economics – Page 18 – Pertinent Observations

Jet Lag And Other Stories

A couple of months back, Bryan Caplan had written:

1. Jet lag. What’s the best way to cope with jet lag? Most people sleep on the plane, then gradually adjust to the local time once they reach their destination. The problem: It often takes a week for people to get a decent night’s sleep. By the time they’re feeling themselves again, they’re almost ready to go home.

My alternative: Do not sleep on the plane. At all. When you arrive, do not sleep – at all – until a locally normal bedtime. Pay the fixed cost without cheating. When you wake up eight to ten hours later, you will be refreshed and in sync with your new time zone. In exchange for less than a day of sleep deprivation, you will feel fine for the rest of your trip.

So I decided to practically test out his advice. When I was flying in to New York over the weekend, I took a conscious decision to not sleep on the flight beyond 7 am New York time. It was hard, and I had to watch drivel such as Sankat City in order to keep myself awake, but after a day of work in New York, I think it is working well. It’s hardly 10pm and I’m feeling insanely sleepy now but I suppose this can be classified as “normal” sleeping time itself.

I also saw Kaminey on the flight. Extremely well-made movie, and the lack of length helps. And I finished reading Jonathan Wilson’s Inverting the Pyramid also during the flight.

New York city is insanely cold, and windy! It is ar eally scary experience wehn the wind hits your face, and there is the chance that your nose might just break and fall off ! When i had gone for dinner last night, I ended up running backwards! Only to save my face from being hit by the wind. Thankfully today the weather was better and I managed to roam for a bit after work.

I hope to update this blog more frequently while I’m here in New York. And doo read all of Bryan Caplan’s article.

Relationships and the Prisoner’s Dilemma Part Deux

Those of you who either follow me on twitter or are my friends on GTalk will know that my earlier post on relationships and the prisoner’s dilemma got linked to from Cheap Talk, the only good Game Theory blog that I’m aware of. After I wrote that post, I had written to Jeffrey Ely and Sandeep Baliga of Cheap Talk, and Jeff decided to respond to my post.

It was an extremely proud moment for me and I spent about half a day just basking in the glory of having been linked from a blog that I follow and like. What made me prouder was the last line in Jeff’s post where he mentioned that my blog post had been part of his dinner conversation. I’m humbled.

So coming to the point of this post. Jeff, in his post, writes:

Some dimensions are easier to contract on. It’s easy to commit to go out only on Tuesday nights. However, text messages are impossible to count and the distortions due to overcompensation on these slippery-slope dimensions may turn out even worse than the original state of affairs.

I argue that it is precisely this kind of agreements that leads to too much engagement. The key, I argue, is to keep things loosely coupled and uncertain; and this, I say, doesn’t apply to only romantic relationships. I argue in favour of principles, as opposed to rules. Wherever the human mind is concerned, it is always better to leave room for uncertainty. Short term volatility decreases the chances of long-term shocks.

So if you contract to date only on Tuesday nights, and on a certain Thursday both of you get a sudden craving for each other. In a rule-based system, you’d have to wait till Tuesday to meet, and that would mean that you’d typically spend the next five days in high engagement, since you wouldn’t want to let go given the craving. There is also the chance that when you finally meet, there has been so much build-up that it leaves you unsettled.

The way to go about this is to not make rules and just make do with some simple principles regarding the engagement, and more importantly to keep things flexible. If you have a “I won’t call you when you’re at work” rule, and there is something you really need to say, this leads to wasted mind space since you’ll be holding this thought in the head till the other person is out of office, and thus give less for other things you need to do in that time.

You might ask me what principles one can use. I don’t know, and there are no rules governing principles. It is entirely to do with the parties involved and what they can agree upon. A simple principle might be “if I don’t reply to your text message it doesn’t mean I don’t love you”. You get the drift, I suppose. And the volatility, too. (ok I’m sorry about that one)

The mechanism design problem for scaling down that Jeff talks about is indeed interesting. His solution makes sense but it assumes the presence of a Trusted Third Party. Even if one were to find one such, and that person understands Binary Search techniques, it might take too much effort to find the level of interaction. I wonder if the solution to scaling down also is the Bilateral Nudge (will talk about this in another post).

