How I modeled the Scottish vote “No”, based on “Behavioral economics”

It’s clear. “Behavior is the new weather channel”!

On the 12th of  this month I tweeted based on a model I developed based on Behavioral Economics and the Scarcity-Abundance DNA model that is part of the algorithm, that the Scottish vote was “NO”. It was accurate enough. Now imagine when I mentioned this modeling to friends in the financial services industry and positions of investing opportunities that went the other way and the return.

This was based on the algorithm that was developed over time based on simple fundamentals of complex human behavior. ““ALIA EST DIFFERENTIA”, OTHER THINGS BEING VARIABLE, IS THE VISIBLE HAND OF ECONOMICS”

 

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The reaction is priceless with the calls coming in and whether I can share or consult or create a fund of my own.

 

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http://fortune.com/2014/09/19/markets-celebrate-scotlands-no-vote/                         http://www.bbc.com/news/uk-scotland-29270441

 

BEHAVIORAL WEATHER PATTERNS AS ECONOMIC SIGNALS
http://gerardjrego.com/2014/06/04/behavioral-weather-patterns-as-economic-signals/

IRRATIONAL INVESTING – PROFITING FROM BEHAVIORS AND FUNDAMENTALS

http://gerardjrego.com/2014/09/04/irrational-investing-profiting-from-behaviors-and-fundamentals/

#BEHAVIORS OF #PREDICTABLEIRRATIONALITY, THE VISIBLE HAND OF ECONOMICS!
http://gerardjrego.com/2014/05/13/behaviors-of-predictableirrationality-the-visible-hand-of-economics/

#BEHAVIORALCOMMERCE IS THE NEW COMMERCE AND TECHNOLOGY

http://gerardjrego.com/2014/05/05/behavioralcommerce-is-the-new-commerce-and-technology/

BEHAVIOR IS DISRUPTING EVERYTHING, FROM MARKETS TO ECONOMIES AND GOVERNMENTS?

http://gerardjrego.com/2014/04/08/behavior-is-disrupting-everything-from-markets-to-economies-and-governments/

 

“ALIA EST DIFFERENTIA”, OTHER THINGS BEING VARIABLE, IS THE VISIBLE HAND OF ECONOMICS”

What has news of an election in India cause it’s stock markets to rise exponentially in days,where with a good percentage companies for years have been impacted with low stock turns, high inventory, high Cash Conversion Cycles, low GMROI and thus high debt and Gearing ratios? Not that it’s different in markets across the world? Or a headline that has valuations jumping by the day in billions? Or a conference on Inclusive Capitalism is an Oxymoron? Or the world has over 450 million small farmers and at the other end we have a food, water, population and energy relationship crisis or how relationships are more important than skills in careers? Or are these metrics even relevant anymore?

Perception of change often proves that all we learn and do has nothing to do with the fundamental equations either in accounting or math, but being “Predictably Irrational”.”

http://gerardjrego.com/2014/05/26/alia-est-differentia-other-things-being-variable-is-the-visible-hand-of-economics/

 

Now on the way to continue the calls and the models for asset-liability investing based on fundamentals.

Irrational Investing – Profiting from Behaviors and Fundamentals

Breaking news. How does the exponential scale of data impact investing opportunities?

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Does this mean shorting the Euro or Pound? Exit equities on markets? Wait for nothing to happen. With billions of people with access to mobile phones and social networks, data proliferation today has lead to the opportunity to connect the disconnected. Connect open data and fundamentals that create behavioral  change and wrap algorithms around the same to create a market profit opportunity, that sustains on basics.

In 2008 when the stock market crashed in October 6th, the Dow fell almost 1,900 points, over 18%.   Why did the markets crash? Fundamentals? Behavior? Or both?

Both! Fundamentals were weak on the majority of assets, that had high inventory holding, low stock turns, high cash conversion cycles, low GM/Stock turn, high gearing ratios and behavior value of stock (read as PE) that did not reflect any fundamental. Why did the happen? Fundamentals and liability behaviors.

