Weekly Insider (Irony, Hypocrisy & the brilliant Nathan Myhrvold)

Before I get to today’s juicy interview, I must share a bit of hypocrisy and irony. Have you ever seen the ACLU recruiting outside of Whole Foods? The irony struck me. ACLU has filed lawsuits against companies that do data-mining for patterns in their customer behavior so they can sell them other products they might not know they want. I asked one of the clipboard recruiters if he found the irony of data-mining for common demographics outside of Whole Foods as delightful as I did. He didn’t understand.

Now, I pleased to share my exclusive Forbes sit-down with Nathan Myhrvold, Ph.D., former Chief Technology Officer of Microsoft and now founder of Intellectual Ventures.

From prehistoric dinosaurs to futuristic nuclear power, what’s the common thread linking the ages?
Me! There’s no real thematic link between dinosaurs and nuclear power or some of the other things I do, apart from my interest in all of them. I’d love to have some grand overarching theory that unifies them all, but unfortunately it’s too wide of a range to bridge that way.

What drives your interests? Is it the obscure, the unappreciated, the undiscovered?
I have a basic interest in science and how science uses our brainpower and reasoning to figure things out. That includes figuring out things that occurred 65 million years ago, where you have only indirect evidence of what happened, and you need to be very clever in applying that evidence to actually determine quite a lot. At the same time, our inventions in areas like nuclear power are trying to figure out new ways to exploit loopholes in nature’s laws for our technological purpose.

I’m always fond of the quote, “The best way to predict the future is to invent it.” What are some of the inventions that you are currently passionately pursuing?
We’ve already alluded to nuclear energy. We’re hoping that we have a strong candidate to replace (at least a part of) the current global energy supply, which really isn’t tenable for very much longer. Additionally, we do quite a bit of work in medical devices. Though not as high tech as the nuclear work, we have the opportunity to save people’s lives, so it’s pretty neat from that perspective. We also have several projects where we’re trying to understand and fight malaria. Those are probably not among our most lucrative ventures, because unfortunately nobody who gets a regular paycheck gets malaria, but it has the opportunity to save a lot of lives and change the world.

When you think about inventions, do you start with a big problem and figure out how to solve it, or do you begin with a set of solutions and then seek problems to go after?
We do both. The latter we call “the answer in search of a question.” For instance, when we uncover a brand new scientific research result that was just published, we’ll look at it and go through a thought process. Is there anything that this knowledge is good for? What has changed? Can we now achieve something that we were unable to accomplish before? We also take the other approach, beginning with the key problems and then trying to identify solutions. For example, malaria is a big problem. How do we stop malaria? We step into more details and try to identify different directions. For instance, how do you control the disease vector (mosquitoes)? How can we kill mosquitoes easily, cheaply, etc.? Or another direction: how do we attack the malaria parasite itself? Can we do something different than what other folks have tried? And because we’re high-tech nerds, we look to see what we can do using the technology means at our disposal to make a material difference.
Those are two ways in which we approach the invention process, but we’re not above looking at all kinds of other methods. You can’t be very doctrinaire about how to approach the impossible problem.

Some say invention is disproportionately luck, whereas others discuss it as a very rational design process. How do you think about it?
We try to marry the two by doing a lot of deliberate analytical work up-front while maintaining the resolve that we’re going to invent something. By doing so, we tend to make the conditions right for serendipity. It’s like the old saying – luck favors the well prepared. Some people are adamant that you can’t set out to invent, because nobody really knows where ideas come from, but we don’t agree with that. We think you can set out to deliberately invent by creating opportunities and bringing the right people to the table that can grasp those opportunities and come up with lots of ideas. Then we’re left with the challenge of sifting through all of those ideas to distinguish the good ones from the bad ones, because they won’t all be good ideas.

