Why Some Countries Succeed

[Original Post written @http://startupiceland.wordpress.com]

I read this post in New York Times with the title "Why Some Countries Go Bust" and I just finished watching Shawn Achor talk about how we focus so much of our efforts on describing the negative things and topics. I was wondering why did the author not make the title in the New York Times article to focus on the positive aspects of the research work done by the Economist Daron Acemoglu. It is so strange, it is a simple switch in how you look at the world and you pretty much communicate the same story but the reader walks away thinking hey, we should do these things in our country rather than thinking, how we are starting to see America go to dogs or for that matter any country. I guess that is why I would never be a journalist, I want to focus on the positive aspects of any challenge in front of us, it gives me the energy to tackle it and if it is something that is beyond my circle of influence then I try very hard to just smile and move on. I am not saying I am great at it but I am trying very hard to make a habit of it. So coming back to the article, the research work done by Daron categorically outlines why certain elements drive a country to prosperity and some others to poverty. Daron and his collaborator James Robinson, argue that the wealth of a country is most closely correlated with the degree to which the average person shares in the overall growth of its economy. The authors go on to outline that when a nation’s institutions prevent the poor from profiting from their work, no amount of disease eradication, good economic advice or foreign aid seems to help. I wonder how is the current situation is Iceland? Are the institutions preventing people from profiting from their work? I don't know and I am not trying to be political. The reason it is important is that the legal operational framework in an economy needs to be fair. What do I mean by Fair? well, anyone with the product or service should be free to profit from it, there it is I have said it. Profit. Why is this such a bad thing? I believe greater the value from your product or service greater should be you profit potential.

Related articles

• A Positive Mindset and Happy Attitude Help You Succeed at Work (workplacepsychology.net)
• Profit Motive: (brothersjuddblog.com)
• The Not So Common Factors Behind Inequality (economistsview.typepad.com)
• The Rise and Fail of Countries and their Economic Elite (skydancingblog.com)
• Why Nations Fail by Daron Acemoglu and James Robinson - review (guardian.co.uk)

Incubators vs Accelerators

[Original Post Written here in WordPress] 
There is a fundamental difference between an Incubator and an Accelerator. Here is a video interview where Brad talks about the difference between Incubators and Accelerators. 

An Incubator gives you real estate i.e table, chair, meeting room and power socket, internet connection, a coffee machine and/or a foosball table in exchange for rent. This has been the traditional model, and I believe the economics of this model does not work. You are trying to get rent from an Entrepreneur who is struggling to get his economic engine going. Some incubators actually take Equity + Rent for providing the above, that is just wrong!

To make a point, Iceland has a bunch of Incubators but no Accelerators! Most Seed/Angel investors when they invest in a Startup fund for all the above. I think that increases the risk to the Entrepreneur and the Investor. Think about it, every Entrepreneur needs to build a network, tinker with the Product-Market fit and build a business when operating in an environment of extreme uncertainty. This is what I believe increases the chance of failure. When I bring this topic up in Iceland, everyone comes to the defense of all the support that exists for Entrepreneurs, I don't doubt that or challenge that but the help is in the wrong direction. I want to bring attention to the successful Accelerators of TechStars and Y-Combinator. Lets look at the numbers:

TechStar (here is the link to live numbers from Crunchbase):

Companies selected through the program: 104

Failed: 8

Acquired: 8

Total Capital Raised by Companies: $126,392,305

Number of jobs created: 645

Timeframe: 5 years

Y-Combinator is by far the most successful Seed Funded Accelerator out of Silicon Valley. Paul Graham the founder has blogged about the results. He looks at the result differently. The total value of the companies that have gone through Y-Combinator according to Paul is $4.7 Billion.

I think Iceland needs an Accelerator and we are working on establishing one!

Related articles

• Incubators, Accelerators, and Your Startup...Oh My! (growdetroit.com)
• Student entrepreneurs frustrated by lack of funding (guardian.co.uk)

The Wealth Gap

Image via Wikipedia

BBC has been doing a documentary on the widening Wealth Gap in the world, I have a problem with the portrayal of the issue. I am not wealthy, far from it so I am not arguing for the sake of taking the opposite opinion, but I just think documentaries need to be unbiased. I had referred to Daniel Kahneman's new book Thinking, Fast and Slow. If you have not yet read it I would highly encourage you to get that book into your reading list. He addresses this issue, he says there is a huge difference in income between people because some people care more about having a high income vs those who do not. I am not saying it is a good thing, what is bad is lack of opportunities for those who want to climb the ladder of wealth, if for whatever reason that does not manifest itself then we have social unrest. I believe the opportunities are always there, all the post that I have written about entrepreneurs is geared towards that, I fundamentally believe everybody can do anything they set their mind to. Your focus determines your reality, if we focus on all the unfairness in the world then we feel miserable and depressed, however if one looks at all the opportunities that exist and all the problems that still need to be solved, then one gets a sense of purpose. I have discovered my purpose, I want to empower entrepreneurs to achieve their highest goals. Been doing that in whatever way I can. So if you are an entrepreneur or want to be one, contact me. I am always available to meet entrepreneurs.

