Category: economics

Cooking

I’m in the process of my weekly cooking. I’m making onion and potato sambar which should last me for about four meals – one tonight, and for three meals during the course of this week. I have been on and off the phone to my mother, as she has been giving out expert instructions from the other end of the other side (yes, this is a fighter sambar that i’m making). It’s almost done, and I’m waiting for the pressure cooker to cool down. There is a small  5 minute process to be done after that happens, and I’m good for the week.

I can’t help but think that our normal process of meal preparation (talking of india in general here) is plain inefficient. Cooking happens at least once a day, in each and every household. You have women balancing jobs, kids and at the same time tryign to find time to cook. Every day. Some people hire professional cooks, who again come once or twice a day in order to cook, and get paid a decent amount (I’m told the going rate for a Brahmin cook (yes, this market is segmented by caste) in Bangalore is Rs. 4000 a month). But then again, you need to be around when the cook arrives, occasionally supervise the cooking, and the quality of food churned out by most of these small-quantity cooks is not much higher than abysmal.

There is tremendous opportunity for economies of scale when it comes to cooking. For example, it takes exactly the same amount of effort to make 1 kilo of rice as it does to make 10 kilos of rice. It is a similar case with sambar, and rasam, and with most curries (even north indian curies) – apart from the effort involved in cutting vegetables which varies linearly with the amount of stuff to be cooked. Yet we choose to do it every day, in every house hold, sometimes up to three times a day. There is something wrong right?

There are two ways in which demand can be aggregated in order to exploit economies of scale – across days and across households. Indians in general prefer fresh food. Even after the introduction of the refrigerator a few decades back, a number of families didn’t buy one because they thought that would encourage consumption of stale food (I don’t have any such fundaes so I cook once a week). There are a number of people who insist that each meal be cooked fresh – I remember that my late father used to insist that at least rice be cooked just prior to each meal (he was ok with not-so fresh sambar, etc.).

Caste fundaes mean that eating out hasn’t traditionally been popular in India. Even nowadays, when you have a lot of people living alone, or with friends, there are very few people who eat out every meal. One look at the timings of the traditional eateries in Bangalore (MTR, Brahmin’s coffee bar, the various SLVs, Vidyarthi Bhavan) tells you a story – they are primarily breakfast and tea restaurants. MTR has recently (12 yrs back) introduced lunch nad dinner but had always been a breakfast and tea place. Most of these places would open from 7 to 11 in the morning and again from 3 to 8 in the evening.

Then there are more religious fundaes which encourage the cooking of each meal fresh – if you observe traditional people with sacred threads eat, you might observe that they do one small pooja with the rice and ghee before starting off. Would anyone want to do that with stale food? Again – similar religious fundaes have traditionally stopped people from eating out. Which is why we have the prevailing model of each meal being prepared in each household.

The problem with most restaurants in India is that they don’t serve home food. After all, they have never been the staple (i.e. every meal) source of food for people, so they have always tried to differentiate themselves from home food. The only restaurants that serve stuff that is made in a similar manner as in households are the small “messes” that operate in areas with a large concentration of single people living without family.

Going forward, I wonder if there is a market for restaurants which make food that is similar to what is made in households (of course it differs by genre, but within a genre it will be made similar to the way stuff is made in households), and which are not too expensive. They might operate on take-away or delivery model (i know that right now there are lots of tiffin-carrier providers, but they need to scale up significantly). They can exploit the economies of scale (both in  terms of cost as well as effort) and provide home-like food for people who would otherwise want to keep a cook.

A good place to start this model would be areas with large concentratioon of single people, or double-income couples – something like Gurgaon. Would there be a market for someone who would provide hygienically made and tasty home-style north indian thalis at around Rs. 30 per plate? Economies of scale mean that this food is likely to be produced at a very cheap cost to the restaurant which will enable it to be priced cheap. The price point will also mean that people will eat there rather than hiring a cook to cook at home. Of course, there needs to be reasonable variety at every meal – which again means that hte restaurant should be reasonably big.

The problem with this model is it might not be feasible as a very small business. It needs to start off in a big way, serving some 1000 people every session – this is the only way enough economies of scale can be harnessed to make things cheap and also provide variety.

Assuming a couple of these start in Gurgaon and are successful, and the model spreads around the country. There is a good chance that a large section of the population will get out of the make every meal every day at every household model.

