Business in Bulgaria 2018?

 Purpose

The following article, written by Ivan Petkov, aims to make an in-depth review of the Bulgarian business, to compare the Bulgarian business environment with that of other neighboring countries, and to highlight some of the risks and trends that I have been able to find for you.
This article was created to help managers and business owners. It should be used as a guidebook in the current business environment and aims to enrich the overall picture that the reader already has.
This article, despite its volume, does not claim to be complete and completeness of the topics concerned.

All the recommendations and guidelines outlined here should be the responsibility of the reader.”Business in Bulgaria 2018?” Is divided into three parts:

  •  Bulgaria? – Macroeconomic Review of Bulgaria, where I describe basic macroeconomic indicators measuring business activity or business indirectly.
  • Business? – researching the big business in Bulgaria, where we analyze the structure of large and medium-sized companies in our country, as well as the business climate in the country compared to other countries in the region.
  • 2018? – the author’s vision for the future, the main issues we face and common proposals to address the challenges of the day.

Methodology

Both deductive and the inductive approaches are been used. In the relevant chapters:

  • Bulgaria? – main conclusions based on macroeconomic indicators. Simple statistical analyzes to understand the data were also used
  • Business? – main lessons based on aggregated data, such as a description of processes and ranking of indicators. Again, simple statistical techniques are used to understand and rank data.
  • about the future and  2018? – conclusions based on observations of processes, logic, and even philosophy and ethics.

Bulgaria?

This chapter will compare the business environment in Bulgaria through the main economic indicators with other countries.
Bulgaria is a small country situated at a key location on the Balkan Peninsula. The country is part of the European Economic Area and although it is the poorest country in the European Union, it is among the world’s richest countries (see map below).
A map of the countries of the world – high green income countries, those in red are low-income, and the rest are medium-sized.

world_map

Now let’s review some important social and economic trends.

Demographics

In this chapter, I will outline the main demographic trends in the country. The conclusions made may seem obvious at first glance, but let’s backed them up with data.

Migration

migration

The migration trends for the past 25 years can be summarised as follows:

  • A decrease in population from less than 9 million people to just over 7 million people.
  • A minimal decline of the urban population as a whole and a drop of 1.1 million people of the rural population.
    * There is also a clear migration trend from the small town to the big city, but this phenomenon is not reflected in this analysis.
  • Nearly 25% decrease in population density
  • Near 20% drop in the working population

Aging and life expectancy

above_65

The share of the adult population in the country (over 65) has increased from 13% of the total population to 20% of the total population. This is due to the rise in life expectancy (+3 years for men and women), a drop in birth rate until 2000, followed by a gradual growth in emigration among young people in the country. * See the graphs below

life_expectancy

 

birth_rate

 

Conclusion

The population in Bulgaria before 1990 was distributed by a centralized planning and with minimal opportunities for migration and emigration (due to state regulations and prohibitions). After that naturally, migration processes from the village to the small town than from the small town to the big cities and ultimately from Bulgaria abroad. At the same time, there is a decrease in the birth rate and an increase in the life expectancy.
Demographic processes are dynamic and complex and I DO NOT BELIEVE that the Bulgarian population will become 2 million until 2050 as exaggerated in the media.

Macroeconomics

Debt

Bulgaria makes the transition from a highly indebted country before 1997 to a country with normal government debt levels. This transition takes place with the help of hyperinflation, bank bankruptcies and a general impoverishment of the population.

2009 and 2014 are years in which the state refinanced its core debt positions. It should be noted that the government debt is growing steadily and is already close to BGN 30 billion, compared to BGN 13 billion in 2008.

