Broken Symmetry

Who owns that patent? Has it been licensed?

Non-specialists may be surprised to learn that the answers to these basis questions in many instances remain indeterminate. Susan L. Glovsky provides an excellent post on PatentlyO on the subject:

The time has come to enact national legislation that provides clear record title to patent applications and patents. The value of patents is too great to continue with the present system. Moreover, patents are a federal right and should be addressed at a federal level. A national system would harmonize U.S. law with those of other countries, which generally have a national system for recordation of patent rights. Recently, the Patent Office proposed rules that would require disclosure of any assignee of patent rights. But these rules simply do not go far enough. Legislation is necessary in order to provide a comprehensive internationally recognized system that assures the recordation of patent title, security interests, and other encumbrances through filings solely in the Patent Office.

See also Patent Reform through the Creation of Economic Facts. A few years ago, I suggested here that an econometric analysis of patented features that focused on frequency-averaged measures of sales and manufacturing might be useful as a mechanism for valuing patents. That is way too complicated to be workable right now at least. But with reliable information about ownership and prior licensing of a portfolio available, comparable-based patent valuations would become more feasible for the many market participants who do not come with their own private database of such information.

Harnessing the Power of Feedback Loops

From Thomas Goetz at Wired:

The basic premise is simple. Provide people with information about their actions in real time (or something close to it), then give them an opportunity to change those actions, pushing them toward better behaviors. Action, information, reaction. It’s the operating principle behind a home thermostat, which fires the furnace to maintain a specific temperature, or the consumption display in a Toyota Prius, which tends to turn drivers into so-called hypermilers trying to wring every last mile from the gas tank. But the simplicity of feedback loops is deceptive.

Via Farnam Street.

I hadn't heard about Bandura's work in the 1960s, although I find that he was cited in Csikszentmihalyi's Flow in passing. It was unclear from the citation how much of an influence he was on C.'s own theory. Although C. does not emphasize flow as a feedback loop, from a systemic perspective that is pretty much what one observes when people are in a state of flow. The topologies get complicated since many experiences of flow involve other people. Think of a jazz quartet and its audience -- live and for its recordings. Or of Congress and the stock market.

I like how this dovetails neatly in with Dweck's mindset theory also. The fixed mindset interrupts any feedback loop, and hence disrupts learning. But too little self-criticism and introspection and there is no feedback.

One of C.'s observations in Creativity is that creative individuals often lose a parent early in life. It seems to me that one would have to develop a capacity for self-criticism earlier on in that instance. Perhaps such individuals have a better capacity for self-generating feedback than do the rest of us, who are looking to others -- especially family -- for queues as to whether we are doing well at this ambiguous assignment that is our existence.

Gawande on Systems Theory

From a commencement address:

Medical performance tends to follow a bell curve, with a wide gap between the best and the worst results for a given condition, depending on where people go for care. The costs follow a bell curve, as well, varying for similar patients by thirty to fifty per cent. But the interesting thing is: the curves do not match. The places that get the best results are not the most expensive places. Indeed, many are among the least expensive. This means there is hope—for if the best results required the highest costs, then rationing care would be the only choice. Instead, however, we can look to the top performers—the positive deviants—to understand how to provide what society most needs: better care at lower cost. And the pattern seems to be that the places that function most like a system are most successful.

The observations apply to lawyers and law.

Patent Reform through the Creation of Economic Facts

This piece by Hernando de Soto on the "Destruction of Economic Facts" caught my eye not long ago:

During the second half of the 19th century, the world's biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. If you wanted to know who owned land or owed a debt, it was a fact recorded locally—and most likely shielded from outsiders. At the same time, the world was expanding. Travel between cities and countries became more common and global trade increased. The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

The patent system is an example of one of these "public memory systems," which has facilitated transactions in intangible (exclulsionary) rights.

The focus of de Soto's attention is on the financial services industry, and in particular on how innovation in financial services has destabilized and undermined the consistence of public memory systems. On his view, this is a root cause of our ongoing recession:

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don't know and can't prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

Go ahead and click through to read the whole piece. His is profound insight. Note one earlier link on BS to a similarly thought provoking piece by de Soto.