Taleb’s Recipe

No, unlike the previous post, this has nothing to do about food. It is about Nassim Nicholas Taleb’s recent op-ed in the Financial Times where he gives his “recipe” for saving the global financial system. Two of my favourite bloggers Arnold Kling and Felix Salmon have responded to it, but I didn’t like either so I thought I should post my response as well.

I borrowed The Black Swan from Aadisht sometime in late 2007. I tried starting to read it several times but never got past Taleb’s childhood stories of his hometown Amioun. I took a couple of months to get past the first 50 pages, I think. And then it was easy reading. I loved the sub-plots. I broadly bought into the main plot. By the time I had finished reading the book, I wanted to ask Taleb to accept me as his sisya. I  bought and read Fooled By Randomness, and liked that too. And then decided to read The Black Swan yet again. It was only a couple of months back that I finally returned the latter book to Aadisht (in the meantime he had bought two other copies of it, and read it).

Till very recently, I would read up any article of Taleb’s that I could find. I wrote to him a couple of times with my CP, and he even responded. I infact wrote to him about “Positive Black Swans and the World of Romance” and he responded with a “Thanks Karthik, Ciao, Nassim”. I had become a worshipper.

However, now I think he’s kinda lost it. I don’t think he intends to write another book and so he has nicely settled down to peddling his last theory (black swan). In response to a recent post on studs and fighters, Kunal had said, “He that is good with a hammer tends to think everything is a nail.”. The same disease affects Taleb I think, as he goes around the world trying to force-fit his black swan model to every conceivable problem.

And then I have a problem with people like Taleb and Satyajit Das, and actually with all those ibankers who are asking for bailouts. These guys made full use of capitalism, and made heaps of money, when things were good. And now that their money has been made, they call for government intervention, and socialism. Taleb and Das are different from the other wall streeters because they are calling for full-scale government intervention, unless the other bankers who are only calling for a bailout!

Now that the elaborate intro is done, let us get to the point. Taleb’s essay consists of ten points. The headings are italicized and there’s a detailed explanation. For purpose of brevity I’m putting only the headings here, and writing my comments after each of them. Go to the FT site to read the full points that Taleb has written.

1. What is fragile should break early while it is still small.

I agree with this. And my take is that competitors need to keep each other in check. For example, if this round of bailouts were not to happen and the biggies were let to fall, no one would grow so big in the future, and even if they did, they would make sure that they were insulated enough from one another. This round of bailouts will make the next crisis (whenever it will happen) worse.

2. No socialisation of losses and privatisation of gains.

Agree with this.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

Taleb has clearly not learnt his own lessons (fooled by randomness). I might have crashed the school bus once, but it may not be my mistake. the one data point of one bus crash should not be used to decide my career as a driver. One should look at how the driver drove before the crash to determine whether he gets a second chance. Blanket banning of people involved will not help.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.

It’s all about structuring. Taleb was a trader and he forgets about structuring. As long as incentives of the employee and the employer are reasonably well aligned, there is no problem with an incentive bonus. The problem in ibanking was that too much emphasis was placed on short-term performance of employees. It’s tragic that the fall of the financial system has brought to an end what was an excellent compensation system (in principle, mind you; not the way it was practised) – where each person was paid fairly based on his/her contribution.

5. Counter-balance complexity with simplicity.

I think the simplest way would be to leave things to the market. Government intervention would lead to a new form of complexity, and in the overall scheme of things increase complexity rather than decrease it. None of the stuff that Taleb has mentioned is easily implementable.

6. Do not give children sticks of dynamite, even if they come with a warning .

Again Taleb prescribes mai-baap sarkaar. Does he realize that if governments had always had tight control over the markets, the markets wouldn’t have crashed on October 19 1987, and he wouldn’t have made any money? (Taleb has reportedly made 97% of his life’s earnings out of this one event). What is “complex derivatives”? And how can you ban it? If you ban it, it’ll go to the black market. You are better off collecting hefty security transaction tax.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

I agree

8. Do not give an addict more drugs if he has withdrawal pains.

Agree once again. We need to structurally change things to get to saner leverage than what was practised 1-2 years back. Regulations should be simple and principles-based, minimizing chance for regulatory arbitrage. Remember that the purpose of creation of most “complex derivatives” in the last 25 years is regulatory arbitrage.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

Bullshit. The point on markets not containing information, that is.

