Vivek Kaul
There is a certain formula to writing a business book which explains the reasons behind the success of a particular company and the learnings other ‘lesser mortals’ can draw from it. It involves the authors choosing examples of companies that have been successful over a period of time, studying them in great detail and then explaining the reasons behind their success.
These reasons then become the ‘list of things to do’ for other managers and business leaders looking to build successful companies. The trouble is that companies that are studied as bellwethers of success often become very mediocre after the book has been published.
There are four major problems with this approach of trying to figure out what makes a company successful. The first problem is what is referred to as survivorship bias. The authors studying success only look at companies which have been successful and not at the companies which might have failed doing the same things that successful companies did.
Take the case of the VHS versus Betamax battle for the video standard, between Sony and Matsushita, both Japanese companies. Sony decided to concentrate on video quality whereas Matsushita decided to concentrate on longer recording time, which ultimately became the key differentiator between the two standards.
So was Sony wrong in concentrating on quality of the video rather than the playing time? Not at all. This was totally in line with Sony’s positioning as a company which makes high end quality products. Even though Sony failed in this case by doing what it thought was the right thing to do, there are many companies which have become iconic companies by concentrating on the quality of the product rather than its price or other features.
The second problem with this approach is that authors are looking at something that has already happened and trying to fit a story around it. As Phil Rosenzweig writes in The Halo Effect…and the Eight Other Business Delusions that Deceive Managers “We want explanations. We want the world around us to make sense…We prefer explanations that are definitive and offer clear implications.”
These explanations create an illusion that success in the world of business is orderly and predictable. As Nobel Prize winning economist Daniel Kahneman writes in Thinking, Fast and Slow “The illusion that one has understood the past feeds the further illusion that one can predict and control the future. These illusions are comforting. They reduce the anxiety that we would experience if we allowed ourselves to fully acknowledge uncertainties of existence… Many business books are tailor-made to satisfy this need.”
Among the many definitive explanations for success that have been offered one of the most popular is that a company should stick to its core and do what it does best. But then there are examples of many companies which do really well by looking beyond their core. “During the 1980s, General Electric, America’s largest industrial company associated with light bulbs, refrigerators, airplane engines, and plastics, sold some of its traditional businesses – home appliances and television and went in a big way into financial services,” writes Rosenzweig. And GE did very well in its new business. So going beyond its core helped GE to reinvent itself even though a lot of business books recommended doing exactly the opposite.
The third problem with the way authors approach business books is that they never really take into account the element of luck. Tonnes of books have been written about around the success of Google, one of the most innovative companies of our times. But none of them really talk about the early streak of luck that Google had. As Duncan J Watts writes in Everything is Obvious – Once You Know the Answer, “In the late 1990s the founders of Google, Sergey Brin and Larry Page, tried to sell their company for $1.6 million.” The story goes that the buyer thought that Brin and Page were asking for too high a price and decided not to go ahead with the deal.
Microsoft had a similar lucky streak. The story goes that when IBM first approached Bill Gates to supply an operating system for IBM’s new PC, Gates referred them to this guy called Gary Kildall, who ran a company called Digital Research. Kildall and IBM couldn’t strike a deal, and so IBM went back to Gates. And this changed the game totally for Gates.
As Michael Mauboussin writes in The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing “IBM struck a deal with Gates for a lookalike of Kildall’s product, CP/M-86, that Gates had acquired. Once it was tweaked for the IBM PC, Microsoft renamed it PC-DOS and shipped it. After some wrangling by Kildall, IBM did agree to ship CP/M-86 as an alternative operating system. IBM also set the prices for products. No operating system was included with the IBM PC, and everyone who bought a PC had to purchase an operating system. PC-DOS cost $40. CP/M-86 cost $240. Guess which won.”
What really got Microsoft and Gates going was the fact that Gates had kept the right to license PC-DOS to other companies. And when other companies started manufacturing PCs, Gates was there selling them his operating system. “The fact is, Kildall played his cards much differently than Gates did, and hence did well but enjoyed financial success vastly more modest than Gates. But it’s tantalising to consider the possibility that with a few tweaks, Kildall could have been Gates,” writes Mauboussin.
The fourth problem with most management books is that they overestimate the role of a CEO in the success of companies. While there is no denying that CEOs do influence performance of companies, but their impact is much lower than most business books tend to suggest.
