Book Notes: Capitalism Without Capital

Why market valuations for some companies are so high when the traditional way of analyzing those companies through their fundamentals don’t support those valuations?

Why it seems that Investment indicators are in low levels when interest rates are so low? Is there an additional element hidden in plain sight that could constitute what could be call there is a “Dark Matter of Investments” ?

What is the relevance of Organizational Design, Process Engineering, Training, Innovation management for companies?

The answer to these and other relevant questions is the growth in relevance of intangible assets.

The book resumes decades of research in intangible investments: How to measure them, what are their characteristics and how they event might explain some atypical behaviors of the stock market

In this post I will write some of the notes I took while reading the book

Basic Concepts

Investment: What happens when a producer either acquires a fixed asset or spend resources to improve it.

Asset: An economic resource that is expected to provide a benefit over a period of time.

Intangible Assets: Complex pricing systems, ambitious branding, marketing campaigns, detailed process, new product designs, new business models, training.

Over time , intangible investments (investing in intangible assets) have steadily increased . Data suggest intangible investment overtook tangible investment around the time of the global financial crisis.

Is it possible that the rise of intangible investment is nothing more than a consequence of improvements in IT? Is the intangible economy a sort of corollary of Moore’s Law or an epiphenomenon of what Erik Brynjolfsson and Andrew McAffe call the Second Machine Age? Or is it that IT and the research that lead to it was shaped by and economy hungry for intangible investments rather than intangible investment happening as a response to the serendipitous invention of various forms of IT

How to measure Intangible Investments

Measuring investments is a very relevant component of GDP , but the “investment” concept was strictly limited to physical stuff . It did not take long for economists to start questioning this.

In 1962 Fritz Machlup (one of the first economists to examine knowledge as an economic resource) wrote a book entitled “The Production and Distribution of Knowledge in the United States” in which he asked whether different types of knowledge were valuable things that could be produced and started to measure spending on everything from research and development to advertising and branding to training.

Recognizing that Research and Development and Knowledge Production was a vital force in raising GDP a working group of the OECD ment in Frascati, Italy in 1963, to agree on a common framework for measuring R&D, codifying the approach in what became known as the “Frascati Manual” , revised in several subsequent editions, the latest being in 2015.

The thing that reignited economists interest in the measurement of intangible investments where computers and software development. In 1999 the US BEA introduced software as an investment tinto the calculation of IS GDP.

The idea of a new economy also prompted economist to examine the role of knowledge investment more generally. Theorist worked out economic models where knowledge played a key role in promoting growth, either via spillovers of knowledge from one producer to another, or via the competitive process of investment in continuous product improvement.

Then began a painstaking process of defining and measuring the different types of investment. In 2005 Corrado, Hulten and Sichel produced the first set of estimates for the United States.

Types of Intangibles

Computerized Information: Software and Databases
Innovative Property: R&D, Patents, Copyrights.
Economic Competencies: Training, Market Research, Creating Distinctive Business Models.

How to measure Intangible Investments

Measuring intangible investment is a not as straightforward as measuring tangible investments. First we need to find out how much firms are spending, but not all of that spending will be dedicated specifically to the creation of a long-lived asset. The process has a lot of subtleties .

For example when software development is done in-house, staticians imagine there is a software “factory” inside the firm and try to measure how much spending it takes to run the factory, but how much time is dedicated to the creation of a long-lived asset. For programmers might spend 90 percent of their time but how much time should be assigned to managers ?
How about Marketing, Organizational Capital and Training? Should those be treated as an Investment?

Not all of this questions have been settled yet , but it is a fact that they are very relevant , an example of this is that the intangibles agenda is central to the OECD Innovation Strategy.

Characteristics and Implications of Intangible Investments

The Four ‘S’ of Intangible Investments:

Scalability: Intangible assets can usually be used over and over in multiple places at the same time. The idea that knowledge is scalable is not new and it has been studied extensively , it sits at the heart of Endogenous Growth Theory. In an economy where investments are highly scalable:

1. There will be some Intangible-Intensive companies that have grown very large.
2. A relative small numbers of dominant large companies
3. Business looking to compete with the owners of scalable assets are in a tough position. Winner-takes-all scenarios are likely the norm

SunkenNess: If a business makes an intangible investment and later on decides it wants to back out, it’s often hard to reverse the decision and try to get back the investment’s cost by selling the created asset, it is usually a Sunken Cost.

