Giving up your seat

So the wife has done a kind of sociological analysis of who offers seats to baby-carrying people on the London Metro. Based on the data points she’s collected over the last three months we’ve been in London, she concludes that people who are most willing to give up their seats are those who have been beneficiaries of similar actions in the past – basically a social capital kind of argument.

I don’t have such an overarching thesis on who gives up seats, but one major observation based on my collection of data points. Most of my train rides with Berry have been between Ealing Broadway, the station closest to where we live, and St. Paul’s in Central London, close to Berry’s nursery and Pinky’s office.

The Central Line, which I take for this journey, is typically crowded in both directions, since most of my trips are during peak office commute hours. However, my experience in terms of people offering me a seat (I’ve never asked for it) has been very different in terms of where I’ve boarded.

What I’ve found is that people have been far more willing to give up their seats when I’ve boarded at St. Paul’s (or anywhere else in the city), than at Ealing. In fact, in about 30-40 train rides originating in Ealing when I’ve been carrying Berry, I only recall one occasion when someone has offered me their seat. On the other hand, it’s rare for me to board at St Paul’s and NOT have someone offer me their seat.

I have one major hypothesis on why it happens – on what goes into getting a seat, and a sense of entitlement. Essentially, Ealing Broadway is a terminus for the tube, and thus an originating station for journeys into town. And I’ve seen people work hard in order to get a seat.

So you have people who leave multiple trains in order to find one where they can find a seat. They get to the station well in advance of a train leaving so that they can get a place to sit. And having invested so much effort in occupying the seat, they feel entitled to the seat, and don’t want to give it up so easily.

On the other hand, St. Paul’s is right in the middle of the Central Line, and people who have seats when the train arrives there are typically those who got them somewhere along the way. Now, while there exist strategies to figure out where a seat might fall empty, and grabbing it, finding a seat in a non-empty train after you’ve boarded is more a matter of luck.

So if you think you got your seat by sheer luck, you feel less entitled to it, and are more than happy to give it up for someone who might have need it more!

Feel free to draw your own analogies!

Opinion polls and betting

So for a change the opinion polls seem to have got it right. I’m talking about the just-concluded elections in the UK here, which has returned a hung parliament. The Tories have fallen just sort of a majority (in Kannada we’d call it “AJM“). It’ll be interesting to see how a government will be formed now.

Now, the thing is that the opinion polls got it right. While the Tories had started off with a big lead at the time the elections were announced, opinion polls over time showed that the race was getting a lot tighter. I’d piggybacked on the opinion polls to conduct my own analysis which got published in Mint.

Having shown off that I’d made the prediction correctly, let me get to my hypothesis of why the opinion polls got it right. Opinion polls in the UK have a greater chance of being right because because betting is legal here.

I was walking around Central London yesterday when I saw this poster outside a betting shop.

Because betting is legal in the UK, betting houses take bets on just about anything, including the results of elections. The way betting works is that the betting houses make markets. They present odds for each side of the deal (in this case, let’s say Tory win, Labour win and hung parliament), and whenever a punter walks into the shop and places a bet, it’s the house that’s taking the opposite side of the bet.

What this implies is that the house better get the odds right, otherwise the difference in their odds and the actual results can wipe out the shop. And how does the betting house know where to set the odds? For something like an election, they rely on the opinion polls.

If the opinion polls get it wrong, the betting houses can end up losing a lot of money (like they evidently did last year during the Brexit vote which most pollsters got horribly wrong). So there is a legal entity which has real skin in the game in opinion polls being right.

I’m not sure of the ownership of the opinion polling companies here in the UK, but I won’t be surprised if they make plenty of money by selling their results to betting shops (at a more granular level than what they make public). And given the intense competition among pollsters here in the UK (at least 15 different agencies conducted opinion polls ahead of yesterday’s elections), there is a real incentive for a pollster to get it right – get it wrong and the betting houses might take their business elsewhere.

In case betting wasn’t legal (such as in India), polling agencies wouldn’t be able to legally sell their results to betting houses and punters, and their markets would be limited to media houses. Media houses don’t have that much of a skin in the game in the polls – their profits don’t depend on getting polls right as much as the profits of betting houses. And pollsters would have less incentive to get the polls right.

Now, howzzat?