Relationships and Prisoner’s Dilemma

So I ws thinking about this car analogy for relationships. I was thinking about how when you start your car, you will need to drive in first gear, with full engine power, slowly releasing the clutch, using a lot of fuel. However, after you have gathered certain speed, it is wasteful and unstable to go on in first gear. It is time for you to take your foot off the gas pedal, hold down the clutch and change gears, and shift the car to lower engine power.

I think it is similar with romantic relationships. Once you’ve reached a certain level and gotten past the initial phase, it is wasteful to continue in the same full throttle. Once both of you understand that the other is firmly in the basket, there is no need to waste much time just assuring and reassuring each other of the other’s presence. It is simply a wastage of fuel. Also, if there is too much torque at too much speed, there is a good chance that the car will spin out of control, so that needs to be avoided.

A relationship is like a car with two control systems. It is important that both of you coordinate the gear change, else there is a danger that the axle might snap. Let us move out of the analogy for the rest of the post.

So there are two of you and both of you have the choice of whether to change gear or not. Now, the ideal thing to do would be to change gears together, since that will ensure the relationship is at the same level but you’ll both be spending lesser energy on it. The worst case is if exactly one of you changes gears. If one of you suddenly slows down while the other is still at full throttle, it is likely that the other will suddenly feel insecure that the one has stopped responding, and this is likely to lead to some sort of breakdown in the relationship, even if temporary. And in order to get things back on track, you’ll need to go full throttle, thus leading to wastage of energy.

So basically, exactly one party deciding to scale down can prove to be disastrous for both of them, because of which the dominant strategy is to stay where you are – at full power. Let me draw the 2 by 2.

———————————————————————

| | Scale down | Remain at full blast |

———————————————————————

| Scale down| 0 | -100 |

———————————————————————

|Remain at | – 100 | -50 |

| full blast | | |

——————————————————————–

You will notice that the players start off at a Nash equilibrium! Of both of them remaining at full blast. And thus neither has the incentive to scale down, unless he/she is sure that the other will also scale down simultaneously! And if the couple is not communicative enough, they will continue in this suboptimal state for too long, and end up burning way too much energy and willpower, which could’ve been otherwise put to good use.

Hence it is important that the couple communicates about matters such as these, and coordinates the shift in gears, and saves valuable energy!

A Balance Sheet View of Life

The basic idea of this post is that interpersonal relationships (not necessarily romantic) need to be treated as balance sheets and not as P&L statements, i.e. one should always judge based on the overall all-time aggregate rather than the last incremental change in situation.

Just to give you a quick overview of accounting, the annual statement typically has two major components – the P&L statement which reflects what happened between the last release of the statement and the currrent point, and the balance sheet which reflects the position of the company at the point of time of release of the statement.

I think Bryan Caplan had made this point in one of his posts, but I’m not able to find it and hence not able to link it. The point is that you should look at relationships on a wholesome basis, and not just judge it based on the last action. The whole point is that there is volatility (what we refer to in my office as “the dW term”) and so there are obviously going to be time periods during which you record a loss. And if on each of these occasions you were to take your next course of action based on this loss alone, you are likely to be the loser.

I’m not saying that you should ignore the loss-making periods and just move on. You do need to introspect and figure out what you need to do in the next accounting period in order to prevent this kind of a loss from repeating. You will need to “work the loss”, not make a judgment to break the relationship based on it. I think a large part of the problems in this world (yeah, here goes another grand plan) stems from people using one-period losses in order to take judgments on relationships.

Another thing is not to generate the accounting statements on a shorter time period. This is similar to one funda I’d put long ago about how you shouldn’t review your investments at extremely short intervals since that will lead to a domination of the volatility term (dW) and thus cause unnecessary headache. You might notice that corporates rarely release their accounts statements more frequently than once a quarter – this has more to do with volatility than with the difficulty in generating these statements.It is similar in the case of interpersonal relationships. Don’t judge too often – the noise term will end up dominating.

One caveat though – very occasionally the last loss may be so bad that it more than wipes out the balance sheet and takes to zero (or even less) the value of the firm. In that kind of a situation, there is no option but to shut down the firm (or break the relationship) and move on. Once again, however, the clincher in the decision to break up has to be the balance sheet which has gone to zero (or negative) and not just simply the magnitude of the last loss.

