How my IIMB Class explains the 2008 financial crisis

I have a policy of not enforcing attendance in my IIMB class. My view is that it’s better to have a small class of dedicated students rather than a large class of students who don’t want to be there. One of the upsides of this policy is that there has been no in-class sleeping. Almost. I caught one guy sleeping last week, in what was session 16 (out of 20). Considering that my classes are between 8 and 9:30 am on Mondays and Tuesdays, I like to take credit for it.

I also like to take credit for the fact that despite not enforcing attendance, attendance has been healthy. There have usually been between 40 and 50 students in each class (yes, I count, when I’ve bamboozled them with a question and the class has gone all quiet), skewed towards the latter number. Considering that there are 60 students registered for the course, this translates to a pretty healthy percentage. So perhaps I’ve been doing something right.

The interesting thing to note is that where there are about 45 people in each class, it’s never the same set of 45. I don’t think there’s a single student who’s attended all of my classes. However, people appear and disappear in a kind of random uncoordinated fashion, and the class attendance has remained in the forties, until last week that is. This had conditioned me into expecting a rather large class each time I climbed up that long flight of stairs to get into class.

While there were many causes of the 2008 financial crisis, one of the prime reasons shit hit the fan then was that CDOs (collateralised debt obligations) blew up. CDOs were an (at one point in time) innovative way of repackaging receivables (home loans or auto loans or credit card bills) so as to create a set of instruments of varying credit ratings.

To explain it in the simplest way, let’s say I’ve lent money to a 100 people and each owes me a rupee each month. So I expect to get a hundred rupees each month. Now I carve it up into tranches and let’s say I promise Alice the “first 60 rupees” I receive each month. In return she pays me a fee. Bob will get the “next 20 rupees”, again for a fee. Note that if fewer than 60 people pay me this month, Bob gets nothing. Let’s say Eve gets the next 10 rupees, so in case less than 80 people pay up, Eve gets nothing. So this is very risky, and Eve pays much less for her tranche than Bob pays for his which is in turn much less than what Alice pays for hers. The last 10 rupees is so risky that no one will buy it and so I hold it.

Let’s assume that about 85 to 90 people have been paying on their loans each month. Not the same people, but different, like in my class. Both Alice and Bob are getting paid in full each month, and the return is pretty impressive considering the high ratings of the instruments they hold (yes these tranches got rated, and the best tranche (Alice’s) would typically get AAA, or as good as government bonds). So Alice and Bob make a fortune. Until the shit hits the fan that is.

The factor that led to healthy attendance in my IIMB class and what kept Alice and Bob getting supernormal returns was the same – “correlation”. The basic assumption in CDO markets was that home loans were uncorrelated – my default had nothing to do with your default. So both of us defaulting together is unlikely. When between 10 and 15 people are defaulting each month, that 40 (or even 20) people will default together in a given month has very low probability. Which is what kept Alice and Bob happy. It was similar in my IIMB class – the reason I bunk is uncorrelated to the reason you bunk, so lack of correlation in bunking means there is a healthy attendance in my class each day.

The problem in both cases, as you might have guessed, is that correlations started moving from zero to one. On Sunday and Monday night this week, they had “club selections” on IIMB campus. Basically IIMB has this fraud concept called clubs (which do nothing), which recruiters value for reasons I don’t know, and so students take them seriously. And each year’s officebearers are appointed by the previous year’s officebearers, and thus you have interviews. And so these interviews went on till late on Monday morning. People were tired, and some decided to bunk due to that. Suddenly, there was correlation in bunking! And attendance plummeted. Yesterday there were 10 people in class. Today perhaps 12. Having got used to a class of 45, I got a bit psyched out! Not much damage was done, though.

The damage was much greater in the other case. In 2008, the Federal Reserve raised rates, thanks to which banks increased rates on home loans. The worst borrowers defaulted, because of which home prices fell, which is when shit truly hit the fan. The fall in home prices meant that many homes were now worth less than the debt outstanding on them, so it became rational for homeowners to default on their loans. This meant that defaults were now getting correlated! And so rather than 85 people paying in a month, maybe 45 people paid. Bob got wiped out. Alice lost heavily, too.

This was not all. Other people had bet on how much Alice would get paid. And when she didn’t get paid in full, these people lost a lot of money. And then they defaulted. And it set off a cascade. No one was willing to trade with anyone any more. Lehman brothers couldn’t even put a value on the so-called “toxic assets” they held. The whole system collapsed.