10. Make an omelette with the broken eggs.

None of this makes any kind of practical sense. It’s just an old man ranting. Thanks, guru (pun intended).

Intellectual Property

A blog post earlier this month on Econlog finished off with a very strong quote by Friedrich Hayek:

One of the forms of private property that people cherish most is their ideas. If you convince them that their ideas are wrong, you have caused them to suffer a capital loss.

I ended up liking it so much that I added it to my work email signature. Thinking about it further, why is it that some people are more open to debate than others? Why do some people admit to their mistakes easily while others are dogmatic about them? Why do some people simply refuse to discuss their ideas with other people? I think Hayek’s observation offers a clue.

Let us consider two people – Mr. Brown and Mr. Green. Mr. Brown believes in diversification, and his investments are spread across several financial instruments, belonging to different categories, with a relatively small amount of money in each of them. For purposes of this analogy, let us assume that no two instruments in his portfolio are strongly correlated with each other (what is strong correlation? I don’t know. I can’t put a number on it. But I suppose you get the drift)

Mr. Green on the other hand has chosen a few instruments and has put a large amount of money on each of them. It is just to do with his investment philosophy, which we shall not go into, as this is just an analogy.

Let us suppose that both Mr. Brown and Mr. Green held Satyam stock on 6th January 2009. They were both invested in Satyam according to their respective philosophies – and the weightage of Satyam in their respective portfolios was also in line with their philosophies. The next day, 7th of January, the Satyam fraud came out. The stock crashed to a tenth of its value. Almost went to zero. How would our friends react to this situation?

Mr. Green obviously doesn’t like it. A large part of his investments has been wiped out. He has become a significantly poorer man. For a while he will be in denial about this. He will refuse to accept that such a thing could happen to one of his chosen stocks. He will try to convince himself that this fall (a 90% fall, no less) is transient, and the stock will go back to where it once was. As days go by, he realizes that his investments have been lost for ever. He is significantly poorer.

Mr. Brown will also be disappointed by the fall – after all, he too has lost money in the fall. However, his disappointment is mitigated by the fact that the loss is small compared to his portfolio. There have been other stocks in his portfolio which have been doing well, and their performance will probably absorb the Satyam losses. Some of the stocks in his portfolio may also be fundamentally negatively correlated with Satyam, which means they will now gain. There is also the possibility that the Satyam fall has opened up some new possible areas of investment for Mr. Brown, and he might put money into them. It is much easier for Mr. Brown to accept the fall of Satyam compared to Mr. Green.

So you replace stocks by ideas, and I suppose you konw what I am gettting at. The degree of openness that people show with respect to an idea they have varies inversely with the share of this particular idea in their “idea portfolio”. The smaller the proportion of this idea, the lesser will be the “capital cost” of their losing the idea. And hence, they will be more open to debate, to discussion, to letting someone critically examine their ideas. If the proportion of this particular idea in their overall portfolio is large, there will obviously be resistancce.

A corrolary of this is that when someone possesses a small number of ideas they are more likely to be dogmatic about them (I am using the indefinitive “more likely” here because even when you have a small number of securities in your portfolio, your exposure to some of them will be really small and so you’ll be less unwilling to lose them. Though I must point out that people with small ideas portfolios become so used to madly defending the big ideas in the portfolio that they start adopting the same tactic for the smaller ideas in their portfolio and become dogmatic about them – which is irrational).

I just hope I didn’t cause you a capital loss by writing this. For me, on the other hand, this was a bonus stock.

Why is Ten Sports sitting on so many rights?

I wanted to stay up last night. I wanted to stay up and watch the WI-Eng match till the very end. Waking up this morning and checking the scorecard, it seems like it was a really good match. And Fidel Edwards seems to have become a last-day-shutdown specialist. This is the second time this series he’s hung on. And he’d done so once before against India at ARG.

There was another reason I wanted to stay up last night. I wanted to watch Liverpool play Real Madrid. I woke up this morning and saw that it was an amazing game, too. Looking through the Guardian Football site (btw, Advani seems to be advertising heavily on that site; it’s a pity he never advertises here on my site) I noticed that Chelski-Juve was also a strong game, despite the result. Another reason I would’ve wanted to stay up last night. For the record, I slept at 12:10. Tea-time in the Test match, and before either of the football games had started.