Folks who did not have the capability to pay for inventory were given access to capital for assets to buy homes that their time did not turn at the pace of the capital borrowed. This lead to a behavior that assets had suddenly increased in value that created the herd of buy-lend deals. Continue the pace and fast forward they became storms that had to finally wreak havoc on what came next. Implosion of capital, assets and most important, people’s lives. Foreclosure was the word of year(s) to follow. The rest they say is history that had taxpayer money that cost $1T!

We constantly hear about HFT, big data, analytics, models, et al. But the reality is that whether on stock exchanges or investing in multiple asset classes, the reality of all is that >99% follow the wind.  So what is Irrational Investing? Combining fundamentals + optics and then invest in the specific asset that is in the exact opposite direction of the “herd”. The two events exactly weeks apart have just the opposite behaviors and analytics. This is the opportunity.

 

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Irrational Investing is looking at Fundamentals of any asset class, whether equity, debt, real estate, etc. and combining these fundamentals with open data that when optically looked at either reflects “liability behaviors or negative news or “asset behaviors” positive news or information.

Sow what does Irrational investing do. It looks at fundamentals of a company, the profit pool presence, the inventory metrics (Stock Turns, CCC, GMROI) and then links “liability” or “asset” behaviors. This then combines the current fundamentals + optics and then invest in the specific asset that is in the exact opposite direction of the “herd”.

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Screen Shot 2014-09-04 at 1.02.59 PM              Screen Shot 2014-09-04 at 1.04.12 PM http://www.usnews.com/news/business/articles/2014/08/03/asian-stocks-boosted-by-us-jobs-data                                                                                                      http://www.reuters.com/finance/markets

Looking at Google trends and mapping open source information or intelligence (OSINT) to fundamentals, the trends are clear. Adding a layer of algorithms that map Fundamentals + Behavior, we have an Irrational Investing engine.*

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As you can witness events that occur evert minute, day, week or month constantly alter behaviors of investors across asset classes where greater than 90% plus of the time lead to losses. This has lead to new behaviors of being ahead of a buy-sell behavior where the perceived leverage is dx/dt, or time in milliseconds or microseconds.

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http://fortune.com/2014/09/03/flash-boys-iex-75-million/

http://online.wsj.com/articles/how-does-high-frequency-trading-affect-individual-investors-1408454495

 

Documenting our work around behaviors we are able to leverage our analytics linking fundamentals and behaviors and mapping profit and loss making opportunities. Simple screen shots from Google finance that link prices with events that occur are a very good indicator.

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What our analysis reveals is irrationality is increasing with the ubiquity of tech.  A simple example is fundamentals that are strong in a company (the way we created our analytical framework) based on changing news and stock prices (investor behavior) reacting and quite the opposite. Both reflecting irrationality, that has and only exploding exponentially with time.

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The brilliant work of Dan Kahneman, Amos Tversky, Dan Ariely, Sendhil Mulianathan and other pioneers of behavioral economics & finance have been of incredible fundamental value to what goes around us in our every day lives. Daniel Kahneman and Amos Tversky wrote “Prospect theory: An Analysis of Decision under Risk” in 1979 which laid the foundation of how psychological behavior and it’s impact on economics in decision making was a critical causal behavior.  This was seminal.

However it is clear that if everyone of us were rational in every market there would be no chaos on the roads, stock markets, contracts, products we buy, homes we fill with things, the food we eat, etc. The list goes on.

“In economics, the invisible hand of the market is a metaphor used by Adam Smith to describe the self-regulating behavior of the marketplace. Individuals can make profit, and maximize it without the need for government intervention.”
http://en.wikipedia.org/wiki/Invisible_hand

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Why is behavior such as critical pivot to look at? People. It is clear that people are #PredictablyIrrational.

#PredictablyIrrationality is the visible hand of economics as a behavior and that over 99% of the masses demonstrate this behavior. It is this very premise that has the opportunity to create value, disrupt value, transfer value or simple implode value ( most of the time). And the framework that we are working on is the #BehavioralAccounting of all that goes on in the linearity.