Do you have any interesting non-traditional sources of inspiration for how your sort through ideas, such as biological evolution or market economics?
It’s easy to draw metaphors to all of those circumstances, and in just about every one of those you’ll find somebody who has thought it through and made a good point in that direction. However, it’s very hard for me to say whether those things are more than just metaphors, and I think that any one of them can work as long as you have really talented people around the table. That’s an issue we haven’t touched on. You can be as deliberate, top-down, analytical or creative as you want, but if you don’t have people who are good at this process, it’s much more difficult. Conversely, there are some people who spark new ideas constantly. Those people, particularly if you put them in a room together, can be inspired by almost anything! It makes a lot of difference to have people who have a knack for coming up with new ideas, and can see past the obvious to things that are new or unexpected.

Speaking of people, I know you hold famous invention sessions where you pull talented thinkers together to conceive new ideas. Could you describe those sessions?
Typically we like to have at least three inventors, and more often we have between five and ten. If it gets to more than ten inventors it doesn’t work as well, because the amount of time any individual person is speaking gets fairly low. Then we may have again as many people who are support staff: patent attorneys writing things down, people presenting facts, etc. We try to kick the sessions off with a semi-structured presentation of a problem, the solution approaches people have tried before, what failed, and what’s valuable to know. Pretty soon, things just take off! Sometimes the sessions go in exactly the direction we’d like, whereas other times we could be talking about a particular medical device, and then somebody says, “Well what about this for solid-state physics!?” The sessions can randomly go in directions that were quite unanticipated, but that’s OK. One of the things that makes invention on-demand possible is that we’re willing to define whatever answer we ultimately get as the answer we wanted.

If you could resurrect some deceased inventors and bring them to one of your invention sessions, who would be near the top of your list?
This reminds me of an old story about somebody who was interviewing for a job, and the interviewer asked, “If you could pick any person, living or dead, to talk to, who would it be?” And the interviewee responded, “The live one!” So, assuming it’s a pretty animated dead person, Thomas Edison is probably my number one choice, because he was so good at inventing in such a wide range of ways – and it would be kind of fun to see how he would do in a modern context. Now, there are also a number of scientists who would be interesting to have scientific discussions with, but for sheer inventiveness it would be hard to beat Edison.

Another duo that has always impressed me is the Wright brothers. They started in 1889 by writing a letter to the Smithsonian asking for everything they could find on flying machines - because they set out to learn to fly. It’s just remarkable that two bicycle mechanics had the chutzpa to think, “By god, we’re going to make a flying machine!” But they did it, and they did it with a sort of methodical approach that nobody else had done. For a more recent inventor, I’d pick Edward Land, the man behind Polaroid Corporation. He has one of the greatest all-time patent counts, though there are a number of modern folks that have more than Land (including some of our people) – I’m almost up at Land’s level.

How many patents have you filed?
I think I saw the other day it was 443.

Is there one patent, where if it pans out, you will consider it your most profound and important invention?
There is one that, if it works, I will be the most proud of. It’s in the realm of solid-state physics and chemistry with medical applications, something we call a “molecular harp”. It’s a very cool, elegant idea with incredible potential. (It is also very difficult technologically to pull off, so it’s possible that the full-blown version isn’t going to work anytime soon). The molecular harp could enable a kind of medical treatment that’s very close to what you see on Star Trek. I realize that sounds nuts, but bear with me for a second. Today, we put people into a CAT scan or an MRI machine, and we can see pictures inside of them without cutting them open. If you told a doctor in the 19th century that we were going to be able to see completely inside of a person without cutting them open, it would have been unheard of! Now, imagine that you had a way to reach inside and perform a therapy with no moving parts, no cutting inside, and no injection of drugs. The molecular harp could let you therapeutically affect all the way down to the molecular level. That’s what you see in Star Trek – when someone’s sick they put them in a chamber, and they shoot beams and fields at them and all of a sudden everything gets fixed. We have an inclination that this might actually be feasible. So, that’s my single favorite idea, and like many of our inventions, it’s a long shot.