Ten Sports seems to have bitten off more than it can chew. It seems to own the rights to telecast too many different things. I think I have raised this point once earlier, but it pzzles me as to what Ten Sports is trying to achieve by getting rights to telecast so many things, most of which are happening at the same time. For example, over the last couple of weeks I’ve been unable to watch the first hour of WI-Eng even if I’d wanted to, because it was overlapping with the last hour of SA-Aus, which was being telecast at the same time.

The reason I slept off early last night was because I didn’t have the option to watch what I wanted. All the three games that I’d’ve been reasonably interested in were supposed to be on Ten Sports (Zee Sports doesn’t count since Tata Sky doesn’t offer that), and I  realized that I’d be forced to watch what the guys at the Taj Entertainment Network would want me to watch. Denied the option to choose what I wanted to watch, I went to bed.

It puzzles me that Ten Sports isn’t subletting its contracts. Devoid of anything decent to show, I suppose that ESPN or NEO would’ve only been too happy to acquire the rights to telecast last night’s Liv-Real game by paying a fee to Ten Sports. And it would’ve unlocked value at the hands of the remote-holder. Ten Sports need not let go of the rights to show all the games. All they need to do is to sell the “out of money options” – the rights to the game which they won’t be able to telecast anyway.

Now, the problem will be if accounting for all costs, no options are out of money. For example, you know you won’t be able to show Liv-Real. But you think that the loss of brand equity of your channel would exceed the money you’d gain by selling this option to another willing channel. The viewers are the only losers at this game, but I don’t know what can be done. After all, viewers  are way too dispersed in order for them to take any kind of action.

Extending this question, what can a sports body do to prevent a bidder from acquiring rights to telecast and then mess up the telecast (or not telecast it at all) ? After all, the sports body is out there to make as much money as possible from the TV rights, and they need to ensure significant investment into broadcasting by the broadcasters, so the “i’ll give rights to only those channels that are in the interest of the people” model won’t work.

One option would be to sell the rights to two channels in each market. But given that broadcast is a natural monopoly, the sports body will not be able to make as much by selling to two bidders as it can by selling to one bidder. Is there any other solution that you can think of? If yes, unleash.

Car Ownership

People, especially in the US, make a big deal about home ownership. In fact a large part of the current economic meltdown has its roots in the American craze for home ownership. Fannie and Freddie were created to help home loans become cheaper, then there was the CDO wave. Then came subprime. NINJA (no income no job amortized). All that. Boom. Bust. Jai.

A related concept that no one seems to talk about is car ownership. They say that the safety of a neighbourhood goes up if the proportion of owner-occupied homes goes up. And this is the underlying theory behind most of the home ownership craze.

|||ly, road safety is directly proportional to the proportion of owner-driven vehicles on the road. Take Bangalore for example. Till the late 90s, the traffic there was excellent and well-behaved. Some roads were already clogged, yes. But drivers were in general very well behaved. And the reason behind that was that most people owned their bikes and cars. They had a greater incentive to make sure that there was no damage done to their vehicles nad drove more carefully.

Yes, personal safety also plays an impact and is independent of whose vehicle the driver is driving, but I think in the progression of severity of accidents, vehicle safety gets compromised before personal safety. In other words, there is a one-way implication here – if you drive keeping in mind the aim of not damaging your vehicle, it is more likely that you are not going to get injured. The reverse doesn’t necessarily hold. And that is why car ownership is so important.

So what happened in Bangalore in the early 2000s when traffic suddenly became horrible? This thing called BPO happened, which brought with it the mostly chauffeur-driven taxis. Now, on one hand, these guys had perverse incentives as their efficiency was measured on the speed from which they got from point A to point B. Apart from this, most of them were not driving their own vehicles (this was a departure from the earlier wave of taxis and autos, most of which were owner-driven) and so they didn’t care so much about damaging their vehicles, which led them to drive more rashly.

Similar is the case with Delhi, which is known to have always had horrible traffic. Being the political capital, Delhi has always had a reasonably high proportion of chauffeur-driven cars. Which is why, for a long time, its roads have been known to be rasher than roads in other cities. And things still haven’t improved.

The thing with car ownership is that it forms a positive-feedback loop. Suppose the number of chauffeur-driven cars goes up. Then, the traffic in general becomes more rasher. And driving becomes more of a headache for you. Which increases your incentive to employ someone to drive your car. Which further pushes up the proportion of chauffeur-driven cars. This is what has happened in Delhi over the last 50 years. This is what has happened in Bangalore over the last 10 years.