Our focus is #circularity and #prosumption. How do we convert to algorithms that enable us turn the pyramid on its head and create new opportunities which we believe we are in the midst of. Industries are getting disrupted around the visible hand of  #PredictablyIrrationality where behaviors are disrupting the very markets that defined the basis of capitalism.

Our work is capturing fundamentals mapping it to behavioral responses and then spotting investing opportunities globally is where we see our work being implemented. While it is still work in progress, we have seen over the years and in continuos testing, the ability to connect the disconnected is where the value lies and with technology ubiquity, even more. Maybe the start of an “Irrationality Fund”!

 

#BEHAVIORS OF #PREDICTABLEIRRATIONALITY, THE VISIBLE HAND OF ECONOMICS!
http://gerardjrego.com/2014/05/13/behaviors-of-predictableirrationality-the-visible-hand-of-economics/

#BEHAVIORALCOMMERCE IS THE NEW COMMERCE AND TECHNOLOGY

http://gerardjrego.com/2014/05/05/behavioralcommerce-is-the-new-commerce-and-technology/

BEHAVIOR IS DISRUPTING EVERYTHING, FROM MARKETS TO ECONOMIES AND GOVERNMENTS?

http://gerardjrego.com/2014/04/08/behavior-is-disrupting-everything-from-markets-to-economies-and-governments/

* Specifics not documented for want of IP and work in development

 

 

 

Verbs are disrupting nouns and behavior the new platform

Verbs are disrupting Nouns!  Almost every company CXO or board member or investor one speaks with and the question is common. How are we getting disrupted and it seems like in slow motion that there is nothing we can do to stop this change? What should we do? Why are tens if not hundreds of billions of dollars in value chains either at risk or getting disrupted as we speak globally?

Behavior (noun from the verb, “behave”) disrupting companies and industries as platforms on a scale never witnessed before? Economics of 5Cs, Context, Community, Content, Collaboration and Commerce are now less than $0.001/behavior. How did Intermarche, a French company leveraged “ugly vegetables instead of throwing them away” a pilot that actually sold out! Or companies such as Airbnb, Uber, Lyft, SolarCity, et al disrupting industries?

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http://www.wimp.com/allsupermarkets/

http://www.dailymail.co.uk/femail/food/article-2693000/Forget-ugli-fruit-meet-ugly-fruit-bowl-French-supermarket-introduces-lumpy-misshapen-fruit-vegetables-sold-30-discount-combat-food-waste.html

Let’s start with some very interesting behaviors or how platforms are leveraging new business models + supplychain optimization to create a new competitive advantage by inventing new industries that are moving;

# Consumption to Prosumption – Postpaid to Prepaid

# Ownership to Access – Subscription

# Capex to Opex – Subscription/OnDemand

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All above are behaviors! What disruptive startups are doing are creating platforms which are software algorithms wrapped around behavioral business models that capture demand and map to supply, while turning the entire value chain into services! The result. New metrics for value.

1. Value capture (verb) – Connecting fragmented demand and supply via Aggregation

2. Value sharing (verb) – Including the demand-supply chains as benefices of economies of scale and scope as ecosystems

3. Value unlocking (verb) –  Geometric or exponential return by lowering Inventory holding, Higher Stock Turns, Lower Cash Conversion Cycles and Higher GM/Stock Turn, for every stakeholder, demand-supply, employee and investor

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Some quick examples.

