On Economists and Plumbers

Whenever an undergraduate student asks me for advice about what to do after graduation, I always recommend two things. A gap year, if possible. And some work experience, especially if the next degree they plan to acquire is an MBA.

The gap year because I think our society needs to learn how to learn outside of college. That is a whole other blogpost, and I’ll get to it this Friday.

The work experience before embarking on an MBA? Because you need to learn what folks in HR do (and don’t do) before you learn about HR in an MBA course. Because you need to experience the agony of a performance appraisal before learning about management in an MBA course. Because you need to fight for budgets for your team before learning about finance. Because you need to know what a deliverable is in the real world before earning the right to moan about assignments in college. Doing an MBA without having worked is a little like learning how to ride a bicycle without ever having seen one, and without actually riding one while learning how to ride it. If that makes no sense to you, great. That’s what that metaphor was supposed to do.


And Gulzar Natarajan says much the same thing, with two crucial differences. He admonishes, rather than advises. And the folks he admonishes happen to have won the Nobel Prize in Economics, so the audience is ever so slightly different:

I think India is a good example of [a country] where they literally had not thought through their own plumbing. If you think of what happened to the urban migrants, India’s welfare system is actually completely designed on the assumption that people live in their stable families which live in one place for year after year. In your village, you’re entitled to apply for the public distribution, which is essentially nearly free food . . . and in rural areas there is the rural employment guarantee system. Both of those are designed for rural citizens who live in their own village. You’re not entitled to go to any village and say: ‘I want my employment guarantee.’ There might be as many as 50m of these low-income migrants who temporarily live in cities. They can’t connect to the welfare system. That’s why there were pictures in the first lockdown of people walking 1,000 kilometres . . . there was no way for them to survive. They just had to go home. That is pure plumbing failure.

https://www.ft.com/content/f998d48a-dd8a-43de-81e5-d530dd9df004

That’s the Banerjee/Duflo quote, taken from Gulzar Natarajan’s blogpost, as is the link itself (I’m not rich enough to subscribe to the FT!).

This is his response:

This is pure rhetoric. It’s the classic hatchet job – form your hypothesis (a system where migrant workers can access food and other welfare benefits), set up a straw man (the public distribution system, PDS, or any welfare benefit), demonstrate how the straw man fails the hypothesis test (the example of covid induced migration), and blame the system (the government “did not think through their own plumbing” on its programs). Before passing such sweeping judgement on something like the PDS or NREGS, it’s useful to understand its original purpose and its trajectory of evolution. It’s also classic hindsight-based judgement.

http://gulzar05.blogspot.com/2021/06/more-on-why-economists-make-bad-plumbers.html

As always, read the rest of the blogpost. Anything written by Gulzar Natarajan is self-recommending. And while you’re at it, read this post (and all of the posts that he links to!)

But the larger lesson you should take away from his blogpost – if you ask me – is this: designing something is very different from implementing it. If you want to be a good designer, you must have worked in implementation for a bit.

Whether it is MBA after having gained work experience or economists working on policy design – or anything else, for that matter, it is worth keeping this in mind: first the trenches, and then the command centre.


And lastly, while on the theme, here’s a book recommendation for you: Skin in the Game, by Nicholas Nassim Taleb.

And this post too, please:

Hammurabi’s Code is among the oldest translatable writings. It consists of 282 laws, most concerning punishment. Each law takes into account the perpetrator’s status. The code also includes the earliest known construction laws, designed to align the incentives of builder and occupant to ensure that builders created safe homes:

  1. If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.
  2. If it causes the death of the son of the owner of the house, they shall put to death a son of that builder.
  3. If it causes the death of a slave of the owner of the house, he shall give to the owner of the house a slave of equal value.
  4. If it destroys property, he shall restore whatever it destroyed, and because he did not make the house which he builds firm and it collapsed, he shall rebuild the house which collapsed at his own expense.
  5. If a builder builds a house for a man and does not make its construction meet the requirements and a wall falls in, that builder shall strengthen the wall at his own expense.

