Why I Fear Doctors and Wealth Managers


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.

Of marriages, second hand cars and being unemployed


Since I started working nearly a decade and a half back, I have quit four jobs. Three out of four times, I quit without having a new job in place. Two out of the three times I was looking for a job, I easily found one.

Nevertheless, if you go by conventional advice this is really not done. And there is solid logic behind it. The economists call it information asymmetry. This is essentially a situation where the seller has more information than the buyer.

When I quit a job and look for a new job, I am a seller of services. The prospective employer is the buyer. I know why I quit my job, the prospective
does not. This is information asymmetry and it creates doubts in the mind of the prospective employer.

The following questions might crop up in the mind of the prospective employer: a) Why did he quit his job? b) Did he really quit, or was he fired? c) Is he too much of a rebel?

The information asymmetry creates problems. As Ray Fisman and Tim Sullivan write in The Inner Lives of Markets: “If a job applicant’s previous employer didn’t want to keep him on the payroll, it’s worth asking why not. You can also imagine that the problem deepens the longer you’ve been out of work: Why on earth hasn’t she found someone willing to give her job and what are other prospective employers seeing that I don’t.”

And this is why quitting a job without having a new one, is something really not done, unless you are thinking of doing something else. Information asymmetry spoils the job market for everyone who quits a job, without having a new one. This, despite the fact that the individual quitting the job might simply be bored or not have gotten along with a nasty boss.

The situation is similar to those who resist marriage for a long time and then want to get married, a little late in life.

As Fisman and Sullivan write: “If you’re still single by the time you reach a certain age, it becomes harder and harder to convince a potential mate, that there isn’t something wrong with you.” In the Indian context, this means regular questions and comments from relatives, as well. I remember a few years back, my maternal grandfather, asked my sister: “If I didn’t like women”. I was 32-33, at that point of time and single. Information asymmetry got to my grandfather as well.

And what is true about jobs, single individuals, is also true about second hand cars. Economist George Akerlof wrote a rather unusual research paper The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, which was published in 1970.

In this paper Akerlof talks about the second hand car market in the United States. He pointed out that there are essentially four types of cars. “There are new cars and used cars. There are good cars and bad cars. A new car may be a good car or a lemon, and of course the same is true of used cars.” Bad cars are referred to as lemons in the United States.

An owner of a car has a good idea about whether his car is a good car or a lemon. As Akerlof put it in his research paper: “After owning a specific car, however, for a length of time, the car owner can form a good idea of the quality of this machine…An asymmetry in available information has developed: for the sellers now have more knowledge about the quality of a car than the buyers.”

This leads to a problem where the buyer of the car has no idea as to how good or bad the car is. Hence, as Akerlof put it: “The bad cars sell at the same price as good cars since it is impossible for a buyer to tell the difference between a good and a bad car; only the seller knows.”

Information asymmetry essentially stops the job market, the marriage market as well as the second hand car market, from working properly.

The column originally appeared in the Bangalore Mirror on July 27, 2016

All you wanted to know about the Real Estate Bill but were afraid to ask

On December 9, 2015, the union cabinet led by Prime Minister Narendra Modi approved the Real Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya Sabha.

In May earlier this year, the bill had been sent to a Select Committee of the Rajya Sabha. The union cabinet has accepted all the suggestions made by the Select Committee. The Bill will now be put up before both the houses of Parliament.

So what does the Bill have to offer? The real estate market in India is an excellent example of information asymmetry where one side has much more information than the other. In this case, the real estate promoters and the real estate agents have much more information than the home-buyers. Even getting something as basic as the going price of an apartment in a given area is very difficult.

The Rajya Sabha Select Committee on the Bill met real estate consumers and this is what it had to say in its report: “These consumers were unanimous in their submission that they have no means to know about the real status of the project for example whether all the approvals have been obtained, who is holding the title of the land, what is the financing pattern of the project and what has been the past record of the builder etc.? As a result, they invested their money without having any information about the project. In many cases, they were not given what was promised to them and in almost all cases the project was delayed.”

The Bill seeks to tackle this information asymmetry and the fact that the real estate sector does not have any single regulator regulating it. The Bill talks about setting up of a real estate regulator (Real Estate Regulatory Authority to be very precise) in every state and union territory. A real estate promoter needs to register a project with the real estate regulator before he starts selling or advertising it.

Projects with the area of land proposed to be developed exceeding five hundred square metres or where more than eight apartments are to be developed, need to be registered with the real estate regulator of the state they are based in.

The application to the regulator needs to be accompanied with details like the real estate projects already launched by the real estate promoter in the past five years. It also needs to be mentioned whether these projects have been completed or are still under development. If the projects has been delayed, the reasons for the delay need to be mentioned.