A look at Airbnb. Built around a behavioral platform of “Trust”. (From Google trends)

 

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#PredictablyIrrational resultant behaviors

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http://www.huffingtonpost.com/2014/04/29/airbnb-laws-san-francisco_n_5235820.html

 

A look at SolarCity Built around a behavioral platform of “scarcity”. (From Google trends)

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#PredictablyIrrational resultant behaviors

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http://www.fool.com/investing/general/2014/01/15/solarcitys-new-trillion-dollar-enemy.aspx

A look at Tesla. Built around a behavioral platform of “Risk” (From Google trends)

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#PredictablyIrrational resultant behaviors

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http://blogs.wsj.com/corporate-intelligence/2014/03/12/tesla-vs-new-jersey-the-other-side-of-the-argument/

A look at Uber. Built around a behavioral platform of “Access” (From Google trends)

 

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#PredictablyIrrational resultant behaviors

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Looking at interest in Fortune 500, Forbes 100, S&P to startups and the trends are incredible. Verbs are disrupting Nouns!

 

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Losses, poor asset quality, high inventory, low stock turns, high Cash Conversion Cycles, low GM/Stock Turn and predictably irrational behaviors in PE ratios.

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By looking at behaviors and mapping to fundamentals is the nature of our work. This gives us as a team the algorithmic ability to look at what’s broken in an industry, company or market and what our model creates as a result from there on what the next opportunity, business model and investment opportunity will be.

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It’s the (behavioral) economy stupid!

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http://harvardpolitics.com/united-states/its-the-economy-stupid/

 

Job description: Entrepreneur in Residence – Disrupt our industry!

I was asked yesterday by a a chief executive of a multi-billion dollar division of a company who is a good friend and met for tea. How do we find the next idea and the people to execute on it? Fast forward and asked me if I can present a few slides on their internal business idea and how I would disrupt them! Now that’s quick. I did mention I would write a job description.

Job description: Entrepreneur in Residence – Disrupt our industry and put us out of business!

We are looking for someone to disrupt us and maybe take over what we have been doing for the last 40 years by changing the rules in the next 3 years! We believe in the Business model warfare of company mortality is now accelerating faster than before! So we want to create and sustain value for our stakeholders and ecosystem by disrupting ourselves! (http://www.innovationlabs.com/publications/business-model-warfare/). Why would our ecosystem, customers, employees and shareholders like this. Because this ensures that we stay ahead of the curve not by planning, but by what we don’t see and someone else does. Uber, Airbnb, SolarCity, et al are disrupting incumbents exactly like that and we don’t want to be left saying “I wish I had thought of that!”

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KPIs:

1. Report to the CEO, CFO and Chief People’s Officer and board

2. Create your idea, poach your team from our best minds inside the company or outside, base you and your team wherever you believe the best minds exist and collaborate to disrupt our industry

3.  Launch within 6 months with an equity investment from our company with a Right of First Refusal to buy the parent company (not vice versa)! This is the ROI/ROE

4.  Single goal. If you and your team of EIRs cannot disrupt our division(s) or corporate structure and business model, we will still work with you

5.  Start in the next 60 days from this ad

 

What are we looking for?

1. Your value system!

2. Your vision!

3. Your execution!

4. Your team!

Compensation structure:
Like all startups. We agree to invest $5m at seed and as per your business plan will work till exit with mainstream capital so that the parent’s gets acquired or, and you also acquire our competition or render us obsolete.

Experience:
You cannot have the experience, because if you did we would have already been acquired. What we need is your deep vision, commitment, team and ecosystem around you. We also decided you cannot be looking for just a salary, because if you did you would be like all of us in the company doing what we do because we learnt it yesterday.

Love to hear your thoughts folks. Just sending this in to my friend.

PS: Asked me for a few slides as what I did as improv which got him to call his team and say, our plan for the last few months may need radical rethinking so you continue and let’s see what comes in 3 slides on the weekend.

Wallstreet disrupted! Direct Public Offerings and Behavioral Economics

Why is DPO or a Direct Public Offering, the long tail of finance ripe for disruption? It is simple. This is the long tail of financing and suffers from the same dynamics of the Pyramid Parallax. Now imagine every time you bought a tea or a burger or fruit from your farmer or your groceries at your local store or in your state, you were actually moving inventory, had a share in the equity of the busies and could trade your shares in a secondary market and not be troubled by how companies you could not observe were spending your investing dollars as a stock ticker on Wall street trading desks?