What about the patent system? Has the patent system undergone a similar destruction of economic facts over the last twenty years?

Not really. More the opposite seems to be true, in fact. At least since the Federal Circuit was established, and especially lately since patent office records worldwide are now available online, the patent system has never functioned more effectively.

And yet, even with all of these improvements, it seems to me that the patent system has not yet been able to provide enough "economic facts" for the market to transition from litigation to transactional norms in handling the allocation and reallocation of patent rights. In effect, there has been no destruction of economic facts within the patent system because the patent system never created economic facts to begin with.

The production of "economic facts" in the sense that de Soto describes should be the ultimate goal of any patent reform. We have seen many incremental and even discontinuous leaps in that direction over the past few decades. But we are not there yet.

Problems with ascertaining title and encumbrances on title are foundational to any economic facts about patents. The systems for handling these economic facts with respect to real property and even copyright are more highly developed than they are for patents, even though title goes to the very root of how patents are valued now because problems with standing can result in zero returns to enforcement.

All of the issues that have been addressed lately, including Therasense yesterday, will help move us incrementally closer to a world in which patent rights transact without litigation. But a focus on the creation and maintenance of a "public memory system" -- a source of "economic facts" about patent valuation -- will get us there quicker.

At the end of the day, valuing patent portfolios is not more complex than the valuation of collateralized debt obligations, currency derivatives, or interest rate swaps. The difference is that those intangibles have (or at least had) a foundation of "economic facts" to facilitate transactions.

Balance-Sheet Networks

From Robert M. May, Simon A. Levin and George Sugihara:

although the study of payment flows is of immediate interest to central bankers, it may miss an essential aspect of systemic risk, namely the ‘contagion dynamics’ of public perceptions and asset valuation associated with the interaction of balance-sheets (the mutual financial obligations and exposures that link companies). For example, how contagious are inflated valuations of Internet stocks? Are there hidden, mutually dependent risks associated with such high valuations? It could be useful to examine the dynamic network of balance-sheets, and if possible to quantify the inter active effects of valuations, credit policies, hedging and so on among financial institutions, especially investment banks. Such balance-sheet networks could be helpful in studying the effects of asset- pricing bubbles, credit crises and the poorly understood but potentially worrying effects of the current widespread use of derivatives (futures and options) and dynamic hedging by investment banks to manage risk on the fly.

Just discovered Sugihara through a link in an interesting post on O'Reilly Radar.

Bookstaber Smooths Out Complexity

Interesting as usual:

Finance is often regarded as a game, but by the conventional von Neumann definition it is not. Granted it is ostensibly circumscribed by the rules of law, but so is war circumscribed by the rules of the Geneva Convention (at least conventional war). Adversaries at war do not have to play by the same rules or even play the same game. Indeed, what more is the strategy of war than playing the game that works to your advantage, and doing so while keeping your adversary unaware of that game? What more is the charge of “asymmetric warfare” than having an adversary that is not playing by your rules or your game – and is winning the war in the process?

FTC issues Report on the Patent System

From the FTC press release:

A new Federal Trade Commission report recommends improvements to two areas of patent law policies affecting how well a patent gives notice to the public of what technology is protected and remedies for patent infringement. The report, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition, emphasizes that the patent system and competition policy share the goal of promoting innovation that benefits consumers.

Available here. My letter comment posted here was cited in a few places in the report. In general, I like what I'm reading. I'm disappointed that the report wasn't issued sooner given the imminent passage of reform legislation. Kudos to the authors for completing such a formidable task.

The Future of Technology Transfer in the United States

-- hanging in the balance. From yesterday's transcript in Stanford v. Roche:

JUSTICE BREYER: My point is that it's somewhat remarkable because of this new statute, now that happens to only to inventions in those areas that are inventions of the contractor who, by the way, invents nothing. Human beings invent things, not entities like universities.

MR. FLEMING: That's quite so.