* My opinion is that when we talk about debt, we should speak in nominal terms. Comparing government debt with the hard-to-calculate magnitude of GDP is often misleading and leads to a more psychologically easier perception of new debt.

loans1

Let’s look at the movement of interest rates over the years.

loans2

Trade import and export

import_export

Bulgaria’s foreign trade is dynamic. Imports and exports tend to have a smooth but systematic growth over the years. An exception is 2008, the only year with a decline in imports and exports (due to the global financial crisis). Another positive trend is that after 2008 the export managed to slightly overtake the import volumes in absolute values.

import_export_services

Here are some insights about the services we import and export over the years:
o Since 2000, the import of communications services has grown steadily year after year
o The export of communications services has become a major asset in the entire export mix, accounting for more than 40%
o The share of imported and exported transport services has been more stable since 2002
o The share of exported tourism services in the structure of our entire exports is one of the most volatile figures. This is rather due to fluctuations in the values of all other export components.
o There is an obvious trend of steady growth in arriving international tourists.

number_tourists

Communications and transport

railways

The National Railways Company (as a monopolist) has lost significant market share in both passengers and goods transport.

SIM_cards

On the other side, the communication market appears to be highly competitive as the average Bulgarian now owns 1.4 SIM cards. There are 3 major telecoms operating in the country.

EU Funds

How is Bulgaria spending its structural European funds?

  • By March 2017, 10 176 projects totaling 11 billion and 226 million BGN have been completed and reported in Bulgaria.
  • 5 698 projects were completed by institutions and 4 424 projects were completed by companies
  • Institutions have managed to achieve an average of 2.8 projects, while firms have an average of 1.2 projects per entity
  • Each of the Ministries managed to implement from 30 to 80 projects and municipalities on average 15-20 projects
  •  170 companies managed to complete over 3 projects with the help of the structural European funds. Of these, only 17 companies managed to implement 5-6 projects.
  • The Institutions absorb 90% of the funds and 10% of the funds were spent directly by the companies
  • The average project value for the institutions is BGN 1.7 million (the top 10 projects are worth over BGN 100 million), while the average value for companies is only BGN 320 thousand.
  • Projects with a unit value of more than 100 million are social, educational, construction or transport
  • The total number of subcontractors is over 37,000. On average, one subcontractor has participated in 2.2 projects.
  • There are 40 subcontractors, each of whom has participated individually in over 40 projects. These subcontractors provide certification services, consulting services, stationery, financial audit, computers and software, marketing services and machines
  • The average duration of one project is 16.6 months and the monetary weighted average duration of one project is 38.3 months

 

EU Projects
Number of Beneficieries
BGN Amount
Average project value
Closed Projects10 1765 63311 226 241 4451 103 208
Institutions5 6982 0039 810 075 4491 721 670
Companies4 4243 5761 413 696 952319 552
NGO's54542 469 04345 723

zop23

EU Projects
Number of Beneficieries
BGN Amount
Average project value
Closed Projects10 1765 63311 226 241 4451 103 208
Institutions5 6982 0039 810 075 4491 721 670
Companies4 4243 5761 413 696 952319 552
NGO's54542 469 04345 723
  • 51% of the EU structural funds money is spent in Sofia on 33% of the projects.
  • The average amount of a project in Sofia is 3 times higher than the average one in all other regions.
  • The companies in the Sofia, Plovdiv and Stara Zagora regions are able to absorb 55% of all funds.

Business?

Let’s move from the general social and economic indicators in Bulgaria to the business in particular. How is the business performing in Bulgaria and how does big and medium business actually look like?

Business environment

What does the Bulgarian business environment look like and the World Bank ranking? What has been done and how attractive a business destination is our country?

Achievements

The following actions for improving the business climate have been implemented in Bulgaria:

  • 2012
    Obtaining credit: Bulgaria has made access to credit information more difficult by stopping the distribution of credit reports to financial institutions by the private credit bureau (Experian).
    Trade Abroad: Bulgaria has achieved faster trade across borders by introducing online customs declaration forms.
    Insolvency procedures: Bulgaria amended its trade law to extend its rights to secured creditors and to increase the transparency of insolvency proceedings.
  •  2013 Starting a business: make it easier to start a business by reducing registration costs (minimum required capital).
  • 2014 Insolvency procedures: facilitate the settlement of insolvency by extending the grounds for opening insolvency proceedings and facilitating the cancellation of suspicious transactions.
  • 2015 Starting a business: the registration fees are reduced
  • 2016 Access to electricity: Increased stability of energy supply through the introduction of a Supervisory Control and Data Acquisition (SCADA) automated control system to monitor.