In order to make our streets safer, we need to incentivize people to drive their own cars and bikes (one clarification – by own, I mean either your own or something that belongs to close family or friends; in both cases, incentive to keep vehicle safe is high). If I’m not wrong, people can claim tax exemption against the salaries they pay their driver. This needs to go first. Next, insurance companies need to have different levels of payout for self-driven and driver-driven accidents (I know this is going to be hard to be implement).

Yes, this might increase unemployment since driving other people’s vehicles is a major occupation nowadays. But is greater unemployment too high a price in order to ensure greater safety? (ok I can quickly think of one counterargument for this – if people become unemployed, the chances they’ll become goons rises, which makes society in general less safe)

Sit down behind the wheel, and be counted. Say no to drivers. Drive your own car. It is in your own, your car’s , other people’s and other people’s cars’ interest. You don’t need to be driven. You need to be in the driver’s seat.

Recession notes

Over the weekend I spoke to a few friends, over phone and GTalk. And enquired about their business. Some interesting insights:

  • On Saturday, I spoke to this guy who is a banker in the City of London. He says that one major fallout of the global economic crisis is that the financial markets have become highly inefficient.
  • Knowing that they won’t get bonuses, he says, bankers have no incentive to arbitrage these inefficiencies. Sadly, people refuse to believe that investment bankers perform socially useful and productive work
  • Yesterday, I was talking to this guy who runs a manufacturing SME. He says that apart from one really bad month (January) when orders fell over 50%, he is doing quite well.
  • Thanks to the downturn, a few manufacturing shops have shut down in various places in Europe. Now, the erstwhile customers of these erstwhile manufacturing shops are looking towards India for their sourcing. My friend is hopeful of bagging one such contract.
  • Thanks to the downturn, firms are integrating their manufacturing. For example, a prominent stationery manufacturer has decided to manufacture 100% of its products from its plants in India. My friend has been a long-term supplier to the india plant of this particular manufacturer, and now expects to get more business from them.

Interesting stuff overall.

Weddings

I’m trying to understand the significance of attending another person’s wedding. It is very unlikely that you are going to add any significant value to the process, since the person who invited you is likely to be extremely busy with the process. Unless you know one of the main people involved in the wedding really well, there is a finite probability that your attendance might not be noted also (just in case the photographer is not diligent enough).

Of course, weddings give you the opportunity to network. Especially if it is a noisy south indian setting (I’ve attended one north indian wedding so far, and what put me off was the requirement to stay silent during the proceedings) or a reception. It is a good excuse for you to catch up with all those people who belonged to the same affiliation group as you and the person who invited you. It is a good opportunity to expand your social circle.

Back in the 1980s, when I was a kid, one of the great attractions of weddings was the food. Bisibelebath was a special item back then, as were the various “wedding special” sweets. Some of the more affluent folk would also offer ice cream for dessert (that has become a common thing now, especially for receptions). The food on its own was enough to make me look forward to weddings. Over time, the general quality of wedding food has dropped. And the general quality of food in restaurants has increased well at a faster rate. So you don’t need to go to a wedding for the food anymore.

Historically, I’ve been fairly social. I’ve usually attended all functions that I’ve been invited to, especially if it’s in the same city. I admit I haven’t really travelled too many times to attend weddings but done short trips (such as Bangalore-Mysore) occasionally. I’ve always calculated that the cost (time, travel, etc.) of attending a wedding is not much in terms of potential benefits in terms of networking, catching up, expanding circle, etc. Of course, I need to admit that over the last couple of years, NED has been part of the equation, and there have been a few occasions when I’ve worn a nice shirt and then backed off from going.

It is all fine when travel is local, where NED is perhaps the only thing that can tilt the balance in favour of not attending the wedding. When you live away, the whole equation changes. The cost of travelling goes up dramatically (in terms of time, money and inconvenience). The climb is especially steep if you live a flight away, rather than just a train journey away. What used to be borderline cases when the distance was small now dussenly become absolute noes. The obvious ayes become borderline cases. And in some cases obvious ayes become obvious noes. It is only when a wedding happens in your new city that what were obvious noes become obvious ayes.

Four months ago, my cousin (father’s brother’s daughter) got married in Bangalore. If I were in Bangalore, it would have been an emphatic aye. In fact, it’s likely that I’d’ve volunteered to take up a significant number of duties at that wedding. However, the way things turned out (my being in Gurgaon), it wasn’t tough to declare that as a noe. The work that I would’ve otherwise volunteered for suddenly became “work”, became a “cost”. Combined with a couple of other factors, it turned out to be a fairly obvious noe. And I don’t think anyone really minded.

