Flawed mental model and investing

Dhirendra Kumar of Value Research has a superb piece on this topic.

Starts with this story:

Here’s a joke that has a great pedigree in the investment world. The father of value investing, Benjamin Graham, apparently used to narrate this story to his students and draw a parallel to the behaviour of stock market punters.

So this oil prospector dies and goes to heaven. At the gate, St Peter reads the account of his life and tells him that he’s qualified for heaven, but there was a problem. “See that crowd over there? They’re all oil prospectors who’ve arrived before you. And the way things work here, you can’ get in until after them. So I’ afraid this looks like a long wait for you.” “Not a problem”, replies the man, “I know how to get rid of that crowd.” So he turns towards that crowd of oil prospectors and shouts out, “Hey, did you hear? Oil has been discovered in Hell.” And sure enough, as soon as they heard him, every single one of them ran off towards hell. Looking at this, St Peter reluctantly said, “Well, it seems your way is clear. You can enter heaven now.” But the oil prospector had his doubts. “You know what? I think I’ll follow the guys. The rumour could be true.”

As Graham used to point out, the oil prospector’s behaviour has much in common with what passes for investment research nowadays. As sophisticated commentators would point out, their mental model of how the market works probably leads them to believe that if a lot of people believe in something, then it must be true. A mental model of something is our idea of how it works internally.

He points to a few more mental models..

Stock market investments have captured human minds for a very long time. There is no other area which can make you both rich and pauper overnight. The former likelihood keeps bringing people to the investing world only to be trapped in some mental model or the other..

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Sad state of Sanskrit scholarship in India

Swarajya magazine has an extract from Chamu Krishna Shastry’s book sāvadhānāḥ syāma on state of Sanskrit scholarship.

It is not just sad but pathetic too:

How Nashik Kumbh mela is leading to tech innovation..

Going back to as early a history as possible. Interesting article in BS on how the Nashik Kumbh mela is leading to tech innovations. It has actually leading to formation of certain startups:

Thanks to initiatives taken by a few like Professor Ramesh Raskar, who heads the camera culture research group and MIT Media Lab in Boston, the quiet city along the river Godavari has for the first time institutionalisedinnovation with the so-called ‘Kumbhathon’, which kickstarted in January last year. The basic objective was to address the various problems faced during the festival, which spans several months, with the use of technology. The initiative included crowd management, patient monitoring, controlling epidemic, and sanitation, besides many other things.

The idea to leverage Kumbh for encouraging local innovation took shape at a time when Raskar was on a private visit to his hometown for Diwali in 2013. While brainstorming with a few friends on what they could do for the city, Sachin Pachorkar, a management professor at a local college, proposed leveraging Kumbh Mela for bringing a culture of innovation to Nashik. The discussion was carried forward and by January they were ready with the first innovation camp, with the help of Raskar, who also brought in some innovators from MIT Lab for support.

“We, together with Dr Raskar, realised cities could not get smarter… citizens could (get smarter) and then make the cities smarter,” says Ashwin Kandoi, co-founder & director of Winjit, a Nashik-based IT services company.

They received around 850 applications from different engineering colleges in and around the area which came up with some 1,000 proposals to solve various challenges. After careful scrutiny, around 200 innovators were selected for the first innovation camp conducted in January 21-24 last year.

Since then, they have organised five camps, or Kumbhathons; and about 10 of the ideas that came up are being implemented during this year’s Kumbh Mela. Many of the ideas that germinated during the Kumbhathons have now given birth to a number of start-ups in the holy city.

For example, one of the ideas that took shape was on controlling with the use of technology the spread of epidemics that are a usual problem at events where huge congregations are involved. The solution proposed by one of the participating teams was to develop epidemic tracker Epimetrics, an app that helps store patients’ data on a central server. The data could then be analysed by experts to see if an epidemic was about to spread, and take necessary steps, such as stocking of medicines and informing hospitals in that area. The authorities could also know where the patients were coming from and the sources of their diseases.

Similarly, the local innovators have developed Meditracker, a fast aid and emergency health care app aiming to supplement emergency rescue operations. When one taps on the emergency button in the app, the nearest ambulance and medical crew find the person on the basis of his or her geographical location.

“The idea is that these should not stop after Kumbh; the innovation culture has to continue. Of the 200 ideas that generated during the Kumbhathons, 10 were taken to the next level on the basis of ease of implementing. These have actually become start-ups,” adds Kandoi, whose company is rendering all tactical support, including providing office space out of his campus, to Kumbhathon volunteers.

Superb stuff.

A brief peek into Chettiar Banking system

One realises how much of economics and finances one has to undo as you keep going through material. It is amazing really.

Came across this interesting piece by Prof Malvika Nair of Troy University. She is a supporter of free banking and has written a few pieces on  free banking in India.

