Why Uber/Ola is Nehruvian

According to Ramachandra Guha’s India After Gandhi, the ostensible reason for India adopting a statist/socialist/planned approach was the scarcity of capital.

With capital being scarce in the newly independent country, Jawaharlal Nehru had reasoned that in order for the country to develop, whatever capital existed had to be deployed in the most productive manner possible. A free market for capital would end up deploying capital where it wasn’t required the most, denying more critical sectors of capital. A planned economy, on the other hand, would result in more efficient usage of capital.

While India has developed significantly in the 70 years since independence, it is still not completely out of the woods. Poverty remains high and India’s per capita income is at the lower end of the spectrum. Thus, while capital may not be as scarce a resource as it was in 1950, effective deployment of capital is still necessary to ensure India’s continued economic growth.

From this perspective, think of the car. When at rest, it is adding no economic value apart from making itself available to its owner (and its owner alone) at a point of time when the latter needs it. From this perspective, the economic value that the parked car adds is almost entirely in terms of “option value”.

A parked car also consumes valuable economic resources, with the most important being the real estate it stands on. This particular resource is so important that it forms an important form of urban regulation in most markets (a building or a business needs to have a certain minimum number of parking spaces and so on).

Moreover, the two common axes on which the value of a car is evaluated are age and distance travelled. Considering that the car adds economic value only in terms of the latter – when it helps transport someone, depreciation of the car in terms of age is entirely uncompensated. On this account, too, a parked car is a dead weight loss.

It is not hard to see, thus, that a parked car is an enormous waste of capital; capital that an emerging economy such as India could very well utilise elsewhere. Yet, the large number of cars in the country that are standing still at any point in time show that despite being an overall inefficient use of capital, a large number of people value the inbuilt option value.

Back in the time when Nehru had his way, he had solved the problem in his own unique way – by limiting the number of cars that could be manufactured and sold in the country, which automatically put a limit on the number of parked cars. In this technologically advanced day and age, however, we don’t need such drastic measures.

All we need is a restructuring of economic incentives such that the option value of a parked car goes down. And what better incentive than to provide the option to summon a car on demand? While this summoned car might have a higher marginal cost per trip than an owned car, taken in aggregate it leads to a significantly lower cost.

Thus, the Nehruvian answer to the inefficient capital wasted in parked cars would be to encourage services that allow you to summon a car on demand. In other words, services such as Uber and Ola fulfil a Nehruvian objective by freeing up capital that was being earlier wasted in parked cars. There is data to show that such services have resulted in a decline in growth of car ownership.

Given that Uber and Ola follow the Nehruvian ideal of reducing wasteful capital, it is baffling that the government in Karnataka, which belongs to the Congress party which is based on Nehruvian ideals, or the government in Delhi, headed by the Nehruvian Arvind Kejriwal, were to campaign to clamp down on such Nehruvian services.

There might be some tremors under Shanti Van.

Meeting your husband’s old crush

I wonder what it’s like to meet your husband’s old crush. Someone who you know he was quite obsessed with back in the day, when he did all sorts of crazy things because his crush was hardly materialising, in honour of whose stillborn love he wrote short stories (something he has never ever done for you), and someone who he is still good friends with even a decade after his crush ended.

I wonder what it’s like to be in a new city, where you’ve only been for four days, and then venturing out to an unknown part of town to meet someone who you’ve never met before, who you’ve never even spoken to, and about whom you know only because of reading your husband’s blogs about her, and because of what your husband has told you about her.

I wonder if it feels weird, or if it is just a part of the game, that you are going to travel two hours to meet someone whose only connection to you is your husband, who is not going to be there with you when you meet her. He has made that introduction, told both of you perhaps more than you need to know about each other, but now he’s throwing both of you into the deep end, asking you to meet, to hang out, to make conversation. Is he asking too much of both of you?

What are you even going to talk about? Your husband, who both of you know very well, is one obvious topic, but what about that signboard in Bishop Cottons Boys’ School (that your husband told you about) that said “great mind discuss ideas, average minds discuss events, small minds discuss people” (or some variation of that)? There is the professional stuff that you guys can talk about, which you perhaps would even prefer, but would you want to spend most of your time on your first meeting with someone you are likely to get along with, just talking about work? Then again, it helps immensely that both of you are outgoing and extroverted and generally good conversationalists, people who are inherently good at putting the counterparty at ease. But with two of you being of the same “type”, will there be a clash?

