Twisting and shouting

Ten years ago to the day, there was tragedy. Around this time I was home. That day I remember my father’s usual Ambassador (his office car) wasn’t available, so he had come in a blue WagonR which looked like anything but a government car. Not that I could see too well, though.

Back in 2004, spectacle lenses made of plastic weren’t yet popular, and even if they were available they were quite expensive. I remember having a shell frame back then (like I do now, except that that one was an ugly-ish brown). The lens was made of glass – the kind that could shatter on impact and enter your eyes.

And shatter and enter it did. I had instinctively closed my eyes, so not much had gone in, though. My first reaction at that point in time was to remember the phone number of my usual opthalmologist (yes I still remember things like that). I even remember calling that guy’s office (yeah, back on those Nokia phones you could type without looking). Friends, however, were of the opinion that I should go to the nearest eye clinic. And Shekar Netralaya (JP Nagar 3rd Phase) was where we ended up.

It was among the freaker of freak accidents. I was playing badminton. <lj user=”amitng”> and I were on one side, two others on the other. We were both close to the baseline when the opponents sent the shuttle high. Both of us went for it, <lj user=”amitng”> slightly ahead and slightly to the left of me. Both of us drew our rackets back with a slight backswing. And that was it.

His racket caught me flush on the left spectacle lens. The lens duly cracked, and parts of it entered my eye. I remember that the game immediately stopped. I remember that one other guy’s car was right there outside the court, so we could go quickly to the hospital. And back in those days there wasn’t even a signal at the Delmia junction, so the U-turn was taken fast so that I could go to hospital.

I don’t remember what they did at the hospital. I think they cleaned up my eye, but one or two pieces remained particularly troublesome. I remember going for a follow-up test two days later. And I remember that one day after the accident I went all the way back to IIMB (after the accident I went home, in my father’s temporary blue WagonR) so that I wouldn’t miss accounting class (yes I was in my first semester so such youthful enthusiasm can be expected). And went back again the following day to write a test which I nearly aced.

And then there was the back story. 2004 was the first time that the IIMs decided to make public the CAT percentile. They had used an algorithm to allocate percentiles, and allocated it up to two decimal places. So if your “percentile” (with decimal places the term doesn’t make sense) was greater than 99.995 (i.e. you were in the top 0.005% of the 130,000 odd people who wrote the exam), your percentile would get rounded up to give a weird-sounding “100.00 percentile”. Top 0.005% of 130,000 means about six or seven people. Two of those were at IIMB. I was one of them. <lj user=”amitng”> was the other.

During our inauguration the certificates for the “directors merit list” of the senior batch were handed out. It was possibly meant to tell us how important being in the top 10 of the batch was, and I’m sure it did inspire a lot of people. And having been the top performers in the entrance test, people perhaps considered <lj user=”amitng”> and I top seeds (neither of us ended up getting it, though he got considerably closer than I did).

And so when I got injured before our first ever unit test and he was in some ways culpable for it (though in fairness it was on the field of play), there was scope for conspiracy theory. And when you have a bunch of creative youngsters and scope for a conspiracy theory, you can well expect someone to stand up and do the honours. And @realslimcody rose to the occasion. And Twisted Shout was born.

The name of the organization has its own story. @realslimcody is a Beatles fan, and he suggested that he name the yellow journalist enterprise as “twist and shout”. Madness heard it as “Twisted Shout” and the name stuck. A couple of episodes later I duly joined Twisted Shout. And we did a lot of twisting and shouting and yellow journalism. If you were our contemporary and not slandered by Twisted Shout you might consider your stint at IIMB of not being worthy enough!

Of course in a place like IIMB, you don’t do something just for the heck of it. Everything has to result in a “bullet point” in your CV (back in 2005 I’d planned to write a book called “In Search of a Bullet Point” about IIMB, but that again didn’t take off. I put NED, I guess). I think I wrote in my final resume that I was a “co-editor in the campus informal journal Twisted Shout”. I think the placement committee (which whetter all CVs) let that one remain (bless them). And as with all such campus endeavours TS quickly died after we graduated (though I tried to resurrect it in a separate blog on this site, it didn’t take off).

