7 ms·

Counterfactual Theory of Value

42 points by enigmatic02 5y ago

ggm 5y ago
I can believe it's useful as an unscaled relative measure but I can't see it having absolute value. It's totally contextually defined. And in the case of McAfee had net negative value over time. Or perhaps Bernie Madoff is a better example.
- readthenotes1 5y ago
  Value changes over time, sometimes quickly, sometimes slowly, but the value of a thing or service is not constant.
seanhunter 5y ago
This thinking is almost exactly how most pricing works in derivative markets and is the real breakthrough in the original Black/Scholes/Merton model[1] that has been reproduced many times since. They showed how you could replicate the payoff from a European-style option by hedging using the underlying and a risk-free instrument (under certain unrealistic assumptions, notably constant vol and the ability to trade in continuous time). Their argument was that since the payoff of the two things (holding the option and performing this hedging strategy) was the same, the price must be the same, and that produced the famous Black-Scholes formula, which is a closed form price for the hedge portfolio under those assumptions. Since then, pricing using a replication portfolio in this way has been a cornerstone of financial maths - the price of a thing and a perfect hedge/replacement for the thing must be the same. [1] https://www.jstor.org/stable/1831029 https://www.jstor.org/stable/1831029
- runeks 5y ago
  > Since then, pricing using a replication portfolio in this way has been a cornerstone of financial maths - the price of a thing and a perfect hedge/replacement for the thing must be the same. And the reason for this is arbitrage. If you can perfectly hedge your position in Asset A using Asset B (and vice versa), then you can make a profit by simultaneously buying the lower-priced asset while selling the higher-priced asset[1]. Thus causing the prices of the two assets to converge. [1] Many of these assets are simply contracts, which means you don’t have to buy the asset before you can sell it: you simply create a new instance of by “writing something on a piece of paper” and sell that.
  - lifeisstillgood 5y ago
    Is the implication here that if we had a Black/Scholes/Merton method for salaries we would see a readjustment of salaries across the board as people could identify their value as wins above replacement - probably a huge shock to CEOs. Is it possible that automation provides that arbitrage opportunity?
    - sokoloff 5y ago
      The gap between the perfect fungibility of two contracts for asset A or B and the hopelessly imperfect fungibility of two employees is too wide for this to hold. (I think.)
      - lifeisstillgood 5y ago
        But ... Amazon for example redesigns i are ouse picking to make employees fungible. I am pretty sure project management is becoming totally fungible - the reporting and chasing and so forth, can be replaced by automation and is becoming so despite best efforts of millions of "mqnagers" Something intrigues me about this idea. The film / book "Moneyball" showed how to re-create great players "in the aggregate". I think that we will soon enter a phase of "MOOP" - measuring our daily activities on a deep basis, phone calls to colleagues and clients, tonality, agreements and actions etc. And at this point redesigning an organisation to recreate CFOs or salespeople "in the aggregate" becomes ... possible? And if you can do that you get close to the ability to create that fungible option - and close to valuing the job.
        sokoloff 5y ago
        Your first line has some auto-correct line noise in it, but I think I get the gist of your post. Moneyball to me was a lesson and framework on how to make great teams, not great [individual] players. Focusing on under-valued qualities allowed the A’s to build a pennant-winning team on a low budget, by selecting free-agent players the baseball operations groups at other teams were over-looking/under-valuing. Coming back to software, I think many of us know the three people we’d go form a startup with and the 50% of people who might be okay but we’d never sign up to start a company with. I don’t know if that is amenable to a Moneyball-style spreadsheet analysis though. If it is, VC firms would pay billions in aggregate for a working system.
roenxi 5y ago
> In startups, why do the founders receive such a disproportionate percentage of equity? There is a really straightforward answer to this - equity isn't distributed according to a theory of value and nobody ever claimed it was. I own some equity in the Australian company CSL. It is unfair to claim I've ever added any value whatsoever to the company at any point, so obviously I don't get that equity because of a value theory. Even on the basis that people anticipated my buying of that equity - I bought in because I believed the value had already been created. Who gets equity isn't based on value, it is based on power and who has it right now. Value is for working out whether you, the valuer, should make a trade or not.
- lr4444lr 5y ago
  It's based also on risk. Like, primarily. Thus the whole of CAPM finance underlying trillions of dollars in wealth worldwide.
- CryptoPunk 5y ago
  >>It is unfair to claim I've ever added any value whatsoever to the company at any point, so obviously I don't get that equity because of a value theory. You don't receive any profit, realized or otherwise, unless the company appreciates in value, and if the company appreciates, that means you provided capital to what was an undervalued company, or a company that could produce a positive return on the investment of that capital. Either way, your investment would likely have a net positive economic effect, and so the profit you received would be earned.
