More on focal points at reunions

On Friday, just before the IIMB reunion started, I had written about reunions being focal points that help a large number of alumni to coordinate and meet each other at a particular date and venue. What I’d not written about there was the problems that could potentially be caused with the said venue being large.

In this case, the venue was the IIMB campus itself. While all official events, meals and accommodation for outstation attendees had been arranged in a single building (called MDC), the fact that people would explore the campus through the event made the task of coordination rather difficult.

The whole point of a reunion is to meet other people who are attending the event, and so it is important that people are able to find one another easily. And when the venue is a large area without clear lines of sight, finding one another becomes a coordination game.

This is where, once again, Thomas Schelling’s concept of Focal Points comes in. The game is one of coordination – to land up at locations in the venue which maximise the chances of meeting other people. While our class WhatsApp group enabled communication, the fact that people wouldn’t be checking their phones that often during the reunion meant we could assume there was no communication. So when you arrived at the venue, you had to guess where to go to be able to meet people.

Schelling’s theory suggested that we look for the “natural, special or relevant” places, which would be guessed by a large number of people as the place where everyone else would coordinate. In other words, we had to guess what others were thinking, and what others thought other others were thinking. Even within the reunion, focal points had become important! The solution was to search at those specific points that had been special to us back in the day when we were students.

On Saturday morning, I took about ten minutes after entering campus to find batchmates – I had made poor guesses on where people were likely to be. And once I found those two batchmates at that first point, we took a further twenty minutes before we met others – after making a better guess of the focal point. Given that the reunion lasted a bit more than a day, this was a significant amount of time spent in just finding people!

 

 

A simpler solution would have been to start with a scheduled event that everyone would attend – the venue and starting time of the event would have defined a very obvious focal point for people to find each other.

And the original schedule had accommodated for this – with a talk by the Director of IIMB scheduled for Saturday morning 10 am. It seemed like a rather natural time for everyone to arrive, find each other and go about the reunion business.

As it happened, revelry on the previous night had continued well into the morning, because of which the talk got postponed. The new starting point was to “meet for lunch around noon”. With people who were staying off-campus, and those arriving only on Saturday arriving as per the original schedule, search costs went up significantly!

PS: This takes nothing away from what was finally an absolutely fantastic reunion. Had a pretty awesome time through the duration of it, and I’m grateful to classmates who came from far away despite their large transaction costs.

Indexing, Communism, Capitalism and Equilibrium

Leading global research and brokerage firm Sanford Bernstein, in a recent analyst report, described Index Funds (which celebrated their 40th birthday yesterday) as being “worse than Marxism“. This comes on the back of some recent research which have accused index funds of fostering “anticompetitive practices“.

According to an article that says that indexing is “capitalism at its best“, Sanford Bernstein’s contention is that indexers “free ride” on the investment and asset allocation decisions made by active investors who spend considerable time, money and effort in analysing the companies in order to pick the best stocks.

Sanford Bernstein, in their report, raise the spectre of all investors abandoning active stock picking and moving towards index funds. In this world, they argue, allocations to different assets will not change (since all funds will converge on a particular allocation), and there will be nobody to perform the function of actually allocating capital to companies that deserve them. This situation, they claim, is “worse than Marxism”.

The point, however, is that as long as there is no regulation that requires everyone to move to index funds, this kind of an equilibrium can never be reached. The simple fact of the matter is that as more and more people move to indexing, the value that can be gained from fairly basic analysis and stock picking will increase. So there will always be a non-negative flow (even if it’s a trickle) in the opposite direction.

In that sense, there is an optimal “mixed strategy” that the universe of investors can play between indexing and active management (depending upon each person’s beliefs and risk preferences). As more and more investors move to indexing, the returns from active management improve, and this “negative feedback” keeps the market in equilibrium!

 

So in that sense, it doesn’t matter if indexing is capitalist or communist or whateverist. The negative feedback and varying investor preferences means that there will always be takers for both indexing and active management. Whether we are already at equilibrium is another question!