If intangibles are generally sunken costs, then why invest? Because some of the returns might be very high. But also, an investment in knowledge , even if it fails to create a marketable asset directly, might still be valuable if it creates information that resolves uncertainty form the firm. What is called “Option Value”and the Options approach to Capital Investment.

SpillOvers: It is relatively easy for other businesses to take advantage of intangible investments they don’t make themselves.

As a civilization we have been making rules about the ownership of tangible investments since at least 4,000 years ( there is evidence in ancient clay tablets from Mesopotamia).

With intangible investments is more recent with the development of industrial patents, countries started to tweak their patent and copyright systems to encourage more invention.

There is a premium on the ability to manage spillovers: companies that can make the most of their own intangibles, or that are especially good at exploiting spillovers from others investments will do particularly well.

A significant part of the strategy of intangible-rich companies is combining and managing their intangibles in such a way as to minimize the spillovers and maximize the benefits they get from them

Being well networked, knowing about important developments in ones field, and having the standing to bring together collaborations, ask for favors, and coordinate partnerships become more important in a business where investments have greater spillovers

All this means that in an “intangible-intensive” economy, the ability to make good the problem of spillovers becomes very important. This calls for a particular range of skills:
-Technical Skills or Engineering Knowledge
-In some cases, legal expertise or a talent for deal-making
-Softer Skills like leadership and networking.

Synergies: Ideas and other ideas go well together: This is especially true in the field of technology.

Brian Arthur in his 2009 book “The nature of technology” states that technological Innovations are “combinatorial”. Any given technology depends on the bringing together of already-existing ideas. “Every novel technology is created from existing ones, and therefore….every technology stands upon a pyramid of others that made it possible in a succession that goes back to the earliest phenomena that humans captured”.

Intangible investments also show synergies with tangible assets, in particular information technologies. The relationship between investment in computers (tangible) and investment in processes, supply chain development, and organizational change (all intangibles), has been documented in detail by Erik Brynjolfsson. In his 2002 paper “Intangible Assets: Computers and Organizational Capital” he concludes that the business that got the most out of their software were the ones that invested in organizational change too and that the organizational complements to firms’ installed computer capital are treated by investors as intangible assets.

The intangible investments explanation to Secular Stagnation

Secular Stagnation is a condition when there is negligible or no economic growth in a market-based economy, when growth is measured based on the level of investments, it is a puzzle for some economists when there is a low level of investment even when there are Low Interest Rates.

However it is somehow strange that:
-corporate profits are higher than ever.
-profits are not evenly distributed
-Decrease in Productivity

An intangible explanation:
1. Mismeasurement: Intangible investment is not included in national accounts.
2. Leaders are better are appropiating spillovers and Laggards have low incentives to invest.

Financing the intangible economy: How all these affects banks?

Intangible investments also will have an impact in the financial services industry. If one of the main criterias to lend to businesses is to analyze if there is tangible investments that can be used as collateral to minimize risk. We should expect the following tendencies:

-Shift away from bank lending as a means for financing business or design new debt products secured against intellectual property

-Shift toward the use of equity

-Changes in financial accounting standards to include intangible investments in balance sheets.

-Increase in private companies, to avoid disclosure because of spillover-rich intangibles.

-Or promote block investing in an ecosistem even if there is spillovers, it wouldn matter

Competing, Maging and Investing in the Intangible Economy

What will succesful companies look like in an intangible-rich economy, and how can managers an investors create and invest in them?

How can firms improve performance that is sustainable? By Doing something distinctive or having a distinctive asset. It’s more likely that intangible assets can be distinctive, things as Reputation, Product Design and Trained employees providing customer service.

Even more valuable, weaving all these assets together make the organization itself an intangible asset.

1. In “Synergistic” firms, maybe only the managers know whats going on, since only the managers can see the big picture and realize how the synergies might link up.
2. In intangible-intensive firms there will be a premium on managers who can share information both up and down the organization and keep loyal workers sticking to the firm.
A well managed organization:
-Continuously monitoring & improving processes.
-Setting Comprehensive and stretching targets
-Promoting high performing employees or fixing underperforming ones
How can managers build a good organization in an intangible intensive firm?
Choosing the right organizational design, depending on whether your organizational predominantly uses or produces intangible assets.