- dredmorbius 5y ago
  Adam Smith's commentary on wages and the considerations in their assignment is interesting. In Book 1, Chapter X, "Of wages and profit in the different employments of labor and stock", "Inequalities Arising from the Nature of the Employments Themselves": The five following are the principal circumstances which, so far as I have been able to observe, make up for a small pecuniary gain in some employments, and counter-balance a great one in others: first, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and fifthly, the probability or improbability of success in them. It's an interesting set of factors, one that many economists and markets-advocates seem wholly unaware. It does not reflect other arguments, notably marginalist analysis, or power dynamics as mentioned elsewhere in this thread. Still, it's worth some consideration, and explicitly references the roles of both risk and training. https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/Chapter_10 https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/...
ur-whale 5y ago
TL;DR: when you want to know the real value of something, picture a world without it.
- wruza 5y ago
  This is inspiring, especially if you want to create something good, clearly seeing how bad that part of the world is now. It seems that it gets only worse each year, so opportunities should open up. But then the latter doesn’t feel like it should. Then you realize that your picture is missing a perception of value, a shift in which costs a fortune of scale and belief, so it takes an Elon Zuckerberg to do that. This is uninspiring.
pydry 5y ago
>Elon Musk provides another example. Today, Tesla is worth more than $1 trillion. Without his will and personality, Tesla probably wouldn’t exist. Yes it would. Mark Tarpenning and Martin Eberhard founded Tesla. They were later forced out by Elon. They were arguably quite poorly compensated for their part in starting this company. This speaks to the fundamental problem with this theory - it's all very well saying that Elon is worth his money because Tesla would be nothing without him, but what if it actually would have been wildly successful without him and he mostly rode the wave with his $6 million series A investment? Of course, you cant prove what "would" have happened, you only know what actually did, so your valur is measured by whomever tells the most compelling story.
- martindbp 5y ago
  You can't prove it, but Musk is not a one-hit wonder. He's transformed the space industry by sheer force of will (as a part time founder & CEO), as Tesla has done for EVs, so it's quite reasonable to assign the success of Tesla to him.
  - pydry 5y ago
    His perception management skills are top notch and he works as an effective conduit for getting capital to engineers. The rest is...meh. In SpaceX's case they picked up on rocketry research where NASA left off because its budget was squeezed.
    - martindbp 5y ago
      Getting funding, finding the most talented engineers, deciding what to build and motivating people are the high-level skills needed from a founder/CEO. I don't see any argument here against his importance to all companies that he's been involved in. Nobody's claiming he's building rockets all by himself.
    - mbrodersen 5y ago
      NASA is a massively ineffective bureaucratic organisation. Even with an “unsqueezed” budget it still wouldn’t have achieved what SpaceX has achieved.
choppaface 5y ago
Not really counterfactual theory, but opportunity cost. The cost of retaining the CEO to most of the shareholders (even a consensus of them) is high because they can’t realistically install a new one. Opportunity cost gets conditioned on the investor. If you’re a maker, or a player with leverage on the board or something, your opportunity cost is different.
- nabla9 5y ago
  The author is trying to reinvent the wheel. Thinking in terms of comparative advantage, autarky price, and opportunity cost makes this clearer. opportunity cost = (returns on best forgone option) - (returns on chosen option).
BenoitP 5y ago
Otherwise known as the Shapley value [1], which also takes into account the interaction between participants. > The Shapley value is the average marginal contribution of a feature value across all possible coalitions. [2] EDIT: There are efforts to decompose that attribution of value into Synergy, Redundancy and Independence components [3], which I believe could also have meaning the context of business. [1] https://en.wikipedia.org/wiki/Shapley_value https://en.wikipedia.org/wiki/Shapley_value [2] https://christophm.github.io/interpretable-ml-book/shapley.html https://christophm.github.io/interpretable-ml-book/shapley.h... [3] https://arxiv.org/pdf/2107.12436.pdf https://arxiv.org/pdf/2107.12436.pdf
02020202 5y ago
nathias 5y ago
Startup valuations have nothing to do with theory of value. Theory of value, like the marxist labor theory of value are theories about the metaphysical status, origin an mechanisms of value. It is an explanation of value in general not a heuristic people would use to evaluate things. If labor theory is right (and it isn't) the answer of why founders get so much more is because they are exploiting the other guys working there.
michaelt 5y ago
> In startups, why do the founders receive such a disproportionate percentage of equity? Because on day zero, 100% of the company must be owned, and the founders are the only ones there. Equity to founders isn't handed out based on an arm's-length negotiation, or on the basis of work done.
- istinetz 5y ago
