Thiel, Cowen, Taleb, Options, Candler, Tiny Schools, Regulation

micro school

I just read this transcript from Tyler Cowen’s interview of Peter Thiel.

I found myself not being able to fully evaluate many of the claims that were made. I don’t know if this is because Cowen and Thiel are simply operating from a much deeper knowledge based than myself, or because they were just being vague and non-linear. It is likely some combination of the two.

Anyways, I did agree with this from Thiel:

If you are starting a computer software company, that costs maybe $100,000, to get a new drug through the FDA, maybe on the order of a billion dollars or so. If the FDA were regulating video game technologies, and you had to do a double-blind study to make sure that the video games weren’t addictive, damaging to your brain, etc.

In short, there are some sectors, predominantly health and education, where over-regulation hinders innovation.

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I’m currently reading Black Swan and AntiFragile by Nicolas Taleb. (HT Ethan Fletcher)

Taleb has so many strong opinions, some of which seem clearly false, that it makes hard to know which of his ideas to trust. But many of his ideas do seem insightful.

I was particularly drawn to his emphasis on options as being a model for how we should think about innovation. Basically, an option minimizes downside while maximizing upside, in that, for a price, you get the option to buy at a certain price without having to commit to buy at a certain price.

His point is that with innovation you similarly want to minimize downside risks while maximizing upside opportunity.

The VC sector basically works on this model: make a bunch of (relatively) small bets, all of which have very high upsides, and hope that one of them works.

In this sense, options are a way of incorporating intellectual humility into bets about the future.

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Recently, Matt Candler has been advocating for Tiny Schools.

One way to think about Tiny Schools is that they are just that: schools with not a lot of kids. An entrepreneur opens a Tiny School, educates some kids, and hopefully the school succeeds.

Another way to think about Tiny Schools is as options: an entrepreneur starts a schools with 15-20 kids and tries to get the model right. If the school doesn’t work, 15-20 kids get a subpar education experience for a few years. Not really the end of the world, though of course not ideal. If the school does work, then the entrepreneur can attempt to scale the model, either by opening more Tiny Schools or by converting the Tiny School into a Regular School.

In short, launching Tiny Schools minimizes downside risks (less kids, no need to buy a large facility) and maximizes upside potential (the schools that do well can then be scaled).

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What regulatory structure might allow for Tiny Schools to thrive?

One model is just to keep Tiny Schools private. This is fine, but requiring tuition inevitably limits who will be served.

Another model is to use public funding, but to make the regulatory model very thin.

I discussed this with Adam Hawf and landed at the following:

  • Market Size: A state would limit the amount of Tiny Schools that received public funds in any given year: perhaps 100 Tiny Schools with no more than 50 students each in any given year. This equates to roughly 5,000 students /  $50 million a year, assuming $10K in public funding per student. This limits the downside for taxpayers.
  • Entry: The application process would be a slimmed down version of a charter application. The entrepreneur would need to have a budget, brief description of the model, and a basic opening plan. 30 pages at most.
  • On-going Regulation: On-going regulations would be based on homeschooling regulations. Basic reporting on students served and finances, but very little oversight.
  • Back End Accountability: There would be no back end accountability. Zero testing requirements or anything of the sort. Rather, the license to operate a Tiny School would be a one time, four year license. Once the license expired, the operator would either need to apply to become a charter school or a private school. From there, the school would enter what ever accountability system the state used for the chosen sector.

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If even ten states adopted this model, at any time we’d have a 1,000 different Tiny School pilots going on around the country.

The downside would be very small.

The upside could be incredibly high.

2 thoughts on “Thiel, Cowen, Taleb, Options, Candler, Tiny Schools, Regulation

  1. Pam Kingsley

    How about taking a lesson from hairdressers and barbershops who rent “chairs” from owners?
    A charter buys a building. For a fee/percentage, charter manages all administrative and operational aspects, as well as, group health insurance and tax planning as the teachers are self-employed.
    Charter “markets” the teacher to families by emphasizing her/his ed background, student scores, student growth after just 1 year, demonstrated “concern” for students & their families, etc. etc.
    De facto, each self-employed teacher is responsible for generating clientele.
    So…
    Charter offers a 60/40 split to teacher.
    25 students = $250,000.
    40% to teacher = $100,000
    As teacher’s reputation builds and attracts more students, split favors teacher. A great teacher, with a great reputation and community following, could manage 30 students, negotiate 60% and be making $180,000 a year.
    Where do I apply?

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  2. ceolaf

    I don’t think you are calculating that right.

    1) I think that you are confusing downside risk with cost. The goal is low cost. One way to control costs is to limit risk. While options DO lower risk to zero, they also add a sunk cost (i.e., the cost of the options). Yeah, it’s a one-time cost. And yes, you can walk away (i.e., not forward risk), but it IS a cost.

    2) These Tiny School DO have costs. And depending on your vantage point, they have rather high costs. And they really are not at all like options.

    * Not like options? Well, there are ongoing costs beyond day one. You cannot just walk away in case of a failure, because you get the kids from the failed Tiny School at the end.

    * There are ongoing costs. Maybe you are thinking that the dollars can be accounted for on day 1 (or 0. whatever.). But there children who are sent to that school keep spending their time there. And the time of children is neither fungible nor replaceable.

    * For a family, the downside cost to a year or two in an absolutely horrible educational experience are enormous. The damage that adults can do to children in six+ hours a day is huge. Obviously, the loss of irreplaceable learning opportunities is huge. But there can be additional affirmative damage, as well. Those are huge costs. Huge.

    3) If you are only thinking in terms of dollars, that misses the point. Educating students is not about a commodity. A community cannot make up (morally) for the harm done to these 50 children by doing better for those 50 children over there. It does not average out. Heck, even the crappy Test-Based Accountability formulas have given up on using averages.

    4) The venture capitalists are looking for the 100x or 1000x payoff. That’s the goal, so most of their investments can fail and they can still make huge profits. That’s your analogy. But I don’t think that anyone is expecting some schools to be 100x or 1000x better than others. Instead, we talk about schools that are perhaps 4x-6x better than the worst schools. That is, somewhere less than “three years of learning” instead of around “half a year of learning.” I don’t even think I’ve seen 10x, in comparing the best schools to the worst. But the venture capitalists look for 100x or 1000x breaking even. So, 100 or 1000 years of learning in one year?

    5) Most experiments fails. That is true in science. That is true in business (i.e., startups). We know this. Across the board, most experiments don’t work. The question is whether the successes make the costs of the failure bearable. If you can get 100x or 1000x payoffs, it’s easy to imagine. But if you can only get less than 3x payoffs, even with averaging, it’s hard to come out ahead.

    6) The purpose of regulation is not to raise the ceiling. It is to raise the floor. Regulation prevents the worst possible. Your system lowers the floor, in the hopes of finding some high flyers. But the failures will be more numerous and far more catastrophic.

    7) You are totally discounting the extreme difficulty of scaling up. Even if you find a Tiny School that works true miracles — say five years of learning in a single year — that does mean you can expand it in the future. Scaling up in education is notoriously difficult. People keep researching and trying and they can’t find ways to make it work. So, the best you’re going to get is your great Tiny School and maybe a couple lessons that improve things on the margin just a little bit elsewhere.

    8) Last, come on man. Think of the children. Think of the children.

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