It is uncanny how two disparate events such as people bunking my class and the 2008 financial crisis are correlated. And there – correlation rears its ugly head once again!


Teaching at IIMB: Mid-term review

IIMB has a strange policy. They are not allowed to have classes tomorrow on account of it being a national holiday so they shifted tomorrow’s concept to today, indicating a complete lack of appreciation of the concept of the long weekend. Anyway, since I didn’t have any other plans for the day or the weekend I decided to not request for a slot change and went anyways. This was my eleventh class out of twenty.

I expected the attendance to be rather thin today, but the class surprised me with more than three-fourths of the registered students turning up (on par with most sessions so far). And despite the class being at 8 am in the morning, none of them slept (at least I didn’t notice anyone sleeping). That is again on par with the course so far – more than halfway though the course and I’m yet to catch a single person sleeping in class! Maybe I should take some credit for that.

The class before today’s was about ten days back (long gap due to mid-term exams), and that day I had a minor scare. I had formulated a case that involved solving the Newsboy Problem (now politically corrected to “Newsvendor model“) as a sub-step in the solution to the case. Having worked out the sketches of the case solution the previous night I went to sleep hoping to work out the full case before I went to class. And my brain froze.

So it was 6:30 on the morning of an 8am class and I wasn’t getting the head or tail of the newsboy problem despite having known it fairly well. Decided to have cereal at home rather than go to SN to give myself more time to read up and understand the model. And my brain refused to open up. Yet I made my way to class, hoping I could “wing it”.

I didn’t have to, for the class exceeded expectations and solved the case for me. One guy popped up with “newsvendor model”. Another guy said that we could consider a certain thing as a “spot price”, thus eliminating the need to make any assumptions on costs. Then we started working out the model on Excel (remember that this is a “spreadsheet modelling” course). And the time came to implement the newsvendor model. And my brain froze in anticipation. “How do we do this?”, I asked, trying to not give away my brain freeze.

“We calculate the critical ratio”, came the chorus (sometimes I dispense with the politeness and order of people raising their hands and speaking in order). “And what is that here?”, I asked. “B6/(B5+B6)” came back the chorus. And then when I asked them how to impute the ordering level based on this, the chorus had figured out the exact way in which we should use NormInv to determine this. The troubling bit of the newsvendor problem having been thus solved, I took control and went forward with the rest of the case. And my respect for the class went up significantly that day.

Later in the day I was relating the incident to the wife, who I might have mentioned is an MBA student at IESE Business School in Barcelona. “Oh my god, your class is so quant”, she exclaimed. This is a topic for another day but perhaps due to the nature of the admissions procedure, students at IIMs are definitely much much more quantitatively oriented than students at B-schools elsewhere. Yet, IIMs don’t seem to be doing much in terms of harnessing this quant potential which should be giving their students a global competitive advantage.

And coming back to my class, they’ll be sitting for placements starting the 9th of February. If my class is a representative sample (it is most likely not, since I’m teaching an elective and these people expressed interest in learning what I’m teaching, so there is a definite bias), this seems like a great batch at IIMB. So I encourage you to go and recruit!


Dressing up in residential schools

As  I was getting ready this morning to go deliver my lecture at IIMB, the wife expressed surprise at how casually I was dressed (I wore jeans, a (collared, “formal”) t-shirt and a hoodie). “In my business school all professors wear suits”, she said. My mind went back to the time when I was a student at IIMB, trying to remember what professors wore. While they were generally dressed more formally than I was today, no one wore suits – the only one who wore a blazer every day was easily the worst professor who taught me at IIMB!

I was thinking about why I don’t feel like dressing formally while going to IIM. And then I thought of the students, and realised that with the odd exception, I’m easily much more formally dressed than most of my students. When students turn up to class in track pants, professors have no incentive to wear anything close to a suit!

And this is not a new phenomenon. Back in my time too, close to ten years ago, people would wear track pants and other articles of clothing you might describe as “home wear” to class (Not me, though. I don’t wear track pants. As a rule. But I remember making it a point to wear shorts to all my final term examinations). So I started thinking about what it is about IIMB that makes people wear “home wear” to class. And I realised it has to do with the proximity.

IIM Bangalore is a wholly residential campus, and the student accommodation is a short walk away from most of the classrooms. In the second year, thanks to electives time tables are such that there is a good chance of having long breaks between classes, so you go to the academic part of the institute for only one class.