So if I was to compare your business model to baseball, you’re aiming for slugging percentage, not batting average?
Exactly. That’s another concept that’s important in our model. Many inventions are simply small incremental improvements – 5% here, 10% there. That’s great, but that’s not what we’re about. We’re about big, radical, revolutionary ideas. Each individual one of these ideas is very risky. You don’t know if or how well it will work, and you don’t know when it may become commercially feasible. But if even one of these big ideas hits, it’s going to be great, and if we pursue enough ideas – enough times at bat - we’re going to hit a home run! The way the rules of this game work, strikes aren’t counted against you. Apart from the fact that it takes time, energy, and money, we can have as many at bats as we’d like, and if we just get a few big hits, it can change everything.

Most of the world for the past few years, much of which has led us to our current debacle, has been focused on short-termism: short-term asset classes, short-term liquidity, quarterly earnings. You are starting to pioneer a long-term asset class. How do you convince institutional investors to match the duration of an investment to the duration of the life of intellectual property?
That has been a big challenge, and it’s one of the things that so far – knock on wood – we have gotten right. This business requires patient money. I tell all of our investors and our employees that what I’ve got here is a get-rich-slow scheme. And if anybody runs for the door at that point, that’s fine, because I’d rather have everybody be reasonable about it. If you give me a reasonable timeframe, I think I can produce terrific returns, but it’s only because we’re going to bet on a combination of scale and patience. That is a unique pitch. To be completely blunt, it’s a turnoff for many, but when I find people for whom that idea resonates, I say, “Here’s something you can do that others can’t.” People who are looking for quick steady returns are never going to capitalize on this type of advantage. I can’t promise that this is going to be spectacularly successful, but I can make an argument that the combination of scale (which helps reduce the riskiness and variance of the bet) and patience makes this an attractive opportunity to get in on the ground floor of an investment model that could work better than most. There is a set of sophisticated investors that realize those get-rich schemes just don’t work so well anymore. That was true just a couple of years ago when we raised our money, and it’s even truer now. Pursuing investments which give you short-term allusion of returns but long-term liability to a huge crash like we just had is the exact opposite of where we want to go.

You’re speaking of Nassim Taleb’s “black swans” – both on the upside and the down.
Nassim’s phrases are very apropos here. The way I first described our business to Nassim is to explain that inventions are call options on a technology. A lot of people have piled onto the notion of investing in a technology that’s starting to get ready for primetime, as the venture guys do. Or, investing in technology when it’s in the middle of it’s growth phase, which is what the NASDAQ has been about for the last 20 years. We’re about creating technologies in the first place, and that’s a part of the overall food chain that’s remarkably un-crowded. Perhaps that’s because everybody else is sensible and we’re foolish, but I tend to think we have an opportunity to pioneer a unique long-term asset class, and if we do it well we can have a hell of a run exploiting that.

What do you think is the greatest invention that has occurred in your lifetime, and the greatest invention in the history of humanity?
In my lifetime, it’s hard not to look at the transistor, which was probably the single thing that caused most the technology industry to occur. Computers without transistors were pretty niche things. I could also say VLSI (very-large-scale-integration) and Moore’s Law as a further development of that, or the software industry (an invention I helped participate in the development thereof). Those are all pretty damned important, and the Internet is the latest incarnation of this technology era. There is a question of aesthetics here – do I pick the most important invention as being the one that launched it all, or the one that’s had the most recent impact on everyone’s life?
In terms of the most dramatic thing in the history of humanity, it’s agriculture. It’s a funny thing to say, but agriculture is what gave us the ability to feed ourselves with enough free time to develop civilization. And it really happened in that order. Agriculture happened first, and then civilization happened because we actually had time to do music and art and mathematics and science and technology and everything else.

You have two college-age sons. What are you encouraging them to pursue?
My boys are both going to be in science. One is very interested in the outdoors and the earth, so he’s going to do some form of geosciences. The other one had a very hard choice between mathematics, physics, and molecular biology, and it looks like he’s going to choose molecular biology. Of course, modern molecular biology involves biophysics and computing and other sciences to a much higher degree than ever before. Whereas physics is what captivated me when I was his age, it’s hard for physics to be as exciting as molecular biology, and I really can’t blame him!

