Luck

Luck, Skill or Something Else?

exam

This is that time of the year when various examination results get published. And I happen to be in Delhi, where my parents and a bulk of my relatives live. So, I have been listening to a few interesting stories around examination results.

More than the individuals writing the exams, it is interesting to see how their parents react, once the results are out. If a child does well, it is always because of his hard work and the adjustment his or her parents had to make in order to ensure that he or she could totally concentrate on studies.

If a child doesn’t do well, then it is almost always because circumstances beyond their control. Excuses start to spring up. Here are a few that I have heard over the years: He or she wasn’t keeping well through the period of the examination; there was a power cut the night before the Maths exam and he couldn’t do well; the invigilator took away his paper five minutes before the time got over (this seems to be a favourite with parents).

As Robert H. Frank writes in Success and Luck—Good Fortune and the Myth of Meritocracy: “[A] disconnect between evidence and belief is people’s tendency to underestimate good fortune’s role in success, while being too quick to embrace bad luck as an explanation of failure… People want to feel good about themselves, and they’re more likely to enjoy the warm glow of a positive self-image if they think of themselves as highly competent and attribute their failures to events beyond their control.”

But the point is that luck plays a role both ways—in success as well as failure in exams, even though we like to bring only bad luck into the picture. Let me share a few personal examples here even though it has been a long time since I wrote an exam.
When I was doing my MBA, there were two papers, Macroeconomics and Microeconomics, which were deemed to be the toughest of the lot. As luck would have it, I never got around to studying either of the subjects but passed both of them.

How did that happen? Before the Microeconomics exam, a friend took pity and taught me one chapter 30 minutes before the exam. A bulk of the questions came from that chapter. I scored all of them correctly and got more than the required 50 per cent. Hence, luck played a huge role there.

Luck, in the form of bad luck, also played a huge role for many of my friends who had studied everything else but missed out on that particular chapter.

When it came to macroeconomics, due to some organisational hassles, there was a holiday of four days before the exams. And that was enough for me to read large sections of the prescribed text book and pass the exam. Without the holidays, there was no way I could have passed the exam by just studying overnight.

These were two examples from my end. But all of us have such lucky streaks when we write exams over a long period of time from our childhood till our early twenties.
The issue is how should parents approach this. Should they tell their children about the role of luck? Or should they keep harping on the benefits of hard work? Or should they take the middle path, and tell their children that while hard work is important, luck has a huge role to play as well? And if they do this, will the children be able to understand this?

As Frank writes: “Parents who teach their children that luck doesn’t matter may for that every reason be more than likely to raise successful children than parents who tell their children the truth. When the going gets tough, as it inevitably does along almost every career path, someone who’s keenly sensitive to luck’s importance may be more tempted just to sit back and see what happens.” And no parent would want that to happen.

The column was originally published in the Bangalore Mirror/Mumbai Mirror/Pune Mirror on June 21, 2017.

Why is Narayana Murthy so angry

In the recent past, Infosys co-founder and former chairman NR Narayana Murthy, has been critical of the salary hikes the company has been giving its top management. Other former executives of the firm have also criticised it.

The most recent example is that of the company giving a hike to its chief operating officer UB Pravin Rao. The company has said that the hike will apply over a number of years. It said that the hike could “go up to 33.4% in year 4, assuming similar grants are made in subsequent years based on company and individual performance.”

Murthy on the other hand feels that the top management should not be taking such high salary increases when most employees have got just a 6-8 per cent hike.

The high salaries of top management vis a vis the salaries of normal employees, has been an issue across large parts of the world. The belief, at least at the board levels of companies is that the top management is getting paid adequately for bringing enough value to the company. Of course, nobody bothers to define the word value.

The question that arises here is: Does the top management impact the performance of companies? And with that logic, does it make sense to pay them more?

Of course the top management does impact performance. It would be silly to say no. The direction the company takes in the future is decided by the top management of the company. At the same time, the impact that the top management has on the performance of companies, is not as much as it is made out to be.

