Tag: Richard Thaller

23 November, 2016

The Confirmation Bias of Demonetisation

It is interesting to see the kind of responses that Narendra Modi government’s decision to demonetise notes of Rs 500 and Rs 1,000 is getting on the social media.

Those who are in favour of the decision seem to always find examples of how the decision is a good one. Like some people keep running into chaiwallahs who take payments through Paytm. There is no denying that there are chaiwallahs out-there who do take payments through Paytm, but what proportion of the total chaiwallahs do they form, is a question no one is answering.

Those against the decision seem to always find examples of the decision being a bad one. For them, the ATMs are still not dispensing cash or banks are crowded or senior citizens are being made to wait and so on. Most of these examples are correct as well.

This Sunday I stepped out to withdraw cash from an ATM. None of three-four ATMs that I usually withdraw cash from, had notes. Hence, I had to come back home disappointed.

This gave me an idea for a small experiment in which I made posts on Twitter as well as Facebook. The post basically went like this: “No lines in any of the ATMs around where I live. Yay. No cash either… 12 days later. This looks like UPA’s 5-year plan.”

Of course, the post in social media terminology was anti Narendra Modi. This got an interesting series of responses both on Twitter as well as Facebook. One of the first responses I got was that the anti-establishment rant felt like that I had decided not to see merit in the actions of the government.

Then there were the usual responses around I being a chamcha of Rahul Gandhi. There were others who said how ATMs were just fine in their cities. One respondent talked about ATMs dispensing cash in Bhopal. I asked him to send me air-tickets. A cousin talked about ATMs working well in Jammu.

The point I am trying to make here is that everybody seems to have already worked out whether demonetisation is a good thing or a bad thing, even before any data has come out. And having worked that out we are all looking for examples which suit our point of view.

Economists call this confirmation bias. As Richard Thaler writes in Mishbehaving—The Making of Behavioural Economics: “People have a tendency to search for confirming rather disconfirming evidence… This tendency is called the confirmation bias.”

This tendency has been at full play in the aftermath of the demonetisation decision. The trouble is that there is no data either ways.

One of the goals of demonetisation is to destroy the current stock of black money held in the form of cash. The total amount of currency demonetised by value stands at Rs 14.2 lakh crore. The lower the amount that makes it to banks to be exchanged, the higher will be the stock of black money destroyed. This shall only become clear once the last date of submitting the demonetised notes of Rs 500 and Rs 1,000 is over. The last date currently stands at December 30, 2016.

Hence, this shall become clear only in January 2017. At the same time, whether the government has been able to clean up counterfeit notes, will also become clear then (assuming it chooses to release the information).

On the flip side, with the new Rs 500 note not hitting the market quickly enough, there is a shortage of currency going around. This has led to the transactions in various markets coming down dramatically. The real situation will become clear at the beginning of next month when the car sales, two-wheeler sales and tractor-sales data come out.

With the transactions in different markets collapsing, overall consumption is likely to take a beating. This will lead to lower indirect taxes (primarily customs duty and excise) for the government. Again, this shall become clear at the beginning of next month, when the ministry of finance publishes this data.

Also, it will take a few months to figure out the real impact of the demonetisation decision. But who has time to wait for a few months on the social media. We have all made up our minds already.

The column originally appeared in the Bangalore Mirror on November 23, 2016

22 April, 2016

The winner’s curse of IPL

The auction of players in the Indian Premier League (IPL) T20 cricket tournament always throws up some interesting results. This time around, the auctions happened in early February and were no different from past years, with several uncapped players, who had played no international cricket and in some cases very little first class cricket, getting bought for a lot of money.

Take the case of Murugan Ashwin, a 25-year-old leg-spin bowler from Tamil Nadu, who had only played very few first class matches before the auction. His base price was Rs 10 lakh and he was finally picked up for a price of Rs 4.5 crore by the Rising Pune Supergiants team.

Why did someone with so little experience get picked up at such a high price? The recency effect was at work, with the recent performances of the players being given more weight by the team managements looking to pick up players. Ashiwn had performed very well in the Syed Mushtaq Ali trophy, which is the name of the domestic T20 competition, getting a wicket every fourteen balls.

The recency effect benefitted several other players as well. Rishabh Pant, the wicket-keeper of the India under-19 cricket team got sold for Rs 1.9 crore to the Delhi Daredevils team. His performances in the under-19 cricket world cup, was probably top of the mind recall for various cricket teams. Pant had smashed 78 runs in 24 balls, a few days before the auction happened.

In fact, in Ashwin’s case his performance in Syed Mushtaq Ali trophy was noticed by several scouts and this led to a bidding among teams driving up his price to Rs 4.5 crore. Scouts tend to be very confident about their choices and this bids up prices. It also leads to what economists call the winner’s curse.

As Richard Thaler writes in Misbehaving—The Making of Behavioural Economics: “When many bidders compete for the same object, the winner of the auction is often the bidder who most overvalues the object being sold. The same will be true for players.”

Thaler of course is not writing about cricket but American Football. But the logic applies equally to IPL as well. There were other cricketers also who benefitted from the winner’s curse. South African all-rounder Chris Morris, was sold for Rs 7 crore, after a bidding war erupted between Rising Pune Supergiants, Mumbai Indians and Kolkata Knight Riders. He was finally bought by Delhi Daredevils. His base price had been set at Rs 50 lakh.

