeing would display if three of its new airplanes crashed in a single week. After all, product integrity is involved in each case, and the plain educational failure was immense.

But almost no such responsible, Boeing-like reaction has come from academia. Instead academia, by and large, continues in its balkanized way to tolerate psychology professors who mis-teach psychology, non-psychology professors who fail to consider psychological effects obviously crucial in their subject matter, and professional schools that carefully preserve psychological ignorance coming in with each entering class and are proud of their inadequacies.

Jevon Paradox, Gluttony, Fecundity & Sub-Prime Science

First: Be sure to check out famed entrepreneur, VC, philanthropist, founder of the momentous San Diego Science Festival and my partner at Lux Capital, Larry Bock during a recent Forbes interview:

http://video.forbes.com/fvn/clayton/jw_larrybock012609

Now: I applaud long-term thinking, but extrapolate too far out, in most domains, and you’ll be lampooned. Now: what if I told you the current financial crisis could be avoided if you and everyone else would just hold your illiquid assets for 100 years, or at least until maturity. Absurd you’d say—and rightly so. The luxury of long time-frames erodes with the pressing priorities of the present.

I’ve long lamented the irrational prioritization of a perceived 100-year problem (climate change—isn’t that what climates do?) over the rational immediacy of 5-year problems like cancer, heart-disease, Alzheimer’s, malaria and AIDS.

Ah, you say: they’re not mutually exclusive, but you’d be wrong. You, your company, and your country regularly make choices to allocate scarce resources: specifically time and money. Misallocation means mistakes, mischief and misery. When times are good and cash and credit is flowing, visibility—or at least confidence in perceived visibility—runs as far as the eye can see. We look far into the distance, taking the near-term for granted. Discount rates go down, durations get extended, patience pervades. But conditions change. And when times are bad and money tightens, visibility gets quickly fogged, people grope for the immediate future in front of them, discount rates skyrocket, durations contract, and impatience impairs all. Like Einstein’s theory of relativity, time horizons can quickly collapse. Future hope turns to present shock.

Now: I promised I’d share two of the most compelling arguments I’ve seen for a more rational prioritization. Ignore them at your own rational, intellectual and financial peril! The first is from Peter Huber, the second from Philip Stott.

Before I give Peter the stage, consider this summary argument from Philip Stott:

"Climate change has to be broken down into three questions: 'Is climate changing and in what direction?' 'Are humans influencing climate change, and to what degree?' And: 'Are humans able to manage climate change predictably by adjusting one or two factors out of the thousands involved?' The most fundamental question is: 'Can humans manipulate climate predictably?' Or, more scientifically: 'Will cutting carbon dioxide emissions at the margin produce a linear, predictable change in climate?' The answer is 'No'. In so complex a coupled, non-linear, chaotic system as climate, not doing something at the margins is as unpredictable as doing something. This is the cautious science; the rest is dogma.”

ARGUMENT #1: First from fellow Forbes columnist Peter Huber as broadcast on NPR’s Intelligence Squared—during a debate on whether the cost to abate carbon was worth it:

“Well, while he was running, Barack Obama was heard to say that he would bankrupt our coal industry. Now, I don’t doubt Washington’s ability to bankrupt almost anything in the United States. But, [APPLAUSE] but China is currently adding a hundred gigs of coal electricity a year. That’s one entire United States worth of coal consumption every three years. There is no end in sight and there are other countries, all across the globe, following exactly in its footsteps. So let me say here quickly, where I end up and then try and tell you how I get there.

We rich people of the planet can’t stop the other five billion poor people from burning a couple of trillion tons of carbon that they have within easy reach. We can’t even make any real dent in global emissions because the emissions are growing too fast, they involve too much involvement by very poor people who can’t easily change their ways and because those poor people are part of the same global economy as us. And if we are foolish enough, which we could well be, we will let carbon worries send our jobs to their shores and they will grow even faster and carbon emissions will grow faster still. It should go without saying, we don’t control global supply of carbon.

