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07 January, 2014

Elastic Collisions: The Limits of Dynamic Pricing

Early New Year's morning an Uber user paid $82 for a one mile ride. My first reaction to this news is that the rider appears doubly stupid: first for paying $82 for a one mile ride; and second for admitting to having paid $82 for a one mile ride. But the experience has kicked off a debate or at least a renewed awareness of dynamic pricing for goods and services.

Obviously the theory of dynamic pricing is to efficiently, some would say ruthlessly, match supply and demand for a given product or service at a specific time and location. In this regard, it's exactly analogous to how a *skilled* bookie uses the odds he sets to ensure he has as many bets for team A as for team B. So catching a cab at 1:47 AM on New Year's Day might be a high demand proposition. On the supply side of that transaction, I guess it's possible that some drivers might decide to be off duty at this time, thus lowering the supply, but I suspect the imbalance is mostly on the demand side of this particular transaction.

Balancing supply and demand assumes a certain amount of elasticity in both supply and demand. If the asking price of a service rises beyond a "threshold of pain" for a specific consumer, it is reasonable to assume that they will not engage in the transaction at that price. Personally, I'd have to be in an amazingly compelling scenario in order to knowingly and willingly pay $82 for a ride of one mile.

On the supply side, the elasticity is manifest in drivers' decisions to be out on the road offering rides. If a driver knows he or she can charge let's say 10% more than normal for a ride, some of them will find this premium attractive; others may decide that 10% is not enough to incentive roaming the streets at two AM on January 1st. Obviously, as the premium rises, so too does the number of drivers that will decide to enter the market.

The dynamic pricing model faces a limit to elasticity on both supply and demand sides. Above some price, the overwhelming majority of consumers will not buy. Below some price, suppliers will not find it worth their time to compete for customers. Obviously, this elasticity is in constant flux, is situation, and is temporal. When the IRIDIUM satellite phone system made its debut, I was asked who would be willing to pay more than $7 per minute to place a phone call. I assumed that two plausible answers were: a CEO who wasn't particularly sensitive to spending $7 per minute at any time and an arctic explorer who wished to call for help after a polar bear had bitten his leg off to whom money was no object at that specific time. My family goes through maybe two gallons of milk per week. Like George H. Bush, I will confess to being a bit hazy on the price I pay per gallon, but let's assume it's around three dollars. If it goes a bit higher, say to four dollars, our buying habits likely will go unchanged. But if the price suddenly went to eight dollars, I'd examine alternatives, including just shunning milk.

Efficiency in a market and how it sets prices (i.e., values things) is also limited by how promptly the links between supply and demand (and their respective elasticities) are mediated. The energy industry is an example of delayed market signals (or their realization) leading to unfortunate investment decisions. This is because while a cadre of Uber drivers can decide almost instantly to take to the streets, it can take a decade to carry out a plan to find and exploit energy resources.

The other limit to elasticity is information. Do prospective buyers know what the current going rated is and what the cost drivers are? Do suppliers know how many buyers are out there, how many competitors are in the game, and what strategies both buyers and sellers are using? An efficient and fair dynamically priced market also assumes a high level of information symmetry: buyers and sellers all have the same information upon which to base decisions. Automated systems like Uber ought to easily meet these criteria.

So why someone chose to spend $82 to be carried a mile escapes me, but I assume some other factor was at play. Maybe intoxication, seriously inclement weather, the desire to impress a date (or having done so, the urgency to whisk that date to one's apartment before the bloom falls off the rose)? All I can say is that if I willing paid $82 for a one mile trip, the destination would be a hospital and I'd be apologizing to the driver for all the blood emanating from my polar bear severed leg.

06 January, 2014

*Asterisk*: Government Subsidies and inducements and alternative energy winners and losers

You can look at subsidies in two ways: as a consumer; and as an investor. We could also have a third prospective, that of a taxpayer, but that will probably just make you angry.

Let's say that aided by state and federal tax credits you can purchase a very desirable Tesla for the price of a 3-series BMW. As a consumer, that can be a great deal assuming the Tesla is the car for you. Once you make the purchase, your savings on "the real cost" of the car are locked in and you should be quite pleased.

As in investor, you might decide that Tesla has a tiger by the tail and that you'd like to get in on that by buying a small slice of the company. You can study projections for sales and expected profit margins, the typical financial underpinnings of any investment target. But you would be unwise to neglect investigating the role that subsidies play in the business. To what extent are they driving sales and how long are they likely to remain in place? Who are the competition and what might they do to reduce Tesla's subsidies or get some of their own? What is the future of carbon credits that prop up Tesla's margins right now? What are the economics and sustainability of Tesla's free SuperCharger stations? Who pays to maintain the integrity and capacity of local power grids when 100,000+ EVs are charging in the evening?

