Acceptable forms of help

I was reading this note by Kunal Bahl, CEO and co-founder of Snapdeal on the company’s turnaround after the failed acquisition by Flipkart last year. It’s a very interesting note – while I’ve never been a fan of the company (never considered buying from them), this story seems rather interesting, especially given the deep shit it was in a year ago.

What caught my eye is this little note about getting help from a small network of mentors. Bahl writes:

I was able to get the guidance and counsel from some of the most respected and leading business persons in the country. […] In our time of need, it was those who had the least to gain, and most to give, that came to our help. Not with money. But with their wisdom and encouragement. I recall sitting in the room with one of the above persons in August 2017, staring down the barrel with only months of money left in the bank. The gentleman, probably seeing how dire our situation was, picked up the phone and called six of the top business people in the country in quick succession explaining our situation to them – that we were good guys stuck in a bad situation – and requesting them to meet me to see if there were any synergies with their businesses[…]

(emphasis added)

What this got me thinking was about why it’s considered okay to give or take help in the form of intangibles, but not in terms of money. It’s rather common that people help each other out by way of providing advice, making introductions and sometimes just hearing them out. It’s not that common, though, that people help each other out with money.

To take a personal example, if someone asks to talk to me to get some advice, or asks for some connections, it’s very likely that I’ll help them out. On the other hand, if someone were to ask me for money I’ll start seeing them suspiciously.

One quick reason as to why intangibles is okay is that it is sometimes “cheap”. Making introductions doesn’t cost you much as long as you think it’s mutually beneficial for both parties (and in that, it seriously helps if you do double consent introductions – talk to both parties independently before introducing). Advice costs you maybe half an hour or an hour of your time, and if you feel like your time is being wasted, it’s not hard to cut losses. And the value that the recipient gets from this can far exceed the cost incurred by the “giver”.

Another reason is that intangibles are intangible – they’re hard to measure. And by that measure, you don’t rack up some sort of debt. If I take money from you, then what I owe you becomes precisely measurable. And until I repay you, things between us can be awkward. Introductions or advice, on the other hand, keep the value of the “debt” fuzzy, and in most case it gets “written off” any way, permitting the two parties to continue their relationship normally.

Anything else that I might have missed out?

Revenue management and transaction costs

So I just sent off a letter to India. To be precise, it is a document I had to sign and send to my accountant there – who sends regular “letters” any more?

The process at the post office (which, in my suburb, is located inside a large bookstore) was simple. In the first screen of the touch screen kiosk, there was an option for “worldwide < 20 grams”. A conveniently placed scale told me my letter weighed 18 grams, and one touch and one touch of my debit card later, I had my stamp. Within a minute, my letter was in the letterbox.

The story of how we pay the same amount for sending mail over large areas (“worldwide” in my case today) is interesting. Earlier, mail rates were based on distance, but as new roads kept being built in the 19th century America, and distances kept changing, figuring out how much to charge for a letter became “expensive”. A bright fellow figured out that the cost (in terms of time) of figuring out how much to charge for mail was of the same order of magnitude as the cost of the mail itself. And so the flat rate scheme for mail, that is prevalent worldwide today, was born.

Putting it in technical terms, transaction costs trumped price discrimination in this case. Price discrimination is the art (yes, it’s an art) of charging different amounts to different people based on their differential willingness to pay. Uber surge pricing is one example (I have a chapter in my book on this). Airline fares are another common example.

Until the late 18th century (well after mail prices had gone “flat”), price discrimination was rather common everywhere, a concept I have devoted a chapter to in the book. In fact, the initial motivation for fixed price retail was religious – Quakers, who owned many departmental stores in the US North-East, thought “all men are created equal before God” and so it was incorrect to charge different amounts to different people.

Soon other benefits of fixed prices became apparent (faster billing; less training for staff; in fact it was fixed prices that permitted the now prevalent supermarket format), and it took off. The concept is the same as stamps – the transaction cost of figuring out how much to charge whom is higher than the additional revenue you can make with such price differentiation (not counting possible loss of reputation, and fairness issues). Price discrimination at the shop is now confined to high value high margin businesses such as cars.

And it works in other high gross margin businesses such as airlines, hotels and telecom. These are all businesses with high fixed costs and low marginal costs for the suppliers. Low marginal costs has meant that price discrimination ha been termed as “revenue management” in the airline industry.