If not anything else, one good thing that will come out of this meeting is that your husband (evil guy he is) is going to call up both of you after you’re done with each other, and find out “how it went”. If not anything else, there will be value added in terms of some entertainment for him, as he will speak to the two of you and try and elicit gossip after you’re done meeting. As far as the universe is concerned, the cost that the two of you will have to pay in terms of possible discomfort and awkwardness will be offset by the value that your husband will gain by means of “entertainment value”. And then there is the option value of the two of you actually getting along and having a good time together!

So for the universe, it works out. For you and for your husband’s old crush, it may lead to negative value. But then such deals are precisely the kind of stuff that your evil ex-banker husband is good at structuring!

Derivatives trading in football players

I love it! It’s a dream come true!! It’s official!!!

Football clubs have finally wisened up to trading in derivatives on players’ contracts, it is apparent based on the transfer deadline news of yesterday. Alvaro Negredo has been loaned out by Manchester City to Valencia, but at the end of the year Valencia have an obligation to make the deal permanent. The same article mentions Fiorentina taking Micah Richards on loan, also from Manchester City. In this case, however, Fiorentina has the option to make the deal permanent after a year.

In fact, thinking about it, this kind of option trading in football contracts is not all that new. When Brendan Rodgers was initially appointed by Liverpool in 2012, he was given a three year deal, with the club having an option of extending it by a year (the deal has since been revised).

It’s all very interesting. I’ve constantly lamented that some of the great concepts in finance which are well applicable to everyday life are not applied to the extent that is required. Option valuation is one such concept, for example. I wrote to a friend just now asking why I should join a club he is exhorting me to join, given it’s not doing much now. His reply can be condensed to “option value”.

Option valuation is not the only thing. There is the concept of liquidity. A very commonly used concept within financial markets, it is surprisingly absent in general economic literature. For example, in finance it is a well understood concept that the more the number of active market participants the less is the transaction cost (measured as the bid-ask spread). The same concept can be used to analyze markets for taxis, housing, cooks (why a cook costs much more in Rajajinagar where demand is much lower than in Jayanagar), etc. You never see too many economists talking about it, though.

The problem might be that practitioners of financial economics concepts find finance too lucrative to apply their concepts elsewhere, while mainstream or left-leaning economists might find finance (especially complex derivative finance) abhorrent, and thus are loathe to borrow concepts from that (generally speculating)!

In terms of liquidity, though, things seem to be changing. My old friend Sangeet has been practically making a living over the last couple of years evangelizing the concept of liquidity, through his excellent blog on platform economics. Check out his recent post on Uber, for example. Platform economics is nothing but the economics of liquidity. The success of Sangeet’s blog shows that people are finally beginning to take the concept seriously. Still not mainstream economists, though!

Inefficiency of Restaurant Reservations

Quartz reports that restaurant reservations have been taken over by bots in San Francisco. Certain restaurants in that city are incredibly hard to get reservations at, so people have started letting lose bots that check for availability every minute and grab the table as soon as it’s available. In fact, there are enough bots out there that at a particular restaurant which opens reservations at 4 am, all tables are taken by 4:01. Every day.

In Kannada, there is an idiom that says “gubbi mEle brahmAstra”, which means using the weapon of Brahma (widely recognized in Hindu epics are the most powerful weapon) to annihilate a sparrow. Using a bot for restaurant reservations is a solution that falls under this category. However, that someone had to think up of this solution shows that there is something wrong with the restaurant reservation market. And it is not just in San Francisco (I guess this solution was first implemented there thanks to the penetration of online restaurant reservations and the high number of techies in the city. Bangalore fails on the first count).

The problem with the way restaurant reservations currently work is that the option is priced at zero. And thus gets allocated on a first come first served basis. Suppose I want to go out on a date tonight but am not sure what cuisine my wife is craving today. Anticipating crowds, given that it is a Saturday, I will make reservations in four different restaurants serving four different cuisines. There is nothing that currently prevents me from doing that. And it costs me nothing (apart from the cost of four phone calls).

A restaurant reservation is essentially an option to occupy a table of a certain size at a certain restaurant in a particular time period. If you show up at the restaurant at the appointed time, the restaurant is obliged to offer you a table. However, the way it is currently implemented is that you are not obliged to show up at that restaurant at that particular time. If you don’t show up, the table the restaurant had “reserved” for you will go empty for that evening, thus resulting in loss of business.