After these efforts, the country ranks 39th in the world as an attractive business destination.

Regional Rank

I must mention that Eastern Europe is a place full of competition and our neighbors are ahead or close to us in the world ranking of the top attractive business destinations.

Country
Doing Business (World Rank)
Regional Rank
Starting a business
Building permits
Electricity access
Regestering a property
Access to loans
Protecting minority investors
Paying Taxes
Foreign Trade
Closing a contract
Insolvency procedures
Macedonia, FYR101123125419112
Latvia142756101146867
Georgia163315222417519
Lithuania214103711216123114
Kazakhstan35514412719132233
Romania3661913211531892710
Belarus3771262322111610815
Armenia3884111368171315917
Bulgaria399219161693185169
Russian Federation40109164516191123411
Croatia431123191017209171212
Moldova4412132411811138111913
Cyprus451317179221881014241
Serbia471416815141721206188
Montenegro5115181224204151513134
Albania581615152225145217236
Kosovo601752018117202161525
Azerbaijan651821817923107201418
Turkey6919201481321614181021
Kyrgyz Republic7520117234101225192522
San Marino792124101212525542120
Ukraine8022621201862219212224
Bosnia and Herzegovina81232525192413242312205
Uzbekistan87248221419152324251216
Tajikistan128252223252324722241723

The things we DO NOT DO so well are:

  • Starting a business – there are even more relaxed procedures than those in the country
  • Paying Taxes – although our corporate tax rate is one of the lowest in the world, the administration and tax reporting procedures are really burdensome. As an example in Bulgaria, it takes about 450 man-hours to declare and pay the taxes of a small business, while this number is 120 man-hours in many countries in our region.
  • Construction permits – the lag in this indicator is due to poor construction control and complicated procedures
  • Access to electricity – again slow procedures associated with relatively high costs

Local Rank

That’s how the biggest cities in the country rank according to their attractiveness to “Doing Business”

Region
Starting a business
Construction permits
Access to electricity
Regestering property
Closing contracts
Average
Bourgas351243
Plovdiv362554.2
Rouse434112.6
Sofia516664.8
Varna143422.8
Pleven225333

The most favorable Bulgarian business cities according to the World Bank are Rousse and Varna.

* Ranking cities and countries have its limitations. You cannot get a clear picture of the actual differences between locations (whether it is a few percents or number of times).

Business entities

In this chapter, we shall look at the big and medium business in the country. What kind of companies operate, in which sectors of the economy and how regional and other interesting statistics are distributed?

Legal form

Number of companies according to their revenue and legal form:

Legal form
Above 20 mill.
From 5 to 20 mill.
From 2 to 5 mill.
From 1 to 2 mill.
From 0.5 to 1 mill.
Total
%
EOOD5071475179422072129811243%
OOD3461135148919082599747740%
AD37855827527927617669%
EAD1611737460495173%
Coop4301721831275163%
ET941551581281%
SD282836411151%
Branch171887353
TPP1131217
ADSIC1552114
KD432211
Political Party3328
Total1440344939044702523918734
Average Revenue408421
Total Revenue (Big BG) in mill. BGN57600275921366470533667109576

Limited Liability Companies (OOD and EOOD) are the most preferred legal form chosen by 84% of all medium and large companies in the country.
Share-based companies (AD, EAD – corporations), due to their specificity, are more common as a legal form designed for big business.
The Coops (Cooperative) as unusual as they may appear, fail to pass the 5-million BGN barrier. Annual revenue (excluding only 34 cooperatives).  This means that at this stage, the social legal structure (where each member has only one vote ) is difficult to implement in the Bulgarian reality.

Regional Distribution

The number of companies according to their revenue and headquarters location.