As Kahneman points out “A very generous estimate of the correlation between the success of the firm and the quality of its CEO might be as high as 0.3, indicating 30% overlap.” Also the books never take into account whether business leaders are taking on too much risk. “A few lucky gambles can crown a reckless leader with a halo of prescience and boldness,” writes Kahneman.
The trouble is if the authors don’t make heroes out of CEOs there books won’t sell. “It is difficult to imagine people lining up at airport bookstores to buy a book that enthusiastically describes the practises of business leaders who, on average, do somewhat better than chance. Consumers have a hunger for a clear message about the determinants of success and failure in business, and they need stories that offer a sense of understanding, however illusory,” writes Kahneman.
And that’s the story of business books. There are no magic formulas as the books try to tell us over and over again. As Rosenzweig best puts it “There’s no magic formula, no way to crack the code, no genie in the bottle holding the secrets to success. The answer to the question What really works? Is simple: Nothing really works, at least not all the time.”
The article originally appeared in the Wealth Insight magazine in the edition dated June 10, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Month: June 2013
Why realty regulatory Bill is not a panacea it’s being out to be
Vivek Kaul
The Union Cabinet cleared the Real Estate (Regulation and Development) Bill on June 4, 2013. The passage of this Bill has been heralded as a move in favour of real estate buyers. The Bill has been in the works for more than six years now, that tells us how serious the government has been on making it a law.
There are several provisions in this Bill that point out towards the same. Real estate developers can launch new projects only once all the relevant permissions are in place. These permissions are to be displayed on the website of the developer and only then can construction begin.
If the promised home is not delivered on time, the buyer will be entitled with a full refund of the amount he has paid along with interest. Separate bank accounts are to be maintained for every project. Developers need to ensure that the money taken from buyers is used for that particular project and not diverted elsewhere. While advertising developers will have to use photographs of the actual site. Failure to do so will attract a penalty.
The Bill also seeks to establish a central appellate tribunal and individual states will be responsible for establishing state level regulators. Further, the Bill does not allow developers to take more than 10% advance from the buyers without a written agreement. This provision it’s felt will help curtail the amount of black money that goes into real estate.
All these provisions put together will help the buyers, seems to the major view coming out. But as the old English saying goes there is a many a slip between the cup and the lip.
First and foremost the Bill as and when it becomes an Act will be applicable only on new real estate projects. Hence, the real estate projects which have already been launched will not come under the aegis of the Act. This means that buyers of those real estate projects which have been delayed will continue to face problems.
The recent past has seen real estate developers launching more and more new projects and use the money thus raised to pay off their past loans. This has led to a situation where there is no money left to build the projects which have been launched. In order to get the money required to build these projects, newer projects are launched. So this modus operandi has led to a situation where projects are rarely delivered on time and are endlessly delayed.
The buyers who are facing trouble because of this will get no relief as and when the Real Estate (Regulation and Development) Bill becomes an Act. (You can read a more detailed argument here).
The Bill also talks about establishing a real estate regulator in every state. This is a very long term process. It calls for the recruitment of a lot of people who understand specific real estate regulation. The question is are there enough such people going around?
Also, any regulator takes time to become effective. Take the case of the Securities and Exchange Board of India(Sebi), the stock market regulator, which was established in 1988 and given statutory powers in the 1992, after the Harshad Mehta scam.
Immediately after Sebi was given statutory powers, the stock market had the vanishing companies scam, where companies raised money through initial public offers (IPOs) and disappeared. Sebi could hardly do anything about it and investors lost thousands of crores.
Towards the turn of the century there was the Ketan Parekh scam, which again caught the stock market and Sebi off-guard. Its only in the last few years that the stock market regulator has come into its own. So its effectively taken Sebi almost twenty years to become somewhat effective.
But even then Sebi has had huge problems dealing with Sahara. The moral of the story is that even regulators don’t stand much of a chance against big established business groups. So how will the real estate regulators go against real estate developers, who are known to be fronts for politicians? Then there is the question of whether the regulator will act in favour of consumers. The Insurance and Regulatory Development Authority, the insurance regulator, over the years has acted more in favour of insurance companies as an industry lobby than thought about people who buy insurance.
A major point in the Bill is that the developers will have to open separate bank accounts for each project and ensure that the money from the buyers goes into that particular project and not elsewhere, as is the case currently. On paper, this is probably the most important point in the Bill. But money is fungible, as anyone who has handled it will tell you. So the question is who will ensure that the money going out from the a particular project account is going towards that project and is not being used to by the developer to meet other obligations or simply being siphoned off.
