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Externalities Calculating the Hidden Costs of Products.html
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Externalities Calculating the Hidden Costs of Products.html
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<html>
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<p>![[Naval-Ep51.mp3]]</p>
<p>
Externalities let you account for the true cost of products by including
hidden costs
</p>
<p>
Nivi: What’s a mispriced externality? You mentioned it on a previous
episode.
</p>
<p>
Naval: An externality is where there’s an additional cost imposed by
whatever product is being produced or consumed, that’s not accounted for
in the price of the product. This can happen for many reasons. Sometimes
you can fix it by putting the cost back into the price.
</p>
<p>
Some of the most ardent critics of capitalism argue it’s destroying the
environment. If you throw away capitalism because it’s destroying the
environment, then guess what—we’re all headed back to pre-industrial
times. That’s not going to be a good thing.
</p>
<p>
Pricing externalities properly is more effective than feel-good measures
</p>
<p>
Because the environment is finite and precious, we have to price it
properly and fold that back into the cost of products and services.
</p>
<p>
If people are wasting water, releasing hydrocarbons into the atmosphere or
polluting in other ways, society should charge them what it costs to clean
up the pollution and return the environment to a pristine state. Perhaps
that price has to be very, very, very high.
</p>
<p>
If you raise the price high enough, you’ll knock out pollution. That’s
much better than feel-good measures like banning plastic bags or
restricting showers during a drought.
</p>
<p>Properly pricing externalities can save resources in a tremendous way</p>
<p>
California likes to run declarations and ads to scare people into avoiding
showers during droughts. It would be better to raise the price of fresh
water. The average consumer might pay a few pennies more for a shower, but
the almond farmers—who consume a lot of water—will cut back; and almond
farming may move to a part of the country where water is more abundant.
</p>
<p>
Properly pricing externalities can save resources in a tremendous way.
It’s a good framework to use when you want to do things like save the
environment, rather than doing feel-good things that won’t actually amount
to anything.
</p>
<p>Bonus: Finding Time to Invest in Yourself</p>
<p>
If you have to work a “normal job,” take on accountability to build your
specific knowledge
</p>
<p>
Nivi: A common question we get: “How do I find the time to start investing
in myself? I have a job.”
</p>
<p>You have to rent your time to get started</p>
<p>
In one of the tweets from the cutting room floor, you wrote: “You will
need to rent your time to get started. This is only acceptable when you
are learning and saving. Preferably in a business where society does not
yet know how to train people and apprenticeship is the only model.”
</p>
<p>
Naval: Try to learn something that people haven’t quite figured out how to
teach yet. That can happen if you’re working in a new and quickly
expanding field. It’s also common in fields that are circumstantial—where
the details matter and it’s always moving. Investing is one of those
fields; so is entrepreneurship.
</p>
<p>
Chief of staff for a founder is one of the most coveted jobs for young
people starting out in Silicon Valley. The brightest kids will follow an
entrepreneur around and do whatever he or she needs them to do.
</p>
<p>
In many cases, the person is way overqualified. Someone with multiple
graduate degrees might be running the CEO’s laundry because that’s the
most important thing at the moment.
</p>
<p>
At the same time, that person gets to attend the most important meetings.
They are privy to all the stress and theatrics, the fundraising decks and
the innovation—knowledge that can only come from being in the room.
</p>
<p>
Coming out of college, Warren Buffett wanted to work for Benjamin Graham
to learn to be a value investor. Buffett offered to work for free, and
Graham responded, “You’re overpriced.” What that means is you have to make
sacrifices to take on an apprenticeship.
</p>
<p>Find the part of the job with the steepest learning curve</p>
<p>
If can’t learn in an apprenticeship model because you need to make money,
try to be innovative in the context of your job. Take on new challenges
and responsibilities. Find the part of the job with the steepest learning
curve.
</p>
<p>
You want to avoid repetitive drudgery—that’s just biding time until your
job is automated away.
</p>
<p>
If you’re a barista at the coffee shop, figure out how to make connections
with the customers. Figure out how to innovate the service you offer and
delight the customer. Managers, founders and owners will take notice.
