Derivatives trading in football players

I love it! It’s a dream come true!! It’s official!!!

Football clubs have finally wisened up to trading in derivatives on players’ contracts, it is apparent based on the transfer deadline news of yesterday. Alvaro Negredo has been loaned out by Manchester City to Valencia, but at the end of the year Valencia have an obligation to make the deal permanent. The same article mentions Fiorentina taking Micah Richards on loan, also from Manchester City. In this case, however, Fiorentina has the option to make the deal permanent after a year.

In fact, thinking about it, this kind of option trading in football contracts is not all that new. When Brendan Rodgers was initially appointed by Liverpool in 2012, he was given a three year deal, with the club having an option of extending it by a year (the deal has since been revised).

It’s all very interesting. I’ve constantly lamented that some of the great concepts in finance which are well applicable to everyday life are not applied to the extent that is required. Option valuation is one such concept, for example. I wrote to a friend just now asking why I should join a club he is exhorting me to join, given it’s not doing much now. His reply can be condensed to “option value”.

Option valuation is not the only thing. There is the concept of liquidity. A very commonly used concept within financial markets, it is surprisingly absent in general economic literature. For example, in finance it is a well understood concept that the more the number of active market participants the less is the transaction cost (measured as the bid-ask spread). The same concept can be used to analyze markets for taxis, housing, cooks (why a cook costs much more in Rajajinagar where demand is much lower than in Jayanagar), etc. You never see too many economists talking about it, though.

The problem might be that practitioners of financial economics concepts find finance too lucrative to apply their concepts elsewhere, while mainstream or left-leaning economists might find finance (especially complex derivative finance) abhorrent, and thus are loathe to borrow concepts from that (generally speculating)!

In terms of liquidity, though, things seem to be changing. My old friend Sangeet has been practically making a living over the last couple of years evangelizing the concept of liquidity, through his excellent blog on platform economics. Check out his recent post on Uber, for example. Platform economics is nothing but the economics of liquidity. The success of Sangeet’s blog shows that people are finally beginning to take the concept seriously. Still not mainstream economists, though!

In which I thulp the RBI

I’m still so pissed off with the Reserve Bank of India doing a Ramanamurthy that I’ve written a serious editorial in Pragati – the Indian National Interest Review (published by the Takshashila Institution). In this piece I take on measures by the RBI to limit ATM transactions and the thing on two factor authorization.

I claim that both these decisions are economically unsound and there is only possibly a farcical explanation for them:

There is perhaps only one idea (more a conspiracy theory) that possibly explains the above decisions from the RBI. Both these decisions, it might be noticed, help push up the usage of hard currency and decrease the levels of bank deposits. Less bank deposits means less money available for banks to lend out, which means that the cost of borrowing from a bank implicitly goes up. Could it be that the above regulations are a move by the RBI to curtail money supply without necessarily doing the politically tricky task of raising interest rates?

If it is (and it is a very remote possibility), we should commend the RBI for what will then amount to be a sneaky decision

Link

Number thirteen

The number of rats I’ve killed in my life has remained constant at twelve for way too long. One of my biggest sources of embarrassment in recent times has been in 2011 when a rat inhabited our home for a full fortnight without me catching it. I’d even chased it around the house one day but it had proved elusive. Considering that that was my first attempt at killing a rat in Pinky’s presence, after having bragged much to her about my previous twelve kills, it was a major disappointment. It was as if my manhood was in question.
I made up for that today by killing number thirteen. This one was rather timid and easy kill. I’d closed the door between the drawing room and back room of my in-laws’ house but the stupid rodent just kept pushing against the door trying to open it. At that moment my mother in law alerted me (I was on a phone call in another room) and in I came and whacked the rat a few times with a broom. It quickly keeled over and I put it in a polythene bag and threw it out.

image

Of course there was considerable groundwork I’d done before this. I’d procured from the mother-in-law a broom and a long stick. I’d closed all the doors and thus restricted the rat to one closed space. I’d tapped around the entire house with the stick trying to scare the rat. And then I moved away to talk on the phone. Groundwork thus laid I proceeded to whack the rodent.