What happens when millions of small business owners with good fundamentals serving their local customers and ecosystems well in their neighborhood need to expand, get more efficient and don’t have access to mainstream capital? How big is that market? Look around your home and you have the answer!Every day millions of SMB owners lack the ecosystem connect to raise capital, expand marketshare, attract talent, attract the best business advisory and create greater value. This is a behavioral economics paradigm. It’s like we tend to choose queues in stores that are longer. However this is the market opportunity.

For example the average lend of under $500,000 per business added to over $126 B to 260,000 small businesses in the United States. However this is just the tip of the iceberg and like the #PyramidParallax of agriculture offers the same opportunity to connect SMBs and Consumers alike with a huge difference. disrupting intermediaries of mainstream capital and consumers being part of the experience.

“SBA has supported more than $126 billion in lending to more than 260,000 small businesses and entrepreneurs.”

http://www.sba.gov/content/sba-lending-activity-fy-2013-shows-sba-continuing-help-small-businesses-grow-and-create-jobs

PyramidParallax                    Screen Shot 2014-07-17 at 7.14.32 AM

 

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https://www.census.gov/econ/susb/

FORTUNE AT THE EDGES OF THE “PYRAMID PARALLAX”, DIRECT ACCESS!

http://gerardjrego.com/2014/07/04/fortune-at-the-edges-of-the-pyramid-parallax-direct-access/

So what is a DPO? Direct Public Offerings (DPOs) are a model of raising capital by selling equity (Section 504 exemption)the way any company would when they list on a major exchange such as NASDAQ or NYSE or LSE, except with a major difference. The securities are sold to a limit of $1m directly by the company or business to large numbers of unaccredited investors of the public within the state of business. This serves well especially if the customers and ecosystem state holders of the business can invest in a company that they buy the products and services and have the opportunity to share the risk and improve the value by investing.

Direct public offering
http://en.wikipedia.org/wiki/Direct_public_offering

 

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http://www.businessweek.com/articles/2014-06-05/how-to-go-public-without-a-stock-exchange

http://www.nytimes.com/2013/08/01/business/smallbusiness/seeking-capital-some-companies-turn-to-do-it-yourself-ipos.html?pagewanted=all&_r=0

The early signals are clear. This market is ripe for disruption.

So applying our methodology of Inventory Lifecycle Return framework which is a set of algorithms that can model, capture and create value through business models we came up with a possible startup for a team. The framework is an interdisciplinary set of algorithms and models between Behavior+Supplychain+Business models+Financial metrics.

So we modeled DirectPublic.  A direct marketplace for the long tail of investing, connecting small businesses to investors who largely will be consumer or customers in the ecosystem of the business and this is a disruptive startup opportunity.  So leveraging our framework we put together a business plan and plug this live with some of the slides to share our work, contrary to what most folks do as the devil is in the detail and the detail is in our algorithmic framework.

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We see the opportunity to create a marketplace that disrupts main street investing ecosystem is ripe. Why now?

1. Commoditization of behaviors at < $0.001/click

2. Behavioral economy is now mainstream, Uber, Lyft, Airbnb, SolarCity, et al

3. Emergence of smallholder ecosystems that are now connectable by marketplaces around mobility

4. The scale of industry

The derivative potential spinoffs of hyperlocal or DPO investing are;

1. Greater resilient communities

2. Reducing conflict

3. Sustainable social networks

4. Creating local opportunities for mainstream capital and adjacent ecosystems

5. Including the “excluded” due to scale

Screen Shot 2014-07-17 at 6.22.10 AM  http://www.premise.com  is a very good example of signals and market access.

 

This is part of our work and if you think that this is a real business plan, you bet it is. Most of the slides are not presented but would give you a core ideas of the work from what are. What we have is the behavioral-economic framework as algorithmic deep analytics which we are modeling across industries and identifying the disruptors/disruptive opportunities. A fund?

