Chaitanya Patel

Against the historical backdrop of nations, morals and religions that rise and fall, “the idea of progress finds itself in dubious shape”, according to Will and Ariel Durant in their amazing book The Lessons of History. Allow me to explain.

The core idea of their work is that man’s nature hasn’t changed all that much throughout history. Technical advances remain but must be “written off as merely new means of achieving old ends— the acquisition of goods, the pursuit of one sex by the other (or by the same), the overcoming of competition, the fighting of wars.”

Science has no morals, it can heal as well as kill. Science can build and, more easily, destroy. The Francis Bacon motto that “Knowledge is power,” doesn’t fully explain the situation. Power rests in the hands of humans – it is our nature that drives the ends to which we wield it.

Sometimes we feel that the Middle Ages and the Renaissance, which stressed mythology and art rather than science and power, may have been wiser than we, who repeatedly enlarge our instrumentalities without improving our purposes.

The Durants make an interesting argument that our comforts and conveniences, largely the result of technological progress, have “weakened our physical stamina and our moral fibre.”

We have immensely developed our means of locomotion, but some of us use them to facilitate crime and to kill our fellow men or ourselves. We double, triple, centuple our speed, but we shatter our nerves in the process, and are the same trousered apes at two thousand miles an hour as when we had legs. We applaud the cures and incisions of modern medicine if they bring no side effects worse than the malady; we appreciate the assiduity of our physicians in their mad race with the resilience of microbes and the inventiveness of disease; we are grateful for the added years that medical science gives us if they are not a burdensome prolongation of illness, disability, and gloom. We have multiplied a hundred times our ability to learn and report the events of the day and the planet, but at times we envy our ancestors, whose peace was only gently disturbed by the news of their village. We have laudably bettered the conditions of life for skilled workingmen and the middle class, but we have allowed our cities to fester with dark ghettos and slimy slums.

History affords us the opportunity to draw any conclusion we wish.

History is so indifferently rich that a case for almost any conclusion from it can be made by a selection of instances. Choosing our evidence with a brighter bias, we might evolve some more comforting reflections.

So we must first define progress.

If it means increase in happiness its case is lost almost at first sight. Our capacity for fretting is endless, and no matter how many difficulties we surmount, how many ideals we realize, we shall always find an excuse for being magnificently miserable; there is a stealthy pleasure in rejecting mankind or the universe as unworthy of our approval. It seems silly to define progress in terms that would make the average child a higher, more advanced product of life than the adult or the sage— for certainly the child is the happiest of the three. Is a more objective definition possible? We shall here define progress as the increasing control of the environment by life. It is a test that may hold for the lowliest organism as well as for man.

At any point in time some nations are progressing and some are regressing. Adding even more nuance, nations and people may advance in one area and recede in another.

America is now progressing in technology and receding in the graphic arts. If we find that the type of genius prevalent in young countries like America and Australia tends to the practical, inventive, scientific, executive kinds rather than to the painter of pictures or poems, the carver of statues or words, we must understand that each age and place needs and elicits some types of ability rather than others in its pursuit of environmental control. We should not compare the work of one land and time with the winnowed best of all the collected past. Our problem is whether the average man has increased his ability to control the conditions of his life.

The unhappiness of undertakers as a measure of progress.

The lowliest strata in civilized states may still differ only slightly from barbarians, but above those levels thousands, millions have reached mental and moral levels rarely found among primitive men. Under the complex strains of city life we sometimes take imaginative refuge in the supposed simplicity of pre-civilized ways; but in our less romantic moments we know that this is a flight reaction from our actual tasks, and that the idolizing of savages, like many other young moods, is an impatient expression of adolescent maladaptation, of conscious ability not yet matured and comfortably placed. The “friendly and flowing savage” would be delightful but for his scalpel, his insects, and his dirt. A study of surviving primitive tribes reveals their high rate of infantile mortality, their short tenure of life, their lesser stamina and speed, their greater susceptibility to disease. If the prolongation of life indicates better control of the environment, then the tables of mortality proclaim the advance of man, for longevity in European and American whites has tripled in the last three centuries. Some time ago a convention of morticians discussed the danger threatening their industry from the increasing tardiness of men in keeping their rendezvous with death. But if undertakers are miserable progress is real.

It is no trivial achievement that famine has almost been eliminated and many of the viruses that killed millions worry us not. And yet the probability is that our civilization will die. As Frederick asked his retreating troops at Kolin, “Would you live forever?”