When you are going to a classroom that is only a short walk away from where you live, and when you go there only for one or two classes, it doesn’t feel like you’re “going somewhere”, so you don’t see any point in dressing up. Moreover, most of the people you meet in class are people you share a hostel with – these people would have seen you in your pyjamas anyway, and seen you get sloshed all over L^2 during one of those parties which I’m told are not so common nowadays! So there is no good reason for you to dress up! And you come to the class in pyjamas!

The wife’s B-school is not residential, and people live a few kilometres away. Very few pairs of people would have seen each other in their pyjamas, and the distance means people are “going somewhere” when going to a school. And so people dress up (and by that I mean they really dress up!). And when students are well-dressed, the professor wants to show off his superior social standing, and thus wears as formal clothes as he can – which usually means a suit!

Again I’m talking from small number of data points – I’ve lived in another residential institution (IIT Madras) – and that too was famous for its rather muted/horrible dressing sense. It’s a pity/mercy (depending on the way you look at it) that us IIMB people manage to well cover up our generally bad dressing by wearing suits at interviews and PPTs and other public events!

Day 1 of teaching at IIMB

As I had mentioned yesterday I’ve started teaching at IIMB. Some thoughts after day 1.

  • The sweetener (idli-vade-chutney) at SN refreshments is awesome but leads me to take a route that is heavier on traffic than the more optimal route (via Sanjay Gandhi and East End). Too many school buses and office cabs that move haphazardly make it less than a pleasant drive
  • My car was again waved past at the IIMB gate. No questions asked. I’m still not sure how they do it every time to my car, given there is no insignia on it! I don’t believe that they remember the car from when I was a student!
  • IIMB has a new classroom complex and I “inaugurated” one of the classrooms there. It’s quite nice, students set out in a wide U format which I quite like. The projector takes HDMI input which is awesome!
  • The class started off rather quietly. I had to put on my sarcastic side and helpfully mention that “there is still time left to drop this course”. Participation picked up after that.
  • For an 8 am class, no one slept, which I take as an achievement! But then it is the first day of the term. Maybe they’ll learn as they go along
  • There were zero objections when I put up my “pie charts are evil. don’t use them” slide. This is the first time I’m not facing any resistance for saying that! In the past I’ve had people say “but then I used a pie chart once and it was very well accepted”, and this after I’ve told them about the perils of anecdata!
  • Everyone calls me “sir”, from the students to the administrative staff and officers. I’m letting them call me thus. It’s funny how one of the administrators who I used to call “sir” when I was a student now calls me “sir”.
  • The drive back was horrible. Insane traffic all along Bannerghatta road till I got past the ring road. Then it was smooth but the 3rd block circle was again jammed. But then IIMB is giving me office space so once I get that I’m unlikely to drive back immediately after the class.
  • I need to manage my voice better. Half an hour in, I realised I had come close to losing my voice. I need to be less hyper and “conserve my voice” at least for the duration of the class.
  • And no, I won’t put such an update after every class. Just that today was the first day so ..
  • I came back and added “adjunct faculty, IIMB” to my linkedin profile 😛

Teaching at IIMB

Starting tomorrow I’ll be teaching at IIMB. It’s a course called “Spreadsheet modelling for business decision problems”, and targeted at term 6 MBA students. I explicitly warned them to not take the course if they don’t consider themselves to be competent at mathematics. Yet, some 60 students have registered (current IIMB batch size is ~400)!

This promises to be fun. The only part that may not be so much fun is that in order to make it compatible with the rest of my work I requested for the 8-930am slot on Mondays and Tuesdays so that means I need to get back to my early-to-bed-early-to-rise ways which have served me so well for most of my career (last few months though I’ve become a late riser).

Now, for everything that I do I like to have a “sweetener” – something that is totally unrelated that spurs me to do whatever I’m doing. Usually the sweetener is something that sounds quite trivial but is actually useful in spurring me on. The sweetener in this case is that SN Refreshments in JP Nagar 2nd Phase lies on my way from home to IIMB, and they make absolutely awesome idli-chutney. So the plan for tomorrow (and every other class day in the next 3 months) is to leave home early and have breakfast there and then head on to IIMB.

I’m hoping for a nice lively class. I’ve reserved 20% of the evaluation for “class participation”. I hope at least that spurs them to be nice and lively! Then again it’s first thing in the morning on Mondays and Tuesdays so you never know..