It seems to be the season for friends to get married, especially juniors from IIMB. Two of them who have just got married to each other are having their reception tonight 100m away from my Bangalore house. A case that would have been an overwhelming yes, now become borderline. Remember that NED to travel varies with the travel-cost in a super-linear fashion, and I think it is that which has turned today’s case into a no. There have already been a few other weddings in the season for which I’ve convinced myself with a similar reason. And there are more.

So I ask myself once again – why should I attend someone’s wedding? I have so far been putting the obvious variables into my calculation – netwroking opportunity, goodwill, opportunity to catch up with people, side effects (a wedding in Bangalore is a good excuse for me to visit Bangalore, etc.), travel costs, chance of occurrence of NED, how much ‘work’ it will be, etc. and have been trying to base my decision on these.

Is there something I’ve missed out? Is there something else that I need to consider which might change the costs and benefits of going? Coming back to the more fundamental  question, why should I attend someone’s wedding?

IPL Structuring

I remember that this time, last year, I was eagerly looking forward to the IPL auctions. It also happened to be a time when I was actively looking out for a new job (i wasn’t going to find one till about six months later). And I was secretly hoping that one of the IPL franchises would employ me as a game theory and structuring consultant in order to help them out with the player auctions. While I tracked it online, I imagined myself sitting in the bidding room at the Trident, showing my excel sheet to the franchise owner and captain, and watch Preity Zinta enhance her Mata Amrita Index.

It was also a period of extreme NED, due to which i didn’t bother looking out actively to try consult for an IPL franchise. It was a period of low confidence, so I assumed I wasn’t good enough for this kind of work, and didnt’ bother doing anything in this direction. Frankly, I didn’t have a clue how to proceed, else i might have put SOME effort at least. A few months later, when the IPL was well underway, I figured out that one of my cousins is a big shot with Bangalore Royal Challengers, and he was among the people at the Trident who picked the Test XI to represent BRC. I wanted to kick myself, but for some reason I didn’t.

Currently, I’m comfortably employed, and so far have been happy with this job. Else I might have wanted to throw my hat into the ring. Once again, IPL team formation season is on. A few transfers have gone through already, and a few are currently in limbo. Bidding will happen next season for people who are joining the league this year. It promises to be an interesting time. And so far I’ve been deeply unhappy with the way the franchises are going about their business.

I’m especially upset with BRC, and have half a mind to call up my cousin who consults for them and give him a piece of my mind. How the hell could they let go of Zaheer Khan in exchage for Robin Uthappa? Yes, the latter is from Bangalore, and has that local pull factor. He has batted quite well this Ranji, though not anywhere close to what he played like 2 seasons back when he topped the batting charts. But he is supposed to be paid twice of what Zaheer was being paid! Is he really worth that much? I’m sure that BRC missed a trick here. I’m sure that had the BRC asked for a fee from Mumbai Indians in order to release Zaheer in exchange for Uthappa, the Indians would’ve definitely paid up. When Chelski can reportedly offer Anelka, Malouda, Alex and 15 million pounds in exchange for Robinho, Mumbai could definitely part with Uthappa and maybe a million dollars in exchange for Zaheer.

There were rumours of the Mumbai Indians negotiating a swap with Kings XI Punjab for a swap between Powar and Harbhajan, which reportedly got stalled because Harbhajan earns so much more than Powar. Once again, what if the Mumbai Indians paid a fee along with Harbhajan for Powar? I know it is ridiculous that Powar is worth Harbhajan plus a fee, but given their disparity in income, this is the only way that this deal is possible. And I’m sure that there is a particular fee, which if paid along with Harbhajan in exchange for Powar, will leave all the interested parties (Punjab, Mumbai, Harbhajan, Powar) better off. It seems like people are too lazy to find it.

The opportunities like this are endless. All that the franchises need is someone who has sufficient knowledge of game theory, coase theorem, a decent knowledge of cricket (interest in domestic cricket is a desirable quality) and who understands how to structure deals. I don’t know if franchises have already recruited such people but if they haven’t, they should try and recruit. The most obvious choice of person that I can think of who possesses all the above skills (including interest in domestic cricket) is me. Unlike last year, I’m not in the job market right now, but don’t mind doing some part-time stuff. I may not get paid, but I’m willing to work for a few IPL tickets and maybe invites to some parties with cricketers.