Life based on a balance sheet view is a balanced life.

Outliers – Notes

Last evening I borrowed Malcolm Gladwell’s Outliers from the library. Finished off reading it in one sitting this morning. I had been disappointed with his earlier book (The Tipping Point) and have been describing it as a blog post that has been written in 200 pages.

Outliers, on the other hand, is significantly better. For starters, there is a really nice narrative style which goes the book going. Having read the book, I still haven’t understood the central idea of it, but there are enough interesting sub-plots and side-fundaes that it’s worth reading. Some notes.

The second chapter of the book hints that you need to spend a considerable amount of time fighting it out at something before you become a stud in that. Gladwell claims there are no “natural studs” at anything, and people become studs at something only after reasonable effort. I think the key is on taking that step up to studness after you have put enough fight, and some people (pure fighters) don’t seeem to do that
There is tremendous non-linearity in the world, and this is a point that Nassim Taleb had also made in Fooled by Randomness. Basically, there are some discrete steps. For example, if I had applied the brakes even one second earlier, I could’ve prevented the car crash I was involved in this April. One extra mark here or there can change a candidate’s JEE rank by 500 places, and totally change his life. Etc.
Gladwell talks about “honor cultures” – where people tend to take offence easily. He claims that this kind of culture is more prevalent in pastoral communities where people need to be more aggressive and possessive. When I read about “honor cultures”, I was reminded of Rajasthan, and the Rajputs there going to war on one another on trivial “honour issues”, and Prithviraj Chauhan using “honour” as the excuse for supposedly pardoning Mohd Ghori in the first battle of Tarain in 1190. Was Rajasthan a traditionally pastoral society in those days?
The Power Distance Index that he talks about makes sense, but unfortunately India is not mentioned in the studies that he quotes. I would expect India to have a fairly high power distance index, but I’d also be interested in seeing if India’s PDI varies regionally – I would expect it to be higher in the north than in the south
A while back, I had written one reason as to why there doesn’t exist a strong breakfast culture in North India. Gladwell’s chapter on rice cultivation inspires an alternate reasoning. He claims that rice farming is much harder than wheat farming, and the former tends to take longer hours, and occupies a larger proportion of the year. Maybe due to the longer hours, south indians felt the need for three meals a day, while two were sufficient in the north. Also, rice digests quicker than wheat, so eating at more frequent intervals is warranted.
The epilogue, in which Gladwell talks about his mother’s family, gives an indcation about the “race system” in Jamaica. Compared to our caste system, which is discrete, Jamaican discrimination is on a continuous scale which has several shades of brown between black and white. Also, this continuous scale means that a child lies somewhere on the colour line between his father and his mother, and his standing in society is determined by his own colour. On the other hand, in the Indian caste system, rules dictate that the child belongs to either the father’s or the mother’s caste. Interesting to see how much of a difference this has made in general economic development.

I know a lot of this might not make sense to you if you haven’t read the book. I have just noted some headline points here. If you need more fundaes, leave a comment with your question and I’ll write about it.

And I would definitely recommend you to read the book. Nice quick read it is.

The impact of Rs. 2/kg rice

In the supplement of yesterday’s The New Indian Express (one of the six articles is here: http://epaper.expressbuzz.com/NE/NE/2009/07/12/ArticleHtmls/12_07_2009_412_002.shtml?Mode=1), it was argued about how the combination of NREGS and cheap rice (most states provide or promise to provide 25 kg of rice per month per poor family at Rs. 2 per kg) is destroying the rural economy.

One day of work under the NREGS gives a person Rs. 100. Half of that will go into buying rice for his family for the ENTIRE MONTH. Extending this argument, twelve days of work under the NREGS will feed his family for the whole year. Given that the staple is taken care of,, there is little incentive for the villager to work to earn more. And so there is a severe shortage of farm labourers, other rural workers, etc.

