Category Archives: fundaes

Planning and drawing

Fifteen years ago I had a chemistry teacher called Jayanthi Swaminathan. By all accounts, she was an excellent teachers, and easily one of the best teachers in the school where she taught me. Unfortunately I don’t remember much of what she taught me, the only thing I remember being her constant refrain to “plan and draw” while drawing orbital diagrams (I’ve forgotten what orbital diagrams look like).

Now, I remember wondering why it was that big a deal that she kept mentioning “plan and draw” while drawing or asking us to draw such diagrams. This question answered itself a few days later at my JEE factory, where the chemistry teacher started drawing an orbital diagram which soon threatened to go outside the blackboard. A friend who was sitting next to me, who was also from my school, quipped “this guy clearly didn’t plan and draw”.

The reason I’m mentioning this anecdote here is to talk about how, when faced with a deadline, we start running without realising what we are doing. I can think of a large number of disastrous projects from my academic and professional life (till a couple of years back my academic and professional life was rather disastrous), and looking back, the problem with each of them was that we didn’t “plan and draw”.

I especially remember this rather notorious “application exercise” as part of my marketing course at IIMB (btw, since the wife is doing her MBA now I keep getting reminded of IIMB quite frequently). We had a problem statement. We had a deadline. And we knew that the professor demanded lots of work. And off we went. There was absolutely no coherence to our process. There was a lot of work, a lot of research, but in hindsight, we didn’t know what we were doing! Marketing was my first C at IIMB (and the only C in a “non-fraud” course, the other being in a rather random course called Tracking Creative Boundaries).

Then I remember this project in my second job. “Forecast”, I was told, and asked to code in java, and forecasting I started, in java, without even looking at the data or trying to understand how my forecasts would solve any problem. Six months down, and forecasting going nowhere, I started coding on Excel, looked at the data for the first time, and then realised how hard the forecasting was, and how pointless (in context of the larger problem we were trying to solve).

There are several other instances – see problem, see target, start running – like the proverbial headless chicken (as made famous by former Indian ambassador to the US Ronen Sen). And then realise you are going nowhere, and it is too late to do a fresh start so you put together some shit.

That piece of advice I received in chemistry class 15 years back still resonates today – plan and draw (pun intended if you are in a duel). Its is okay to take a little time up front, knowing that you will progress well-at-a-faster-rate once you get started off. You need to understand that most projects follow the sigmoid curve. That progress in the initial days is slow, and that you should exploit that slowness to plan properly.

Sigmoid Curve

I will end this post with this beautiful video. Ilya Smyrin versus Vishwanathan Anand. Semi-finals of the PCA candidates tournament in 1994 – the tournament that Anand won to face off with Garry Kasparov at the WTC. Anand, playing black, gets only five minutes to play the whole game. Watch how he spends almost a minute on one move early on, but has planned enough to beat Smyrin (Anand only required a draw to progress, given the rules).

Law of conservation of talent

For starters. there is no such law. However, there exists a belief in most people’s minds that everyone is equally talented, and it is only that talent in different people is spread across different dimensions.

It starts when you are in school. If you are not good at maths, people tell you that you must be good at something else – arts perhaps. At that age it is perhaps not a bad thing – to be told when you are a child that you have no talent no way helps you in growing up. You are encouraged at that age to try different things, to find the thing that you’re good at.

And then you grow up. And you grow up with this entrenched belief of the “law of conservation of talent”. When you see someone good at something, you will assume that that is the only thing that they are good at. When you see that someone is bad at something you assume there is something else that they are good at. When you see someone good at more than the average number of things, you think they cannot be real, or that it is unfair, or perhaps that they are just faking it.

I once heard this story of a mother arguing with a schoolteacher that her son did not need remedial classes in maths. When told that the kid was indeed poor at maths, the mother responded “so what? He might be good at art. Why does he have to pass his maths exam for that?” (not sure I’ve paraphrased accurately but this is broadly the picture). While it might be a good idea to tell the kid that there is perhaps something else that he is good at, the mother strongly believing in the same thing is simply not done.


Back in business school, there was this set of people who claimed to have a deep passion for marketing. Now, these people belonged to two classes. The first were actually passionate about marketing – there was something about marketing that gave them a kick and they wanted to pursue a career that would allow them to generate such kicks. From my conversations with them I know the passion was real, and most of them are doing rather well now in their marketing careers.

