Bangalore Mirror

If you are smart, why aren’t you rich?

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We often attribute being rich to being smart. This is not to say that the rich are not smart. The likes of Bill Gates, Warren Buffett and NR Narayana Murthy, are exceptionally smart people. But not all rich are smart. Many rich are rich because of inheritance, or by being at the right place at the right time, or by simply being cronies to politicians.

Take what Gurcharan Das writes in about family owned businesses in his book India Unbound. As he writes: “Pulin Garg, the thoughtful professor at the Indian Institute of Management, Ahmedabad…used to say, “Haweli ki umar saatth saal [The life of a family owned business is sixty years].””

What does this tell us? It tells us that a family owned business typically lasts around 60 years or by the time the third generation takes over. By the time the third generation takes over, the family owned business starts to disintegrate due to various reasons.

As Das writes: “Thomas Mann expressed…in Buddenbrooks, arguably the finest book ever written about family business. It describes the saga of three generations: in the first generation the scruffy and astute patriarch works hard and makes money. Born into money, the second generation does not want more money. It wants power…Born into money and power, the third generation dedicates itself to art. So the aesthetic but physically weak grandson plays music. There is no one to look after the business and it is the end of the…family.” And then the family is no longer as rich as it used to be.

If the logic of, if you are smart, why aren’t you rich, was correct all the time, this would never have turned out to be the case. The rich would continue to be rich.

This basically explains why all rich people are not smart. But what about smart people being rich? Or to put it more specifically why aren’t all smart people rich?

Let’s take the example of Thales of Miletus, a Greek Philosopher, acknowledged as the father of Greek philosophy, by no one less than Aristotle himself. This is a point made by Mihir A Desai in his book The Wisdom of Finance—Discovering Humanity in the World of Risk and Return.

Miletus lived between 624BC and 546BC in what is modern day Turkey. He was also one of the seven sages of Greece. Other than being hailed as the father of Greek philosophy, he is also hailed as the first Greek mathematician, having been born before other such luminaries like Pythagoras and Euclid.

As Desai writes: “Thales earned his position… by pioneering the use of natural, instead of supernatural, explanations for phenomena, advocating hypothesis-driven thinking, and even managing to predict solar eclipses with the crudest of instruments.”

But Thales was poor and was taunted for the uselessness of his philosophy. He was basically being asked the question that I have raised above: “If you are smart, why aren’t you rich?”

Thales decided to redress this impression.

As Desai writes: “Thales decided to capitalize on his ability to forecast a good olive harvest. “He raised a small sum of money and paid round deposits of the olive-presses in Miletus and Chios, which he hired at a low rent as nobody was running him up; and when the reason arrived, there was a sudden demand for a number of presses at the same time, and by letting them out on what terms he liked he realised a large sum of money.”

Basically, Thales hired olive presses when there was no demand for them and let them out at a high price when there was a good demand for them. In the process, he essentially demonstrated that “it is easy for philosophers to be rich if they choose, but this is not what they care about.”

At a more generalised level, smart people can be rich if they want to and put their heart and soul to it, but that is not something that they care about.

The column originally appeared in the Bangalore Mirror on September 6, 2017.

The Mystery of Agatha Christie

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In my free time, I am a crime fiction junkie i.e. all I do is read crime fiction. Over the years Scandinavian authors (in particular Swedish) writing crime fiction have become my favourites. The irony is that there is very little crime in Scandinavia in comparison to many other developed countries.

One reason why Scandinavian crime fiction works for me is simply because it is much more than just a murder mystery. Along with being a murder mystery, most Scandinavian crime fiction is also a reflection of the Scandinavian society as it has evolved. In many cases, history plays a very important role in resolving the mystery.
Having said that, when it comes to a good old simple murder mystery no one can beat the magic of the British writer Agatha Christie.

Dear Reader, you must be wondering why am I going on and on about crime fiction, in a column which is supposed to be on economics. Allow me to explain.

The kind of crime fiction Agatha Christie specialised in has its origin in economics and in a French financial security called the tontine. Tontine was basically an annuity. And what is an annuity? As K Geert Rouwenhorst writes in a research paper titled The History of Financial Evolution: “[In the 18th century] Governments would mostly borrow in the form of annuities: investors would lend the government say $100 and in return the government would pay investors an interest rate for the remainder of the life of the nominee; the principal was never returned.”

In the British case there was something known as the consol. The consols were perpetual bonds and like annuities they did not end with death. They went on forever and paid an interest of 3 per cent or 5 per cent.

And what were tontines? As Mihir A Desai writes in The Wisdom of Finance—Discovering Humanity in the World of Risk and Return: “Just to make things more interesting, the French government allowed individuals to buy annuities in groups, and then each individual’s payout would go up as other members in the group died. So, the government would pay a fixed amount to the group until the last member died, and, as individuals died, the survivors would get larger and larger shares of that amount. The last survivor would get very large payments until they too passed. These schemes were tontines.”