As Daniel Kahneman writes in Thinking, Fast and Slow: “CEOs do influence performance, but the effects are much smaller than a reading of the business press suggests.” The business press tends to make heroes out of the top managements of companies. If a company is doing exceptionally well, the typical conclusion that is drawn is that it is doing well because of the CEO and the other top management.

As James Kwak writes in Economism—Bad Economics and the Rise of Inequality: “The idea that good CEOs are entitled to enormous rewards is based on the belief that success or failure of a company depends on one person—what historian Nancy Koehn calls the Great Man theory of history”

Given this belief it is not surprising that the CEOs and the top management get paid as much as they do. But the link between top management pay and the continued success of a company isn’t so high. As Kahneman writes: “Researchers measure the strength of relationships by a correlation coefficient, which varies between 0 and 1… A very generous estimate of the correlation between the success of the firm and the quality of its CEO might be as high as .30, indicating a 30% overlap.”

Hence, the link between CEO quality and the success of the firm is not very strong. What is forgotten is that business at the end of the day is a team game. The top management sitting at the headquarters can only do so much to keep ensuring that the company continues to be as successful as it was in the past.

As Kwak writes: “Business is a team sport… Because no one knows what a CEO is worth, her pay is whatever she can convince her corporation’s board of directors to give her.”

Also, luck plays a big role in the success or failure of a CEO. As Kwak writes: “A 2001 study by Marianne Bertrand and Sendhil Mullainathan found that high CEO pay is often the result of dumb luck. For example, they found that heads of oil companies were paid more when profits increased, even when those profits were simply due to rising oil prices.”

Hence, as Kahneman concludes: “Because luck plays a large role, the quality of leadership and management practices cannot be inferred reliably from observations of success.” Once you take these factors into account, it is not surprising that Narayana Murthy is angry.

The column was originally published in the Bangalore Mirror on April 12, 2017

The Luck of Investing in Real Estate

India-Real-Estate-Market

When flying out of the terminal 2 at the Chatrapati Shivaji International Airport in Mumbai, I like to follow a certain routine.

This includes eating a sandwich along with a cup of coffee and watching airplanes take off and land. The entire routine lasts for around 15 minutes. And this is precisely what I was doing two days back, when I saw a person walking towards me. I wouldn’t call him a long-lost friend but he was someone I had come to know during my course of work.

Don’t we all know a bunch of people we know, but we really don’t know? So, he was one of those.

“And who have we run into,” he said, sitting down in front of me. After the mandatory hello, this gentleman got to the issue straight away. “So why are you so against investing in real estate?” he asked.

“Well, I am not against anything. I am only against things which don’t make sense to me at a certain point of time. And as of now it doesn’t make sense to invest in real estate, in my humble opinion. But if you want to buy a home to live-in, that is a different issue altogether,” I explained, extremely irritated at having been disturbed.

“Oh, you know but the value of the home I bought has gone up four times,” he said with great confidence.

This is the oldest argument made by those still confident about investing in real estate. It comes in two forms. One form was just cited above. The other form is to talk about a third person who seems to have made money by investing in real estate. This can include Sharma ji, Verma ji, Gupta ji, Mr Banerji or Mr Subramanian, one of whom lives down the road.

This argument deals in absolutes. “I bought for Rs. 10 lakh and I sold it for Rs. 50 lakh,” is how you go about selling this point. The trouble is that it doesn’t take into account any expenses incurred in between.

This includes the maintenance cost that needs to be paid to the society every month. Or the property tax that needs to be paid to the municipality every year. Or the cost of insuring the home. Or the interest on the home loan. Or the cost of buying an insurance on the home loan. On the positive side, it does not include any rent that comes in and any tax deductions that are made.

The point being that no one calculates the return on investment on investing in property. In fact, there is no such number going around. If you want to know the past returns of a stock or a mutual fund, it is very easy to find that. But if you want to know about the past returns on real estate, there are only absolute numbers going around.

There are only stories. And people like to believe in stories, not numbers.

“So when did you buy this home?” I asked the gentleman.

“Around 2005,” he replied.

“You were lucky,” I blurted out.

“What do you mean?” he asked.

I had made the proverbial mistake of attributing the success of a person to his luck. And given that I would have to explain what I meant.