 

Tiered equity structure and investor conflict

About this time last year, I’d written this article for Mint about optionality in startup valuations. The basic idea there was that any venture capital investment into startups usually comes with “dirty terms” that seek to protect the investor’s capital.

So you have liquidity preferences that demand that the external investors get paid out first (according to a pre-decided formula) in case of a “liquidity event” (such as an IPO or an acquisition). You also have “ratchets”, which seek to protect an investor’s share in the company in case the company raises a subsequent round at a lower valuation.

These “dirty terms” are nothing but put options written by existing investors in a firm in favour of the new investors. And these options telescope. So the Series A round has options written by founders, employees and seed investors, in favour of Series A investors. At the time of Series B, Series A investors move to the short (writing) side of the options, which are written in favour of Series B investors. And so forth.

There are many reasons such clauses exist. One venture capitalist told me that his investors have similar optionality on their investments in his funds, and it is only fair he passes them on. Another told me that “good entrepreneurs” believe in their idea so much that they don’t want to even consider the thought that their company may not do well – which is when these options pay out, and so they are happy to write these options. And then you know that an embedded option can increase the optics of the “headline valuation” of a company, which is something some founders want.

In any case, in my piece for Mint I’d written about such optionality leading to potential conflicts among investors in different classes of stock, which might sometimes be a hindrance to further capital raises. Quoting from there,

The latest round of investors usually don’t mind a “down round” (an investment round that values the company lower than the preceding round) since their ratchets protect them, but earlier investors are short such ratchets, and don’t want to see their stakes diluted. Thus, when a company is unable to find investors who are willing to meet its current round of valuation, it can lead to conflict between different sets of investors in the company itself.

And now Mint reports that such conflicts are a main reason for Indian e-commerce biggie Snapdeal’s recent struggles, which has led to massive layoffs and a delay in funding. The story has played out exactly as I’d written in the paper last year.

Softbank, which invested last in Snapdeal and is long put options on the company’s value, is pushing the company to raise more funds at a lower valuation. However, Nexus and Kalaari, who had invested earlier and stand to lose significantly thanks to these options, are resisting such moves. And the company continues to stall.

I hope this story provides entrepreneurs and venture capitalists sufficient evidence that dirty terms can affect everyone up and down the chain, and can actually harm the business’s day-to-day operations. The cleaner a company keeps the liabilities side of the balance sheet (in having a small number of classes of equity), the better it is in the long run.

But then with Snap having IPOd by offering only non-voting shares to the public, I’m not too hopeful of equity truly being equitable any more!

Explaining the lack of dishwashers in India

For the last four weeks, after landing in Britain, we’ve been using the dishwasher fairly regularly. On an average, we run it once a day, and the vessels come out of it nice and shiny – to an extent that is nearly impossible when you wash them by hand. Last year when we were in Spain, too, we used the dishwasher fairly often.

Considering the convenience (all your dishes done in one go, and coming out nice and shiny), I’ve been wondering why the dishwasher hasn’t taken off in India. The requirement for water and electricity doesn’t explain it – the near-ubiquity of the washing machine in upper middle class households suggests that is not that much of a problem. It’s not a function of our using steel plates, either – if that were the only constraint, people would have switched plates to get the benefit of this convenience.

The real answer lies in the archaic concept of the enjil (saliva; known as jooTa in Hindi), and theories on how saliva can get transmitted and contaminate stuff. To be fair, it’s a useful concept in a way that it doesn’t allow anyone’s germ-bearing saliva to contaminate things around them, except for roads and sidewalks that is! Specifically, the enjil concept ensures that food doesn’t get remotely contaminated by someone’s saliva. But it takes things a bit too far.

For example, sharing plates, even when you’re using separate spoons (let’s saw when sharing dessert at a restaurant), is taboo. When you double-dip your spoon into the plate, germs from your saliva get transmitted there, and can potentially contaminate people you are sharing your food with. Or so the theory goes. The exceptions are in childhood, where a child is allowed to share plates with the mother, and after marriage, when couples are allowed to share plates! Go figure how that works.

Similarly, traditional Indians eschew the dining table, and the concept of keeping serving bowls on the same surface as plates. Again, the concept is that saliva can somehow “transmit” from the plates to the serving bowls and contaminate everyone’s food.