During the launch function of my book last year, I got asked if Uber’s practice of personalising fares for passengers is fair (I had given a long lecture on how Uber’s surge pricing is a necessary component of keeping average prices low and boosting liquidity in the taxi market). I had answered that a marketplace needs to ensure that its pricing is perceived as being “fair”, else they might lose customers to competitors. But what if all players in a market practice extreme price discrimination?

Thinking about it, transaction costs will take care of price discrimination before businesses and marketplaces start thinking of fairness. Beyond a point (the point varies by industry), the marginal revenues from price discrimination will fall below the transaction cost of executing this discrimination. And that poses a natural limit to how much price discrimination a business can practice.

Dam capacity

In Mint, Narayan Ramachandran has a nice op-ed on the issue of dam capacity and damn management in the wake of the floods in Kerala last year. In that, he writes:

For dams to do their jobs in extreme situations, they should have large unfilled capacity in their reservoirs when extreme events occur

Reading this piece reminded me of Benoit Mandelbrot’s The (Mis)Behaviour of Markets, and his description of the efforts of the colonial British government in Egypt in deciding the height of the Aswan dam. The problem with the Nile was “long range dependence” – the flow in the river in a year was positively correlated with the flow in the previous few years. This meant that there would be years of high flow followed by years of low flow.

The problem was solved by a British hydrologist Harold Edwin Hurst by looking at thousands of years of data of the flooding of the Nile (yes, this data was available), and there is a nice description of it in Mandelbrot’s book.

I had taken a few insights from this chapter for my own piece on long-range dependence in stock markets that I had written for Mint a few years back.

Coming back to Narayan’s piece, one problem is that in India we have an obsession with keeping dams filled up. In Karnataka, for example, every year during the monsoons, newspapers keep track of the level of water in the major reservoirs, expressing worry in case they’re not full enough. In that sense, I guess our dams haven’t been planned for long-range water sharing, and that has contributed to problems such as sudden water release.
Also not helping matters I guess is the fact that a lot of rivers flow across states, and the level of dams is a source of negotiation between states, and this leads to further keeping them small and ill-geared to long term water management.

Social Capital and Caste

Conventional wisdom is that social capitalin India is low because of our historical caste system. By placing people in a rigid hierarchy, and giving some people privileges over others just because of the families they were born into, the caste system prevented people from cooperating as well as they would in a more equitable society – that is what conventional wisdom says.

However, a point that we cannot miss is that despite the caste system placing a hierarchy on people, people from different castes did regularly cooperate and trade with each other. In fact, with caste being tied to hereditary professions, people had little choice but to regularly interact and trade with people from other castes. And this inevitably created social capital.

Putting it differently, the result of the caste system was an unequal but stable society, and this stability led to reasonably good social capital (history might be biased given it was written by people from certain castes, but we don’t see many instances of caste riots or clashes from over 200 years ago). You can think of it as a stable society with “handicaps”, where some people were privileged over others (in fact, there was a hierarchy of privilege), to the extent that it was okay for some people to abuse others in various ways.

Over the last 150 years or so, the caste system has been (rightly) challenged, and we are seeing various movements towards a more equal society. One side effect of this has been that the (unequal) equilibrium that had existed has been disturbed, leading to caste-based antagonism and a fall in social capital.

We are in the process of moving from one (unequal) equilibrium to another (more equal) equilibrium, but until we get there, existing beliefs and biases will continue to be challenged, which means some sets of people will continue to be suspicious of others, and there will be mistrust and thus low social capital.

Originally posted at Pragati Express

Scott Alexander, Bryan Caplan and Nitin Pai on fighting crime (feat. Matt Levine)

The basic idea is that coming down hard on a small number of high-profile crimes can have disproportionate effects in terms of curbing crime

It all started with the pseudonymous blogger Scott Alexander, in what seemed like a justification of outrage. Or maybe it started earlier – with a post by Bryan Caplan deploring outrage. Caplan was commenting about the propensity of people to jump on to bandwagons deploring seemingly minor crimes while not caring enough about worse crimes that were not in the public spotlight already. Caplan had then written:

I can understand why people would have strong negative feelings about the greater evil, but not the lesser evil. But I can’t understand why people would have strong negative feelings about the lesser evil, but care little about the greater evil. Or why they would have strong negative feelings about one evil, but yawn in the face of a comparable evil.

