Keeping Transaction Costs Low

The Bruhat Bangalore Mahanagara Palike’s coffers aren’t Bruhat, it seems. For the up-coming road widening project, for which considerable amounts of land need to be acquired, it seems like the BBMP can’t afford to pay in cash. Hence, it has been proposed that compensation will be paid in terms of Transferable Development Rights (TDRs). The basic funda is that when your land gets acquired, you get rights to construct more in some other existing site, or on the remaining part of your site, or some such.

Quoting

According to a BBMP official, TDR is an instrument through which the Palike facilitates landlosers to construct additional floor or building in the remaining portion of the property or anywhere in the City.

The BBMP would issue a Development Rights Certificate (DRC), which can be either be utilised for personal need or can be sold to anyone who wants to construct an extra floor. The owner gets the right to construct a built up area 1.5 times over and above of that the property acquired for development. For instance, if 600 sq ft built-up area is given up to the BBMP, the property owner will receive a DRC for 900 sq ft built-up area.

This is interesting on several counts. Firstly, do you realize that what the BBMP is paying for the land is effectively an option? A TDR is nothing but an OPTION to construct more than what would normally have been permitted. The valuation of this option hinges upon the fact that current building laws are highly restrictive (in terms of the built up area as a proportion of the site area) and so the option of constructing more will actually be valuable.

It would be interesting to see how these options get valued. You can trust that there will be a lot of litigation concerning this since you can expect most people to have problem with the valuation. First of all valuation of financial options is itself so tough, you can imagine how hard valuing these TDRs can be.

Then, there is the whole supply aspect. The whole model of these TDRs will hinge upon the unwritten promise that more such rights will not be given away any time in the near future, since that will cause the value of existing TDRs to drop sharply. Given that there is one single agency (the BBMP) that controls the supply of such rights, and that the potential supply of such rights is infinite, there is a chance that valuation of these rights might be depressed.

One important thing the BBMP needs to take into account while issuing these rights is to make sure there are no transaction costs for trading these rights. The “transferable” bit needs to be emphasized in order for the value of these rights to be truly unlocked. I can see a large number of individuals who will be compensated with these rights who will want to trade them away, since they are unlikely to possess another site to utilize them. And given the number of big buildings coming up on small sites, I can foresee there being a decent demand for it.

I do hope that investment banks (or their equivalent) come forward in order to make markets in these rights. I’m sure banks won’t miss opportunity to step in here, but the important thing is for regulation that will enable such intermediation. It is in the interests of the BBMP to keep these transaction costs low, since that is going to have a positive impact on the valuation of these rights, and eventually less such rights can be given.

Postscript: It would be interesting to study the impact of these rights on bribery rates of BBMP officials. I’m sure that currently a lot of money is made in illegally granting rights for buildings that don’t conform to regulations. Since there will now be a legal way of getting similar favours (I’m told that the Akrama-Sakrama scheme has similar intentions) it would be useful to see if bribes do drop.

The other side of the long tail

There are several people who talk about how the advent and the popularity of the internet has resulted in markets in many a long tail. Without loss of generality, let us just take the market for writing here. Several niches which were earlier not served since there wasn’t enough of a dedicated audience in a particular geographical area for a certain set of articles and so no one bothered to write and disseminate them.

For example, it is unlikely that there was enough of a “market” for a series of posts on the Studs and Fighters Theory in the days before the internet – a market big enough for a newspaper or a magazine or a journal to bother publishing. Now, the internet not only allows me to publish it without effort or cost, but also lets me know that there is enough of a market for this kind of a series for me to bother publishing it rather than just explain it to a few friends in a smoky bar or cafe.

Now, the funda is that sometimes the long tail can exist in geographically coherent markets and not online! For example, all of yesterday, while at work i was frantically searching for sources to follow the BBMP election results. Everyone led me to this TV9 video streaming but it didn’t open on my office network and I couldn’t find any other live sources that were constantly updating the results. I had had similar problems following the results of the Karnataka Assembly elections two years back.

It was then I realized that the “traditional market” can itself be the long tail! For example, the amount of information I found about the elections in this morning’s papers was really impressive – in fact, the much ridiculed ToI had pretty good coverage of the polls, as did the Deccan Herald or the New Indian Express. Earlier in the morning, yesterday, too there were the Kannada channels which focused exclusively on the election results.

