Author: SK

On liberalism and government control

My first exposure to political ideologies took place in 2004, when I joined the now-defunct (but then brilliant) social networking site Orkut. While filling up my personal details, I was asked to pick my political beliefs from a drop-down.

It had things such as “left-liberal”, “very left-liberal”, “right-conservative”, etc. Now, while I considered myself liberal back then (I’ve moved far more liberal on personal freedom issues since then), there was no way I could describe myself as “left”, since I’ve always been a free market fundamentalist. Finally I noticed there was something called “libertarian” in the dropdown, and assumed it might stand for my beliefs and chose that. In hindsight, it turns out I was right (no pun intended).

A year or two later, I got introduced to a “libertarian cartel” (I was never a member, so don’t know who were members). Presently, I was invited to join some of them in discussions, and my love for the libertarian philosophy grew (these discussions were instrumental in me moving far more liberal on personal freedom issues). Yet, looking around the political spectrum, you had few libertarian parties (going across countries).

You had the set of parties that can be broadly classified as “Republican” which allowed you to do business the way you liked, but sought to restrict personal freedoms. And there were the parties that can be classified as “Democrat” which promoted personal freedoms, but restricted how you could do business. And you had philosophies such as communism which sought to control both. The “fourth quadrant” was (and is) largely empty.

It is not hard to understand why this fourth quadrant is empty – in exchange for responsibilities of governing, politicians desire power, and this power can only come at the cost of restricting freedoms of the constituents. Different political formations choose to exercise this power along different axes, but little differentiates them – they all seek to control. While libertarianism is appealing for the constituent, it doesn’t make sense for politicians since it doesn’t compensate sufficiently for the responsibility of  governance. Hence you don’t find libertarian political parties.

Yet, we find that slowly but surely, reforms do happen. Over time, restrictions on freedoms (both personal and economic) do get relaxed, albeit at a glacial pace, and this is true across countries, despite there being no “libertarian” politicians. Why does this happen?

The simplistic answer is that politicians in functioning democracies have to face lengthy periods of time in opposition, when they are at the mercy of the party that is then in power. Since politicians tend to be vindictive animals, you don’t want to leave behind any laws that might be used to harass you while you are out of power. So the ruling party should tend to ease restrictions that can be used against its members when they are out of power.

Again, this is fine in theory, but why does it not always happen? The answer is that opposing political parties are not “orthogonal enough”. If politicians on multiple sides of the divide have broadly similar ideas on certain issues, there can be a tacit understanding (a “doctrine of no first use”, perhaps) to not use the laws that they agree on against each other.

When you have parties that have orthogonal philosophies, you can expect them to do their bit while in power to undermine the sources of their rivals’ control, so that their rivals might enjoy less control the next time they are in power. And citizens in such democracies are likely to enjoy greater freedoms.

As the old saying (paraphrased) goes, “when politicians from all parties agree to something, it is unlikely to be in the interests of the people”.

Payment systems

I had lunch today at a rather fancy Japanese restaurant here in Barcelona (I’ve forgotten if I wrote that blog post last year on how you get fantastic East Asian food of all kinds here). I didn’t pay a fancy price – this concept called “Menu del dia” (menu of the day), one of the very few good things instituted by General Francisco Franco meant that you can get cheap weekday lunches at most restaurants in Spain.

The above (Katsudon and beer), along with some noodle soup and two sushis and a cup of coffee, set me back by €13, which isn’t too bad by Barcelona standards (most weekday lunch platters at restaurants cost ~€10).

While eating I noticed that other patrons at the restaurant were walking up to the bar to pay the owner directly, rather than asking for the bill at the table.

So once I was done with eating and drinking, I went up to the bar to pay. The owner had seen me coming and had prepared my bill, which he presented to me. As I reached into my pocket, he got out the card swiping machine.

It might have been a shock to him when I presented a €20 bill instead, and he had to scramble to produce the change from somewhere inside the kitchen (the other patrons before me had all paid by card).

While this is one data point, it’s interesting how the economy here has moved to a situation where the default method of payment is through credit/debit card, rather than by cash (though my favourite bakery refuses to accept card for payments less than €5). The ease of card payments (most debit cards nowadays come enabled with NFC, though a fair number of merchants still insert the card to read the chip) combined with ubiquity of cards has meant that card usage has started trumping cash.

