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In Defense of Bad Ideas

surjan.substack.com

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Re: In Defense of Bad Ideas

#21

Post by pjc50 »

jkhdigital wrote: post #5

Bad ideas are magical when they come in the form of long call options (bounded cost, unlimited upside). Bad ideas destroy companies/nations/civilizations when they come in the form of short put options (bounded benefit, unlimited downside).

Succinct and accurate. A couple of real examples: the famous LTCM https://en.wikipedia.org/wiki/Long-Term_Capital_Management blew up in one of the late 90s financial crises by doing something that was almost exactly that (writing a lot of puts)

The 2008 mortgage crisis didn't have unlimited downside, but an awful lot of parties were making tiny slivers of money off things they thought had zero chance of default whose default risk was both higher and correlated.

Nuclear power arguably goes in this category too: it's mostly great, which is why people quoting numbers of deaths claim it's safe, apart from the couple of catastrophes that have left huge areas of contaminated land.

If you're trying something that has no risk to others and the worst case for you is the loss of your investment, feel free to go for it. If the worst case affects others negatively or your liability might be more than your investment, you should definitely think twice.

Oh, and be very careful about margin investing and options trading for non-specialists.

Re: In Defense of Bad Ideas

#22

Post by adwn »

The article assumes that SpaceShipOne's design was actually a good design. It wasn't.

To be precise, it was a good design to satisfy the artificial requirements of the prize, but nothing else. The design doesn't scale. The hybrid rocket motor has been the source of countless headaches, lousy performance, and more than a decade of delays, the feathering mechanism has already cost the life of a test pilot, and the need for a pilot plus co-pilot severely reduces the payload capacity.

Now, the article's thesis – that good and bad ideas are sometimes hard to distinguish before they've been tried – is still true, but the author chose a bad example.

Re: In Defense of Bad Ideas

#23

Post by high_derivative »

jkhdigital wrote: post #5

Bad ideas are magical when they come in the form of long call options (bounded cost, unlimited upside). Bad ideas destroy companies/nations/civilizations when they come in the form of short put options (bounded benefit, unlimited downside).

Not sure what this metaphor adds, especially because it's inaccurate.

A short put does does not have unlimited downside as the value of the underlying can only go to zero. A short call has unlimited downside as the value of the underlying can go arbitrarily high.

Re: In Defense of Bad Ideas

#24

Post by projektfu »

thaumasiotes wrote: post #18
brewmarche wrote: post #17

Earlier quoted context omitted.

Short just means they have a negative amount of that, in this case a negative amount of options.

No, short means your position is predicated on the idea that the future price of something will be lower than the current price. Owning a positive number of put options makes you short the underlying stock, which is presumably why the comment upthread described put options as "short put options". Selling put options gives you a long position, not a short position. I wanted to analyze this in terms of the original com…

You have to think of the futures definition of long and short, not the equities definition of short. In every futures contract, the long is paying money and the short is receiving it for the contract. Every options contract has a short, the writer, and a long, the buyer.

Re: In Defense of Bad Ideas

#25

Post by bluedino »

I've always wondered how terrible automotive designs make it to production. Engines or transmissions that quickly fail, cars that are just garbage in quality...nobody along the years of development stopped to say "maybe we shouldn't build this..", or perhaps someone did?

Did the company building this get their moneys worth when it comes to lessons learned?

Re: In Defense of Bad Ideas

#26

Post by taneq »

hliyan wrote: post #9

Reminds me of the strange aircraft designs of Burt Rutan, the closest thing the 80-90's had to an Elon Musk: https://www.flyingmag.com/photo-gallery/photos/awesome-airpl...

If you're referring to SpaceShipOne, that's because Rutan's company built it: https://en.wikipedia.org/wiki/SpaceShipOne

Re: In Defense of Bad Ideas

#27

Post by darkerside »

adwn wrote: post #22

The article assumes that SpaceShipOne's design was actually a good design. It wasn't. To be precise, it was a good design to satisfy the artificial requirements of the prize, but nothing else. The design doesn't scale. The hybrid rocket motor has been the source of countless headaches, lousy performance, and more than a decade of delays, the feathering mechanism has already cost the life of a test pilot, and the need…

It's a great example. The only reason these factors clearly outweigh the positives is because the benefit of hindsight. Or do you imagine the brightest minds of NASA just weren't thinking clearly for decades?

The killer feature of the shuttle was supposed to be the cost savings from being able to make multiple trips using the same equipment (sound familiar?). It turned out not to be a feasible solution from a technical cost standpoint, but if people can't clearly estimate the cost of adding a new feature to a website, I totally believe would have been indistinguishable from a good idea at the time.

Re: In Defense of Bad Ideas

#28

Post by Cthulhu_ »

bluedino wrote: post #25

I've always wondered how terrible automotive designs make it to production. Engines or transmissions that quickly fail, cars that are just garbage in quality...nobody along the years of development stopped to say "maybe we shouldn't build this..", or perhaps someone did? Did the company building this get their moneys worth when it comes to lessons learned?

When it comes to mechanical failures like that, it's never due to incompetence; it's due to cost cutting concerns (e.g. using less material, cheaper / inferior material) and / or planned obsolescence. Automotive engineers are highly competent, and most will have had a lot of education when it comes to materials, strengths, stresses, wear and tear, etcetera. And car companies build up that knowledge over the decades.

Definitely not a problem with all cars, but the better built cars are more expensive.

I want to say "you get what you pay for", but at the same time I know nowadays there are a lot of products (e.g. electrical tools) where the brand is bought up and the new owner makes big cost cutting measures to maximize their profit margin, the money coming from "brand inertia", that is, a brand is known for being good for a couple years after they start reducing quality and durability.

Re: In Defense of Bad Ideas

#29

Post by PopeDotNinja »

thesz wrote: post #20
PopeDotNinja wrote: post #16

Earlier quoted context omitted.

Sub-orbital. Think getting the craft up to altitude of 100+ km, hang out for a few minutes, and descend back to Earth. SpaceShip One, the prototype inspiring the Virgin Galactic fleet, was capable of reaching speeds of 0.9 km/s. [1] Escape velocity to get into orbit from Earth's surface is 11.2 km/s. [2] [1] https://en.wikipedia.org/wiki/SpaceShipOne [2] https://en.wikipedia.org/wiki/Escape_velocity

Escape velocity is a velocity to escape gravitational field. Orbit velocity is a velocity to orbit a thing inside its gravitational field. For example, ISS has orbit speed of about 7.7 km/s at 350 km above the ground. Orbit speed "at the surface" of Earth is about 8km/s, I believe.

Thanks for the clarification.

Re: In Defense of Bad Ideas

#30

Post by short_sells_poo »

high_derivative wrote: post #23
jkhdigital wrote: post #5

Bad ideas are magical when they come in the form of long call options (bounded cost, unlimited upside). Bad ideas destroy companies/nations/civilizations when they come in the form of short put options (bounded benefit, unlimited downside).

Not sure what this metaphor adds, especially because it's inaccurate. A short put does does not have unlimited downside as the value of the underlying can only go to zero. A short call has unlimited downside as the value of the underlying can go arbitrarily high.

For sure, but the return distribution of equities at least was historically highly negatively skewed. There can be upside volatility in stocks, but it has either no persistence or it happens just after a massive crash. Taking this skewness into account, it is not unreasonable to consider short puts more risky in a very handwavy and back-of-an-envelope calculation.

Of course, other assets with more symmetric distributions (FX?) might have no such bias.

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