“Well, if you had invested in real estate any time post 2009, there is a reasonably good chance that your investment would have ended up in a mess,” I explained.

“What do you mean?” he asked again.

“Many people who invested in real estate post 2009, still haven’t got the homes they had invested in. The builders have either run out of money or in some cases simply disappeared.”

“Oh,” he replied, rather nonchalantly.

“So, in many cases people who thought they are buying a home to live in, have had to continue paying the rent on the home that they live in, along with the EMIs.”

“Oh,” he said again.

“They are basically screwed.”

“But what are you trying to say?”

“Success in real estate investing like many other things in life is also a matter of timing. You think you have made money because you invested in 2005. Many others who invested in 2009 or after, are stuck. And unlike other forms of investing there is no exit route. Also, given that the amount involved in this case is large, there is no getting back from it,” I explained.

“Oh, but all that doesn’t apply to me,” he said rather confidently.

“Really? So, this home you bought and which has gone up four times in value, have you ever tried selling it?” I asked.

“Yes.”

“And for how long have you been trying to sell it?”

“For the last six months.”

“And you still haven’t managed to find a buyer for it?”

“No. I think it is worth a certain price. But the stupid buyers haven’t been willing to pay.”

“Ah!”

“My broker also thinks it is worth the price that I think it’s worth.”

“Oh, really. The price you and your broker have, is in your head. That is certainly not the market price, because if it was, your home would have been sold by now.”

“That is not the case,” he responded very aggressively.

“You are anchored on to a price and are not willing to sell for anything less than that price. But in the time to come, as your home continues to remain unsold, you will revise your expectations and be ready to sell at a lower price,” I said, gulped my cup of coffee, and started walking towards gate number 87 to catch my flight.

To conclude, if you are unable to sell a house that you had bought as an investment, that doesn’t make the buyer stupid.

The column originally appeared in Vivek Kaul’s Diary on October 26, 2016

Of Success, Al Pacino and Amitabh Bachchan

amitabh bachchan

The reasons behind the success of Amitabh Bachchan are well analysed. People have talked about his deep baritone voice. His tall and brooding persona. His legendary acting skills. And the fact that his portrayal of the angry young man captured the frustrations of an entire generation.

Bachchan may have succeeded because of all these reasons and more. Nevertheless, there is a something that people never seem to talk about—the role that luck played in Bachchan’s success. Bachchan’s golden era started with the success of Zanjeer, which was released in 1973.

But the fact of the matter is that he was not the first choice for the role of Inspector Vijay Khanna, the lead character in the movie. This became the first of the many angry young man roles that Bachchan would eventually play. As Diptakirti Chaudhuri writes in Written by Salim Javed—The Story of Hindi Cinema’s Greatest Screenwriters: “Not one major star of the day was ready to act in the film”.

The script was first sold to Dharmendra for a princely sum of Rs 2,500. The actor’s brother Ajit Singh Deol was supposed to produce the movie and Prakash Mehra would direct it. Things did not work out between Ajit Deol and Mehra, and as a reason Dharmendra opted out of the movie.

The script then went to Dilip Kumar. As Chaudhuri writes: “[Kumar] thought it would make a very good film but felt the lead character was too one-dimensional and did not allow enough scope for ‘performance’.”

The script then went to Dev Anand. At that point of time both Salim Khan  and Javed Akhtar felt that this would be a “horrible miscasting”. Anand asked for a couple of songs to be picturised on him and that was that. The story continued.

Mehra approached Raj Kumar. “He too loved the script, probably because he had been an inspector before joining films, and agreed to do the role, but—and this was a big but—he wanted the film to be shot in Madras. One apocryphal story goes that he did not like the smell of Prakash Mehra’s hair oil and made this preposterous demand to wriggle out of having to work with him,” writes Chaudhuri.

After all these stars refusing to do the film, the script landed with Bachchan. As Chaudhuri writes: “Partly out of desperation and partly out of respect for Salim-Javed, and Pran[who had a pivotal role in the film], Prakash Mehra signed Amitabh Bachchan.” And the rest as they say is history.