Perhaps it is desirable that life should take fresh forms, that new civilizations and centers should have their turn. Meanwhile the effort to meet the challenge of the rising East may reinvigorate the West.

But great civilizations do not entirely die, they leave fragments. These fragments are the connective tissues that bind us together.

Some precious achievements have survived all the vicissitudes of rising and falling states: the making of fire and light, of the wheel and other basic tools; language, writing, art, and song; agriculture, the family, and parental care; social organization, morality, and charity; and the use of teaching to transmit the lore of the family and the race. These are the elements of civilization, and they have been tenaciously maintained through the perilous passage from one civilization to the next. They are the connective tissue of human history.

If education is the transmission of civilization, we are unquestionably progressing. Civilization is not inherited; it has to be learned and earned by each generation anew; if the transmission should be interrupted for one century, civilization would die, and we should be savages again. So our finest contemporary achievement is our unprecedented expenditure of wealth and toil in the provision of higher education for all.

This calls into question the role of education.

None but a child will complain that our teachers have not yet eradicated the errors and superstitions of ten thousand years. The great experiment has just begun, and it may yet be defeated by the high birth rate of unwilling or indoctrinated ignorance. But what would be the full fruitage of instruction if every child should be schooled till at least his twentieth year, and should find free access to the universities, libraries, and museums that harbor and offer the intellectual and artistic treasures of the race? Consider education not as the painful accumulation of facts and dates and reigns, nor merely the necessary preparation of the individual to earn his keep in the world, but as the transmission of our mental, moral, technical, and aesthetic heritage as fully as possible to as many as possible, for the enlargement of man’s understanding, control, embellishment, and enjoyment of life.

The fragments we transmit to the current generation are richer than ever before. We stand on the shoulders of those that have come before us and in assuming the new height, we attempt to allow others to stand on our shoulders. If we see farther, it is because of this.

If progress is real despite our whining, it is not because we are born any healthier, better, or wiser than infants were in the past, but because we are born to a richer heritage, born on a higher level of that pedestal which the accumulation of knowledge and art raises as the ground and support of our being. The heritage rises, and man rises in proportion as he receives it.

History is, above all else, the creation and recording of that heritage; progress is its increasing abundance, preservation, transmission, and use. To those of us who study history not merely as a warning reminder of man’s follies and crimes, but also as an encouraging remembrance of generative souls, the past ceases to be a depressing chamber of horrors; it becomes a celestial city, a spacious country of the mind, wherein a thousand saints, statesmen, inventors, scientists, poets, artists, musicians, lovers, and philosophers still live and speak, teach and carve and sing. The historian will not mourn because he can see no meaning in human existence except that which man puts into it; let it be our pride that we ourselves may put meaning into our lives, and sometimes a significance that transcends death. If a man is fortunate he will, before he dies, gather up as much as he can of his civilized heritage and transmit it to his children. And to his final breath he will be grateful for this inexhaustible legacy, knowing that it is our nourishing mother and our lasting life.

If you liked this post, you’ll love these two:

The Three Lessons of Biological History — Human history is a fragment of biological history. If we are to learn enduring lessons it is best to go back in time.

What History Teaches us about The Concentration of Wealth — Assuming practical ability differs amongst people, the majority of whatever society values will always rest with the minority of men.

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Recently read about a blogger writing about what he learnt from being on one Investing forum. Mine is a little broader..this includes many blogs, pages, sites,…. Most people visiting these sites KNOW that they can EASILY earn 25% p.a. for the next 3o or 40 years. Buffett ka baap. Most blogs are run by people […]

“Liberty and good government do not exclude each other; and there are excellent reasons why they should go together. Liberty is not a means to a higher political end. It is itself the highest political end. It is not for the sake of a good public administration that it is required, but for security in the pursuit of the highest objects of civil society, and of private life. Increase of freedom in the State may sometimes promote mediocrity, and give vitality to prejudice; it may even retard useful legislation, diminish the capacity for war, and restrict the boundaries of Empire.”

— Lord Acton, The History of Freedom in Antiquity [1877]

“The best things in life happen to you when you’re alone.”

***

Agnes Martin was a famous abstract painter and minimalist.

In this short interview with Chuck Smith and Sono Kuwayama from her studio in 1997, the 85-year-old Martin shares the secret of happiness, and some wisdom on solitude.