What I’m saying here may be fairly obvious, but just wanted to point out that long tail need not refer exclusively to the new media, or new channels. When you look at it in certain ways, several of the traditional media are also catering esssentially to a long tail, though when there was only the traditional media, no one really used the term.

Talking of BBMP elections, take a look at this graphic that was presented in the Deccan Herald today. Don’t you see a pattern in this?

Bangalore Map

Orange Juice and Petrol

So I was reading this article by Ajay Shah about administered pricing for petroleum. He does an excellent (though it gets a bit technical in terms of statistics) analysis about what could go wrong if the government were to free pricing of petroleum products. He mostly argues in favour of deregulation, and that is a view that I completely endorse.

One of the big fears about deregulation that he mentions is the fear that volatility in retail prices of petroleum products might increase, and he argues that this is a good thing and is much better than the government artificially hiding the prices and subjecting the junata to major price shocks once in a while. While I agree with him on this, I don’t think prices will change frequently in the first place.

While I was reading this article, I started thinking about the neighbourhood Sri Ganesh Fruit Juice (yeah there are a dozen of those in every neighbourhood in Bangalore) center. About how the guy keeps the price of orange juice constant throughout the year, despite the price and availability of oranges themselves fluctuating wildly across seasons. Yeah he might do minor adjustments such as changing the proportion of water but he can’t do too much of it since he needs to maintain quality.

The basic funda here is that customers want certainty. Every time they go to the shop for their fix of orange juice, they want certainty in the prices. Even if you are on an average cheaper, you will lose customers if your price is more volatile than your competitor’s. Of course there are occasions when you can’t help it and are forced to change your price – and on these occasions your competitors are also likely to do the same. But as far as possible, you try your best to decouple the price of orange juice from the price of orange which is pretty volatile.

Now I don’t know if the volatility in crude oil prices is more than the volatility in orange prices (it’s likely to be) but considering that oil companies are supposed to be more sophisticated than your neighbourhood juice shop guy, I would expect similar behaviour from them – of keeping retail prices of petroleum products as stable as they can. Of course they are likely to follow long-term trends but they are surely not going to pass on the short-time noise in prices to the customers.

So this fear of increase in volatility of retail prices is unfounded, assuming of course that the oil marketing companies are good businesspeople!

Shopping in New York

When I went shopping in New York on Friday I was reminded of this article by Tim Harford that the bofi had posted as part of a comment on one of my earlier posts. The basic insight in the article (which draws upon some widely cited research – I’ve read about it in several other places) is that too much choice may not be a good thing. That basically if presented with too much choice you are likely to just put NED rather than put effort into making the choice, and so it makes sense on behalf of the marketer to restrict choice.

So on Sunday evening, after having spent most of the day with a bunch of friends I know through an online group, and an hour or so with RG Mani, a very tired me walked into Macy’s, which claims to be the largest store in the world. I don’t dispute that claim – there are some six floors with each floor being the size of an average Big Bazaar. And there are clothes. And clothes. And shoes. And clothes. And more clothes.

Since I was trying to shop not only for myself, I ended up spending a considerable amount of time in the women’s section also. And the problem there was one of plenty. There was so much stuff to look at that it caused intense NED. I ended up just giving up on large sections of the store, and not even looking at even a sample of price tags there (yeah, I’m a cheap guy and was looking only for heavily discounted stuff). I won’t elaborate further on this “too much choice => NED” funda. Read the Harford article for more on that.

I don’t know what the strategy of the store is and whether they had deeply discounted stuff at all. The sample of clothes that I happened to check the price tags of were all extremely expensive. Perhaps the store did have some cheap stuff, but I don’t understand the policy of hiding it somewhere. Is the thinking that people on the lookout for cheap stuff are going to look more carefully and will hence find it? Which means some kind of “skimming” in terms of people’s attention spans? But the problem with this strategy is that by not displaying the cheap front up front, you may end up turning away a lot of people who look for cheap stuff!

Looking through all the huge floors of Macy’s caused me so much NED that when I saw an excellent looking reasonably priced Tommy Hilfiger sweater I didn’t even bother trying it. Maybe if I’d seen that sweater earlier I would’ve owned it now! So much that choice, and size, can do!

On Monday I went to this store called Century 21 near my office and had a more productive shopping experience. They also had both cheap and expensive stuff but they prominently advertised the cheap stuff with prominent “sale” signboards. Much more targeted, much more convenient for the cheap shopper, much more sales which means much more profits. Only thing I wonder is if this strategy of theirs turned away people looking for the higher margin expensive stuff..