How can a restaurant handle this? One idea is to overbook. If you have 10 tables, allow 12 people to make reservations, in the hope that on an average day, 10 or less will show up. While this may lead to higher occupancy, problem is when all 12 show up. You then run the reputational risk of making a reserved guest wait, or worse, turning them away. Another option is to book only a fraction of the tables. If you have 10 tables, give out reservations only for 8, and let people know that you are open to walkins (if someone calls after the 8 are taken, you can say “I’m sorry, but we can’t take any reservations. However, we have some unreserved tables. You can come and check it out. If you’re lucky you’ll get it”). That way, by keeping yourself open for walkins, you can prevent loss of inventory- except that if you are a high end restaurant you are unlikely to get too many walk in customers.

Another option (which I believe is a method online retailers in India use for cash-on-delivery customers) is to maintain a list of people who called you along with their phone numbers and whether they showed up. That way, you can deny habitual offenders a reservation. However, considering that if you are a high end restaurant people are unlikely to visit you very often this may not work either.

The ideal economic solution, of course, would be to charge for reservations. People pay a small deposit when they make a reservation. If they do show up, this amount gets adjusted against their bill. However, given that most reservations happen over the phone (except in SF), you have no way to charge for it. So is the solution that you move your reservations exclusively online, so that you can charge for it? Then you could lose out on customers who are uncomfortable with making reservations online.

Even if all your reservations were online (like in SF), there is a problem in charging for reservations – you wouldn’t want to be the first restaurant doing that. One thing high end restaurants pride themselves on is their reputation, and charging for reservations can make them appear “cheap”, and they wouldn’t want to do that unless it is the done thing.

So how are restaurants managing the situation now? My take is that they are adjusting for it in the price. They are not overbooking, but assuming the cost of empty tables (as a result of no shows) in their overall pricing. This way, customers who are honouring reservations are effectively subsidizing those that don’t. While the market “clears”, the implicit subsidy towards customers who don’t honour their reservations leads to dead weight loss. There is also moral hazard – since desirable customers (the ones who show up) are subsidizing the un-desirable (the ones that don’t).

Is there a solution to this? One way to look at this would be for restaurants to centralize their reservations. I’m surprised no one has done it yet. You can have a website and a call centre from which you can take reservations for a large number of restaurants. The restaurants will pay for it since it will mean that they don’t need to have someone by the phone taking and managing reservations. And given that the same call centre manages bookings for multiple restaurants, they can identify duplicate bookings and overbook accordingly. Customers can be incentivized to use the same ID for booking for multiple restaurants by introducing a multi-restaurant loyalty card. And then – once there is a large number of restaurants that have moved their reservations to this call centre, they can start thinking of collectively moving towards a system of penalizing for unfulfilled reservations.

There – I’m giving a business idea away for free!

Disconnected Life

The last forty eight hours were spent without internet connection, perhaps the first time I’ve spent an extended period of time at home without being connected. At first, it was incredibly peaceful, as without distractions it gave me enough time to finish off in 2 days all the 3 books (none of them very heavy, mind you, and all were “funda books”) that I’d brought home from the British Library. What was incredible was the amount of time I had in general, for everything. With the internet on, there are way too many distractions. Tweetdeck buzzes every minute. You are keen to “unbold” every mail as soon as it arrives in your inbox. Out of sheer habit, you periodically check out facebook and cricinfo. Lots of time gets wasted, no doubt.

I’d be lying, however, if I were to seay that I didn’t miss the net at all. Foremost was the need to check email, which I did though my phone periodically. I didn’t bother, however, unbolding all the stuff that was there. I only checked the mails that I thought were important, and the rest were “cleared” after I got back my connection this morning (the outage was because I’d applied for a new data plan, and the worthies at BSNL (bless them) decided I should go through some pain for having put them though the pain of changing the plan).

Then, there was some research I was trying to do yesterday, and I was looking for some data, which I wasn’t able to get since there was no internet. I went out of touch with my usual gtalk/twitter friends, but since it was only for a day I don’t really mind that. Most importantly, I missed regular updates of Ranji trophy scores, since those weren’t available anywhere else. It was too much of a hassle to be only via the phone (I don’t have 3G) for extended periods of time. There was also a lot of writing I did in the period, and all those blog posts are now sitting on my hard disk. I’ll upload them one by one with sufficient gaps so that I don’t flood you.

The worst part of no internet was the loss of the “option value” to stay connected. The best part was that it gave me a lot of time to do whatever I else really wanted to do without all the distractions the internet brings. I hope to go on an “internet break” for some time every day, switching off my modem for a few hours. Hopefully that’ll help me make better use of my time. For now, I’m glad to have the 4Mbps connection!