The tontines led to the basic idea behind a Christie crime novel. As Rouwenhorst writes: “If you “google” the word tontine, you’ll see a long list of references to crime novels… Each member of a group would invest… and the interest on the entire capital would to be divided among the surviving members of the group. As members would eventually decease from a group, the payout to the remaining people would go up. So now you understand why this becomes a topic for crime novels – as the number of participants in a tontine dwindles and they learn about each other’s whereabouts, it wouldn’t exactly provide the right incentive from a social point of view.”

Tontines basically set the idea of a crime novel based around a largish group in a closed setting, where people keep getting killed. In a group, in which someone has done something wrong and no one knows who, trust between the members of the group is bound to come down. Speculation on who the wrong doer is, will be rife. Agatha Christie wrote many novels around this dynamic.

The most famous of the lot, which was also made into a memorable feature film, was And There Were None. Then there were other superb novels like The Murder of Roger Ackroyd, Murder on the Orient Express, Death on the Nile and The Murder at the Vicarage, based on the same dynamic.

All these novels had their root around a group, a murder (or murders) and the speculation that followed. This became possible because the French government in the 18th century came up with a financial security called the tontine. And people say economics and finance are boring.

The column originally appeared in the Bangalore Mirror on August 30, 2017.

 

 

 

Why I Fear Doctors and Wealth Managers

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A few years back I had classic symptoms of diabetes and I went to see a doctor. The doctor recommended sixteen blood tests and he was insistent that I carry out the tests at a laboratory of his choice.

At the same time, he gave me two medicines without telling me what exactly they were. When I went to buy them, I figured out that they were anti-depressants. I found it difficult to figure out as to why he had recommended these medicines. I tried to remember the questions he had asked and my answers to them.

One question that he had asked was whether I had any anxiety. I had said yes. I was in the middle of writing a big book and had trouble sleeping on some nights.

I never got around to having the medicines or getting the bloody tests done, and decided to go to another doctor, who started with four blood tests not sixteen and no medicines.

What this doctor and many other doctors make use of is something the economists refer to as asymmetry of information. It essentially refers to a situation in any economic transaction where one party has more information than the other. As Guy Sorman writes in An Optimist’s Diary “Economic actors don’t all have the same information at their disposal.”

So, when we go to a doctor, the doctor clearly has more information or at least is believed to have more information than we have about the human body. Doctors use this asymmetry of information to try and make more money by ordering a battery of tests which are not required. At times, it can mean a longer stay in the hospital than is necessary. Patients typically don’t question this because the belief is that ultimately the doctor knows better.

As K Sujatha Rao, a former bureaucrat who has worked extensively in the health area, writes in Do We Care? — India’s Health System: “Asymmetrical information endows providers with power and authority over the patients who have incomplete information about what ails them. Providers then take advantage of such moments of vulnerability by ordering a battery of tests, unnecessary surgeries, or prescribing high-cost medicines.”

What allows the doctors and the infrastructure backing them to do as they please, is the fact that there are no regulations going around. As Rao writes: “There are no regulations, accountability, and transparency regarding the functioning of private hospitals and diagnostic centres per se, though they provide a major share of care. Apart from illiteracy and absence of grievance redressal systems, information campaigns on unhealthy habits of behaviour have been severely comprised for want of funding and attention.”

Better regulation and grievance redressal mechanism can provide some help to prospective patients who are currently sitting ducks for medical professionals to aim at.
A similar information asymmetry also plagues savers looking to save their money in banks in the form of fixed deposits. Chances are you might walk into the bank wanting to save your money in the form of a fixed deposit but end up with an investment in some type of insurance policy, because the wealth manager at the bank convinced you.

The products are very different. Insurance policies lack liquidity, which fixed deposits have. Insurance policies cannot guarantee returns, which fixed deposits do. But insurance policies provide huge commissions to those selling them. And this is why wealth managers are so aggressive in wanting to sell them. Over the years, regulation on misseling has improved and that has been of some help.

In fact, in many cases, I have come to the conclusion, even the bank staff does not know what they are selling. But the solution here is straightforward. The right way of investing can be learnt by reading up and understanding the basics of different financial products on offer. This way the asymmetry of information can be brought down or completely removed, when it comes to financial products.

But the same cannot be done when it comes to doctors and our understanding of the human body.

The column originally appeared on August 23, 2017, in the Bangalore Mirror.

Who Will Break the Google Monopoly?

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I first discovered the internet nearly two decades back. It was an era when the internet speed was slow and the charges were extremely high. One could end up paying as much as Rs 120 per hour at an internet café. In fact, the first few times I logged on to the web, I wondered what was the fuss all about.

It is worth remembering here that I am talking about an era when even the humble sms was yet to make an appearance and the mobile phone rates were extremely expensive, with one having to pay for both incoming as well as outgoing calls. It was also an era when people largely surfed the internet from internet cafes. Of course, all that has now moved to the smart phone and home WiFi connections.