On happiness …

There are so many people who don’t know what they want. And I think that, in this world, that’s the only thing you have to know — exactly what you want. … That’s the way to be happy.

Later in the interview she turns the table and asks Smith if he feels like he’s doing what he was born to do. When he responds in the affirmative, she replies “that’s the way to be happy.” (This runs counter Cal Newport’s stark opposition to not follow your passion.)

On the worst thing to think about — you:

The worst thing you can think about when you’re working is yourself. … (because when you do) you make mistakes.

Another interesting part of the interview is when she responds to the question on how she feels when the painting is done. She fails to let herself decide right away … instead she waits.

Once the painting is done … I ask if it was a good painting. But I also wait three days before I decide.

While we’re not advocates of the stop-thinking approach, there are opposing ends of the spectrum and thinking too much or even being too rational is not always the best way to live. Martin gave up meditation when she trained herself to stop thinking.

Before you train yourself to stop thinking … I don’t believe what the intellectuals put out. The intellectuals discover one fact and then another fact and then another and they say from all these facts we can deduce so-and-so. No good. That’s just a bad guess. Nothing can come but inaccuracy.

The last point is perhaps the most important. This one strikes at the heart of today’s culture and into the value of an empty mind — free from busyness and distractions. Martin believes that when you have an empty mind, you can see things when they come into it. Imagine the freedom of an empty mind — one not bound by to-do lists, meetings, work and the other muck we dump into it. When the mind is full our attention revolves around the meaningless. And yet attention is perhaps the most valuable thing we have.

I’m reminded of the words of W.H. Auden

“Choice of attention – to pay attention to this and ignore that – is to the inner life what choice of action is to the outer. In both cases, a man is responsible for his choice and must accept the consequences, whatever they may be.”

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Tweedledum and Tweedledee
Agreed to have a battle;
For Tweedledum said Tweedledee
Had spoiled his nice new rattle.

Just then flew down a monstrous crow,
As black as a tar-barrel;
Which frightened both the heroes so,
They quite forgot their quarrel.

Trump is the monstrous crow, as black as a tar-barrel. He will be good for the US. The system needs a bit of shaking up. The Republicans and the Democrats — Tweeledum and Tweeledee — have messed it up with their kabuki. Their staged battles, costumes, flying through the air tricks, etc., is highly entertaining. The details of the stage design are a perfect metaphor for the existing political setup.

A disruption will dislodge the status quo and perhaps push the moribund system to a different (and likely better) equilibrium. Granted that Trump is no visionary leader with wisdom oozing out of him. But he is the mild heart attack that jolts a person to take a serious look at his life and turn things around, if I may introduce another metaphor.

B.H. Liddell Hart (1895-1970) was many things, but above all, he was a military historian. He wrote tracts on Sherman, Scipio, Rommel, and on military strategy itself. His work influenced Neville Chamberlain and may have even (accidentally) influenced the German army’s blitzkrieg tactic in WWII.

What’s beautiful about Hart’s writing is his insight into human nature as seen through the lens of war. Hart’s experience both studying wars and participating in them — he was a British officer in World War I and present for both World War II and a large portion of the Cold War — gave him wide perspective on the ultimate human folly.

Hart summed up much of his wisdom in a short treatise called Why Don’t we Learn from History?, which he unfortunately left unfinished at his death. In the preface to the book, Hart’s son Adrian sums up his father’s approach to life:

He believed in the importance of the truth that man could, by rational process discover the truth about himself—and about life; that this discovery was without value unless it was expressed and unless its expression resulted in action as well as education. To this end he valued accuracy and lucidity. He valued, perhaps even more, the moral courage to pursue and propagate truths which might be unpopular or detrimental to one’s own or other people’s immediate interests. He recognized that this discovery could best be fostered under certain political and social conditions—which therefore became to him of paramount importance.

Why study history at all? Hart asks us this rhetorically, early on in the book, and replies with a simple answer: Because it teaches us what not to do. How to avoid being stupid:

What is the object of history? I would answer, quite simply—“truth.” It is a word and an idea that has gone out of fashion. But the results of discounting the possibility of reaching the truth are worse than those of cherishing it. The object might be more cautiously expressed thus: to find out what happened while trying to find out why it happened. In other words, to seek the causal relations between events. History has limitations as guiding signpost, however, for although it can show us the right direction, it does not give detailed information about the road conditions.

