Finding symmetries in an unsymmetrical world ..

Posts Tagged ‘economics

[On applied economics in business models, revenue growth & blue ocean strategies for the passer-by customers]

 

And then, there was a “Google” with its much coveted page ranking algorithm, but the users and the companies betting their money & resources on the web wanted more, and they wanted it fast.

 

So was born the Big data wave (well there was a lot more in the space between.. ). So what is this Big data wave, and what is the ecosystem behind it?

 

Quite simply it is this – given a piece of information, how likely is it that this behaviour will be “consistent” – or that given that I see a response A , what is the probability that it will continue to be (in some confidence intervals) , still A ? At it’s heart, Bayesian classifiers and the whole lot of Quantitative Econometrics & modelling tries to do just this – except the fact – that the data that we indeed have- is just NOT enough to MAKE scientific decisions. Now let’s understand why this is so –

 

Simply because  the NEED of capturing so many dimensions of data have only evolved very recently, and thus given that we cannt really back test the models, is as good as saying, well , look we have a CLO \ CDO instrument ( the ones that got the 2008 Global Financial meltdown)  – bu we do not know whether we can really bet on it – and now , surprise ! Companies value it like they value money – since everybody does, this must be WORKING .

 

Then is this picture true/not true ?

 

Well it depends, yes,  having an additional way to triangulate / benchmark the Business decisions must be  good , having a deep insight into customer buying patterns, and knowing how best to facilitate his decision making must be good too, but the fact remains simple –

 

“ Given that that information becomes a commodity, how do we price it ? ”   – how do we know the price points that this information can be “traded at”. This question was originally raised in a Big data talk at the Churchill club, but it has stayed on. Ever since, I have asked this question to the CEO’s of Research Analytics firms, marketing & PR firms and to people in the Big data wave. They say, well right now, we are beginning to understand to measure different dimensions of the willingness to pay of the consumer, and the more and better insight we have into this , the better will we be able to “classify this information” – it is like the intelligent filtering , the more intelligence pumps in, but more is never enough , since it is so qualitative.

 

On top of this wave rides another wave, which is with Social media listening tools, trying to draw trends and analysis, and adapt before being lost in the over social- connected- spilling wave. This wave relies on trusting that (Thus if you throw in an assumption that people put their best foot forward, most of the quantitative models would collapse , on the predictability count – and they, like money  is valued, solely because “everyone buys this currency” –  so while the consumers get more and more aware of the “listening” they would get more “probabilistic-ally sophisticated”  – though it is hard to say , whether it is good, or bad – surely that evolution will happen in my career trajectory, and would be wonderful to ride this wave, and not just be another “passer by” . So welcome again, to the new evolution , which si essentially “inside out” of the consumer needs, but just with some frills attached , may be because  “the consumer himself does not know what he wants ” .

 

There is one more thought that I want to leave you with – ” Those that make the choices, simpler, faster, more guilt free, and use rewarding schemes, will get there first- and ofcourse cascading through the choice paradigm of the consumer has never been as challenging as this.  So knowing I love coffee, only when it rains, and only in the evening, is a powerful information – This is the goal – knowing, when, what, how I like to consume the goods & services – this is the future of personal marketing. 

 

( I used to write a lot about Permission marketing, but I think the loyalty gets all time low, and so does the ROI on the same)

 

So, Modelling has evolved, so has revenue metrics , “customer satisfaction” and the “needs of the customer” – the age of good to have, but why pay – but the good news is though the customers spend a lot of time with differing services, they are getting less price sensitive when it come to anything digital/technology ( Controlling for the business cycle affect) . In my previous post, I also described, how passer by’s are being tricked in consumers (pun-intended) – This in my opinion is the evolution of economics – and this evolution is VERY PROMISING, indeed !

 

So welcome to a world where all sciences come together in this one world ! 

And businesses always want more, they value growth & blue oceans, that’s where the meat is , afterall !


 

Ekta Grover

 

 

 

  

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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 !”

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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 .

India is a largely agricultural land. But given that, it is both ironic and shame that each year we have thousands of deaths due to malnutrition, starving, and farmer suicides.

Here, I (attempt) to describe the anatomy of the increasing suicide cases year after year

Problem –

Farmer suicides due to inability to pay loans , low returns on the produce , famine -adversary conditions, poverty, cheating on the interest rates by landlords and deceptive and spurious/vicious circle of loans which are required for the initial investment into crop produce , to find and fund alternative sources of irrigation .

Insurance instruments existing in the market –

Currently a few players are in the market who “cover the risk” of vagaries of bad weather, rains and famine, lesser/low return(S) produce due to large scale damages due to pests and crop disease .

Agricultural insurance company of India (Estb1956)

Insurance for Agriculture ,LLC (Estb 1986)

What we , however need – is a safeguard against the price controls affected by the government as a policy measure of vote bank politics , the adequate and cheap availability of Agricultural produce backed loans and insurance installments , the removal of middle men, better Inventory management , storage and retrieval systems. Crops being a perishable commodity, we need quick access to take this produce to the market.

That calls for a massive change in the infrastructure. But a fundamental question remains- If we perceive it according to the thumb rule of Game theory- would enough incentives remain with the government to support the farmers?

For the change to happen the governments must perceive it as a “threat” that it must act, or its utility function will reduce overall.

In a democracy, and yet not so answerable government, it gets even tougher .This is not to say that there is not adequate transparency, just a “lack of will” to implement these decisions.

As Adam Smith quoted in his much known – “An inquiry into the wealth of nations “

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. “

Given we all are driven by different order, dimensions and magnitude of self Interest – what is the interest for the government to vest effort to do something about it ?