Simplicity and improvisation

While writing my previous post on the film game, I was thinking about simplicity and improvisation. About how if you seek to improvise, in order to improvise well, you would rather choose a simple base. Like how the simplicity of film aata allows you to improvise so much and create so much fun. I was thinking about this in several contexts.

This concept first entered my mind back in class 11, when a mridangist classmate told me that for all music competitions, he would choose to play the aadi taaLa. His funda was that the simple and intuitive 8-beat cycle in this taaLa let his mind free of conforming to the base and allowed him to use all his energy in improvisation.

Thinking about it, though I have little domain knowledge, I would consider it very unlikely that a Carnatic performer would choose a vakra raaga for the “main piece” of a concert. The main piece requires one to do extensive alaap and then taaLa and requires a lot of improvisation and creative thinking on the part of the performer. Now, a vakra raaga (one where there are strict rules governing the order to notes) would impose a lot of constraints on the performer and he would be spending a large part of his energy just keeping track of the raaga and making sure he isn’t straying from the strict scales.

Starting from a simple easy base allows you to do that much more. It gives you that many more degrees of freedom to experiment, that many more directions to take your product in. If you build a sundae with vanilla ice cream, you can do pretty much what you want with it. However, if you use butterscotch, you will need to make sure that every additive blends in well with the butterscotch flavour, thus constraining your choices.

When the base for your innovation is itself fairly complicated, it leaves you with little room to manouever, and I’m afraid this is what occasionally happens when you are into research. You specialize so much and start working on such a narrow field that you will be forced to build upon already existing work in the field, which is already at a high level of sophistication. This leaves you with little choice in terms of further work, and you end up publishing “delta papers”.

Similarly in the management context, if you start off by using something complicated as your “base framework”, there aren’t too many things you can put on top of it, and that constrains the possibilities. There is even the chance that you might miss out on the most optimal solution to the problem because your base framework didn’t allow you to pursue that direction.

It is all good to borrow. It is all good to not reinvent the wheel. It is all good to stand on the shoulders of giants. However, make sure you pick your bases carefully, and not start on complicated ground. You will produce your best work when you give yourself the maximum choice.

Arranged Scissors 14 – Losing Heart

I’ve been in this market for a while now. It was sometime in February that my mother decided that I had utterly failed in my attempts to find myself a long-term gene-propagating female partner, and that she needed to step in and find someone for me. It was sometime in March that I went to this shady photo studio at DLF Galleria in Gurgaon and got a “wedding profile” snap taken. Later in March, I got listed at some shadymax exchange in Malleswaram. And there was the “market visit”.

The last weekend of this March I was in Bangalore, and was taken to this shady-max exchange in Malleswaram for a “market visit”. My uncle had told me that we needed to go sufficiently early, since there were apparently profiles of six hundred girls that I had to inspect that day, and make a shortlist. We had had a hurried breakfast at a Darshini in JP Nagar and then headed out to the exchange. My uncle, aunt and mother took turns to go up to the counter there and fetch the “smartha brides” files one by one. And I would spend about a minute on each file – which had fifty profiles. The six hundred profiles were done in less than a quarter of an hour. Phallus had simply refused to budge.

Aadisht, via his friend Vishakh, came up with this awesome framework of “head, heart, phallus“. The basic funda is that in order for you to enter into a long-term gene-propagating relationship, your head, heart and phallus need to independently like the counterparty (women insert appropriate substitute into the 3rd component). There is nothing earth-shaking about this framework as another of my friends pointed out, but the important thing is that it distinguishes between heart and phallus. Which I think most other explanations of louvvu (including bollywood movies) tend to ignore. And people also ignore it and get confused between heart approval and phallic approval, leading to disaster.

I had taken a long break from this arranged scissors market – a combination of being generally disgusted, poor health and being in between jobs. Recently (with the advent of Navaratri) I’d gotten back, and realize that I’ve lost my heart. Yeah, you might think this sounds funny but it’s not. I’ve truly lost my heart. And the only good that can come out of this is that if a crocodile catches and threatens to eat me, I can tell it the truth.

This whole arranged scissors concept seems to dehumanize the wonderful concept of long-term gene-propagating relationships. You are expected to make your decisions quickly, and you are expected to design “questionnaires” so as to get the maximum amount of info through each meeting. You are expected to browse through files containing six hundred profiles and make a shortlist. And when you are in the process of making the shortlist, you have your mom and aunt peering over your shoulder with helpful comments such as “this girl’s mouth is too wide” or “that girl’s nose is too blunt”.