Based on the transcript, I am hopeful that the Supreme Court gets what is so important about this case. So much hangs in the balance.

For a good background on the case, see this note by Ronald Mann on the Scotusblog.

Pam Karlan taught me Constitutional Law at Stanford Law School. I spent an uncomfortable amount of time arguing with her in front of the class. I have the highest respect for her advocacy, but evenhandedness was not one of her strengths, at least when I took her class.

Move Bankrupty-Remote Entities Back on the Balance Sheet?

Fascinating interview of Gary Gorton re: the gory details of the credit crisis in late 2008, which continues to present:

Securitization basically allows the traditional banks to finance their loans by selling them rather than holding them on balance sheet, and the source of value here is avoidance of bankruptcy costs. A firm that originates loans does so by lending money to any number of borrowers—both corporate and consumer—and it then selects a large portfolio of its loans to sell, in a very specific legal sense, to a “special purpose vehicle,” an entity it creates for that very precise reason. The main advantage of doing so—of establishing the SPV and legally selling the loans to it—is that this arrangement circumvents the costs associated with bankruptcy.

Via Alex Tabarrok at MR.

I understand why Gorton is in favor of innovation in revenue generation, and I even understand why he considers shadow banking an inevitable next step given the amount of institutional money moving around now. I even understand why there need to be bankruptcy remote entities -- there should be a spread of higher and lower-risk vehicles.

What I don't understand is how or why these special purpose vehicles get to stay off the balance sheet.

High-Frequency Trading Fact of the Day

From an interesting paper on the flash crash by Easley, Mailoc Lopez de Prado, and O'Hara:

Since 2009 high-frequency trading firms, which represent approximately 2% of the nearly 20,000 trading firms operating in the U.S. markets, have accounted for over 73% of all U.S. equity trading volume.

Via Computational Legal Studies

Robert Martin on University-Industry Relations

From Inside Higher Ed:

Rather than a commercialization model to explain higher education’s woes, a better analogy is a political campaign, where the focus is to raise all the money you can and spend all the money you raise to create an image that may or may not accurately reflect reality. The conflict of values is between public relations expediency and the academy’s traditional regard for quiet substance. As faculty, we acquiesced in this takeover because it was in our financial interest to comply; more fund-raising meant more money for salaries and perks.

...

An individual faculty member’s ability to influence governance is dependent on his or her academic reputation and alternative employment opportunities. Established scholars have alternatives; they can vote with their feet. Established teachers have little opportunity to vote with their feet.

Very interesting and candid take. [This Robert Martin is of no relation. -MFM]

Networks of Economic Market Interdependence and Systemic Risk

by Dion Harmon, Blake Stacey, Yavni Bar-Yam, and Yaneer Bar-Yam:

The dynamic network of relationships among corporations underlies cascading economic failures including the current economic crisis, and can be inferred from correlations in market value fluctuations. We analyze the time dependence of the network of correlations to reveal the changing relationships among the financial, technology, and basic materials sectors with rising and falling markets and resource constraints. The financial sector links otherwise weakly coupled economic sectors, particularly during economic declines. Such links increase economic risk and the extent of cascading failures. Our results suggest that firewalls between financial services for different sectors would reduce systemic risk without hampering economic growth.

Via Brandon Keim at Wired.

Tim O'Reilly's Hymn for Open Government

A bit more poetic than usual, even for him:

There is a greater and greater gap between the systems used to manage complexity in the private sector and the same systems in the public sector. An average citizen carrying an iPhone has access to real-time "situational awareness" that outstrips military systems costing millions of dollars. From WalMart to Wall Street, from Google to the next generation of personal robotics, intelligent algorithms process massive amounts of data in real time, and respond automatically in close to real time. Meanwhile, government regulators too often rely on paper-based processes and reports that trail events by months, if not years.

...

The idea of building a platform, rather than building all of the end user applications yourself, turns out to be surprisingly relevant for government, allowing the private sector to build applications that the government might never have imagined, or been able to budget for if they did. As governments open their data and services to developers, we're seeing an explosion of innovation, and the development of new citizen services by the citizens themselves.

