Investing in bubbles

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I’m reading George Dyson’s Turing’s Cathedral. The book chronicles the time between 1930 and 1960 when Alan Turing, British mathematician, launched a movement amongst a small group of thinkers that resulted in the creation of the computer. It’s fascinating, if fairly technical, and I highly recommend it. Dyson describes the founding of the Institute for Advanced Study at Princeton, which housed Kurt Godel, John Von Neumann, Freeman Dyson, and Albert Einstein. During World War II, all of the world’s most brilliant scientists were tied up in the race to build the biggest bomb. In a world before computers, this race came down to the ability to calculate differential equations and integrate over extremely large sums to estimated how certain reactions would propagate given understandings of physics and chemistry. Before the computer, “a computer” was simply “one who computes”, usually a student, or someone else who could be hired for relatively cheap. These computers would manually — with pen and paper, or with very basic calculators — work their way through these summations in groups and in shifts, often going through the night, in a race to produce the set of numbers that were needed to meet the needs of the engineers on the front lines designing weapons. There needed to be a better way to do it. And slowly, innovations in cathode ray tube technology, where you basically move an electron from one end of a vacuum tube to another, allowed for sets of signals which you could encode as binary digits, so that you could write instructions to a machine, instead of by hand. You see where this is going.

After the war, the Manhattan project and a lot of the military work slowed significantly, but these scientists kept up their momentum, in part because the funding kept coming, and in part because the spectre of the Cold War was looming, and the race to continue to produce bigger bombs carried forward. By hook or by crook, the computing was going to happen faster. And in the process, we made the leap from analog to digital, and haven’t looked back since. Before this book, I didn’t know that the computer came out of a process like this, but it makes sense.

Bill Janeway, investor and economist, speaks eloquently about how bubbles are a good thing. In his mind, a bubble is a period of significant price insensitivity around a certain type of problem, either ‘downstream’ or ‘upstream’. The upstream direction is a case like the creation of the computer, or the internet: a government is enmeshed in geopolitics that lead policymakers and politicians to believe that at all costs a certain problem must be fixed. War tends to be a good example of that. The United States had to build a better bomb. And if that meant creating a new way of crunching numbers quickly, then they would spend and deploy as many resources as necessary to ensure that outcome. The downstream direction, on the other hand, is when speculators fall in love with a space: like tulips in the Netherlands, gold at plenty of moments in time, or dot-coms in the late nineties. In these cases, private investors, with increasing (and often alarming) indifference to price, drive the value of any individual object in the ecosystem through the roof temporarily. In Janeway’s words, it took $100 billion dollars of price-insensitive investing to create Google and Amazon. And, well, he’s right. After all, innovation happens through trial, and error, and error, and error, and error. Errors are expensive; somebody needs to underwrite them.

When I heard Peter Thiel describe the types of views as to what drove technology innovation through the 20th century (and, ostensibly through history), I was almost offended by the neoconservative perspective, as it seemed silly: that wars and arms races are the reason for the computing and information eras. But maybe that thinking is not wrong, just incomplete. It’s not just wars, but any price insensitive trial and error processes. This explains why the most successful design practices encourage ‘radical brainstorming’ and a space for lots of trial and error. They are trying to create little innovation ecosystems at their desks; little Tulip manias, if you will. As an individual investor, I fear bubbles like the plague. But as a techno-optimist, and believer in innovation, I see their value.

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