Category: fundaes

Randomizing advertisements

This 7.5 minute break in the middle of an IPL innings is a bad idea. The biggest problem is that everyone knows the exact length of the break, and can use it to do stuff – like cook, or clean, or crap, or fag, or maybe watch the Everton-Man U shootout. 7.5 minutes is a lot of ad time, but the problem is that absolutely no one will be watching them. So if you were a smart advertiser, you wouldn’t want to put your ad in that slot – you are better off taking an over break slot.

Now what I propose here is not applicable to cricket – at least I hope it’s not since conventionally you can’t slot ads whenever you want to (Lalit Modi thinks he can change that, though). I don’t know if this concept has already been implemented, and I’d be rather surprised if it hasn’t been. The basic idea is to randomize the length of advertising slots.

So you are watching your favourite soap and there’s a commercial break. And you go off into the kitchen to make a cup of tea. But you don’t really want to miss even a minute of the action, so you’ll go only if you know that the advertisements will go on for two minutes. Historical data tells you that the ads will last for two and a half minutes, and off you go. Now what if suddenly tomorrow there is only twenty seconds of advertisements and you end up missing a bit of the action? You curse yourself, and the soap, and the TV channel, and the TV, and Tata Sky, but you make a mental note not to go make tea during this break the next day.

Now, by randomizing the length of advertising breaks, channels can ensure that people actually watch the ads. If you don’t know if the break will last twenty seconds or two minutes, you are likely to sit glued to the TV, watching the same channel dishing out the ads. You are unlikely to go off to make tea, or to crap, or to channel surf, if you don’t know when programming might start next. You occasionally get pained – when the breaks are too long – but on the whole you end up watching most of the ads.

Yes, there is the chance that the viewer gets pained when the random length for ads that gets picked turns out to be really large. Also, if we shorten a few ad breaks, we should also lengthen a few others? Or increase the number of ad slots? Not really – is my argument.

The clincher here is that by randomizing length of ad breaks, you are increasing the TRPs for the ads! Yes your program may have high TRP but does that normally translate to ads? With this randomization procedure it does. And when this gets established, you can start charging higher for these slots. And if on an average you can charge a higher rate per second of advertisement, you can sure continue to run the program with a smaller number of ads?

It’s win all around. Customer wins because he gets more programming time than ad time. Advertiser wins because he gets more eyeballs for his ad. TV channel doesn’t lose since the loss of revenue from lesser number of ads is more than made up by the higher rate charged on the ads. In fact, by “holding” the customer, the channel ensures he continues watching this program rather than go off on a tangent while channel surfing.

Normally, I try to show situations where everyone can win by reducing the randomness in the system. This case is opposite. By introducing randomness in the system, everyone wins! I wonder if there is a fallacy here. Or maybe what I’ve written here is so obvious that everyone is implementing it and I’ve failed to notice since the only TV I see is sport (not american sport) which has fixed ad breaks.

Why MBAs do finance – a studs and fighters perspective

I don’t have sources here but enough people have cribbed that nowadays too many MBAs are going into finance, and banking, and not too many of them get into “real management” jobs, which is what the country/the world desires them to get into. I clearly remmeber a Mint column on this topic by Govind Sankaranarayanan. And that is surely not the exception. And I remember reading this article very recently (don’t know where) which says that the reason MBAs were taken into banking was to provide a business perspective to banking, and not to be hardcore finance people themselves.

Management roles can be broadly classified into two – functional management and coordination management (the latter is also known as “general” management). Functional management is more like “captaincy” – you essentially do similar work to what your team does, and you guide and direct them, and help them, and boss over them, and get paid a lot more for it. The best part of functional management is that you can outsource all the chutiya kaam to some underling. And there is enough “functional” interaction for you with your team in order to keep your mind fresh.

Coordination management, on the other hand is mostly about getting things done. You don’t necessarily need to have experrtise in what your team does, though some degree of comfort does help. Most of your work is in coordinating various things, talking to people, both inside the team and outside, both inside the company and outside, and making sure that things are done. No special studness is generally required for it – all it requires is to be able to follow standard operating procedures, and also to be able to get work done out of people.

Historically, functional managers have been “grown” from within the team. it is typically someone who was doing similar work at a lower level who gets promoted and hence takes on a leadership role. So in an engineering job, the functional manager is also an engineer. The sales manager is also typically a salesman. And so on.

Historically, MBAs have been generally staffed in “coordination management” roles. Typically these are multifunctional multiskilled areas for which it is not easy to pick someone from one of the existing departments, and hence MBAs are recruited. Historically, when people have talked about “management”, they have referred to this kind of a role.