It’s ten years since that landmark incident that sparked the birth of Twist and Shout. I must mention my eye is fine – fine enough for me to wear contact lenses as I type this. There’s a scar inside my eye, though, and that’s something I’ll carry all my life. But it doesn’t affect life one bit, and life goes on!

Oh, I wasn’t right on that one – after the injury the doctor had told me that I shouldn’t let sweat enter my eyes. Two months after the injury I managed to get myself a red bandana (with skull and crossbones on it), and I ended up wearing it at all “sweatable opportunities” – when I played or partied. The bandana got legendary in its own way, and its story shall be told another day (or perhaps it’s already been told somewhere on this blog).


Damodaran on Uber’s Valuation

It is fascinating to watch this back-and-forth between NYU Prof Aswath Damodaran and Uber board member Bill Gurley on the taxi company’s valuation.

To set the context, when the latest funding round for Uber was announced, valuing it at USD 17 billion, Damodaran – a guru in valuation – wrote his own analysis which valued the company at about a third of that value. While it was a typical Damodaran post – long, detailed and making and stating lots of assumptions – it was probably intended as an academic exercise (the way I see it).

Instead it seems to have really caught the fancy of the silicon valley investment community, and led to a response by Gurley (I admit I haven’t read his full response – it seemed to attack straw men in places). And Damodaran has responded to the response. Now that the Three Way Handshake is complete I don’t expect any more backs and forths, but I won’t rule it out either (it’s possible but not plausible, to use Damodaran’s terminology).

What fascinates me is why an academic’s academic post on valuation of a company has created so much of a flutter – so much to merit a long-winded response from the board member. I’m reminded of two things that my valuation professor had told me some 10 years back when I was in business school.

1. Valuation is always wrong
2. Value of a company is what the market thinks it’s valued at

The first of these is a bit of a motherhood statement and adds no value to this particular discussion so let’s not take that into account. It’s the second reason that has got the investors’ knickers in a twist.

In the past, I’ve seen Damodaran publish valuations of companies that are about to go public, or are already public – Tesla and Twitter for example. It is usually an academic exercise, and Damodaran’s valuations value these companies at lower than what the market values. However, given that these posts have appeared after there has been a broad consensus of a company’s valuation, it has not really impacted a company’s valuation, and thus have been treated as an academic exercise.

The problem with Uber is that it is a private company, and unlikely to go public for a very long time. The problem with a private company is that it is difficult for investors to agree on its valuation – there are very few trades and the stock is illiquid (by definition). And illiquidity means extremely high bid-ask spreads (to put a technical spin on it) and widely varying valuations.

Sometimes, when nobody knows what something is valued at (like Uber – which is creating a new category which no one has any experience in valuing), what people look for is some kind of a peg, or an “anchor”. When they see what they think is a reasonable and broadly reliable valuation, they tend to use that valuation as an “anchor” and if a large number of investors agree on one such anchor, the anchor ends up being the company’s valuation itself.

To reiterate, value of a company is what the market thinks it’s valued at. Nobody knows what Uber is valued at. Investors and existing shareholders agreed at a particular valuation, and did a deal at that valuation. However, this valuation is not “deep” – not too many people agree to this valuation.

It is in this context that an (very well renowned) academic’s valuation, which values the company at far less than the last transacted price, can act as an anchor. Damodaran is extremely widely respected in investing circles, and hence his valuation is likely to have received much attention. It might even be possible that his valuation becomes an “anchor” in investors’ minds of Uber’s valuation. And this is where the problem lies.

Even if you were to account for the consistent downward bias in Damodaran’s valuations and adjust Uber’s valuation accordingly, it is likely to lead  to a much lower anchor compared to the last transacted price. And this is not likely to be good for existing investors. Hence, they need to take steps to quickly debunk Damodaran’s valuation, to make sure it doesn’t end up as an anchor! And hence the long response by Gurley, and the silicon valley investor community in general!

To summarize, all that this entire brouhaha on Uber’s valuation shows is that its price discovery so far has been rather shallow.