The deal with plays

I live near Basavanagudi in South Bangalore, hardly 6 km from the city’s best theatre Ranga Shankara. In the other direction, a (relatively) new auditorium which plays host to several promising plays (KH Kala Soudha) is even closer. There are times when we consider going for a play at one of these locations. To date, however, I’ve been to a performance (can’t call it a play) at KH Kala Soudha once. The only time I’ve been to Ranga Shankara was five years ago, back when i was in college.

I think one of the reasons for this is that I can never muster the necessary incentive to go watch a play. A large number of plays, as I understand, hold nothing much of promise in the stories that they tell. I’m not much of an actor, and don’t have an eye for fine acting which I want to discover. Yes, sometimes the way some stories are told is fantastic, and this is even more so when the play in question is telling a known story (the one play I’ve watched in Ranga Shankara was a Harivansh Rai Bachchan interpretation of Hamlet; where they use Yakshagana dancers for the play-within-a-play, and that was a fantastic way of telling the story).

Still, the thought of having to sit there in one place, without doing anything that might distract the performers, focusing all my energies on the performance, for the “option value” that there might be something really insightful in what the performers are trying to convey is daunting. With widespread sponsorship from governments and corporates, most plays are very reasonably priced, but the attention they demand can put me off.

And then I wonder if the reason I don’t like plays so much is because they’re rehearsed, that everything goes according to a particular script, that every move of the actor has been choreographed! The way plays are structured essentially requires discipline on part of all the actors, and the play could sometimes be seen as just an exhibition of discipline! I must mention here that I have even less patience for other more obvious exhibitions of discipline such as parades.

I read that the Rangashankara  festival is coming up soon, and I do hope I can get myself to at least check out a few plays (especially since I’m now fairly rich in terms of time). However, I must say it will take a lot of convincing on your part to make me come watch your play. If you say “we’re performing Shakespeare’s Romeo and juliet” I’ll say “why should I come watch you when I can read the play?”. But if you tell me that there’s a story that you want to say, which you’re going to say in a particularly unique way, then I might be interested.

Working Hours at Work

There are some people in my office (and in every other office that exists) who believe in “face-time”. That they need to be present for a certain number of hours every day at work irrespective of whether there is work to do or not. I find this wasteful, and distasteful. I don’t see why I need to spend time in office if I don’t have any work to do, and I consider time spent in office when I’m not working to be a positive waste of time.

Yes, there are times when I do get sucked in to this face-time crap, and just sit on in office when I don’t have anything to do (either there’s nothing to do, or I’m in such a bad state of mind that I’m unproductive). Sometimes, it does make sense simply for the option value – when you’re sitting there, there’s a chance something might strike you and take you past the mental jam you’re currently caught in. But most of the time, this option is worthless.

So recently I was trying to do an analysis of how I spend time at work, and if I get rid of the unproductive stuff (like random chats with colleagues, random reading, etc.) I can divide my time at work into two important components – times when I’m actually doing work, and times when I’m simply waiting to talk to someone, for their inputs, or comments, or whatever else. And when I did further analysis, I realize that the latter took up more time than the former.

Teamwork, integrated teams, helping each other, regular feedback, all these are important. But at the cost of spending several hours in office without actually doing any work? When you could’ve spent that time at home, doing what you really like to do. Especially when you have been given a Blackberry and so can read the inputs at any point of time? And when you have a mobile phone, and have the luxury of being able to log in to work from home..

Of course, the other side of this is that if you bring your work home, the fine line between work and home disappears. You are now always on call, have to be constantly checking your Blackberry. You think twice about leaving home, and the blackberry and the mobile phone, and going off somewhere. It doesn’t make you feel all that good..

Wondering how I can balance this all out. And spend as little time as I need to in office, while still doing the amount of work that I’m expected to do. I guess I simply need to get practical about this and stop bothering about what other people think about my hours, and all such. As long as I do the work.

Last Thursday, working in one long burst, I finished the work I’d set myself for the day and dashed off an email by 4pm. And then realized that it would be at least another 2-3 hours before I could get a response. And so packed off home, since I had some work there (true to expectations, the replies came in after 7pm). I felt good about leaving office when I knew I wasn’t going to be productive. But then there was this strange guilt that the system puts on you for doing like you please, without regard to the system.

