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The Ponzi threshold and the Armstrong principle

Mark Palko writes of the Ponzi threshold: “sometimes overhyped companies that start out with viable business plans see their valuation become so inflated that, in order to meet and sustain investor expectations, they have to come up with new and increasingly fantastic longshot schemes, anything that sounds like it might possibly pay off with lottery ticket odds.”

Interesting convergence of ideas, as this reminds me a lot of the (Lance) Armstrong Principle: If you push people to promise more than they can deliver, they’re motivated to cheat.

Here’s Palko’s example (see also here):

First, hype and next-big-thingism push Uber’s value far beyond any defensible level, then, as reality sets in and investors realize that the original business model, though sound, can never possibly justify the money that’s been put into the company, Uber’s management responds with a series of more and more improbable proposals in order to keep the buzz going.

What can be hard to understand with Uber, as with Armstrong, is how things went on like this for so long. It’s practically conventional wisdom now that Uber is trapped, and it was no secret within the cycling world that Lance was doping. But in both cases lots of influential people stayed on the train for a really long time. Part of it must be the sunk cost fallacy or its intellectual/reputational equivalent, part must be the stock pumping idea (if you have money invested in Uber or reputation invested in Lance, then you’d rather keep the bubble afloat for as long as possible), and part of it must be the calculation that it will all work out (in Uber’s case, that might be public subsidies such as juicy citywide Uber contracts for public transit; for Armstrong perhaps the hope was that his anti-doping adversaries would eventually give up).

In any case, whatever one thinks about these particular cases, it’s interesting to see the connection between the Ponzi threshold and the Armstrong principle.

17 Comments

  1. D Kane says:

    > It’s practically conventional wisdom now that Uber is trapped

    Huh? The “conventional wisdom” — which most financial professionals would classify as “current valuation” — is that Uber is worth billions of dollars, perhaps a number like $20 billion. This is down a lot from its valuation a year or two ago, but still hardly “trapped.”

    You (and others) may think that Uber is in real trouble, has no viable path to profitability, is doomed to lose to Wyaymo, whatever. But the market definitely disagrees.

  2. cugrad says:

    “If you push people to promise more than they can deliver, they’re motivated to cheat.”

    This is always easier said than done. How much push is too much? When you advise a student, do you know his limit? Or when a trainer at the gym takes on a client, does he know the client’s limit? In my opinion, you can and should push, but as to the cut off point, you may never know.

    So, productivity and discipline/ethics go hand in hand. I think let go of one hand while holding tight the other is where the problem is. Just my opinion.

  3. Mark Palko says:

    On a related Note:

    “Tesla Sales: $12 billion General Motors Sales: $144 billion Tesla Market Cap: $58 billion General Motors Market Cap: $55 billion”

    https://twitter.com/charliebilello/status/1013853310967844864

    • Mark Palko says:

      See also Netflix and Disney

    • AllanC says:

      Comparing Market Cap to Sales between companies with vastly different capital structures is a highly ineffective way to accomplish anything. Enterprise Value helps compare between capital structures, but even still, you need to be extremely careful to consider if the companies you are comparing are in competitive industries that make strictly zero economic profit or are companies that enjoy incumbent competitive advantages.

      See, for example, any of Bruce Greenwald’s lectures (some available on YouTube).

  4. Eric says:

    Hey, how come nobody mentioned Theranos? Or maybe that deserves a separate post.

  5. Dzhaughn says:

    Here’s an interestingly extreme example: The new business model is to give away the money to strangers! “Cash-flush Business-light” indeed.

    https://www.nytimes.com/2018/07/01/technology/cryptocurrency-ripple.html

    Is the Times now taking cues from this blog? And why not?

    • Mark Palko says:

      For the world of crypto-currencies, the ripple plan borders on rational. They are sitting on billions of dollars worth of a virtual security that will be worth virtually nothing when the bubble pops. Giving away a few hundred million of that security to keep the illusion going might not be a bad idea. I only hope that the recipients of the charitable foundation part of the plan are unloading the XRP ASAP.

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