After a few sessions at internet cafés, I was told that there are websites known as search engines which allow you to search for stuff on the internet. One such website was called Ask Jeeves and there were others like Lycos and Alta Vista. While, all this sounded interesting, rarely did these websites throw up what one was searching for.

As Tim Harford writes in Fifty Things That Made the Modern Economy: “In 1998… if you typed ‘cars’ into Lycos—then a leading search engine—you’d get a results page filled with porn websites. Why? Owners of porn websites inserted many mentions of popular search terms like ‘cars’, perhaps in tiny text, or in white on white background. The Lycos algorithm saw many mentions of ‘cars’, and concluded that the page would be interesting to someone searching for ‘cars’.” It was easy to game the system. This is something that I personally experienced when I first started to use the internet regularly in 1999.

And then came Larry Page and Sergey Brin with Google. Their original idea was not come up with a search engine at all. In fact, they were trying to do something different. They were trying to build a system in order to measure how much credibility a research paper had. In academia, a research paper published in an academic journal is said to have credibility, if it is cited by other research papers. It has even more credibility if it is cited by research papers which are themselves cited many times by other research papers.

This led to the basic idea behind the Google search engine. As Harford writes: “Page and Brin realised that when you looked at a page on the nascent World Wide Web, you had no way of knowing which other pages linked to it. Web links are analogous to academic citations. If they could find a way to analyse all the links on the web, they could rank the credibility of each page in any given subject.”

And this idea essentially led to Google throwing up relevant search results unlike other search engines. The irony is that Page and Brin were not really sure of the potential of what they had built. 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.

Thankfully, they didn’t. And now they are in a position where they have a natural monopoly. Why? As Harford writes: “Among the best ways to improve the usefulness of search results is to analyse which links were ultimately clicked by people who previously performed the same search, as well as what the user has searched for before. Google has far more of that than anyone else. That suggests it may continue to shape our access to knowledge for generations to come.”

The column originally appeared on August 16, 2017 in the Bangalore Mirror.

On Selfie-Love

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The latest internet sensation is a young woman who goes by the name of Dhinkchak Pooja. And her claim to a fame is a totally tuneless song called selfie maine le li yaar (My friend, I have taken a selfie).

For those who still don’t know what a selfie is, it is a self-photograph taken with a digital camera. To go a step ahead, once the selfie has been taken, it is posted on the social media.

A good selfie song would have talked about the current obsession to click selfies and post it on the social media. But sadly Dhinchak Pooja’s song doesn’t.

What explains this selfie obsession? In order to answer this question, we will have to look at some history.

As Seth Stephens-Davidowitz writes in Everybody Lies—What the Internet Can Tell Us About Who We Really Are: “When photographs were first invented, people thought of them as paintings. There was nothing else to compare them to. Thus, subjects in photos copied subjects in paintings. And since people sitting for portraits couldn’t hold a smile for the many hours the painting took, they adopted a serious look. Subjects in photos adopted the same look.”

And this created a problem for the film and camera company Kodak. People were not clicking enough pictures. In order to correct this, Kodak devised a strategy. As Davidowitz writes: “Kodak’s advertising began associating photos with happiness. The goal was to get people in the habit of taking a picture whenever they wanted to show to others what a good time they were having. All those smiling yearbook photos are a result of that successful campaign (as are most of the photos you see on Facebook and Instagram today).”

Over a period of time, the camera and the photo films, were replaced by digital photography. The irony is that Kodak developed the first digital camera, but did not cash in on it. As Mark Johnson writes in Seizing the White Space:“In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.”

Sasson was told “that’s cute – but don’t tell anyone about it.” The reason for this was very straightforward. Kodak at that point of time was the largest producer of photo film in the world. And there was no way it was letting filmless photography destroy that market.

But nobody can stop an idea whose time has come. Digital photograph went from strength to strength despite Kodak. And the funny thing is that the association between photographs and the idea of having a good time continued, and only grew stronger. In fact, digital photography along with social media has made it even more easy for people to show that they are having a good time.

Digital photography has now moved on to smart phones and costs nothing after the fixed cost of buying the phone has been made.  Earlier one could only click a certain number of pictures with a photo film. After that a new film had to be bought and that cost money. These pictures had to be then developed in a lab and that cost money as well. Hence, people couldn’t go totally overboard while clicking pictures.

The digital pictures in particular selfies can be posted on to the social media to tell the world what a good time the person taking the selfies is having, which is why so many selfies are taken in the first place.

The camera companies which are the new photo film companies understand this association of photography with happiness and showing off, and that explains to a large extent why so many camera ads are now built around the idea of taking pictures in general and selfies in particular.

So, the more things change, the more they remain the same.

And we thought phones were something we used to talk to one another.

The column originally appeared in the Bangalore Mirror on August 9, 2017.