Social attitudes usually reflect social conditions (not moral preferences)

It turns out that personal finance isn't so "personal."  Much of it has to do with prevailing attitudes toward financial conditions.  Bank of America CEO Kenneth Lewis recently worried in public [WSJ; behind firewall] about people who might walk away from their mortgages now their homes are worth less than their loan balance.

Calculated Risk puts up some scary numbers, which indicate the potentially seismic consequences of large-scale shifts in social attitudes. How scary?  How does TWO TRILLION strike you?

If every upside down homeowner resorted to "jingle mail" (mailing the keys to the lender), the losses for the lenders could be staggering. Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion.

Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion (far in excess of the $70 to $80 billion in losses reported so far).

There's a huge social component to personal ethics--much larger than we usually suppose.  Is walking away from your mortgage bad behavior?  Well, what if not only makes financial sense, but many people are doing it?  What if it were recommended?  Shame depends on the visibility of certain personal behavior in the eyes of a public, and there seems to be much less shame associated with cutting one's mortgage losses.  The big lesson (apart from the shame I hope the banks are feeling) is that personal character is developed in symbiosis with social conditions, not in spite of them.

A cinema whose house is always full

As promised, I'm getting around to posting my better business ideas. Yes, yes. I'm sure your breath has been bated.

INTRO
Think of your favorite movie. Now imagine the ideal environment in which to watch it. Do you see yourself alone, in your underwear, in your own bedroom, late at night, watching your favorite movie on your computer monitor? Unless you're one of those rare individuals willing to argue the artistic and cultural merits of porn, it's not likely.

The future of porn? Maybe. The future of cinema? Don't count on it.

Probably you're thinking of a dark room with a huge screen and comfortable chairs. And, almost certainly, other people. Although the advent of forums like YouTube has fomented whole new genres of minimalist movies (e.g., machinima, video how-tos, porn vlogs, and even as yet un(sound)bitten political speeches), our thirst for full-length feature films appears unslaked. And we still prefer viewing them, when possible, in the company of other viewers. As an art form, film descends from theater, and the social dimension of theater is irreducible and ineradicable. Part of the meaning of watching theater--and therefore part of the meaning of watching films--is watching them as part of group.

Viscerally, we know this is true. Funny movies are funnier when viewed in a packed cinema. Scary movies are scarier. Exciting movies are more exciting. The whole experience of watching a film is intensified and improved when the house is full.

In a sense, "audience" is a role--a role it sucks to have to play by yourself.

OPPORTUNITY
Most current thinking about about how people are going to consume movies in the future, even the freshest, can be divided into models based on how people consume live theater on the one hand and how people consume internet pornography on the other. (There are some non-stupid "innovations" in the works which try to make the most of the cinema space, but they have little to do with the movie-going experience per se.) The theater model can't seem to get past the fact that plays are performances while films are recordings of performances--that is, they're what we call media. The porn model can't seem to get past the fact that watching anything except porn by yourself isn't nearly as much fun as watching it as part of an audience.

The most important development in the movie business during the past 20 years isn't--with all due respect to Peter Jackson and his fanboys--CGI, but the megaplex:

The improved viewing experience and the ability to let consumers watch whatever movie they wanted almost whenever they wanted brought more people through the door and bulked up Hollywood's grosses.

I love this conceit--that access to 20 or 30 screens has allowed consumer to "watch whatever movie they wanted almost whenever they wanted." Whatever movie I want? Give me a break. And what about TV series, animated shorts, foreign releases, etc. etc. etc.? And rental stores? There are good reasons why they're dying out.

"Um.. Bollywood? The Thunderbirds? Fullmetal Alchemist? Le Dîner de cons? Nah, we don't got any of that. But, dude, have you seen The Transformers?"

Megaplexes offer an order of magnitude more choice than the 3-screen movie house; your average rental store (which carries some 3,000 titles according to Chris Andersen) ups the choice by two more orders of magnitude. And then Netflix and company bump that up to 60,000+ titles--another order of magnitude plus a doubling thrown in for good measure. No doubt that 30 screens offers a lot of choice, but it's still the film industry and the theater managers who decide what's on the menu. Time to break out.

THE IDEA
The challenge, I would argue, is to get The Long Tail of screenable media (i.e., movies, TV, video games, and a bunch of stuff I'm sure I'm missing) to interface elegantly with the social theater experience.