Region
Above 20 million
From 5 to 20 million
From 2 to 5 million
From 1 to 2 million
From 0.5 to 1 million
%
Sofia804186919322335244650%
Plovdiv12831938644757710%
Varna882391952722946%
Bourgas531511862642955%
Blagoevgrad22941752513125%
Stara Zagora60901161141433%
Veliko Tarnovo3179941181122%
Haskovo154774991172%
Pazardzhik194273841262%
Dobrich20437469581%
Kyustendil224537895
Rouse4161494754
Pleven1945595052
Lovech1034614870
Gabrovo1741474159
Shumen1632353151
Smolyan1122324254
Sliven1333383541
Vratsa622424637
Silistra921423337
Razgrad1024363239
Targovishte1124313733
Yambol1226232832
Montana718133843
Kardzhali421173132
Pernik1118142120
Vidin11071110

It is worth noting that 50% of the business in Bulgaria is registered in one city and that is Sofia. The next most popular places for doing business are Plovdiv with 10% of the whole population, Varna 6%, and Burgas 5%.
All of this is a confirmation of the demographic processes described above in the article.

VAT Registration

The number of legal entities by revenue and VAT registration.

VAT Reg.
Above 20 mill.
From 5 to 20 mill.
From 2 to 5 mill.
From 1 to 2 mill.
From 0.5 to 1 mill.
%
Yes1412332637754525503696%
No281231291772034%
TOTAL14403449390447025239

As expected, due to objective and legal requirements, the country’s large and medium-sized businesses are VAT registered.

Registered Capital and number of employees

Above 20 mill.
From 5 to 20 mill.
From 2 to 5 mill.
From 1 to 2 mill.
From 0.5 to 1 mill.
Total
Registered Capital in mill. BGN2347293172654116091937522
Number of Employees48724427754513021991284621711048463
Number of Companies1440344939044702523918734
Average Registered Capital in mill. BGN16.32.70.70.20.22.0
Average employees per company3388033191256

Here is a common mistake confirmed also by my practice as a business consultant:  small and newly-registered companies are registered with little or no initial capital. Registering a company with 2 leva capital almost always leads to problems with the financing of the initial business activities and eventually personal tax problems for the owners.
Nearly half a million of the Bulgarian population is working in the 1500 largest companies in the country.

Business Sectors

In this chapter, I will try to analyze the large and medium-sized Bulgarian enterprises by sectors of the economy. Although the data I have for such an analysis is incomplete (I do not have sectoral data for about 5200 companies or 28% of the total), I think that the characteristics of the remaining set would be of interest to the reader.

 

Number of companies by size and business sectors

Busines Sector
Above 20 mill.
From 5 to 20 mill.
From 2 to 5 mill.
From 1 to 2 mill.
From 0.5 to 1 mill.
%
Employees
Average
Note
Trade, repair of automobiles and household goods435105111901333134929%193 01736
* Missing data2928269641351181328%160 81231
Real estate, renting and business services782633023764418%89 20661
Agriculture, hunting and forestry331283403232656%29 17427
Transport, storage and messaging761982232692916%74 92071
Construction781911952682805%49 87849
Manufacture of food products, beverages and tobacco7413111197943%40 51280
Hotels and restaurants6605391882%21 85473
Other activities serving the public and the person28655470702%20 09970
Health and social work22656972582%63 3702221
Manufacture of textiles and textile products; production of clothing15585257701%39 1211551
Metallurgy and manufacture of metal products, except machinery and equipment28515457591%22 75991
Manufacture of machinery and equipment35443936601%42 1011971
Manufacture of electrical, optical and other equipment29433736421%24 960133
Financial intermediation56552418291%47 8942631
Manufacture of pulp, paper, paperboard and products11482338421%10 20763
Manufacture of chemicals, products and fibers28292521251%17 284135
Manufacturing, not elsewhere classified5193135301%7 61263
Manufacture of other non - metallic mineral products14262426201%10 05291
Production and distribution of electricity and heat, gaseous fuels and water41161721141%32 1492951
Manufacture of rubber and plastic products20222121231%13 480126
Manufacture of wood and of products of wood, except furniture6112534301%7 08667
Extraction without extraction of energy raw materials623111160%9 381165
Manufacture of leather and related products171214170%4 15381
Production of vehicles1085980%9 096227
Others1311318150%8 286892
Total144034493904470252391 048 46356

