## Religion and Probability

If only people were better at mathematics in general and probability in particular, we may not have had religion

Last month I was showing my mother-in-law the video of the meteor that fell in Russia causing much havoc, and soon the conversation drifted to why the meteor fell where it did. “It is simple mathematics that the meteor fell in Russia”, I declared, trying to show off my knowledge of geography and probability, arguing that Russia’s large landmass made it the most probable country for the meteor to fall in. My mother-in-law, however, wasn’t convinced. “It’s all god’s choice”, she said.

Recently I realized the fallacy in my argument. While it was probabilistically most likely that the meteor would fall in Russia than in any other country, there was no good scientific reason to explain why it fell at the exact place it did. It could have just as likely fallen in any other place. It was just a matter of chance that it fell where it did.

Falling meteors are not the only events in life that happen with a certain degree of randomness. There are way too many things that are beyond our control which happen when they happen and the way they happen for no good reason. And the kicker is that it all just doesn’t average out. Think about the meteor itself for example. A meteor falling is such a rare event that it is unlikely to happen (at least with this kind of impact) again in most people’s lifetimes. This can be quite confounding for most people.

Every time I’ve studied probability (be it in school or engineering college or business school), I’ve noticed that most people have much trouble understanding it. I might be generalizing based on my cohort but I don’t think it would be too much of a stretch to say that probability is not the easiest of subjects to grasp for most people. Which is a real tragedy given the amount of randomness that is a fixture in everyone’s lives.

Because of the randomness inherent in everyone’s lives, and because most of these random events don’t really average out in people’s lifetimes, people find the need to call upon an external entity to explain these events. And once the existence of one such entity is established, it is only natural to attribute every random event to the actions of this entity.

And then there is the oldest mistake in statistics – assuming that if two events happen simultaneously or one after another, one of the events is the cause for the other. (I’m writing this post while watching football) Back in 2008-09, the last time Liverpool FC presented a good challenge for the English Premier League, I noticed a pattern over a month where Liverpool won all the games that I happened to watch live (on TV) and either drew or lost the others. Being rather superstitious, I immediately came to the conclusion that my watching a game actually led to a Liverpool victory. And every time that didn’t happen (that 2-2 draw at Hull comes to mind) I would try to rationalize that by attributing it to a factor I had hitherto left out of “my model” (like I was seated on the wrong chair or that my phone was ringing when a goal went in or something).

So you have a number of events which happen the way they happen randomly, and for no particular reason. Then, you have pairs of events that for random reasons happen in conjunction with one another, and the human mind that doesn’t like un-explainable events quickly draws a conclusion that one led to the other. And then when the pattern breaks, the model gets extended in random directions.

Randomness leads you to believe in an external entity who is possibly choreographing the world. When enough of you believe in one such entity, you come up with a name for the entity, for example “God”. Then people come up with their own ways of appeasing this “God”, in the hope that it will lead to “God” choreographing events in their favour. Certain ways of appeasement happen simultaneously with events favourable to the people who appeased. These ways of appeasement are then recognized as legitimate methods to appease “God”. And everyone starts following them.

Of course, the experiment is not repeatable – for the results were purely random. So people carry out activities to appease “God” and yet experience events that are unfavourable to them. This is where model extension kicks in. Over time, certain ways of model extension have proved to be more convincing than others, the most common one (at least in India) being ‘”God” is doing this to me because he/she wants to test me”. Sometimes these model extensions also fail to convince. However, the person has so much faith in the model (it has after all been handed over to him/her by his/her ancestors, and a wrong model could definitely not have propagated?) that he/she is not willing to question the model, and tries instead to further extend it in another random direction.

In different parts of the world, different methods of appeasement to “God” happened in conjunction with events favourable to the appeasers, and so this led to different religions. Some people whose appeasements were correlated with favourable events had greater political power (or negotiation skills) than others, so the methods of appeasement favoured by the former grew dominant in that particular society. Over time, mostly due to political and military superiority, some of these methods of appeasement grew disproportionately, and others lost their way. And we had what are now known as “major religions”. I don’t need to continue this story.

So going back, it all once again boils down to the median man’s poor understanding of concepts of probability and randomness, and the desire to explain all possible events. Had human understanding of probability and randomness been superior, it is possible that religion didn’t exist at all!

## The problem with real estate taxation

I spent a year working in an India-focused high frequency trading hedge fund. I used to trade stocks and equity derivatives there. We were primarily an arbitrage hedge fund, and our aim was to make money by trading on assets that were mispriced, in order to make riskless profits. For example, if the price of a certain stock at a certain instant was Rs 100 on the BSE and Rs. 99 on the NSE, we would buy the stock at the NSE and sell it at the BSE, simultaneously, thus making riskless profits. Contrary to what some of the “99%ers” say, we saw social value in what we did. We were making prices fairer for the rest of the market, and removing anomalies.

There was one big problem though, this beast called “securities transaction tax”. Every transaction in securities in India attracts this tax. While it seems to be a fairly small number, when you are trading large volumes and looking to arbitrage out wafer-thin margins, it ends up being significant. This tax, we figured, was a big hindrance in true arbitrage-free pricing of securities in India. The tax meant that assets could be mis-priced up to a certain limit, because wiping out that mispricing through a trade was unprofitable thanks to this tax. This “flow tax”, thus, makes financial markets inefficient.