I’ll keep you guys updated on anything whacky that might happen in class. Oh, and I’m going to be starting a “class blog” for my students where they can write for extra credit. Will send out the link once it’s up and populated.

Now to decide whether to go by car (for some strange reason when I take the car – the same one I had when I was a student at IIMB – I never get stopped by the security guys at the gate. there’s no sticker on the car though) or by motorcycle (easier to navigate traffic and park near SN)!

Twisting and shouting

Ten years ago to the day, there was tragedy. Around this time I was home. That day I remember my father’s usual Ambassador (his office car) wasn’t available, so he had come in a blue WagonR which looked like anything but a government car. Not that I could see too well, though.

Back in 2004, spectacle lenses made of plastic weren’t yet popular, and even if they were available they were quite expensive. I remember having a shell frame back then (like I do now, except that that one was an ugly-ish brown). The lens was made of glass – the kind that could shatter on impact and enter your eyes.

And shatter and enter it did. I had instinctively closed my eyes, so not much had gone in, though. My first reaction at that point in time was to remember the phone number of my usual opthalmologist (yes I still remember things like that). I even remember calling that guy’s office (yeah, back on those Nokia phones you could type without looking). Friends, however, were of the opinion that I should go to the nearest eye clinic. And Shekar Netralaya (JP Nagar 3rd Phase) was where we ended up.

It was among the freaker of freak accidents. I was playing badminton. <lj user=”amitng”> and I were on one side, two others on the other. We were both close to the baseline when the opponents sent the shuttle high. Both of us went for it, <lj user=”amitng”> slightly ahead and slightly to the left of me. Both of us drew our rackets back with a slight backswing. And that was it.

His racket caught me flush on the left spectacle lens. The lens duly cracked, and parts of it entered my eye. I remember that the game immediately stopped. I remember that one other guy’s car was right there outside the court, so we could go quickly to the hospital. And back in those days there wasn’t even a signal at the Delmia junction, so the U-turn was taken fast so that I could go to hospital.

I don’t remember what they did at the hospital. I think they cleaned up my eye, but one or two pieces remained particularly troublesome. I remember going for a follow-up test two days later. And I remember that one day after the accident I went all the way back to IIMB (after the accident I went home, in my father’s temporary blue WagonR) so that I wouldn’t miss accounting class (yes I was in my first semester so such youthful enthusiasm can be expected). And went back again the following day to write a test which I nearly aced.

And then there was the back story. 2004 was the first time that the IIMs decided to make public the CAT percentile. They had used an algorithm to allocate percentiles, and allocated it up to two decimal places. So if your “percentile” (with decimal places the term doesn’t make sense) was greater than 99.995 (i.e. you were in the top 0.005% of the 130,000 odd people who wrote the exam), your percentile would get rounded up to give a weird-sounding “100.00 percentile”. Top 0.005% of 130,000 means about six or seven people. Two of those were at IIMB. I was one of them. <lj user=”amitng”> was the other.

During our inauguration the certificates for the “directors merit list” of the senior batch were handed out. It was possibly meant to tell us how important being in the top 10 of the batch was, and I’m sure it did inspire a lot of people. And having been the top performers in the entrance test, people perhaps considered <lj user=”amitng”> and I top seeds (neither of us ended up getting it, though he got considerably closer than I did).

And so when I got injured before our first ever unit test and he was in some ways culpable for it (though in fairness it was on the field of play), there was scope for conspiracy theory. And when you have a bunch of creative youngsters and scope for a conspiracy theory, you can well expect someone to stand up and do the honours. And @realslimcody rose to the occasion. And Twisted Shout was born.

The name of the organization has its own story. @realslimcody is a Beatles fan, and he suggested that he name the yellow journalist enterprise as “twist and shout”. Madness heard it as “Twisted Shout” and the name stuck. A couple of episodes later I duly joined Twisted Shout. And we did a lot of twisting and shouting and yellow journalism. If you were our contemporary and not slandered by Twisted Shout you might consider your stint at IIMB of not being worthy enough!

Of course in a place like IIMB, you don’t do something just for the heck of it. Everything has to result in a “bullet point” in your CV (back in 2005 I’d planned to write a book called “In Search of a Bullet Point” about IIMB, but that again didn’t take off. I put NED, I guess). I think I wrote in my final resume that I was a “co-editor in the campus informal journal Twisted Shout”. I think the placement committee (which whetter all CVs) let that one remain (bless them). And as with all such campus endeavours TS quickly died after we graduated (though I tried to resurrect it in a separate blog on this site, it didn’t take off).