So through my description above, and through your own observations in several places, you would have figured out that coordination management/general management is typically a fairly fighter process. It is about getting things done, about following processes, about delivering, etc.

This applies only to India – but there is a reasonably high “stud cutoff” that is required in order to get into the better B-schools in the country. This is because the dominant MBA entrance exam – CAT – is an uberstud exam (I would argue that it is even more stud than the JEE – which requires some preparation at least, and hence puts a reasonable fighter cutoff). So you have all these studs getting into IIMs, and then discovering that the typical general management job is too fighter and too less stud for them, and then looking for an escape route.

Finance provides that escape route. Finance provides that escape valve to all those MBAs who figure out that they may not do well in case they get into general management. Finance as it was in the last 5-10 years was reasonably stud. And thus attracted MBAs in reasonably large numbers.

The simple fact is that a large number of people who get into MBA won’t be able to fit into a general management kind of job. Hence there is no use of commentators cribbing about this fact.

If the IIMs decide that they would rather produce general managers rather than functional managers, they would do well to change admission requirements. To make admission less stud and more fighter. ISB, in that sense, seems to be doing a decent job – by having significantly lower stud cutoffs and putting more emphasis on work experience and other fighterly aspects. Hence, you are more likely to find an ISB alum going into general managementt as opposed to IIM alum.

Why you should vote for the BJP

Ok before you bleeding-heart liberals scream at me pointing out the post-Godhra riots of 2002, or Kandahar, or the Shri Rama Sene, let me clarify that this is a purely economic argument. My argument is that if we want economic reforms to go ahead, we should vote for the BJP. I am not commenting on social aspects, or liberalism, or foreign policy, or defence, or uniform civil code. I must also mention that the only party whose manifesto I’ve read is that of the Samajwadi Party, but I have a decent idea of what the BJP and Congress manifestos look like. Both quite horrible, though they don’t come close to the SP’s.

The main argument here is that no government wants to reform to a situation of lesser government. It is a simple situation of letting go of what you have under your control, without any tangible benefits. After all, reforms have never really won too many votes (though I think if the Congress had campaigned properly, and unitedly, in 1996, they would’ve have spared us from being ruled by Deve Gowda). Yes, the bijli-sadak-paani argument is there, but that is more about infrastructure; not about economic reforms or liberalization.

So why do governments reform? Especially when they are doing so at the cost of their own power? It appears irrational, right? Fact is that control over a particular sector doesn’t benefit all arms of the government equally. There will be a few lobbies, and a few ministries, in a few areas that stand to benefit significantly more from government intervention in the sector,as compared to other parts of the government.

Next, the ruling party doesn’t necessarily control all parts of the government. Yes, they control most of the ministries, but there are several other government posts that may not be underr their control. Some may be under the control of allies. Certain bureaucrats who benefit heavily because of government intervention in the sector may even favour the opposition. I think it should be possible to document the “leanings” of various govenment departments in various states. And which of them will get liberalized when depends on which side is in power.

So the reason people reform (apart from when under severe crisis such as under PVN) is analogous to a sacrifice in chess. You give up something in the hope that in return, the opposition loses much more. So if you look at various reforms carried out by various governments (state and central; maybe even abroad; PVN stands out as an exception) you are likely to see this “chess sacrifice” pattern. Governments are more likely to reform, liberalize and maybe spin off departments that are under the control of parties in the opposition.

The next argument is that the Congress, having been in power for close to 50 years, is likely to be “in control” of a larger number of government departments than the BJP, which has been in power for about 6 years. This is the main reason, apart from left intervention of course, that the incumbent UPA government didn’t carry out too many reforms in the last five years, and even rolled back certain reforms carried out by the NDA (essential commodities act, petrol pricing, etc.). It is also critical that whatever reforms a government wants to carry out should be front-loaded – so as to give the reforms time to “settle down” and for people to adjust, before a new government comes in and perhaps rolls them back.

The BJP by itself is no good when it comes to reform – its ridiculous stance on FDI in retail being a case in point. Yes, they did quite a bit of reforms during their 6 years in power, but one can argue that a large number of them fit the “sacrifice” pattern. However, in general they stand to lose a lot less by reforming than does the Congress (exception is in retail as most traders and small merchants are pro-BJP). And hence, they are likely to carry out more reforms than a Congress-led government would.

You might argue that it might be better to vote for a third front party, since there is very little it has to lose in terms of reforming. However, the problem with most third front parties is that they are all active only in very few states, and thus may not stand to gain much by way of a national-level “sacrifice”. And coming back to a national-party led government, my argument is that you are more likely to see reform in ministries held by the chief ruling party, than those held by the allies.