 

 

 

Drones, Behavior+Inventory+Marketplaces, disrupting the status quo

A quick update on a call with a potential disruptive tech inventor team. Question tabled was how to leverage the IP and tech created for the drone industry?

The idea is to share a few slides but the framework as well as the conversations are confidential in nature. What we document in parts is to keep sharing our work at a conceptual level with the actual data and work within our team, till we publish the work as launch a company or service around the deep algorithms and analytics.

The industry was around energy or that is not necessarily what the entrepreneurial team saw it as, until this conversation around the  Inventory Lifecycle Return framework that we presented.

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The discussion that  on how to look at the Inventory Lifecycle Return framework that we have developed and in the process of publishing. It enables the modeling, value capture and valuation of inventory as assets and liabilities across any industry, company or ecosystem as well as the investing dollars for that inventory.

 

A few slides from that discussion is below and SolarCity was the example modeled.

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DESIGNING FOR “BEHAVIOR”

http://gerardjrego.com/2014/06/05/designing-for-behavior/

BehaviorsDisruptingInventory      BehaviorsDisruptingInventory1

 

 

Post our discussion we have all come out saying we have a model that can analyze any industry, understand and model where and what the real value is and how to capture, invest or connect markets. What if this was a service that we could have entrepreneurs, investors, companies and ecosystems leverage as a service. That is what we are working on at the moment as a team.

 

Market signals continue, at the edges of the #pyramidparallax

Adding a few quick slides and notes to the June 16, 2014 blog as the signals continue so critical that the government of India has to plan and budget for the risks, volatility and food security or lack of it that continues to impact the long tail of agriculture, which is a challenge and gap globally. As you can see the headlines continue.

Screen Shot 2014-07-11 at 9.37.35 PM  Screen Shot 2014-07-11 at 9.38.05 PM http://businesstoday.intoday.in/story/agriculture-gets-priority-in-narendra-modi-govt-budget-2014/1/208042.html

http://in.reuters.com/article/2014/07/11/india-inflation-farming-idINKBN0FG0H020140711

 

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http://wef.ch/1oqbiqo

 

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http://articles.chicagotribune.com/1998-11-25/news/9811250108_1_sonia-gandhi-onions-congress-party http://timesofindia.indiatimes.com/india/Food-prices-rose-157-between-2004-and-2013/articleshow/22777817.cms

The blog was a discussion on where the real opportunity to disrupt and the real value capture with the inclusion of the long tail where the IRR was equally critical and included as the intermediary that would connect the two ends of what I call the #PyramidParallax MarketSignal_Oct2013 MarketSignals

DISRUPTING MEDIA, CROWDSOURCING SIGNALS INTO MARKETS. How do take traditional media which is today whether print, online, tv or mobile are looking for a business model(s)? Behavioral signals are the persuasive technologies that when aggregated into markets and close the loop around prosumers are the gap and the opportunity. Think Airbnb, Uber, Solar City, etc.

http://gerardjrego.com/2014/06/16/disrupting-media-crowdsourcing-signals-into-markets/ The reason is the the #PyramidParallax as this one single image so brilliantly illustrates
PyramidParallax
http://www.shellfoundation.org/download/pdfs/transforming_agricultural_supply_chains.pdf http://www.farmaid.org/site/c.qlI5IhNVJsE/b.6097643/k.A9BA/Concentration_in_Agriculture_Forcing_our_Family_Farmers_Out_of_Business.htm
http://gerardjrego.com/2014/07/04/fortune-at-the-edges-of-the-pyramid-parallax-direct-access/
These are the quick notes on the update as these signals will continue to come across all fragmented industries Agriculture, BFSI, Healthcare, Education, et al and the big challenges which are ripe for disruption. The opportunity to connect and provide direct access to the edges of the #PyramidParallax has never been greater with all variables multiplying their causal effects from population growth to agricultural productivity and climate change. The Inventory, Stock Turns, Cash Conversion Cycle and GMROI are very clear metrics and you know where they are most felt. People who produce upstream and folks who connect us downstream. The rest is lost in translation in the middle.