Stephen Curry and mixed strategies

Ever since I learnt recently about the rise of Stephen Curry, and Golden State Warriors’ rise using a three-point strategy, my interest in basketball and the NBA has gone up. I still can’t watch a game – the randomly spaced ad-breaks are too mindfucking for that. But I’ve been reading a lot more about Curry and Golden State Warriors and Joe Lacob of KPCB.

There are two ways in which you can attack in basketball – you can either keep tiki-takaing and drive in to get close to the basket to layup/dunk or you can go for a three-pointer. We can think of each basketball attack as a “game”, where the offensive team decides to go for either the three-point or the tiki-taka, and the defensive team decides how to defend against it.

I won’t bother with drawing the payoff table here, but given research on similar “games” in sports (such as penalty kicks in football), it wouldn’t be hard to guess that the dominant strategy here is the “mixed strategy”, where a team chooses at random whether to tiki-taka or long range.

Over time, this would have led to a certain proportion of the time when the team would have decided to take long shots, and defences would have adapted accordingly (defence against a mixed strategy is also a mixed strategy).

What Curry’s extraordinary three-point shooting skills have done is that they’ve completely changed the payoffs for his team, but significantly increasing the payoff of the three-point strategy. So the Warriors have adapted their strategy accordingly, by going for the three-point game more often than the tiki taka game.

And my sense is that Curry’s shooting statistics are so much better than others’ that the proportion with which the Warriors go with the three-point strategy (as the game theoretic solution suggests) is significantly higher than the proportion with which other teams adopt such a strategy in attack.

Consequently, defences have failed to anticipate this change in the payoff matrix and defend like they do against other teams (whose mixed strategy hasnt changed). In other words, the Warriors’ opponents haven’t been playing the optimal strategy while playing against them. And this is what has led to their unprecedented 73-win NBA season.

With time, other teams are likely to adjust and adapt more optimal strategies. It’ll be interesting to see how the Warriors perform next season!

Admission of errors and bad bank loans

I have a policy that whenever I make a mistake, I admit it. I believe that suppressing an error does more harm than good in the long run, and it is superior to admit it at the time of discovery and correct course rather than keeping things under wraps until the shit hits the fan (a la Nick Leeson, for example).

There is another reason I like to admit to my mistakes – by doing so frequently, I want to send the signal that I’m self-aware and self-critical and aware of what I’ve done wrong. This, I believe, sends a signal that I should be trusted more, since I have a grip on rights and wrongs.

It doesn’t always work that way. There was a company I once worked for, where my responsibilities meant that my errors had an immediate material impact on the company. I don’t know if this (direct material impact) mattered, but my signalling went horribly wrong there.

The powers-that-were came from a prior belief that people would suppress their mistakes as much as they could, and that I was admitting to them only because I couldn’t suppress them further. Their reaction to my constant admission of mistakes (I was writing production code, a bad bad idea given my ADHD) was that if I were admitting to so many mistakes, how many more of my mistakes were yet to be discovered?

In other words, the strategy backfired spectacularly, possibly given the mismatch of our priors, and I later figured I might have done better had I tried suppressing (or quietly fixing) rather than admitting. That, however, hasn’t led to a change in my general strategy on this issue.

I was reminded of this strategy when State Bank of India and Punjab National Bank released their quarterly results last week. Their stocks got hammered on the back of drastically reduced profits on account of higher provisions – an admission that a significantly higher proportion of their loans had gone bad compared to their earlier admissions.

The question that comes to mind is whether the increase in provisioning and admission of bad loans should be taken as a credible signal that these banks are cleaning up their balance sheets (which is a good thing) or whether it only indicates a bigger tip of a bigger iceberg (in which case I’d be paranoid about my deposits).

Not knowing what strategy these banks are playing (though statements from the RBI suggest they’re likely to be cleaning up), I guess we have to wait for results over the next couple of quarters to learn their signals better.