So ladies and gentlemen, if the Congress comes back to power, they will consolidate power in the departments that they have “captured” over the last five years, and in the earlier years when they were in rule. this number is significantly greater than the number of departments that the BJP controls, and hence the Congress is likely to use the ongoing crisis as an excuse to bring in bigger government. The BJP, on the other hand, with less to lose, is likely to take a more pragmatic approach.

Vote for the BJP. Bring the NDA back to power. Let them re-start on the reforms that were made in 1991-2004. Five years down the line, the Congress can come back and liberalize retail.

Update

I usually have a practice of replying to all comments on my blog. However, you might have noticed that I haven’t replied to most comments on this post. As I had mentioned right up front, I am making an economic argument and have clearly mentioned that I’m not going to entertain any comments wrt social policy (and sadly, most comments have been in that direction). So fight it out among yourselves and don’t get me involved in the discussion. And a couple of days after I wrote this post, I was asked to help out with the Congress’s online campaign.

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.

Arranged Scissors 8: Culture fit with parents

That you are in the arranged marriage process means that your parents now have full veto power over whom you marry. Given that you don’t generally want them to veto someone whom you have liked, the most common protocol as I understand is for parents to evaluate the counterparty first, and the “candidate” to get only the people who have passed the parental filter. Then the “candidates” proceed, and maybe meet, and maybe talk, and maybe flirt and maybe decide to get married.

Hypothesis: The chance of your success in the arranged marriage market is directly proportional to the the culture fit that you have wtih your parents.

Explanation: Given that parents have veto power in the process, and given the general protocol that most people follow (which I have described in the first para above; however, it can be shown that this result is independent of the protocol), there are two levels of “culture fit” that an interested counterparty has to pass. First, she has to pass the candidate’s parents’ culture fit test. Only after she has passed the test does she come in contact with the candidate (in most cases, not literally).

Then, she will have to pass the candidate’s culture fit test. By the symmetry argument, there are two more such tests (girl’s parents’ filter for boy and girl’s filter for boy). And then in the arranged marriage setting, people tend to evaluate their “beegaru” (don’t think english has a nice phrase for this – basically kids’ parents-in-law). So you have the boy’s parents evaluating the girl’s parents for culture fit, and vice versa.

So right at the beginning, the arranged marriage process has six layers of culture fit. And even if all these tests are passed, one gets only to the level of the CMP. (given that very few filter down to this level, i suppose a lot of people put NED at this stage and settle for the CMP).

Without loss of generality, let us now ignore the process of boy’s parents evaluating girl’s parents and vice versa (the problem is complex enough without this). So there are basically four evaluations, made by two pairs of evaluators (let us consider parents as one entity – they might have difference in opinion between each other occasionally but to the world they display a united front). Now for each side it comes down to the correlation of expectations between the side’s pair of evaluators.

The higher the “culture fit” you possess with your parents, the higher the chance that you will agree with them with regard to a particular counterparty’s culture fit. And this chance of agreement about culture fit of counterparty is directly proportional to the chance of getting married through the arranged marriage process (basically this culture fit thing can be assumed to be independent of all other processes that go into the arranged marriage decision; so take out all of those and the relationship is linear). Hence proved.

Now what if you are very different from your parents? It is very unlikely that you will approve of anyone that they will approve of, and vice versa. In such a situation it is going to be very hard for you to find someone through the arranged marriage process, and you are well advised to look outside (of course the problem of convincing parents doesn’t go away, but their veto power does).

So the moral of the story is that you should enter the arranged marriage market only if you possess a reasonable degree of culture fit with your parents.

(i have this other theory that in every family, there is a knee-jerk generation – one whose “culture” is markedly different compared to that of its previous generation. and after each knee-jerk, cultural differences between this generation and the following few generations will be low. maybe i’ll elaborate on it some other time)

Arranged Scissors 1 – The Common Minimum Programme

Arranged Scissors 2

Arranged Scissors 3 – Due Diligence

Arranged Scissors 4 – Dear Cesare

Arranged Scissors 5 – Finding the Right Exchange

Arranged Scissors 6: Due Diligence Networks

Arranged Scissors 7: Foreign boys

Don’t use stud processes for fighter jobs and fighter processes for stud jobs

When people crib to other people that their job is not too exciting and that it’s too process-oriented and that there’s not muc scope for independend thinking, the usual response is that no job is inherently process-oriented or thinking-oriented, and that what matters is the way in which one perceives his job. People usually say that it doesn’t matter if a job is stud or fighter, and you can choose to do it the way you want to. This is wrong.