It’s ten years since that landmark incident that sparked the birth of Twist and Shout. I must mention my eye is fine – fine enough for me to wear contact lenses as I type this. There’s a scar inside my eye, though, and that’s something I’ll carry all my life. But it doesn’t affect life one bit, and life goes on!

Oh, I wasn’t right on that one – after the injury the doctor had told me that I shouldn’t let sweat enter my eyes. Two months after the injury I managed to get myself a red bandana (with skull and crossbones on it), and I ended up wearing it at all “sweatable opportunities” – when I played or partied. The bandana got legendary in its own way, and its story shall be told another day (or perhaps it’s already been told somewhere on this blog).


Teaching marketing

Recently, the Alumni Association of IIM Bangalore had invited alumni to give interviewing practice to second year students at the institute. This was in an attempt to help them prepare for their “final” placements that are coming up in March. With a view towards brushing up my interviewing skills (haven’t interviewed anyone for close to three years now) and also to check out the kind of people that go to IIM nowadays I decided to volunteer. And ended up interviewing some five or six people.

I had told the organizers that I’d be interviewing for a hypothetical job in my firm and that they should preferably send students with an inclination for “quant” and for consulting. Perhaps there was a mismatch in communication, and perhaps I sent my “requirements” too late, but it so happened that at least half the people who came to were “majoring” in marketing (nowadays they’ve introduced the “major-minor” system at IIMB. If you do five electives from one “area” you “major” in that. Three electives from an “area” gets you a minor. There is no compulsion to either major or minor, though).

Given that the questions that I’d prepared were inclined towards interviewing for a quant/consulting/analytics kind of role (basically whatever I currently do in my “job”), I decided to not veer too far from that while teaching these people. To each of them I put forth a “case”, where the central problem was marketing-related but needed numbers to “solve”. In fact, I made up the case on the spot after one of these students told me he had interned at an e-commerce firm.

So I told them that they are the marketing manager of an e-commerce firm and the firm has launched a few advertising campaigns and now needs to test the effectiveness of such campaigns. I asked them how they would measure this.

Given that they might have just about started off practicing for their placements, I realized they didn’t have much expertise doing “case interviews”, and so tried to help them navigate the case. So for each of them I started by asking them what kind of metric they would use for measuring the effectiveness of the campaigns. And this is the stage that each of their “interviews” came unstuck.

Incredibly, each of them independently started off with “we will first understand what segment this campaign is targeted at”. And then their process of measurement involved identifying a sample of customers of this segment and then “measuring if they had got the intended message of the campaign”. When I told each of them that they weren’t allowed to do a survey, and added for good measure that a focus group discussion is also out of question, they all seemed absolutely lost. I couldn’t really proceed with their cases.

I find it incredible that the three of them (granted – small sample) who are second year students in one of India’s better business schools (at least I hope so) completely failed to imagine that the effectiveness of an advertising campaign can be measured in terms of “sales” or “website hits” or “click through rate” (depending upon the “intended message” of the campaign, one of these becomes the appropriate metric). It seemed to me that their management education had clouded their ability to think intuitively.

In my limited experience in interacting with marketers, I’ve found that a large number of them are fairly resistant to using numbers in their business, and speak in terms not fathomable to the common man (I once made the mistake of applying to a marketing analytics firm, and was promptly sent some questions about measurement of “brand feeling” and such like. I withdrew my application). The impression I get from my small sample is that marketers’ way of thinking is completely divorced from that of other people in business, and have always wondered about why this is. I had assumed it might be a function of getting ingrained into certain marketing jobs, but now it seems like this way of thinking is more deep-rooted.

I was taught core marketing by a somnolent professor who was renowned to be a “great marketer”. He clearly didn’t market marketing too well, for I didn’t take any marketing electives after that. However, I think I “get” related fields such as game theory and behavioural economics, and try to understand marketing using those frameworks. Usually it doesn’t take you too far in a conversation with marketers, though.

Based on my interactions with the three marketing major students I interviewed, it seems to me that something is wrong with marketing teaching, especially at IIMB. It seems to me that marketing is taught as a rule-based discipline, rather than based on first principles. Perhaps that is how recruiters of marketing majors want it to be like, but it seems like this kind of “education” is only going to create poor quality marketers.

PS: I admit to small sample bias, extrapolation and such like.