And then there was the second type. This was the class of people who had found that they were no good at mathematics and accounting and economics, and thus figured that they had no hope of a career in anything related to any of these fields, and thus found refuge in marketing. Of course they wouldn’t admit that – they would also claim a deep passion in marketing. While that was okay – perhaps marketing gave them their best chance of pursuing a successful career, and thus I don’t grudge their choice – what got my goat was that these people would claim that because they were no good at the “hard sciences” (mathematics, accounting, etc.) they were “creative”. Who says that mathematics and accounting and economics are not creative subjects? And why does anyone who is not good at these subjects (it is impossible, for example, to excel at mathematics unless you are creative) automatically become “creative”? It is the law of conservation of talent, simple.


For people who are good at more than one thing, law of conservation of talent can bite you in more than one way. Actually there is more to do with this than just law of conservation of talent – people like to analyze other people by putting them in easily understood silos, or categories. And law of conservation of talent helps assign sets of talents to these silos.

Over the last two years, by hook or by crook, I’ve built my reputation to be a great quant. I consult with companies helping them with their quant and data stuff, I write a quant blog and I write a series in Mint on quant in elections. While it is all good and I’m glad that I’ve built a reputation as a quant, the downside is that people refuse to look beyond this and recognize my other skills.

For example, I think I’m rather good at economic reasoning, and I believe that my prowess in that combined with my prowess in working with numbers can deliver massive value to my potential clients. However, when people see me as a quant, it is hard for them to digest that I could also be good with economic reasoning, or behavioural sciences, for example. Thus, when I take on a mandate to do something beyond quant, people find it extremely hard to accept that I dole out non-quant advice too. I blame the law of conservation of talent for this – when people think you are good at quant, they exclude all other skills you might possibly have.

I’ll end this post with another anecdote from  business school. A few months in, things were going well and I had (even back then) built a reputation as someone who was good at quant and mathematics and accounting and economics (in business school, all these fell on the same side of the fence, so the law of conservation of talent allowed you to be good at all these at once). Quizzing was a related activity, so I was “allowed” to be good at that. If I remember right, what perhaps upset people’s calculations was when I represented my class in the inter sectional basketball tournament and didn’t perform badly – based on reactions after the game I think people were a bit thrown off that I could be good at basketball too (especially given that I’ve never looked remotely athletic, and have always been a slow mover). Law of conservation of talent again!

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!

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!

Ramanamurthy, barbells and the bimodal distribution

One of my favourite movies (perhaps my favourite movie) is this 1990 Kannada movie called Ganeshana Maduve (Ganesha’s marriage). It takes off on the 1940 James Stewart starrer The Shop around the corner – ok the story of the movie doesn’t matter here so I’ll stop this digression.

One of the pivotal scenes in the movie is where 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! This negotiation can be seen in this landmark scene from the movie:

In one of his books (perhaps “The Black Swan”) Nassim Nicholas Taleb talks about what he calls the “barbell distribution” for investing. Most of your money, say around 80-90%, he says, should be invested in risk-free securities such as government bonds. The rest, he recommends, should be invested in extremely high risk high return investments – like venture capital or far out of the money options. This kind of investing strategy, he says, produces superior long-term returns than the conventional investing model.

Both the “Ramanamurthy principle” (as I call it, starting with this blog post) and the barbell distribution are instances of “bimodal distributions”. You can also think of bimodal distributions as being a strategy.

To refresh your statistical knowledge, a bimodal distribution is one that has two “modes”. The histogram of this distribution looks something like this (now you might get why Taleb, a self-confessed body builder, likens this to the barbell):

Based on this distribution one can craft a “bimodal strategy” for life – including investing. You either take extremely low risk or extremely high risk – nothing in between. You completely stop taking sugar in your coffee but have the occasional dessert. You either paint the entire building or don’t paint the building at all (like Ramanamurthy). Stripping off all the technical content, this strategy can simply be described as “don’t do things in half measures” or “not spreading oneself too thin”.

Of late I’ve found this kind of a strategy rather useful in my work and other life. One example is the sugar distribution – a little sugar in every cup of coffee doesn’t particularly give much pleasure but adds on to my blood sugar content. The occasional dessert (after having eschewed sugars entirely), on the other hand, can lead to insane pleasure.