When the NREGS came about, some people applauded it saying that it would ensure that minimum wage laws would now be met. Given that people were now assured of a certain sum (say Rs. 100 per day) for doing meaningless stuff like digging and filling holes, they would go to do other harder and more meaningful work only if they were paid more (and you need to take into account that “real work” takes more discipline, hard work, etc. than it takes to wrok for a welfare program – so the NREGS actually pushed up the minimum wage for farm labour to much higher than Rs. 100).

Now, with various states coming up with cheap rice schemes, the whole thing has gone topsy turvy. Given the subsidized rice, it is now possible for the worker to earn enough for his staple food by just doing a few days of work under the NREGS! The only need for him to work elsewhere, and possibly harder, is to pay for his “luxuries” (considering the price of subsidized rice, requirements and NREGS pay, it can be shown that 100 days of NREGS work can pay for all the essentials).

Given that the essentials are taken care of by the combination of NREGS and cheap rice, the only reason that the worker will need to do actual (i.e. non-NREGS) is to help him save, or for “luxuries”. Yes, some workers will have special needs for money at different points of time because of which they will take on the extra work, but if you aggregate the supply of work, you will realize that the ‘hurdle daily rate’ for the worker to accept “real work” becomes really high.

Since the worker doesn’t absolutely need the money, he can now become the price-setter in the job market rather than being a price-taker. So what this effectively does is to push the “minimum non-NREGS wage” really high indeed (I can’t intuitively put a number on it, but it could be as much as Rs. 200). My bet is that a lot of rural-economy-produced goods will turn out to be really expensive next year since a lot of producers might choose not to produce them given the high cost of labour.

Quite a few commentators have said that the NREGS is a noble scheme for empowering the poor, and given that most of the ‘work’ done is meaningless, it can be replaced by simple cash transfers. The problem is that if that is combined with yet another welfare measure such as cheap rice, it can create severe distortions in the market.

The moral of the story is that if you want to help the poor, please go ahead and do so. What you shouldn’t do is to help them twice over – that can result in severe market distortions like the one that the express article talks about. What is needed is greater coordination between the centre and the states in the welfare measures.

Getting rid of the landline

A large number of people I know have got rid of the land line phones at their homes and replaced them with a mobile phone for each member of the family. So now, there is no “home number” and each member of the family has their own personal number. And from talking to some of these people, apparently the economics work out well – an uncle I know says that the combined bill out of the five mobile phones that his family members own is far less than the bill he had to pay back when he had a land line.

Now, the reason for this reduction bill is fairly intuitive – now, one can keep track of how much each of the family members talks. Earlier, even with itemized billing it would be difficult to track who made which call and who is contributing to the inflation in telephone bills. However, now, it is possible to keep track of how much each person spends. And even if the “family fund” is willing to pay 100% of everyone’s bills, people are now wary of inflating the bills since everyone will now know who has been responsible for the inflation. And that automatically causes people to speak less.

I have a landline phone. The main reason I keep it is that it comes along with the broadband connection, which is a must for me. Apart from this, I think it is important to have a “home phone” or a “family phone” even if everyone in the house has a mobile. This is especially useful to give to relatives, etc. And last but not the least the landline phone feels good to the ear and the cheek, and is comfortable to hold in the hand – compared to a mobile phone which is likely to give you a pain in the hand and ear in case of long conversations.

However, when people are concerned about cutting cost and don’t need a broadband connection, it is intuitive to personalize people’s bills and thus get rid of the landline. In fact, I think nowadays some companies do it too, where employees are expected to make their business calls through their personal mobiles and then get it espensed from the company, rather than using the common office phone.

Anecdotes from school: Divisibility test for Seven

This is a new series on this blog, called Anecdotes from school. I realize I’ve had so many awesome anecdotes in school that I should tell you people about it. Of course I won’t write about the incidents when I beat up people or got beaten up by people (both were common). Even leaving them out, school was quite an awesome time so I think I should write about it.

One fine morning when I was in 9th standard, I arrived at school to find the rest of my class raving over this little guy called Ramu. He had apparently made some major mathematical breakthrough, and the school had called the Deccan Herrald to interview this prodigy. He is the next Ramanujan, people claimed (no, Ramu wasn’t short for Ramanujan). Efforts were made by all parties to hurt my class topper ego – what is the use of being a topper if you can’t come up with breakthrough discoveries, they said.