It will be interesting to see how the payments ecosystem will develop in India, which is still largely a cash economy. My belief (and hope) is that India will leapfrog credit/debit cards (as it has leapfrogged landline telephones and big box retail, moving directly to mobile phones and e-commerce) and take up electronic payments in a big way.

IMPS (immediate payment service) is already a fantastic protocol for bank-to-bank transfers, and the costs are extremely low. In April, the Unified Payment Interface (UPI) will be rolled out, which makes transfers to hitherto unknown people even easier! If our banks do a good job of implementation, there is a good chance it might get adopted widely (long back I’d made a case for the RBI to subsidise such payments).

Admission of errors and bad bank loans

I have a policy that whenever I make a mistake, I admit it. I believe that suppressing an error does more harm than good in the long run, and it is superior to admit it at the time of discovery and correct course rather than keeping things under wraps until the shit hits the fan (a la Nick Leeson, for example).

There is another reason I like to admit to my mistakes – by doing so frequently, I want to send the signal that I’m self-aware and self-critical and aware of what I’ve done wrong. This, I believe, sends a signal that I should be trusted more, since I have a grip on rights and wrongs.

It doesn’t always work that way. There was a company I once worked for, where my responsibilities meant that my errors had an immediate material impact on the company. I don’t know if this (direct material impact) mattered, but my signalling went horribly wrong there.

The powers-that-were came from a prior belief that people would suppress their mistakes as much as they could, and that I was admitting to them only because I couldn’t suppress them further. Their reaction to my constant admission of mistakes (I was writing production code, a bad bad idea given my ADHD) was that if I were admitting to so many mistakes, how many more of my mistakes were yet to be discovered?

In other words, the strategy backfired spectacularly, possibly given the mismatch of our priors, and I later figured I might have done better had I tried suppressing (or quietly fixing) rather than admitting. That, however, hasn’t led to a change in my general strategy on this issue.

I was reminded of this strategy when State Bank of India and Punjab National Bank released their quarterly results last week. Their stocks got hammered on the back of drastically reduced profits on account of higher provisions – an admission that a significantly higher proportion of their loans had gone bad compared to their earlier admissions.

The question that comes to mind is whether the increase in provisioning and admission of bad loans should be taken as a credible signal that these banks are cleaning up their balance sheets (which is a good thing) or whether it only indicates a bigger tip of a bigger iceberg (in which case I’d be paranoid about my deposits).

Not knowing what strategy these banks are playing (though statements from the RBI suggest they’re likely to be cleaning up), I guess we have to wait for results over the next couple of quarters to learn their signals better.

Capitalism and Freedom and JNU

This piece by David Henderson has a very powerful quote by Milton Friedman. Quoting in full:

In the circumstances envisaged in the socialist society, the man who wants to print the paper to promote capitalism has to persuade a government mill to sell him the paper, a government printing press to print it, a government post office to distribute it among the people, a government agency to rent him a hall in which to talk and so on. Maybe there is some way in which one could make arrangements under a socialist society to preserve freedom and to make this possible. I certainly cannot say that it is utterly impossible. What is clear is that there are very real difficulties in preserving dissent and that, so far as I know, none of the people who have been in favor of socialism and also in favor of freedom have really faced up to this issue or made even a respectable start at developing the institutional arrangements that would permit freedom under socialism. By contrast, it is clear how a free market capitalist society fosters freedom.

Think about the ongoing protests at Jawaharlal Nehru University, a far-left-of-centre university, regarding the rally they took out last week and the government crackdown thereafter. While the current protests there have little to do with economics, and mostly about government control, given that a large section of the university has a mostly leftist anti-capitalist agenda, it’s a good example to take.

So where did the students and faculty of JNU obtain the resources to organise their protest marches? Some posters and banners might have been handmade, but many would’ve been bought (or made to order) from capitalist banner manufacturers.

The protests were largely covered by capitalist media houses which gave them further ballast, and acted as a force multiplier. Discussions on capitalist TV channels and newspapers (some of them publicly listed) added legitimacy to the protests.