But its negative value as a warning sign is more definite. History can show us what to avoid, even if it does not teach us what to do—by showing the most common mistakes that mankind is apt to make and to repeat. A second object lies in the practical value of history. “Fools,” said Bismarck, “say they learn by experience. I prefer to profit by other people’s experience.”

The study of history offers that opportunity in the widest possible measure. It is universal experience—infinitely longer, wider, and more varied than any individual’s experience. How often do people claim superior wisdom on the score of their age and experience. The Chinese especially regard age with veneration, and hold that a man of eighty years or more must be wiser than others. But eighty is nothing for a student of history. There is no excuse for anyone who is not illiterate if he is less than three thousand years old in mind.

[…]

History is the record of man’s steps and slips. It shows us that the steps have been slow and slight; the slips, quick and abounding. It provides us with the opportunity to profit by the stumbles and tumbles of our forerunners. Awareness of our limitations should make us chary of condemning those who made mistakes, but we condemn ourselves if we fail to recognize mistakes.

There is a too common tendency to regard history as a specialist subject— that is the primary mistake. For, on the contrary, history is the essential corrective to all specialization. Viewed aright, it is the broadest of studies, embracing every aspect of life. It lays the foundation of education by showing how mankind repeats its errors and what those errors are.

Later, Hart expounds further on the value of truth, the value of finding out what’s actually going on as opposed to what one wishes was the case. Hart agrees with the idea that one should recognize reality especially when it makes one uncomfortable, as Darwin was able to do so effectively. If we forget or mask our mistakes, we are doomed to continue making them.

We learn from history that men have constantly echoed the remark ascribed to Pontius Pilate—“What is truth?” And often in circumstances that make us wonder why. It is repeatedly used as a smoke screen to mask a maneuver, personal or political, and to cover an evasion of the issue. It may be a justifiable question in the deepest sense. Yet the longer I watch current events, the more I have come to see how many of our troubles arise from the habit, on all sides, of suppressing or distorting what we know quite well is the truth, out of devotion to a cause, an ambition, or an institution—at bottom, this devotion being inspired by our own interest.

[…]

We learn from history that in every age and every clime the majority of people have resented what seems in retrospect to have been purely matter-of-fact comment on their institutions. We learn too that nothing has aided the persistence of falsehood, and the evils resulting from it, more than the unwillingness of good people to admit the truth when it was disturbing to their comfortable assurance. Always the tendency continues to be shocked by natural comment and to hold certain things too “sacred” to think about.

I can conceive of no finer ideal of a man’s life than to face life with clear eyes instead of stumbling through it like a blind man, an imbecile, or a drunkard—which, in a thinking sense, is the common preference. How rarely does one meet anyone whose first reaction to anything is to ask “Is it true?” Yet unless that is a man’s natural reaction it shows that truth is not uppermost in his mind, and, unless it is, true progress is unlikely.

Indeed, in the 125 short pages of the book, Hart demonstrates the above to be true, with his particular historical focus on accuracy, truth, and freedom, explaining the intertwined nature of the three. A society that squashes freedom of thought and opinion is one that typically distorts truth, and for that reason, Hart was a supporter of free democracy, with all of its problems in full force:

We learn from history that democracy has commonly put a premium on conventionality. By its nature, it prefers those who keep step with the slowest march of thought and frowns on those who may disturb the “conspiracy for mutual inefficiency.” Thereby, this system of government tends to result in the triumph of mediocrity—and entails the exclusion of first-rate ability, if this is combined with honesty. But the alternative to it, despotism, almost inevitably means the triumph of stupidity. And of the two evils, the former is the less. Hence it is better that ability should consent to its own sacrifice, and subordination to the regime of mediocrity, rather than assist in establishing a regime where, in the light of past experience, brute stupidity will be enthroned and ability may preserve its footing only at the price of dishonesty.

Hart’s clear-eyed view of the world as an examiner of human nature and the repetition of folly led him to conclude that even if authoritarianism and coercion were occasionally drivers of efficiency in the short-run, by the quick and determined decision-making of a dictator, that in the long-term this would always cause stagnation. Calling to mind Karl Popper, Hart recognizes that freedom of thought and the resulting spread of ideas is the real engine of human progress over time, and that should never be squashed:

Only second to the futility of pursuing ends reckless of the means is that of attempting progress by compulsion. History shows how often it leads to reaction. It also shows that the surer way is to generate and diffuse the idea of progress—providing a light to guide men, not a whip to drive them. Influence on thought has been the most influential factor in history, though, being less obvious than the effects of action, it has received less attention— even from the writers of history. There is a general recognition that man’s capacity for thought has been responsible for all human progress, but not yet an adequate appreciation of the historical effect of contributions to thought in comparison with that of spectacular action. Seen with a sense of proportion, the smallest permanent enlargement of men’s thought is a greater achievement, and ambition, than the construction of something material that crumbles, the conquest of a kingdom that collapses, or the leadership of a movement that ends in a rebound.

