On age and experience and respecting elders

A lot of commentary about the financial crisis of 2008 spoke about there not being anyone around who had experienced the Great Depression of the 1930s. The American Economy was largely stable till the end of the 1970s, they had argued, because the memory of the Depression was fresh in the minds of most policy-makers, and they made sure not to repeat similar mistakes. With that cohort retiring, and dying, however, in the 1990s and 2000s there emerged a bunch of policy makers with absolutely no recollection of the depression (in the 1990s, most policy makers would have been born in the 1940s or later). And so they did not hedge themselves and the economy against the kind of risks that had brought America down to its knees in the 1930s.

Now, think back to a society which was far less networked than ours is, and there was little writing (“no writing” would take us too far back in time, but think of a time when it was fairly expensive to write and store written material). This meant, that there were no books, and little to understand and experience apart from what one directly experienced. For example, one would never know what a storm is if one had never directly experienced it. One wouldn’t know how to light a fire if one had never seen a fire being lit. You get the drift. Back in those days when societies were hardly networked and there wasn’t much writing, there was only one way in which one could have learnt things – by having experienced it.

I suspect that this whole concept of elders having to be unconditionally respected had its advent in one such age. Back then, the older you were, the more you had experienced (naturally!), and hence the more you knew! There was no other way in which one could accumulate knowledge or understanding. In places like India, even education didn’t help, for “education” back in those days consisted of little more than learning the scriptures by rote, and didn’t teach much in terms of real knowledge. So taking the advice of elders naturally meant taking the advice of someone who knew more. It is natural to assume that these people who knew more than the ones around were respected.

With the advent of books, and later (post Gutenburg) the advent of cheap books, all this began to change. It became possible for people to know without having experienced. It became possible for people to get more networked, and the direct impact of both of these was that it became possible to know more without having really experienced it. In this day of highly networked societies and wikipedia, it is even possible to know everything about something without even pretending to have experienced it (attend some high school seminars and you’ll know what I’m talking about). There is no connection at all now between age and how much you know.

Culture, however, doesn’t adapt itself so quickly. It didn’t help that “elders”, whose position as the “most knowledgeable” was being threatened thanks to writing and networking, were also the people in power. In any case, the real reason of respect for elders had probably been lost, so it was easier for them to extend their reign. And so it continues to extend.

Older people nowadays fail to recognize that younger people might know more than them, and get offended if the younger people tend to argue with them. Yes, experience is still a great teacher, but the correlation between experience and knowledge has long since been broken. As the pupils sang at the beginning of the Vishnuvardhan starrer Guru Shishyaru (the teacher and the pupils), “doDDavarellaa jaaNaralla, chikkavarellaa kONaralla, gurugaLu hELida maatugaLantoo endoo nijavallaa” (elders are not wise, youngsters are not buffaloes, what the teacher says is never true).

PS: As I was writing this, it struck me that this whole “respect for elders” paradigm is more prevalent in societies (such as India) where education was largely religious. Societies where education was more secular don’t seem to have this paradigm.

Fractal life

Recently I finished reading Mandelbrot’s The (mis)Behaviour of Markets for the second time. Fantastic book. I think it is a must read for people who are interested in financial markets, and especially for those who work in capital markets. While it stays away from equations and “math”, and prefers to use pictures (or cartoons) to illustrate and show concepts (a method I definitely prefer to obscure math), it does raise a lot of very interesting fundaas.

So last week I was feeling stressed out. I realized that I had worked too hard on Wednesday and Thursday hence I got stressed out on Friday. A couple of months back, I took a couple of days of medical leave because I was stressed out. I reasoned that was because I’d pushed myself too hard the earlier two weeks. And thinking about all this today, I thought the incidence of stress has gone up over the last couple of months. This, I reasoned to pushing myself excessively for over a year now.¬†And if I were to analyze my today’s work, I could probably say that I pushed myself too hard in the afternoon and hence got stressed out in the evening.

Same pattern, you see. At different scales.You get the drift, I guess. And stress is just an example I took. If I think about how my louvvu for my wife has evolved, again same pattern. There is a “global pattern”, and that same “global pattern” repeats itself over shorter intervals over the last two years. Irrespective of the quantum of time I look at, I see that same “global pattern” stretched or compressed to the appropriate time scale. In other words, love is also a fractal.

You can see fractals all around you. You can see self-similarity everywhere. And yet, even when you have small samples. you instinctively try to model it as a normal distribution. Without realizing that the “normal” distribution in life is the Power law.