Guarantees in meetings

There are some events/meetings which involve strong network effects. People want to attend such events if and only if a certain number of other people are going to attend it. But then they don’t know before hand as to who else is coming, and hence are not sure whether to accept the invitation. These are events such as school reunions, for example, where if only a few people come, there isn’t much value. And it’s hard to coordinate.

In such events it’s always useful to provide a guarantee. For example, a friend from (B) school was in town last week and expressed an interest in meeting other batchmates in Bangalore. A mail thread was promptly started but until the morning of the event, people remained mostly noncommittal. Not many of us knew this guy particularly well, though he is generally well-liked. So none of us really wanted to land up and be among only one or two people along with this guy.

And then there was a guarantee. One other guy sent a mail saying he’d booked a table at a bar, and this sent a strong signal that this guy was going to be there too. Then there were a couple of other very positive replies and the guarantee having been set, some seven or eight people turned up and the meeting can be called a “success”.

Sometimes when you’re trying to organise an event, it makes sense to get unconditional attendance guarantees from a couple of people before you send out the invite to the wider world. So you tell people that “X and Y” (the early guarantors) are definitely coming, and that will pull in more people, and that can be the trigger in making the event a success! In certain circles, X and Y need to be celebrities. In smaller circles, they can be common men (or women), but people whose guarantees of attendance are generally trusted (i.e. people who don’t have a history of standing up people)!

Another small reunion of my B-school batch happened last month and in the run-up to that I realised another thing about RSVPs – yeses should be public and noes private. One guy took initiative and mailed a bunch of us proposing we meet. I hit reply all on purpose to say that it was a great idea and confirm my attendance. Soon there was another public reply confirming attendance and this snowballed to give us a successful event. There were a few invitees we didn’t hear from, who didn’t attend, and I assume they had replied privately to the invite in the negative.

The problem with events on Facebook is that your RSVP is public irrespective of your reply – so even if you say no, everyone knows you’ve said “no”. And so you think it’s rude to say “no”, and say “yes” just out of politeness, even though you have no intentions of attending.

I’ve attended a few events where the hosts estimated attendance based on a Facebook invite and grossly overestimated attendance – too many people had hit “yes” out of sheer politeness.

So the ideal protocol should be “public yes, private no”. Facebook should consider giving this as an option to event creators so that people reveal their true preferences in the RSVP rather than saying “yes” out of sheer politeness.

In that sense it’s like a Vickery auction whose basic design principle is that people reveal their true willingness to pay and not underbid to avoid the winner’s curse!

Offline marketing of online services

Using snail-mail for marketing is an effective strategy for it grabs more of your attention. But messages need to be more personalised to have effect.

This came in the mail yesterday. If you are an old-timer like me, you will recognise it as an “inland letter card”. The edges are frayed because it had been so long since I’d received one such card that I’ve forgotten how to open them.

bigbasket

You will notice that this inland letter came from Bigbasket, the online grocery shopping firm. At first look, it is bizarre that an e-commerce firm is using snail mail for its marketing. On second thoughts, though, it isn’t that bizarre!

The thing with online modes of communication such as email or SMS is that the cost of sending a message is low, very close to zero. What this leads marketers to do is to bombard you with messages. For example, I bought something from Jabong a couple of weeks back and they’ve since sent me at least an SMS a day. I promptly delete them without reading. On my email, I’ve been unsubscribing wherever possible from promotional lists from which I get messages – for they are too frequent and too “vanilla” (it’s bizarre that even marketers who know much about me refuse to use that information in their communication).

In short, there is too much clutter in online (email/SMS) marketing, and the chances of any promotion really standing out and getting the user’s attention is minuscule.

Sending snail-mail, on the other hand, is expensive. It costs you to buy the paper, print out the letters and then you pay for postage. This means that with the advent of cheaper means of communication, most marketers have moved away from it. What that has done is that you get much lesser snail-mail than you used to a few years ago. Which means that the amount of attention you devote to each snail-mail is actually more!