Once the collective importance of each individual in helping or hindering progress is appreciated, the experience contained in history is seen to have a personal, not merely a political, significance. What can the individual learn from history—as a guide to living? Not what to do but what to strive for. And what to avoid in striving. The importance and intrinsic value of behaving decently. The importance of seeing clearly—not least of seeing himself clearly.

Hart’s final statement there calls to mind Richard Feynman: “The first principle is you must not fool yourself, and you are the easiest person to fool.”

Finally, Hart admits that the path of studying history and studying truth is not an easy one. Truth is frequently cloaked, and it takes work to peel away the layers. But if we are to see things clearly, and we must do so if we’re to have a peaceful world, we must persevere in the hunt:

It is strange how people assume that no training is needed in the pursuit of truth. It is stranger still that this assumption is often manifest in the very man who talks of the difficulty of determining what is true. We should recognize that for this pursuit anyone requires at least as much care and training as a boxer for a fight or a runner for a marathon. He has to learn how to detach his thinking from every desire and interest, from every sympathy and antipathy—like ridding oneself of superfluous tissue, the “tissue” of untruth which all human beings tend to accumulate for their own comfort and protection. And he must keep fit, to become fitter. In other words, he must be true to the light he has seen.

Still Interested? Check out the short book in its entirety.

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The post Latticework of Mental Models: The Two Systems of Thinking appeared first on Safal Niveshak.

Excuse me if I sound naive or I am missing important details but it seems to me that, on the face of it, businessman Vijay Mallya's offer to banks is a pretty decent one and banks should get into serious talks with him. They can hope to write back losses and boost profits in the quarter ahead if they do so.

FT reports today that Mr Mallya is willing to repay 440 million pounds out of a principal amount of 512 million pounds. The Indian papers had reported an offer of close to Rs 7000 crore. The banks need to clearly indicate what figure is acceptable to them and what terms they would like. Simply rejecting an offer does not take us anywhere.

Bankers know very well that going down the legal route- getting Mr Mallya extradited and, perhaps, arrested on return- will not take them very far. Indeed, the danger is that a legal battle will stretch out for years and the banks get back very little. The government needs to make up its mind: does it want to get Mr Mallya or does it want the banks' money back?

I had a chance to talk to some bankers. They all agreed that they go for Mr Mallya's offer. However, they told me they would not lift their little finger until the government told them in writing that that they could go ahead. As one of them put it," Who wants the CBI after him five years from now?".

It's a pretty sad state of affairs. We are faced with banking paralysis today, a variant of the policy paralysis that undermined the UPA government. Stalled projects can't go through to completion because banks are unwilling to take a hair-cut and plough in fresh funds. They can't effect recoveries again because they can't take the necessary hair-cuts. Because they can't effect recoveries, their capital position is worsening and they are unable to make new loans. Fear psychosis has gripped bankers in the public sector- so much so that bankers are now focused on retail lending and would like to stay out of corporate loans and especially project finance.

Banking paralysis is, perhaps, the biggest factor impending our economy recovery along with falling exports. The government needs to get its act together. The steps required are: an independent Settlement Advisory Board to vet loan settlements; recovery followed by fresh lending; and infusion of greater capital into banks. Without this combination of measures, prospects of accelerating growth are pretty dim.

Here is a quote from Mr Mallya's interview with FT:

Chain-smoking cigarillos and sipping English tea, the pony-tailed multimillionaire confirms he has offered, in a submission to India’s Supreme Court, to repay £440m on outstanding principal of £512m borrowed from state banks. 

But the banks declined because — in his words — they are fearful of taking any haircut on their loans in the face of the public frenzy whipped up against him in India.
“It is important to understand the environment in India today. The electronic media is playing a huge role not just in moulding public opinion but in inflaming the government to a very large extent.”

.....Mr Mallya blames the political climate for the failure to reach a deal with the banks, a climate that saw him described this week as a “fugitive from justice” by the country’s attorney-general.
“As professional bankers, they would like to settle and move on but, because of my image as portrayed, they are reluctant to be seen as giving me any discount,” he says. “It will attract huge media criticism and inquiries by vigilance agencies in India.”