Correlated judgment

When you judge people about something, you do not normally judge them on that thing alone. You also judge them on “correlated traits”. For example, there is this popular adage (that was popular when I was in IIT) that goes “beauty times brains equals constant”. This implies that anyone who is above average in terms of looks is likely to be below average in terms of mental capabilities. Whether such a correlation exists is not known, but by instinct if we someone beautiful, we assume that the person is not great in terms of mental ability (in my later years at IIT, we recognized this limitation of the model and proposed “beauty times brains times availability equals constant”, acknowledging that beautiful intelligent people exist, but are most likely taken).

There is no end to such correlations, which usually make rounds around college campuses. For example, there is the “he is the partying types, so is unlikely to be a good worker”. Now, while it is true that the amount of time available to most people is constant, and that heavy partying can come at the cost of working, such an adage discounts the fact that some people could simply be better time managers, or don’t care much for some axis apart from partying and working (sleeping, for example!), which allows them to be good at two things that people are normally not good at!

It is common for people to judge people. However, thanks to implicit correlations of traits that are built into people’s minds, when you get judged on one thing, that is not the only thing you are judged on – you are also judged on the things that are correlated with that!

Time for more examples. Once my parents saw a friend of mine very evidently flirting with a girl. They immediately judged him as being “a flirt” and branded him thus. While judgmental, there is no mistake in that judgment – he was indeed a flirt, and would gladly admit to it. But then my parents, using their inbuilt correlation filters, went one step ahead. “He is such a flirt”, they told me, “We don’t think he is a good person. You should not hang out with him any more”!!

Back in 2005, in IIMB, I had stood for elections to the Academic Council. At a party a week before the elections I happened to get wasted, and ended up talking to people inappropriately. The next morning, as I’m trying to get over my hangover, I heard “dude, how could you get wasted if you are standing for elections?” I have no clue how getting wasted at one party would make me a bad Academic Councillor! I must mention I lost the elections.

It was at a discussion yesterday with Bharati and my wife Priyanka that this topic of correlated judgment came up, when we were discussing how life in a business school can be unforgiving. A few minutes later, Priyanka popped up “that baby was so cute, I expected him to be dumb!”


Beer numbers

I’ve always wondered why the craft beer at Arbor, a popular microbrewery in Bangalore, is so potent. While I was losing it on one such last night, I made a small calculation (rather simple) which gave me the answer.

The standard serving size at Arbor is 500 ml. The strength of the beers varies from 5.5% alcohol content to 8% alcohol content. While making this calculation last night, I was sipping the one with 8%. 8% of 500 ml is 40 ml, which means that I had 40ml of unadulterated ethanol (combined with 460 ml of other stuff).

Most standard whiskies and hard liquor have 40% alcohol content. So if I were drinking whisky rather than beer (i usually drink whisky and not beer), that one glass of beer was “worth” 100 ml of whisky!

And what about the “regular” beer that I have, which is a 330ml bottle of Kingfisher Premium? That has 6% alcohol content, or 20 ml of alcohol in a beer, which equates to 50 ml of whisky, which is less than one large peg of whisky! To put it another way, one standard unit of beer at Arbor contains about twice the amount of ethanol as one standard unit of bottled beer!

And then it is manufactured right there – because it is a “microbrewery” it is unlikely for each batch to have the precise amount of alcohol. There will be a margin of error. And I’ve been told (verbally, through the grapevine, so this is not official information) that they err on the side of more alcohol – so when the stated alcohol content in something is 8%, they prepare their setup so that the chances of alcohol content being lower than 8% is extremely low. Put that together with the above calculation and you’ll understand why you get so drunk at Arbor!


Indian Pale Ale is the “beer of beers”. Beer itself is famously an “acquired taste” – I remember being so disgusted when I had my first beer back in 2004 that I didn’t have another beer for another year. Now I’m quite used to the taste of Kingfisher.

But then the taste of IPA is even more “acquired” than that of bottled beer. I had some trouble finishing the IPA I ordered yesterday – what helped me finish it was perhaps the alcohol content which was already working! On a previous occasion I’ve ordered an IPA and only half-finished it. But then fans of IPA swear by it and go all the way to Arbor specifically for its IPA! So it is the “beer of beer”, or perhaps “beerendra beer” (Bikram Shah Dev).