Links for 13th December, 2018

  1. In praise of The Worldly Philosophers (I wholeheartedly agree)
  2. Deepak Shenoy on Aswath Damodaran, Flipkart and Jamna Auto. If you have the slightest interest in finance and investing, this is heavily recommended.
  3. Arnold Kling reviews “Skin in the game”
  4. I haven’t read a single one of these – but given that it’s Tim Harford doing the recommending, I’ll add these to the list.
  5. Scott Sumner on China.

Links for 20th November, 2018

  1. On diaspora bonds. This should leave you slightly (ok, more than slightly) worried. See also – although I have linked to this earlier – this.
  2. A cultural explanation for why scaling is hard (and from certain points of view, undesirable)
  3. Skin in the game, the Volcker edition.
  4. Do you want to understand how derivatives work in practice? Read this. Via @mal_or_normal
  5. Mr. Patel might enjoy reading Volcker’s autobiography.

Professor Nigam’s Twitter Thread on the AIU

Professor Nigam is the registrar at NLSIU, and he was kind enough to read my series of posts on the Almost Ideal University. What’s more, he took the time to respond with a very thoughtful series of tweets, as a part of his excellent series that is freely available on Twitter. I don’t know if he has a name for it, I think of it as the “My Dear Law Students” series.

If you are a student of law, the series ought to be mandatory reading. If you are a student of writing, the series ought to be mandatory reading. I’m quite serious, please do read all of them!

In this post, I’m going to cite some of his tweets, and add my two penn’orth.


And nor will students of economics be able to demonstrate real world potential unless assisted by real economists. You learn best when taught by folks with skin in the game. In my Almost Ideal University, you can’t become a teacher without having worked in the field first. And that’s a non-negotiable requirement.

Yes, of course there are problems with this. Why will folks want to leave a corporate job? Won’t the pay be lesser in academia? Why would firms be ok with having folks just “go away” for six months to teach? All great questions, and valid ones. But that’s exactly what we need to figure out if we’re going to ever get around to building out the AIU.

These problems arise, of course, only because I am in complete agreement with Professor Nigam when he says that you need people with skin in the game.

And I’d much rather solve these (much harder) problems than solve the problem of how to make three hour long in-class theoretical exams more relevant.


The equitable access problem is a real one, and I’ll state upfront that I do not really know how to solve it. Technology can help to an extent, but the AIU won’t be equitable to begin with. Yes, replicability, if it works out, will help. But it won’t ever be a perfectly equitable system. My sole defense is that the system I seek to replace is, if anything, even more inequitable.

Not, I hasten to add, that this should mean that we stop worrying about equitable access in the case of the AIU!

And regarding the second tweet in this section, yes, bureaucracy is inevitable. But if gamified well, there is a chance that the system (again, while not being perfect) will be better than the status quo.

My point is this: if we can get students to view assignments as something to work on cooperatively rather than combatively, the need to monitor is that much lesser. Of course, the need to mentor is that much higher, but isn’t that the point of education in the first place?

But yes, those of us in academia will need to figure out how to make this happen, and as Professor Nigam has pointed out, that with the help of working professionals.

There’s a great deal of detailing to be worked out here, and apprenticeships, mentorships and professionals in residence on campus will all have a role to play. Again: a hard problem to solve, but attempting to solve for this is a worthy mission as an academician.


I wish I could do a better job of writing more clearly, and the fault is mine over here. In my AIU, the onus isn’t on the student to attend. The onus is on the professor to make the class interesting enough to attend. The student is always free to not attend, but the professor should be good enough to make the student feel regret at not being present in class. Specifically:

  1. The professor should have the ability to not just explain a particular student’s doubt, but also in the process enrich everybody else’s understanding of that issue.
  2. The professor (or their assistant, perhaps) should allow the most non-intuitive doubts to filter up in class. That is, study groups, whether offline or on (say) Discord servers will allow the students themselves to resolve the relatively easier doubts. Those that prove resilient will be handled by the professor. Will it work perfectly right from the get-go? Of course not. Is it worth trying? I vote yes – but of course, as they say, your mileage may vary.
  3. So, no, not a diminishing role for physical classroom instruction at all. Au contraire, a role of paramount importance for the physical classroom, for synthesis will happen there. And perhaps can only happen there, but that takes us into deep waters for a blogpost. And on a related note, the more you agree with me over here, the more you should worry about inequities across the entire system. For obviously, physical classroom sessions can’t scale.