Pinky may not have seen the kill herself but I was on the phone with her as I whacked the rat. Phone in one hand held to the ear. Broom in another whacking the rat dead. Quite I sight I made I imagine!

And while Pinky did not see this kill directly I did one better – Pinky’s mother was there through the entire process (she did her bit by supplying the whacking implements and sacrificing a sweet to lay bait for the rat and most importantly alerting me when the rodent made its stupid move). I feel so glad. I feel like my life has been resurrected. I can finally rest, having made up fit that spectacular failure of 2011.

The rat is dead. Long live the rat!

The RBI does a Ramanamurthy

This is the second time in a few weeks I’m referring to this scene from Ganeshana Maduve. Please watch it first.

To repeat the story:

Ramanamurthy the owner of the “vaTaara” (a kind of apartment that was popular in Bangalore till the 1980s, with lots of small houses in the same compound) wants to whitewash his house. The residents of the vaTaara  demand that if he whitewashes his house he should whitewash the entire vaTaara. After a long and protracted negotiation, Ramanamurthy agrees to their condition – he doesn’t whitewash his house!

It is a similar story with taxi operators in India. Uber (the Ramanamurthy) figured out a way to bypass RBI’s two factor authentication system and offer seamless payment options for their taxi services. Soon other taxi operators like TaxiForSure and Ola started crying foul saying they too wanted their houses painted, i.e. they too wanted to locate payment servers abroad to accept one factor authentication credit cards.

And now RBI, like the rent controller ubiquitous (in mention only) in movies of the late 80s has stepped in and stopped Ramanamurthy from painting his house, too – they’ve barred Uber from charging in US dollars for Indian rides. It would be interesting to see how the market will develop now.

My personal opinion is that RBI’s insistence on two factor authentication is half-assed. They should make every effort possible to increase the number of credit card (or account-to-account) transactions. On one hand it decreases flow of black money but more importantly it means that people will keep more cash within the banking system (rather than as hard cash) which will have a multiplier effect on money available for lending and all that.

It’s fine to have regulations in place such that credit card fraud is minimized but that doesn’t mean cutting credit card transactions altogether! Hopefully the RBI will see the light of day on this one soon.

Alcohol and Shit

I started drinking when I was 21, after I had graduated from IIT. To most, that might sound surprising, but it’s a fact. It wasn’t supposed to be that way – I had initially planned to make my alcohol debut in my last week at IIT, just before the final exams. However, I ended up falling sick and missed the occasion. It would be another two months and entry into another institute of national importance before I finally broke my duck.

There are several reasons that could possibly explain my delay in experimentation with alcohol (you read that right – despite ample opportunity I never even considered experimenting with alcohol at IIT). But thinking back at those days the most compelling one is shit. Yeah, you read that right. I delayed my experimentation with alcohol because I was afraid of what shit it would lead to. Literally.

In the middle of my first night at IIT, I ended up in hospital. Yes, you read that right. The first day had gone alright. My father had accompanied me and helped me set up my third of the room. I had opened a bank account, registered myself at the mess, and after my father left in the evening, went about exploring campus and venturing into other hostels to meet people I know (a cardinal mistake by an IIT “freshie” but somehow I escaped getting caught).

And then in the middle of the night it started. A few trips to the loo later I figured it was time to seek help (it’s not that I wasn’t prepared – my belongings included a sheet of Andial – reputed to put an instant stop to the toughest of shit. But I ended up puking it out that day). I woke up Paddy the Pradeep, who was the only person in my hostel I knew well. He called the institute hospital, which sent an ambulance, and I spent the rest of the night in the hospital, with some shots and on drips. The next morning I was fit enough to be attending the orientation ceremony.