In free banking literature, there are these debates on whether banks should have a 100% reserve system or a fractional reserve banking system? Fractional reserve is when banks just keep a fraction of deposits as reserves and lend the rest. 100% reserve system is when banks maintain the entire amount and do not lend anything. The former ones are often credited as responsible for the crisis as depositors cannot get their full deposits at anytime. The latter one are seen as safer and do not have any such problems with deposits.

This piece is on how Chettiars operated their banks following a fractional reserve system:

Book Review: History of Corporate Finance

With a title of a book like History of Corporate Finance, the expectations are running high even before one starts reading. It is written by Jonathan Barron Baskin and Paul J. Miranti Jr. It was started by Baskin but due to his untimely death was completed by Miranti Jr. 

The book was released in 1997 and could easily have been a finance classic but somehow does not hold the reader’s attention. The essays do not connect seamlessly and one does not get a complete picture. It ends up being a mesh up of history of firm, money, governance and so on.

Having said that, it is still a compelling read and tells you a lot about how different financing mechanisms emerged – debt, debetures, common stock, preference stock and so on. Then one also understands how for finance to work one has to look beyond finance. Things like law, information flow etc are as critical. The initial essays especially point to the role of information asymmetry. There was hardly any information on the firm wanting to raise finance. This was problematic in large scale and risky projects like railways and canals. How information asymmetry was curbed by various entities and government guarantee is quite a read.

Above all, it tells you how finance and its various arrangements are as old and historic as it can get. All this talk of financial engineering. modern finance, finance/banking revolutions are just bunkum really compared to what was achieved back then. The way these ideas were shaped and difficulty with which they were sold to public was the real revolution.

What does the public know about monetary policy?

Carin van der Cruijsen, David-Jan Jansen, Jakob de Haan have a piece on how central banks can improve their communications with the public.

Central banks have typically targeted their communication at financial markets. Increasingly, however, many have started actively communicating with the general public. Using Dutch survey data, this column finds that the public’s knowledge of monetary policy objectives is far from perfect, and varies widely across respondents. Those with a greater understanding of ECB objectives tend to form more realistic inflation expectations. Central banks seeking to target the general public must take account of discrepancies in households’ knowledge of and interest in monetary policy.

When financial markets who track every bit of central bank cannot figure things, how can public figure out what is going on?

All this is also interesting from another perspective. Central banks historically have been created to serve either governments or fin markets (or both). There was hardly a public angle to these organisations. Now, this whole idea has changed to serving the public. It has become a recent fascination as central banks seek a broader public role. They wish to be seen as a public institution like the legal system, police and so on. They have actually been partially successful in this endeavour as they have surpassed all these institutions in terms of noise and hype.  With so much coverage, there is a feeling amidst public that something big is going on. But the public hardly has the skills to figure the reality. So, it lets the things be.

So this idea of reaching out to public is interesting. But then this could backfire as well as monetary policy is so jargonish that people might actually misunderstand what is going on.

Case of Ecuador, Kazakhistan etc..

Where decline in oil/commodity prices is a huge boost for Indian economy, it is leading to serious troubles for others:

• Bloomberg has a post on how everything is going wrong in Ecuador.
• Gulzar has a post on how Kazakhistan’s exchange rate strategy has backfired.

 

Discussing the not-so-glamorous under-belly of India’s e-commerce system

One big problem of analysing what makes a sector/company successful is that the analysis leaves the very people which are behind the success. Much of the credit goes to some CEO/leader who has shaped the organisation. But the real people are broadly ignored.

This is much like the literature which looks at empires and kings as well. Certain emperors are eulogized over others for their grand plans and victories. But no one looks at the conditions of foot soldiers during the rule. And when these details are looked into, we realise none of the great emperors/kings were as great as they were made out to be. Most of them even ignored the basic human conditions of their armies.  Wars were won over the cost of many such people who either did not have voices or were crushed.

Just a few days ago, there was this article which investigated the crazy work culture of Amazon. They seem to have surpassed the Wall Street culture which one thought was impossible to beat. Reading such pieces makes you wonder the behind the scene activity of this highly efficient e-commerce enterprise.

And then Amazon is not alone in the game.

Gulzar points to this interesting article on the underbelly of Indian e-commerce. We keep celebrating the founders of these companies. The attention is mostly on their branded degrees and the market valuation of these companies. But hardly probe deeper on what makes these places tick. In this case, delivery boys play a crucial role and like the Amazon people have a crazy work-life balance as well. Where Amazon people have to climb the wall  on hitting it, the delivery boys have to climb through Indian traffic.