Ten countries ruled by thoroughly nasty people control eighty percent of the world’s oil, a trillion barrels currently worth fifty trillion dollars at current market prices. Now, if I told you that there was that value in gold where it actually is, where the oil actually is, you would scoff at any suggestion that anything we could do, no matter what we spent, could force those people to keep that oil in the ground. It’s all they’ve got. They will drill it. They will pump it. They will find a market and somebody will burn it. Poor countries all around this planet are sitting on a trillion tons of readily accessible coal. It’s all they’ve got for energy beyond the other great carbon reservoir of the planet, which is the rain forests and the soils, which they also, by and large, control. They will squeeze the carbon they can out of cheap coal, cheap forests and cheap soil, because that’s what’s there, unless they can get something even cheaper than that.

And that, as I shall discuss shortly, is going to take some doing. We no longer control demand for carbon, either. The five billion poor people are already the main problem – not us. If you have heard otherwise, you have heard wrong. Collectively, the poor already emit twenty per cent more greenhouse gas than we do. We burn a lot more carbon individually, of course, but they have a lot more children. Their fecundity has beaten out our gluttony and the gap is now widening very fast. [APPLAUSE] China, not the United States, is now the largest emitter of greenhouse gas on the planet and it will soon be joined by others. It’s only a matter of time. And finally, the poor countries have made perfectly clear that they are not interested at all in spending what a low carb diet would cost. They have more pressing problems. So it really does come down to this. First, can we give the world something cheaper than carbon?

The moon shot law of economics says, Why, yes, we can. If we just really put our minds to it, it will happen -- atom bomb, moon landing, energy, you name it. No, not this time. Fossil fuels are very cheap because they concentrate a lot of energy in a small space. You find a mountain of coal and you can just shovel gargantuan amounts of energy into the boxcars. Renewable fuels like sun and wind are much harder. Windmills are now fifty story skyscrapers, yet one windmill generates a piddling two megawatts. A jumbo needs a hundred megawatts to get off the ground. Google is building hundred megawatt servers just to move bits around. Meeting New York City’s total energy demand would require something like thirteen thousand windmills spinning at full speed or more like fifty thousand windmills scattered all over the state because you’ve gotta have enough of them to be sure enough of them are in the windy spots.

What was your Mayor thinking when he suggested that you might just tuck them into Manhattan? I mean, that kind of thinking betrays a very common view that, [APPLAUSE] In fact, it betrays a profound ignorance about how difficult it is to get huge

amounts of energy out of these very dilute, thin forms of fuel, like sun and wind. Renewable technologies are not moving down the same plummeting cost curves that we’ve seen in our laptops and our cell phones. When you replace conventional with renewable everything gets bigger, not smaller – much, much bigger – and costs get higher, not lower. China and India won’t trade three cent coal for fifteen cent wind or thirty cent solar.

And if we force those expensive technologies on ourselves, we will certainly end up doing more harm than good. Twenty percent of the planet buys much less carbon, the other eighty percent will be delighted to buy at a lower price. The real jobs will go where the energy is cheap, just as they go where the labor is cheap because manufacturing and heavy industry require so much energy. And in a global economy you can’t possibly compete if you’re paying two or three times as much as your competitors for an essential input. Green jobs means Americans paying other Americans to chase carbon while the rest of the world builds power plants and factories. But the rest of the world is less efficient than us and less careful. A massive transfer of carbon and industry and jobs from us to them will raise carbon emissions. It will not lower them.

So, unless we are going to ask the Pentagon to take charge – and good luck with that -- we don’t have the power to deliver any lasting reduction in global carbon emissions at all. Whatever we might achieve in the very short term at home, we can’t control the global supply of carbon. We can’t control the five billion poor people who desperately want to burn it and who already control more of the demand than we do. And we can’t control the flight of jobs and industry to where the industry is cheap. Frantically chasing the impossible and falling flat on your face doesn’t make things better. It often makes things worse and it’s never worth the money. [APPLAUSE]

ARGUMENT #2: Philip Stott of University of London

I really wish I could believe that we can manage the costs that would control climate. Very sadly, I have to quote Samuel Johnson, the great British lexicographer. “An obstinate stubbornness, a rationality, stops me believing it.” And with a twinkle in my eye, because we’re in New York and near Wall Street, what I want to show, very dangerously, is that, climate science and these costs are sub-prime science…sub-prime economics, [APPLAUSE] and above all, sub-prime politics. And they will cost us dear, despite what Adam and Oliver and Hunter will be saying. And we’ve got to be very, very careful. And Bjorn used a very important phrase.