A rare area of disagreement for me in this Twitter thread, for I do have a lot of confidence in the motivational levels of undergraduates. Not all undergraduates, I should be clear. As with everything else in life, so also with motivational levels of undergrads: there will be a distribution. Some will be very motivated, and will remain so no matter how bad college is. At the other end of the distribution, some will remain very unmotivated, no matter what how good college is.

But that being said, it is true that I prefer to award the benefit of the doubt to the student. This is in good humor, Professor Nigam, and please do forgive me my impertinence, but innocent until proven guilty! Or in this case (and is it the same thing?) motivated until proven otherwise. 🙂

But quite honestly, and I’m no longer joking around, I very strongly believe that the enthusiasm to learn is systematically sucked out of a student with every passing year in academia. The more years you spend in the system, the more likely it is that you will want to not learn. This is not a universal law, but in my experience, it has been a fairly accurate heuristic.

Will there be students who will abuse the system I propose? Absolutely. That is the nature of a distribution.

Do more students suffer today for being made to mandatorily sit through classes that just aren’t good enough? Absolutely, and I would rather avoid this than the former.


Completely agreed!

I could get into one of my classes, as a hypothetical, a retired bureaucrat who has impeccable knowledge of how the Union Budget takes shape over the course of the financial year in India. This hypothetical bureaucrat has forgotten more about the budgetary process than any of us will ever know. Unfortunately, watching paint dry is more entertaining than listening to this person speak.

We’ve all met folks like these: really, really good experts, but really, really bad communicators. And that’s fine! Their job wasn’t to be good communicators. It then becomes my job as the teacher in that class to make it more interesting. Maybe I interview the bureaucrat, rather than have him speak? Maybe I record the interview and play snippets? Maybe I speak offline with him, and then conduct I class based on that conversation?

But yes, we absolutely need great teachers to make the subjects accessible and enjoyable.


It’s a great question, and I wish I had an answer, but I don’t. As I said in my first post on the AIU:

I’m a big believer in the fact that students should have skin in the game, and therefore I think that a price should be paid for acquiring an education. But I’m also all too aware of the fact that some students simply cannot pay, and therefore think that some amount of subsidization is inevitable.
It gets trickier still, because you will almost certainly have to spend more resources on those students who will need subsidization. They are, other things held constant, likelier to need more intensive training in getting the quality of their writing up to the same level as that of other students, simply because they are likelier to not have had the same exposure to quality education in school. And this will apply to other dimensions as well: quantitative skills, the luxury of having time to practice their skills and so on.

https://econforeverybody.com/2021/07/09/the-almost-ideal-university/

That is, the economist in me is saying that students from poor or underprivileged families will need more intensive training and help, educating them in the AIU will be more expensive. But that still doesn’t explain the how of it. Sure, it’ll cost more, but for doing what, exactly, and how?

There are some potential answers (bridge programs, extra assignments, more mentorships) but I’m hazy on the details right now.

Would I be correct in saying, however, that if we don’t solve this problem within the university itself, the student will face an ever tougher challenge out of it? That is, an underprivileged student who doesn’t get the kind of education we are speaking about right now will find it even more difficult to succeed out in the real world – is that a reasonable hypothesis? And if yes, then it becomes even more imperative to ensure that we work towards ensuring that these students get the kind of learning that we are speaking about?

Food for thought, for sure, and I’ll be feeding at this trough for a while. 🙂


Thank you, to Professor Nigam, for an excellent set of thought-provoking questions!

And a request to all of you – please help by letting me know what makes sense, and what doesn’t when it comes to the Almost Ideal University.

Forecasting The Future

All forecasting models are fun to learn about, and to tinker with in your software of choice. But it is equally true that all forecasting models are problematic.

First, they’re based on the assumption that the future will look like the past. Eventually, that will not be the case – this is a guarantee.

Second, even if they are based on the past, there is the problem of survivorship bias to consider in your sample of choice (my thanks to Aadisht for helping me realize this better).

And third, your predictions cannot – I repeat, cannot – account for all the underlying complexities. Forecasting is a ridiculously risky thing to do, and kudos to those who try, for this very reason.