What are some of your all-time favorite books and movies?
Jared Diamond’s Guns, Germs, and Steel is one of my favorite books. As far as movies go, there are a lot of movies I really like, but it’s hard to beat some of the early Kubrick movies like A Clockwork Orange or Dr. Strangelove.

Weekly Insider (Airbrushing Airwaves & The Adjacent Possible)

Happy New Year, Welcome Back.

First off: the “adjacent possible”. Then: “airbrushing airwaves”.

For many years in this column I’ve applauded and espoused Nassim Taleb’s philosophy (as put forth in “Fooled by Randomness” and “The Black Swan”) of not only not knowing what we don’t know, but not knowing (or accepting) that it isn’t possible in many instances to know the future. We mistake luck for skill and often mistakenly attribute success to genius when it’s mere luck.

Being pattern-seeking mammals (remember: the non-pattern seekers got eaten by tigers, having sat still when the bushes rustled), we’re uncomfortable processing randomness. We look at puffs of clouds and see faces and animals. We’re hardwired for it. We can’t help ourselves.

Now I bring to you another idea that I consider as important. It’s from complexity theorist and physicist Stuart Kauffman and it’s called “the adjacent possible.” In my words it’s this: Stuff happens. That stuff might be useless. Until it isn’t.

In longer form: Some stuff (whether in nature or business or science) might randomly get invented (either by accident or byproduct of an original intent) and that stuff might have an attribute that has absolutely no apparent use, you can’t even predict a use way into the future for it. But then lo and behold, sometime in the future, something happens and suddenly a use for that attribute, by itself or in combination with another thing, gets discovered.

Some of you immediately are thinking: Ah, it’s evolution! Random mutation and natural selection. And that’s true. But it’s more than that. The idea of the “adjacent possible” is about the possibility space of all the things that might happen as some new biological trait, technology feature, molecule have pathways that might one day be taken.

Here’s Stuart Kauffman in his own words:

“You might look at a heart and ask, what is its function? Darwin would answer that the function of the heart is to pump blood, and that's true—it's the cause for which the heart was selected. However, your heart also makes sounds, which is not the function of your heart. This leads us to the easy but puzzling conclusion that the function of a part of an organism is a subset of its causal consequences, meaning that to analyze the function of a part of an organism you need to know the whole organism and its environment. That's the easy part; there's an inalienable holism about organisms.

“But here's the strange part: Darwin talked about pre-adaptations, by which he meant a causal consequence of a part of an organism that might turn out to be useful in some funny environment and therefore be selected. The story of Gertrude the flying squirrel illustrates this: About 63 million years ago there was an incredibly ugly squirrel that had flaps of skin connecting her wrists to her ankles. She was so ugly that none of her squirrel colleagues would play or mate with her, so one day she was eating lunch all alone in a magnolia tree. There was an owl named Bertha in the neighboring pine tree, and Bertha took a look at Gertrude and thought, "Lunch!" and came flashing down out of the sunlight with her claws extended. Gertrude was very scared and she jumped out of the magnolia tree and, surprised, she flew! She escaped from the befuddled Bertha, landed, and became a heroine to her clan. She was married in a civil ceremony a month later to a very handsome squirrel, and because the gene for the flaps of skin was Mendelian dominant, all of their kids had the same flaps. That's roughly why we now have flying squirrels.

“The question is, could one have said ahead of time that Gertrude's flaps could function as wings? Well, maybe. Could we say that some molecular mutation in a bacterium that allows it to pick up calcium currents, thereby allowing it to detect a paramecium in its vicinity and to escape the paramecium, could function as a paramecium-detector? No. Knowing what a Darwinian pre adaptation is, do you think that we could say ahead of time, what all possible Darwinian pre adaptations are? No, we can't. That means that we don't know what the configuration space of the biosphere is.”