This seems to be the job of the state level real estate regulators that the Bill seeks to establish. But will state level regulators be able to manage things at such a micro level? Will they have the required expertise? I have my doubts. Implementation of laws has never been a strong point with India and Indians.
Also this provision in the Bill has been significantly diluted over the years. As Dhirendra Kumar of Value Research writes in a column “Compared to the 2009, the government has weakened the anti-fund-diversion provisions of the Bill. In the 2009 draft, all funds collected from the buyers would have to be kept in a separa
te bank account, from which money could be taken out only for direct use of the project.” This has been diluted and the current version of the Bill allows developers to route only 70% of the money raised from buyers into a separate bank account. “This serves no purpose except to make it easier for developers to divert 30 per cent of the funds,” writes Kumar.
The Bill does not allow developers to take more than 10% advance from the buyers without a written agreement. This it is said will help in controlling black money. This to me seems like someone’s idea of a joke. When has any agreement prevented Indians from transacting in black money? Scores of developers across this country continue charging money in black separately for car parking, despite there being a Supreme Court order against the same.
The Bill also says that buyers will be entitled to a full refund along with interest if the developer does not deliver the project on time. This may not be of much help because even with the compensation, the buyer may not be able to buy a home. Home prices may have risen in the meanwhile. Also, after a project is delayed, you cannot expect the buyer to put money in a fresh project, which again promises to deliver a few years later, like the original developer did.
Buying a fully ready home may turn out to be expensive and beyond the budget of the buyer, even with the compensation. Given this, the buyer should be compensated either the price of buying a similar home in the open market, as promised by the builder, or refunded his money along with interest, whichever is higher.
Also, it is one thing to make a law which calls for the developer to pay up in case a project is delayed, and it is totally another thing to expect him to pay up. Take the case of DLF. The company was fined Rs 630 crore for abusing its dominant market position by the Competition Commission of India (CCI). As an article in Governance Now magazine points out “The CCI pronounced DLF guilty for grossly abusing its dominant market position in the relevant market and imposing unfair conditions in the sale of apartments to home buyers in contravention of the provisions of the Competition Act, 2002. The CCI also imposed a penalty of whopping Rs 630 crore.”
But there has been no damage to DLF. “Ever since the order came out, DLF has paid zero to CCI. Not only that. They have launched four different projects since then, despite of our continued objections to the CCI,” Amit Jain of the federation of apartment owner’s association (FAOA) told Governance Now. So if DLF can get away without paying a regulator, where is the question of developers paying the aam aadmi for delayed projects?
The politicians have already tweaked the provisions of the Bill in favour of the developers. In fact, in the 2009 version of the Bill only those projects which were less than a 1000 square metres and had less than four dwelling units were exempt from the provisions of the Bill. The current version of the Bill is applicable only to projects over 4000 square metres in size with no limit on the number of dwelling units. Also there is a twist in the tale. As Kumar writes “Even more alarmingly…when a project is executed in phases, then each phase will be considered separately. This means that even very large projects could just be broken up into sub-4000 meters phases and escape much of the regulatory oversight of the Bill and the regulator.” So all we know, the developers might exploit this loophole to the hilt.
To conclude, India does not have independent regulators. And people who head regulatory bodies report to politicians. Even the real estate regulators will report to politicians. And many politicians have significant interest in real estate, ensuring that developers will do what they want to do. The law of the land be dammed. Or as the old saying from the Hindi heartland goes “jab saiyyan bhaye kotwal to darr kaahe ka?(when my lover is the police inspector, what do I have to fear?). So deep runs the politician-builder nexus.
And the Bill does very little to address this. To be fair, one cannot expect any law to end the nexus. But if the Indian real estate scenario has to improve it is this nexus that needs to be broken. And that is not going happen anytime soon.
(The article originally appeared on www.firstpost.com on June 6, 2013)
(Vivek Kaul is a writer. He tweets @kaul_vivek)
From Junglee to Ye Jawaani Hai Deewani: The revenge of Himachal on Kashmir
Vivek Kaul
The Kashmir valley was an integral part of Hindi films through the sixties, seventies and most the eighties. Kashmir and the escapist stuff that the industry specialised in went well together.
The hero and the heroine romancing in the beautiful Mughal Gardens, Nishat or Shalimar, on the outskirts of Srinagar. Or walking through knee deep snow in Gulmarg. Or the heroine filling her matki (an earthen pot) with water from the Lidder river in Pahalgam. Or the most common shot of the film’s lead couple enjoying a ride in a shikara on the Dal lake. All this looked fantastic on the big screen. And thus shooting in the valley became an integral part of Hindi films.