The hardest truth to swallow is that the world isn’t really fair, and it isn’t a world you’d necessarily draw up from scratch. It’s not usually what you suppose it should be. None of what’s around us came about by grand design: From a spark many billion years ago, things evolved in a fairly undirected manner (as far as we can tell).

When the world doesn’t quite agree with our ideas, we often begin distorting our own cognition. We confuse should with is, and then complain or rationalize when reality shows we’ve gotten the wrong answer.

The history of Marxist political ideology is a pretty good example. It’s not unreasonable to think that the world should, in some cosmic sense, be a bit more egalitarian. We’re all born and we all die just the same — why should some among us enjoy the spoils while some among us wallow? Capitalism encourages that outcome to an extent, and it sometimes accidentally rewards behavior that is anti-social or simply not adding anything to the world. (A thousand derivatives traders and casino operators just cringed.)

The problem is that reality is way more complex than a simple fairness test would hope to show.

A really large-scale egalitarian society has never worked for a few interrelated reasons, chief among them that: groups don’t have power, people have power (raising the question, who specifically decides how to allocate society’s resources?); utopia doesn’t scale; market forces provide very effective carrots, sticks, and signals that directed egalitarianism lacks, among other reasons. Reaching for extreme levelness in outcomes has always been deeply problematic and always will be, because that’s how reality is constructed.

Inevitably when certain people who get into power run the experiment again, and it does not work as intended, its deepest acolytes return to first principles instead of acknowledging a flawed premise. Well, that wasn’t real Marxism. Yes the proposed system of economic distribution didn’t work, but that’s not our fault. It still should be this way. Things should be fairer. We just did it wrong. Let’s run it again!

Results like that show the brain performing some real acrobatics to keep its desired and cherished idea intact. The Greek statesman Demosthenes, living about 350 years before the birth of Christ, put it best by saying “What a man wishes, he also believes.” In other words, because we want it to be true, we make it so in our minds, evidence be damned.

We’re all subject to this bias from time to time.

In the financial world, many an investor has seen his investment go south only to complain about how unfair the damn world is, how things shouldn’t have gone that way — the CEO should have been more attentive, the creditors should have been more fair, competitors should have been more rational. It’s not supposed to go like this! Far from the investor’s mind is the thought that he simply misdiagnosed a complex situation with a range of outcomes, including bad ones. But reality is irreducibly complicated — it doesn’t ignore things just because you do. It isn’t supposed to be anything. It’s just hard.

This isn’t to be harsh. It’s just the way things are. It’s not about you. Nature just doesn’t care too much about your should.

This happens in relationships all the time. It’s almost an iron rule of life that marrying someone with the intent of changing them is not going to work. Who wants to be chiseled, molded, and nagged by their spouse? Who’s really been successful at that? Most of us seek acceptance, and when we don’t get it, we fight for our independence. That’s just human nature.

And yet how many divorces happen due to traits that were plainly present before the marriage began? Is a continuation of long-held traits the fault of the non-compliant spouse, or was there a willful misunderstanding from Day 1?

That’s not to say that a good spouse shouldn’t work to improve themselves. Of course they should. It is a recognition of the base rate that major improvements are not very common.

Think of the last major personality flaw you had that you actually shed for good. I’ll wait…

And so our lack of understanding human nature and of the complex reality leads us to bad results, frequently because we wish the world was another way. We think it ought to be another way, and we keep that conclusion even after the world shows us we’re wrong, leading to one mistake after another as we rationalize repeated errors with ought style thinking.

Start resolving to test yourself with the basic question: Do I believe this because I wish it was so, or because it actually is so? Have I acted in some way because I wish that action caused success, or because it actually does? If you can’t tell the difference, it’s likely to be wishful. And if you simply don’t know, then leave it at that: You don’t know. Resolve to find out the truth as best you can.

Instead of beating our heads against the wall, we should spend more time trying to understand the world as it is, and live accordingly. Or, in the brilliant words of Joseph Tussman:

“What the pupil must learn, if he learns anything at all, is that the world will do most of the work for you, provided you cooperate with it by identifying how it really works and aligning with those realities. If we do not let the world teach us, it teaches us a lesson.”

