Pertinent Observations

CRIBS

I hereby propose that the venerable institution that was created earlier this year after a meeting in Fortaleza, based on an extension of a concept that the venerable Jim O’Neill proposed some ten years back, be renamed CRIBS.

There are several reasons for this. Primarily, the new name reflects the relative power of the countries that form the now organisation – there is no doubting, for example, that China is the most powerful nation in this grouping – indeed it can be argued that China is the most powerful nation in the world (with all the US treasuries they hold and all that).

The next more powerful nation in the group is of course Russia. Look at how they’ve quietly invaded Ukraine with impunity, knowing fully well that the Western powers can do little beyond cheap talk to contain them. Look at them forming the Eurasian Union, getting the support of Kazakhstan and Belarus – fairly inconsequential, of course, but with strong signalling value. Also let us not forget that inconsequential the UN and the UN Security Council may be – both China and Russia are permanent members of the council. Taking this forward it is not hard to see that these two are more powerful than India which is more powerful than Brazil (under recession now) which is more powerful than South Africa (which was never a part of the original grouping that O’Neill proposed).

The other reason for renaming the group is that the new name is more apt in terms of communicating the absolute pointlessness of a group of nations that has little in common but for the fact that they are large, significant in their respective local geographies, supposedly growing (though Brazil is not now) and were put in one paper by a famous economist working in a famous investment bank.

The third reason is that “BRICS” reminds people of bricks, which is constructive (pun intended). There is nothing constructive about this grouping, notwithstanding the bank that they are going to set up. Thus, the current name of the grouping is misleading and unfair to the general public.

I’m sure many more reasons can be invented, but these three are good enough reasons to rename the grouping. I hereby request our Dear Prime Minister Shri Narendra ModiJI to refuse to contribute India’s share to the bank unless it is renamed -after all none of the other countries are any good at English, so India should be able to bulldoze its way on this one!

A month of detox

I cheated a little bit this morning. Since it’s been a month now since I got off Twitter and Facebook, I logged in to both for about a minute each, to check if I have any messages. The ones on Facebook weren’t of much use – just some general messages. There was one DM on twitter which had value, and I sent the guy an email explaining I don’t use twitter any more. I presently logged out.

The one month off Twitter and Facebook has so far gone off fantastically. For starters it’s given me plenty of time to read, meet people, talk to people and other useful stuff. And apart from some interesting links that people post on Twitter, I haven’t really missed either of them.

There have been times when there have been thoughts that would have earlier led to a tweet. However, given that the option exists no more, I end up doing one of two things – if there is substance to the tweet and I can elaborate on it, then I do so and it results in a blog post (you must have noticed that the frequency of blogging has gone up significantly in the last one month).

If it’s not really blog worthy but just something that I want to share with someone, I think of whose attention I would have liked to have caught by putting that tweet. In most cases I have found that there is a small set of people whose attention I would have liked to catch with a tweet – every time I tweeted, I would think of how a particular set of people would respond. So what I do when I have something to say and a particular set of people to say it to is to just message it to them.

While this gives a much better chance of them responding to the message than if they just saw it on their timeline (or missed seeing it), it also has the added benefit of starting conversations. Which is not a bad thing at all. In the last one month I’ve seen that my usage of WhatsApp and Google Talk has gone up significantly.

The only thing I miss about twitter is the interesting links that people post. I’ve tried a few things to remedy that. Firstly I tried to see if I could write a script that crawls my timeline, gets popular links (based on a set of defined metrics), and then bookmarks the top five each day. I went some way with the code (pasted below the fold here) but couldn’t figure how to post the linked articles to Pocket (my article bookmarker of choice). So I ended up tweeting those chosen links (!!) with a #looksinteresting hashtag, so that ifttt does the job of adding to Pocket.

It went for a bit till multiple people told me the tweets were spammy. And then I realized I needed to tweak the algorithm, and it needed significant improvement. And then I realized the solution was at hand – Flipboard.

If you have an android phone or an iPad and not used FlipBoard you’re really missing something. it’s a great app that curates articles based on your indicated areas of interest and history, and one of the sources it can get links from is your own Twitter and Facebook accounts. It is generally good in terms of its algo and good links usually bubble up there.

When I went off Twitter and Facebook on the 6th of August (in a fit of rage, outraged by all the outrage and negativity on the two media) I wanted complete isolation. And thus I deleted Twitter and Facebook from my FlipBoard also. Now I realized that adding back twitter on FlipBoard will allow me to access the nice links shared there without really getting addicted back to twitter, or partaking all the outrage.

For the last two weeks it’s worked like a charm. That twitter is present only on FlipBoard, which I use not more than twice a day (once in the morning, once at night), means that I’ve had the best of both worlds. And not being on twitter has meant that i’ve been able to get a fair bit of work done, finished three books (my first attempt at reading fiction in ten years fizzled out midway, though – Joseph Conrad’s Heart of Darkness failed to sustain my interest beyond about 40% (I have it on kindle) ), written dozens of blog posts across the three blogs and had more meaningful conversations with people.