Producer: Allows information to flow, promotes serendipitous interactions, keep key talent, promote skills to manage the innovation process.

User: More hierarchies, shor-term targets.

The intangible economy will place a premium on good organization and management. With more sunk costs, spillovers, and the opportunity for scale and synergies, the need for additional coordination rises, and so good organization and management will be in higher demand.

Are you creating intangible assets (writing software, doing design, producing research)?. If so, you probably want a flat organization with more autonomy, fewer targets, and more access to the boss. This allows information to flow, helps serendipitous interactions, and keeps the key talent.

How can an outside investor detect if a firm is building its intangible assets?
Can investors get information about intangibles from accounting data? Baruch Lev answers this question ins his 2016 book The End of Accounting (excerpt from the book in the WSJ can be found here). According to Lev, much of companies intangible investments are hidden from view, because by current accounting standards, intangible investments are expended (charge the entire cost of the asset in one year to costs) when they should be capitalized (recognizing that the spending created and asset) . In consequence financial accounts have become much less informative of company earnings.

So what should investors do? One option is to avoid the problem of finding out the information altogether and buy shares in every company. i.e. Diversify.

But also an alternative strategy arises for investors who can identify good intangible investments and back companies that make them. Asset Managers can serve investors by being much more canny about a firm, going beyond the information in the accounts. Understanding the deep innards of the company and the way that external conditions will allow it to use it’s intangible assets will be a highly valued skill.


Intangible investments theory has been studied by more than two decades, I guess the interest in intangible investments has gained relevance because we have more evidence that the hypothesis proposed in the original research seems to be correct.

Recently , Michael J. Mauboussin from Morgan Stanley published an excellent paper where he analyzes the implications for the investment management profession. The key insight: Understanding the magnitude and return on investment provides an investor with a better understanding of a company’s future earnings. The challenge is that the mix of investment has shifted over time and is today more intangible than tangible. That means the recording of investments has largely migrated from the balance sheet to the income statement. An investor’s job has not changed but the analytical approach has.

Sarah Ponczek from Bloomberg also published an article where she writes about the influence on intangible investments in the recent market rally, a remarkable example: “The value of Moderna Inc.’s intangible assets heavily rely on the biotech firm’s ability to develop and distribute a coronavirus vaccine. Consider the math: Moderna’s market-cap amounts to about $28 billion, yet the company’s tangible book value (what can be found on its balance sheet) is less than $1.2 billion. That means $26.9 billion — or 96% — of Moderna’s market value is derived from intangibles.”

Besides the valuation and economic implications I found the book very useful for professionals whose jobs revolves around, Digital Transformation , Strategy/Business Development or Portafolio/Program Management , since it gives a robust explanation of the relevance of Business Process Engineering , Managing correctly the intangible investment process in Software Projects, Managing correctly the innovation process through Open Innovation Programs, and how companies should treat Employee Training Spending as an Investment

July 27 Readings

Shopify Saved Main Street. Next Stop: Taking On Amazon.

How to Trick Your Brain into Remembering Almost Anything.

Unlocking value with durable teams: “Over the past six months, my group at the Financial Times has moved from project-based teams to durable teams. In this post I’ll explain why we made that move and how this is helping us deliver bigger and better things for our customers.”

The man who cracked the lottery.

Why Cryptocurrency Matters In The Coming Fight Between The Digital Yuan And Dollar

What Is an Individual? Biology Seeks Clues in Information Theory: “To recognize strange extraterrestrial life and solve biological mysteries on this planet, scientists are searching for an objective definition for life’s basic units.”

Understanding Abundance: Introduction “We will introduce a few general mental models for thinking about abundance, how it differs from what we’re used to, and what heuristics we can still count on to be true in the future.”

Book Notes: Thinking in Bets

Decision Making is a Key Skill in Management and Life, however in the last years it has become a well known fact that human beings are far from being rational creatures, and our thought process is full of cognitive bias.

Annie Duke Book gives you some tips on how to become better decision makers based on her experience as a professional poker player.

In this book she explains how you can apply some of the techniques and “tricks” of poker playing in avoiding those biases and making better decisions.

These are some of my notes from the book.