The more tinkering society does, the better the chance that someone else will pick up that tinkered thing and run with it in a way never imagined. Kevin Kelly founder of WIRED has made a persuasive argument that there’s a moral imperative to invent. Consider if the piano hadn’t been invented by the time of Mozart. Consider if organized basketball leagues hadn’t been invented before Michael Jordan. Or what if the PC hadn’t been invented before Bill Gates? The more “instruments” we invent, the better the odds that a genius picks one up, tweaks it or masters it and carries it further, advancing society.

Sometimes the uses of an instrument end up being even more useful in a completely different field. Someone recently shared with me how a geophysicist used sound waves to map oil wells in the 1990s. A singer friend new this geophysicist was an expert with sounds waves and asked him to tune her singing. Not only did it work, it worked so well, the music industry has now been secretly using it for a decade, it’s called “AutoTune”. Cher's hit song "Believe", Madonna's "Music", current rap star T-Pain. The pitch for the technology: correct your pitch, or tweak it. What about hip-hop’s mantra of "Keep it real"--yeah, right. It’s now airbrushing the airwaves.

Viewed through the lens of history, you shouldn’t be surprised by this. The history of technology has been one of displaced labor. New jobs are birthed as old ones die. Talent is embedded in technology. And technology gets further embedded in advanced materials. Where the molecules are the device I’ve long called this “Simplexity”.

Consider Hollywood and videogame developers who use CGI. They are eliminating the need for actors (or at least managing egos of live ones). Olympic athletes are stripped of medals for doping and enhancing. Milli Vanilli were fully mocked (one of them attempted suicide) for lip-synching. Will discovery of digital doping lead to stripping Grammy medals? Unfortunately, it’s probably no more likely than false economic ideas will lead to stripping Nobel medals.

As Tom Clancy said, “The difference between fiction and reality? Fiction has to make sense.” Art imitates life. The science fiction of Blade Runner with Replicants now seems a future possibility.

In the music business I can envision lyrical Luddites leading a cultural revolution against the inauthentic and engineered while demanding the analog, true and slightly out of tune. Where will true talent come from? Statistically speaking: Asia. As a case in point: see Charisse, 15 year old Phillipine phenom discovered by Oprah, promoted by David Foster, already doing duets with her own hero, Celine Dion.

A once obscure girl in Asia, with a once randomly invented technology (webcam) on a once obscure website (YouTube), that gets randomly watched by another once obscure woman, Oprah Winfrey. As I always say, we cannot predict the future, we can only invent it.

Weekly Insider (Mourn Model Makers, Volatility & Aliens Cause Global Warming)

As I always write: the only certainty is uncertainty. Paradoxically, the implied volatility today suggests that volatility will be stably-volatile for the foreseeable future (months ahead). You should expect periods of punctuated disequilibrium driven by fund redemptions in parallel with the transfer of ownership of common stock from short-term investors to long-term investors marked by high volatility and dramatic intraday reversals like yesterday.



The volatility isn’t coming from frenetic traders, but an ebb and flow of long-term investors providing liquidity to short-term investors, with the trend being exacerbated in either direction by many small daily momentum players.



Consider: yesterday closes higher. FIRST: this causes some hedge funds (without long-term lockups of capital and with monthly or quarterly LP liquidity) to decide its a good day to sell some positions to meet redemptions and hold only those positions that might pop on short-term news. SECOND: The correlated holdings overlap force other funds to sell. THIRD: Momentum investors pile on to clip a few basis points. FOURTH: Long-term, long-locked funds buy common stock from the short-term short-locked funds (because long-term capital cares less about daily or weekly price fluctuations. If meaningful mispricings exist, as they do, long-term holders will buy and plan to hold for 3 years. Mark this: The single greatest competitive advantage any fund can have is differing time horizon from a thundering herd of sellers being shepherded by short-term redemptions. As risk-guru Peter Bernstein has noted: throw away all the complex formulas, risk is not having cash when you need it.