I hereby extend my sabbatical from Twitter and Facebook for another month.

Below the fold is the code I wrote. It’s in R. I hope you can make some sense of it.

Continue reading “A month of detox”

Letter and spirit

The board says “throwing garbage near the post box is prohibited” so people have come up with a rather ingenious solution – throwing garbage away from the postbox.

Marketing

I’m in a conversation with a friend on marketing my consulting services and he gave me a most genius piece of advice

You can say you do supervised learning instead of saying regressions.

Last month I was at this big data conference. Everyone I met said they were into big data or analytics or some such. The follow up question would always be “and what exactly do you do?” Followed by a laugh about how these are much abused terms.

Election Metrics goes international

For those of you who are not particularly aware of it, for the last year and a half I’ve been writing this column called Election Metrics for Mint. It’s basically a quantitative take on elections, and in my estimate I should’ve written over 50 pieces for them so far.

The last two pieces, however, have been different in the sense that I have now moved beyond covering Indian elections to look at elections abroad. In my last but one post, published last month, i took a look at potential cheating in Afghan elections. (Now I remember linking to that piece from here).

Now, in the latest piece that was published today I look at the forthcoming Scottish referendum, and a recent poll by YouGov in which 47% of respondents said they wanted to vote in favour of independence. I use some binomial jugglery that shows that this translates to a 2.5% chance of a Yes vote, which while insignificant, is an order of magnitude higher than the 0.0004% chance of “Yes” that can be implied from an earlier poll.

I then use the “possible, plausible and probable” framework made famous by Bill Gurley and Aswath Damodaran in their “exchange” in July to show why this poll is significant (it shows that a “Yes” vote is “plausible”, while earlier it was possible but definitely not plausible).

A culture of thinking and differentiated services

In a very interesting Op-Ed in Mint this morning, Anurag Behar argues against vocational training at the school level, arguing that the purpose of school education is to enable children to think, and that the ability to think is paramount in offering superior services.

He gives the example of a welder who understands basic geometry and the mechanics of metals, saying such a welder can offer superior services to one who has just been trained in welding. Thus, a welder who had been through school and thus understands the basics of geometry and mechanics can do a much better job as a welder than one that has just learnt how to weld.

Now, while this culture of thinking is important, another important pre-requisite is the culture of differentiated services. The question we need to ask is if the market here is mature enough to pay a premium for the welder who knows geometry and mechanics compared to an illiterate welder.

Intuitively it makes sense – an educated welder is likely to be more careful in his work and is likely to offer much superior quality. However, what I’m not so sure of is that the market in India is currently mature enough to recognize this increase in quality and thus pay a premium for such services. And unless the market matures to pay a premium for an educated welder, an educated person will choose a career other than being a welder and we will be only left with uneducated welders offering poor quality.

Law of conservation of talent

For starters. there is no such law. However, there exists a belief in most people’s minds that everyone is equally talented, and it is only that talent in different people is spread across different dimensions.

It starts when you are in school. If you are not good at maths, people tell you that you must be good at something else – arts perhaps. At that age it is perhaps not a bad thing – to be told when you are a child that you have no talent no way helps you in growing up. You are encouraged at that age to try different things, to find the thing that you’re good at.

And then you grow up. And you grow up with this entrenched belief of the “law of conservation of talent”. When you see someone good at something, you will assume that that is the only thing that they are good at. When you see that someone is bad at something you assume there is something else that they are good at. When you see someone good at more than the average number of things, you think they cannot be real, or that it is unfair, or perhaps that they are just faking it.

I once heard this story of a mother arguing with a schoolteacher that her son did not need remedial classes in maths. When told that the kid was indeed poor at maths, the mother responded “so what? He might be good at art. Why does he have to pass his maths exam for that?” (not sure I’ve paraphrased accurately but this is broadly the picture). While it might be a good idea to tell the kid that there is perhaps something else that he is good at, the mother strongly believing in the same thing is simply not done.

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Back in business school, there was this set of people who claimed to have a deep passion for marketing. Now, these people belonged to two classes. The first were actually passionate about marketing – there was something about marketing that gave them a kick and they wanted to pursue a career that would allow them to generate such kicks. From my conversations with them I know the passion was real, and most of them are doing rather well now in their marketing careers.

And then there was the second type. This was the class of people who had found that they were no good at mathematics and accounting and economics, and thus figured that they had no hope of a career in anything related to any of these fields, and thus found refuge in marketing. Of course they wouldn’t admit that – they would also claim a deep passion in marketing. While that was okay – perhaps marketing gave them their best chance of pursuing a successful career, and thus I don’t grudge their choice – what got my goat was that these people would claim that because they were no good at the “hard sciences” (mathematics, accounting, etc.) they were “creative”. Who says that mathematics and accounting and economics are not creative subjects? And why does anyone who is not good at these subjects (it is impossible, for example, to excel at mathematics unless you are creative) automatically become “creative”? It is the law of conservation of talent, simple.