Anyways, I need to be more practical about all this, and screw signaling. And to turn around an old Hutch ad, which says “Blackberry from Hutch, to keep daddy away from office”. I say “Blackberry from Hutch, to keep daddy at work even when he’s away from office”.

Ranji Reform

Perhaps the best thing that the BCCI has done in recent times is to hike the match fees given to players in First Class and List A matches. If i’m not wrong, first class players now get Rs. 2 lakh per game as match fees, and 1 lakh for List A games. Thus, if a player is a regular in his state team, he is assured of at least Rs. 15 lakh per annum, thus ensuring he can remain professional and not have to do a “day job”.

This is excellent in terms of option value for high school students who are good at cricket who are undecided if they should concentrate on their cricket career or if they should go to college and concentrate on studies. And this in turn leads to better quality of cricketers in the pool available for first class games.

For a fringe player, selection to the national team is a lottery. It is also a big step up from the Ranji game. And when you are an under 19 cricketer (unless you are Tendulkar of course; let’s talk about normal people here) there is little that indicates if you are going to be an international regular. However, your performances in school/college level and age group tournaments are an extremely good indicator of how well you are likely to do on the domestic circuit.

Now, the income that the domestic circuit offers means that it might be more profitable for you to concentrate on cricket and try and make it big, rather than giving up cricket and going to college. Even if you fail to make it big, you won’t end up doing too badly in life. So if you think you have a good chance of making the state team, you would rather go for it than playing safe and going to college.

And this means that several players who would have otherwise left the game (in the absence of reasonable income from playing domestic cricket) are available in the pool which makes it more competitive and raises the overall quality of cricket in the country, and consequently that of the national team.

At least the BCCI gets some things right.

It’s about getting the Cos Theta right

Earlier today I was talking to Baada and to Aadisht (independently) about jobs, and fit, and utilization of various skills and option value of skills not utilized etc. So it is like this – you possess a variety of skills, and the job that you are going to do will not involve a large number of these. For the skills that you have that match the job’s requirements, you get paid in full. For the rest of the skills you possess, you only get paid the “option value” – i.e. your employer has the option to utilize these skills of yours and need not actually utilize them.

Hence in order to maximize your productivity and your pay, you need to maximize the cos theta.

Assume your skill set to be a vector in a N-dimensioanl hyperspace where N is the universe of orthogonal skills that people might possess. Now there are jobs which require a certain combination of skill sets, and can thus be seen as a vector. So it’s about maximizing the cos theta between your vector and your job’s vector.

So it’s something like this – you take your skills vector and project it on to the job requirement vector – your total skills will get multiplied now by the value of cos theta, where theta is the angle in the hyperspace between your skills vector and the job vector. For the projection of your skills on the requirement, you get paid in full. For the skills that you have that are orthogonal to the requirement, you get paid only in option value.

One option is to of course build skill set, and keep learning new tricks, and maybe even invent new skills. However, that is not a short-term plan. In the short to medium term, however, you need to maximize the cos theta in order to maximize the returns that your job provides. But as Baada put it, “But there is slisha too much information asymmetry to ensure that cos theta is maximised.”

There are two difficult steps, actually. First, you need to know your vector properly – most people don’t. Even if you assume that you can do a lot of “Ramnath” stuff and get to know yourself, there still lies the challenge of knowing the job’s vector. And the job’s requirement vector is typically more fluid than your skills vector. Hence you actually need to estimate the expected value of the job’s requirement vector before you take up the job.

The same applies when you are hiring. It is actually easier here since the variation in the hiree’s vector will not be as high as the variation in the job profile requirement vector, and you have a pretty good idea of the latter so it is easy to estimate the “projection”.

This perhaps explains why specialists have it easy. Typically, they have a major component of their skills vector along the axis of a fairly well-defined job profile (which is their specialization). And thus, since theta tends to 0, cos theta tends to 1, and they pretty much get full value for their skills.

At the other extreme, polymaths will find it tough to maximize their returns to skills out of a single job, since it is unlikely that there is any job that comes close to their skills vector. So whichever job they do, the small value of the resulting cos theta will cancel out the large magnitude of the skills vector. So for a polymath to maximize his/her skills, it is necessary to do more than one “job”. Unless he/she can define a job for himsel/herself which lies reasonably close to his/her skills vector.

(there is a small inaccuracy in this post. i’ve talked about the angle between two vectors, and taking the cosine of that. however, i’m not sure how it plays out in hyperspaces with a large number of dimensions. let us assume that it’s vaguely similar. people with more math fundaes on this please to be cantributing)