Tailpiece 2

I was there as a part of a really large gathering (some 25 people), with people entering and exiting at random times, so they instituted a good measure to ensure we paid fairly. Every time someone ordered something, the drink would come along with the bill, which the orderer would clear right there.

This way there was no scope for messy calculations on who owed whom how much and all that, and no need for any bill-splitting algorithms!


Upside and downside of bankruptcy

I sometimes think of my mobile phone going out of charge as being similar to filing bankruptcy – if the phone is at 1% battery, the loss is “linear” – all I need to do is to plug it back in and once it’s charged again it’ll function as it used to. There is no “non-linear” loss.

Phone going from 1% to 0% changes that, though. Now, even if you were to plug in the phone as soon as it has gone to 0%, you cannot switch it on till it gets back to some level of battery (that’s the case with my current and earlier androids. Not sure about other phones). Thus, you have a non-linear extra cost because you let the phone hit 0%.

It is similar to bankruptcy in that once you file for bankruptcy you are suddenly piled on with additional paperwork and costs and even if you were to “get charged up”, there will be additional costs that you will have to bear that you wouldn’t have to had you managed to find a plug (funding) when you were close to blackout (bankruptcy) but not yet there! This is the downside of bankruptcy – it imposes non linear costs.

But then there is an upside also – maybe this is a different kind of bankruptcy, but this is one that has upside. Maybe the bankruptcy that I’m going to talk about now is what is called as “Chapter 11″ in the US while what I described earlier is like “Chapter 7″ (do you know that US bankruptcy law is inspired by the Mahabharata? In the great Mahabharata war, the two sides had 7 and 11 regiments respectively. And since it was a disastrous war, the numbers 7 and 11 were picked up by the US bankruptcy lawmakers to name their different kinds of bankruptcy).

So there are times when I have a lot of things to do. I would have bitten off more than I could chew. And I find that I have so many things to do that just thinking about all the things I have to do in that limited time mess up my mind and not allow me to do any of them. It is at such points in time that I sometimes “declare bankruptcy” – declare that I’m not going to do any of the things that I’m supposed to do.

Now, the pressure is off. Since I’ve decided I don’t want to do anything, whatever I do after that is a bonus. Now I can take up these tasks one by one and do more than what I would have had I not decided to declare bankruptcy. There is some downside of course – some tasks might remain incomplete, but importantly more gets done than if I’d declared bankruptcy!

This is the good side of bankruptcy!

Graphing social networks

When I’m meeting a random bunch of people I like to graph out social networks in terms of who knew whom before the meeting happened. For example, I was meeting some friends yesterday – B was in town, and wanted to meet people. He called A and C, who got along D (also known to B). After this meeting B was supposed to meet E, but E landed up anyhow. Based on who knew whom before the meeting this is how the network topology went. People are represented by vertices and if there’s an edge between them that means they know each other.

socialnetwork1So it started with A and B meeting, with C supposed to land up in a while. Now, C knows A and B through two different “affiliation groups”, but knows both quite well. So C lands up, but now the question is what do you talk about. The basic structure of the group – where A-B, B-C and C-A know each other through three separate affiliation groups means you can’t talk about people (thankfully!).

Anyway conversation goes on, and then D lands up. When B asked C if they could meet, he said “I’m not in touch with anyone else here in Bangalore. But if you think there’s someone else from our affiliation group who’s here and wants to meet, bring them along”. Thus, C invites D (whom he hasn’t met for ages) and D lands up.

Now, for the first time,  the group is not a clique – since A and D don’t know each other. It’s up to B and C now to control the conversation in a way that A or D don’t get bored. People talk about work, careers and all that – where anyone can give gyaan.

After a while, E lands up. Now, E doesn’t know anyone else in the group (apart from B). So now, B becomes a cut-vertex. B starts talking to E. With B and E taken out, in the A-C-D network, C is now a cut-vertex! So it’s up to C to manage the conversation with A and D! C isn’t particularly good at that!

Soon A leaves. Now, the group effectively splits, while sitting at the same table. B talks to E (no one else knows E), and C talks to D. All is well.