Then there is the fitness regime that I’m trying to follow. The classic gym routine is to do a lot of warm up, and then some weights, generally exercising just one muscle set, and this is to be done every day, for over an hour a day. The routine I’m trying to follow dispenses with these warmups and light weights and focuses on lifting a few repetitions of very heavy weights, three times a week.

These are only a few examples of where this kind of a strategy can prove useful. Maybe you should think of where this might be applicable – and it is likely that it will work better than your little bit of everything model!

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..

Why Keynes’s prediction has not come true

Writing in the 1930s economist John Maynard Keynes predicted at at the “time of our grandchildren” (figurative term since he himself had no kids) people would live a life of leisure and work for an average of fifteen hours a week. Yet, it’s been eighty years since and we still slog away, putting in anywhere between forty and sixty hours a week as we earn our living. And it doesn’t look like things are going to change soon

So why did this happen? I propose two reasons. When I quit my first job almost eight years ago within three months of joining I complained that the workload was way too high. I added that I didn’t need all the money that job paid me and wouldn’t mind taking up something that paid half the money and where I had to work only half the time. No such thing materialized and I slogged away, before going freelance two years back.

Now why does this little anecdote matter? I’m using this to show that the returns to work are not linear. If you were to plot the number of hours worked per week on the x axis and the total value added on the y axis you are likely to get a convex function. In other words the marginal benefit out of every additional hour you work per week is an increasing function of how much you’ve already worked.

The question is why this is so. One simple answer is that in jobs with a high degree of learning by working longer you end up learning faster. Then within the job you can have network effects where the work you do in one part of the job can help you do another part better (I constantly see this in my freelancing where I work on several projects at a time). If there is a steep learning curve it is easier for the firm to appoint one worker to work sixty hours a week than two to work thirty each – since the starting costs get saved. And so forth.

So this increasing returns to effort (in terms of the hours worked) is that the trade off between work and leisure gets resolved in favour of leisure only at a very high level of work – where you are working close to capacity and don’t want to risk burnout and want to maintain your sanity. Before that the increasing returns to effort means that you are likely to put off leisure in favour of “just a little more work”.

The question is if all jobs work this way, and why an economist as brilliant as Keynes didn’t see this concept of increasing returns to work. The answer is that increasing returns to work applies only to a certain kind of jobs – jobs that require a high level of skill and learning and which can be broadly classified as “knowledge jobs”.

Back in Keynes’s time such knowledge jobs were few – far fewer than they are today. Most workers were in jobs that didn’t require a high degree of skill or learning. In unskilled jobs or jobs that are physically demanding the expanding returns to effort part of the curve is extremely short. Once you have figured out the best way to bolt together two metal pieces doing more of this job is not going to make you much faster in bolting together two metal pieces.

Instead since it is physical after you’ve put in a certain number of hours in a day you begun to tire and become less efficient (notice this point occurs at a later stage for knowledge jobs). And the returns to hours curve starts flattening out much sooner. If you were to do the trade off with leisure using such a curve the equilibrium might occur much earlier than for knowledge work – perhaps at Keynes’s predicted value of fifteen hours per week.

Now even today while the proportion of non knowledge jobs is smaller than eighty years back the number of people doing such jobs is not small. So if the work-leisure equilibrium happens at fifteen hours a week why do people work longer?

The answer is that work-leisure is not the only equilibrium one is solving for. You also need to work enough to be able it fund your living. And it has happened that fifteen hours of non knowledge work pays nowhere close tO what is required to fund a reasonable living. For this reason non knowledge workers are forced to work much longer than their work-leisure equilibrium rule permits!

So why didn’t Keynes see this? I think what he missed was the boom in the knowledge economy in the postwar period. With the rise in the knowledge economy what you had was a set if jobs that had increasing returns to effort. Moreover these returns, on an hourly basis, were far larger than the returns on a non knowledge job. The boom in the knowledge economy meant that people working in such jobs impacted general prices and this forced the non knowledge workers to work longer!

So we have the unique situation now that those people who can afford to work for only fifteen hours a week have no incentive to do so. On the other hand people who have an incentive to work no more than fifteen hours a week are forced to work longer because otherwise they cannot find their lives!!