Over and above this an authenticated copy of the approvals and commencement certificate from the competent authority also needs to be submitted. Other important details like land title, the layout plan for the proposed project, the location details of the project, also need to be submitted to the regulator.

After an approval is granted by the real estate regulator, the real estate promoter will have  to upload all these details on to the website of the real estate regulator. Any advertisement of the project should have the precise link to the project details as well.

At the time of booking and issuing an allotment letter to the buyer, the promoter needs to make available to the buyer, the time schedule of completion of the project, including the provisions for civic infrastructure like water, sanitation and electricity.

Many real estate companies over the years have sold homes without the basic amenities in place. In some cases, housing societies have even lacked a water connection and have needed to get water delivered through water tankers almost on a daily basis for years. The Real Estate Bill hopes to correct this. It also hopes to correct the information asymmetry that prevails in the sector up until now.

The Bill also allows any real estate buyer to file a complaint against the real estate promoter or real estate agent with the real estate regulator in case any violation of the provisions of the Bill as and when it becomes an Act.

A major problem with the sector has been a delay in the delivery of homes. One of the major reasons this happens is because real estate companies announce a new project, raise money and then use that money either to complete an earlier project or pay off debt.

This has led to a situation where many projects have been delayed endlessly given that the trick of starting a new project and raising money doesn’t seem to be working anymore. The Bill seeks to correct this situation. The real estate promoter needs to maintain 50% or “such higher percent, as notified by the appropriate government” of the amount raised from the buyers of homes, in a separate bank account.

This money can be only used for the cost of construction and can be withdrawn by the real estate promoter in proportion to the percentage of completion of the project. This is one of the major clauses in the Bill and if implemented correctly can bring huge relief for the buyers.

This clause has been diluted. In the original version of the Bill, the promoter needed to maintain 70% of the amount raised in a separate bank account. The reason offered for this dilution is that in many cases land prices form a major part of the project and maintaining 70% of the money raised in a separate bank account isn’t the best way forward.

Further, up until now the buyer while buying a home had no clue about what exactly was the area that he was paying for. The Bill defines the term carpet area exactly as: ““carpet area” means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.” Again, if implemented well this clause can bring huge relief to home buyers.

Real estate agents will also need to register with the regulator. This is another good move where not anyone and everyone will jump into become a real estate agent or a broker, as is the case currently.

Also, currently the real estate promoters keep changing the plans as they keep building the project. Once the Bill becomes an Act, this may no longer be possible. Any alterations to sanctioned plans, layout plans and specifications of the buildings or the common areas within the project will need written consent of at least two-thirds of the buyers other than the promoter, who have bought apartments in the building.

This is another buyer friendly measure. On a jovial note what this means is that real estate promoters will have to stop advertising all those swimming pools which are planned at the time a project is launched but never get built.

Up until now buyers have had to pay a huge rate of interest every time they miss a payment to the real estate promoter. But the promoters never pay or at least don’t pay the same high rate of interest, if there is any delay on their part. The Bill essentially calls for the same rate of interest to be paid by the real estate promoter as well as the buyer in the eventuality of a default on either side.

Further, if the promoter violates any one of the provisions under section 3 of the Bill he shall be punishable with imprisonment for a term which may extend up to three years or a fine which may extend up to a further 10% of the estimated cost of the project, or with both. Section 3 of the Bill basically deals with the real estate promoter having to register with the real estate regulator before launching a project and then following a series of buyer-friendly steps.

On paper, the Bill seems to be well thought out and takes care of the all the issues that buyers have had with real estate promoters in the years gone by.

Nevertheless, the implementation of the Bill as and when it becomes and Act, will be carried out at the state government level. And whether state governments carry out the implementation in true letter and spirit remains to be seen. I have a few reservations regarding the implementation of the Bill when it becomes an Act, which I shall discuss in a column next week.

Postscript: The Rajya Sabha website has uploaded the Select Committee’s recommendations as well as the Real Estate Bill in a scanned format instead of uploading the proper report.
If Digital India is the way forward this is clearly not done. Information needs to be made available to everyone in the most accessible way. Hope the concerned authorities are listening.

The column originally appeared on The Daily Reckoning on December 11, 2015

India’s real estate market is being run by crooks

Vivek Kaul

The real estate sector remains down in the dumps. Nevertheless, insiders(the builders, the real estate consultants, the housing finance companies etc.) would like us to believe that “acche din” will be here for the sector pretty soon and hence, we should be investing in it.