There were three major factors that brought the Hindi film industry to Kashmir. More and more Hindi films started to be shot in colour in the early 1960s. This coincided with more Hindi films being shot outside the claustrophobic film studious of what then used to be Bombay (now Mumbai). This meant that producers and directors went looking for locations that would look good on the big screen. And Kashmir fit in perfectly.
The final push came in the form of Shammi Kapoor and his first colour film Junglee. Shot majorly in the Kashmir valley, this was the movie that ‘really brought’ Hindi film producers and directors to the valley. Many of Kapoor’s successful films were shot in the valley. This included Kashmir ki Kali, Andaaz, Janwar etc. The story goes that at his peak Kapoor in the mid 60s, Kapoor used to spend seven months of the year shooting in the valley.
After Kapoor, director Yash Chopra continued the trend of shooting in Kashmir with Kabhie Kabhie and Silsila. In fact, Kabhie Kabhie was essentially Chopra’s tribute to Kashmir. And the valley has not been captured so beautifully by anyone else till date.
The love affair between the Hindi film industry and the Kashmir valley continued through much of the 1970s and the early 1980s. Hrishikesh Mukherjee’s Bemisal which released in 1982, starring Amitabh Bachchan, Vinod Mehra and Raakhee, even had a song on the Kashmir valley : “Kitni khoobsurat ye tasveer hai…ye kashmir hai.”
The eighties dulled the love affair, as first the Hindi film industry discovered Switzerland and then terrorism made gradual inroads into the valley. Vidhu Vinod Chopra’s Khamosh which released in 1985, was one of the last films to be shot in the valley. The movie was a murder mystery set in and around the hill station of Pahalgam, and ironically enough did not have any songs, showcasing the beauty of the valley.
Through much of the 1990s and 2000s, Kashmir remained inaccessible to the Hindi film industry as terrorism took over the valley. But terrorism in Kashmir was too juicy a plot point to ignore, and thus became a part of the storyline of several Hindi films. The only trouble was that shooting in the valley was impossible. This trend was started by Mani Ratnam’s Roja which was made in Tamil and later dubbed into Hindi.
So various places, depending on the budget of the producer were passed off as Kashmir. If the budget was good enough, Switzerland could be passed off as Kashmir, if it wasn’t even Lonavala (a hill station close to Mumbai) would do. The only big budget movie which was shot in the valley during the years when terrorism was at its peak was Vidhu Vinod Chopra’s Mission Kashmir which released in 2000. The Aamir Khan starrer Fanaa, which released in 2006, had a storyline set around a Kashmiri terrorist, but almost all of what was passed off as Kashmir was shot in the Tatra Mountains in Southern Poland.
In the last ten years, a few Hindi films have been shot in the valley. There has been odd movie like Yahaan, a story of an army officer falling in love with the sister of a terrorist, which was shot almost end to end in the Kashmir. There was also Santosh Sivan’s beautifully shot low budget movie Tahaan which released in 2008. Sikander and Lamha were other low budget movies that were shot in the valley. And so was a small portion of Vishal Bhardwaj’s 7 Khoon Maaf.
Last week’s release Ye Jawaani Hai Deewani has been among the few big budget movies to have been shot in the Kashmir valley in years (The other movie that comes immediately to my mind is Yash Chopra’s swansong Jab Tak Hai Jaan.Imitiaz Ali’s Higway is also being shot in the valley, as was a part of his previous release Rockstar). And the first half of the film has some of the most breathtaking scenery that you will ever see in a Hindi film. The irony though is that the storyline of the movie passes off what is Gulmarg in Kashmir as Manali in Himachal Pradesh. While the hill stations of Himachal Pradesh are very beautiful, nothing comes close to Gulmarg after it has snowed. Its breathtakingly beautiful and totally out of this world.
This so called ‘artistic license’ has not gone down well with Omar Abdullah, the Chief Minister of Jammu and Kashmir. As he tweeted “It’s irritating when we roll out the red carpet & facilitate the shoot only to have people believe its Manali.”
I saw the movie in a Delhi multiplex on Friday afternoon (May 31, 2013). As the young women and aunties around me went ‘Awww‘ and ‘How Cute‘, everytime Ranbir Kapoor appeared on screen, the question I asked myself was why would anyone want to pass of Kashmir valley as Himachal Pradesh?