Now, while “Alexander”‘s response seems to justify outrage (and I’m no fan of online outrage), he did so with an interesting analogy, on how to curb crime when the police has limited resources. He writes:

[…] the police chief publicly commits that from now on, he’s going to prioritize solving muggings over solving burglaries, even if the burglaries are equally bad or worse. He’ll put an absurd amount of effort into solving even the smallest mugging; this is the hill he’s going to die on.

Suppose you’re a mugger, deciding whether or not to commit the first new mugging in town. If you’re the first guy to violate the no-mugging taboo, every police officer in town is going to be on your case; you’re nearly certain to get caught. You give up and do honest work. Every other mugger in town faces the same choice and makes the same decision. In theory a well-coordinated group of muggers could all start mugging on the same day and break the system, but muggers aren’t really that well-coordinated.

The police chief’s public commitment solves mugging without devoting a single officer’s time to the problem, allowing all officers to concentrate on burglaries. A worst-crime-first enforcement regime has 60 crimes per day and solves 10; a mugging-first regime has 30 crimes per day and solves 10.

And then it is again Caplan’s turn to respond. I’m bad at detecting satire, so I’m not sure if he is being serious (I don’t think he is). But he proposes a “sure fire way to end all crime”:

Step 1: Credibly announce that all levels of government will mercilessly prosecute the firstcrime committed in the nation each day.

Step 2: There is no Step 2.

But then, I’m sure that Nitin Pai is being serious in proposing a similar method to curb the spate of violent crime in India based on WhatsApp forwards. In his piece for the Quint, he writes:

the Home Ministry ought to use its considerable powers to tackle the problem. It’s not hard either. One well-advertised arrest, prosecution and sentencing will deter the cowards that comprise lynch mobs. Three high profile arrests and prosecutions – and see how quickly lynchings stop. The smallest police station in the remotest village can stop lynchings if the local sub-inspector has received clear political messages against it.

Finally, the reason why I figured Caplan’s “solution” is satire is because of this passage from Matt Levine’s excellent Money Stuff newsletter (likely it’s behind a Bloomberg paywall, but it’s free if you subscribe by email). Commenting about high frequency trading, Levine writes:

But the answer in actual U.S. market structure is, come on, there is no such thing as “the same time.” Do you know how many nanoseconds there are every single second? (A billion.) The odds that each of us would hit the “Buy” button at the exact same nanosecond are infinitesimal. So if I put in my order to buy the stock at 10:45:06.543210876 a.m., and you put in yours at 10:45:06.543210987 a.m., then I got there first and I win.

Is this a good answer? It has a simple appeal. It just gets rid of the question “who gets the stock if we put our orders in at the same time?” It replaces an economic question about how to allocate the stock with an empirical question of who got there first.

So the problem with fighting the first crime of the day, or year, or whatever, is that a criminal will know fully well, given a reasonably high enough crime rate, that the probability of his crime being recorded as the first in the year or day or whatever is less than one. And the higher the crime rate, the lower the probability that his crime will be recognised as the first one. And so there is a high chance he can get away with it.

And that is where Nitin’s idea scores. Rather than going after the “first crime”, pick a few crimes arbitrarily and “go after them like hell”. Since in this case most of the people who are forwarding dangerous forwards are “ordinary people”, this will likely shake them up, and we’ll see less of these dangerous forwards.

Cross posted from Pragati Express

Jordan Peterson’s Chapter Eleven

So I read Jordan Peterson’s 12 Rules For Life last month. It took a bit of an effort, and there were a couple of occasions when I did wonder if I should abandon the book. However, my stated aim of reading at least 50 books this year made me soldier on, and in the end I’m glad I finished it. Especially for Chapter Eleven of the book (Do not bother children when they are skateboarding).

Now, this is a long chapter, and Peterson spends considerable time rambling about various controversies he has got involved in over the last few years – such as his stand on political correctness, or his stand on environmentalism (in fact, he has an interesting take on the latter – that environmentalism and climate change worries have an adverse impact on mental health of people, so I didn’t mind reading him on that!).

The chapter is about risk – one thought (which has also been expressed by Nassim Nicholas Taleb in one of his books – which one I can’t remember), is that people have a “natural level of risk”. And if you, for whatever reason, prevent them from taking that risk, they will find other ways to take risk, perhaps indulging in riskier activities.