</p>
<p>Develop a founder mentality</p>
<p>
The hardest thing for any founder is finding employees with a founder
mentality. This is a fancy way of saying they care enough.
</p>
<p>
People will say, “Well, I’m not the founder. I’m not being paid enough to
care.” Actually, you are: The knowledge and skills you gain by developing
a founder mentality set you up to be a founder down the line; that’s your
compensation.
</p>
<p>
You can get a lot out of almost any position. You just have to put a lot
into it.
</p>
<p>Accountability is something you can take on immediately</p>
<p>
Nivi: We’ve discussed accountability, judgment, specific knowledge and
leverage. If I’m working a “normal” job, is specific knowledge the one I
should focus on?
</p>
<p>
Naval: Judgment takes experience. It takes a lot of time to build up. You
have to put yourself in positions where you can exercise judgment. That’ll
come from taking on accountability.
</p>
<p>
Leverage is something that society gives you after you’ve demonstrated
judgment. You can get it faster by learning high-leverage skills like
coding or working with the media. These are permissionless leverage. This
is why I encourage people to learn to code or produce media, even if it’s
just nights and weekends.
</p>
<p>
So, judgment and leverage tend to come later. Accountability is something
you can take on immediately. You can say, “Hey, I’ll take charge of this
thing that nobody wants to take charge of.” When you take on
accountability, you’re also publicly putting your neck on the chopping
block—so you have to deliver.
</p>
<p>
You build specific knowledge by taking accountability for things that
other people don’t know how to do. Perhaps they’re things you enjoy doing
or are naturally inclined towards doing anyway.
</p>
<p>
If you work in a factory, the hardest thing may be raising capital to keep
the factory running. Maybe that’s what the owner is always stressed out
about.
</p>
<p>
You might notice this and think, “I’m good at balancing my checkbook and
have a good head for numbers; but I haven’t raised money before.” You
offer to help and become the owner’s sidekick solving their fundraising
problem. If you have a natural aptitude and take on accountability, you
can put yourself in a position to learn quickly. Before long, you’ll
become the heir apparent.
</p>
<p>
Early on, find things that interest you and allow you to take on
accountability. Don’t worry about short-term compensation. Compensation
comes when you’re tired of waiting for it and have given up on it. This is
the way the whole system works.
</p>
<p>
If you take on accountability and solve problems on the edge of knowledge
that others can’t solve, people will line up behind you. The leverage will
come.
</p>
<p>Specific knowledge can be timely or timeless</p>
<p>There are two forms of specific knowledge: timely and timeless.</p>
<p>
If you become a world-class expert in machine learning just as it takes
off and you got there through genuine intellectual interest, you’re going
to do really well. But 20 years from now, machine learning may be second
hat; the world may have moved on to something else. That’s timely
knowledge.
</p>
<p>
If you’re good at persuading people, it’s probably a skill you picked up
early on in life. It’s always going to apply, because persuading people is
always going to be valuable. That’s timeless knowledge.
</p>
<p>
Now, persuasion is a generic skill—it’s probably not enough to build a
career on. You need to combine it in a skill stack, as Scott Adams writes.
You might combine persuasion with accounting and an understanding of
semiconductor production lines. Now you can become the best semiconductor
salesperson and, later on, the best semiconductor company CEO.
</p>
<p>
Timeless specific knowledge usually can’t be taught, and it sticks with
you forever. Timely specific knowledge comes and goes; but it tends to
have a fairly long shelf life.
</p>
<p>
Technology is a good place to find those timely skills sets. If you can
bring in a more generic specialized knowledge skill set from the outside,
then you’ve got gold.
</p>
<p>Technology is an intellectual frontier for gaining specific knowledge</p>
<p>
Nivi: There were a couple other tweets from the cutting-room floor on this
topic. The first: “The technology industry is a great place to acquire
specific knowledge. The frontier is always moving forward. If you are
genuinely intellectually curious, you will acquire the knowledge ahead of
others.”
</p>
<p>
Naval: Danny Hillis famously said technology is everything that doesn’t
work yet. Technology is around us everywhere. The spoon was technology
once; fire was technology once. When we figured out how to make them work,
they disappeared in the background and became part of our everyday lives.
