Luck, Skill or Something Else?


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.

Kids in the rat race


When I went to school in the 1980s and early 1990s, summer holidays were just holidays. There was no holiday homework. Also, there were no other activities that one had to be a part of because the parents wanted so.

There was no summer camp either, which from what my married friends with kids tell me, is a must these days. Further, there were no extra tuitions to take for every subject taught in school. What the teachers in school taught was deemed to be good enough.

There was always enough time to do things that one wanted to do, which on some days meant nothing. On other days it meant playing cricket with friends in the evening and board games in the afternoon. It also meant listening to some music and watching a little bit of television in the evenings.

Oh and school bags were light. And life was simple.

These days, the kids seem to be as busy as their parents are. I guess, if any kid is brought up, the way I was brought up, it would seem that the parents really don’t care for him or her.

What has changed? The parameters that define a good upbringing have changed. Further, it is worth remembering here that everything in life is relative. My parents left me alone during holidays to do things that I wanted to do. This was primarily because other parents did the same.

If other parents had behaved differently back then, chances are mine would have done the same. It is worth elaborating on this through an example. As Robert H Frank writes in The Darwin Economy—Liberty, Competition and the Common Good: “When you go for a job interview, for example, you want to dress presentably, but the standard for looking good are almost purely relative. An interviewer may have no conscious awareness of how different candidates were dressed. But if you show up in a $500 suit, you’ll be more likely to get a callback if other candidates were wearing $200 suits than if they were dressed in $2,000 suits.”

The situation with kids is similar. If most parents leave their kids alone to do what they want to do during summer holidays, other parents are likely to do the same. This situation is similar to a situation where you turn up for an interview in a $500 suit and other candidates also turn up in a similarly priced suit. In that situation the suit you are wearing doesn’t really matter.

But if others turn up in a $2000 suit, then suddenly your suite isn’t really good enough. So, if most parents are getting their kids involved in activities during holidays, and you are just letting your kid hang around doing what he or she wants to do, you are really not going to look good or feel good as a parent.

As Frank says “the standards for looking good are almost purely relative”. And this applies to parents taking care of their kids as well. Hence, if parents are to feel good about their parenting, the kids also need to be a part of a rat race like their parents. They need to attend extra tuitions, be a part of different activities after school, join a summer club and so on.

This need of parents to feel good about their parenting has also led to a situation where kids are sent to coaching classes for engineering and medical exams, even before they clear their tenth standard exams.

Another reason this happens is because parents these days have long-working hours and by keeping their kids busy, they don’t feel guilty about not having enough time for their kids.

But what about just letting a kid be? And letting him to do what he or she wants to do and let the process of self-discovery, works its way through? Nah, that is too 1980s. We are after all in the teens. Nevertheless, it is worth remembering what Lily Tomlin, an American actress, once said: “The trouble with the rat race is that even if you win, you’re still a rat.”

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

The column originally appeared in Bangalore Mirror on May 18, 2016

Why are People So Touchy About EPF


There has been a lot of drama surrounding the changes that the Narendra Modi government has tried to introduce in the Employees’ Provident Fund(EPF) in the recent past. It started with the government trying to tax the EPF.

In the budget speech made in February, 2016, the finance minister Arun Jaitley said: “I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.”

Just the word tax was enough to get the protests going. The social media went berserk. And so did television channels as well as newspapers, protesting vehemently against this move.

In clarifications that followed the actual plan of the government came forth. The change actually applied only to private sector employees who earned more than the statutory wage of Rs 15,000 per month.

If these employees chose to withdraw 100% of their EPF corpus, 60% of the corpus created after April 1, 2016, would be taxable. Further, there was a
around it. As the clarification later issued by the finance ministry pointed out: “It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% of the remaining Corpus is invested in Annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.

The clarification did not help. The protests continued and the proposal to tax EPF was then withdrawn.  All this is well known by now. The question I want to ask here is, what led to the people protesting as vehemently as they did?

The middle class in this country is not known to protest against anything. They generally get around to accepting most things over a period of time. So what happened here? The answer perhaps lies in what behavioural economists refer to as the phenomenon of loss aversion.