I’m also wondering if cricketers’ pay will go down starting the 2011 season onwards. The IPL auctions happened just before the downturn was to begin, and I’m sure that franchises have overpaid for most players. Since players have all signed three year contracts, their pay till the 2010 season is safe. Beyond that, I’m not sure if franchises will offer them fresh contracts at higher or equal salaries.

It would also be interesting to see if some version of the Bosman ruling is to operate in the IPL. We can only wait and see.

Interior Design

Recently it has been reported that former ML MD John Thain spent some 1.2 million dollars  in decorating his office. And people say that this is very conservative by normal CEO standards. Normal people (like me) might wonder why one needs to spend so much on one’s office. Even if you were to list out what needs to go into an office, and then go on to buy the best possible item in each category, this kind of money seems obscene.

So if you are still wondering why people end up spending so much on their offices, you will need to get in touch with someone from the profession called interior design. It’s quite fascinating. The way these people think is extremely instructive, and actually it would make sense for an investment bank CEO to learn this from the designer and then use such ideas to trade. They way these people imagine stuff, they comparisons that they make, the associations that they draw, are incredible. Actually, I think interior designers might be good people to partner on a quiz team.

So it cannot be any random painting that needs to go on the walls. The painting needs to have a theme, and this theme needs to fit in with the general theme of the company. And interior designers being interior designers, will develop their own idea of the company’s theme. And then use this to design the office. So coming back, the painting needs to conform to the ideals of the company. Next, the painter who painted this painting needs to conform to the ideals of the company. Put these two together and the painting will cost a bomb. Doesn’t matter, they need to get everything right. And perfect. And in order

Interior designers also seem to be proficient in stuff such as vaastu, feng shui, numerology, and all such. So each and every desk in the office needs to be oriented in the right way. It’s ok if the employee doesn’t have space to stretch his legs. Doesn’t matter if the position of one particular desk means they can’t play gulli cricket in office. It has to be that way.

It is excellent that interior designers do their jobs so diligently. The way they think, their attention to detail, the way they see the big picture, is all extremely good. In fact, interior design is probably one profession where, to succeed, you need to be both a stud and a fighter. So kudos to the entire community. However, there is a small issue.

The biggest problem with interior design is that it’s all so subtle. Ok, the colour of this wall matches the theme colour of the company. But who would notice? Ok, the painter who painted this exquisite painting just outside the CEO’s door might belong to the same moon nakshatra as the CEO. Excellent attention to detail. But does anyone notice it? it is quite a pity. These designers spend so much time and clients’ money in bringing out the perfect design, but most of their excellent thinking, and work, goes unnoticed.

There is this story about Michelangelo painting the Sistine Chapel. He was painting an extremely dark corner, which was out of eyesight of most visitors, or maybe all visitors to the Chapel. Someone goes up to him and asks why he is taking so much trouble in painting this particular nook when no one will notice it. He replies that he is doing it because God is watching. Extremely commendable. And I suppose interior designers also work on the same principle. However, I’m not sure if Michelangelo billed any additional amount to the Chapel for painting this unseen corner.

The other day, I was talking to my uncle about the design of his drawing room in his Gurgaon house. He mentioned to me that soon after he bought the place, he had called an interior designer to help him design the drawing room. The lady broadly told him about her plans for the house, which my uncle seemed to appreciate, and they sat down to discuss fees. The deal was that the interior designer would instruct my uncle about where he needs to get each and every piece of his furniture from. She would determine the design, the designer and the shops. And my uncle would have to do exactly as she said. And here is the clincher: the interior designer’s fee would be 2% of my uncle’s total expenses on his drawing room.

I don’t think incentives can be more misaligned than this. You get paid to help your client spend his/her money, and the more money you make your client spend, the more money you make. So it is always in your best interest to make sure that the client spends as much as possible. The only limitation might be the client’s budget, but your incentives make sure that you will stretch it to its limit. In case of professional CEO’s, they don’t really have limits, and it is their shareholders that pay. Which is why you get situations like Thain’s expense of $1.2mm on his office room being considered low by industry standards.