Next, there is an elaborate protocol to deal with used plates. They are not supposed to be washed in the same sink as other vessels. Yes, you read that right. When I was growing up, the protocol for used plates was to first rinse them in the bathroom (after throwing leftover food in the dustbin) before dropping them in the sink. It didn’t matter how well you rinsed the plate in the bathroom – that water had fallen on it after your usage would indicate that it was now purified, and fit to sit with all the other unwashed vessels.

Now consider the dishwasher. To achieve economies of scale at the household level, and to ensure vessels don’t pile up, you put all kinds of vessels in it at the same time – plates, spoons, forks, serving bowls and  cooking vessels! In other words, “saliva-bearing” dishes are put into the same contraption at the same time as “saliva-free” cooking dishes, and the “same water” is used to wash all of them together.

And that clearly violates all prudent practices of saliva management and contamination avoidance that we have all grown up with! And trust me, it takes time to get over such instinctive practices one has grown up with. And so I predict that it will at least be another generation (20 years or so) when there are sufficient households with adults who grew up without a strong concept of enjil, and who might be willing to give the dishwasher a try!

Why Brits talk so much about the weather

One stereotype about British people is that they are always talking about the weather. In the absence of any other topic to talk about, they get back down to talking about the weather.

Having lived here for a day after a half after moving here yesterday, I can offer one explanation about why Brits talk so much about the weather – the high information content. In the last day and half, the weather here has been so volatile that the information content in statements about the weather can be rather high.

Most places in the world have rather predictable weather. Delhi has hot summers and cold winters. It almost always rains in the tropical rain forests. It almost always rains in Mumbai during the monsoon. And so on. And when the weather is predictable, the information content in describing it is rather low.

For example, if there is a 90% chance that it will rain in Mumbai one monsoon day, a statement on the presence or absence of rain contains only 0.47 bits of information/entropy (-0.9 log 0.9 – 0.1 log 0.1). If the probability that a summer day in Delhi will be sunny is 99%, then the information content in talking about the weather is just 0.08 bits.

The thing with London weather, based on my day and half of observation, is that it is wildly volatile. This afternoon, for example, there was a hailstorm. And only a couple of minutes later there was bright sunshine. And then there was another hailstorm. I can see heavy rain from my window as I write this now.

Crow and fox getting married in London

A post shared by Karthik S (@skthewimp) on

So given how crazy and volatile the weather in London is, the information content in talking about the weather is rather high. As I write, there’s sunshine streaming through my window, and heavy rain outside. And I’m chatting with a friend who lives not very far from here, and whatever I tell her about the weather here is “information” to her, since it’s not the same there.

It’s this craziness and high volatility in weather in Britain that makes it worth talking about. The information content in a statement about the weather is always high. And this is not the case elsewhere in the world. And so people elsewhere get annoyed by Brits talking about the weather.

PS: What does it tell you that I’m blogging about the weather a day and half after landing in Britain?

Incredible stupidity in taxi marketplaces

So it’s nearly a week since Uber and Ola drivers in Bangalore went on strike, and there’s no sign of it (the strike) ending. The longer the strike goes on for, the more incredibly stupid all parties involve look.

The blame for the strike should first fall on Uber and Ola, who in some hare-brained madness, forgot that running a platform means that both sides of the market are customers and need to be taken care of. They took good care of passengers, providing discounts and growing their market, but rather quickly pulled the plug on drivers, and there is no surprise that drivers are a rather pissed off lot.

The root cause of driver dissatisfaction has been falling bonus payments, and consequently, incomes. This is a result of Uber and Ola providing too great a subsidy during the time they built up the market.

I don’t fault them for providing those bonuses – when you are building a two-sided market, you need to subsidise one side to solve the chicken-and-egg problem. Where I have the problem is with the extent of bonuses, which gave drivers an income far in excess of what they could make in steady state. This meant that as the market approached steady state and incentives were withdrawn, once side of the market started getting pissed off, undermining the market (Disclosure: I’d once proposed to Ola that they hire me to help them with pricing and incentive structuring. the conversation didn’t go too far).

With Uber and Ola having done their stupid things, the next round has gone to the drivers. In a misguided attempt that a long strike will help them get better deals from the platforms, they are prolonging the strike. They’ve even ransacked Uber’s offices, and gone to the government for help.