And what is loss aversion? As economist Robert H Frank writes in his new book Success and Luck—Good Fortune and the Myth of Meritocracy: “[The] sense of entitlement to the fruits of one’s labours may owe much to the phenomenon known as loss aversion. One of the most reliable findings in behavioural economics loss aversion refers to the fact that people will fight much harder to avoid a loss than they would to achieve a gain of the same amount. Since most…people work hard for the money they earn, it feels like they own it, and that makes taxation feel like theft.

And this precisely what explains all the protests that erupted against the government trying to tax the EPF. While protests in this case were justified, what followed was uncalled for.

Before trying to tax the EPF, the government had put out a notification on February 10, 2016. As per this notification an individual investing in EPF could withdraw only his contribution made to the EPF and the interest accumulated thereon, in case he was unemployed for a period of at least two months.

Before this notification was issued 100% withdrawal was possible. Further, those who changed jobs also withdrew 100% of their accumulated EPF. All they had to do was to declare that they were unemployed. This wasn’t a healthy phenomenon given that money invested into EPF is essentially being put aside for retirement.

The Employees’ Provident Fund Organisation(EPFO) was not structured to be able to keep track of individuals changing jobs. The introduction of Universal Account Number(UAN) along with the February notification, made it impossible for those changing jobs to withdraw 100% of EPF. And this was a good move.

But there were huge protests against this as well. And the government had to withdraw this notification. In fact, this happened primarily because people saw this as another attempt of the government to play around with their EPF and loss aversion kicked in.

In fact, the media created confusion around the question, by asking questions like why an employee should not be allowed to withdraw money for weddings, education of their children, building/buying a home and medical emergencies.

Take the case of an editorial that appeared in The Times of India on April 21, 2016. It asked: “People may need to withdraw from EPF to tide over a situation when they are between jobs. Or they may want to build a house. Or they may face a medical emergency. In all these cases EPF withdrawals enhance their economic security, which was the core idea behind EPF. There is no case, therefore, for debarring such withdrawals.”

This gave the impression that no withdrawal from EPF was possible anymore. This was totally wrong. Those unemployed could withdraw their contribution to the EPF as well as the interest accumulated on it.

Further, the EPF already had rules for money to be withdrawn for medical emergencies, housing, education as well as weddings. These rules were not fiddled around in the new notification issued on February 10, 2016.

The Section 68K of the Employees’ Provident Fund Scheme 1952, allows an individual to withdraw up to 50% of his contribution and the interest accumulated thereon, “for his or her own marriage, the marriage of his or her daughter, son, sister or brother or for the post-matriculation education of his or her son or daughter.”

As far as medical emergencies are concerned, the amount that can be withdrawn from the EPF should not exceed, the individual’s “basic wages and dearness allowances for six months or his own share of contribution with interest in the Fund, whichever is less.” Withdrawal is allowed for buying/building a home as well.

After hungama around this move ended, the government decided to cut the interest rate on the EPF for 2015-2016 to 8.7%. This was 10 basis points lower than the 8.8% recommended by the Central Board of Trustees(CBT) of EPFO. Further, it was 5 basis points lower than the interest of 8.75% paid in 2014-2015 and 2013-2014.

This means that the interest paid in 2015-2016 would have been Rs 50 per lakh lower than what was paid in 2014-2015. This is a very small amount. But there were protests against this move as well, primarily by trade unions.

The explanation for this again lies in loss aversion. People now believe that the government is trying to play around with their hard earned money. And any small change attempted on part of the government is likely to lead to protests.

These protests finally led to the government reversing its earlier decision and deciding to pay an interest of 8.8% on EPF for 2015-2016, as recommended by the CBT.

The question that crops up here is, what economic reforms can be expect from a government which isn’t even in a positon to pass on an interest rate cut of 5 basis points (from 8.75% in 2014-2015 to 8.7% in 2015-2016).

Further, the government could have handled the situation better by at least trying to explain the logic behind its moves. But that doesn’t seem to have happened and it has ended up with creating needless trouble for itself.

The column  originally appeared in the Vivek Kaul Diary on May 2, 2016