Let’s not just follow what’s fashionable. In fact, Johnson again had a wonderful phrase for it. “Let’s not be befuddled, by the clamor of the times.” [APPLAUSE] Let me therefore start, by science, I’m not going to say much on science because, I agree with what Robert said, right at the start in this. It’s actually not very much about the science, it’s always been about economic and political choice. Everything is when it comes down to it, like it or not. But I just want you to have one image, and it’s a very serious scientific image, I want you to think of the world…I want you to think of the world from inner Siberia, to Greenland, then to Singapore, and then come to the Arab states and to Sahara. What, ladies and gentlemen, is the temperature range I have just covered. It is from minus 20 degrees C, to nearly 50 degrees C, a range of 70 degrees C, in which humanity has adapted and learnt to live. [APPLAUSE] We are talking about, ignoring the extremes that Oliver said, a

prediction of 2 to 3 degrees C, what a funk! [LAUGHTER, [APPLAUSE] I’m very serious, what a funk! Humanity lives successfully from Greenland to Singapore to Saudi Arabia. 70 degrees C. And what is more, the carbon reductions will not produce an outcome that is predictable. Climate is the most complex, coupled, nonlinear, chaotic system known to man. Of course there are human influences in it, nobody denies that. But what outcome will they get, by fiddling with one variable at the margins. I’m sorry, it’s scientific nonsense. And a very serious nonsense. [APPLAUSE] But it’s the economics above all, because that’s the motion, the costs. I come from the left wing politically. I am fed up with environmentalists putting regressive costs and taxes on the poor. [APPLAUSE] It always costs more in the end, whatever Adam and the other say, and it’s always fundamentally on the poor.

They’ve forgotten the famous Jevons Paradox, Professor Jevons from my own country, University College, London, that actually when you save on energy, you don’t really save, you simply transfer it to new energy costs, and actually probably issue more CO2. So when you save energy you take another holiday, you take another flight, your CO2 increases. And he demonstrated that in the 19th century. Have we forgotten this basic economics.

But above all, it’s this. I’m going to be honest about this, I don’ttrust the environmentalist agenda. For 30 to 40 years, what they have fundamentally been wanting to do, is place an infinity in cost-benefit. In other words, so that the rationality of economic choices is undermined by effectively a religious choice, not an economic choice. [APPLAUSE] Under an infinity of course, choice is not made under the procedures that were put down by Peter, and by Bjorn.

But it won’t work. And that leads me, it becomes a closed system of thought, and that always worries me deeply. But it’s the politics then, finally, sub-prime politics. We are full of eco-poseurs and in the United States you have some gems. [LAUGHTER] I don’t think I need to mention them. But what we’ve got to remember is that, this motion is about the cost of artificially in a sense, forcing down the carbon. Energy security, efficiency, are [UNCLEAR] of course they’re absolutely vital. Energy security will become of the major themes…of the Obama administration, and rightly so, but that isn’t artificially forcing down carbon. And exactly as Peter said, only this week, China announced a 30 percent increase by 2015, in its coal production. Actually announced that only this week. And in a sense, we are not being realistic. As I said I would love to be able to think we can control climate, when of course it is indeed going to have to be adaptation, flexibility put to an outcome that we don’t know ‘cause I actually don’t know what climate, they’re wanting to produce for us. And actually I don’t think they know either. [APPLAUSE]

But let me come back to Johnson again, ‘cause Johnson said everything—Bible, Shakespeare and Johnson, you’ve got it. [LAUGHTER] And Johnson said virtually everything. In a very, very brilliant book that he wrote in the 18th century there called Rasselas, he talks of an astronomer who claims that he can control climate. This is what he says. “The sun has listened to my dictates, and passed from tropic to tropic by my direction. The clouds at my call, have poured their waters.” And what does Johnson say about this astronomer—astronomer? He was mad! And so are we, if we actually believe we can control climate predictably, the costs in every sense will be enormous. Oh, mamma mia. We are the dancing queens. Let’s give this global warming nonsense, its Waterloo tonight. Thank you.”