This question is more important than it looks- simply because it has both the problem statement and the answer in itself ,at the same time . And that is precisely what is interesting.

Let’s see what drives most of the farmer suicides –

The Government often lowers the price of the basic commodities like rice, wheat, potato, onions, and tomatoes to create popularity – vote bank Politics .This however hits the farmer as he still has to take the produce to the local market where it is sold at a subsidized rate, and consequently it hits his returns .

Let us now see what this means for the farmer to maximize his utility function –

The options available to the farmer now are –

  1. To produce the commodities/produce which are not subsidized and give him maximum Return on Investment and labor to ensure that he can pay off a part of the loans and sustain himself (and his family)
  2. Driven by the adverse loans and consequently being hag-ridden by the land lords (Most of the farmers in India grow produce on leased lands ,and borrow part of most initial investments from local landlords and other private(local) money lends , this being in major due to lack of adequate loans available )
  3. To create an artificial lack of supply by destroying the produce, throwing it off hoarding it, hence giving the supply and demand a gentle tremor. This is very damaging to the GDP of the country as the goods and the services produced are lost after sufficient man hours are invested in it .

Let us now evaluate the options for the government –

  1. Being indifferent – it can gain unpopularity if sufficient people are aware of the suicides driven by facts aforementioned. Also the opposition party can challenge this question in the parliament, mostly for its vested interests though.

b.    Taking action – and not subsidizing produce –

—Can cause a lost of substantial votes due to inflation and its subsequent un popularity from the middle class families who do not have their primary occupation as agriculture ,and the section using the loan instruments to  make money betting on the produce of the farmers .

—Can cause a lost of substantial votes due to inflation and its subsequent un popularity from the middle class families who do not have their primary occupation as agriculture ,and the section using the loan instruments to  make money betting on the produce of the farmers .

—Might result into increased popularity (and votes) – from the learned section and the section having agriculture as the primary occupation

Has the potential for increased returns from the exports – if the additional produce is not “killed” to create an artificial supply tremor .

Thus, as is seen, the risks or the rewards materialize only near its end terms – so being indifferent is the major chosen “Action” – rather inaction.

Here’s what we need to change –

Getting both private players and public players into the agriculture insurance sector

Creating more answerability (Will be taken in more detail- in a day or two)

Easy and quick accessibility of loans

Encouraging more social entrepreneurs to solve the challenges in the rural sector

Adding more value to the lifestyle of the rural populace – this could mean lower suicide rates

Building more efficient “systems” – and inventory and supply management systems to do away with the loss due its perishable nature .

Initiatives which connect the farmer to the market – like e-choupal (ITC) , and other such ventures .

Organizations like ITC echoupal are already making the impact through its initiates – here is the time for a bigger impact .

In sum ,

The more stronger the self interest is – the stronger will be the Impact -and the potential CHANGE that can happen to this largely ignored sector .

The nature of commodity prices affecting the commodities is a little uncertain .However it has a huge potential for the betterment of an average farmer.

Anyone willing to answer this ?

~
ek

Do the new ..

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

Having been grown in humble middle class family, I use to accompany my Dad to most of the trips to “Sabji-Mandi” , or the local market on  humid evenings.

Dad had a fixed regime to purchase anything, even if we intended to buy just one Kg’s of Potatoes, he would make me escort him to virtually the entire Mandi, and enquire about the prices that the potatoes were selling at . Satisfied, he would eventually go back to the lowest vendor, with a quality that he perceived was wholesome .

After each of these trips, I would grit my teeth ,and complain to my mother after I got back home “Dad, always purchases from the same vendor he asked the price from, and yet he makes me carry all the grocery bags, and accompany him to wherever he went. More so, after I m back, I miss on my cartoons! I m not going with him again.”

But the next time, dad would ask us two sisters ,who would like to come with him for the trip, I would jump, and say I .the temptation of a ride was far overwhelming . It was on one of these trips back home that I asked dad ,what I so often complained to mom .To which he explained If you do not know the price at which something sells, how do you decide, how much it is worth paying for.”

Dad grew up much before liberalization and the onset of Free trade, and open economy, and yet he understood it all, so well.

So, Knowledge of the markets is the prerequisite for any buying decision, for not only it helps a customer make a buying decision, it also gives the intangible “perceived equity” of the price that the goods are purchased at.

When you purchase a good, stock, or pay for any intangible asset (time being the most important) there are two questions to be asked –

(a.) How much are others willing to pay for it ?

(b.) Can I get it cheaper elsewhere?

(c.) What is my opportunity cost of investing the time I take to make this buying decision? (in terms of time and effort ‘lost’)

Living in the information age , that we are in, there is an immense, often overwhelming knowledge spillover in the internet ,and around us . And unless we know how to organize and manage this “limited commodity” – our time , there is no escape !

In one of my other first few stints with Economics, I was preparing a “chatni” , or the Indian Sauce , and it occurs that Onions are the basic ingredients of the preparation . Those were the days when the price of onions was shot to a whopping 40-60  Rs a Kg, it was the year 1994 ( I believe it was , coz the BJP government fell after that )  . Just when I was done with my culinary arts , and presented the same to my mother who was amused as to how I could prepare a nice preparation substituting radish with onions . That brings me to the concept of substitute goods, ie if the price of a good shots up, and unless the good happens to be a Giffen good, its perceived NEED must fall .

To think of it now, it is these interactions with economics I had in my early years, that shaped the way I perceive and decode economics.

What are your Real life lessons ?

~

ek

“Lucky are those who do not have time for Time-Pass ”


Hey there, would be nice to have you around !

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