*These sectors are defined by the NationaStatisticscs Insitude

Summarizing this data can lead to many conclusions and speculations but the main trends that stand out are:

1. The most significant sectors in Bulgaria are:

  •  Trade and repair of cars and household goods(all consumer goods)
  •  Real estate and business services
  •  Agriculture
  •  Transport, storage and messaging
  •  Construction

These industries are full of competition as in each there are more than 1 000 large and medium-sized companies

2. The most labor-intensive sectors (Note 1) are:

  • Health and social activities
  • Manufacture of textiles
  • Manufacture of machinery and equipment
  • Financial services
  • Production and distribution of electricity and heat, gaseous fuels, water

In the labor-intensive industries mentioned above, there are almost no small companies, and the average staff in a company is over 200 people.

2018?

In this third and final chapter of this analysis, I focus on the future, mark trends and express my personal opinion to some facts, events, and phenomena that characterize the modern way of life.
* Every talk about the future is associated with a great deal of uncertainty and reflects the author’s views.

Deviations from the scientific approach

Although I have used mostly scientific methods in the previous chapters, here is the place to mention some significant deviations from the scientific approach. These deviations are stated, not because I doubt my conclusions, but because I want the reader to have a comprehensive understanding of the conclusions made.

Old Data

Yes, the data used in the previous chapters are current as of 01.01.2016, but they reflect the 25 years transition to a market economy that the country has gone through. This is valuable data that is representative that can be summed up and used for conclusions.

Assumptions and theories

Yes, many of the conclusions (which follow) that are made are partly based on guesses and author’s beliefs about the past, the present, and the future. These assumptions are backed up by logic, often accompanied by evidence proving the thesis, yet some of them have not been applied in practice and certainly pose unforeseen challenges.

What the Future holds?

The world and Bulgaria as part of it are changing on a daily basis at an unprecedented rate. Information moves faster than faster and at the sime time is growing exponentially. The same can be said about money, people and many other social phenomena.
Let us take a closer look at these processes taking place globally and locally in Bulgaria.

Centralization

The term “economies of scale” has been introduced in economic theory and practice since the Industrial Revolution. The essence of this term lies in the idea that larger scale entities have the opportunity to save on their unit costs only because they are big. They simply allocate their fixed costs (eg. rents, licenses, administrative expenses, etc.) on a larger basis (more output of units).

That means that many things in the economy can only happen at a certain scale. Highways can be built if a certain number of cars pass, newspapers are printed only if there is a certain number of readers, and so on.

The economists, politicians, and journalists preach the “economies of scale” all in the process of globalization. This leads to strong processes of centralization of power, people, and resources.

Modern economic and social processes lead to unequal, extreme distribution of results or, in other words, the winner takes it all.

  • There are hundreds of millions of websites on the internet, but 99% of traffic goes to the top 10 sites
  •  Population gathers in about 10-megapolis around the world.
  • 95% of the wealth in the world is owned by 1% of the richest
  • We all play football, but only 100 man earns 95% of the money given to all the players, and so on.

Bulgaria is also going through the centralization processes at it’s best.

  • More than 50% of the companies in Bulgaria are registered in the capital (Sofia),
  • 50% of working Bulgarians work in the largest 5% of the working companies in the country
  • These companies have on average hundreds of times more revenue, capital and employees than the richest half of the other Bulgarian companies
  • Gini’s index of Bulgaria is the highest in Europe

In short, the biggest ones will become even bigger.

Health and aging

Due to reduced birth rate and reduced infant mortality, the population lives longer, but its structure shifts from predominantly young people to predominantly elder individuals.

Modern medicine has significant achievements in protecting our health. An irrefutable proof of this is the decrease in child mortality. A major problem of health and social systems is finding an appropriate economic model.

The Bulgarian health financing model is also somewhat mistaken. The struggle for medical paths and the prescription of highly advertised medicines are poisonous business practices that do not provide benefits to the society. These only lead to worrying system distortions on a large scale.