  But all other stock allocations are an arms length transaction; so all you've done is reframe the question to "why do the founders retain so much equity?" Why dont seed fund demand 16% instead of 8%? Why doesn't the 6th employee demand 5% instead of 3%?
  - jasode 5y ago
    >reframe the question to "why do the founders retain so much equity?" The founders can only retain as much equity as the marketplace allows. Each side has a threshold to do a business transaction. >Why dont seed fund demand 16% instead of 8%? Why doesn't the 6th employee demand 5% instead of 3%? The parties can demand any percentage they want but the ultimate resolution is will the other side agree to it? In other words, the question is, "Why do angels _agree_ to 8% instead of 16%"? Because an offer requiring 16% would be rejected by the founder and lose to other angels only requesting 8%. E.g., back in 1999 during the dot-com craze, VC Sequoia Capital offered MP3.com (founder Michael Robertson) $10 million for 45% of the company. He said no deal. They later negotiated it down to 20% ... which is in the more reasonable ~15% to ~20% range of other VC deals. Lesson: Demanding a high 45% so that the founder only retains 55% instead of 80% doesn't automatically mean the founder will say "yes" to the reduced equity. People can still voluntarily choose not to do business with you at all. All "demands" are competing in the marketplace. Can an employee demand a higher 10% equity? Sure. Whether the founders _agree_ to it depends on the marketplace and the employee's particular leverage (e.g. a very rare skill).
deleted 5y ago
[deleted]
Traster 5y ago
The problem I have with this is that it presupposes that you can change 1 thing and view the difference. What if the only reason a company is successful is because of a unique idea that 3 people came up with together? Are each of them worth 100% of the company- take any of them away and it’d be worth nothing. Any company or endeavour is made up of complex interactions of many different people it’s impossible to differentiate with respect to just one variable.
- thaumasiotes 5y ago
  > The problem I have with this is that it presupposes that you can change 1 thing and view the difference. You should have other problems with it. Value that would be lost in the absence of a thing is unrelated to the value gained by its presence, because you have more choices than "pay for the thing" or "do without". The theory of value espoused in this post would tell you that you should pay more for the oxygen you consume than you do for your computer. (There is some self-contradiction in the post - it defines counterfactual value thus: > what if pay is determined by asking: “How much would this company be worth without this individual?” But then it provides an example of something very different: > Baseball managers use the Counterfactual Theory of Value all the time, using a statistic called “Wins Above Replacement.” It predicts how many more wins a player gives their team, compared to whoever would replace them.)
  - HPsquared 5y ago
    You'd be willing to pay more for the oxygen than the computer (its value is very high) but the price is low (it's free). Usually when you buy something, the value (to you) is greater than the price, which is greater than the cost (to the seller).
    - thaumasiotes 5y ago
      I am no more willing to pay for the oxygen I breathe than you are. It's not just free, it's also worthless. Paying for it would only make sense in a context like scuba diving, where I'd be in an environment in which finding my own oxygen was difficult.
lordnacho 5y ago
Labour theory isn't wrong for the reason he states. Causing people to work harder isn't actually a problem with the theory. It's wrong for other reasons. The moneyball theory of value is not terrible, is actually pretty sound. But this kind of analysis works well in a context like sports because there's only so many players in a team and the team is basically just struggling in a win or lose world against other similar teams. Your wins come from someone else's losses. The sports metaphor is also applicable because sports are reproducible. It's the same little world over and over again, with the same people. And there's just an enormous amount of stats to back up or reject some hypothesis. Goalkeeper is good or bad? Let's check how many shots he faced and what quality they were. In the general market this is not the case. The firm only launches its first product once, in a world where you don't get to repeat the conditions. We also do have a history of each contributor's actions. Basically it's very hard to make comparisons.
oli5679 5y ago
One thing that is important here is whether the counterfactual is the marginal employee, or nobody. In the sports roster case, a soccer/baseball team would be in trouble if they lost one of their average-talent players if they didn't have anyone on the pitch but there might be a plentiful supply of low-cost players willing to work for a similar amount. This means that the counterfactual of 'lose average player and replace with noone' suggests that the player has a very high counterfactual theory of value, but 'lose average player and replace with similar average player' suggests that the counterfactual value is not high. There might be a star player such that they are not replacable by anyone, or by anyone also able to demand a high salary from an alternative team, and they would have a very high value according to both counterfactuals. It seems to me that many sports teams operate with the 'similar average player' counterfactual. I think you could draw analogies to businesses and employee pay.
zeckalpha 5y ago