The Setting. So, imagine an urban megaplex which offers 30 screens of varying sizes--from the 300-person stadium to the 15-person black box. (I'm picking 15 as the minimum capacity because, in my experience anyways, 12 is the magic number where dinner party tips and becomes a house party.) However we manage it, our megaplex is technically capable of showing anything that's currently out on DVD on any of its screens. (I see two basic possibilities here: either (1) allow the viewers to bring their own media--you're just a screen and seat provider; or (2) go digital--maybe make ISO images of every DVD you can get your hands on, or an equivalent. I like (2) better for a variety of reasons, but (1) might be the place to start while the IP agreements get hammered out.)

Architecturally, the lobby resembles a cafe more than a cattle yard. Picture a large space subtly divided by differences in floor height, floor coloring, lighting, etc. in order to create a cluster of distinct, yet interconnected spaces, each of which feels somewhat enclosed and therefore intimate. The idea is to provide environmental level support the social dimension of consuming screenable media. Film clubs, groups of friends, and/or couples can use this space to nosh and chat before and after movies.

The Website. The website of our megaplex looks more like a social networking website than a tarted-up broadsheet for the very simply reason that it is a social networking site. The website is the platform which our megaplex uses to decide--on a rolling, ongoing basis--what it's going to show on each of its screens. Website members "vote" for a particular title and a particular time-slot by prepurchasing tickets to those titles at those times. (Credit card authorization--not charged until movie is shown.) The most popular title for any given time-slot is shown in the biggest theater, the second most popular in the second biggest screen, and so on. Titles are "locked in" 48 hours in advance in order to allow everyone to plan their schedules and casual viewers to pick what they want.

One interesting consequence of this system is that it becomes possible to distribute various screens over several different physical locations within a city. Not too many different locations, or people would get confused. But a single web system could link together a handful of physical clusters of screens into a single movie selection and viewing system, effectively allowing our megaplex to consume urban real estate much more efficiently. We can therefore offer 100 screens' worth of choice without thereby incurring a need for a gargantuan, unbroken chunk of real estate. In fact, precisely the opposite. The more geographically concentrated our demand (the more "urban"), the more screens we can offer. And further, since every theater is filled to capacity (or as close as we can get) every time, we optimize our use of square footage even further.

Show Me the Money. Our megaplex will pass profits back to those who own the rights to the media on a per-seat-sold basis rather than a per-showing basis. This has several consequences.

First, pricing for the viewer is dynamic. The more "votes" a suggested title-and-time gets, the cheaper the tickets. This displaces some of the responsibility (and risk!) of promoting a particular title-and-time onto its supporters. A film club working its way through all of Humphrey Bogart's films, for example, will not only form the core of the audience which views those films--they'll also promote those title-and-times to everyone else. Take this line of thinking to its logical conclusion, and you've got individual promoters buying out entire screens and promoting film events (say, a Star Wars-a-thon) on their own. The promoters shoulder the risk of promotion; the audience gets a full house experience; and our megaplex gets a locked-in profit on an optimized use of cinema square footage. Every title which gets shown in our megaplex has, before it shows, demonstrated that it can command such-and-such level of committed demand.

Second, pricing between our megaplex and media rights owners is negotiable on a title-by-title basis--even on a showing-by-showing basis--because our megaplex can show exactly how many seats are sold for each title. Structurally, such a system will favor older titles (whose production costs have already been either recouped or written off), niche titles (which capture focused, sustained affection), and less publicized titles (which have fewer advertising costs built into their financing model). Basically, although our megaplex is perfectly capable of competing with "normal" theaters when it comes to blockbusters, it's capable of making gold out the vast libraries of screenable media currently lying around in our culture.

And third, this system really opens up the possibilities for using a cinema-like space in creative ways. Business presentations? Naturally. Ungodly-huge-screen Super Smash Bros. Brawl parties? No problem. Anime marathons? Duh. In a way, this model is a bit like McDonald's:

The brilliance behind Harry Sonnenborne’s model [for McDonald's] was to sell real estate and not hamburgers. His suggestion was to purchase or lease the land on which all the McDonald’s restaurants were built on. Franchisees would then pay the company either a monthly rent amount or a percentage of their gross sales, whichever amount was greater.

The idea isn't to sell movies (which today's theaters can't do, so they sell outrageously priced corn syrup instead) , it's to rent square footage, facilities, and equipment to those in a position to use those resources to their utmost. Why be a lousy movie promoter or a gouging snack-food vendor when you can be a fantastic screenable media landlord? Let the watchers be the deciders, because those who decide what to show bear the risk for promoting it.

AFTERWORD
There are plenty of holes here, so please, comment away.