This keeping the background in mind that for the last two decades the Hindi film industry has had no access to the Kashmir valley. During this period it has passed off different parts of the world as Kashmir. And now that it can shoot in the valley, it has passed it off as Himachal. Also, Himachal Pradesh has never been able to replace Kashmir in Hindi films.
So why do that? The movie provides the answer as well. At the end of the trekking trip, the two lead pairs of the movie (Ranbir Kapoor-Deepika Padukone, Aditya Roy Kapoor -Kalki Koechlin) have a lot of bhaang on the occasion of the Holi festival, and dance non-stop to the song balam pichkari jo tune hai maari.
Now Hindi films aren’t meant to be logical. But having the hero-heroine of the movie sing a Holi song after downing bhaang, on the foothills of Gulmarg in Kashmir, a terrorism infested state, would have been totally illogical. And that to me seems be the only reason why Kashmir has been passed off as Himachal Pradesh. This despite the fact that Jai Jai Shiv Shankaranother famous Holi song from the 1974 movie Aap ki Kasam was shot in Gulmarg. But then those were the days when Kashmir was peaceful.
So its but natural that Omar Abdullah is peeved. But he can take solace in the fact from another artistic license that was taken more than 50 years back in 1961. Shammi Kapoor’s most famous song Yahoo-Chahe Koi Mujhe Junglee Kahe was shot in Kufree, in Himachal Pradesh. Though the rest of the storyline of the movie (Junglee) was set in Kashmir. The song was originally supposed to be shot in Gulmarg, but the hill station did not have enough snow that year, forcing the makers of the movie to look for snow somewhere else. For years people have thought that the song has been shot in Kashmir.
So in a way Ye Jawaani Hai Deewani passing off Kashmir as Himachal, is Himachal’s revenge on Kashmir, though more than fifty years late. Interestingly, Junglee had Shammi Kapoor in the lead role and was directed by Subodh Mukherjee. Shammi Kapoor was the granduncle(i.e. Paternal grandfather’s brother) of Ranbir Kapoor, who stars in Ye Jawaani Hai Deewani. And Subodh Mukherjee was the granduncle of Ayan Mukherjee who has directed Ye Jawaani Hai Deewani.
The article originally appeared on www.firstpost.com on June 11, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Why we're not best-equipped to multitask
Vivek Kaul
Nidhi Pandey, a 17 year old girl died, after she was hit by a speeding bus in Dadar, Mumbai, on June 3, 2013. The Mumbai Police strongly believe that she was listening to music while crossing the road. As the Mumbai Mirror reports “Nidhi died around 10 am yesterday after she was hit by a private bus while crossing a road at Dadar TT. While her family denies she was wearing earphones at the time, the police believe it is highly likely that she was. Manisha Murumkar, sub-inspector, Matunga police station, said, “We strongly suspect that Nidhi was listening to music while crossing the road as she was found with her earphones plugged into her phone and both ear pieces near her ears.”
Prima facie it does seem that Nidhi was listening to music while crossing the road given the statement of the Mumbai Police, which claims to have reached the accident spot within ten minutes of the accident. “We reached the spot in 10 minutes and took her to Sion hospital in our police van. However, it was too late – Nidhi died before she could be admitted,” sub-inspector Murumkar told Mumbai Mirror. Given this, the conclusion one can draw is that Nidhi was so immersed in the music that she had no clue of the speeding bus.
But Nidhi Pandey was unlucky. There are so many people who have their earphones on and are listening to music while doing other important activities, like crossing the road, climbing onto trains and so on. A common sight these days is people smsing while walking on the pavement or even crossing the road. Then there are others who talk on their mobile phones while driving. The ‘smarter’ ones either use ear-phones or hands-free while speaking on their mobile phones while driving, thinking that using such gadgets makes the experience safe and risk-free.
But that is not the case. Christopher Charbis and Daniel Simons in their book The Invisible Gorilla – And Other Ways Our Intuition Deceives Us refer to this situation as inattentional deafness. “When people are focussing attention (visual and auditory) on (a) task…they are unlikely to notice something unexpected,” write the authors. So when people are engrossed listening to music while crossing the road, they are likely to miss the oncoming bus.
In fact Chabris and Simons conducted a very small experiment which has since then gone global. They made a small film which basically had students of Harvard University playing basketball. One team was wearing white and another team was wearing black.
After they had made the film, they ran a small experiment, where they asked volunteers to watch the film and count the number of passes made by the team wearing white, ignoring the passes made by the team wearing black.
