The Former King of Good Times


Vijay Mallya must be currently one of the most hated and most discussed people in the country. He has defaulted on bank loans of around Rs 9,000 crore and left the country. At least, that is the way most people who know who he is, look at him. He has come to be associated with everything bad that is currently happening to the banks in India.

Nevertheless, he has become a victim of what is called the availability bias. Leonard Mlodinow explains this in his book The Drunkard’s Walk—How Randomness Rules Our Lives through an example.

As he writes: “Which is greater: the number of six-letter English words having n as their fifth letter or the number of six-letter English words ending in ing? Most people choose the group of words ending in ing.

Why is that? As Mlodinow explains: “Because words ending in ing are easier to think of than generic letter words having n as their fifth letter. But you don’t have to survey the Oxford English Dictionary—or even know how to count—to prove that guess wrong: the group of six-letter words having n as their fifth letter words includes all six-letter word ending in ing.

This type of mental mistake is referred to as the availability bias. As Mldowinow writes: “In reconstructing the past, we give unwarranted importance to memories that are most vivid and hence most available for retrieval.”

Mallya has become the victim of this availability bias. Whenever the topic of corporates and businessmen who have taken loans from banks and not paid them comes up, Mallya’s name comes first. Nobody talks about other businessmen who haven’t paid their loans as well.

Why is that the case? Other than being a businessman, Mallya is also a sports enthusiast and a page 3 regular, who gets regularly covered in the media. Over and above his businesses, from airlines to liquor to real estate, Mallya has also owned an IPL cricket team and a Formula One racing team. Hence, he gets regularly covered in the media and has top of the mind recall among people.

And given that he has a top of the mind recall, the media has covered his loan shenanigans more extensively than other businessmen. Hence, he has become associated with the corporates defaulting on banks loans, more than anyone else.

As Daniel Kahneman writes in Thinking, Fast and Slow: “People tend to assess the relative importance of issues by the ease with which they are retrieved from memory—and this is largely determined by the extent of coverage in the media. Frequently mentioned topics populate the mind even as others slip away from awareness. In turn, what the media chooses to report corresponds to their view of what is currently in public’s mind.”

It’s a little bit of a chicken and egg story here. Because Mallya has top of the mind recall, the media writes about him. And because the media writes about him he has top of the mind recall among people.

Vijay Mallya owes banks around Rs 9,000 crore. As on December 15, 2015, the total gross non-performing assets (or bad loans) of banks of the loans they have given to corporates, stood at around Rs 2.59 lakh crore. Mallya’s contribution to the total corporate bad loans is only around 3.5%. Hence, there are bigger defaulters out there, who the banking system and the government need to deal with, and the media need to write about. But that doesn’t seem to be happening.

This is not to suggest that Mallya is god’s gift to mankind and is being needlessly victimised. At the same time, he is nowhere the villain he is being made out to be. As Mlodinow writes: “By distorting our view of the past, the availability bias complicates any attempt to make sense of it.”

Mallya’s king of good times image, in the minds of people, is now working against him. This is not helping the former King of good times in his bad times.

The column originally appeared in Bangalore Mirror on March 23, 2016

Why Indians still love real estate

Every time I write a column saying that the good days of investing in real estate are over, I get newer theories on why I am wrong. The latest that I have heard is that the government will not allow real estate prices to fall. Oh and there is another one – the seventh pay commission will lead to an increase in salaries of government employees and the higher salaries will be ploughed into owning real estate.

The theories notwithstanding, the question to ask here is, why do Indians love owning real estate? The simple answer is that some of them have got black money to invest. And it’s not so easy to invest black money in other forms of investment like mutual funds, bank fixed deposits, etc. Further, you can see the real estate you own and get a sense of satisfaction from it. It’s a hard asset. The same is not true about other forms of investing.

Having said that if we left it at these reasons, it would be a very simplistic way of looking at the entire scenario. There are multiple other factors at work.
When it comes to real estate, how do minds of people work? Everyone knows someone who has bought a piece of real estate, some land or a home, at a very low price and sold it at a very high price. There are two behavioural biases at work here: anchoring and availability.

When you know of someone who has bought a flat at Rs 10 lakh and sold it at Rs 50 lakh, the Rs 50 lakh number gets anchored in your mind. As John Allen Paulos writes in A Mathematician Plays the Stock Market: “Most of us suffer from a common psychological failing. We credit and easily become attached to any number we hear. This tendency is called the “anchoring effect”.”

Then there is there the availability effect at work as well. Nobel Prize winning psychologist Daniel Kahneman defines the availability effect as the “ease with which instances come to mind”. If you know of someone who has bought a flat at Rs 10 lakh and sold it at Rs 50 lakh, you will recall this example almost immediately.

The anchoring and the availability biases will lead you to believe that there is a lot of money to be made in real estate. But what you are not taking into account is the actual cost of owning real estate. The interest you pay on the home loan. The stamp duty that needs to be paid initially. The property tax that needs to be paid every year. The maintenance charges that need to be paid to the society every month. The risk of owning an under-construction property (where real money is made). The risk of the builder increasing the price. The risk of the builder disappearing (as seems to be happening regularly these days). And so on.

Why are these factors not taken into account? Simply because there is only so much a human brain can process at a time and there is only a limited amount of time to make a decision. This is human weakness is termed as “bounded rationality”. The term was coined by social scientist Herbert Simon. Due to these reasons Indians are firm in their belief that real estate is the best form of investing. And this might have been even true between 2004 and 2013, when the returns from investing in real estate where pretty good.

But since then the returns from investing in real estate have been lower than what you would have made by letting your money sit idle in a savings bank account. The reason is very simple. The prices are way too high. In Bangalore, the weighted average price of a flat is Rs 88 lakh. Given the high prices, the demand has collapsed. And without demand there can be no price rise.

The story has changed and it’s time to wake up and smell the coffee.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on Aug 12, 2015