The broader point here is that if any of these stars had taken on the role of Vijay Khanna that was offered to them, Bachchan’s story may have turned out to be remarkably different than it eventually did.

Before Zanjeer, the only performance of his worth recalling was in the film Anand, as a side-hero to the then superstar Rajesh Khanna. After Anand, Bachchan had done a bunch of forgetful films. And that is how things would have continued, if Zanjeer had not come his way. In fact, his career could have fizzled out very quickly and he wouldn’t have survived as long as he eventually has.

A sort of a similar story played out with Hollywood star Al Pacino, as well. Pacino first shot to fame, a year before Bachchan, in 1972, when The Godfather was released. Pacino played the character of Michael Corleone in this movie, who was the youngest son of mafia boss Vito Corleone (played by the legendary Marlon Brando).

As Robert H Frank writes in Success and Luck—Good Fortune and the Myth of Meritocracy: “Studio executives…wanted to cast Robert Redford, Warren Beatty, or Ryan O’Neal to play Michael Corleone in Francis Ford Coppola’s film adaptation of Mario Puzo’s The Godfather. Coppola, however, wanted an unknown actor, someone who actually looked like a Sicilian.”

But Coppola was clear that he wanted Pacino and threatened to abandon the project if anyone else was signed on. This forced the studio executives to agree and Pacino landed up with the role of Michael Corleone.

As Frank writes: “In Puzo’s novel, Vito Corleone was the central character. But Vito’s youngest son Michael is clearly the protagonist in Coppola’s adaptation. Pacino, who had previously appeared in only two minor films, thus landed what turned out be the most important role in what many critics have called the best film ever made.”

Interestingly enough Coppola was a young film director at that point of time and as Frank writes: “Inexperienced directors almost never get their way into disputes with studio bosses.” But Coppola did.

The point being that hard work and talent are important for success but they are of no use without luck and opportunity. As Frank writes: “Those who believe that talent and hard work inevitably triumph might argue that because Pacino was relatively young at the time, his skills would have eventually made him successful even if he hadn’t landed the Michael Corleone role. But there are many thousands of highly talented actors who just never get the right opportunity to demonstrate their skill.”

Like Pacino got the lead part in The Godfather, Bachchan got it in Zanjeer. They were lucky to get these parts, which gave them a huge opportunity to showcase their real talent. Of course, after they became successful, a narrative was created around their success. This narrative pointed out to their talent, their hard work and so on.

While all that is true, one cannot take away the fact that at a certain point of time, they were very lucky. And that luck gave a fillip to their careers. As Frank writes: “It is almost easy to create a narrative after the fact that portrays such outcomes as having been inevitable. Yet every event is the outcome off a complex interwoven sequence of steps, each of which depends on those preceding it. If any of those earlier steps had been different, the entire trajectory would almost surely be different, too.”

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on April 26, on www.valueresearchonline.com

Act now: Arun Jaitley needs to use his lucky streak to push through reforms

 