The myth of "passive income"

A friend of mine, JD, who used to work as a developer in New England, tells me that there's a new board game which is "sweeping the country." The game: Cashflow 101. The object of the game: become wealthy by mastering the art of investing. The game's designer (or perhaps just endorser): Robert Kiyosaki of Rich Dad, Poor Dad fame.

After reading his Yahoo! Finance column a few times, I've come to conclusion that Kiyosaki is a financial charlatan (which means that I refuse to drive traffic his way by linking to his stuff directly). In a nutshell, Kiyosaki's financial advice boils down to "Choose to be wealthy." I'm not kidding. His is the worst kind of quasi-libertarian snowjob, since if you pay for any of his motivational products or services, but don't get rich, why, it must be that you just haven't "really committed yourself" to being wealthy. If you're poor, it's your fault. You just haven't really, in your heart of hearts, chosen to be rich.

"As you can see, my heart of hearts loves poverty more than I do."

While it's true that the acquisition of wealth can be a very subtle art, it's an open secret that (in the US, at least) the most simple, most direct, and by far most common strategy for getting rich is to have wealthy parents. But this is all really an aside. What I really want to discuss is the folly underlying Kiyosaki's game and the worldview it reflects.

In Cashflow 101, each player begins with a randomly selected income-expense profile--a job and a bunch of expenses. After that,

There are two stages to the game. In the first, "the rat race", the player aims to raise his or her character's passive income level to where it exceeds the character's expenses. The winner is determined in the second stage, "the fast track". To win, a player must get his or her character to buy their "dream" or accumulate an additional $50,000 in monthly cash flow.

The whole thing revolves around this mysterious concept of passive income.

He just followed me home. Seriously. So... can I keep him?

Aaron Maxwell has written a pretty good beginner's guide to Cashflow 101, which explains that

[p]assive income is income that comes in with little or no additional effort on your part. If you have royalties from a book, income from a rental property you own, or stock that pays dividends each quarter, you have passive income.

Maxwell immediately goes on the qualify that definition:

Sometimes you'll have to do SOME work - if that rental house develops a leaky roof, you'd better have it fixed if you want to continue collecting rent! The difference is that for a "normal" job, you have to invest your time continually to keep receiving income, and if you work half as much, your income immediately goes down by half or more. With passive income, after you do some initial work up front, you have an income stream that continues with little or no time on your part to maintain it.

And there's the rub. Passive income isn't genuinely passive in the sense that it requires no effort. It's simply that compensation isn't immediately correlated to effort. Passive income doesn't require endless, futile labor to sustain it. Rather passive income represents one flow within a relationship of ownership--and in the opposite direction flows responsibility. We receive passive income from assets for whose condition and behavior we are liable.

Calling the income passive is misleading, because it implies that such income arrives not simply without--or with minimal--effort, but with minimal worry as well. But ask any landlord--you're essentially paid to worry about stuff. Whatever the gods of pop music claim to the contrary, tenants do not call Ghostbusters first. Especially when the heat goes out. First, they call the landlord. Then, they call their lawyers.

I ain't afraid o' no tenant.

Responsibility implies liability. Although rental property income provides the most stark example, other kinds of passive income also admit of analogous forms of responsibility. In exchange for book royalties, the author remains responsible for what he's written. In exchange for stock dividends, the owner becomes responsible for the behavior of the company whose shares she owns. (Warren Buffett famously advocates treating the purchase of stock as equivalent to the purchase of the entire company.)

The point here is that wealth, because it depends upon ownership, entails responsibility and liability in direct proportion. There's no such thing as truly passive income, and anyone who thinks she wants to be rich should be warned that Easy Street is the main thoroughfare in Neverland. Wealth is a sacred social trust, not a ticket to heedless self-indulgence. It is most certainly possible to enjoys the fruits of responsibility, but only for so long as and to the degree that one proves willing and able to bear its weight.

We have a word for those who take the lazy way to easy street, and it ain't flattering.

Development of the slums, for the slums, by the slums

Shack / Slum Dwellers International (an organization which seems to take a Puckish pride in the lumpishness of its name) has undertaken a challenging mission: "Securing land tenure and housing" for the urban poor "in 24 countries on 3 different continents." Bold, but hardly original. Their approach, however, is another matter.

The group, known by the initials SDI and formed in India in 1996, is a loose network of grass-roots organizations of the urban poor. It’s grown to millions of members in 24 nations, cities spread from Manila to Cape Town, Mumbai to Sao Paulo. Typically, members are women ready to share their meager savings in collective efforts to upgrade their homes, secure titles to the land their houses sit on, build a latrine block, perhaps start a school.

Slum dwellers sit right across the table from local government authorities, designing projects and negotiating how they’ll be financed and carried out.