I’d done a round-up of posts I had read in January 2020 (remember January 2020? Those were the days) that tried to predict what the world would look like when it came to India, technology and the world. I bring this up to re-emphasize the point I was trying to make in the previous paragraph: no matter how sophisticated your model, no matter how careful your sampling, and no matter however many dots you connect: reality will always have you beat.

That’s just how it is. Forecasting models work well until they don’t, and that one time they don’t can often be more costly than all the times they did.


And that brings me to this tweet:


What should you take away from this tweet (and the rest of the thread)?

My primary audience when I write here is, in a sense, myself back when I was an undergrad/post-grad student. So what advice would I want to give to myself after having read that Twitter thread?

  1. As Nitin Pai himself goes on to say in a subsequent tweet, this is a useful principle to have: Don’t try to predict the future.
  2. Respect skin in the game. Did he get it wrong? Sure he did. But hey, it takes courage to put your reasoning, your thoughts and your conclusions in the public domain. Feel free to disagree with the conclusions, but accord people who write in public the respect they deserve for having done so.
  3. Have the courage to admit you were wrong. We have two examples in front of us. One is the usual “I was misquoted/misunderstood” weasel talk. The other is an admission of error, straight up, and without qualifiers. Like the tweet above.
  4. Work at getting better. A publicly available record of your thoughts is invaluable, because it forces you to write after thinking carefully. It is also invaluable because you can outsource the “where can I get better” to the internet. And there are enough (trust me) people on the internet who will enthusiastically point out where you’re wrong. Use that advice constructively. By that I mean this, specifically: continue to write in the public domain, and that will mean making mistakes. Try not to make the same ones twice.

Like Nitin, I have written about what we’ve been going through, and how we might get out of it. All of it is available here on this blog. Some of it might turn out to be wrong – in fact, there’s a guarantee that if I write enough, some of it will be wrong. And given the pandemic that we’re going through, the stakes are impossibly high.

But it is the process of writing in public, and giving feedback on what other people write in public that drives our thinking forward.

So again, if you’re a student reading this: write. Write in the public domain. Make mistakes. Develop a thick enough skin to take on the criticism. Learn the (almost impossible to acquire) skill of figuring out when you’re wrong, and develop and hone the courage it takes to admit it.

And then, write again.


(Quick note: posting will be sporadic for some time.)

On Networking

It’s a question I get quite often: can you teach me about how to network better?

  1. I actually don’t network all that well. I suck at small talk, for starters. I’m never sure of what to do when I walk into a large gathering. My preferred thing to do at large parties is to seek out a person I’m comfortable with, and chat with that person for as long as possible. So if that is the kind of networking you have in mind, I’m not the guy to ask.
  2. But reaching out to folks to ask for help, I have a lot of experience in. I’ve been doing it for years, and will do it for life. Unashamedly, unabashedly. That I can speak about, since I have skin in the game.
  3. “Life is a non-zero sum game” is an axiom for me. So if somebody asks me for help, I will always try to help. I’d advise you to do the same. And that is a good way to start building out your network: help other folks when they ask you for it. Two advantages, one personal, one societal.
    1. Of course that person is likelier to help you when you reach out to them for help. You can, Vito Corleone style1, call in favors, even years down the line.
    2. But at the margin, that person is also likelier to pay it forward. That is, there is a non-zero chance that the person you helped will in turn help other folks who ask that person for help. If your ultimate aim is to build a society that is more willing to help each other to learn (as mine is), help others as much as possible. And you can call that networking, if you like. 🙂
  4. But that is the larger point about networking. I think most people have “how can I get others to help me?” in mind when they want to get better at networking. And sure, that’s very much a part of it.
  5. But it cuts both ways, no? I think it makes sense to first ask “How can I help others?”, before asking others for their help. Exports matter as much as imports!
  6. And a college student (my primary target audience on this blog) might well say, “But what can I help them with? They have so much more experience and knowledge than me!”
    1. True, for the most part. Not always, mind you, but I get the merits of that argument.
    2. But can you help somebody else? Can you help your juniors learn better? Can you help your neighbor’s schoolkids out with a project? Can you put out blogposts regularly that other folks may eventually read?
  7. If at least a part of your personal mission in life is to help other people, you will be that much more confident in asking others for help. Because you’re not asking for help only for yourself to get a job (for example), but through the help you’re receiving, others are benefitting too.
  8. The bottom-line is this: networking isn’t just about asking how to get others to help you. It is also about asking how you might help others. And doing the latter first makes it much easier to ask for the former.
  9. One final point: it is of course still entirely possible that the person you’ve asked for help will say no. They’re not doing it because they don’t like you, or your work. It is because they have commitments of their own, and honestly and really don’t have the time.
  10. Which is fine! There’s seven billion of us out there, you can always find someone else 🙂

Previous posts on EFE that have mentioned networking.