This doesn’t account for frequentist past looking vs Bayesian future looking value. At some point, the value created by an individual is no longer what it used to be, but ownership compensation persists, while cash compensation tapers off.
MaybeItsMia 5y ago
Tesla would exist without Elon Musk. Elon Musk literally simply just bought the company, along with the right to call himself the "founder". Sure without Elon Musk Tesla might be more accurately valued, IE valued significantly less, but it's unclear how much social value is actually created by his showmanship. There's a difference between exchange value and use value.
- MichaelBurge 5y ago
  Exchange value is use value for the company, because it can make stock deals to obtain things for the same nominal(dollar) amount while giving up much less equity. Similarly, if the stock is undervalued, it becomes more costly to raise capital in public markets. So hiring a CEO with poor market perception limits a company's options, even if they're internally very effective.
  - derbOac 5y ago
    I dont mean to take a position on Musk per se, but I do think there's a reasonable argument that Tesla might actually do better without him. He does bring a certain amount of risk. I raise this in part because one of the problems with counterfactuals is evaluating a state of affairs that you dont have access to. In fact, evaluation of that alternate state is necessarily biased by the currrent state.
cassepipe 5y ago
Isn't the first paragraph of this article what every introduction to the labor theory of value says it is not? This is the "mud pie" argument. You may disagree with the theory but please check what it is first .
- cassepipe 5y ago
  Here is a somewhat refutation of the mud pie argument https://youtu.be/ccT66pMJPCw https://youtu.be/ccT66pMJPCw
VictorPath 5y ago
There might be some phenomenon he is pointing out here, but his logic in doing so makes no sense. Even his internal logic makes no sense. He starts out by talking about the value of a product (commodity) determined by the labor theory of value. Then he jumps to how much someone is compensated in salary. Then he jumps to a company's value and the ease at which someone at the helm can raise capital. In terms of comparing two systems of value, this is jumping all over the place. How value is added to a specific nascent commodity going through an assembly line is a different thing than the ability of one person versus another to raise capital and how that affects a company market cap and is different than what they should be compensated. People like Eugen von Boehm-Bawerk wrote well-reasoned arguments against the labor theory of value, which might be right or wrong, but at least they have a clear line of reasoning. This piece talks about value but jumps all over the place. There might be an interesting phenomenon being pointed to, but there is no well reasoned argument.
- prometheus76 5y ago
  Here's my argument against the labor theory of value: if you spend one hour making mud pies, and I spend one hour making sandwiches, then our products have equal value according to the labor theory of value.
  - winnit 5y ago
    Not really, since you are swapping an easily available commodity ‘mud’ for bread and fillings. You should specify that the value added to the mud would be unequal to the value added to the sandwich ingredients to make the point you want to. Since you begin with different initial conditions you ‘muddy’ the conclusions.
    - prometheus76 5y ago
      OK, here's another refutation of the labor theory of value. A woodworking crafter with twenty years of experience takes five hours to make a bookshelf. A person who just started woodworking today takes twenty hours to make the same bookshelf, but it is out of square, out of plumb, is wobbly and has several nail holes in it. According to the labor theory of value, the noob bookshelf is worth more because the laborer took twenty hours to make said shelf, instead of the five hours of the efficient crafter.
jplr8922 5y ago
The labor theory of value is an old marxist economic theory which is not used by serious social scientists in their field. The modern approach is called the opportunity cost, and by definition is a counterfactual scenario. It is triggered by a choice you actually have. Otherwise it's called science fiction. This article does a very average job at explaining the whole thing... Even the Elon Musk example is not accurate. The value of Tesla in the ''without Elon'' scenario is wrong, because in that case Elon would be *replaced* by another overconfident nerd. Just think of Apple without Steve Jobs ; he got replaced by something different, and the firm is still standing strong today... Good counterfactual thinking is super important, but I do not feel that the author is a master of the art.
dredmorbius 5y ago
This is a restatement of marginalism. Essentially: what is the marginal contribution of some factor X. Including the case where X is some individual contributor. The question Dave Perell asks needs to be augmented by one other: What is the cost, and value, of an alternative input factor? If X provides 100 units of value at 20 units of cost, and Y provides 90 units of value at 9 units of cost, then the net advantage is to utilise Y (net benefit: 81) rather than X (net benefit: 80). Of course in the real world, neither benefits nor costs are quite so readily assessed, but the principle remains: you want to account for both the productivity* AND the cost of the input or contributor.
fisherjeff 5y ago
This seems like a roundabout way of saying something that seems fairly anodyne: A F500 CEO doesn’t provide 1,000x the value of a rank-and-file employee, they’re just (debatably, IMO) 1,000x more scarce.