Division of Labour

Some six of us have planned for a vacation for next month. And so far, the “labour” of planning the vacation has been divided unevenly. So far, it has been three of us who have been doing a lot of the work – talking with tour operators, drawing up schedules, planning transport and accommodation, booking tickets, etc.

Now with a large part of the work having been done, the three of us who have been doing the work have decided to put NED and have left it to the other three “freeriders” to complete the rest of the work. As you might expect, the other three continue putting NED and in the last few days not much work has been done.

The question is this – what is the optimal strategy for the three of us who have been so far doing work? We think we’ve done more than enough of our share and so the others should take over now. On the other hand, the more we leave it to the other three, the more procrastination that will happen which might come back to hit all of us in terms of higher rates, etc.

It is dilemmas like this that allow freeriders to freeride – they know that by freeriding, they are not the only ones who are losing out, and that there are people who are more driven than them who will also end up losing out if these guys freeride. And the freeriders know that the driven guys won’t let things drift and will positively do something about it, and that encourages them to freeride further. And so forth.

Is there a solution to this problem? When there is a common objective, how should incentives be structured in order to make the freeriders work, while also not making it obvious that these are artificially tailored incentives?

Intellectual Property

A blog post earlier this month on Econlog finished off with a very strong quote by Friedrich Hayek:

One of the forms of private property that people cherish most is their ideas. If you convince them that their ideas are wrong, you have caused them to suffer a capital loss.

I ended up liking it so much that I added it to my work email signature. Thinking about it further, why is it that some people are more open to debate than others? Why do some people admit to their mistakes easily while others are dogmatic about them? Why do some people simply refuse to discuss their ideas with other people? I think Hayek’s observation offers a clue.

Let us consider two people – Mr. Brown and Mr. Green. Mr. Brown believes in diversification, and his investments are spread across several financial instruments, belonging to different categories, with a relatively small amount of money in each of them. For purposes of this analogy, let us assume that no two instruments in his portfolio are strongly correlated with each other (what is strong correlation? I don’t know. I can’t put a number on it. But I suppose you get the drift)

Mr. Green on the other hand has chosen a few instruments and has put a large amount of money on each of them. It is just to do with his investment philosophy, which we shall not go into, as this is just an analogy.

Let us suppose that both Mr. Brown and Mr. Green held Satyam stock on 6th January 2009. They were both invested in Satyam according to their respective philosophies – and the weightage of Satyam in their respective portfolios was also in line with their philosophies. The next day, 7th of January, the Satyam fraud came out. The stock crashed to a tenth of its value. Almost went to zero. How would our friends react to this situation?

Mr. Green obviously doesn’t like it. A large part of his investments has been wiped out. He has become a significantly poorer man. For a while he will be in denial about this. He will refuse to accept that such a thing could happen to one of his chosen stocks. He will try to convince himself that this fall (a 90% fall, no less) is transient, and the stock will go back to where it once was. As days go by, he realizes that his investments have been lost for ever. He is significantly poorer.

Mr. Brown will also be disappointed by the fall – after all, he too has lost money in the fall. However, his disappointment is mitigated by the fact that the loss is small compared to his portfolio. There have been other stocks in his portfolio which have been doing well, and their performance will probably absorb the Satyam losses. Some of the stocks in his portfolio may also be fundamentally negatively correlated with Satyam, which means they will now gain. There is also the possibility that the Satyam fall has opened up some new possible areas of investment for Mr. Brown, and he might put money into them. It is much easier for Mr. Brown to accept the fall of Satyam compared to Mr. Green.

So you replace stocks by ideas, and I suppose you konw what I am gettting at. The degree of openness that people show with respect to an idea they have varies inversely with the share of this particular idea in their “idea portfolio”. The smaller the proportion of this idea, the lesser will be the “capital cost” of their losing the idea. And hence, they will be more open to debate, to discussion, to letting someone critically examine their ideas. If the proportion of this particular idea in their overall portfolio is large, there will obviously be resistancce.

A corrolary of this is that when someone possesses a small number of ideas they are more likely to be dogmatic about them (I am using the indefinitive “more likely” here because even when you have a small number of securities in your portfolio, your exposure to some of them will be really small and so you’ll be less unwilling to lose them. Though I must point out that people with small ideas portfolios become so used to madly defending the big ideas in the portfolio that they start adopting the same tactic for the smaller ideas in their portfolio and become dogmatic about them – which is irrational).

I just hope I didn’t cause you a capital loss by writing this. For me, on the other hand, this was a bonus stock.