A few days back, we had studied divisibiility tests. Powers of two were simple, as were 5, and 3 and 9. 11 was also quite simple, and that left only 7 among the “simple primes” for which there didn’t exist an elegant divisibility test. “This is an unsolved problem”, Matki, our maths teacher, had declared. “Any one who can solve this is sure to win a Nobel Prize” (evidently she didn’t know that no Nobel is given out for Math. Of course, us 13-14yearolds also had no clue about such finer details.

So Ramu had woken up one morning with a divisibility test for seven. As I mentioned earlier, by the time I reached, the entire class had been convinced. I’m not sure if Matki had heard about it yet. It was a weird test, and I must admit I don’t remember it. It was extremely inelegant, with different operations to be done with different digits of the number. If it were elegant, I had reasoned, this problem wouldn’t have been unsolved for so long, I had reasoned. So inelegance would not really take away any greatness from the method.So I asked Ramu to demonstrate it to me.

He wrote down a few numbers on the blackboard – all known multiples of seven. Actually he picked only powers of seven (49,343 and 2401). The reason he did this (picking powers) is unclear. So he takes the numbers, puts his magical algorithm on it, and there it is. Done. Hence proved. QED.

Of course this was too much for my class topper ego to take, and I spent the rest of the day trying to find holes in this argument. In the meantime Matki and the other senior maths teachers in school had learnt about this, and had gotten convinced of the greatness of Ramu and his algorithm. The team from Deccan Herald was supposed to arrive at 4 o’clock, we were informed.

It was sometime in the afternoon. Maybe during the history lesson. My ego had been hurt so much that I obviously didn’t care about the lesson. All I cared for was to poke holes in Ramu’s algorithm. I decided to stress-test it. I picked 8. And ran the “divisibility test for seven”. The algorithm said “divisible”. I picked 9. Again the algorithm said “divisible”. 1. Divisible by 7. 2. Divisible by 7.

I had confronted Ramu during the lunch break regarding my “experiments” with his algorithm. “You obviously know that 8 is not divisible by 7. Why do you even bother running the test on that?” He countered. “Errrr.. Isn’t that the point of the divisibility test?”, I asked. I had already started to become unpopular in class. I then started picking random large numbers whose divisibility by 7 I had no clue about. According to Ramu’s algorithm, all were supposed ot be divisible by 7.

Deccan Herald was hurriedly contacted again, and asked not to come. I don’t know how Matki or any of the other maths teachers had reacted to this. I was “boycotted” by the class for the next one week for destroying the career of a budding mathematician. Ramu, however, wasn’t finished. A week later, he came up with an algorithm for trisecting an angle using only a straight edge and a compass.

Tranche of wallet

One of the buzzwords in marketing in the last few years has been “share of wallet”. “We don’t aim for market share in any particular segment”, they say. “What we are aiming for is a larger portion of the customer’s share of wallet”. Basically what marketers try to do is to design their products such that a larger portion of customers’ spending comes to them rather than go to competitors (again – they claim they have no direct competitors and everyone else who competes for the customer’s spending is a competitor).

So far so good. But the problem with looking at things from a “share of wallet” pespective is that it assumes that the wallet is homogeneous. That each part of the wallet is similar to the other, and spending for different items comes uniformly from all parts of the wallet. This isn’t usually very well recognized, but what matters more than “share of wallet” (of course that matters) is the “tranche of wallet” that this particular product sits in.

I don’t think I need to give a rigorous proof for this – but some spending is more equal than others. For example, if you are dirt poor and have only ten rupees left in your pocket, you would rather buy a loaf of bread than buy a tube of lipstick. Some goods are more important than the others. “Necessities” they call them. The rest become “luxuries”. Even the “luxuries” are not homogeneous – there are various tranches in that.

So the aim for the product manager should be to get into the deeper tranches of the customer’s wallet (assuming that the top tranche is the “equity tranche” – the one that takes the first hit when spending has to be cut). Targeting the top tranche may be a good business in good times, but when things go even slightly bad, spending on this product is likely to take a hit and thus the “share of wallet” falls dramatically. Getting into a deeper tranche means more insurance, so to say.