42 points by enigmatic02 5y ago

ggm 5y ago

I can believe it's useful as an unscaled relative measure but I can't see it having absolute value. It's totally contextually defined. And in the case of McAfee had net negative value over time. Or perhaps Bernie Madoff is a better example.

readthenotes1 5y ago
Value changes over time, sometimes quickly, sometimes slowly, but the value of a thing or service is not constant.

seanhunter 5y ago

This thinking is almost exactly how most pricing works in derivative markets and is the real breakthrough in the original Black/Scholes/Merton model[1] that has been reproduced many times since. They showed how you could replicate the payoff from a European-style option by hedging using the underlying and a risk-free instrument (under certain unrealistic assumptions, notably constant vol and the ability to trade in continuous time). Their argument was that since the payoff of the two things (holding the option and performing this hedging strategy) was the same, the price must be the same, and that produced the famous Black-Scholes formula, which is a closed form price for the hedge portfolio under those assumptions. Since then, pricing using a replication portfolio in this way has been a cornerstone of financial maths - the price of a thing and a perfect hedge/replacement for the thing must be the same. [1] https://www.jstor.org/stable/1831029 https://www.jstor.org/stable/1831029

runeks 5y ago
> Since then, pricing using a replication portfolio in this way has been a cornerstone of financial maths - the price of a thing and a perfect hedge/replacement for the thing must be the same. And the reason for this is arbitrage. If you can perfectly hedge your position in Asset A using Asset B (and vice versa), then you can make a profit by simultaneously buying the lower-priced asset while selling the higher-priced asset[1]. Thus causing the prices of the two assets to converge. [1] Many of these assets are simply contracts, which means you don’t have to buy the asset before you can sell it: you simply create a new instance of by “writing something on a piece of paper” and sell that.
- lifeisstillgood 5y ago
  Is the implication here that if we had a Black/Scholes/Merton method for salaries we would see a readjustment of salaries across the board as people could identify their value as wins above replacement - probably a huge shock to CEOs. Is it possible that automation provides that arbitrage opportunity?
  - sokoloff 5y ago
    The gap between the perfect fungibility of two contracts for asset A or B and the hopelessly imperfect fungibility of two employees is too wide for this to hold. (I think.)
    - lifeisstillgood 5y ago
      But ... Amazon for example redesigns i are ouse picking to make employees fungible. I am pretty sure project management is becoming totally fungible - the reporting and chasing and so forth, can be replaced by automation and is becoming so despite best efforts of millions of "mqnagers" Something intrigues me about this idea. The film / book "Moneyball" showed how to re-create great players "in the aggregate". I think that we will soon enter a phase of "MOOP" - measuring our daily activities on a deep basis, phone calls to colleagues and clients, tonality, agreements and actions etc. And at this point redesigning an organisation to recreate CFOs or salespeople "in the aggregate" becomes ... possible? And if you can do that you get close to the ability to create that fungible option - and close to valuing the job.
      - sokoloff 5y ago
        Your first line has some auto-correct line noise in it, but I think I get the gist of your post. Moneyball to me was a lesson and framework on how to make great teams, not great [individual] players. Focusing on under-valued qualities allowed the A’s to build a pennant-winning team on a low budget, by selecting free-agent players the baseball operations groups at other teams were over-looking/under-valuing. Coming back to software, I think many of us know the three people we’d go form a startup with and the 50% of people who might be okay but we’d never sign up to start a company with. I don’t know if that is amenable to a Moneyball-style spreadsheet analysis though. If it is, VC firms would pay billions in aggregate for a working system.

roenxi 5y ago

> In startups, why do the founders receive such a disproportionate percentage of equity? There is a really straightforward answer to this - equity isn't distributed according to a theory of value and nobody ever claimed it was. I own some equity in the Australian company CSL. It is unfair to claim I've ever added any value whatsoever to the company at any point, so obviously I don't get that equity because of a value theory. Even on the basis that people anticipated my buying of that equity - I bought in because I believed the value had already been created. Who gets equity isn't based on value, it is based on power and who has it right now. Value is for working out whether you, the valuer, should make a trade or not.