  1. don’t take that analogy too far, please![]

The Almost Ideal University, Part I

Tyler Cowen recently wrote about “his” university:

If you were to design a university from scratch, what might it look like? The idea isn’t necessarily to have a model for other schools to follow, but rather an experiment. Assume that various legal, contractual and accreditation constraints do not stand in your way.

https://www.bloombergquint.com/gadfly/what-would-your-fantasy-university-look-like

In this post, which may well end up being a fairly lengthy one, I will outline what “my” university will look like. This is a place I would want to work at, would want to be involved in the administration of, and would want many (but not all) students to study at. That’s what I mean by “my university”.


First things first: my idea is to have a model for other schools to follow. There are many interesting models of what an institution of learning should look like, but the problem with almost all of them is that they don’t scale. And the ones that do scale aren’t interesting models of what an institution of learning should look like. You want to be at the sweet spot between the two extremes.

It’s actually a little more complicated than that. You don’t just want to be at the sweet spot between these two dimensions, but you also want to have optimality along two other dimensions: affordability and replicability.

My ideal university, in other words, should optimize for a sweet spot that acknowledges the trade-offs between quality, scale, affordability and replicability.

All students who are in this university should get education of high quality at a price that is reasonable for the kind of education they are getting. All models of dispensing education in this university should be documented and freely available in the public domain.

When I say:

  • All students: I’m talking about scale. No student should be turned away because they were not able to solve x questions in y minutes on a particular day in the year. That’s how entrance examinations work, and the reason we need entrance examinations is because we can’t scale well enough. Patting ourselves on the back for getting the “best” students is our way of disguising the fact that we are unable to provide quality education to many more students.
    ..
    ..
  • High quality: I’m talking about quality. It is difficult to define and dangerous to measure, but you know it when you see it. Quality is not A+ on the NAAC, because nobody who has been through a NAAC process can put their hand on their heart and say that it is a good way to measure quality. Neither is quality the number of students who score more than x% in an examination, because ditto.
    Here’s a definition of quality that I am comfortable with: are you, at the end of your education, able to readily apply concepts you have learnt in order to be productive in your workplace?
    If you want to be educated in order to be a professor, did we teach you well enough for you to be able to teach right away? If you want to be educated in order to be a data analyst, did we teach you well enough for you to be able to work on a project right away? And so on, but that’s the point of a quality education – can you put what you claim to have learnt to good use?
    More: if your job requires you to acquire a skill we didn’t equip you with, did we teach you how to teach yourself? A quality education isn’t just about learning, it also ought to be about learning how to learn.
    Each of us has our own way of learning, of course. Some do better by listening, some by reading, some by visualization, some by introspection. A student who graduates from a university must have the ability to understand what she lacks in terms of skill sets, and have the ability to equip herself with that skill by using resources online.
    That’s quality.
    ..
    ..
  • A price that is reasonable: Tyler Cowen urges us to not worry about constraints, and I think I understand where he is coming from when he makes the request. Figure out the best you can build, and we’ll solve the constraints as we go along. But at least in India, one of the reasons higher education is in such a mess is precisely because we haven’t used the price mechanism effectively enough. Of the four, this dimension is perhaps the trickiest to think about.
    I’m a big believer in the fact that students should have skin in the game, and therefore I think that a price should be paid for acquiring an education. But I’m also all too aware of the fact that some students simply cannot pay, and therefore think that some amount of subsidization is inevitable.
    It gets trickier still, because you will almost certainly have to spend more resources on those students who will need subsidization. They are, other things held constant, likelier to need more intensive training in getting the quality of their writing up to the same level as that of other students, simply because they are likelier to not have had the same exposure to quality education in school. And this will apply to other dimensions as well: quantitative skills, the luxury of having time to practice their skills and so on.
    Cross-subsidization? Vouchers from the government? Income sharing agreements? My personal preference would be for the last of these, but I’ll happily admit to being uncertain about what the correct answer is.
    ..
    ..
  • Replicability: The last sentence in my statement above is about replicability. It doesn’t matter if your approach works or not, where replicability is concerned. Funding/regulatory approval for your university ought to be contingent on it being easily replicable. Your methods, your ideas and your processes must be open source. Why? Because an educated populace is the whole point of education! At a system-wide level, the opportunity cost of protecting the trade secret of an well-run educational institution is simply too high.
    Documenting the ideas, their implementation, the challenges encountered during implementation, the refinement, the impact evaluation and the evolution of the university – and that on an ongoing basis, needs to happen. And this should be publicly available, for reasons stated above.
    And it isn’t even that big a risk, because the secret to a well run university isn’t the ideas for it – it lies in their implementation, and therefore in human capital. Spread the knowledge of how to build good universities far and wide!

