Archive for October 17th, 2011

Black Swan Moments or Platypus Moments?

October 17, 2011

Luci Ellis of RBA brings a truly Aussie perspective  to this whole financial stability debate.

He says we should not really think about Black Swan moments as they cannot be predicted. Instead the focus should be on Platypus moments. Platypus is a strange animal and is really bizzare to know that such an animal exists. So, if you find certain economic and financial developments as bizzare but they are true, time to take notice. It is the Platypus moment for you:

 

So instead of looking for the unimaginable black swan, I would advocate observing those attitudes and behaviours, as well as the data. And the test I would apply is inspired by another member of Australia’s weird and wonderful fauna – the platypus. You see, when Europeans first saw a black swan, it would have been a surprise, but I doubt it rocked their world. There are plenty of other cases where the same species of animal is a different colour in different regions. But the platypus is strange. It is a mammal, but it has a duck’s bill; it is the only mammal with venomous spurs; it lays eggs; and it is a monotreme. When European scientists first saw the stuffed body of a platypus, they found it so bizarre that they thought it was a fake.

It’s that sense of disbelief, of incredulity, that something is too ridiculous to be true, and yet it is true: that feeling is telling you something. When you have that feeling, you are having what I have come to describe as a Platypus Moment. And it is that moment, that feeling, we should be alert to. It is not just a reaction to a statement or claim you find unbelievable. The reaction is to a practice or behaviour you concede is truly occurring, but find bizarre or foolish. The motivations underlying the behaviour are not coherent. The behaviour spurred by the motivations is not internally consistent, at least not from the perspective of the system.

He recalls a Platypus moment when he heard about this happening in US:

To give a personal example, some years ago I experienced a Platypus Moment when I first read about vendor-financed down payment assistance charities in the United States. They became quite common during the housing boom there. Home-building companies would donate money to charities that in turn gave money to first-home buyers to fund their deposits. Usually these charities were quite local, so the builder that funded them often got the money back by inflating the sale price of the house. Unsurprisingly, US government housing agencies have found that borrowers who had received this kind of assistance were three times more likely to default on their mortgage as those who had not (Montgomery 2008).

‘How’, I asked myself, ‘is this even legal?’

Sometimes it will be better, and more effective, just to point out that the platypus is strange. Like black swans, they turn up more often than you expect.

Hmmm.. Central Bankers/economists taking cues from zoology, ornithology (as they are referrred as hawks, doves, pigeons etc) is interesting stuff. Bringing different perspectives from other fields to explain things is always interesting.

 

Hmm… Australia has so many bizzare animals – Kangaroos,

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Tragedy of projecting India’s inflation

October 17, 2011

I have been doing some research on inflation trends (research to be out soon).

Thought of sharing this research with you. It is interesting to look at RBI’s inflation projections since 2006-07 in each of its monetary policies.

 

RBI WPI Inflation Projections for Mar-end (in %)

 

Annual Policy

Q1

Q2

Q3

March Mid-term review

Actual

2006-07

5 to 5.5

5 to 5.5

5 to 5.5

5 to 5.5

6.6

2007-08

5

5

5

5

7.5

2008-09

5.5

5.5

7

3

1.2

2009-10

4

5

6.5 with upward bias

8.5

10.4

2010-11

5.5

6

5.5 (under the new series)

7

8

9.7

2011-12

6 with upward bias

7 with upward bias

Source:: RBI

Barring 2008-09 when inflation declined because of global factors, RBI has been missing its year-end inflation target by a wide margin. The challenges become extremely complex from 2009-10 onwards when despite RBI revising inflation projections upwards in each policy, the actual number has only been higher. The inflation trajectory in this period has been volatile and is a complex mix of supply and demand factors. This has made both forecasting and taking appropriate policy actions an extremely difficult task.

India has not had this kind of history where inflation has remained elevated for close to 2 years now. Hence, one cannot even draw policy lessons from history.

Trying to make menu costs as low as possible..

October 17, 2011

Have been thinking about writing this for a while but could not click a picture to show this. Ajay Shah helps by posting a picture about this interesting innovation.

Basically, we also understand inflation by looking at menu costs which is the cost of printing new price menus. If inflation keeps rising so would menu costs.  So, central bankers should be looking at targeting inflation at a level which makes menu costs negligible.

As in India we keep failing to lower inflation (especially food inflation), people have come with innovative ideas. As prices of raw materials keeps rising, so does costs of items sold (like tea, coffee etc). This involves rising menu costs. So it is important to have a strategy by which one can keep changing the prices on the menu with as little costs as possible.

Like this Ajay Shah post showing  a tea stall writing the prices in chalks instead of getting the prices printed. I have noticed a similar thing in one of the Frankey Roll outlet next to my office in Mumbai.

Innovative stuff. What else can people do?

I would imagine that restaurant owners to use magical ink pens whose writing can be rubbed off easily to lower menu costs on the smaller book-menus as well….

 

 

 


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