It intrigues me as to how interior design fee structures have settled down this way. And the only thing I can think of is that most people are spending someone else’s money. Their shareholders’ money, in most cases. If I were to engage an interior designer some day, I would try and structure her fees differently. I would tell her (numbers here are indicative only) “I’m willing to spend Rs. 10 lakh, and I will pay you a minimum of 20,000 rupees. For every lakh less than 10 lakh that I end up spending, I will give you Rs. 10,000 more.”  Or maybe not. I may just negotiate a fixed fee.

The Aftermath

Baada collaborated on the research leading up to his post. I hereby acknowledge his contribution and condemn his laziness for not blogging it himself.

One of the major problems of the financial crisis that has been happening for about two years now is that investment bankers, as a profession, stand discredited. Before this, they used to claim to be on the top of the intellectual ladder. And now, thanks to a handful (more than a handful; but still a small proportion) of phenomenally stupid investment bankers, the entire community stands discredited. Not just that, they have left the community of quants, of people who can be good at structuring, of finance people, of statisticians, all discredited. You say “all you need to do is to get a few ibankers into these jobs” and you’ll have people come at you like a pack of hounds, waving Mint and saying “look at the damage these buggers have caused, and you think they can solve this problem”.

So Baada and I were talking about cricket the other day. About how thanks to the demands of television, flat pitches are being prepared everywhere. Which is leading to tame and boring draws. Which has led to domestic cricket being effectively reduced to a one-innings game. Which has led to massive fourth innings run chases. Which has led to bowlers break down once every couple of seasons. And so forth.

The argument put forth in favour of flat pitches is that in order to maximise television revenues, you need the game to last five days. Excellent argument, and Baada and I agreed to it. But the friggin’ point is that if you have  a boring game, no one is going to watch it. If you have a game that is most likely to end up as a draw, it will have no audience. Advertisers would be paying through their nose for near-zilch viewership.

In the medium term, things should even out. Advertisers will realize that due to the boring nature of Test cricket, no one will watch it anyway, and will back away. Ad rates will fall. And TV rights bids will fall consequently. And the boards will understand their folly and take steps to make cricket interetsing again. (there is also the danger that boards will use this to say that no one watches Test cricket anymore and scraps it altogether). However, advertisers should not be so passive and wait for things to even out.

Given a large number of statistics, playing conditions, day of week seasonality and all such stuff, it shouldn’t be hard for the smart advertiser to figure out which are going to be his most profitable slots. And bid specifically for those. If one smart advertiser does that, then that advertiser stands to gain against other advertisers who will end up paying more money for less profitable slots. And so all advertisers will become smart. Now, the channels will stop seeing uniform demand patterns for their various advertising slots. They will now need to acquire smartness in order to combat the smart advertisers. This way, smartness will prevail in the system.

I’m sure that once something like this happens, natural balance will get restored. It will take much less time for TV channels to realize that three-day Tests on bowling pitches can get them greater revenues compared to runfests played over five days. And they won’t take much time to communicate the same to the boards who will then restore Test cricket back to glory.

The problem with a lot of advertising people is that they see themselves as “creative people” because of which they assume they don’t need to know and use maths. And they don’t do the smart calculations I described earlier. As for the brand managers, it is likely that a lot of them decided to pursue marketing because they either didn’t like quant or found themselves weak at quant. Apart from a few simple excel models, they too are likely to shun the kind of smartness required here.

So where are the white knights who can save the version of the gentleman’s game played in whites? Not currently in the ad agencies. Most likely not in the marketing departments. They are all out there. A few months ago, they were employed. Earning very good salaries, and grand bonuses. Earning amounts of money unaffordable to most advertising and marketing companies. Thanks to the financial meltdown, they are available now. Looking for a fresh challenge.

This is the best time for you to infuse quant to your business. You won’t get the kind of quant supply in the market that you are seeing now. Even if the financial industry doesn’t recover (in any case it will never go back to 2007 levels), supply side factors should ensure lower supply. Do that little experiment now. Acknowledge that numbers can do a lot of good for your business. Understand what structuring is all about, and estimate the kind of impact a good structurer can have on your revenues. Make that little bit effort and I’m sure you’ll get convinced. Go make that offer. An offer these ex-ibankers can’t refuse in the current circumstances at least.

PS: When I refer to investment banking, I also include the “outside-the-wall” side of the business (called “markets”; “sales and trading”; “securities” and various other names). In fact, I mostly talk about the outside-the-wall business, not having had any exposure inside the wall.