lr4444lr 5y ago
It's based also on risk. Like, primarily. Thus the whole of CAPM finance underlying trillions of dollars in wealth worldwide.
CryptoPunk 5y ago
>>It is unfair to claim I've ever added any value whatsoever to the company at any point, so obviously I don't get that equity because of a value theory. You don't receive any profit, realized or otherwise, unless the company appreciates in value, and if the company appreciates, that means you provided capital to what was an undervalued company, or a company that could produce a positive return on the investment of that capital. Either way, your investment would likely have a net positive economic effect, and so the profit you received would be earned.
dredmorbius 5y ago
Adam Smith's commentary on wages and the considerations in their assignment is interesting. In Book 1, Chapter X, "Of wages and profit in the different employments of labor and stock", "Inequalities Arising from the Nature of the Employments Themselves": The five following are the principal circumstances which, so far as I have been able to observe, make up for a small pecuniary gain in some employments, and counter-balance a great one in others: first, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and fifthly, the probability or improbability of success in them. It's an interesting set of factors, one that many economists and markets-advocates seem wholly unaware. It does not reflect other arguments, notably marginalist analysis, or power dynamics as mentioned elsewhere in this thread. Still, it's worth some consideration, and explicitly references the roles of both risk and training. https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/Chapter_10 https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/...

ur-whale 5y ago

TL;DR: when you want to know the real value of something, picture a world without it.

wruza 5y ago
This is inspiring, especially if you want to create something good, clearly seeing how bad that part of the world is now. It seems that it gets only worse each year, so opportunities should open up. But then the latter doesn’t feel like it should. Then you realize that your picture is missing a perception of value, a shift in which costs a fortune of scale and belief, so it takes an Elon Zuckerberg to do that. This is uninspiring.

pydry 5y ago

>Elon Musk provides another example. Today, Tesla is worth more than $1 trillion. Without his will and personality, Tesla probably wouldn’t exist. Yes it would. Mark Tarpenning and Martin Eberhard founded Tesla. They were later forced out by Elon. They were arguably quite poorly compensated for their part in starting this company. This speaks to the fundamental problem with this theory - it's all very well saying that Elon is worth his money because Tesla would be nothing without him, but what if it actually would have been wildly successful without him and he mostly rode the wave with his $6 million series A investment? Of course, you cant prove what "would" have happened, you only know what actually did, so your valur is measured by whomever tells the most compelling story.

martindbp 5y ago
You can't prove it, but Musk is not a one-hit wonder. He's transformed the space industry by sheer force of will (as a part time founder & CEO), as Tesla has done for EVs, so it's quite reasonable to assign the success of Tesla to him.
- pydry 5y ago
  His perception management skills are top notch and he works as an effective conduit for getting capital to engineers. The rest is...meh. In SpaceX's case they picked up on rocketry research where NASA left off because its budget was squeezed.
  - martindbp 5y ago
    Getting funding, finding the most talented engineers, deciding what to build and motivating people are the high-level skills needed from a founder/CEO. I don't see any argument here against his importance to all companies that he's been involved in. Nobody's claiming he's building rockets all by himself.
  - mbrodersen 5y ago
    NASA is a massively ineffective bureaucratic organisation. Even with an “unsqueezed” budget it still wouldn’t have achieved what SpaceX has achieved.

choppaface 5y ago

Not really counterfactual theory, but opportunity cost. The cost of retaining the CEO to most of the shareholders (even a consensus of them) is high because they can’t realistically install a new one. Opportunity cost gets conditioned on the investor. If you’re a maker, or a player with leverage on the board or something, your opportunity cost is different.

nabla9 5y ago
The author is trying to reinvent the wheel. Thinking in terms of comparative advantage, autarky price, and opportunity cost makes this clearer. opportunity cost = (returns on best forgone option) - (returns on chosen option).

BenoitP 5y ago

Otherwise known as the Shapley value [1], which also takes into account the interaction between participants. > The Shapley value is the average marginal contribution of a feature value across all possible coalitions. [2] EDIT: There are efforts to decompose that attribution of value into Synergy, Redundancy and Independence components [3], which I believe could also have meaning the context of business. [1] https://en.wikipedia.org/wiki/Shapley_value https://en.wikipedia.org/wiki/Shapley_value [2] https://christophm.github.io/interpretable-ml-book/shapley.html https://christophm.github.io/interpretable-ml-book/shapley.h... [3] https://arxiv.org/pdf/2107.12436.pdf https://arxiv.org/pdf/2107.12436.pdf

02020202 5y ago

nathias 5y ago

Startup valuations have nothing to do with theory of value. Theory of value, like the marxist labor theory of value are theories about the metaphysical status, origin an mechanisms of value. It is an explanation of value in general not a heuristic people would use to evaluate things. If labor theory is right (and it isn't) the answer of why founders get so much more is because they are exploiting the other guys working there.

michaelt 5y ago

> In startups, why do the founders receive such a disproportionate percentage of equity? Because on day zero, 100% of the company must be owned, and the founders are the only ones there. Equity to founders isn't handed out based on an arm's-length negotiation, or on the basis of work done.