What they don’t realise is that having invested what they have in their cars to drive on these marketplaces, their success is inextricably tied to the success of the marketplaces. And the more the jeopardise the marketplaces, the less their incomes in future.

A long strike reduces market size on two counts – it gives people time to adjust to the absence of service and get adjusted to alternate arrangements, and it decreases the reliability of the marketplaces in the eyes of the passengers. Thus, the longer and more frequent the strikers by the drivers, the less that passengers will look to use these services in the future.

A strike can work when the striking employees are protected by some form of labour laws, and there is no way ahead for their employers apart from a negotiated settlement. In case of a marketplace, the platform has absolutely no obligation to the drivers, and Uber and Ola can simply do what Uber and Lyft did in Austin, TX – pack up and move on. And if they do that in Bangalore, the drivers with their shiny new cars will be significantly worse off than they were before the strike.

The other act of stupidity on the drivers’ part has been to involve the government, which, as expected, has responded in a nandelliDLi (“where do I keep mine?”) fashion. The recent ban on shared rides (UberPool/OlaShare) came after a regulator read the rulebook after the last strike by the drivers. Given the complex economics of platform markets, any further regulation can only hurt the drivers.

All in all, the drivers’ stupidity can be traced back to not understanding platform markets, and protesting the way protests used to be done in highly unionised industries. Drivers, whose main skill is in driving cars, cannot be faulted so much for not understanding platform markets. Uber and Ola, on the other hand, have no such excuse!

Who do you subsidise?

One basic rule of pricing is that it is impossible for all buyers to have the same consumer surplus (the difference between what a buyer values the item at and what he paid). This is because each buyer values the item differently, and is thus willing to pay a different price for it. People who value the item more end up having a higher consumer surplus than those who value it less (and are still able to afford it).

Dynamic pricing systems (such as what we commonly see for air travel and hotels) try to price such that such a surplus is the same for all consumers, and equal to zero, but they never reach this ideal. While the variation in consumer surplus under such systems is lower, it is impossible for it to come to zero for all, or even a reasonable share of, customers.

So what effectively happens is that customers with a lower consumer surplus end up subsidising those with a higher consumer surplus. If the former customers didn’t exist, for example, the clearing price would’ve been higher, resulting in a lower consumer surplus for those who currently have a higher consumer surplus.

Sometimes the high surplus customer and the low surplus customer need not be different people – it could be the same person at different times. When I’m pressed for time, for example, my willingness to pay for a taxi is really high, and I’m highly likely to gain a significant consumer surplus by taking a standard taxi or ride-hailing marketplace ride then. At a more leisurely time, travelling on a route with plenty of bus service, I’d be willing to pay less, resulting in a lower consumer surplus. It is important to note, however, that my low surplus journey resulted in a further subsidy to my higher surplus journey.

When it comes to markets with network effects (whether direct, such as telecommunications, or indirect, like any two-sided marketplace), this surplus transfer effect is further exacerbated – not only do low-surplus customers subsidise high-surplus customers by keeping clearing price low, but network effects mean that by becoming customers they also add direct value to the high surplus customers.

So when you are pleasantly surprised to find that Uber is priced low, the low price is partly because of other customers who are paying close to their willingness to pay for the service. When you pay an amount close to the value you place on the service, you are in turn subsidising another customer whose willingness to pay is much higher.

This transfer of consumer surplus can be seen as an instance of bundling, but from the seller’s side. Since a seller cannot discriminate effectively among customers (even with dynamic pricing algorithms such as Uber’s surge pricing), the high-surplus customers come bundled with the low-surplus customers. And from the seller’s perspective, this bundling is optimal (see this post by Chris Dixon on why bundling works, and invert it).

So the reason I thought up this post is that there has been some uncertainty about ride-hailing marketplaces in Bangalore recently. First, drivers went on strike alleging that they weren’t being paid fairly by the marketplaces. Then, a regulator decided to take the rulebook too literally and banned pooled rides. As i write this, a bunch of young women I know are having a party, and it’s likely that they’ll need these ride-hailing services for getting home.

Given late night transport options in Bangalore, and the fact that the city sleeps early, their willingness to pay for a safe ride home will be high. If markets work normally, they’re guaranteed a high consumer surplus. And this will be made possible by someone, somewhere else, who stretched their budget to be able to afford an Uber ride.

Think about it!

Cross-posted at RQ