Similar questions exist for solar, wind, and geothermal energy. Subsidies will certainly reduce your installed price per kilowatt-hour. But how long of a "free ride" can you count on in the form of laws requiring your local utility to purchase from you your excess power while relying on their base-load safety net? Who pays to maintain and synchronize the 60 cycle AC we all assume is present at every wall outlet? These issues affect both consumers and investors and are significant drivers to the long-term viability of these energy sources.

Another, less obvious, variety of subsidy is where the government enters into a lucrative and possibly very large contract for services with a relative newcomer to the field. This is the case in commercial space launch services.

When Roger Maris had his 61 home-run season, breaking Babe Ruth's record, many baseball purists insist the record have an asterisk attached to it. The asterisk would denote that Maris accomplished his feat in the span of a 162 game season, while Ruth did his in the days of the 154 game season. If folks can get worked up about that distinction, a giant asterisk is certainly merited for the artificial subsidies, credits, legislation, and other inducements that tilt the cost:benefit equations for alternative energy products and sources.

Consumers can ignore (or just be pleased by) what's behind the asterisk as it lowers their purchase price below the true cost. But they must still remain wary of how their ongoing future operations and other cost of ownership items are affected.

Investors are foolish to ignore the asterisk as what's behind it can make or break the viability of their long-term bet.

10 December, 2013

What we've been working on at CAU: an automated pilot's advisor based on cockpit data fusion


As always, two truths remain immutable: there is nothing new under the sun, and great minds think alike. And to these, perhaps we can add a third: better late than never.

A client tasked us with defining detailed functional requirements for an "add-on" pilot's aircraft performance monitoring and advisory system for application in transport category airplanes (i.e., "big iron"airliner types). We named the system PASS -- Performance Advisory Safety System.

The initial instance of PASS is laptop-based with access to aircraft system parameters via a standard data bus interface. The first requirement for PASS is to pose no risk to aircraft systems, so its interaction on the bus is entirely passive monitoring and data collection. All transactions are one-way. A subsequent iteration of PASS functionality can be integration into an existing flight management system (FMS). 

What PASS does is automate performance monitoring tasks such as:
  • Calculate V1 speed
  • Determine CG location and verify within limits
  • Monitor expected/acceptable acceleration during takeoff
  • Verify airspeed indicator "aliveness" and consistency during takeoff roll
  • Perform in-flight "reasonableness and consistency checks" across data such as throttle settings, fuel flow, EGT, airspeed, and attitude
  • Verify aircraft configuration is appropriate for flight phase.
An important PASS function is to assist flight crews in resolving dilemmas posed by failed instruments, displays, or the data sources driving them. For example, PASS can diagnose and warn of a failed pitot-static system by comparing all airspeed and static sources with aircraft configuration, flight path angle, and engine outputs, 

In response to system faults and failures that it detects, PASS integrates the appropriate checklist, POH information, and system malfunction procedures, thereby optimizing cockpit resource management and reducing crew workload.

We've completed the initial set of requirements and are ready to move into the next phase -- a working prototype to allow demonstration of the concept as well as collection of flight crew comments and other inputs. 

We are encouraged that others are thinking along similar lines:


15 August, 2013

3 Basic Flying Rules to Live (and Keep Alive) by


Flying in all its forms is remarkably safe considering the unforgiving nature of the environment pilots operate in. A fundamental way to keep operations as safe as possible is to be mindful of and adhere to three basic rules. These apply to normal as well as unusual and emergency situations. Following them will go a long way to keeping normal flying from becoming emergency flying.

The rules are:

1). AVIATE
2). COMMUNICATE - and-
3). NAVIGATE

I've presented them in descending order of priority, but a pilot or crew absolutely has to do all of them. Here's how it works:

Aviate. Simply put, someone must always be flying the airplane. This means tending to the basic stick and rudder functions and the care and feeding of the systems that keep you aloft and in controlled flight. With more than one pilot, it is crucial (but unfortunately not sufficiently obvious) that someone has to be unambiguously responsible for flying the airplane. You can rely on automation to relieve some of the second by second workload, but can never abdicate control of your fate to an autopilot. The monitoring and assessment tasks you perform as a pilot are identical irrespective of whether you are hand flying, using a wing leveler, or a full-blown multi-axis autopilot. The rule applies to your Cessna-150 or a Boeing 747. One area of special emphasis is your response to abnormal flight situations. The temptation is powerful to devoting all the brainpower in the cockpit to solving a systems problem. This temptation has to be avoided by a one person crew as well as a multi-member crew. And one person has to be clearly in charge.