Now, about the trade-offs between these four dimensions. No university, anywhere in the world, can optimize all four (scale, quality, affordability and replicability) at the same time. The first two alone will inevitably involve trade-offs.

What would my ideal university optimize for, and what would I be ok sacrificing, at the margin?

The SQAR framework

I will sacrifice scale at the altar of quality, and I will also sacrifice affordability at the altar of quality. Quality and replicability are non-negotiable in my worldview.


Why sacrifice scale?

Because if I have to choose between scale and quality, I’ll choose quality every day of the week. A job well done is preferable to lots of jobs not-so-well done. Lot of jobs really well done is great in theory, but it tends to not work out in practice, and especially so when it comes to education.

Why sacrifice affordability?

Because if I define quality as the ability to apply what you’ve learnt, a graduate from my university stands a better than even chance of being productive, and therefore employable. And that means a better than even chance of income sharing agreements working out in practice. And so yes, education in my university may not be cheap, but you can always pay later, out of your future income streams. And my university has skin in the game too! No income stream, no income sharing, and my university has taught you for free. We have taught you badly, since you aren’t able to generate income, and so we don’t deserve to be paid. That’s it.


What might students actually do in my university, and how will it actually work? I’ll get to this in Monday’s post.

Krishna Subramanian’s List of Things to Read and Learn

Krishna Subramanian, Ajinkya Jadhav’s batchmate in SCMHRD, was kind enough to message me separately on LinkedIn, and send across his list of things students might benefit by reading, along with some tips and tricks that he found to be useful.

If you have finished college and are reading this, a request: please help out students who are currently in college, and are wondering how to add to their learning. I and other faculty members can help out with syllabi and all that, but you are folks with skin in the game. What helped you in your career, what helped you learn better, what did you wish you had done when you were in college?

I’m reachable on LinkedIn and on email. Please send along your recommendations, and I’ll share them here. Thank you!

On to Krishna Subramanian’s list – thanks a ton for sending these in, kind sir 🙂

 

My own top 5 books which all MBA Streams should read
1) Basic Economics by Thomas Sowel
2) Atlas Shrugged by Ayn Rand
3) Intelligent Investor by Benjamin Graham
4) Goal by Etiyahu Go
5) Life and work priciples by Ray Dalio.
6) Linchpin by Seth Godin (Bonus)

Books for Finance professionals, Other than above:
1) Manorama Yearbook
– If you are working in India, it would surprise you how little you know about India. Keeping this handy and going through once in a while is a massive boon.
2) Security Analysis By Graham & Dodd
3) Damodaran on Valuation
4) R programming for dummies. (most underrated skill any finance professional can have)
5) Warren Buffett and the interpretation of financial statements by Mary Buffett and David clark.

This should help.

I would recommend the following technology trends
to keep an eye on:
1) Blockchain ( Blockchain Revolution by Don and Alex Tapscott is a good read )
2) Artifical Intelligence ( course by Andew Ng on Coursera and Prediction machines by Agrawal gans and goldfarb)
3) Augmented Reality (best is youtube videos, because you really need to understand visually why this will change business)

Ajinkya captured the blogs and podcasts perfectly, so I figured I would add a list of don’t dos?