This current environment is just this: hedge funds hanging on as long as they can, while bringing in their gross exposure because of deleveraging, cost of short borrow and redemptions. Most are unwinding (some faster than others) by size, staff or entire funds causing ownership stakes in companies (ie. “stocks”) to be transferred from short-term and momentum investors to long-term value investors.



Everyone now laments the model makers. Nassim Taleb, whose ideas I’ve pounded the table on in these columns for years has himself pounded the table on a recent Bloomberg interview calling for the heads of the academic curriculum that continue to teach erroneous ideas based on flawed assumptions of how markets or humans really work. “Messily” and “irrationally” is hard to capture mathematically—which is why finance professors and business schools still teach CAPM (capital asset pricing model), beta and other greek-letter nonsense. It’s like Charlie Munger’s story of the doctor who taught his students an incorrect procedure just because it was easy to teach.



Speaking of model makers, below as promised is the second installment of Michael Crichton’s outstanding wisdom, presented in a speech titled: “Aliens Cause Global Warming”. I first excerpt a favorite passage that relates to the current absurdity of model makers and the implausibility of linear prediction:

….Stepping back, I have to say the arrogance of the model-makers is breathtaking. There have been, in every century, scientists who say they know it all. Since climate may be a chaotic system-no one is sure-these predictions are inherently doubtful, to be polite. But more to the point, even if the models get the science spot-on, they can never get the sociology. To predict anything about the world a hundred years from now is simply absurd.

Look: If I was selling stock in a company that I told you would be profitable in 2100, would you buy it? Or would you think the idea was so crazy that it must be a scam?


Let's think back to people in 1900 in, say, New York. If they worried about people in 2000, what would they worry about? Probably: Where would people get enough horses? And what would they do about all the horseshit? Horse pollution was bad in 1900, think how much worse it would be a century later, with so many more people riding horses?



But of course, within a few years, nobody rode horses except for sport. And in 2000, France was getting 80% its power from an energy source that was unknown in 1900. Germany, Switzerland, Belgium and Japan were getting more than 30% from this source, unknown in 1900. Remember, people in 1900 didn't know what an atom was. They didn't know its structure. They also didn't know what a radio was, or an airport, or a movie, or a television, or a computer, or a cell phone, or a jet, an antibiotic, a rocket, a satellite, an MRI, ICU, IUD, IBM, IRA, ERA, EEG, EPA, IRS, DOD, PCP, HTML, internet. interferon, instant replay, remote sensing, remote control, speed dialing, gene therapy, gene splicing, genes, spot welding, heat-seeking, bipolar, prozac, leotards, lap dancing, email, tape recorder, CDs, airbags, plastic explosive, plastic, robots, cars, liposuction, transduction, superconduction, dish antennas, step aerobics, smoothies, twelve-step, ultrasound, nylon, rayon, teflon, fiber optics, carpal tunnel, laser surgery, laparoscopy, corneal transplant, kidney transplant, AIDS… None of this would have meant anything to a person in the year 1900. They wouldn't know what you are talking about.



Now. You tell me you can predict the world of 2100. Tell me it's even worth thinking about. Our models just carry the present into the future. They're bound to be wrong. Everybody who gives a moment's thought knows it.



I remind you that in the lifetime of most scientists now living, we have already had an example of dire predictions set aside by new technology. I refer to the green revolution. In 1960, Paul Ehrlich said, "The battle to feed humanity is over. In the 1970s the world will undergo famines-hundreds of millions of people are going to starve to death." Ten years later, he predicted four billion people would die during the 1980s, including 65 million Americans. The mass starvation that was predicted never occurred, and it now seems it isn't ever going to happen. Nor is the population explosion going to reach the numbers predicted even ten years ago. In 1990, climate modelers anticipated a world population of 11 billion by 2100. Today, some people think the correct number will be 7 billion and falling. But nobody knows for sure.”

LINK TO THE WHOLE SPEECH BELOW. ENJOY!
SPEECH: Michael Crichton - Part II - Aliens Cause Global Warming