As if this wasn’t enough, shit problems struck again a month down the line, this time during the first round of exams. To make matters worse, the hostel had water problems (always an issue in Chennai). And the institute hospital’s medications wouldn’t seem to help. It was a nightmare.

It was around then that my classmates had settled down in the institute and started experimenting in life. As they began their experimentation I began to notice, and be told stories of, some side effects. If you drank too much you would puke. If you drank too much, the next morning you would have a hangover. And it was only after you shat that the hangover would pass, i was told. It all sounded like so much of a nightmare to me, who was already scarred about any potential stomach problems. There was no way I was going to try something that would give me more shit.

It was after I moved to an institute with reasonably assured water supply that I started my experimentation. Experiments were mostly successful (except for occasional infringements like this and this and this ). Shit wasn’t so much of a problem at all, I realized. The experimentation, though delayed, had ultimately been successful.

It’s of late – perhaps in the last one year – that I’ve noticed a peculiar problem. Whenever I have a few rounds (few can be as few as one) of Vodka or Beer, it results in terrible shit the following day. You get the normal dump right in the morning. But the real bad shit comes out in two installments, usually one after breakfast and one after lunch. It’s really foul-smelling (normally you shouldn’t mind the smell of your own shit or fart, but this is exceptionally bad). It causes great pressure (which means you better stay not far from a toilet). And when it comes out it results in insane pleasure.

One interesting thing is that this happens only when i consume beer or vodka. It never happens with whisky (the kind of alcohol I most often imbibe) – not even with cheap IMFL whisky. With whisky I can drink copious amounts, get drunk, and carry on the next morning like I had fruit juice the previous night. But not with beer or vodka – does anyone have an explanation for this?

You might have guessed that the gritter for this post was certain events last night and this morning. That’s right. At a party last night I didn’t realize that they were serving whisky, too, and went for beer (UB Export Strong – also known as “Yaake Cool Drink”). Having started I had more rounds of it. And after breakfast this morning it’s started acting! If only I’d gone for the whisky!

SPinky

My cousin has coined the word “spinky” – a portmanteau of Spain (where the wife now lives) and Pinky (the wife’s primary nickname). Actually I’m not sure if it’s my cousin or her three year old son who coined the word but it sounds cool.

And considering that spinky anagramizes to skimpy when written in Kannada I think it’s rather cool. I don’t know why but I’m suddenly reminded of our engagement cake where we’d got “skimpy weds pinky” or some such thing inscribed. I have no clue why I got that written (I admit it was my choice) but I had to take uncomfortable questions from relatives as to why I’m named skimpy (pinky was coined by her parents and can be considered to be a natural diminutive of Priyanka so that’s more explainable).

One side effect of that inscription on the engagement cake is that all my friends know the wife as “pinky”. So this conversation actually happened last month.

Me: so Priyanka was saying ..
He: who’s Priyanka?
Me: my wife
He: oh you mean pinky?

And considering that pinky doesnt particularly like to go by “pinky” (she prefers the other diminutive Pri, which was coined by some friends) she’s going to great lengths to get her friends in Spain to call her Pri.

But spinky sounds so cool it’ll be a travesty if it doesn’t catch on. So if you’re in barcelona now and are part of Pinkys regular play group please make sure you call her pinky and don’t let her get away with being called Pri. For pinky is so much cooler you know. And spinky is even cooler!

Spain + Pinky = SPinky, wife of SKimpy.

Chatting and messengers

So the wife has just moved abroad and I haven’t even bothered getting international calling enabled on my mobile phone. It’s not that I’m not concerned about keeping in touch with her – it’s more to do with the plethora of options to keep in touch with her than a normal phone call.

Firstly there’s whatsapp, which I’ve used for the last two years (the trigger to join whatsapp was the limit in the number of text messages one could send per day which was introduced in 2012 as a “rumour prevention mechanism”). A large number of people on my contacts list use WhatsApp, which means that it is extremely rare that i use normal text messaging to connect to them.