Kudos to Kappos

I'm an unabashed fan of this:

So imagine the courage and leadership necessary for David Kappos and his team to look at the revenue from selling these products, and to say ‘No, that’s wrong. The President's Open Government Directive makes it clear that these should be public goods, available without fee or favor; bundle them into the bulk downloads’.

Via O'Reilly Radar

Martin Wolf on the Declaration of Trade War with China

From today's FT:

Has the time for a currency war with China arrived? The answer looks increasingly to be yes. The politics and economics of an assault on Chinese exchange rate policy are increasingly convincing. The idea is, of course, deeply disturbing. But I no longer believe there is an alternative.

We have to address four questions. Is China a “currency manipulator”? If it is, does it matter? What might China reasonably be asked to do? Finally, can other countries shift China’s policies, with limited collateral damage?

Very good analysis of the options for recourse. What a mess.

Small Steps Toward a Time-Series Graph of the Balance Sheet

From FlowingData:

In an effort to make Canadian government expense data more accessible, FFunction designed the Expense Visualizer. A slider on top lets you filter by time, and small graphs show spending by different departments. Rearrange panels as you wish, and select among several scaling options as absolute values or relative. Bookmark your custom views or send them to others.

Ask and Ye Shall Receive

Over two years ago, I put up a post called Cost Accounting and Lean Accounting as a Fourier Pair. That post has turned out to be one of the most popular on this blog. The point of the post (which is short -- go read it) is that the way accounting information is collected and reported through financial statements is not optimal. The post concludes with the following recommendation:

Financial statements should report average turnover rates for each balance sheet account.

And on Friday, the SEC unanimously passed a rule requiring something even better:

Under the proposed rule, all companies would have to disclose not only how much debt they have at the end of the quarter but also average and maximum figures during the quarter.

Technically, a turnover rate would give you the same information. But the average and maximum figures are easier to understand, and hence probably harder to game.

I like to think that somebody involved with the proposal -- directly or indirectly -- might have seen or heard about the post. Either way, I'm very happy. I think this is one of the most significant advances in accounting rules since the invention of double-entry bookkeeping.

SEC Demands More Real-Time Balance Sheet Data

It's about @#$@# time! WSJ reports: (see their graphic especially)

The agency's staff has been considering whether banks should be required to provide more frequent disclosure of their average borrowings, which would give a better picture of their debt throughout a quarterly period than do period-end figures.

See related posts: (by Nyquist-Shannon, quarterly balance sheet sampling permits only semiannual and longer term trends to be spotted)

What should the FTC and SEC do first to help consumers?

Great Suggestions for Financial Reform (from Lloyd Blankfein)

Why Accounting Information Should Be Reported in Real Time

Schapiro's remarks are still ringing in my ears:

"Rather than relying on carefully staged quarterly and annual snapshots, investors and creditors should have access to a complete real-life picture of a company's financial situation," the senators wrote to SEC Chairman Mary Schapiro, citing the Journal articles, among other things.

PACER Fee Diversion

Fee diversion isn't a problem only for the PTO:

The other issue with PACER -- and it's hard to ignore -- is cost. The reason why the courts charge money for these public domain documents is that Congress authorized them to. In the 2002 E-Government Act, Congress essentially said that they"re allowed to charge you their fees to recoup the cost of running this public access system, only to the extent necessary to recoup these costs. The courts determined at the time that that should be $0.07 a page and eventually upped that per page access rate to $0.08 per page. But if you look at their budgeting documents, we've found that they actually charge a lot more than the expense necessary to provide these documents. My colleague, Steve Schultze, has done a ton of work digging into the federal judiciary budget. We found that about $21 million every year looks like it's being spent directly on running the PACER systems. That includes networking, running servers, or directly to providing public access through PACER. Their revenue in 2010 is projected to be -- I believe -- $94 million. So there"s a $73 million difference this year in the amount of money that they"re collecting versus the amount of money that they're spending on public access. That $73 million difference is thrown into this thing called the Judiciary Information Technology Fund or the JIT Fund.