So with snail-mail being the more expensive form of marketing, it is actually more effective for marketers because it draws your attention! (You can think of it as a multi-player prisoner’s dilemma where the marketer wants to maximise her claim on your attention (relative to her costs), and can do so by either using email or snail-mail. The optimal solution, I believe, is a kind of “mixed strategy” – mostly email, but the odd snail-mail here!)

So an online sales company reaching out to you by snail mail is not that bizarre after all. If only they had customised the mail to put my name on it (not hard to do at all), and made it seem like a personal letter, it would have been even more effective!

There have been two occasions in the last five years when I’ve actually responded to upsell campaigns. One was by Airtel who called and offered me a 3G data plan for almost the same price as what I was then paying for my 2G plan. I had been intending to upgrade and I took it.

The other was by Tata Sky, who sent me a beautifully crafted personalised letter printed on thick A4 paper, indicating I was a “premium subscriber” and asking if I wanted to upgrade to Tata Sky+ HD, and giving me a number of a dedicated call center who I had to call to upgrade. It is likely that had it been email I might have discarded it (or if I were using today’s Inbox, marked it as “Done”). Snail mail drew more attention, and the personalisation made me feel good. And I upgraded.

Methods of Negotiations

There are fundamentally two ways in which you can negotiate a price. You can either bargain or set a fixed price. Bargaining induces temporary transaction costs – you might end up fighting even, as you are trying to negotiate. But in the process you and the counterparty are giving each other complete information of what you are thinking, and at every step in the process, there is some new information that is going into the price. Finally, if you do manage to strike a deal, it will turn out to be one that both of you like (ok I guess that’s a tautology). Even when there is no deal, you know you at least tried.

In a fixed price environment, on the other hand, you need to take into consideration what the other person thinks the price should be. There’s a fair bit of game theory involved and you constantly need to be guessing, about what the other person might be thinking, and probably adjust your price accordingly. There is no information flow during the course of the deal, and that can severely affect the chances of a deal happening. The consequences in terms of mental strain could be enormous in case you are really keen that the deal goes through.

Some people find the fixed price environment romantic. They think it’s romantic that one can think exactly on behalf of the counterparty and offer them a fair deal. What they fail to discount is the amount of thought process and guessing that actually goes in to the process of determining the “fair deal”. What they discount is the disappointment that has occurred in the past when they’ve been offered an unfair deal, and can do nothing about it because the price is fixed. But I guess that’s the deal about romance – you remember all the nice parts and ignore that similar conditions could lead to not-so-nice outcomes.

Bargaining, on the other hand has none of this romance. It involves short-term costs, fights even. But that’s the best way to go about it if you are keen on striking a deal. Unfortunately the romantics think it’s too unromantic (guess it’s because it’s too practical) and think that if you want a high probability of a deal, you should be willing to offer a fixed price. And the fight continues.. Or maybe not – it could even be a “take it or leave it” thing.

Relationships and the Prisoner’s Dilemma Part Deux

Those of you who either follow me on twitter or are my friends on GTalk will know that my earlier post on relationships and the prisoner’s dilemma got linked to from Cheap Talk, the only good Game Theory blog that I’m aware of. After I wrote that post, I had written to Jeffrey Ely and Sandeep Baliga of Cheap Talk, and Jeff decided to respond to my post.

It was an extremely proud moment for me and I spent about half a day just basking in the glory of having been linked from a blog that I follow and like. What made me prouder was the last line in Jeff’s post where he mentioned that my blog post had been part of his dinner conversation. I’m humbled.

So coming to the point of this post. Jeff, in his post, writes:

Some dimensions are easier to contract on.  It’s easy to commit to go out only on Tuesday nights.  However, text messages are impossible to count and the distortions due to overcompensation on these slippery-slope dimensions may turn out even worse than the original state of affairs.