Protestors would have needed a way to coordinate regarding the time and location and manner of protests. While old-fashioned methods such as notice boards and offline meetings could have been used, it is far more likely (and far easier) that the protestors used a capitalist social network (such as WhatsApp or Telegram (though admittedly the latter is not-for-profit, but it’s just that its owners are not optimising for profits) ) to coordinate their protests, using smartphones and computers made by capitalist manufacturers and sold by capitalist shopkeepers.

In other words, capitalism is a necessary condition for any kind of freedom, especially freedoms directed against the state. In a wholly state-owned economy, last week’s protests would have been far harder, if not impossible.

The state-owned media could have been one-sided in the coverage. The state-owned banner manufacturers could have refused to sell to the protestors. State-owned social media would have snooped on and subverted attempts to organise (if not block them altogether). I’m only picking a few examples here.

The next time you think you can have social freedom without capitalism, think again. It is capitalists driven by profit motives who provide anti-state activists the necessary tools to express their freedom.

Information gain from relationship attempts

Every failed relationship (or attempt at a relationship) has plenty to teach you – in terms of things you got right, or wrong. Things that would make you cringe later on, and others that would make you wonder why the relationship failed. Each failed relationship (or attempt) helps you recalibrate yourself as a person – in terms of what kind of people to go after, and what kind of strategies to adopt during the process. Thus, a relationship is important not only from the direct joy it provides you, but also in terms of learnings for future relationships.

The standard model about “finding your level” in terms of determining your expectations from a potential partners involves trial and error. You “sample” by hitting on someone who you think might be a good fit. If it goes well, story ends. Else, you “learn” from this experience and hit on someone else.

How good a learner you are determines how many attempts you’ll take to find someone “your level” who is a “good fit” and end up in a great relationship. Yet, the kind of attempts you make puts a natural cap on the amount of information you extract from the attempt.

For example, there might be a potential counterparty with whom you have an extremely low (close to nothing) chance of getting into a relationship. Conventional wisdom says that you shouldn’t attempt hitting on her (to avoid pronoun confusion, let’s assuming that everyone you can hit on is feminine. Adjust accordingly if your preferences vary), for the odds are stacked against.

While this is good enough reason not to attempt that relationship (though sometimes the downside might be low enough for you to take a punt), the other problem is that you don’t learn anything from it. The extremely low prior probability of succeeding would mean that there is no information from this that can help tune your system. So you’re wasting your time in more than one way.

It works the other way also. Let’s say there’s someone who really looks up to you and wants to be in a relationship with you. You know that all it takes for you to get into a relationship with her is to express interest. If you know the relationship will add value to you, go ahead. However, it is absolutely useless in terms of your “find your level” – the extremely high prior probability means it won’t add sufficient value to the process.

So while they say that someone who’s been through failed relationships (or attempts at relationships) is experienced and has a more refined set of expectations, the sheer number matters less than the quality. It is the amount of information you’ve been able to extract from each such relationship (or attempt). A one-sided (where one of you is clearly “out of the league” of the other, doesn’t matter who is who) relationship doesn’t add much value.

Happy Valentine’s Day!

Parks and public safety

I spent the last hour and a half working from a park near my house in Barcelona. It helped that I wasn’t using my laptop – I was mostly working with a notebook and pen. The incredible thing was that never once did I feel unsafe working in that park, and it has to do with the park’s design.

I got accosted by a human only once – by this guy asking me if I had a cigarette lighter and who walked away when I said no, and by dogs (of all shapes and sizes) multiple times. Despite the fact that I was in a park, and people don’t go to parks at 10 am on a weekday morning, there was a constant flow of people in front of me. There were, to put it in other words, sufficient “eyes on the street” which contributed to the place’s safety.

I’ve ranted sufficiently on this blog about the design (or lack of it) of Bangalore’s public parks (one with a name sufficiently similar to that of this post). The problem with the parks, in my opinion, is that they are exclusive closed spaces which are hard to access.