In a recent report JLL India, a real estate consultant, pointed out that: “Many home buyers as well as investors have been speculating about the movement of residential property prices in Mumbai…The market’s readings indicate that that it will start moving up later this year. An average price appreciation of around 6% is expected by the end of Q4 2015. Mumbai’s residential property market will start seeing a lot of buying activity in around six months, with buyers taking advantage of prevailing market conditions to get good deals. The increased market activity is expected to continue next year too.”

What the report does not point out is the fact that the Mumbai Metropolitan Region has an unsold inventory of homes of close to 46 months or 192.27 million square feet. This data was released by Liases Foras, another real estate consultancy, sometime back. What it means is that if homes continues to sell at the current rate it would take around 46 months for the current stock to sell out. A healthy market maintains an inventory of eight to 12 months.

JLL India may have its own estimates of unsold inventory but they can’t be significantly different from that of Liases Foras. And if there is so much ready supply available, how can real estate prices go up?

This is just one example of research reports that real estate consultants keep coming up with where the conclusion is that “real estate prices will continue to go up”. For them it makes sense to do this simply because they make more money if the real estate sector is doing well, given that there are more deals to execute and more commission to be made in the process. And if the real estate sector is not doing well then they need to tell the world at large that it will start to do well, soon. These positive reports are splashed across the media, given that real estate companies are huge advertisers and a healthy real estate sector is a boon for the media.

The trouble is that the real estate sector in India has a huge information asymmetry, or something that the Nobel Prize winning economist George Akerlof referred to as a “market for lemons”. In a 1970 research paper titled The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, Akerlof talked about four kinds of cars: “There are new cars and used cars. There are good cars and bad cars (which in America are known as “lemons”). A new car may be a good car or a lemon, and of course the same is true of used cars.”

Akerlof then went on to explain why trying to sell a lemon is very difficult. In an essay titled Writing the “The Market for ‘Lemons'”, Akerlof wrote: “I knew that a major reason as to why people preferred to purchase new cars rather than used cars was their suspicion of the motives of the sellers of used cars.” Long story short—a buyer will not buy without proof of the used car being in good shape and the seller did not have the proof.

And this led to the market for second-hand cars not working well. Tim Harford explains this phenomenon very well in his book The Undercover Economist: “Anyone who has ever tried to buy a second-hand car will appreciate that Akerlof was on to something. The market doesn’t work nearly as well as it should; second-hand cards tend to be cheap and of poor quality. Sellers with good cars want to hold out for a good price, but because they cannot prove that a good car is really a peach, they cannot get that price and prefer to keep the car for themselves. You might expect that the sellers would benefit from inside information, but in fact there are no winners: smart buyers simply don’t show up to play a rigged game.”

Hence, the market for second-hand cars has huge information asymmetry—one side has much more information(the seller) than the other(the buyer). And given that the market does not work well.
The real estate market in India is a tad like that. The insiders have all the information and there is no way to verify if the information they are putting out is correct. Take the case of something as simple as the prevailing price trend in a given locality.

There is no publicly available information. All you can do is ask the broker operating in that area and more often than not, he will tell you that “prices are on their way up”. If you are able to figure out a price, there is no way of figuring out whether there are deals happening at that price.

Hence, the system as it currently stands is totally rigged against the buyer. Even when the buyer buys an under-construction property there is no way of figuring out if the builder will deliver everything that he has promised at the time of the sale. There are regular cases of builders promising to build a swimming pool, taking money for it and then not building it. Then there are cases of parking lots being sold even though that is not allowed. In the recent past, builders have disappeared after taking on money and not completing the project.

As Nate Silver writes in The Signal and the Noise –The Art and the Science of Prediction: “In a market plagued by asymmetries of information, the quality of goods will decrease and the market will be dominated by crooked sellers and gullible and desperate buyers.” And that is precisely what is happening in India.

In fact, the real estate market in India currently is like the stock market used to be in the 80s and the 90s. India’s biggest exchange the Bombay Stock Exchange(BSE) was run by and for brokers. Other stock exchanges operating in different cities ran along similar lines. Small investors investing in the market were regularly taken for a ride.

The Securities Exchange Board of India was given statutory powers in 1992. And it took time to crack the whip. The National Stock Exchange started operations in November 1994 and gradually took away business from the broker dominated BSE. The BSE has been trying to play catchup since then.

The real estate business in India needs to be cleaned up along similar lines. The Real Estate (Regulation and Development) Bill, 2013, envisages setting up of a real estate regulator in each state. The builders need to be registered with the regulator and at the same time disclose essential details about the projects. These provisions if and when implemented are likely to reduce the information asymmetry which plagues the sector. But till then “caveat-emptor” will continue to prevail.

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

The column originally appeared on DailyO on May 25, 2015