The problem with the group was that none of the “connectors” (B, C) were particularly good at connecting people, and keeping one conversation. This, though, wasn’t the case at a drinks session I attended on Monday evening. There, the social network at the beginning of the conversation looked like this (variables here all mean different people, only I was common to both meetings):


The thin lines here indicate that B-F and E-F had met before, but didn’t know each other well enough. As you can see, A is now the cut-vertex here. The difference, though, is that A is a master networker, and has a self-professed interest in “collecting interesting people”. The group for the meeting was also fully curated by A – no one “brought along” anyone else.

So A ensured that the conversation flowed. He made sure people connected, and there was great conversation. At the end of the day the network was a clique!

I’ve never been good at making these connections. I dread gathering where I’m the cut-vertex – forever afraid that someone might be left out. Connecting and collecting people is surely a skill I need to develop!

PS: At a coffee shop in Mumbai eight summers ago, I was at one end of the social network which looked like this. Don’t ask me how it came about!


Hacking life

One of those terms that periodically bubbles up to the top of people’s imagination is “life hacking”. The phrase by itself may or may not make sense – actually looked at the right way, it might. However, the problem with such catchphrases is that they tend to get much abused and people start using them in contexts where they’re not appropriate (think, for example, “big data”. Similarly, I loathe to call myself an “analytics consultant” since that’s much abused. I instead use some variation of “quant management consultant” which is not yet abused).

Coming back to life hacks, the problem with life hacks is that a lot of what goes under the name of life hacking isn’t actually hacks. For example, recently the Mint newspaper (who I write for) published a series on life hacking by this guy called Charles Assisi. The three part series was extremely underwhelming and meh.

Take the first part, for example. It includes supposed “hacks” such as “find yourself” and “get things done”. While I agree that these might be useful principles to live life by, they simply don’t qualify as being hacks.

The basic definition of hacking is to rig up something on the fly. Check out the “hack” page on urban dictionary, for example. Sample some of the (more charitable) definitions of hacking:

A temporary, jury-rigged solution, especially in the fields of computer programming and engineering: the technical equivalent of chewing gum and duct tape. Compare to kludge.


 A computerized bartender that automatically mixes your drinks and debits your account? Now THAT’S a hack.

You get the drift right? A hack is something like the Indian “jugaad” – something that’s put together because a mainstream solution doesn’t work. If I buy curtains for my window it’s not a hack. If I cover it up with a bedsheet instead (like I’ve currently done in one of the rooms in my house), it’s a hack!

Coming back to the point, the problem with a lot of “life hacking” discourse is that what it speaks about cannot be classified as hacking (Assisi’s pieces are Exhibits A, B and C of this). The problem, however, is that hacking of any form doesn’t lend itself to newspaper articles, for hacking is always context sensitive.

The reason I’ve used a bedsheet as a curtain is that i have a non-standard sized window and I’m too lazy to go get custom-made curtains – notice that this is a problem unique to me, and hence I’ve hacked together a solution. This, now, cannot be translated to a newspaper piece that says “Home hacks: Use bedsheets as curtains”.

Life hacking, in its traditional form, is rather useful, but doesn’t “travel”. For example, one of the “hacks” that Assisi writes about is “choose focus”. Now, intuitively, there’s nothing “rocket science” about this. For most people, focusing on a task at times can be rather trivial, and thus doesn’t need a “hack”.

But what about people with ADHD like me, who cannot focus? I know that focusing is a wonderful thing, but I can just never get myself to focus. This is where a “hack” (to get myself to focus despite being inherently bad at it) might prove useful – and if the hack proves successful I can “productionize” it. But then, that’s my specific context, and there is no way a newspaper article can address that!

So life hacking exists. Yes, it’s a thing. But it’s a context sensitive thing. A hack that can work for you will not work for me – unless our contexts are extremely similar! Keep that in mind before you profess or import hacks!

Sri Lanka diaries: Hotel of the tour

The “hotel of the tour” award for my just-completed vacation in Sri Lanka goes to Pigeon Island Beach Resort in Trincomalee. Now, it is not that they had the best rooms. It is not that the rooms were the best maintained. It is not that the service there trumped the service at every other hotel that I stayed in. It was simply that they seemed to have given the most thought to the hotel design.