Around a minute later, the volunteers were asked whether they had seen something else. Nearly half of them said they hadn’t seen anything else. But they had missed out on something major. As Daniel Kahneman writes in Thinking, Fast and Slow “The viewers of the film are instructed to count the number of passes made by the white team, ignoring the black players. This task is difficult and completely absorbing. Halfway through the video, a woman wearing a gorilla suit appears, crosses the court, thumps her chest, and moves on. The gorilla is in view for 9 seconds. Many thousands of people have seen the video, and about half of them do not notice anything unusual.”
As author Margaret Heffernan admits in Wilful Blindness – Why We Ignore the Obvious At Our Peril “The experiment has been shown repeatedly, around the world, in front of diverse audiences. I first saw it in Dublin, in an audience full of executives. Like them, I was so focussed on counting the passes I never saw the gorilla.”
In fact so stunning were the results that Chabiris and Simons did not believe the results initially. As Heffernan points out “Simons was so stunned by the results that he says that for several years afterwards, he still kept expecting people to spot the gorilla.”
So what happened here? Why did the people fail to see the obvious? As Kahneman writes “Intense focussing on a task can make people effectively blind, even to stimuli that normally attract attention…It is the counting task (counting the passes being made by the white team) – and especially the instruction to ignore one of the teams – that causes the blindness. No one who watches the video without the task would miss the gorilla….The authors (i.e. Chabris and Simons) note that the most remarkable observation of their study is that people find its results surprising. Indeed, the viewers who fail to see the gorilla are initially sure that it was not there – they cannot imagine missing such a striking event. The gorilla study illustrates two important facts about our minds: we can be blind to the obvious, and we are also blind to our blindness.”a
There was another experiment carried out by the Washington Post newspaper a few years back, with Grammy Award winning violinist Joshua David Bell being a part of it. At 7.51am on January 12, 2007, Bell started playing violin at the L’Enfant Plaza subway stop at Washington D.C in the United States. Bell had kept his violin cases open for donation as he played six classical pieces over the next 43 minutes. During the period 1097 people crossed him.
Gene Weingarten, a staff writer at the Washington Post, was the brain behind the experiment. After the experiment Weingarten asked Leonard Slatkin, music director of the National Symphony Orchestra, of what he thought would happen if a world famous violinist decided to play his violin incognito at rush hour time and with an audience of around 1000 odd people.
“Let’s assume that he is not recognised and just taken for granted as a street musician… Still, I don’t think that if he’s really good, he’s going to go unnoticed. He’d get a larger audience in Europe… but, okay, out of 1,000 people, my guess is there might be 35 or 40 who will recognize the quality for what it is. Maybe 75 to 100 will stop and spend some time listening,” replied Slatkin.
The actual result was very surprising and nowhere near what Slatkin thought it would be.
As Weingarten later wrote in the Washington Post “In the three-quarters of an hour that Joshua Bell played, seven people stopped what they were doing to hang around and take in the performance, at least for a minute. Twenty-seven gave money, most of them on the run — for a total of $32 and change. That leaves the 1,070 people who hurried by, oblivious, many only three feet away, few even turning to look.”
And this for the same Joshua David Bell playing, whose concert tickets could cost as much as $100, and who earned as high as $1000 per minute, everytime he played. Weingstein was very disappointed with the way the experiment turned out. As he wrote “It’s what happens right after each piece ends: nothing. The music stops. The same people who hadn’t noticed him playing don’t notice that he has finished. No applause, no acknowledgement…If we can’t take the time out of our lives to stay a moment and listen to one of the best musicians on Earth play some of the best music ever written; if the surge of modern life so overpowers us that we are deaf and blind to something like that — then what else are we missing.”
But the people travelling through the subway stop had been inattentionally deaf to the great music being played. They were totally focused on boarding the Metro train from the station and were totally deaf to the great music being played around them. It was the same as what happens in the invisible gorilla experiment. People are so focussed on counting the passes that they totally miss the gorilla.
The basic point of these experiments is that multitasking is not something that human beings are good at, even though most of us do it all the time. One of the most the common multitasking situations is drivers using mobile phones while driving to talk, sms and these days even for posting something on Facebook. But as Charbis and Simons point out “the driving impairments caused by talking on a cell phone are comparable to the effects of driving while legally intoxicated.”