So there are two kinds of jobs – stud (i.e. insight-oriented) and fighter (i.e. process oriented). And you can do the job in either a stud manner (trying to “solve a problem” and looking for insights) or in a fighter manner (logically breaking down the problem, structuring it according to known formula and then applying known processes to each sub-problem). So this gives scope for a 2 by 2. I don’t want this to look like a BCG paper so I’m not actually drawing a 2 by 2.

Two of the four quadrants are “normal” and productive – doing stud jobs in a stud manner, and fighter jobs in a fighter manner. There is usually an expectancy match here in terms of the person doing the job and the “client” (client is defined loosely here as the person for whom this job is being done. in most cases it’s the boss). Both parties have a good idea about the time it will tak e  for the job to be done, the quality of the solution, and so on. If you are in either of these two quadrants you are good.

You can’t do a stud job (something that inherently requires insight) using a fighter process. A fighter process, by definition, looks out for known kind of solutions. When the nature of the solution is completely unknown, or if the problem is completely unstructured, the fighter behaves like a headless chicken. It is only in very rare and lucky conditions that the fighter will be able to do the stud job. As for “fighterization”, about which I’ve been talking so much on this blog, the problem definition is usually tweaked slightly in order to convert the stud problem to a fighter problem. So in effect, you should not try to solve a “stud problem” using a fighter process. Also, as an employer, it is unfair to expect a mostly fighter employee to come up with a good solution for a stud problem.

The fourth quadrant is what I started off this blog post with – studs doing fighter jobs. The point here is that there is no real harm in doing a fighter job in a stud manner, and the stud should be able to come up wiht a pretty good solution. The problem is wiht expectations, and with efficiency. Doing a fighter job in a stud manner creates inefficiency, since a large part of the “solution” involves reinventing the wheel. Yes, the stud might be able to come up with enhanced solutions – maybe solve the problem for a general case, or make the solution more scalable or sustainable, but unless the “client” understands that the problem was a stud problem, he is unlikely to care for these enhancements (unless he asked for them of course), and is likely to get pained because of lack of efficiency.

Before doing something it is important to figure out if the client expects a stud solution or a fighter solution. And tailor your working style according to that. Else there could be serious expectation mismatch which can lead to some level of dissatisfaction.

And when you are distributing work to subordinates, it might also help to classify them using stud nad fighter scales and give them jobs that take advantage of their stronger suits. I know you can’t do this completely – since transaction costs of having more than one person working on a small piece of work can be high – but if you do this to the extent possible it is likely that you will get superior results out of everyone.

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).

Fighterization of food

One of the topics that I’d introduced on my blog not so long ago was “fighterization“. The funda was basically about how professions that are inherently stud are “fighterzied” so that a larger number of people can participate in it, and a larger number of people can be served. In the original post, I had written about how strategy consulting has completely changed based on fighterization.

After that, I pointed out about how processes are set – my hypothesis being that the “process” is something that some stud would have followed, and which some people liked because of which it became a process. And more recently, I wrote about the fighterization of Carnatic music, which is an exception to the general rule. Classical music has not been fighterized so as to enable more people to participate, or to serve a larger market. It has naturally evolved this way.

And even more recently, I had talked about how “stud instructions” (which are looser, and more ‘principles based’) are inherently different from “fighter instructions” (which are basically a set of rules). Ravi, in a comment on Mohit‘s google reader shared items, said it’s like rule-based versus principles-based regulation.

Today I was reading this Vir Sanghvi piece on Lucknowi cuisine, which among other things talks about the fact that it is pulao that is made in Lucknow, and now biryani; and about the general declining standards at the Taj Lucknow. However, the part that caught my eye, which has resulted in this post with an ultra-long introduction was this statement:

The secret of good Lucknowi cooking, he said, is not the recipe. It is the hand. A chef has to know when to add what and depending on the water, the quality of the meat etc, it’s never exactly the same process. A great chef will have the confidence to improvise and to extract the maximum flavour from the ingredients.

This basically states that high-end cooking is basically a stud process. That the top chefs are studs, and can adapt their cooking and methods and styles to the ingredients and the atmosphere in order to churn out the best possible product.You might notice that most good cooks are this way. There is some bit of randomness or flexibility in the process that allows them to give out a superior product. And a possible reason why they may not be willing to give out their recipes even if they are not worried about their copyright is that the process of cooking is a stud process, and is hence not easily explained.

Publishing recipes is the attempt at fighterization of cooking. Each step is laid down in stone. Each ingredient needs to be exactly measured (apart from salt which is usually “to taste”). Each part of the process needs to be followed properly in the correct order. And if you do everything perfectly,  you will get the perfect standardized product.