At first look I wasn’t particularly impressed with the hotel. Now, it is a highly rated hotel going by TripAdvisor, because of which we had booked it, but the first impressions weren’t great. The reception area was small – just one table, staffed with people not in any uniform (it’s a beach resort – so I should’ve figured that the T-shirts they were wearing was actually uniform!). The hotel was rather small and narrow, with access to a narrow sliver of the beach. The rooms were big, but the loo seemed uncomfortable, with the way the pot was wedged next to the shower cubicle. And the air conditioning never seemed to cool the room enough!

It was after a trip to the beach later in the afternoon that I figured out the value in the hotel design. Now, when you go to the beach, you can expect to get all dirty and muddy. So resorts usually have a shower installed on the way back from the beach to the rooms. This was there. What really impressed me, though, was the tap in the garden right in front of my room! Now, even after showering on the way back to the room, my feet and slippers had got all dirty and muddy. It would have been a mess to clean up the room had I walked in with my muddy feet. So this tap meant that I could wash my feet once again before stepping into the room, thus saving the hotel the trouble of cleaning all those rooms whose occupants had taken care to wash their feet!

Then there were the clothes hangers outside each room. Now, you don’t expect everyone who go to the beach to be wearing swimsuits, and that means a lot of wet clothes. People usually fill up the bathroom with these wet clothes and it can get uncomfortable! Again, it was great thought to put these clothes hangers so that you needn’t fill up your bathroom with the wet clothes! It was another matter that they didn’t have enough of those, and we had to dry our clothes on a chair outside the room!

The following night we stayed at Hotel Earl’s Regent in Kandy, a new hotel inaugurated by “His Excellency President” Mahinda Rajapakse in January this year. It is a hotel which showed a lot of promise, and we were even upgraded to rooms with Jacuzzis. But the detail in design was missing.

For example, at one end of the bathroom was the Jacuzzi and at the other end the shower cubicle. Now, the towel rack was right above the Jacuzzi, and there were no towel hangers on the doors of the shower cubicle. This meant that once you got out of the shower, you had to get all the way across the bathroom to pick up your towel, thus wetting it in its entirety! Then, despite having bathing spaces at either end of the bathroom, there was only one foot mat. Again, this meant that if you failed to move it to your side of the bathroom when you stepped in, the bathroom was again liable to get dirty!

It is amazing how much people are willing to invest in hotels, without getting these small details that can delight a customer right!

Then there was the issue of the plug points. Sri Lanka uses Indian plug points, which meant that we hadn’t bothered to take adapters along. Both in Earl’s Regent and in Cinnamon Grand in Colombo (a five star hotel), most of the plug points turned out to be British-style! Now, you might get a lot of your guests from Britain and it might make sense to have those plug points, but it is surprising that only one point in each room can take Sri Lankan plugs! Now, when each of you has a phone, and then you have an iPad, all of which need charging, it becomes real hard to manage with such plugs!

I don’t know what it is about five star hotels that they refuse to offer health faucets! Every hotel on tour offered them except Cinnamon Grand (the most expensive), where we were forced to use toilet paper. Now, you might get some Western guests who don’t know how to use health faucets, but having them in the room does no harm, while providing great value to Asian and Middle Eastern guests! On a similar note, the Palm Garden Village Hotel in Anuradhapura (a massive forested resort) didn’t offer a health faucet but instead had a separate arse-washing pot. It was again inconvenient and ineffective design, when a simple health faucet would have done the trick with less real estate wasted! And if they had space for a separate arse-washing pots, they might have as well put Sochi-style adjacent pots – it was after all a romantic hotel, with adjacent showers, etc!

Cinnamon Grand also had the worst showers. They had two taps – one for adjusting the level of the hot water, and one for the cold water, and they were the only two controls you had to adjust both the temperature and the pressure of the flow. So if you finally (after a lot of trial and error) got control over the temperature, and wanted to increase the pressure, you had the unenviable task of adjusting two taps simultaneously! Or if you wanted to stop the shower to soap yourself, you had to again do the trial and error thing of finding the right temperature!