One solution that has emerged is the hands-free. Turns out a hands-free is equally bad. “Experiment after experiment has shown no benefit whatsoever for hands-free phones over handheld ones. In fact, legislation banning the use of handheld phones might even have the ironic effect of making people more confident that they can safely use a hands-free phone while driving,” write the authors. So while traffic police fines people for talking on their phones while driving, there is no punishment for talking using a hands-free or earphones for that matter.
Charbis and Simons summarise it best when they write”the main conclusion from studies of multitasking is that virtually nobody does it well: As a rule, it is more efficient to do tasks one at a time rather than simultaneously.” So the next time you are crossing the road, just cross the road, the music blaring through the earphone can wait for a few seconds.
The article originally appeared on www.firstpost.com on June 5, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Why the new bear market theory in gold is all wrong
Vivek Kaul
An old theory about bull markets is that every bull market has a theory behind it. This was true about the bull market in gold which started in 2002 and ran for almost ten years till late 2011. The price of gold during this period went up from around $280 per ounce (one troy ounce equals 31.1 grams) in January 2002 to around $1895 per ounce in September 2011.
The gold bull market had essentially two theories driving it, at different points of time. Between 2002 and September 2008, gold rallied because there was the fear of the American financial system collapsing, as the American citizens went piling on debt to buy new homes, only to sell them after a short period of time.
The American financial system came close to collapse. And some time later it was revealed that Europe was heading towards a similar and a bigger mess. Central banks around the world tried to stem the rot by printing truck loads of money. This money was first used to save the various financial institutions and banks which were on the verge of collapse.
After the governments had managed to save the financial institutions from collapsing, the next lot of money printing was carried out to revive their respective economies. The hope was that by pumping more and more money into the economy, the governments would be able to ensure that there was ample money supply in the economy.
This would ensure low interest rates, leading to people borrowing and spending more, and banks lending more. This spending would lead to people buying more homes, automobiles, consumer goods and so on, helping businesses make more money and thus help revive the overall economy. Low interest rates would also help people to re-finance their homes loans, leading to lower equated monthly instalments(EMIs). The money thus saved would be spend on other things and thus add to economic growth.
The danger here was that all this excess money floating around could chase the same number of goods and services, and lead to very high inflation, as had happened in the past. To hedge against this risk, investors started moving their money into gold.
The investment in gold comes with the belief that gold retains its purchasing power over long periods of time. As Nick Barisheff President and CEO of Bullion Management Group Inc and the author of$10,000 Gold: Why Golds Inevitable Rise Is the Investor’s Safe Haventold Firstpost in a recent interview “It took 66 ounces of gold to buy a compact car in 1971. Today it would take about 10 ounces. We can see the same ratio with houses…Today you can buy 3 average size houses for the same amount of gold you would have needed to buy 1 house in 1971 even though the prices of houses have risen significantly in dollar terms since then. That’s how gold serves as a hedge against inflation and maintains its purchasing power.”
With investors buying gold to hedge the risk of high inflation, the price of the yellow metal went up from $780 per ounce in mid September 2008 to around $1895 per ounce in early September 2011, which meant an absolute return of 143% over a three year period.
The price of gold has fallen since September 2011, and as I write this it quotes at around $1410 per ounce. With this fall, we now have a new theory being bandied around. And its now being said that gold rallied all these years on a misunderstanding.
As per this new theory, those investing in gold have got it all wrong. The fundamental argument about investing in gold is that excess money printing leads to high inflation and to hedge against that inflation investors buy god. But this time around the argument doesn’t really hold, we are now being told. This is because the world is in the midst of a balance sheet recession.
The term balance sheet recession has been coined by the Japanese economist Richard Koo. He feels the situation in the United States and almost all of Europe is very similar to as it was in Japan when the stock market bubble as well as the real estate bubble burst in 1990.
In a balance sheet recession a large portion of the individuals who had taken on loans to be a part of a bubble (real estate in case of America as well as Europe and real estate as well stock market in case of Japan), start saving more to repay their loans. When this happens they are not spending as much as they were in the past. This means incomes of businesses come down, which slows down economic growth as well.
Governments try to revive this economic growth by printing and pumping more money into the economy. This is done in the hope that interest rates will remain low, and encourage people to borrow and spend more. This spending will in turn create economic growth. The trouble is that people are in the saving mode and no mood to borrow and spend.
This also means that all this money that has been printed continues to remain in the vaults of banks. And when that happens, the situation where more and more money chases the same amount of goods and services, leading to higher prices and inflation, doesn’t really come around.
And when there is no high inflation there is no point in buying an asset as useless as gold is.