istinetz 5y ago
But all other stock allocations are an arms length transaction; so all you've done is reframe the question to "why do the founders retain so much equity?" Why dont seed fund demand 16% instead of 8%? Why doesn't the 6th employee demand 5% instead of 3%?
- jasode 5y ago
  >reframe the question to "why do the founders retain so much equity?" The founders can only retain as much equity as the marketplace allows. Each side has a threshold to do a business transaction. >Why dont seed fund demand 16% instead of 8%? Why doesn't the 6th employee demand 5% instead of 3%? The parties can demand any percentage they want but the ultimate resolution is will the other side agree to it? In other words, the question is, "Why do angels _agree_ to 8% instead of 16%"? Because an offer requiring 16% would be rejected by the founder and lose to other angels only requesting 8%. E.g., back in 1999 during the dot-com craze, VC Sequoia Capital offered MP3.com (founder Michael Robertson) $10 million for 45% of the company. He said no deal. They later negotiated it down to 20% ... which is in the more reasonable ~15% to ~20% range of other VC deals. Lesson: Demanding a high 45% so that the founder only retains 55% instead of 80% doesn't automatically mean the founder will say "yes" to the reduced equity. People can still voluntarily choose not to do business with you at all. All "demands" are competing in the marketplace. Can an employee demand a higher 10% equity? Sure. Whether the founders _agree_ to it depends on the marketplace and the employee's particular leverage (e.g. a very rare skill).

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Traster 5y ago

The problem I have with this is that it presupposes that you can change 1 thing and view the difference. What if the only reason a company is successful is because of a unique idea that 3 people came up with together? Are each of them worth 100% of the company- take any of them away and it’d be worth nothing. Any company or endeavour is made up of complex interactions of many different people it’s impossible to differentiate with respect to just one variable.

thaumasiotes 5y ago
> The problem I have with this is that it presupposes that you can change 1 thing and view the difference. You should have other problems with it. Value that would be lost in the absence of a thing is unrelated to the value gained by its presence, because you have more choices than "pay for the thing" or "do without". The theory of value espoused in this post would tell you that you should pay more for the oxygen you consume than you do for your computer. (There is some self-contradiction in the post - it defines counterfactual value thus: > what if pay is determined by asking: “How much would this company be worth without this individual?” But then it provides an example of something very different: > Baseball managers use the Counterfactual Theory of Value all the time, using a statistic called “Wins Above Replacement.” It predicts how many more wins a player gives their team, compared to whoever would replace them.)
- HPsquared 5y ago
  You'd be willing to pay more for the oxygen than the computer (its value is very high) but the price is low (it's free). Usually when you buy something, the value (to you) is greater than the price, which is greater than the cost (to the seller).
  - thaumasiotes 5y ago
    I am no more willing to pay for the oxygen I breathe than you are. It's not just free, it's also worthless. Paying for it would only make sense in a context like scuba diving, where I'd be in an environment in which finding my own oxygen was difficult.

lordnacho 5y ago

Labour theory isn't wrong for the reason he states. Causing people to work harder isn't actually a problem with the theory. It's wrong for other reasons. The moneyball theory of value is not terrible, is actually pretty sound. But this kind of analysis works well in a context like sports because there's only so many players in a team and the team is basically just struggling in a win or lose world against other similar teams. Your wins come from someone else's losses. The sports metaphor is also applicable because sports are reproducible. It's the same little world over and over again, with the same people. And there's just an enormous amount of stats to back up or reject some hypothesis. Goalkeeper is good or bad? Let's check how many shots he faced and what quality they were. In the general market this is not the case. The firm only launches its first product once, in a world where you don't get to repeat the conditions. We also do have a history of each contributor's actions. Basically it's very hard to make comparisons.

oli5679 5y ago

One thing that is important here is whether the counterfactual is the marginal employee, or nobody. In the sports roster case, a soccer/baseball team would be in trouble if they lost one of their average-talent players if they didn't have anyone on the pitch but there might be a plentiful supply of low-cost players willing to work for a similar amount. This means that the counterfactual of 'lose average player and replace with noone' suggests that the player has a very high counterfactual theory of value, but 'lose average player and replace with similar average player' suggests that the counterfactual value is not high. There might be a star player such that they are not replacable by anyone, or by anyone also able to demand a high salary from an alternative team, and they would have a very high value according to both counterfactuals. It seems to me that many sports teams operate with the 'similar average player' counterfactual. I think you could draw analogies to businesses and employee pay.

zeckalpha 5y ago

This doesn’t account for frequentist past looking vs Bayesian future looking value. At some point, the value created by an individual is no longer what it used to be, but ownership compensation persists, while cash compensation tapers off.