The shower at my home has three controls – one tap each for hot and cold water, and another to adjust the overall pressure of the shower. This third tap can be used to adjust intensity after the first two have been used to adjust temperature! The other hotels on tour offered a single lever – right-left movement adjusted the temperature while up-down movement adjusted the pressure! Worked beautifully. Maybe there is a theorem somewhere that the best shower controls have an odd number of levers!

Market forces

This morning I refused to board an auto rickshaw since it had one of those old analogue metres. Most autos in Bangalore nowadays use digital metres, which is the regulation. Except a few like the one I saw in the morning.

Now, given that most autos have digital metres people have a choice to choose only such autos. I’m sure the driver I met this morning will realise soon enough that he’s not getting as much business as he can due to his old metre, and make the switch.

It’s similar with usage of metres. In some parts of Bangalore it’s the norm for auto rickshaws to ply by metre. In such areas any driver who tries to make a quick buck by negotiating a higher fare is likely to lose customers. When a customer knows that after letting go of an auto which asked for excess fare, he had a good chance of finding one that will go by the regulated fare, he is less likely to heed to the demand for excess fare.

You can think of this being a case of what Malcolm gladwell calls the tipping point – once markets have tipped to one side (let’s say using regulated fares for auto rides) there is positive reinforcement that leads to an overwhelming move in that direction.

To get back to the metre example, when the fares increased a few months back traffic cops in Bangalore ran a drive where they checked for auto metres and fined those who had not made the switch by a particular date. Maybe that’s led to about 95% of the metres getting recalibrated. The beauty here is that market forces will take care of pushing this 95% to 100% and cops need not spend any more time and energy on enforcing this! Similarly if cops want to enforce usage of regulated  fares they would waste time by doing this drive in areas where most rides are by metre – the focus should be on tipping the other areas over!

To summarise, some parts of regulation gets enforced by sheer market forces, and regulators should not be wasting their energies there. Focus should instead be given to those areas where market failure is extreme – for that is where regulation has a role to play.

High Frequency Trading and Pricing Regulations

It all began with a tweet, moments ago. Degree Raju, a train travel attempter (I don’t know how often he manages to actually travel since he never seems to get tickets) tweeted this:

It is an apt analogy. The reason high frequency trading exists is that there is regulation on what the minimum bid-ask spread needs to be – it needs be at least 1 cent in the US, and at least 5 paise in India (if I’m not wrong). If the best bid (quote to purchase a stock) is at 49.95 and the best ask (quote to sell a stock) is at 50.00, there is nothing you can do to get ahead of the guy who has bid 49.95 – for regulations mean that you cannot bid 49.96!

The consequence of this is that if you want to offer the best bid, at a price close to 49.95, there is no option but for you to be the first person to have bid that amount! And so there is a race among all possible bidders, and in order to win the race you need to be fast, and so you co-locate your servers with the exchange, and so you (and your co-runners) indulge in what is called High Frequency Trading (this is a  rather simplified explanation, and it works).

Tatkal ticket booking has a similar pricing anomaly – the cancellation charges on Indian railways are fixed, and really low. Moreover, fares are static, and are not set according to demand and supply. More moreover, the Indian Railways suffers from chronic under-capacity. The result of all this together is that if you need to get a railway ticket, you should be the first person to put a bid (at a fixed price, of course) for that ticket, and so there is a race among all ticket-buyers!

In case the pricing of railway tickets was more flexible – either dynamic pricing according to demand, or higher cancellation charges (as I’ve noted here), this mad race (pun intended) to buy tatkal tickets would not be there. The way things are going I wouldn’t be surprised if agents want to get servers co-located with IRCTC servers so that they can procure tickets the fastest.

With HFT in stock prices, if only there were no limit on the minimum tick size – let’s say that a bid or an ask could just be any real number within a reasonable (say 6-digits?) precision, then in order to have the best bid, you need not be the fastest – you can compete on price!

Thus, HFT in stock markets and tatkal ticket booking are two good examples of situations where onerous regulations have led to a race to be the fastest.

And all this ties in with this old theory I have which says that the underlying reason for most financial innovation is stupid regulations. Swaps were invented because the World Bank could not borrow with floating (or was it fixed?) interest rates. CDOs became popular because AAA rated instruments required lower capital provisioning than home loans. Such examples are plentiful..