Of course, the slum dwellers get professional advice [.pdf], but we're talking about slum dwellers acting as their own real-estate developers. For themselves and on their own terms. And they just got an unrestricted grant of US $10M from the Gates Foundation.

Unbelievable? On the contrary: perfectly necessary. When governments, NGOs, and big businesses can't or won't get people what they want, people quite naturally just do it themselves. Although it's obvious, it bears repeating: the poor (like every other demographic) are their own best--and in many cases only--allies.

Do values have value?

One of the most pernicious fallacies into which our business thinking is prone to fall--and this is especially true in disciplines like finance and engineering, where numbers are particularly preeminent--is the conflation of measured value and real value. It's an old truism that you cannot manage what you cannot (or do not) measure. But managers, driven by objective results, take it one step further: If we cannot (or do not) measure it, the thinking goes, then for all practical purposes we can act as if it were not real. Oh, the endless debaucheries which descend from this one, simple stupidity.

Who says you can't measure love?

If we reject this fallacy, however, we ipso facto assume the value of CSR ("Corporate Social Responsibility"), which is really just another way of saying that the bottom line isn't really the bottom line. (Although, then again, maybe it is.) There are plenty of us who believe that environmental concerns, labor issues, management practices, and other corporate habits of thought and action impact the bottom line. Many of us also see quite clearly that making lots of money in our stock portfolio isn't worth it if the costs show up elsewhere.

Where else? Well, we might, I don't know, run out of water or something. (Even soft drink company execs, who seem to view potable water as competition, must realize that water is the main ingredient in their product.) Or perhaps canned air will become the only kind of air worth breathing. (Los Angelians must love the smell of cancer in the morning.) Or we pave our "path to financial freedom" using the backs of children. Or maybe we'll get to that point where corporate boneheadocracy seems normal.

After all, who cares? We customers and shareholders don't have to pay to clean up everything up when corporate America poops in the nest. But then who does? We taxpayers do, that's who. But wait. Aren't "customers," shareholders," and "taxpayers" just different roles played by the same flesh and blood human beings? Not only that, but at the end of the fiscal year, there's really only one balance sheet. Costs that corporate America manages to externalize just end up on a different line item on our annual budget, that's all. If we don't pay them as customers or shareholders, we pay them as taxpayers or family members or landholders or what have you. Only the dense, the foolish, and the psychopathic truly believe that the corporate bottom line is their own bottom line.

Burning Beds, Inc. has posted outstanding earnings for the past three quarters, and... hey! That's my bed!

Once you assume that clean water, clean air, happy children, and sane work environments have value (anyone other than these guys want to argue that this stuff is without value?), there are two possible ways forward:

1. Get creative when it comes to measurement. Instead of whining about how some things are "unmeasurable," innovate new mensuration and valuation techniques. Two interesting actors in the field of valuation innovation are Innovest and Communications Consulting Worldwide (CCW). What's this all about? Consider the following example: Say Wal-Mart's got labor troubles (no, really, imagine it); how much does that dent in their reputation cost shareholders? According to CCW, "if Wal-Mart had a reputation like that of rival Target Corp., its stock would be worth 8.4% more, adding $16 billion in market capitalization." That's a game changing assertion, shifting the debate from "Can the effects of reputation be measured (i.e., is it possible)?" to "Can we improve the methodology used in this study (i.e., how well are we doing it)?"
   
2. Stop managing and start leading. Insanity, as AA has it, is doing the same thing over and over and expecting different results. While the methods of bureaucratic management can optimize a banal system defined by quantified data, they are poorly suited to effecting metamorphic leaps in consciousness and/or character. As a rule, our businesses don't need to "do better," they need to "do differently." Better data and better management practices cannot provide a fresh, holistic vision for the future of business--only inspired leadership can do that. Bill McDonough and the Regenesis Group are two interesting players in the field of consciousness shifting.
   

We did not manage our way to the moon.

While I believe that creative mensuration and valuation techniques are effective tools for advancing a CSR agenda, they are useless without the proper outlook. Only competent, inspired leadership--a coherent vision supported by capable entrepreneurship--can truly change things. The incremental approach is appropriate as a rhetorical approach (that is, as part of a strategy of persuasion), but only a true leap in consciousness and character can ever save us from ourselves.

How green is your zipcode?

MarketWatch's real-estate writer Amy Hoak publishes a few links--with extensive commentary--to websites which provide information your average real-estate agent may not be able to provide. Setting aside the sex offender nonsense, the article provides some great links.