Still Interested? Check out some related posts:

The Powerful Predictor Behind Successful Relationships — When does a broken relationship start to go wrong? Whatever you’re thinking — an awkward conversation with your boss, the white lie you told about being busy that was discovered, the time you were supposed to be out with friends but were really somewhere else — you’re probably wrong.

Recognizing Our Flaws is The Beginning of Wisdom — “We are drunks looking for our lost keys under a lamppost not because that’s where we lost our keys but because that’s where the light is.”

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A few months back I cleaned up my connections list on LinkedIn. Basically I removed people who I don’t “know”. I defined “know” as knowing someone well enough to connect them to someone else on my network (the trigger for a cleanup was when someone asked me to connect them to someone else on my network who I hardly knew).

The interesting thing about the cleanup was that a lot of the spurious connections I had on LinkedIn were headhunters. Thinking back at how they got in touch with me, in most cases it was with respect to a specific opportunity for which they were finding candidates. Once the specific opportunity had been discussed there was no value of us being connected on LinkedIn, and were effectively deadweight on each other’s networks.

Over the last couple of days, ever since I wrote this piece for Mint on valuation of startup ratchets, I’ve got several connection requests, all from people I don’t know. Normally I wouldn’t accept these invitations, but what is different is that most requests have come with non-standard messages attached. Most have mentioned that they liked my Mint piece and so want to either connect or discuss it.

When you want to simply exchange messages with someone, there is no need to really add them as a “friend”. Except that LinkedIn’s pricing policy makes this kind of behaviour rational.

LinkedIn offers a small number of “InMails” which you can send to people who you aren’t directly connected to. Beyond this number, each InMail costs you money. So if you want to have a discussion with someone you’re not connected with, there’s an element on friction.

There’s a loophole, however. You can send messages for free as long as they go along with a connection request. And if that request is accepted, then you can have a “free” conversation with that person.

So given the current price structure, if you want to have a conversation with someone, you simply send your initial message as part of a friend request. If the person wants to continue the conversation, the request will get accepted. If not you haven’t lost anything!

Then again, there are mitigating features – an InMail won’t get charged unless there is a reply, and LinkedIn’s UI is so bad that it takes effort to read messages attached to connection requests. So this method is not foolproof.

Still, it appears that LinkedIn’s pricing practice (of charging for InMails) is destroying the quality of the network by including spurious links. I guess they’ve done a cost-benefit analysis and believe that the cost of spurious connections is far lower than the revenue they make from InMails!

 

Yesterday, in Mint, I wrote about ratchets in option valuation (a pet topic of mine), and gave alternate valuations of different Indian “unicorns” by accounting for the downside protection clauses that come with startup investment.

Money quote:

This implies that a share of the company held by [investors] includes a long put option, while a share of the company held by earlier investors includes a short put option (since they have implicitly written this option). In other words, a share held by the new investors is worth much more than a share held by earlier investors.

Now comes news that Global Fashion Group (that includes Jabong and a few other fashion houses started by Rocket Internet) has raised money at a “down round”. This gives me a good opportunity to put my theory to practice.

GFG has now raised $339M for a headline valuation of $1.13 billion. In its earlier round, it had raised $169M for a headline valuation of $3.5 billion. Let us look at a hypothetical employee of GFG who owned 0.1% of the company before the previous round of investment, and see what these shares are worth now.

Absence of ratchets

GFG had a “pre-money” valuation of $3.33 billion, and 0.1% of that would have been worth $3.33 million. As of that round of investment, existing investors had 95% stake in the company, so our friend’s share of the company would have come down to 0.095% (95% of 0.1%).

The new round shows a pre-money valuation of $791 million, and so our friend’s stock would be worth $750,000 after the latest round of valuation. This is a comedown from the previous valuation, but is still significant enough.

Presence of ratchets

Let’s assume that the previous round of investment into GFG came with a full ratchet (we’ll look at other downside protection instruments later). This would mean that its investors in that round would have to be compensated for the drop in valuation.

Investors in the previous round put in $169M for a headline valuation of $3.33Bn. The condition of the full ratchet is that is that if this round’s pre-money valuation were to be less than last round’s post-money valuation, the monetary value of last round’s investors has to be the same.

So despite this round showing a pre-money valuation of only $791M, last round’s investors would claim that $169M of that belongs to them (the way this is achieved in an accounting context is that the ratio in which their preferred shares convert to common shares changes). So the earlier investors (who came before last round) see the value of their shares go down to a paltry $622M. From owning 95% of the company, the down-round means they only own 79% now. And that is before the new round has come in.