1) Do not read any book only once.
2) Accounting is a mechanical process but Finance is not. Do not be close minded on how things must be done. (once you come into the world, even accounting is not mechanical)
3) Do not forget your basics. NPV, IRR, Time value of Money, P&L, Balance sheet, Cash flow statements.. these things should be absolutely solid. Its remarkable how many people still fumble with these.
4) Do not ignore Taxes./hidden charges. We always do things ” tax exclusive” but remember, taxes/ hidden charges are a massive key to anything. Eg: Read about active and passive Mutual Funds.
5) Do not call Ashish as Sir. (This is correct, and important – Ashish)

Lastly I think Ajinkya captured it best, you are the average of the 5 people you hang out with. Even if you read none of the above, bring out ruthless choice in your company.

Thank you for all the learnings,
Krishna Subramanian

 

Understanding margins

This is part of a series that is building up over time, in gloriously random, unplanned fashion. We started with a post about understanding forward markets, then moved on to understanding leverage, then arbitrage. Today is about margins.

Imagine that you and your friends have decided to get together and throw a surprise birthday party for one of your friends. Now, birthday party implies cake. It’s the law, right?

And so you decide to go and book a cake, delivery three weeks from now (because that’s when the birthday is).

In the language of the financial markets, you’ve gone long on the forward contract for the cake, and the baker is the counterparty – she has gone short on the forward contract for the cake.

The baker says, well, ok, fine. The chocolate cake that you’re asking for will cost you a thousand bucks. And he asks that you pay, say, two hundred rupees now, and the rest on the day of delivery.

That is the basic idea behind margins. When applied to financial markets, the same principle is at work. If you have entered into a forward contract, you should pay part of the money up front. And the principle exists for the same reason in financial markets that it does in the market for chocolate cakes.

Boss, I don’t want to be left high and dry on the day of delivery. If you have paid me some money today, there’s a much higher chance that you’ll follow through on the deal. You now have, as they say, skin in the game.

So far, so simple, correct? Now let’s complicate the story a little bit.


Imagine that, a week from now, the government announces that flour, eggs, vanilla, salt, sugar, baking powder and all dairy products are free, for everybody. Yes, this is an unrealistic assumption, but I’m an economist. We get to pull these stunts.

Is the baker going to be happy? Well, in general yes. Lower prices for her ingredients means that she will be able to produce cakes at much lower prices. Of course, if markets are efficient, this will also mean that the prices of cakes will fall. And therefore, in the specific case of the contract that you have with her, she is going to be less than happy.

Because she knows, as you do, that you can now get an equally good cake from another baker, at say, seven hundred rupees. The ingredients are free, after all! And she can do math as well as you can – so she realizes that it is in your interests to forget about the two hundred rupees that you paid her, and book a cake from another baker at seven hundred.

Total costs to you? Nine hundred: two hundred rupees that you paid her, plus seven hundred for the cake from the other guy. You’re still saving a hundred bucks!

And so she comes to you and says, hey listen. We have a deal, you and I. I think there’s a chance that you are going to back out of this deal, given these low prices for the ingredients. So I’m sorry, but I need you to pay me another two hundred rupees right now.

(By the way, if your response is “Aur nahi diya to kya?”, we enter the world of enforceable contracts, property rights and the law. But we won’t go down that path today.)

What the baker has done is she has MTM’ed your contract. Marked To Market.

That essentially means that every single day, the baker monitors the situation, and asks how much is the contract worth if it was deliverable today, and adjusts the initial deposit accordingly.

It cuts both ways, of course: if the price of the ingredients were to quadruple, you would go to the baker and not only ask for your initial deposit back… but also ask that the baker gives you money instead. Because now she has the incentive to back out of your original deal.


There are rules about how margins work, and as usual, financial markets have their own little cottage industry of jargon around this. There’s the initial margin, the maintenance margin, margin calls and so on. But the point behind margins is very simple – you should have an incentive to not walk out of the deal, if things change in the market.

Financial markets, in other words, don’t take people at their word.

And on balance, that’s a good thing.


Imagine if companies said to students on the day of the job offer that you keep one hundred thousand rupees with us, and we’ll give it back to you six months after you join us. Are you likelier to stop searching for better, more high-paying jobs?