And earlier today, while she was waiting for a connection at Frankfurt airport, the wife asked me to install Viber, saying it allows us to talk without any international dialing cost. I just had a brief conversation with her and the quality was extraordinary (especially given i’m on a weak BSNL broadband here and she was in a car there). Then I looked at my contacts who are on viber, and the number of my contacts who are using Viber is insanely high! Almost makes me seem foolish for not joining in so far.

And then earlier today I spoke to someone in Singapore using Skype. Call quality wasn’t that great – we dropped a couple of times – but it was still pretty good. And then there is google hangouts. And then there is apple’s facetime (perhaps the main reason the iPad fell my side when we were dividing our assets prior to the wife’s move is that I could have an Apple device with me so that we can FaceTime!).

The number of options for messaging is so large that I wonder how long the whole calling and messaging model will continue. I had shown in a recent blog post (on my public policy blog) that the number of SMSs sent per user in India peaked three years ago and has then been on a secular decline. And now there is news that the telecoms regulator in India is thinking of instituting a fee on providers such as WhatsApp and Viber because of the revenue losses they are causing to the mobile phone service providers in India (like Airtel, Vodafone, etc.).

The question therefore is what the future of telecom will look like given the large number of internet based reliable communication providers who are springing up. My prediction is that the phone call is not going to die – what sets apart a phone call from a Voice over IP connection (such as Skype or Viber) is that it is “online” (i forget the technical term for it – ok got it it’s “network switching” as opposed to “packet switching” which is how the internet works).

To explain that in English, when I talk to you over the phone (normal phone call) there is a dedicated line that goes out from me to you. Basically your telecom provider and mine and the network interchange come together so that a virtual line is drawn from me to you, and this is exclusive for us as we talk (call dropping on mobile phones happens when we try to move from one “cell” to another and get lost in between).

The internet doesn’t work that way. When I send you a “voice message” over the internet, it goes one hop at a time. There is no dedicated line from me to you. The reason we are now able to voice chat online reliably is that the bandwidth available is so much that packets usually get connected quickly enough (think of a bus network so dense that you can change buses instantly to get to your destination – it virtually simulates a “direct bus”). When the network is busy or the bandwidth clogged, however, there might be some delays (while a phone call once connected remains connected).

Given this distinction the phone call offers a level of reliability that packet switching based voice messengers can never reach. And there will always be a market for extremely high reliability. Hence the phone call is not going anywhere.

The SMS, on the other hand, is again packet switched, and a mechanism in which carriers could extract large amounts of money. The SMS will soon die a natural death – kept alive only by means of government mandated services such as two factor authentication of credit card transactions.

While the fees on carriers such as Viber might become a reality in a place like India they are unlikely to sustain as international norms become uniform. What we are likely to see instead is mobile carriers coming to terms with existence of such providers, and some interesting internet pricing plans.

Currently, to use Viber for a fair bit you need a fairly high FUP (fair usage policy) limit on your phone (carrying voice digitally takes a lot of bandwidth). Carriers might introduce some kind of a graded payment structure such that they can partly recover (through higher internet charges) the lost revenues thanks to lost call charges.

If any mobile phone operator is reading this and needs help on devising such pricing mechanisms, feel free to use my consulting services. Among other things in the past I’ve done revenue management for airline ticketing and cargo (the holy grail of revenue management) while working for Sabre – the pioneer in revenue management.

Bachelor notes: day zero

I’m writing this having just dropped the wife at the airport. I’m taking the bus back home. While it helps that this bus goes 200m from my house and i saw it leave just when I was ready to leave the airport, I realize that with the wife not at home there’s no incentive for me to get home asap. A little delay doesn’t hurt!

And to think that the last time I took the airport bus home was one week shy of five years ago, which was a month before I first met the lady who is now the wife!!

While I’m at it I’m suddenly reminded of the time eleven years ago, when I was at IIT and decided I wanted to “slow down the pace of life”! And my way of achieving that was by selling my cycle!