The poorest portion of the population is already obese and rather not hungry (except in Africa alone). This, along with the large increase in allergies, hypertonia, and carcinogenicity, is due to the massive penetration of all sorts of chemicals in our daily lives. Yes, all these chemicals do not kill us instantly, but to assess their true impact on our organisms it takes a significant amount of time (tens of years to ban the use of lead in consumer products).
Industrialization, urbanization, the chemical industry and the modern way of life have a negative impact on everyone’s health.

We live longer than ever and get sicker than ever.

Media and communication

Modernity comes with real-time news flooding us and information explosion that create confusion in one’s perceptions. Electronic games, gambling, ads, and credit cards have a strong impact on the consumer’s anxiety  (stimulating immediate consumption). Everything is massively exclusive and focused on the present. In other words, satisfy all your needs of any nature NOW, regardless of the cost. Take a vacation loan, rub a ticket of luck, change your phone with the latest version, and so on.
Modern times stimulate us to seek immediate feedback. You pass levels, get stars ratings, comments, likes, emails, and all sorts of instant messages, emojis.
Paying for attention is the new media business model. This comes all together with exponentially more information, of which 99% is just noise. We watch sports, breaking news, play electronic games and all this is to satisfy the inner need to accomplish something meaningful, to participate in an epic victory, even if it is someones else epic victory.
We are highly connected, but the quality of these connections is lower than ever.

Trust and working on long-term meaningful projects has become a luxury.

Status and stability

The increased movement of people and capital, the strong centralization of resources both lead to a lack of stability + loss of influence of the former institutions.

People change their jobs more often than ever. New businesses are being created and gone bankrupt more often than ever before. Any diplomas and certifications have repeatedly lost their value and importance.

People are confused and do not know what to expect from tomorrow. All of this, of course, has been exploited by the media and politicians who build their reputation on the foundations of mass fear and confusion.

Constant change is the safest modernity bet.

Striving for a better tomorrow

In the previous chapter, I outlined the negative aspects of modernity because I think that defining the problems is a fundamental approach to identifying opportunities and adding value in general.

In this chapter, I will try to systematize general guidelines to deal with the problems of our modern times.

Sustainable decentralization

Centralized systems are complicated organizations run by one head office. These centralized systems simply cannot be divided, for example, in half without losing their basic properties and essences.

How does nature tackle the problems of increasing scale? The main weapon in this fight is fractals. These are structures that have established a non-trivial self-similarity with their own parts. The little one looks like the bigger, the bigger looks like the whole. Examples include the shape of the leaves of the ferns, the shape of the broccoli, the snowflakes, etc.

fractals

In nature and social life processes of centralization and decentralization are constantly competing. Some examples of decentralization processes occur in digital environments, such as open source software and decentralized cryptocurrencies.

The social processes of (de) centralization have three dimensions:

  • Architectural (de) centralization – how much the system depends on (people, businesses, computers, etc.)? The departure (damage) of how many subjects the system can bear?
  • Political (de-centralization) – how many individuals or organizations control the system?
  • Logical (de) centralization – whether the system looks like a monolithic object or rather as an amorphous mass? If we divide the system into two equal halves, will they be able to function independently?

We can try to draw these dimensions on the graph:

decentalization

 

But why it makes sense to decentralize some systems:

  • Reducing global risks
  • Sustainability and strength of the system
  • Fair distribution

Building sustainable decentralized systems is a complex problem on which many great minds are working right now, yet we are barely beginning to understand how things work.

Trial and error

A basic method of work and innovation that DOES NOT get enough recognition(or at least publicity) is the trial and error method. It stands at the heart of any scientific innovation, progress, and even evolution.

Trials and errors are the single most important tools for discovering and exploiting opportunities. In the social domain, making errors in laboratory conditions rarely brings useful information about reality. In order to learn from our errors, we need to survive at first place that is why managing our risks exposures remains our strongest tool for making mistakes.