I argue that it is precisely this kind of agreements that leads to too much engagement. The key, I argue, is to keep things loosely coupled and uncertain; and this, I say, doesn’t apply to only romantic relationships. I argue in favour of principles, as opposed to rules. Wherever the human mind is concerned, it is always better to leave room for uncertainty. Short term volatility decreases the chances of long-term shocks.

So if you contract to date only on Tuesday nights, and on a certain Thursday both of you get a sudden craving for each other. In a rule-based system, you’d have to wait till Tuesday to meet, and that would mean that you’d typically spend the next five days in high engagement, since you wouldn’t want to let go given the craving. There is also the chance that when you finally meet, there has been so much build-up that it leaves you unsettled.

The way to go about this is to not make rules and just make do with some simple principles regarding the engagement, and more importantly to keep things flexible. If you have a “I won’t call you when you’re at work” rule, and there is something you really need to say, this leads to wasted mind space since you’ll be holding this thought in the head till the other person is out of office, and thus give less for other things you need to do in that time.

You might ask me what principles one can use. I don’t know, and there are no rules governing principles. It is entirely to do with the parties involved and what they can agree upon. A simple principle might be “if I don’t reply to your text message it doesn’t mean I don’t love you”. You get the drift, I suppose. And the volatility, too. (ok I’m sorry about that one)

The mechanism design problem for scaling down that Jeff talks about is indeed interesting. His solution makes sense but it assumes the presence of a Trusted Third Party. Even if one were to find one such, and that person understands Binary Search techniques, it might take too much effort to find the level of interaction. I wonder if the solution to scaling down also is the Bilateral Nudge (will talk about this in another post).

Relationships and Prisoner’s Dilemma

So I ws thinking about this car analogy for relationships. I was thinking about how when you start your car, you will need to drive in first gear, with full engine power, slowly releasing the clutch, using a lot of fuel. However, after you have gathered certain speed, it is wasteful and unstable to go on in first gear. It is time for you to take your foot off the gas pedal, hold down the clutch and change gears, and shift the car to lower engine power.

I think it is similar with romantic relationships. Once you’ve reached a certain level and gotten past the initial phase, it is wasteful to continue in the same full throttle. Once both of you understand that the other is firmly in the basket, there is no need to waste much time just assuring and reassuring each other of the other’s presence. It is simply a wastage of fuel. Also, if there is too much torque at too much speed, there is a good chance that the car will spin out of control, so that needs to be avoided.

A relationship is like a car with two control systems. It is important that both of you coordinate the gear change, else there is a danger that the axle might snap. Let us move out of the analogy for the rest of the post.

So there are two of you and both of you have the choice of whether to change gear or not. Now, the ideal thing to do would be to change gears together, since that will ensure the relationship is at the same level but you’ll both be spending lesser energy on it. The worst case is if exactly one of you changes gears. If one of you suddenly slows down while the other is still at full throttle, it is likely that the other will suddenly feel insecure that the one has stopped responding, and this is likely to lead to some sort of breakdown in the relationship, even if temporary. And in order to get things back on track, you’ll need to go full throttle, thus leading to wastage of energy.

So basically, exactly one party deciding to scale down can prove to be disastrous for both of them, because of which the dominant strategy is to stay where you are – at full power. Let me draw the 2 by 2.

———————————————————————

|                        |    Scale down           |  Remain at full blast     |

———————————————————————

| Scale down|    0                               |  -100                                  |

———————————————————————

|Remain at   |  – 100                         |  -50 |

| full blast     |                                      |                                              |

——————————————————————–

You will notice that the players start off at a Nash equilibrium! Of both of them remaining at full blast. And thus neither has the incentive to scale down, unless he/she is sure that the other will also scale down simultaneously! And if the couple is not communicative enough, they will continue in this suboptimal state for too long, and end up burning way too much energy and willpower, which could’ve been otherwise put to good use.

