Adeo Ressi, a seasoned entrepreneur and founder of theFunded.com, spoke recently to a group of students and CEOs on campus about startup fundraising in the current climate:

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or download the MP3 here.

There was something bothering me a few weeks ago about an argument I remembered from James Surowiecki’s book, the Wisdom of the Crowds, which is surprising as I had read it about two years ago.  It regards the passage below, from page 8:

“What this means is that the stock market had, almost immediately, labeled Morton Thiokol as the company that was responsible for the Challenger disaster… the steep decline in Thiokol’s stock price - especially compared with the slight declines in the stock prices of its competitors - was an unmistakable sign that the investors believed Thiokol was responsible… on the day of the disaster there were no public comments singling out Thiokol as the guilty party… regardless, the market was right… six months after the explosion… Thiokol was held liable for the accident.”

First off, the word “competitors” is not accurate - because the correct comparison to be made is to other companies who manufactured parts for the space shuttle, not companies who were competing with Thiokol but had nothing to do with the spacecraft; but no worries, the paper he cites is a-OK in this regard.

The claim being made is that because the stock price of Thiokol went down further than the other manufacturers, the market must have “known” they were guilty.  Given the nature of insider trading, this is a possibility.  But can you make such a claim from the evidence?

Let’s look at the data, then: a few of the large companies that built components for the space shuttle included Lockheed, Martin Marietta, and Rockwell International.  Here are graphs of the stock prices, and traded volumes, of their ticker symbols (LK, ML, and ROK, respectively, along with Thiokol’s MTI) the month of the disaster (thanks to my friend Salman for digging up some of the historical data for me):

while all 4 stocks have a jump in volume on the 28th (the day of the disaster), Thiokol’s certainly does dip lower than the rest.  According to the paper written by professors Mulherin and Maloney, Thiokol dipped 12% compared to 3% for the others.  They mention that the “data show no evidence of trading by insiders on January 28, 1986,” yet go on to make the claim that there was “no ambiguity that the stock market quickly isolated Morton Thiokol as the cause of the accident.”  Moreover, “the fact that market liquidity was available to maintain a market in Lockheed, Martin Marietta, and Rockwell while the market for Morton Thiokol dried up suggests that the stock market discerned the guilty party within minutes of the announcement of the crash” (an older draft of the paper used “is evidence that” in place of “suggests that”).

Even if it was statistically significant, I’d say the evidence is still inconclusive, simply because you can’t rely on correlation to be anything more robust than an indicator.  Perhaps I should proffer an alternative explanation for the larger fall in Thiokol’s stock price, then?  How about, Morton Thiokol was a much smaller, less-diversified company than any of the other three, and had the most to lose from the space shuttle disaster?  If I could get my hands on some of the annual reports to see what percentage of their revenues come from NASA contracts…

Nevertheless, I don’t think the argument holds water.  But I do love it when people anthropomorphize the markets

the Stock Market Reaction to the Challenger Crash

a great analogy from the chairman of Oaktree Capital got me thinking about forest fires:

“the Los Angeles Times kicked off a major series on forest fires.  Here’s part of what it said:

The government’s long campaign to tame wildfires has, perversely, made the problem worse. . . .  By stamping out most wildland blazes as quickly as possible, the Forest Service has stymied nature’s housekeeping – the frequent, well-behaved fires that once cleaned up the pine forests of the Sierra Nevada and the Southwest.  Now, woodlands are tangled with thick growth and dead branches.  When fires break out, they often explode.

Sound familiar?  Clearly, the analogy between financial crises and forest fires is solid.  And I told Tom that just as the Fed’s growing tendency to solve every problem led people to take greater risks, the policy of fighting fires early also created moral hazard by encouraging people to build homes further into the forest.  It fell to the community to keep those unwisely built structures safe, just as the government now feels it has to rescue subprime borrowers and financial institutions.

Capitalism can produce great results, but participants have to be allowed to both win and lose.”

which reminded me not only of risk homeostasis, but a fascinating portion of the book Young Men and Fire, about the 1949 Mann Gulch fire which claimed the lives of 13 smoke jumpers, where he describes what the other fire fighters saw their leader doing as they tried to escape being engulfed by flames:

“I saw him bend over and light a fire with a match.  With the fire almost on our back, what the hell is the boss doing lightning another fire in front of us?  We thought he must have gone nuts… what is this dumb bastard doing?… saw the foreman enter his own fire and lie down in its hot ashes to let the main fire pass over him… Dodge instantly invented what was to become known as the ‘escape fire‘ by lighting a batch of bunch grass with a gofer match… in so doing, he started an argument that would remain hot long after the fire.

Traditionally set by plains Indians to escape from grass fires and that pioneers on the plains picked up invention from Indians - start one in the immediate vicinity of person or company in peril… at first small and harmless, the fire will soon burn over an area large enough to form a safe asylum, and when the sweeping cohorts of flame came bearing down upon the apparently doomed company, the mighty line would part as if by pre-ararngement and pass harmlessly by on either side.

His invention, taking as much guts as logic, suffered the immediate fate of most other inventions - it was thought to be crazy by those who first saw it… who kept going, most to their deaths.”

someone filmed a pit-stop with an infrared camera; from the ’streaks’ the tires leave behind as the driver pulls away, I’m guessing they’re either pre-heated, or weren’t replaced (which would be unusual)…

from the 2008 race in Turkey, courtesy F1.com
they don’t show races on the tele here (not that I have one), but you can find them a few days later here.

not a variation of “the man in the arena,” but a term from the world of cryptography.  It’s the technique British magician Derren Brown used while playing 9 others in games of chess, to come out on top.  This is the video of the performance:

Not that’s impossible to do so without trickery - this is an old picture of the late Bobby Fischer:

the example I remember of the man-in-the-middle attack is that of the South African air force.  Each airplane has a transponder on it that’s used to identify-friend-or-foe - yet an enemy side can impersonate them by intercepting the signal, relaying it to another South African station, recording their response, and replaying it to the airplane.