Something tells me I’ve written about this recently on the blog but I’m on the mobile and hence too lazy to check right now!!

Back to bachelorhood

Starting tonight I’ll be a bachelor once again. For the next nineteen months or so. No it’s not that I’m returning my post graduate diploma and hence getting this downgrade (it’s been a while since I cracked a bad joke here so I’m entitled). It’s that the wife is going away. To get herself an MBA (yes I know that after this she will be better qualified than me since she’ll be getting a proper MBA while i have a post graduate diploma only. Maybe I can retire soon? ).

She’ll be going off to Barcelona tonight. The original plan had me moving there too. But then classic old NED happened and I ended up not looking for a job or assignment there and since it’s not an inexpensive place to stay I’m staying back. Plan to visit her every once in a while. And even though tickets to Europe are prohibitively expensive I now have a place to go to in case I need a break.

But for that I need to first get myself a visa. I guess one of my chief tasks in the next few days will be to get this bit of business done. But then I have my own business.

Regulars on this blog might be aware that I haven’t had formal employment for close to three years now. I freelance as a quAnt consultant – helping companies figure out how to make use of the volumes of data they collect in improving their business decision making. It’s been doing quite okay but my plan is to use the next few months when I don’t have any domestic commitments to see if I can take it to the next level.

It might also be pertinent to mention here that the first bit if business I got for this particular venture was through this blog – the last time I put out a post like this one a long time reader who was looking for quant assistance left a comment here and that led to a rather fruitful assignment. Perhaps mentioning this here might result in a repeat?

Now that I’m blogging more than I used to in the recent past I’ll also be using these pages to keep you updated on the long distanceness. I’ve also noticed that since I last put the update on leaving twitter and Facebook that there’s some more activity here. Keep that flowing and I hope for some good conversations on the comment pages here.

Ordering in large groups

When you go out in a large group, ordering can sometimes become a pain. This is especially the case if you know each other well and want to collectively share a large number of dishes rather than each person ordering a dish for herself. Usually, you can end up either under ordering (I’ve seen cases where three curries have been ordered for a table of ten people) or over ordering (when lots gets left over). And someone or the other is usually left unsatisfied.

There are two extremes in which collective ordering for a large group can actually work. At one extreme, there is one “leader”, whom everyone else trusts to order. The leader finds out the group’s preferences and aggregates them and takes the decision on the group’s behalf. Usually the leader is someone who is trusted, so their decisions are generally followed. There might be some inefficiencies but the rest of the people can focus on the conversation while the leader can bask in the glory of power.

The other extreme that works is completely decentralized ordering, like we did last night when I met a bunch of relatives. People trickled in slowly, and we found it was not feasible (for the butterflies in our stomachs) to wait for the whole group to arrive before we started ordering. And so I ordered a pizza and a pitcher of sangria (when in a large group you don’t need to specifically target who is going to consume the pizza and each glass of sangria – it gets aggregated over). I took a slice of the pizza and a glass of the sangria, and the rest actually disappeared rather quickly.

As people came in, they got the hint, and we never had to waste any time in discussions of the “shall we order this” sort. People kept ordering what they wanted, and since we had an implicit agreement of “sharing”, everything presently got consumed. That we were collectively full was indicated by the point in time when no one was ordering. It turned out to be a fantastic dinner.

Now, there are some conditions that need to be met for this kind of ordering to work. Firstly, there should be no one in the group who is shy or hesitant to order by themselves or requires pampering – such people will end up hungry in this situation. Secondly, there should be some sort of implicit trust in the  group that people will be somewhat reasonable in their order. Finally, given that the only way to split the bill in such situations is equally (since who ate what is rather fuzzy) “tragedy of the commons” should not happen. All conditions were broadly satisfied last evening, and (in my opinion) things worked out.

What kind of ordering algorithms have you used in the past, and how has that fared? Do you think decentralized ordering actually works, or if there are other conditions that need to be satisfied for it to work? Do leave a note on your experiences with ordering!