The problem is bigger when it comes to real estate. Historically, property taxes have been really low, but property transaction taxes have been high. There is a good reason for this. Back in the old days where record-keeping was inefficient and incomplete, it was impossible for the government to map out who owned which piece of land. Instead, they figured that they would have a record on all property transactions, and thus put a tax on that. This is a worldwide phenomenon.

It has led to two big problems in India. First is the market inefficiency that I spoke about with my equities example. High transaction taxes means that property markets are illiquid, and this prevents more people from entering and investing in the market. This also means that any price changes in the broad market are not reflected easily enough across a vast majority of property. Secondly, the high transaction taxes means there is massive under-reporting of the actual prices at which transactions take place. Both the buyer and the seller have an incentive to do so, and deprive the government of tax money. This leads to creation of massive amounts of black money in real estate. The problem is similar to the creation of all those Swiss bank accounts back in the days of 99% marginal tax rates.

There is a side-effect also, one that our socialist-minded government and the National Advisory Council (NAC) might be sympathetic to. Low reported prices of land transactions also implies lower realization for farmers and other villagers when land is forcibly acquired by the government. Though compensation might be declared as multiples of the “market value”, the true market value in most cases is so depressed that farmers usually get paid a pittance.

That aside, so what prevents us from dismantling these distortionary transaction taxes on property? Firstly, they are a massive source of income to state governments and local bodies, and if they are to be dismantled they need to be replaced with another equivalent tax. Economists usually advocate property holding taxes as a less distortionary and more stable means of funding local governments. Till recently, however, bad record-keeping meant those weren’t enforceable. You already have nominal property taxes that are collected, but reports in newspapers suggests that implementation is lax, and there is significant tax evasion there.

Even if all property records are formalized and computerized, there is another major hurdle in dismantling property transaction taxes and increasing property holding taxes. Higher property holding taxes means that the value of property will see a sudden drop (lower “free cash flow” each year, and all that). Markets might become more efficient and liquid, but real estate companies who have sunk in millions assuming a certain valuation of their properties will see a sudden erosion in that value, and see value in lobbying against this change taking place. In the long run, they will benefit, in terms of greater investment, greater liquidity and faster disposal of the properties they have built. But the initial “shock” in terms of reduced valuations will mean they will lobby against this change.

Thus, unless something drastic happens in terms of reforms, it is likely that we will be stuck in this inefficient regime of high property transaction tax.

Cross posted at The INI Broad Mind

## An Illiberal Society

Every few months or so a bunch of (mostly) Bangalore-based liberals go up in massive outrage all over the interwebs. On each occasion, the trigger for this would have been a bunch of cops raiding some bar, and imposing a new set of rules. The last time this happened, it was about cops randomly checking black-skinned people for drug possession and pushing, leading to pubs banning blacks from entering, altogether. This time, cops have instructed that pubs not play “loud, western music” and banned live music from pubs.

Already, pubs and even restaurants in Bangalore have to close by 11 pm and there is no dancing allowed (again because “dance bars” are banned). A bunch of pub-goers hanging outside a few minutes after 11 is an open invitation for the cops to enter the pub and try collect some hafta. The problems are plenty, but the biggest problem is that there is no political solution in sight.

The problem here is that however vocal and loud the liberals may be, they still don’t make up enough numbers in terms of the city’s population to make a difference. The fact of the matter is that the large majority of the city’s population (even if one were to consider only the middle classes into account) is either not bothered about these pub rules, or actually supports the new rules that the police make from time to time.

Firstly, it is not possible in order to have different rules for different kinds of pubs. So whatever rules govern say Fuga need to also govern South End Bar at the end of my road. Secondly, a large number of pubs are in residential areas, and for good reason – you do not want to go too far when you need a drink. There is some difference in terms of licenses between wine shops and bars (the former can’t “serve” liquor) but most wine shops double up as “standing bars” anyway. Hence, it is likely that you’ll have a bunch of drunks patrolling the residential streets late every night.

Thirdly, and most importantly (though I’d like the “police reforms” specialists at Takshashila to weigh in), the police force in the city is massively understaffed and underpaid. It’s not possible for our cops to make sure that despite the presence of walking drunkards, the streets are going to be safe. It will take a massive political effort in order to change this. Hence, given that it is not really possible for the cops to police the streets effectively, they resort to signaling.

By forcing all bars to shut down at a certain time, they signal to the population that they get things under control every evening, and there wouldn’t be much nuisance. The rules regarding dancing are an attempt by the police to somehow extract money out of pubs, since dance bars are officially banned (I don’t know why), and they can use the same set of rules to harass the discotheques. Loud music is again to gain credence among neighbours (remember that most pubs are in residential areas) that they’re doing something about the “menace”. The ban on “loud western music” is inexplicable.

This police harassment of bars is not a standalone problem, it’s part of a bigger problem in terms of police reforms. As a stand alone problem, though, given the small proportion of people it affects, I don’t foresee a good solution. What needs to be done is to aggregate all stakeholders who are affected by this – regular pub/discgoers, pub owners (very important), liquor companies, people selling cigarettes and bondas late in the night, and collectively lobby for change in regulation. It’s not going to be an easy battle, considering that a large proportion of the city’s population is conservative, and will be up in arms against any change in rules. It won’t be an easy task either, since liberal but lazy parties like me (who prefer to get wasted at home) will also not lend support.