The sprawling Krishna Rao Park in the middle of Basavanagudi, for example, has only two or three entrances, and the number of trees in the park means that large parts of it are hardly visible, providing a refuge to unsavoury elements. This phenomenon of few entrances to parks is prevalent in other city parks as well, with the consequence that the BBMP (city administration) closes off the parks during the day when few people want to go in.

The park I was sitting in this morning, on the other hand, had no such safety issues. It helped that there weren’t too many trees (not always a positive thing about parks), which improved visibility, but most importantly, it was open on all sides, providing a nice thoroughfare for people walking across the area. This meant that a large number of people in the vicinity, even if they didn’t want to “go to a park” ended up passing through the park, because of which there was a constant flow of human traffic and “eyes on the park street”, making it a significantly safer space.

There might be (maintenance-related ) reasons for having limited entrances to parks in Bangalore, but the administration should seriously consider opening up parks on all sides and encouraging people to walk through them (after all, walking paths are an important part of Bangalore parks). Maintenance costs might go up, but safety of parks will be enhanced significantly, and it will be possible to keep parks open at all times, which will enhance their utility to the public.

Maybe Krishna Rao park, with roads on all sides and in the middle of Basavanagudi, might serve as a good pilot case for this.

Revenue management at Liverpool Football Club

Liverpool Football Club, of which I’ve been a fan for nearly eleven years now, is in the midst of a storm with fans protesting against high ticket prices. The butt of the fans’ ire has been the new £77 ticket that will be introduced next season. Though there will be few tickets that will be sold at that price, the existence of the price point has been enough to provoke the fans, many of whom walked out in the 77th minute of the home draw against Sunderland last weekend.

For a stadium that routinely sells out its tickets, an increase in ticket prices should be a no-brainer – it is poor revenue management if either people are scrambling for tickets or if there are empty seats. The problem here has been the way the price increase has been handled and communicated to the fans, and also what the club is optimising for.

At the outset, it must be understood that from a pure watching point of view, being in a stadium is inferior to being in front of a television. In the latter case, you not only have the best view of the action at all points in time, but also replays of important events and (occasionally) expert commentary to help you understand the game. From this point of view, the reason people want to watch a game at the ground is for reasons other than just watching – to put it simply, they go for “the experience”.

Now the thing with stadium experience is that it is a function of the other people at the stadium. In other words, it displays network effects – your experience at the stadium is a function of who else is in the stadium along with you.

This can be complex to model – for this could involve modelling every possible interaction between every pair of spectators at the ground. For example, if your sworn nemesis is at the ground a few seats away from you, you are unlikely to enjoy the game much.

However, given the rather large number of spectators, these individual interactions can be ignored, and only aggregate interactions considered. In other words, we can look at the interaction term between each spectator (who wants to watch the game at the ground) and the “rest of the crowd” (we assume idiosyncrasies like your sworn enemy’s presence as getting averaged out).

Now we have different ways in which a particular spectator can influence the rest of the crowd – in the most trivial case, he just quietly takes his seat, watches the game and leaves without uttering a word, in which case he adds zero value. In another case, he could be a hooligan and be a pain to everyone around him, adding negative value. A third spectator could be a possible cheerleader getting people around him to contribute positively, organising Mexican waves and generally keeping everyone entertained. There can be several other such categories.

The question is what the stadium is aiming to optimise for – the trivial case would be to optimise for revenue from a particular game, but that might come at the cost of stadium “atmosphere”. Stadium atmosphere is important not only to galvanise the team but also to enthuse spectators and get them to want to come for the next game, too. These two objectives (revenue and atmosphere) are never perfectly correlated (in fact their correlation might be negative), and the challenge for the club is to price in a way that the chosen linear combination of these objectives is maximised.

Fundamental principles of pricing in two-sided markets (here it’s a multisided market) say that the price to be charged to a participant should be a negative function of the value he adds to the rest of the event (to the “rest of the crowd” in this case).

A spectator who adds value to the crowd by this metric should be given a discount, while one who subtracts value (by either being a hooligan or a prude) should be charged a premium. The challenge here is that it may not be possible to discriminate at the spectator level – other proxies might have to be used for price discrimination.

One way to do this could be to model the value added by a spectator class as a function of the historic revenues from that class – with some clever modelling it might be possible to come up with credible values for this one, and then taking this value into account while adjusting the prices.