In the world of CDOs (from where I borrow this tranche, equity, etc. terminology), people who take on the equity tranche and other more risky tranches do so only in exchange for a premium – basically that you need to be paid a premium amount (compared to lower tranches) during good times so that it compensates for lack of income in the bad times. So this means that if you are trying to target the most disposable part of the wallet (i.e. the part of wallet that takes the first hit when spending has to be cut), you better be a premium player and make enough money during good times.

So the basic insight is that. The more disposable spending on your product is for your customer, the more the premium that you have to charge. Some products such as high end fashion accessories seem to have got it right. Extremely disposable spending, which leads to volatility of income; balanced by extremely high margins which make good money in good times.

Certain other products, however, don’t seem to have got it right. One example that comes to mind is Indian IT. Some of the offerings of Indian IT companies come near the disposable end of their customers’ wallets. However, to compensate for this, they don’t seem to charge enough of a premium. So they make “normal” profits during good times, and sub-normal profits during bad times – leading to an average of sub-par performance.

So before you enter a business, see which part of your customer’s wallet you are targeting. See if the returns that you will get out of this business in good times will be enough to tide you over during bad times. And only then invest. Of course, before the 2007-present downturn happened, people had no idea what bad times were, and thus entered into risky businesses without enough of a risk premium.

Theory of comparative advantage and chutiya kaam

Suppose you and me together have to do two tasks A and B. We need to decide who does what (let’s assume that we need to pick one task each). Now I’m a stud and you are a chutiya so I’m better than you at both A and B. So how do we split? It all comes down to the degree to which I’m better than you in each of these tasks. Suppose I’m marginally better than you at A, but significantly better than you at B. Theory of comparative advantage (commonly used to describe international trade) says that I should do B and you should do A – this way, total productivity is maximized. I suppose this makes intuitive sense.

You have a number of people cribbing about what is popularly knonw as “chutiya kaam” – approximately translates to bullshit work. Work that is uninspiring for them, but which they need to do because it needs to be done. Sometimes you have otherwise fairly intelligent and efficient people assigned to chutiya kaam – with the explanation that there is no one else who is well-enough equipped to do it. And these people find that less intelligent nad less efficient people are being given better work.

The reason the more intelligent and efficient person might get the chutiya kaam is that he is better at that than his colleagues, even if he is better than his colleagues in the more intelligent stuff. So I suppose if you want to avoid chutiya kaam altogether, one of the ways of doing it is to prove yourself to be a chutiya at that. To be inefficient and incapable of doing that, and in the hope that it will then get palmed off to someone else who is perceived to be better.

But then this is a double edged sword. There are people who believe that all kinds of “chutiya kaam” are inferior to all non-chutiya kaam. And that if you are not good at chutiya kaam you cannot be good at everything else. I’m reminded of this guy in my class who was captaining the class team for a day and who refused to let me open the bowling because I’d dropped a catch. “You can’t even catch properly, and how can you expect to bowl?” he had asked.

The unfortunate thing is that a large number of people are like this. They refuse to accept that chutiya and non-chutiya kaam are not comparable, and require different skill sets, and that they will neeed to apply trade theory to figure out who does what. They look at your skills in one and use that to judge you in another. And allocate resources suboptimally. And when faced with this kind of people, the strategy of trying to be chutiya at chutiya kaam may not work.

So I suppose the key is to figure out what kind of person your boss is. Whether he appreciates that different jobs can take different skills, and no one job “dominates” another. And whether he applies trade theory when it comes to work allocation. If the former, you can’t really do anything. If the latter, you can try being chutiya at chutiya kaam.

Postscripts

“chutiiya kaam” is not a homogeneous term. Some jobs are chutiya for some people but non-chutiya for others. It varies from person to person.

I have grouped all “chutiya kaam” together just for the sake of convenience. There are differnet kidns of chutiya kaams and all of them require different skill sets.

Each non-chutiya kaam also requires its own skill set. I’ve again grouped them together for the sake of convenience of argument

I firmly believe that principles of economics that can be useful in real life (such as demand and supply, trade theory, game theory, etc.) should be part of the 10th standard economics syllabus, rather than teaching kids to mug up GDP growth rates for different states for different decades

I have resisted the temptation to bring in the studs and fighters theory into this analysis