Archive for the ‘economics’ Category
Statisticians do it with models :)
Posted on: April 17, 2011
This post began in my head quite some time back – when almost every other night , I had this drowning feeling about “Doing something about IT” . After a while I thought , gosh I could used some help ! So the next day , I asked my Prof’ ” If computer Grads “Show off” their skills by coding and going to all these fancy competitions , there MUST be something the Economics grads must be doing,what is it ? “
You have this lovely beautiful, almost flawless model and you look at it – and you are like – but its so obvious , how could anyone write that ? And as you ask this , you are (almost) marvelling at the sheer beauty of it .
As an Econ Grad ,look around – simple as it may sound – you will find loopholes which you CAN fix – so DO it with “the” MODELS 🙂
Seeing it before anyone else does – that’s the goal . And then finding the data that will fit it 🙂
And (please) keep it simple, stupid 🙂
—
ekta
*Wrote my first “model” this morning , actually it woke me up – almost , and like my “Copenhagen pool a pool” – the idea which I developed while at SAP labs,India –the idea of which I got after seeing a play about an event that occurred in Copenhagen in 1941 about a meeting between the physicists Niels Bohr and Werner Heisenberg.
I get this question *** all the while – so much so that I decided to do a post about it.
Somewhere in my early teens, I remember particularly the time we had vacations culminating after exams in Early march , and then was the time to plan for vacations .My expenditures in this time used to be books – not the serious ones though – but I particularly remember that I used to make about three trips a day – because all I did was to read and the shop keeper guy who lend us these books gave quite some discount (provided I returned the books the same day) to lure an “ordinary middle class” kid to make these trips back and forth. While both us sisters were looking forward to the new set of books(Junk – food implied while returning from each of these trips) and clothes, and a well deserved “Dolce Far niente” — mom always said “ahh its march..”
For us Indians March meant – you have to finally settle off with paying the taxes. Although we neither quite knew nor understood what that meant – we “internalized” these taxes . i.e we still asked her for money for this time that we wanted to spend on – but instead of asking these now in march – when she was credit constrained – we asked her to increase out pocket money systematically since October so that we could both save enough for the spending in march. Years later I now learn that this is actually the “ricardian equivalence” – and that’s the beauty of it .
Or be it the Knowledge of the markets episode I had multiple times as a child while assisting my father to the “local mandi “ (market) – and …
I now know that in a competitive equilibrium markets clear and that prices come out as a solution to the problem . Eureka ! Each of these times as I am sitting in the class and thinking from words to Mathematics and Mathematics to words – I run several journeys back and forth all these markets , to our own middle class budget constraints – and about what really intuition is .
Economics is beautiful because it is science and not just social science ; because it teaches you to simplify and explain things logically and understand abstractly.It is like knowing it already , but being able to claim that its actually true ; like almost “seeing it coming” — and that’s the hunch .
From mathematics to abstract and back to the application ..
And ,I learn for the joy of it .
—
ekta
*** Ohh and by the way – if you dont know me – you don’t know that I choose to study Economics after practically burning all my ships after a graduation in Computer science . Oh well – ok no .. “I don’t know how it was where you were ..” but where I was everywhere I went I get this puzzled look – “….but Why economics ?” – what do you know about it – and I would go on to say , “well frankly , all I know is very limited – but I better know it !”
There’s an interesting post by Anil Bokil and it proposes some fundamental reforms to deal with the corruption that has so badly gripped the grassroots of India .
The Key highlights of the proposal —
– abolish all taxes in the country except import and customs duties.
– remove all currency notes above Rs.50 denomination from the system by asking all holders of this currency to deposit it in the bank.
– make it mandatory for all transactions above Rs.2000 to be done through the banking channel, i.e. through cheques, or credit/debit cards.
– Introduce a flat transaction tax of, say, 2% on every transaction in the banking system in the recipient’s hand.
Here’s my take on the ideas- with a critique on the proposed mechanism design.
The impact of the transaction costs on the money collected, will add up to taxes and revenues for the Government. However it carries a huge risk – dealt in the Chaos theory later in the post.
The point is – If the input functions to this black box- the new mechanism proposed is hazy, it will have severe gaps in terms of what it intends to achieve and how the revenues will be distributed .
The Story of India’s growth is not only the amount of the currency in print- it is the growth of the Virtual money generating instruments. It is the easy accessibility of loans – both high and low interest rates .This proposal also hits the backbone of any economy- the liquidity that is so very essential to the growth.
It is clear that such proposals will not only encourage hoarding of money -to save this “additional transaction charge” levied on them, but also there is a bigger challenge to address .
Firstly, it is not clear how the money will be “BANKED” – i.e collected in the first place. This is equivalent of collecting the statistics about the population and distribution demographics of a country- which are very difficult to procure.
Moreover this data collected at the micro level which affects the Macro Economics obeys the chaos theory – which states that a small change in a variable can make a huge difference in the data that is collected.
Popularly referred to as the butterfly effect. Small differences in initial conditions (such as those due to rounding errors in numerical computation) yield widely diverging outcomes for chaotic systems, rendering long-term prediction impossible in general.
This now brings us back to the question – how do we capture the black money that is both being hoarded and also being used to fund the other operations which are not captured in the legal structure?
One might argue that it will facilitate that the operations used to fund acts of terrorism , criminal operations , political campaigns and like will become more visible , but the question remains – the collating of the data- i.e how much do we have ?
Moreover money is not just hard currency or virtual currency – it is also the basic component that adds in the GDP of any country – the Goods and the services that facilitate this creation .