A unique nudge experiment from Hamburg to stop urination at public places

Gulzar points to this interesting nudge:

It has covered nine public walls with repellent paint which makes pee spray back on the person’s shoes and pant! Public urination on city walls by night revellers is a big problem in the city and has not been controlled despite a legislation banning it as well as fines of upto $500.

How a metro railways moved from a PPP to public sector control in UK

M Asher, S Sheikh and V Ramakrishnan have a piece on this shift of ownership.

How a large transport sector PPP (Public Private Partnership) in UK, a high-income country, with a reputation for good public financial management,  came to be restructured from a PPP to full public sector control in less than a decade, and the implications this episode holds for India, a middle-income country.

Interesting bit.

Infra is not just an ownership thing as we like to assume. Infact most infra worldwide has been built by public sector only. What matters more is the microeconomics and incentives around the sector. One has to think deeper through the contracts involved, pricing, scale and so on.

 

Why Rand Paul wants more thorough Fed audits?

Central banks in other countries should consider themselves really lucky that they do not have to deal with politicians like Ron Paul (and his son Rand Paul). Moreover, they do not have as troubled a central bank history or have higher number of scholars polishing their central bank history.

Central bankers in other countries can keep politicians quiet by just showing off their US university pedigree. It is just so easy really.  But these games do not work on US politicians as most themselves come from such univs. The grilling a Fed official goes through is way higher than what central bankers go through in other countries. In latter, there is no grilling really.

Here is Rand Paul writing on why he thinks Fed should be audited more thoroughly.

Birth, life and death of Development Finance Institutions in India..

Deepak Nayyar, Professor Emeritus, JNU has a piece on EPW.

Kerala vs Uttar Pradesh: Why economic outcomes differed?

Pramit Bhattacharya of Mint has a piece on the topic. The article is based on a paper by Prof Prerna Singh.

The broad idea is that Kerala elites could promote sub-nationalism within the state and provide public goods in a more egalitarian fashion. UP elites were more nationalist in their approach and did not bother too much about the local population. The public goods provision was selective and narrow:

The chequered history of Kolkata based banks..

Bandhan microfinance kickstarted its operations as a bank last weekend. The emergence of Bandhan is nothing short of a fairy tale story from starting as a small microfinance institution to becoming a large bank. It is even more interesting to see the bank emerge from Kolkata, capital of West Bengal. One has not seen any major activity from the eastern part of India. Moreover, this banking bit has been restricted to either Mumbai or Southern India.

Though, this is actually going back to history as Presidency Bank’s first base was at Kolkata and even the first bank in India- Bank of Hindoostan-  started operations in Kolkata.  But as Kolkata lost its importance in Indian economic geography, so did banks from the place as well.

Aniek Paul of Mint has this interesting piece on history of Kolkata/Calcutta based banks.  It has been a fairly chequered journey:

The Authoritarian Temptation…Why more authoritarian regimes are being voted to power?

Interesting piece by Nina L. Khrushcheva of the New School in New York.

She wonders the reason why people are preferring more authoritarian regimes. She calls them soft dictatorships (or hard democracies?) where these authoritarian figures are voted to power:

India’s deadly cities creating equally deadly work/life scenarios

Ajit Biswas and Kris Hartley of NUS have a piece. Despite all talks, we are still not realizing who grave the overall situation is becoming. It has perhaps moved beyond crisis stage and is just looking at imploding. Cities like Bangalore which had plenty of lakes long ago have either lakes drying or just become pollution graveyards. The lakes have foams instead of water.

Earlier growth/development in the country was about India vs Bharat with former growing over the latter. Now even the India part is just crumbling at an alarming place. With all focus on fancier things of life, the basics are just ignored.

So what does the duo say?

How did we get salesmen knocking on our doors? Birth of the mighty idea..

Harvard Business School’s Walter A. Friedman has written this interesting book – Birth of a Salesman. In business, nothing else matters. You may have the ‘t best product but till you can’t sell it, it is all nought. Most corp leaders of yesteryears who shaped iconic firms  were all sales people par excellence.

Here is an interview of the Prof. He says Salesman is a quintessential American contribution:

The inspiring lessons from managing logistics of Kumbh Mela

It is all getting so ironical really. The west gradually seems to be warming up to the east and showing more interest in the way latter has been doing things. On the other hand, the east is just busy copying the west. Within this, there is nothing more ironical than seeing Harvard University’s interest in Kumbh Mela. This mela which has been organised for ages but I dont think it has caught anyone’s fancy. Post Harvard  case study, there is a lot of interest.

Rahul Jacobs reflects on the lessons he learnt from a recent PPT on the holy mela:

Financial engineering versus cancer..

This is interesting short note. Financial engineering can cause cancer to the financial firm but could be useful for curing the cancer to humans.

Using twitter to predict bank runs

BoE’s Underground blog has a nice post on how to use (and not be mislead) by big data ideas.