MaybeItsMia 5y ago

Tesla would exist without Elon Musk. Elon Musk literally simply just bought the company, along with the right to call himself the "founder". Sure without Elon Musk Tesla might be more accurately valued, IE valued significantly less, but it's unclear how much social value is actually created by his showmanship. There's a difference between exchange value and use value.

MichaelBurge 5y ago
Exchange value is use value for the company, because it can make stock deals to obtain things for the same nominal(dollar) amount while giving up much less equity. Similarly, if the stock is undervalued, it becomes more costly to raise capital in public markets. So hiring a CEO with poor market perception limits a company's options, even if they're internally very effective.
- derbOac 5y ago
  I dont mean to take a position on Musk per se, but I do think there's a reasonable argument that Tesla might actually do better without him. He does bring a certain amount of risk. I raise this in part because one of the problems with counterfactuals is evaluating a state of affairs that you dont have access to. In fact, evaluation of that alternate state is necessarily biased by the currrent state.

cassepipe 5y ago

Isn't the first paragraph of this article what every introduction to the labor theory of value says it is not? This is the "mud pie" argument. You may disagree with the theory but please check what it is first .

cassepipe 5y ago
Here is a somewhat refutation of the mud pie argument https://youtu.be/ccT66pMJPCw https://youtu.be/ccT66pMJPCw

VictorPath 5y ago

There might be some phenomenon he is pointing out here, but his logic in doing so makes no sense. Even his internal logic makes no sense. He starts out by talking about the value of a product (commodity) determined by the labor theory of value. Then he jumps to how much someone is compensated in salary. Then he jumps to a company's value and the ease at which someone at the helm can raise capital. In terms of comparing two systems of value, this is jumping all over the place. How value is added to a specific nascent commodity going through an assembly line is a different thing than the ability of one person versus another to raise capital and how that affects a company market cap and is different than what they should be compensated. People like Eugen von Boehm-Bawerk wrote well-reasoned arguments against the labor theory of value, which might be right or wrong, but at least they have a clear line of reasoning. This piece talks about value but jumps all over the place. There might be an interesting phenomenon being pointed to, but there is no well reasoned argument.

prometheus76 5y ago
Here's my argument against the labor theory of value: if you spend one hour making mud pies, and I spend one hour making sandwiches, then our products have equal value according to the labor theory of value.
- winnit 5y ago
  Not really, since you are swapping an easily available commodity ‘mud’ for bread and fillings. You should specify that the value added to the mud would be unequal to the value added to the sandwich ingredients to make the point you want to. Since you begin with different initial conditions you ‘muddy’ the conclusions.
  - prometheus76 5y ago
    OK, here's another refutation of the labor theory of value. A woodworking crafter with twenty years of experience takes five hours to make a bookshelf. A person who just started woodworking today takes twenty hours to make the same bookshelf, but it is out of square, out of plumb, is wobbly and has several nail holes in it. According to the labor theory of value, the noob bookshelf is worth more because the laborer took twenty hours to make said shelf, instead of the five hours of the efficient crafter.

jplr8922 5y ago

The labor theory of value is an old marxist economic theory which is not used by serious social scientists in their field. The modern approach is called the opportunity cost, and by definition is a counterfactual scenario. It is triggered by a choice you actually have. Otherwise it's called science fiction. This article does a very average job at explaining the whole thing... Even the Elon Musk example is not accurate. The value of Tesla in the ''without Elon'' scenario is wrong, because in that case Elon would be *replaced* by another overconfident nerd. Just think of Apple without Steve Jobs ; he got replaced by something different, and the firm is still standing strong today... Good counterfactual thinking is super important, but I do not feel that the author is a master of the art.

dredmorbius 5y ago

This is a restatement of marginalism. Essentially: what is the marginal contribution of some factor X. Including the case where X is some individual contributor. The question Dave Perell asks needs to be augmented by one other: What is the cost, and value, of an alternative input factor? If X provides 100 units of value at 20 units of cost, and Y provides 90 units of value at 9 units of cost, then the net advantage is to utilise Y (net benefit: 81) rather than X (net benefit: 80). Of course in the real world, neither benefits nor costs are quite so readily assessed, but the principle remains: you want to account for both the productivity* AND the cost of the input or contributor.

fisherjeff 5y ago

This seems like a roundabout way of saying something that seems fairly anodyne: A F500 CEO doesn’t provide 1,000x the value of a rank-and-file employee, they’re just (debatably, IMO) 1,000x more scarce.