First (of course), the environment:

The U.S. Environmental Protection Agency Web site has a tool that allows visitors to search a community by ZIP code for environmental facts about the area, including pollution statistics, the location of hazardous waste sites and information about the area's watershed.

Another site dedicated to helping the public retrieve information about local environmental health is Scorecard.org, which generates a pollution report card at the county level, giving information on such topics as air and water quality.

Where in this picture would you like to live?

Second, another issue dear to me, schools:

A national database of school demographic information can be found on the National Center for Education Statistics Web site. Click on the "School, College and Library Search" tab at the top in order to view data including a particular school's student-to-teacher ratio or enrollment by race and ethnicity.

For a snapshot of academic performance and to compare schools, a prospective homeowner might browse the School Matters Web site, a service of Standard & Poor's.

Another site, Great Schools, offers similar tools.

Even as the internet threatens to inflict fully-fledged virtuality upon us, it also enhances the quality and quantity of information about place.

Web 2.0 meets real estate

I recently--in the context of this blog, I mean--opened the can of worms that is web 2.0 vis-a-vis education. Another important intersection between the internet and the real world is real estate. Although there's a tendency, as I recently noted, for people to think that the internet univocally minimizes the importance of geography, in fact there are a number of interesting ways in which the internet actually reifies geographical distinctions. One important way is through the organization and distribution of real estate information.

I've been poking around in the web 2.0 universe a little bit lately, and I'd like briefly to introduce four web 2.0 real estate tools to anyone who may not have yet heard of them. Organized roughly in order, in this author's humble opinion, from most interesting to least interesting (all emphasis added to call out the key innovation of each project):

(1) Zillow. From the site:

Today we are answering what we believe is the first question most home buyers, sellers, and the curious ask: "How much is this home really worth?" Zillow.com calculates a valuation (the Zestimate™) that anyone can see — for free — for most homes in the U.S., including yours. Or the one you want to be yours. Or the one you are curious about. Or ours, for that matter. You can refine the value of any home with My Estimator, an interactive tool that allows you to enter things you know about a home but we don't.

(2) Homethinking. From the site:

Homethinking helps you find real estate agents by showing you what each real estate agent has done in the past and what customers have said about the job they did.

(3) Propsmart. From the site:

Propsmart is a next-generation, independent real estate search engine and online community. We crawl and index over 1 million homes for sale and other properties, then organize and display them on a slick Google Map interface.

(4) Trulia. From the site:

Whether you are moving down the street or clear across the country, we're here to help you understand real estate trends at the local level. When you are about to make the biggest financial decision of your life, we help you understand how your future home stacks up compared to similar homes on the market, and similar homes that have recently sold. We show you how sales prices have been trending where it matters—in your county, city, ZIP code and neighborhood.

All players to watch.

Preservation + green = good questions

The Real Estate section of today's Sunday NYT has an article on "The Greening of Graying Buildings." The article covers two successful preservation projects--a NJ farmhouse and a Hoboken factory--which also go green. The most interesting of the two is the farmhouse, developed by Conservation Development of Hillsborough, NJ. (Full disclosure: The principal of Conservation Development, Lise Thompson, is a personal friend and colleague.)

It may not look green... and that's the point.

In its customarily clunky way, the NYT states the obvious as though it were utterly arcane:

THE conversion of a huge Hoboken warehouse building into condominiums and the nearly completed restoration of a small 1860 farmhouse near the Delaware River are two very different sorts of projects. But they share an intriguing goal: creation of 21st-century “green” homes in history-laden structures without stripping the buildings’ original character.

It's not "intriguing"--it's only sensible. In any case, the real story here is captured beautifully and succinctly in a quote from Ms. Thompson:

“Sometimes, we had to ask ourselves: What is ‘green?’”

Green isn't a "movement," a "lifestyle," or even a technological category. Green is a state of consciousness--a paradigm--a mental model. The challenge isn't a scientific or technical one--the whole question of "efficiency" is merely a sidebar--but rather a spiritual one. In order to build greener buildings, we must become greener people.

Ms. Thompson goes on to explain a bit of her generative thinking vis-à-vis this project:

“The fact is that preserving the house is itself ‘green,’ because it avoids further development and sprawl — but there are tensions between being green and authentic restoration, and we had to resolve them as best we could.”

While there's plenty of room for growth beyond this statement, the point is that Ms. Thompson didn't assume that there is only one answer, and that all she had to do was find it. Instead, she creatively opened up an entire new vista for thinking green: the idea that preservation itself is a kind of environmentally sensitive practice.

There's much left to explore here. But the takeaway, which of course the NYT doesn't really take away, is that green isn't the answer, it's the question.