For a while you resist, and resolve that you won’t get sucked into this mess. You resolve that you are still looking for “true louvvu” (whatever that is) and won’t settle for a common minimum program. You resolve that you’ll use the arranged marriage exchange as a dating agency. And soon it begins getting to you. You begin to see the merits of judging noses as too flat and mouths as too wide. You start breaking a girl down into components, and giving marks to each, and taking a weighted average to see if it is beyond “pass marks” (ok I’m obviously exagggerating here). You agree to meet potential counterparties even if you know that it’s improbable that you’ll like her.

My head, I think, is doing quite fine. So is the phallus. However, I think I’ve lost my heart. It’s been three and a half years since I even hit on someone. My heart seems to have forgotten how to love, and to have a “crush”. I’ve forgotten how my heart used to react during prior blades. In each of those cases, if I remember right, it was the heart that initiated it, and the head and phallus only gave approval later. Now, I have no clue how that used to happen. That seems so improbable.

This whole concept of meeting people with the explicit intention of evaluating them for long-term gene-propagating relationships is seedy. I think it goes against the laws of nature, and completely ruins that wonderful feeling that one usually associates with louvvu. It makes you too judgmental (I’m judgmental otherwise also, but not this judgmental), and you are so busy evaluating her that you don’t enjoy it at all. And how can you trust your judgment when you know that you haven’t liked the process of judgment at all?

Yesterday I met a friend, an extremely awesome woman. Once I was back home, I sent a mail to my relationship advisor, detailing my meeting with this friend. And I described her (the awesome friend) as being “super CMP”. I wrote in the mail “I find her really awesome. In each and every component she clears the CMP cutoff by a long way”. That’s how I’ve become. I’ve lost it. I’ve lost my heart. And I need to find it back. And I don’t know if I should continue in the arranged scissors market.

Hug Theories

This is some kind of a chow-chow bhath post – I’ve aggregated several concepts related to hugging and the Mata Amrita Index and am putting them in one place.

Firstly, is hugging a cost or a benefit? This thought came to my head recently when I was really thankful to a friend and wanted to express my appreciation by giving her a hug. Then, doubts crept into mind if she would actually consider a hug from me as a reward, and I finally ended up desisting. So the basic funda is would she consider hugging me as a cost or as a benefit? If the former, my thank you hug would have the adverse effect, while it would’ve been just fine if it were the latter.

And what about me? I was thinking of hugging her as “a reward”. What does that say about my mindset about hugging her? Do I consider it as a cost or as a benefit? If the latter, I’m not really being thankful to her but am just using the occasion to put hug. And if I considered hugging her as a “cost” would I be able to hug her properly enough for her to feel my gratitude?

Then, how does this tie in with the bilateral Mata Amrita Index? Is it obvious that if both of us consider hugging each other as a cost, our bilateral MAI will be low? Is it obvious that if both of us consider hugging each other as a benefit, our BMAI will be high? What if I consider hugging you as a cost while you consider it as a benefit? How will our BMAI profile be? Let me know what you think about this.

The other thing I want to rant about is this concept of a “half-hug” or a “sideways-hug” where only the shoulders of the huggers touch each other, and most of the rest of the torsoes are separated. People say that this is usually used with acquaintances, and in social occasions. I fundamentally dislike this concept. It’s neither here nor there, and I believe that this creates discomfort in both parties. If at least one of the two parties considers hugging the other as a cost, this half-hug will be on the whole uncomfortable (from my limited experience, you can’t enjoy a hug if at least one of the parties is not feeling comfortable). Is it really worth it? Wouldn’t it be better to just shake hands?

So I fail to understand how this concept has still survived. Wouldn’t a judicious combination of handshake and proper hug be enough to eliminate this? On my part, I’m doing my best in order to not half-hug/side-hug. If I’m completely comfortable with the counterparty, I put full hug. Else handshake. And call me homophobic, but as a rule I don’t hug other guys.

Another question is how do you hug when one of you is significantly taller than the other? Priyanka, who claims to be an expert on the subject, says that one option is for the taller person to marginally lift the shorter person to bring him/her to the same level, but isn’t that too cumbersome? Does there exist a more elegant solution to this problem? And don’t suggest sideways-hug – I don’t want one party to be smelling the other’s armpits.