This brings us logically to our next rule;

Communicate: This is how everyone knows who is in charge, who is doing the flying ("I have the airplane", is a good declarative statement to make. All the better when it is clearly and promptly responded to: "Roger, the airplane is yours."), and what the gameplan is. Communication is a fundamental and essential element of effective resource management for a multi-person crew. Another dimension of communication is external to the cockpit. You have to ensure that ATC personnel and, as appropriate, other users of the airspace, know where your are, where you're going, what your situation is, and any other factor that forms what we will refer to as "your intentions." If you have passengers, it is certainly helpful to apprise them of the situation and your intentions.

And this leaves the final rule;

Navigate: By this I mean more than X marks the spot on a sectional chart. You must navigate successfully through the landscape that is your total situational awareness. Knowing about the terrain below you; relative range and headings to airports, fields, and other landing opportunities, and their conditions; and the location of nearby traffic is critically necessary but not sufficient. You must also address things like your fuel situation, weather, and aircraft system status. When you're successful navigating, the intentions you formulate will always be within the capabilities of your crew as pilots, and of your aircraft.

12 August, 2013

A STRANGE CONFLUENCE OF EVENTS

Whitey Bulger, notorious Boston organized crime figure, informant, and long-time fugitive, was found guilty of racketeering, conspiracy, and murder today. He was acquitted of a lesser federal offense of dancing with a mailman. Auspiciously, his guilty verdict comes on the same day as Elon Musk's disclosure of the plans for his Hyper Loop transportation system (some assembly required).

This got me to thinking about all the technological wonders and societal developments we are on the very verge of...

When Whitey is sentenced, his story might very well go *something* like this:

1). Federal Marshals on Segway scooters will escort him to a central transportation mode where;

2). He will board a hyperloop "train" to the node nearest the federal prison where he is to serve out his sentence. He will arrive at his destination 16 minutes before he left.

3). Transport from the node to prison will be via a Tesla Model W sedan that will make use as required of supercharger stations along the route. For security reasons, robotic battery swaps will not be used. Marshals have been instructed to make judicious use of air conditioning and headlights and to ensure that New York Times (paradoxically enough now owned by Elon) reporters and the gang from Top Gear are kept at least 300 miles from the planned route which will be cleared of the typical hordes of Google self-driving cars that have not yet collided with each other due to subtle bugs in their Ubuntu 17.04 operating systems.

4). Electricity to power the chargers will have been derived from room temperature fusion contained within a 1000mL laboratory beaker augmented by a Kenner Easy Bake Oven purchased off of Ebay and slightly modified in Italy. If accomplished entirely during the daytime on a sunny day, or if conditions in the region are suitably blustery, the option exists to power the journey entirely with renewable energy. In this event, Bulger will be credited with a $2500.00 green energy rebate.

5). Federal agents will keep to their tight delivery schedule by frequently consulting Apple Newton devices.

6). If Bulger misbehaves while in the custody of his terrestrial prison, he will be transferred to the Bigelow Inflatable Incarceration Facility (BIIF) in geostationary orbit over Devil's Island.

7). He'll be boosted up there aboard a Sierra Nevada Dream Chaser lofted by a SpaceX Falcon Heavy. The winged Dream Chaser will then be recovered after an autonomous horizontal landing at Mohamed Morsi National Airport (named for our 47th President who presided over the expansion of the US to 57 states and the District of Baghdad - which is still safer than the District of Columbia). Airspace safety will be ensured by a fleet of Lockheed Martin RQ/4Q2-297 hunter-killer drones set to maximum aggression/indiscriminate wedding party crasher (IWPC) mode.

8). After becoming somewhat acclimated to the micro-gravity environment, Bulger will be offered work as a Helium-3 miner on an asteroid that was captured and moved to low earth orbit.

9). If he accepts such work, Bulger will be paid the federal minimum wage of $17,500.25 per hour. Obama Care (now called Hillary Care for some reason) will address all his health insurance needs at no cost and he will earn the Incarcerated Person Income Tax Credit of $300,000,000.00 annually.

10). Over time, and with good behavior, Bulger will be entitled to quarterly conjugal visits. His partner will use the Dan Goldin Better, Faster, Cheaper Memorial Space Elevator to make the round trip to and from orbit. If Bulger opts for a non-carbon based partner, his right to do so is protected by Constitutional Amendment Ninety-Five, the Protection of Robosexual Marriage Act.