Coming back to Liverpool, the problem seems to be that the ticket price increase (no doubt given by an intention to further maximise revenue takings) has badly hit fans who were otherwise adding positive value to the stadium atmosphere. With such fans potentially getting priced out (in favour of fans who are willing to pay more, but not necessarily adding as much value to the ground), they are trying to send a message to the club that their value (toward the stadium atmosphere) is being underestimated, and thus they need greater discounts. The stadium walkouts are a vehicle to get across this point.

Maximising for per-game revenue need not be sustainable in the long term – an element of “atmosphere” has to be added, too. It seems like the current worthies at Liverpool Football Club have failed to take this into account, resulting in the current unsavoury negotiations.

Now that I’ve moved to Barcelona, Liverpool FC need not look too far – I’ve done a fair bit of work on pricing and revenue management, and on two-sided markets, and can help them understand and analyse the kind of value added by different kinds of spectators, and how this can translate to actual revenues and atmosphere. So go ahead and hire me!

Counter staffing and service levels

I’m writing this from the international section of the Bangalore International Airport, as I wait to board my flight to Barcelona. It was a plan I’d made in October 2014 to “hibernate” for a few months in Barcelona during my wife’s last term of classes there, and this is the execution of the same plan.

There was a fairly long line at the passport control counters this morning, and it took me perhaps twenty minutes to cross it. When I joined the line, there were about 10 passport officers to say goodbye to Indian passport, so the line moved fairly quickly.

Presently, officers started getting up one by one, and going to one side to drink tea. I initially thought it was a tea break, but the officers drinking tea soon disappeared, leaving just four counters in operation, implying that the line moved much slowly thereafter. Some people were pissed off, but I soon got out.

It is not an uncommon occurrence to suddenly see a section of “servers” being closed. For example, you might go to the supermarket on a weekday afternoon to expect quick checkouts, but you might notice that only a fraction of the checkout counters are operational, leading to lines as long as on a weekend evening.

From the system of servers’ point of view, this is quite rational. While some customers might expect some kind of a moral obligation from the system of servers to keep all servers operational, the system of servers has no obligation to do so. All they have an obligation towards is in maintaining a certain service level.

So coming back to passport control at the Bangalore airport, maybe they have a service level of “an average of 30 minutes of waiting time for passengers”, and knowing that the number of international flights in late morning is lower than early morning, they know that the new demand can be met with a smaller number of servers.

The problem here is with the way that this gets implemented, which might piss off people – when half the servers summarily disappear, and waiting period suddenly goes up, people are bound to get pissed off. A superior strategy would be to do it in phases – giving a reasonable gap between each server going off. That smoothens the supply and waiting time, and people are far less likely to notice.

As the old Mirinda Lime advertisement went (#youremember), zor ka jhatka dheere se lage.

Bias in price signals from ask only markets

Yesterday I listened to this superb podcast where Russ Roberts of the Hoover Institution interviews Josh Luber who runs Campless, a secondary market for sneakers (listen to the podcast, it isn’t as bizarre as it sounds). The podcast is full of insights on markets and “thickness” and liquidity and signalling and secondary markets and so on.

To me, one of the most interesting takeaways of the podcast was the concept that the price information in “ask only markets” is positively biased. Let me explain.

A financial market is symmetric in that it has both bids (offers to buy stock) and asks (offers to sell). When there is a seller who is willing to sell the stock at a bid amount, he gets matched to the corresponding bid and the two trade. Similarly, if a buyer is willing to buy at ask, the ask gets “taken out”.

The “order book” at any time thus contains of both bids and asks – which have been unmatched thus far, and looking at the order book gives you an idea of what the “fair price” for the stock is.

However, not all markets are symmetric this way. In fact, most markets are asymmetric in that they only contain asks – offers to sell. Think of your neighbourhood shop – the shopkeeper is set up to only sell goods, at a price he determines (his “ask”). When a buyer comes along who is willing to pay the ask price of a good, a transaction happens and the good disappears.

Most online auction markets (such as eBay or OLX) also function the same way – they are ask only. People post on these platforms only when they have something to sell, accompanied by the ask price. Once a buyer who is willing to pay that price is found, the item disappears and the transaction is concluded.