And in order to explain why we are fundamentally wired to take risk, Peterson talks about gender, and relationships. He talks about friend-zoning, for example:

Girls aren’t attracted to boys who are their friends, even though they might like them, whatever that means. They are attracted to boys who win status contests with other boys.

And winning these status contests involves taking risk! Peterson goes on about relationships, about the crisis in the United States nowadays where women are more educated than men (on average), and then choose to remain single rather than “marrying down”.

This is the bit which really caught my attention – the apparent contradiction between the desire for women to do well, and this desire resulting in their not being able to find partners for themselves. And there are no easy solutions here. The desire for a woman to “marry up” is biological, and nobody can be faulted for being ambitious and wanting to do well for themselves in life.

Now, it is easy to go all ad hominem about this argument, calling Peterson a chauvinist and a traditionalist (as his opponents, mostly on the political left, have done), but the problem he mentions is real, and as the father of a (rather young) daughter, it hit hard for me – obviously I want her to do really well in life and make a mark professionally; but I also want her to propagate my genes, and do a good job of that.

I’m hopeful that as the daughter of Marriage Broker Auntie, she’ll be able to sort things out. But them, she may not want to listen to her mother – at least in these matters!

There were other places where the book was really inspirational. Chapter Twelve had a simple message – that there are times when you go through shit, and a way to get through them is to appreciate the smaller joys of life. In fact, Peterson is at his best when he talks about clinical psychology – which is the topic of his everyday research.

He does a fantastic job in Chapter One as well, and I may not be exaggerating by saying that the chapter was thought-provoking enough to make me analyse how I might have ended up with depression, and then make a conscious effort to avoid those actions that either betrayed depression, or made me feel more depressed. And that makes me get why people contribute so much to him on Patreon. Some of his advice can indeed be life changing.

However, I have no plans to pay him anything more than the £9.99 I paid Amazon for the book. And that is partly because the psychology parts of the book are indeed brilliant, he frequently goes on long rambling thoughts on religion (Christianity in particular, since that is the religion most familiar to him) and philosophy. And in those parts (there’s an especially long sequence between chapters 7 to 10 of the book), the book gets incredibly laboured and boring.

I recommend you read the book. The clinical psychology parts of it are nothing short of brilliant. There’s a lot of religion and psychology you will need to go through as well, and I hope you find more insight there than I managed to!

Here are the notes and highlights I made from the book.

 

The Anti-Two Pizza Rule

So Amazon supposedly has a “two pizza rule” to limit the size of meetings – the convention is that two pizzas should be sufficient to feed all participants in any meeting. While pizza is not necessarily served at most meetings, the rule effectively implies that a meeting can’t have more than seven or eight people.

The point of the rule is not hard to see – a meeting that has too many people will inevitably have people who are not contributing, and it’s a waste of their time. Limiting meeting size also means cutting total time employees spend in meetings, meaning they can get more shit done.

While this is indeed a noble “rule” in a corporate setting, it just doesn’t work for parties. In fact, after having analysed lots of parties I’ve either hosted or attended over the years, and after an especially disastrous party not so long ago (I’ve waited a random amount of time since that party before writing this so as to not offend the hosts), I hereby propose the “anti two pizza rule” for parties.

While five to eight people is a good number for a meeting, having enough people contributing but no deadweight, the range doesn’t do well at all for more social gatherings. The problem is that with this number, it is not clear if the gathering should remain in one group, or split into multiple groups.

When you have a “one pizza party” (5-6 people or less), you have one tight group (no pun intended) and assuming that people will get along with each other, you’re likely to have a good time.

When you have a “three pizza party” (more than 10 people), it’s intuitive for the gathering to breakup into multiple groups, and if things go well, these groups will be fluid and everyone will have a good time. Such a gathering also allows people to test waters with multiple co-attendees and then settle on the mini-group that they’ll end up spending most time with.

A two-pizza party (6-10 people), on the other hand, falls between the two stools. One group means there will be people left out of the conversation without respite. In such a small gathering, it is also not easy to break out of the main group and start your own group (again, seating arrangement matters). And so while some attendees (the “core group”) might end up having fun, the party doesn’t really work for most participating parties.

So, the next time you’re hosting a party, do yourself and your guests a favour and ensure that you don’t end up with between 6 and 10 people at the party. Either less or more is fine!

You might want to read this other post I’ve written on coordinating guest lists for birthday parties.