The proposal attempts to arrest Inflation – but what would happen as a side affect is –
a. It will also arrest the development – thus giving incentive to hoard money
b.It will encourage the investors – as the perceived value of “stalling currency” will encourage to park money in other comparatively safer havens – which promise greater magnitudes of growth.
We have already seen the investors parking money in Banks of other nationalities – like Switzerland and Singapore- coz of the appreciating value of money.
i.e the utility function is what any investor would look at , and attempt to maximize.
Utility function for any investor –
Original sum = x Units
Appreciated value of x units after n years =
k units in the proposed Mechanism *
j units in the other alternatives
* Includes the transaction cost and the other overheads which includes money that goes in procuring the liquidity + effort and time lost
Now any investor will attempt to compare the maximum payoff between k and j . Simply put, it is not possible for ANY banking system to permit k >> j for the following reasons –
The banking system needs to scale in proportion to the NEW demand of the backbone that is intended now.
This also includes the other Backup infrastructures that are basic to the primary creation –
Internet access to every individual – lack of which creates both a bottleneck in terms of the liquidity that it intends to provide.
Take an example of a city , or a suburb struggling with huge deficits of electricity , and poor- or not-up to date internet infrastructure – how do we then scale up these transactions ?
The lack of this basic infrastructure ensures that a lot of money and effort goes in procuring the money – which is both ironic .For one, time is money – this will only increase the trips to the bank – which will have more repercussions for the anathema.
—Collapse or unavailability of any of this channel will create huge pressure and impacts in terms of the .It is not clear how the banking systems will operate.
—Moreover, who monitors that the transactions above Rs 2000 are tracked and done through the banks – If I need to exchange money – I may still do it -as I still have the funds – I can withdraw them – correct?
It looks like we may as well move to barter – than progressing from and upward from what we have already built.
—This does not cater the emergency, life and death situations – immediate needs for travel and cash requirements.
—Stocking huge amounts of money in the banks will not help till the system scales up to distribute the funds that would go to fund the interest that it needs to distribute. This would require “Finding “what to fund- and an easy availability of loans .This gives extra incentives and red signals of what happened with the housing bubble – plethora of loans – in this case – to distribute the stocked otherwise money that would otherwise not appreciate.
Overall it needs much work, and must accommodate all the repercussions .
To sum it up , the manufacturing, like all the other Asset backed sectors requires huge access of liquid cash . “Moving” money through the bank transactions looks good on its face, but it is flawed- because
For this to happen the banking sector needs a revival and a complete makeover , it needs to scale to meet the challenges of a complete globalization in its true sense .That will not happen unless we have invested enough in the infrastructure .
~
ek
Mathematics is the language of Nature . Patterns emerge, when you look hard enough .
Survivorship bias is the logical error of concentrating on the people or things that “survived” some process and ignoring those that didn’t.In other words , focusing on the victories to mask the wrong that has been done .
That is to say masking the results of poor performing assets/instruments to cosmetically improve the appearance of the lot .That being said,it happens all the while withe the Mutual funds and other Financial Instruments , or with the Top performers of every college being idolized and revered with the Marketing Clinches.
With top performers , any college masks out the droppers, mediocre students who did not get a job (worser still got a non- value add job – say selling burgers – or documenting- figures don’t account this “averaged” cases ) – Which is to say that Averages is always misleading .What we need to look at is Random numbers , probability of the distribution of the top performers in each of the specialization ,and consequently mapping this with your abilities -and finding out your chances of survival !
Also , finding out the standard deviation from the mean gives a fair estimate of the deviation to be expected , or that which is both normal and acceptable .
Now let us see what that means in game theory,and how could we detect the same ? Let see this with an example of Money Markets (simply because the payoffs and the utility function are better understood in this context -and there is a measurable set of parameters to evaluate this “bias “ on .)
The rule of thumb in Game Theory ascertains to know the strategy of the other player-and hence predict what would be in his self interest to make the move .
That in an Asset Management organization could mean – to better reflect and sell other “far better performing ” funds –
a. To close the funds that have higher risk and comparatively low returns .
b. To Mask the data by first implementing (a) ,and then taking an average of the subset of the better-off funds -and declare the weighted Performance average to be far better than it is .
Now let us see the risks – i.e what this means to an individual investor
There are two cases here –
a. That this investor invested in the “bad” funds .
b. That this investor invested in the subset of funds minus the bad funds (i.e the better off funds) – so no impact
* potential impact discussed in point (c)
c. That this is a new investor seeking to distribute his portfolio across the different funds of the AMC .
In case b and c , the misleading data hurts because – it gives an overall impression and hence the incentive for further/future investment ,which harms the investor by increasing the risk,and lowering the returns .
The safeguard – To find what the average actually means – is it a weighted average of all the funds of the AMC , how long have the funds being running since inception, the debt/ equity exposure and hence the risk vs the returns , the brand image of the AMC , the returns quoted against per year performance or averaged over three/five /other periods – mostly the firms “use” 1 year retuns- simply because they look lucrative and better instruments .
Also , these are the things to look at –
What were the market conditions that the performance intends to capture – bull, bearish , averaged markets .
Is the firm comparing apples with apples – Is the comparison between different funds of different AMC ‘s taking the market conditions into account . Is it evaluating it against the same averaged overall period ?
Are the figures exaggerated -what else is potentially beautifying it ? Is the mathematics correct ?
~
ek
You don’t need newer landscapes to make new discoveries – just a pair of new eyes – Raffael Lomas
Finding symmetries in an unsymmetrical world .. 