What makes things complicated with platforms such as OLX or eBay (or Josh Luber’s Campless) is that most sellers are “retail”, who don’t have a clear idea of what price to ask for their wares. And this introduces an interesting bias.

Low (and more reasonable) asks are much more likely to find a match than higher asks. Thus, the former remain in the market for much shorter amount of time than the latter.

So if you were to poll the market at periodic intervals looking at the “best price” for a particular product, you are likely to end up with an overestimate because the unreasonable asks (which don’t get taken out that easily) are much more likely to occur in your sample than more reasonable asks. This problem can get compounded by prospective sellers who decide their ask by polling the market at regular intervals for the “best price” and use that as a benchmark.

Absolutely fascinating stuff that you don’t normally think about. Go ahead and listen to the full podcast!

PS: Wondering how it would be if OLX/eBay were to be symmetric markets, where bids can also be placed. Like “I want a Samsun 26 inch flatscreen LCD TV for Rs. 10000”. There is a marketplace for B&Bs (not Airbnb) which functions this way. Would be interesting to study for sure!

Gandhi

I was playing table tennis in my hostel at IIT with a friend who came from North India. At some point during a rally, the ball hit the edge of the table on his side, and moved far away, giving me the point. I apologised (when you normally do when you win a point by fluke), and said “Gandhi”. He didn’t understand what that meant.

It was then that I realised that using the word “Gandhi” as a euphemism for “fluke” is mostly a Bangalore thing. Back when I played table tennis during my school days, a let was called “Gandhi”, as was a ball hitting the edge of the table. It was the same case with comparable sports such as badminton or tennis or even volleyball. A basket that went in by fluke in basketball was also “Gandhi”.

Now, it might be hard for people to reconcile flukes with MK Gandhi, who was assassinated sixty eight years ago. Some people might also find it repugnant – that the great Mahatma’s name might be used to describe flukes. Looking at it as a fluke, however, is a shallow interpretation.

While it is hard to compare Gandhi (the person) with flukes, it is not hard at all to look at him as a figure of benevolence. He was known for his non-violent methods, and for turning the proverbial “other cheek”. He pioneered the use of non-cooperation as a method of protest (which has unfortunately far outlived its utility) and showed that you could win by being extremely nice. This was channelled in a movie a decade ago which spoke about “Gandhigiri” as a strategy for world domination.

So when the table tennis ball hits the edge of the table and flies off, invoking Gandhi’s name is a sign of benevolence by the person who has lost the point, who implicitly says “you, bugger, didn’t deserve to win this point. But I’ll be benevolent like Gandhi and allow you to take it”. It is similar in other sporting contexts, such as a let or a freak basket.

The invocation of Gandhi’s name as a sign of benevolence is common in other fields as well. In 1991, my cousin had to miss her second standard annual exams as she had to fly to Bangalore on account of the death of the grandfather we shared. Her school, in an act of benevolence, promoted her anyway, an act that was described by other relatives in Bangalore as “Gandhi pass”.

If there is a Gandhi pass, there is a Gandhi class also (again I was surprised to know it’s not a thing in North India). Another of Gandhi’s defining characteristics was the simplicity of his life. Though he could afford to travel better, he would always travel third class, which had the cheapest ticket. As a consequence, the cheapest ticket came to be known as the “Gandhi class”.

The term (Gandhi class) is now most commonly used in the context of cinemas, referring to the front few rows for which tickets are the cheapest. Even though multiplexes have larger blocks nowadays, which means front row tickets are no cheaper than those a few rows behind, the nomenclature sticks. If you are unlucky enough to only get a seat in the first couple of rows, you proudly say you are in “Gandhi class”.

That his name has come to be associated with so many everyday occurrences, mostly in irreverence, illustrates the impact Gandhi has had. Some people might outrage (as the fashion is nowadays) about the irreverence, and “reduction” of Gandhi to these concepts.

I’m still surprised, though, that things like “Gandhi class”, “Gandhi pass” and “Gandhi” as a euphemism for fluke weren’t that prevalent in North India fifteen years ago.