The JIT Fund is being used on other court technology projects, like flat screen monitors, telecommunications, embeddable microphones in court benches. I'm not opposed to these projects being funded and more technologies in courtrooms, but these projects are being funded at the expense of public access to the law, including the ability for researchers and others interested in our judicial process to access and study how the judicial process works, which I think is highly detrimental to society.

Via O'Reilly Radar blog.

When Choice Architects Turn Evil?

From the Food Educate blog:

One of the most important pieces of information in a nutrition label is the serving size. Many people look at the calorie count, and are happy to see low numbers. But what they don’t notice is that they are consuming twice or more than the stated serving size. Which means twice the calories, twice the fat and sodium, etc.. (but on the bright side – also twice the minerals & vitamins.

See earlier post on choice architecture here.

Inflation and Commercial Research and Development

Guess when these words were written:

The Democrats may or may not be less concerned with a balanced federal budget than the Republicans.... [T]he responsible Republican leadership has said again and again that if business should really turn down they would not hesitate to lower taxes or make whatever deficit-producing moves were necessary to restore prosperity and eliminate unemployment....

Even if this change in policy had not become generally accepted, certain other changes have occurred that would produce much the same results, though possibly not so quickly.... [Historically], much of the federal revenue came from customs duties and similar excise sources. These fluctuated moderately with the level of prosperity but as a whole were fairly stable. Today, in contrast, 80 per cent of the federal revenue comes from corporate and personal income taxes. This means that any sharp decline in the general level of business causes a corresponding decline in revenue.

Meanwhile, various devices such as farm price supports and unemployment compensation have been imbedded in the laws. At just the time that a business decline would be greatly reducing the federal government's income, expenditures in these fields made mandatory by legislation would cause governmental expenses to mount sharply. Add to this the definite intention of reversing any unfavorable business trend by cutting taxes, building more public works, and lending money to various hard-pressed business groups, and it becomes increasingly plain that if a real depression were to occur the federal deficit would easily run at a rate of...

Price Discrimination, Airline Edition

The airline industry has some unusual characteristics in terms of competition, a point which Charlie Munger has pointed out in the past:

Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.

If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.

Thus I was pleased recently when I checked in for a flight and found that I could pay extra for more leg room, and had to pay for each checked bag. Yes, pleased. "Finally!" I thought, "The airlines are finding new product and service dimensions along which to compete. Maybe we'll see higher quality of service if more creative capital finds its way into the market."

But a news item today provided a new perspective on the challenges faced by managers and owners in the airline industry:

U.S. House Democrats criticized airlines Wednesday for increasingly charging for checked baggage, seat selection and other services, and indicated they are considering legislation to tax the revenue collected from the fees.

Back to the sardine tin!

Martin Wolf on the Perils of the Land Cycle

Martin Wolf in the Financial Times (free registration required):

I am a land speculator – a mini-aristocrat in a land where private appropriation of the fruits of others’ efforts has long been a prime route to wealth. This appropriation of the rise in the value of land is not just unfair: what have I done to deserve this increase in my wealth? It has obviously dire consequences.

The problem is compounded in California by the redistributive transfer from individuals to corporations that is Proposition 13. The other day, a puzzling question came up: Why haven't voters in California managed at least to repeal Prop. 13 to the extent it benefits for-profit corporations?

Andy Grove on the Human Capital Needed for Scaling

This is easily the most insightful analysis of the most important issue the United States now faces that I have read this month:

Since the early days of Silicon Valley, the money invested in companies has increased dramatically, only to produce fewer jobs. Simply put, the U.S. has become wildly inefficient at creating American tech jobs. We may be less aware of this growing inefficiency, however, because our history of creating jobs over the past few decades has been spectacular -- masking our greater and greater spending to create each position.

My hope is that the loosening of the currency peg will help reverse some of these trends over the coming decades.

Update for June 28, 2010

I have been indisposed to blogging for the past 10 days, and may be for another 10. In the mean time, four very important sets of opinions were handed down by the Roberts court today.

Download opinions here.