Resulting and Hindsight Bias

It is very common to equate the quality of a decisión with the quality of an outcome. When this happens we might decide to change the way we make decisions or change a strategy that has been correctly analyzed and defined.

The author gives two examples:

  • NFL  Seattle Seahawks Coach Pete Carroll on his 2015 Super Bowl XLIX call against New England, to pass the bowl (instead of running) in the closing seconds of the game.  Since the ball was intercepted and Seattle lost the game. Everybody judged the decisión has some of the “worst in NFL History!”.

  • A CEO firing the president of his company: The search for the new president didn’t go well. Sales started to fall. Already two different people on the job. But the decision itself was the result of the prior president’s poor performance and his inability to improve his leadership skills.

Both examples are bad results, not bad decisions.  When we judge based only on results, we are “resulting”(it is called like that in the poker world), we do this because of hindsight bias.

Pressure to be absolutely certain before acting.

We usually get only one try at any given decision , and that puts great pressure on us to feel we have to be certain before acting, a certainty that necessary will overlook the influences of hidden information and luck.

What makes a  decision great is not that it has a great outcome. A great decision is the result of a good process , and that process must include an attempt to accurately represent our own state of knowledge.  That state of knowledge, in turn, is some variation of “I’m not sure”.

 But we are taught that “not knowing” is a bad thing. We have to take away the negative connotation.

Good poker players and good decision-makers have in common their comfort with the world being an uncertain and unpredictable place. They embrace that uncertainty, and instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the changes that different outcomes will occur. Focusing on the Process, not only on the outcome.

We have to redefine wrong, but also redefine right: If we aren’t wrong just because things didn’t work out, then we aren’t right just because things turned out well.

Treat Decisions as Bets, and also  reinforce the belief formation process with a bet question.

Since there is potential opportunity cost in any chance we forgo, we could treat decisions as bets.  We could identify the following “betting elements” of decisions: Choice, Probability, Risk etc.

Most decisions are bets against our-selves.  But our bets are only as good as our own beliefs. The problem is that by nature,  we believe everything to be true, and once a belief is lodged it is difficult to dislodge. It takes a life of its own, leading us to notice and seek out evidence confirming our belief,  we rarely challenge the validity of confirming evidence, and ignore or work hard to actively discredit information contradicting the belief.  This is called  Motivated Reasoning. How can you prevent it? By “thinking in bets”:

When we are analyzing the “soundness” of a belief,  what about asking yourself- Wanna bet?  (i.e. Am I sure enough of this particular belief that I would accept a bet on it?)  Then , if the pattern of “beliefs formation” is:

  1. We hear something
  2. We believe it.

    Asking wanna bet? Adds a third step.

  3. Think about it?
    • Vet it, determining whether or not it is true?
    • How do I know this
    • Where did i get this information
    • What is the quality of my sources
    • How much I trust them

Self serving bias and Outcome Fielding.

When analyzing the qualities of our decision, we should try to classify outcomes (of our decisions) to identify luck vs skill. This is called fielding of outcomes or Outcome Fielding. If done well , it allows us to focus on experiences that have something to teach us (skills) and ignore those that don’t (luck)

Because self serving bias we are bad at outcome fielding. Once again, treating outcome fielding as a bet can accomplish the mindset shift necessary to reshape habit. If someone challenged us to a meaningful bet on how we fielded an outcome, we would find ourselves quickly moving beyond self serving bias.

Thinking in bets, triggers a more open minded exploration of alternative hypotheses, of reasons supporting conclusions opposite to the routine of self serving bias. It also triggers “prospect taking” comparing how we field our own outcomes vs other outcomes.

A group of trusted advisors: The Buddy System.

So besides treating decisions as bets, how do we beat motivated reasoning and self-serving bias? We know our decision-making can improve if we find other people to join us in truth seeking. 

Motivated reasoning and self-serving bias are two habits of mind that are deeply rooted in how our brains work. We have huge investment in confirmatory thought, and we fall into these biases all the time without even knowing it. Confirmatory thought is hard to spot, hard to change, and, if we do try changing it, hard to self-reinforce.  It is one thing to commit to reward ourselves for thinking in bets, but it is a lot easier if we get others to do the work of rewarding us.