People have a natural fear of mistakes. We are just biologically wired to perceive them badly. Our body reacts to mistakes so that we can learn from them. Scientists have shown that people with gambling problems do not seek to maximize their profit but to maximize the number of games won. A loss on our emotional scale amounts to an average of 2.5 wins.

But is it possible to have a lot of losses a small number of wins and our bottom line to be positive? Of course, YES. If only the losses are of low value and the profits are really big ones. In most cases, this is how modernity works.

How does the trial-error approach works? Just use a lot of iterations. Start with many attempts in many different directions and even improbable variations  (because the world is too complex and varies significantly for our models). After this evaluate the successful ones and further experiment with them.

True freedom and progress lie in making mistakes, surviving them and adjusting. This is how evolution works.

To support my thesis about the right scale: Systems with many but small agents can afford thousands, even millions more mistakes compared to systems with several dominant agents.

Time

In order to implement the “trial and error” principle in addition to managing our bets (investment exposure), we need time (enough iterations to build a basis for conclusions). All this is contrary to our desire for immediate feedback. One of the most difficult activities are saving money, long-term investments, and working on long-term projects with unclear payouts.

Unlike the new technocrats, who are willing to use the latest technology just because it is new, comes a phenomenon documented as the “Lindy Effect.” For things that have the property of dying or depreciating, naturally, as time passes by, their expected remaining live is decreasing (a man at 30 is expected to live more than a man at 60). What about things that do not die like ideas and technologies? With them, the “Lindh Effect” says that future life expectancy is roughly proportional to past life. In other words, 2000 years old technology is more likely to live for 2000 years more, and a technology that is 10 years old is likely to survive for another 10 years.

One bet: in 100 years, we are still more likely to use forks and less likely to use tablets.

Two women cannot give birth to one child for 4.5 months – it’s a matter of time.

Buffers

In the previous chapter, we understood that evolution is optimizing odds using trial and error. Now a more trivial task: we can save $100  per month of our income, we want a family holiday after 1 year, a car after 3 years and an apartment after 10 years. How to allocate our savings?

It is clear that there will probably be money only for the vacation. Solving such a “lab task” is completely meaningless. The world is too colorful (complex) to try to optimize our savings. The most rational thing to do is to store buffers.

Storing excess capacity and resources in buffers is the opposite of optimizing systems. Buffers help us overcome our inability to accurately predict the future. They are a natural mechanism for dealing with mistakes, unforeseen and extreme circumstances (for example, our lungs can collect twice as much air as we normally need).

Nature has accumulated buffers of free capacity in our bodies as a mechanism for survival in unforeseen situations. Just DO NOT Over-optimize.

 

Personal bet (“skin in the game”)

Modern professions: politician, broker, journalist, a manager in a large corporation. What is the common between these professions? All of them are kind of intermediaries and in most cases work for someone else’s account and on the other’s behalf.

The optimal strategy for all these agents is to maximize their commission, which may or may not relate to the client’s income. In order to maximize their commission and the current profit of their clients, these intermediaries often exposing customers to large, hidden future risks. Risks that will happen when they are not here.

This is called The Agent Problem. Government policies that will work after four years, regardless of their return, are not voted on because they will benefit someone else mandate. Thus, modern corruption is also a manifestation of the agent’s problem. Real estate brokers are encouraged to sell the property at a high price because their commission is a % of it. Management bonuses are also tied to monthly results.

Agents as mediators have floating profits and limited loss (mostly losing their jobs). When it comes to big money, power, and influence, this risk exposure is simply insufficient.

Tackling the agent’s problem can be accomplished through a combination of two approaches:

  • Reducing centralization – described in the previous chapters
  • Including a larger personal stake in their job description

Kibitzers in the park, looking at chess, do not voice their opinion when others play for money. They are forbidden to talk. Now try to silence a journalist because she doesn’t have personal exposure to her opinion and you will be crucified as anti-free-speech-homophobe. Lobbyist policies often come to us packed as publicly beneficial from seemingly unbiased agents.

A personal bet (having a downturn of negative consequences) is the natural mechanism of dealing with the agent’s problem.

 

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