Confession time. I’ve been in Gurgaon for 8 months and have yet to go to Old Delhi to eat (maybe I should make amends this saturday. if you want to join me, or in fact lead me, leave a comment). The only choley-bhature that I’ve had has been at Haldiram’s. And however well they attempt to make it, all they can churn out is the standardized “perfect” product. The “magic” that is supposed to be there in the food of Old Delhi is nowhere to be seen.

Taking an example close to home, my mother’s cooking can be broadly classified into two. One is the stuff that she has learnt from watching her mother and sisters cook. And she is great at making all of these – Bisibelebhath and masala dosa being her trademark dishes (most guests usually ask her to make one of these whenever we invite them home for a meal). She has learnt to make these things by watching. By trying and erring. And putting her personal touch to it. And she makes them really well.

On the other hand, there are these things that she makes by looking at recipes published in Women’s Era. Usually she messes them up. When she doesn’t, it’s standardized fare. She has learnt to cook them by a fighter process. Though I must mention that the closer the “special dish” is to traditional Kannadiga cooking (which she specializes in), the better it turns out.

Another example close to home. My own cooking. Certain things I’ve learnt to make by watching my mother cook. Certain other things I’ve learnt from this cookbook that my parents wrote for me before I went to England four years ago. And the quality of the stuff that I make, the taste in either case, etc. is markedly different.

So much about food. Coming to work, my day job involves fighterization too. Stock trading is supposed to be a stud process. And by trying to implement algorithmic trading, my company is trying to fighterize it. The company is not willing to take any half-measures in fighterization, so it is recruiting the ultimate fighter of ’em all – the computer – and teaching it to trade.

Preliminary reading on studs and fighters theory:

Studs and Fighters

Extending the studs and fighters theory

It’s about getting the Cos Theta right

Earlier today I was talking to Baada and to Aadisht (independently) about jobs, and fit, and utilization of various skills and option value of skills not utilized etc. So it is like this – you possess a variety of skills, and the job that you are going to do will not involve a large number of these. For the skills that you have that match the job’s requirements, you get paid in full. For the rest of the skills you possess, you only get paid the “option value” – i.e. your employer has the option to utilize these skills of yours and need not actually utilize them.

Hence in order to maximize your productivity and your pay, you need to maximize the cos theta.

Assume your skill set to be a vector in a N-dimensioanl hyperspace where N is the universe of orthogonal skills that people might possess. Now there are jobs which require a certain combination of skill sets, and can thus be seen as a vector. So it’s about maximizing the cos theta between your vector and your job’s vector.

So it’s something like this – you take your skills vector and project it on to the job requirement vector – your total skills will get multiplied now by the value of cos theta, where theta is the angle in the hyperspace between your skills vector and the job vector. For the projection of your skills on the requirement, you get paid in full. For the skills that you have that are orthogonal to the requirement, you get paid only in option value.

One option is to of course build skill set, and keep learning new tricks, and maybe even invent new skills. However, that is not a short-term plan. In the short to medium term, however, you need to maximize the cos theta in order to maximize the returns that your job provides. But as Baada put it, “But there is slisha too much information asymmetry to ensure that cos theta is maximised.”

There are two difficult steps, actually. First, you need to know your vector properly – most people don’t. Even if you assume that you can do a lot of “Ramnath” stuff and get to know yourself, there still lies the challenge of knowing the job’s vector. And the job’s requirement vector is typically more fluid than your skills vector. Hence you actually need to estimate the expected value of the job’s requirement vector before you take up the job.

The same applies when you are hiring. It is actually easier here since the variation in the hiree’s vector will not be as high as the variation in the job profile requirement vector, and you have a pretty good idea of the latter so it is easy to estimate the “projection”.

This perhaps explains why specialists have it easy. Typically, they have a major component of their skills vector along the axis of a fairly well-defined job profile (which is their specialization). And thus, since theta tends to 0, cos theta tends to 1, and they pretty much get full value for their skills.

At the other extreme, polymaths will find it tough to maximize their returns to skills out of a single job, since it is unlikely that there is any job that comes close to their skills vector. So whichever job they do, the small value of the resulting cos theta will cancel out the large magnitude of the skills vector. So for a polymath to maximize his/her skills, it is necessary to do more than one “job”. Unless he/she can define a job for himsel/herself which lies reasonably close to his/her skills vector.

(there is a small inaccuracy in this post. i’ve talked about the angle between two vectors, and taking the cosine of that. however, i’m not sure how it plays out in hyperspaces with a large number of dimensions. let us assume that it’s vaguely similar. people with more math fundaes on this please to be cantributing)

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.