Hence it is important that the couple communicates about matters such as these, and coordinates the shift in gears, and saves valuable energy!

IPL Structuring

I remember that this time, last year, I was eagerly looking forward to the IPL auctions. It also happened to be a time when I was actively looking out for a new job (i wasn’t going to find one till about six months later). And I was secretly hoping that one of the IPL franchises would employ me as a game theory and structuring consultant in order to help them out with the player auctions. While I tracked it online, I imagined myself sitting in the bidding room at the Trident, showing my excel sheet to the franchise owner and captain, and watch Preity Zinta enhance her Mata Amrita Index.

It was also a period of extreme NED, due to which i didn’t bother looking out actively to try consult for an IPL franchise. It was a period of low confidence, so I assumed I wasn’t good enough for this kind of work, and didnt’ bother doing anything in this direction. Frankly, I didn’t have a clue how to proceed, else i might have put SOME effort at least. A few months later, when the IPL was well underway, I figured out that one of my cousins is a big shot with Bangalore Royal Challengers, and he was among the people at the Trident who picked the Test XI to represent BRC. I wanted to kick myself, but for some reason I didn’t.

Currently, I’m comfortably employed, and so far have been happy with this job. Else I might have wanted to throw my hat into the ring. Once again, IPL team formation season is on. A few transfers have gone through already, and a few are currently in limbo. Bidding will happen next season for people who are joining the league this year. It promises to be an interesting time. And so far I’ve been deeply unhappy with the way the franchises are going about their business.

I’m especially upset with BRC, and have half a mind to call up my cousin who consults for them and give him a piece of my mind. How the hell could they let go of Zaheer Khan in exchage for Robin Uthappa? Yes, the latter is from Bangalore, and has that local pull factor. He has batted quite well this Ranji, though not anywhere close to what he played like 2 seasons back when he topped the batting charts. But he is supposed to be paid twice of what Zaheer was being paid! Is he really worth that much? I’m sure that BRC missed a trick here. I’m sure that had the BRC asked for a fee from Mumbai Indians in order to release Zaheer in exchange for Uthappa, the Indians would’ve definitely paid up. When Chelski can reportedly offer Anelka, Malouda, Alex and 15 million pounds in exchange for Robinho, Mumbai could definitely part with Uthappa and maybe a million dollars in exchange for Zaheer.

There were rumours of the Mumbai Indians negotiating a swap with Kings XI Punjab for a swap between Powar and Harbhajan, which reportedly got stalled because Harbhajan earns so much more than Powar. Once again, what if the Mumbai Indians paid a fee along with Harbhajan for Powar? I know it is ridiculous that Powar is worth Harbhajan plus a fee, but given their disparity in income, this is the only way that this deal is possible. And I’m sure that there is a particular fee, which if paid along with Harbhajan in exchange for Powar, will leave all the interested parties (Punjab, Mumbai, Harbhajan, Powar) better off. It seems like people are too lazy to find it.

The opportunities like this are endless. All that the franchises need is someone who has sufficient knowledge of game theory, coase theorem, a decent knowledge of cricket (interest in domestic cricket is a desirable quality) and who understands how to structure deals. I don’t know if franchises have already recruited such people but if they haven’t, they should try and recruit. The most obvious choice of person that I can think of who possesses all the above skills (including interest in domestic cricket) is me. Unlike last year, I’m not in the job market right now, but don’t mind doing some part-time stuff. I may not get paid, but I’m willing to work for a few IPL tickets and maybe invites to some parties with cricketers.

I’m also wondering if cricketers’ pay will go down starting the 2011 season onwards. The IPL auctions happened just before the downturn was to begin, and I’m sure that franchises have overpaid for most players. Since players have all signed three year contracts, their pay till the 2010 season is safe. Beyond that, I’m not sure if franchises will offer them fresh contracts at higher or equal salaries.

It would also be interesting to see if some version of the Bosman ruling is to operate in the IPL. We can only wait and see.