Once we are in a group that regularly reinforces exploratory thought, the routine becomes reflexive, running on its own. Exploratory thought becomes a new habit of mind, the new routine, and one that is self-reinforced. In a Pavlovian way, after enough approval from the group for doing the hard work of thinking in bets, we get the same good feeling from focusing on accuracy on our own. We internalize the group’s approval, and, as a matter of habit, we begin to do the kind of things that would earn it when we are away from the group (which is, after all, most of the time).

Even research communities of highly intelligent and well-meaning individuals can fall prey to confirmation bias, as IQ is positively correlated with the number of reasons people find to support their own side in an argument. That’s how robust these biases are. We see that even judges and scientists succumb to these biases. We shouldn’t feel bad, whatever our situation, about admitting that we also need help.

A growing number of businesses are, in fact, implementing betting markets to solve for the difficulties in getting and encouraging contrary opinions. Companies implementing prediction markets to test decisions include: Google, Microsoft, GE, Eli Lilly, Pfizer, and Siemens. People are more willing to offer their opinion when the goal is to win a bet rather than get along with people in a room.

Rules of engagement

What are the rules of engagement that the group should practice? CUDOS

Be a data Sharer. That’s what experts do. We are naturally reluctant  to share information that could encourage others to find fault in our decision-making. Agree to be a data sharer and reward others in your decision group for telling more of the story.

Universalism:  Nearly any group can create an exercise to develop and reinforce the open-mindedness universalism requires.
If we hear an account from someone we like, imagine if someone we didn’t like told us the same story, and vice versa.
That requires open-mindedness of the messages that come from paces we don’t like.

Disinterestedness: Avoid conflict of interests.  If two people disagree, a referee can get them to each argue the other’s position with the goal of being the best debater.

Organized Skepticism: Skepticism gets a bump rap because it tends to be associated with negative character traits. Someone who disagrees could be considered “disagreeable”. Someone who disagrees could be considered “disagreeable”. Someone who dissents may be creating “dissention” Maybe part of it is that “skeptical” sounds like “cynical”. Yet true skepticism is consistent with good manners, civil discourse, and friendly communications.

Also Bring your past and future self to the decision table.

Just as we can recruit other people to be our decision buddies, we can recruit other versions of ourselves to act as our own decision buddies.

The best poker players develop practical ways to incorporate their long-term strategic goals into their in-the-moment decisions.

Night Jerry: This tendency we all have to favor our present-self at the expense of our future-self is called temporal discounting. We are willing to take an irrationally large discount to get a reward now instead of waiting for a bigger reward later. Bringing our future-self into the decision gets us started thinking about the future consequences of those in-the-moment decisions. “Hey, don’t forget about me. I’m going to exist and I´d like you to please take that into account”.

Moving regret in front of our decisions: Business journalist and author Suzy Welch developed a popular tool known as 10-10-10 that has the effect of bringing future-us into more of our in-the-moment decisions. What are the consequences of each of my options in ten minutes? In ten months? In ten years?

Backcasting: When it comes to advanced thinking, standing at the end and looking backward is much more effective than looking forward from the beginning. When we identify the goal and work backward from there to “remember” how we got there, the research shows that we do better.  “Prospective hindsight”, imagining that an event has already occurred, increases the ability to correctly identify reasons from outcomes by 30%.

Premortems: A premortem is an investigation into something awful, but before it happens. We all like to bask in an optimistic view of the future. We are generally biased to overestimate the probability of good things happening. Despite the popular wisdom that we achieve success through positive visualization, it turns out that incorporating negative visualization makes us more likely to achieve our goals.

June 15 Reads

a16z Podcast: World’s Largest Supercomputer v. Biology’s Toughest Problems:

Folding at Home was launched 20 years ago this summer in the lab of Vijay Pande at Stanford. In this episode, Vijay (now a general partner at a16z) is joined by his former student and current director of Folding at Home, Greg Bowman, an associate professor at Washington University in St. Louis, and Lauren Richardson. We discuss the origins of the Folding at Home project along with its connection to SETI@Home and Napster; also the scientific and technical advances needed to solve the complex protein folding and distributed computing problems; and importantly what does understanding protein dynamics actually achieve?

Radical Markets by Eric Posner and Glen Weyl a review essay by David K. Levine

Should the Modern Corporation Maximize Shareholder Value?

On Strategy: A Primer: A book focused on the theory and praxis of strategy (free pdf copy).

O’reilly Radar trends to watch: June 2020