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For people who are good at more than one thing, law of conservation of talent can bite you in more than one way. Actually there is more to do with this than just law of conservation of talent – people like to analyze other people by putting them in easily understood silos, or categories. And law of conservation of talent helps assign sets of talents to these silos.

Over the last two years, by hook or by crook, I’ve built my reputation to be a great quant. I consult with companies helping them with their quant and data stuff, I write a quant blog and I write a series in Mint on quant in elections. While it is all good and I’m glad that I’ve built a reputation as a quant, the downside is that people refuse to look beyond this and recognize my other skills.

For example, I think I’m rather good at economic reasoning, and I believe that my prowess in that combined with my prowess in working with numbers can deliver massive value to my potential clients. However, when people see me as a quant, it is hard for them to digest that I could also be good with economic reasoning, or behavioural sciences, for example. Thus, when I take on a mandate to do something beyond quant, people find it extremely hard to accept that I dole out non-quant advice too. I blame the law of conservation of talent for this – when people think you are good at quant, they exclude all other skills you might possibly have.

I’ll end this post with another anecdote from business school. A few months in, things were going well and I had (even back then) built a reputation as someone who was good at quant and mathematics and accounting and economics (in business school, all these fell on the same side of the fence, so the law of conservation of talent allowed you to be good at all these at once). Quizzing was a related activity, so I was “allowed” to be good at that. If I remember right, what perhaps upset people’s calculations was when I represented my class in the inter sectional basketball tournament and didn’t perform badly – based on reactions after the game I think people were a bit thrown off that I could be good at basketball too (especially given that I’ve never looked remotely athletic, and have always been a slow mover). Law of conservation of talent again!

The problem with precedence

One common bureaucratic practice across bureaucracies and across countries is that of “precedence”. If a certain action has “precedence” and the results of that preceding actions have been broadly good, that action immediately becomes kosher. However, from the point of view of logical consistency, there are several problems with this procedure.

The first issue is that of small samples – if there is a small number of times a certain action has been tried in the past, the degree of randomness associated with the result of that action is significant. Thus, relying on the result of a handful of instances of prior action is not likely to be reliable.

The second, and related, issue is that of correlation and causation. That the particular action in the past was associated with a particular result doesn’t necessarily mean that the result, whether good or bad, was a consequence of the action. The question we need to ask in this case is whether the result was because of or in spite of the action. It is well possible that a lousy policy in the past led to good results thanks to a favourable market environment. It is also equally possible that a fantastic policy led to lousy results because of a lousy environment.

Thus, when we evaluate precedence, we should evaluate the process and methodology, rather than result. We should accept that the action alone can never fully explain the result of the action, and thus evaluate the action in light of the prevailing conditions, etc. rather than just by the result.

It is going to take significant bureaucratic rethinking to accept this, but unless this happens it is unlikely that a bureaucracy can function effectively.

Derivatives trading in football players

I love it! It’s a dream come true!! It’s official!!!

Football clubs have finally wisened up to trading in derivatives on players’ contracts, it is apparent based on the transfer deadline news of yesterday. Alvaro Negredo has been loaned out by Manchester City to Valencia, but at the end of the year Valencia have an obligation to make the deal permanent. The same article mentions Fiorentina taking Micah Richards on loan, also from Manchester City. In this case, however, Fiorentina has the option to make the deal permanent after a year.

In fact, thinking about it, this kind of option trading in football contracts is not all that new. When Brendan Rodgers was initially appointed by Liverpool in 2012, he was given a three year deal, with the club having an option of extending it by a year (the deal has since been revised).

It’s all very interesting. I’ve constantly lamented that some of the great concepts in finance which are well applicable to everyday life are not applied to the extent that is required. Option valuation is one such concept, for example. I wrote to a friend just now asking why I should join a club he is exhorting me to join, given it’s not doing much now. His reply can be condensed to “option value”.

Option valuation is not the only thing. There is the concept of liquidity. A very commonly used concept within financial markets, it is surprisingly absent in general economic literature. For example, in finance it is a well understood concept that the more the number of active market participants the less is the transaction cost (measured as the bid-ask spread). The same concept can be used to analyze markets for taxis, housing, cooks (why a cook costs much more in Rajajinagar where demand is much lower than in Jayanagar), etc. You never see too many economists talking about it, though.

The problem might be that practitioners of financial economics concepts find finance too lucrative to apply their concepts elsewhere, while mainstream or left-leaning economists might find finance (especially complex derivative finance) abhorrent, and thus are loathe to borrow concepts from that (generally speculating)!

In terms of liquidity, though, things seem to be changing. My old friend Sangeet has been practically making a living over the last couple of years evangelizing the concept of liquidity, through his excellent blog on platform economics. Check out his recent post on Uber, for example. Platform economics is nothing but the economics of liquidity. The success of Sangeet’s blog shows that people are finally beginning to take the concept seriously. Still not mainstream economists, though!