</p>
<p>
Technology is, by definition, the intellectual frontier. It’s taking
things from science and culture that we have not figured out how to mass
produce or create efficiently and figuring out how to commercialize it and
make it available to everybody.
</p>
<p>
Technology will always be a great field where you can pick up specific
knowledge that is valuable to society.
</p>
<p>If you don’t have accountability, do something different</p>
<p>
Nivi: Here’s another tweet from the cutting-room floor related to
accountability: “Companies don’t know how to measure outputs, so they
measure inputs instead. Work in a way that your outputs are visible and
measurable. If you don’t have accountability, do something different.”
</p>
<p>
Naval: The entire structure of rewarding people comes from the
agricultural and industrial ages, when inputs and outputs matched up
closely. The amount of hours you put into doing something was a reliable
proxy for what kind of output you’d get.
</p>
<p>
Today, it’s extremely nonlinear. One good investment decision can make a
company $10 million or $100 million. One good product feature can be the
difference between product-market fit and complete failure.
</p>
<p>
As a result, judgment and accountability matter much more. Often the best
engineers aren’t the hardest workers. Sometimes they don’t work very hard
at all, but they dependably ship that one critical product at just the
right time. It’s similar to the salesperson who closes the huge deal that
makes the company’s numbers for the quarter.
</p>
<p>
People need to be able to tell what role you had in the company’s success.
That doesn’t mean stomping all over your team—people are extremely
sensitive to others taking too much credit. You always want to be giving
out credit. Smart people will know who was responsible.
</p>
<p>
Some jobs are too removed from the customer for this type of
accountability. You’re just a cog in a machine.
</p>
<p>
Consulting is a good example. As a consultant, your ideas are delivered
through someone else within the organization. You may not have visibility
to the top people; you may be hidden behind a screen. That’s a trade-off
you’re making in exchange for your independence.
</p>
<p>You’ll develop thick-skin if you take on accountability</p>
<p>
When you have accountability, you get a lot more credit when things go
right. Of course, the downside is you get hurt a lot more when things go
wrong. When you stick your neck out, you have to be willing to be blamed,
sacrificed and even attacked.
</p>
<p>
If you’re the kind of person who thrives in a high-accountability
environment, you’re going to end up thick-skinned over time. You’re going
to get hurt a lot. People are going to attack you if you fail.
</p>
<p>Scale your specific knowledge with apprentices</p>
<p>
Nivi: Once you get some specific knowledge, you can scale it by training
your own apprentices and outsourcing tasks to them.
</p>
<p>
Naval: For example, I made good investments and figured out the venture
business. I could have kept doing that and making money. Instead, I
co-founded Spearhead to train up-and-coming founders to become angels and
venture investors. We give them a checkbook to start investing.
</p>
<p>
It’s an apprenticeship model. They come to us with deals they’re looking
at, and we help them think it through. This model is more scalable than my
personal investing.
</p>
<p>Specific knowledge comes on the job, not in a classroom</p>
<p>
At Spearhead we lead classes teaching founders about investing, and we
also hold office hours to discuss specific deals they bring.
</p>
<p>
It turns out the classes and talks we lead are largely worthless. You can
give all the generic advice people need in about an hour. After that, the
advice gets so circumstantial that it essentially cancels to zero. But the
office hours are incredibly useful.
</p>
<p>
This reinforces the notion that investing is one of those skills that can
only be learned on the job. When you find a skill like that, you’re
dealing with specific knowledge.
</p>
<p>
Another good indicator of specific knowledge is when someone can’t give a
straight answer to the question: “What do you do every day?” Or you get an
answer along the lines of, “Every day is different based on what’s going
on.”
</p>
<p>
The thing is so complicated and dependent upon circumstances that it can’t
be boiled down into a textbook form.
</p>
<p>
Nivi: The mafia figured out this apprenticeship model a long time ago. The
best way to end up running one of the families was to become the driver
for the Don.
</p>
<p>
Naval: Tony Soprano was a businessman who had to enforce his own
contracts. That’s a very complicated business.
</p>
<p>This transcript has been edited for clarity.</p>
</body>
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