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Napoleon Bonaparte once said “I know he’s a good general, but is he lucky?”
Luck is an essential part of politics and lucky governments tend to do better than plain and simple skilful governments. As ex cricketer turned writer Ed Smith writes in Luck—A Fresh Look At Fortune “Academic research supports the idea that voters often can’t tell the difference between lucky governments and skilful ones.” In fact, research carried out by Australian economist Andrew Leigh suggests that “it is more important to be a lucky government than an effective government”. Leigh studied nearly 268 elections between 1978 and 1999.
As Smith writes regarding this study “A government’s average rate of re-election is 57 per cent…Even superb economic management, outpacing world growth by 1 percentage point, only raises the Prime Minister or President’s likelihood of re-election from 57 per cent to 60 per cent. An economically competent government gets an electoral boost of 3 per cent; a lucky one gets a leg up of 7 per cent [i.e.]… the government’s re-election rate jumps to a 64 per cent likelihood.”
Hence, if a government has “luck” going for it, it is important that it does not throw it away and takes some decisions that help it over the long term.
Narendra Modi took over as the Prime Minister of India on May 26, 2014. Things were looking difficult on the economic front and a poor monsoon was being predicted.
The fiscal deficit of the Indian government as on May 31, 2014, stood at Rs 2,40,837 crore. This meant that during the first two months of the financial year (April 2014 to March 2015), the fiscal deficit had already reached 45.6% of the annual target. By June 30, 2014, the fiscal deficit for the first three months of the financial year had reached 56.1% of the annual target. Fiscal deficit is the difference between what a government earns and what it spends.
Typically the income of the government is back loaded, given that its earnings are the highest during the last three months of the financial year. But a large part of the expenditure of the government is more or less spread out through the financial year. Given this, the fiscal deficit typically tends to be high during the first few months of the year.
Nevertheless, even after taking this factor into account, a fiscal deficit of 56.1% of the annual target during the first three months of the year was a very high number. During the last financial year the number had stood at 48.4%. This was largely a reflection of the fiscal mess that the Congress led UPA government had left the country in.
Over and above this, the initial monsoon numbers were not very encouraging. The India Meteorological Department(IMD) in a press release dated July 11, 2014, pointed out that the“rainfall activity was deficient/scanty over the country as a whole” for the period between July 3 and July 9, 2014. This deficiency of rainfall was at 41% of the long period average.” This delay in rainfall had led to a 51% annual decline in the sowing of kharif crops.
These two factors which could have undermined the performance of the new Modi government greatly, have changed for the good in the recent past.
One of the major reasons for a high fiscal deficit has been the fact that oil marketing companies have been incurring huge “under-recoveries” on the sale of diesel, cooking gas and kerosene. The government in turn has had to compensate the OMCs for these “under-recoveries”. This pushed up the government expenditure and hence, the fiscal deficit.
The good news is that oil prices have been falling. The international crude oil price of Indian Basket of oil as computed by Petroleum Planning and Analysis Cell (PPAC) fell to US$ 99.94 per barrel on 19.08.2014. Two months earlier on June 19, the price of the Indian basket of oil had touched $111.94 per barrel.
This fall in oil prices has ensured that the under-recoveries of the OMCs for the financial year 2014-15 are projected to be Rs 91,665 crore while the figure was Rs 1,39,869 crore in the 2013-14. If this trend continues the government is likely to incur a lower expenditure for compensating the OMCs for their under-recoveries. And this will also have an impact on the fiscal deficit.
The government has also been lucky on the monsoon front. As the IMD said in a release dated August 15, 2014, “For the country as a whole, cumulative rainfall during this year’s monsoon has so far upto 13 August been 18% below the Long Period Average (LPA).” This is way lower than the deficiency in early July. A bad monsoon could have created several economic challenges for the government. Thankfully, the scenario did not turn out to be as bad it was initially expected to be. Hence, it is safe to conclude that the Modi government has indeed been very lucky on the economic front during its first 90 days.
Given this, the government should use this lucky streak to push in some reform on the pricing of petroleum products. With oil prices falling, this would be a good time to decontrol diesel prices. Over and above this , this would be a good time to limit subsidies on kerosene and cooking gas as well. As has been suggested here earlier, this might be a good time to start raising cooking gas prices by Rs 10 per cylinder every month, in order to eliminate the subsidy on it, over a period of time.
What might further work for the Modi government is the fact that oil prices might continue to fall in the years to come. As Crisil Research points out in a report titled Falling crude, LNG, coal prices huge positive for India dated August 2014 “Over the next five years, we expect global oil demand to increase by 4-4.5 m
illion barrels per day (mbpd). However, crude oil supply is expected to increase by 8-10 mbpd. This, we believe, will bring down prices from current levels.”
This should help the government control its fiscal deficit. If the government is able to lower its fiscal deficit, it will have to borrow less and that will eventually lead to lower interest rates. If the government borrows less, there will be more money to lend to others. At lower interest rates consumers are more likely to borrow and spend. This will have a positive impact on economic growth.
The Modi government has luck going for it right now, but this may or may not last. Hence, it is important that it makes the best of it, and pushes in some decisions which will work well for the economy in the long run.

The article originally appeared on www.Firstbiz.com on August 22, 2014 
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)