11). Irrespective of the sentence Bulger receives, there's always the possibility of parole sometime down the line. In this case, Bulger will be assigned to a halfway house in Detroit. A number of properties have already been purchased against this eventuality at an average cost of $147.38 each.

18 July, 2013

Sticking around through the end: A surprising management trend and the danger of Faith-based Engineering

During my career and across a number of engineering/management consulting engagements, I have become aware of a phenomenon that many of the more cynical among us have either seen firsthand or suspected - managers and leaders being promoted, reassigned, switching jobs, or otherwise moving on from roles or positions before their poor decision "chickens" come home to roost.

This takes the form of a manager setting unrealistic expectations, encouraging the team to embrace wildly optimistic performance goals, making Faustian budget bargains, setting crazy schedules, and other forms of "faith-based engineering". Before the consequences of these misjudgments become obvious or acute, the manager has left the project, program, or company and the problems fall into the laps of (at least relative) innocents.

Recently this pattern has been disrupted. Because of the economy, the opportunities for escape from an effort you've screwed up have been reduced. There are less new projects, programs, and job vacancies. Managers find they are more likely to have to stick around long enough for their errors and misdeeds to catch up with them.

Bottom line is: pay attention to the decisions you're making; that future you're mortgaging just might turn out to be your own.

15 July, 2013

Dud and Oi! - a short review of the Discovery Channel's series Blood and Oil

Update 28 July 2013: Appears I was not alone in my low opinion of the "merits" of this show. B&O seems to no longer be on Discovery's broadcast lineup. Perhaps lawyers for Particle Drilling pursued some sort of injunctive relief in order to divorce their product from this train wreck?

Blood and Oil chronicles the struggle of the Cutter Oil Company and the Cutter family in Ohio against the predations of the evil monolith that is "Big Oil". I was hopeful that the show might depict for the public what energy exploration and production is about in at least a semi-realistic manner. My foolish hopes are dashed. Most of their struggles are against self-inflicted problems.

The scion of the Cutter family (after his dad's recent death), CJ, is an idiot; Homer Simpson personified, but with absolutely none of the charming goofiness or humor. It's small wonder that everyone around him is depicted as being frightened, just as any reasonable person would be in the presence of a real world Homer and all the potential for harm that his surliness, ridiculously hot temper, and incompetence would imply. Suffice it to say that impulse control doesn't seem to be big in his skill set.

Younger brother Josh has a degree (in geology -- of the "rocks for jocks" variety, I assume) that is never put to use in selecting drilling sites. Nor is seismology or any other technological tool that might be used to mitigate risks of a $500K investment. The show stresses (every 8.3 seconds, it seems) that "Cutter pays for drilling costs out of their own pockets", in contradistinction to the free-loading finks of big oil.

The first well they drill is in their sister's backyard (quite literally), started without her knowledge or consent. At least we can't accuse CJ of being a NIMBY type (or at least not a NIMSBY - Not in my Sister's Backyard). Drilling operations seem to be conducted in a blissful universe where permits, OSHA, and basic common sense safety practices are as yet undiscovered.

CJ frequently refers to "turning up the crazy" as a means of getting things done. Sadly, the crazy knob appears to be coaxial with the STUPID knob, and both get twisted up to eleven. A group of looters descends on the Cutters' ancestral homestead -- CJ's carefully considered strategy, tear the 150 year old structure down with a back hoe and then set the wreckage afire with a flare gun. That will teach them pesky looters. And oh yeah, smash the thieves' presumed vehicle while you're at it. Having a bad day? Turn that frown upside down by smashing something big into pieces that are small.

CJ, Josh, and the unfortunates who are condemned to work for them decide to destroy a grain silo (which makes sense because all they do in any grain storage area is grapple each other into submission, WWE style). CJ's "turn up the crazy" concept is to place an arbitrary blob of some sort of explosive in an arbitrary location in the silo and detonate it with a rifle shot. All this seems to accomplish is blowing off the top of the silo, thus inadvertently educating viewers on the rocket principle. Then they enter the silo (I mean what could possibly go wrong) and go for round two with a double-sized charge. After reentering the now more precariously leaning silo to inspect their handiwork, CJ sets about knocking it down with his back hoe, all the while noting how dangerous this all is.

My recommendation is to only watch this show with its wooden (or maybe leaden) dialog delivered so ineptly in a purely ironic sense in much the same way that one might enjoy watching Sharknado. You'll probably be able to get through two and one-half episodes this way.