Karun Nair who plays for Karnataka, also benefitted from multiple teams bidding for him. He was finally sold for Rs 4 crore, many times his base price of Rs 10 lakh. The same stood true for Rajasthan fast bowler Nathu Singh, who was sold for Rs 3.2 crore, many times his base price of Rs 10 lakh. Deepak Hooda’s price also went from his base price of Rs 10 lakh to Rs 4.2 crore, after multiple teams bid for him. Hooda plays as an all-rounder for the Baroda team in the domestic cricket competitions in India.

Not only the winner’s curse is at work, but there is something known as the false consensus effect at work, as well. And what is this effect? As Thaler writes: “Put basically, people tend to think other people share their preferences. For instance, when the iPhone was new I asked the students in my class two anonymous questions: do you own an iPhone, and what percentage of the class do you think owns an iPhone? Those who owned an iPhone thought that a majority of their classmates did as well, while those who didn’t thought iPhone ownership uncommon.”

Now how does this apply in case of auction of players? As Thaler writes: “When a team falls in love with a certain player they are just sure that every other team shares their view. They try to jump to the head of the line before any other team steals that guy.”

KC Cariappa who got bought for Rs 2.4 crore by Kolkata Knight Riders in the 2015 auction is an excellent example of the same. He was deemed to be a mystery player and the Kolkata Knight Riders team seemed to have fallen in love with him. In the process they bid up his price to Rs 2.4 crore, from a base price of Rs 10 lakh.

The thing is that many of these expensively priced players do not perform as well as the teams think they will. The winner’s curse takes its toll. An excellent example of this is Yuvraj Singh, who was bought for Rs 16 crore and Rs 14 crore respectively in 2015 and 2014, and did not deliver much bang for the buck.

As Thaler writes: “The winner’s curse says that those players will be good, but not as good as the teams picking them think.” Not surprisingly this time around Singh was finally sold at a much lower Rs 7 crore, to Sunrisers Hyderabad. Chances are this time he might perform better than the last two years.

The surprising thing is that it is not always performance that gets the money in IPL. Take the case of leg-spinner Pravin Tambe, who has bowled brilliantly over the last few years. In the 2016 auction he was sold to the Gujarat Lions for Rs 20 lakh. Given that he is 44, goes against him.

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

The column originally appeared in the April 2016 issue of the Wealth Insight magazine.

22 July, 2015

Why companies fire employees

Vivek Kaul

In the aftermath of the financial crisis that started in September 2008, after the investment bank Lehman Brothers went bust, the news regarding companies firing employees in order to cut costs, is regularly published in the media. The global information technology firms have fired a lot of people over the last few years in order to stay competitive.
In an economic environment where business is dull, the companies try to maintain profit levels by cutting costs. There are various ways in which this is done. An organisation I worked for in the past tried to cut costs by getting rid of toilet paper in the restrooms. This move was met with immediate protests and sometime later the status quo was restored.
Jokes apart, a major way in which companies cut costs is by firing employees. This is a painful process which typically leads to people working at the middle and lower levels suddenly finding themselves without a job. Normally, those at the top levels of management as well as those who work in the HR department, carry on with their jobs.
What makes the situation worse is the fact that people who are fired are in no way prepared for it and are told one fine day that they would no longer be needed. In this day and age when almost everybody has EMIs to pay and the joint family system has completely broken down in cities (in the Indian context), it is a very difficult situation to be in.
What I have always wondered is why do companies fire employees? Why don’t they reduce salaries across the board and ensure that everyone has a job. In fact, those at the upper levels should forego more, given that they are more responsible for the good or bad performance of the company. Those at the middle and junior levels typically do what they are told to. Further, cutting salaries across the board can’t be very difficult to implement, I guess.
I have put this question to a few HR people I happen to know. The answer I typically get from them is that when the economy is not doing very well, it is a good time to get rid of the “deadwood” (essentially employees who are not very productive) and make the company leaner. This I guess is a part of the answer but not a complete answer to my question.
To get a complete answer we need to know a little about a famous American economist Irving Fisher. In the latter part of his career, Fisher had turned into an entrepreneur and hence, ended up employing people.
One of the interesting things that he did was to index the salaries of his employees to the rate of inflation. So if inflation went up salaries went up as well and vice versa. As Sylvia Nasar writes in Grand Pursuit—The Story of Economic Genius: “He [i.e. Fisher] was probably the first employer to ever grant an explicit, annual, automatic “cost of living” adjustment.”
Nevertheless, Fisher’s experience with this experiment wasn’t very smooth. As long as the salaries were going up his employees were fine with the situation. But the moment salaries started to fall the employees resented it.
As Fisher would later recount in Stable Money—A History of the Movement: “As long as cost of living was getting higher…employees welcomed the swelling contents of their…pay envelopes…But as soon as cost of living fell they resented the “reduction” in their wages.”
The point being that employees do not like salaries being cut and it typically leads to a lot of resentment. Hence, it is just easier for organisations to fire people, rather than cut salaries across the board.
As Richard Thaler writes in Misbehaving—The Making of Behavioural Economics: “Cutting wage makes workers so angry that firms find it better to keep pay levels fixed and just lay off surplus employees(who are not around to complain).”
This behavioural problem essentially leads to people being fired.
(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on July 22, 2015