Hence, there is a fundamental flaw in the reason why people have been buying gold. This is one of the new bear market theories in gold, being bandied around.
There are multiple problems with this approach. First and foremost, the theory has come around only after the price of gold has fallen. Over and above that governments all around the world have been printing money in the hope of maintaining low interest rates and people borrowing and spending more. They have also been printing money in the hope of creating some inflation. When prices are rising or are expected to rise, there is a greater chance of people getting out in the market and buying stuff, so that they don’t have to pay more in the days and months to come.
But this hasn’t really worked because there is a balance sheet recession on. Central banks and governments have tried to solve this by printing even more money. But inflation hasn’t shown up in the official numbers as yet.
As Jeff Nielson, Editor of www.bullionbullscanada.com puts it “The premise is that you can print infinite quantities of paper; but as long as you hive-off that money-printing from the “broader economy” there (supposedly) will be no inflationary impact.”
So governments can print all the money that they want but there will be no inflation, as long as the money is lying in bank vaults. The question is that if money is to lie in banks vaults only and not lent out, then why print it in the first place?
Also, just because people are not borrowing doesn’t mean all the money being printed is not being put to use. As Nielson explains “What is meant by hiving-off this money-printing? Giving every penny to bankers, and letting them gamble with it in their (private, unregulated) derivatives casino, or hold government bonds for the interest arbitrage.”
So bankers and financial institutions are borrowing this money at close to 0% interest rates and speculating in different kinds of investments and markets around the world. This also explains to a large extent why stock markets around the world have been doing stupendously well, even though the global economy has been stagnating. It has also led to bankers and financial institutions buying government bonds, and thus helping governments borrow money at close to 0% interest rate. All this obviously isn’t reflected in the official inflation numbers.
The other trouble is the way in which official inflation numbers are calculated. The consumer price index which measures inflation is looked at as a definitive measure by economists. But there are problems with the way it is constructed. As a recent report titled Gold Investor: Risk Management and Capital Preservation released by the World Gold Council points out “The weights that different goods and services have in the aforementioned indices do not always correspond to what a household may experience. For example, tuition has been one of the fastest growing expenses for US households but represents only 3% of CPI (consumer price index). In practice, tuition costs correspond to more than 10% of the annual income even for upper-middle American households – and a higher percentage of their consumption.”
An August 2012 World Bank report said between June 2012 to July 2012, corn and wheat prices had risen by 25%. While soybean prices had increased by 17%. During this period inflation in the United States was close to 0%. This led Nielson to quip that “total inflation was supposedly at absolute-zero among the obese U.S. population. Did nobody eat that month…?”
Famed investor Jim Rogers summarised this best in an interview when he said “if you shop in the U.S., you know that there is inflation – whether it’s taxis or tolls or insurance or education or entertainment or food. I mean, the price of everything is going up. It’s only the U.S. Government that says prices aren’t going up…Go and try to buy something. Go see that there is inflation in the U.S. just as there is everywhere else.”
Then there are also methodological changes that have been made to the consumer price index and the way it measures inflation over the years, which in practice do not always reflect the full erosion of the purchasing power of money. If inflation in the United States was still measured as it was in the 1980s, it would be now close to 10% instead of the official 2%.
So yes there is a lot of inflation, it is just that it is not showing up in the government numbers (This link gives a detailed argument). Nielson makes another fundamental point. He says “For me the perversity of the mainstream media acknowledging all the money-printing but refusing to acknowledge currency-dilution is even more fundamental. All of these people are reporting on markets. If a company dilutes its share structure through excessive printing of shares; all of these same analysts would immediately recommend fleeing that company because of “dilution.””
But the same analysts don’t do that when governments print money. “Fiat currencies(i.e. Paper money) are literally nothing but the equivalent of “shares” in our overall economy. Yet when our currencies are diluted (through exponentially increasing money-printing) the concept of “dilution” is — supposedly — impossible for any of these analysts to comprehend,” says Nielson.
As economist Milton Friedman (who was no gold bug) wrote in Money Mischief – Episodes in Monetary History: “Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation. There is probably no other proposition in economics that is as well established as this one.”
To conclude, its worth remembering that just because money printing by government hasn’t produced official inflation till date, doesn’t mean that there will be no high inflation in the time to come. We simply don’t know. And that is something worth remembering.
(The article originally appeared on www.firstpost.com on June 4, 2013)
(Vivek Kaul is a writer. He tweets @kaul_vivek)