Related articles

• Who runs your life? (workingwithact.com)
• Thinking, Fast and Slow by Daniel Kahneman (booktopia.com.au)
• The Wealth Gap - Inequality in Numbers (bbc.co.uk)
• Wealth Gap Widening Between Lawmakers and Constituents (theroot.com)

My first academic paper - Can Power Law help us avoid high impact tail events?

As I wrote about previously, I have been accepted into the PhD program in Economics in University of Iceland. The first paper that I wrote is complete and has been accepted to be published as part of the University of Iceland's annual journal. In addition to that I will be giving a talk about the paper on October 30, here is the program details. Here is the link to paper:

Can Power Law help us avoid high impact tail events?

Abstract:

Some observable data related to social sciences can be described using the power law distribution. Can we understand the impact of tail events better if we used the power law distribution instead of the typical Gaussian 'Normal' distribution? The purpose of this paper is to investigate this premise in the context of the Icelandic economy and present the findings.

"The traditional Gaussian way of looking at the world begins by focusing on the ordinary, and then deals with exceptions or so-called outliers as ancillaries. But there is also a second way, which takes the exceptional as a starting point and deals with the ordinary in a subordinate manner - simply because that 'ordinary' is less consequential"
                   - Nassim Nicholas Taleb and Benoit Mandelbrot

Although power law distributions do not have the predictive power of a Gaussian Normal distribution, can Power Law help us avoid the high impact Tail Events?

Its official - accepted into the PhD program in University of Iceland

So it is official now! I have been accepted into the PhD program in Economics in University of Iceland. My advisor is Dr.Helgi Tomasson. I need to ask him to update his profile in English. Anyway, we have been working on a paper to analyze the Icelandic Krona. I have written about it in my previous posts. We are simulating a Diffusion Process to model the white noise and map that to the empirical data of the ISK-USD exchange rate. This would be our first stab at this approach... as part of my thesis I will be using more sophisticated methods and generalize the conclusions to influence policy choices in Iceland.

Policy implications if we use Power Law distribution

I have been working on my first paper with the title "Can Power Law help us avoid highly improbable tail events?" the premise of the argument is that if some economic variables fall in the Power Law distribution then policies associated with those economic variables need to be handled differently. For example, I am taking the problem of the Icelandic Krona, I have written about the Icelandic Krona before and I am convinced that it follows a Power Law distribution.

If we know that ISK follows a power law distribution and future fluctuations in ISK are going to follow the Power Law distribution should the Icelandic state still use the currency in its current form? or should it switch over to a more stable currency say the Euro? this debate is on-going in Iceland and I am afraid people are viewing this decision with their political lense and not the economic lense.

Just a simple switch in the probability distribution of the ISK has some serious policy implications. Lets do a simple thought experiment: The Financial Supervisory Authority of Iceland used a 20% devaluation of the ISK as a basis to stress test the banks in Iceland, why did they choose 20% because they thought ISK followed a Gaussian Normal Distribution and a 20% devaluation is a 2 or 3 sigma event or a very low probability of occurance, however if we change the distribution to Power Law a 20% devaluation of the ISK has a much higher probability therefore they would have chosen a much higher deviation for the stress test say 50% this would have shown the true color of the Icelandic banks capital adequacy and vulnerability to wholesale funding. The question is if the stress test had been done in 2006 when Iceland had a mini crisis, the FSA could have put a stop to the aggressive borrowing by the Icelandic banks which in turn would have reduced the leverage of the companies in Iceland and the citizens.

So choosing the right probability distribution matters! atleast that is the basis for my PhD thesis lets hope the thesis could influence some policy choices.

Icelandic Krona vs US Dollar - A Power Law Distribution

Image via Wikipedia

The Icelandic Krona currency exchange index follows the Power Law, it can be seen in the most rudimentary of analysis...

Here is the analysis of ISK-USD exchange rate data for however long I could get, a simple histogram shows visually that the exchange rate is distributed by a power law. In addition, I was able to do a Log plot of the observations and it clearly follows a path that should give us

enough indication that the ISK exchange does not follow a Normal "Bell" curve distribution.

However, last week I was talking to a currency trader and he told me that before the crash of the Icelandic Krona last year, they calculated the proabability of ISK crashing and they found it to be a 8 sigma (read highly unlikely! or A Black Swan) event... the fact that it happened proves atleast to me that the methods and theory used to analyze the ISK is not correct. I am writing a paper with Dr.Helgi Tomasson with University of Iceland with the title "Can Power Law help us avoid the highly improbable tail events?" hopefully we will be able to answer the above question.

Related articles by Zemanta

• Eve Online offers lessons for the financial crisis (telegraph.co.uk)