Or if the placement cell said you need to keep ten thousand rupees on deposit with us, and only then can you sit for an interview. Would that stop the “I just wanted to see what the process was like, I didn’t actually want a job offer from this company” students from sitting for the placement process?

Neither of these things is going to happen, relax. But that, in essence, is the point of margins.

Five Links About – Well, What Else?

It doesn’t matter whether you support Trump, Biden – or even Kanye. It doesn’t matter whether you read this at 10 in the morning on the 4th of November 2020, which is when I’ll be scheduling this post, or much later (and that could be hours, days, weeks or months later). I’ve tried to collate five sources that will give you the long view of whatever might happen on this day. With that in mind, here we go:

Ezra Klein speaks about the American divide, and posits that it isn’t about Republicans v Democrats (and read the whole excerpt, and then the whole book!):

Over the past decade, the dreams of democratic theorists everywhere actually came true. The internet made information abundant. The rise of online news gave Americans access to more information — vastly more information, orders of magnitude more information — than they had ever had before. And yet surveys showed we weren’t, on average, any more politically informed. Nor were we any more involved: Voter participation didn’t show a boost from the democratization of political information. Why?



But among those with cable and internet access, the difference in political knowledge between those with the highest and lowest interest in cable news was 27 percent. That dwarfed the difference in political knowledge between people with the highest and lowest levels of schooling. “In a high-choice environment, people’s content preferences become better predictors of political learning than even their level of education,” Prior wrote.



Misperceptions were particularly high when people were asked to describe the other party. Democrats believed 44 percent of Republicans earned more than $250,000 a year; it’s actually 2 percent. Republicans believed that 38 percent of Democrats were gay, lesbian, or bisexual; the correct answer is about 6 percent. Democrats believed that more than four in 10 Republicans are seniors; in truth, seniors make up about 20 percent of the GOP. Republicans believed that 46 percent of Democrats are black and 44 percent belong to a union; in reality, about 24 percent of Democrats are black and less than 11 percent belong to a union.



Here’s the kicker: As the charts below show, the more political media people consumed, the more mistaken they were, in general, about the other party. This is a damning result: The more political media you absorb, the more warped your perspective of the other side becomes.

https://www.vox.com/2020/1/28/21077888/why-were-polarized-media-book-ezra-news

… while Bruno Macaes hypothesizes that the split is between fiction and reality (and interpret that any way you will)

The main binary in American politics is not between left and right, but between fiction and reality. One experiences particular fictions, but at some point they must be revealed as no more than fictions. They must be switched off, in anticipation of new stories.

https://brunomacaes.substack.com/p/biden-the-kill-switch

This article is impossible to excerpt from, but deserves to be read in full, multiple times. Ross Douthat on what the right, the centre and the left learned from four years of Trump.

A worthwhile read on – no matter the outcome, whenever you read this – the Nate Silver/Taleb debate:

Because FiveThirtyEight only predicts probabilities, they do not ever take an absolute stand on an outcome: No ‘skin in the game’ as Taleb would say. This is not, however, something their readers follow suit on. In the public eye, they (FiveThirtyEight) are judged on how many events with forecasted probabilities above and below 50% happened or didn’t respectively (in a binary setting). Or, they (the readers) just pick the highest reported probability as the intended forecast. For example, they were showered with accolades when after, ‘calling 49 of 50 states in the 2008 presidential race correctly’ Nate Silver was placed on Times 100 most influential people list. He should not have accepted the honor if he didn’t call a winner in any of the states!

https://towardsdatascience.com/why-you-should-care-about-the-nate-silver-vs-nassim-taleb-twitter-war-a581dce1f5fc

And hey, take the long view!

In 44 chronological episodes, the “Presidential” podcast takes listeners on an epic historical journey through the personality and legacy of each of the American presidents. Created and hosted by Washington Post reporter Lillian Cunningham, “Presidential” features interviews with the country’s greatest experts on the presidency, including Pulitzer Prize-winning biographers Doris Kearns Goodwin, David McCullough, Jon Meacham and Bob Woodward. Start listening at the very beginning, with the life of George Washington, or jump ahead to any president whose story you want to better understand.

https://www.washingtonpost.com/graphics/business/podcasts/presidential/