Investors in the new round have put in $339M for a headline valuation of $1.13Bn, giving them a round 30% stake. Earlier investors have a 70% stake, of which investors who came before the previous round (which includes employees like our friend) have a 79% stake, giving them a net stake of 55%.

Coming back to our friend, remember that he owned 0.1% of the shares before the last round of investment. The ratchet means that he owns 0.1% of 55% of the company’s current headline valuation. This values his shares at $622,000.

But not so fast – since this assumes that the latest round of investment has no ratchets. If we need to take into consideration that this round has a full ratchet as well, the option formula I used in the Mint piece says that GFG is now worth $760M, far lower than the $1.13Bn headline valuation.

This implies that the stock held by investors prior to this round is now worth only $421M ($760M – $339M). Investors prior to the last round held 79% of these shares, so their stake is worth $331M now. Our friend held 0.1% of that, so his stake is only worth $331,000.

In other words, if both the previous and current rounds of investment in GFG came with a full ratchet protection, the shares held by ordinary investors such as our friend would have lost 56% of its value on account of optionality alone! Notwithstanding the fact that the remaining shares are held in a company whose value is on the downswing!

Then again, downside protection for investors could have come by other means, which were less harsh than full ratchet. Nevertheless, this can help illustrate how much of founders’ and employees’ shareholder value can be destroyed using ratchets!

Before we get to Charlie Munger, let’s chat for a minute.

We’ve been noticing a problem lately that you might be familiar with or experiencing yourself: The search for wisdom not actually translating into consistently applied wisdom.

You read a book, love it, put it down. You read a set of articles, love them, put them down. You’re fired up. And then, a week later, the fire is gone. The learning didn’t make it through.

What the hell happened?

We’ve come to call this Transmission Loss, the gap between learning and execution.

The greater the loss, the less “yield” you’re actually getting from the things you learn. Transmission loss tends to be a lot lower in the most practical, repeatable areas of life: If you’re going to be a carpenter, you learn how to properly cut wood and that skill tends to stay with you. If you’re going to be a programmer, you never forget the concept of nested “If-then” statements. It’s as fundamental as breathing. If you’re a pilot, you go through routine maintenance of your skills using aircraft simulators. If you’re a surgeon, you constantly hone and improve the necessary mechanical skills to operate on your patients. These skills, and others like them, are “sticky” and “cumulative.” They’re brought up to fluency and then kept at a high level through repetitive practice. That’s why surgeons and pilots don’t kill many people, why a smart young high school student can build a program unimaginable to us 50 years ago, and why a carpenter doesn’t suddenly forget how to build a strong and stable shelf. The things you learn tend to stick to your ribs over time.

But in the “soft” sciences, the kind we often write about, learning doesn’t seem to be as sticky or as cumulative. “Experts” make the same mistakes as “novices.” We learn concepts from The Psychology of Human Misjudgment, or the power of compound interest, or the power of building seamless webs of trust, fall in love with them, and then continue to behave the same way we did before learning them.

Investors can be the worst at this: They learn about the dangers of leverage and then invest half their portfolio in debt-ridden high-fliers, or learn about the shortcomings of a metric like EBITDA, but go on using it merrily a week later. Many of us have known a general manager who claimed to love the teachings of Peter Drucker or Warren Bennis or whoever else, but carried on treating people with dictatorial zeal, shocked to see them unmotivated or unproductive. And how many compensation plans do we deal with that totally ignore the basics of human nature? Yet, I strongly suspect their creators were familiar with the concept and principles of personal incentives.

It seems that in these “softer” fields, our actions are much harder to match with our education. We don’t always think of it this way, but some of the “surprises” that befall people are the equivalent of a trained pilot pulling back on the stick and expecting the nose of the plane to dive down.

***

It’s tempting to think of the main difference between these skills as complexity. As in, investing money or managing sales people is more complex than flying an airplane or learning to play chess at a high level. That’s partially true and partially not true — flying a plane is obviously not a simple, easily learned task, but at least the laws of physics are invariant.

The largest difference I can see between those sticky, cumulative skills and the stuff that regresses easily is that the former have a clear set of fixed/knowable rules and a process for maintaining fluency, while the latter seemingly do not.

Once a pilot has learned the ins and outs of flying a 747, the probability of a mistake is exceedingly low, assuming he keeps up his practice and training.

There’s a strong element of If I do this, then that will happen, and that element tends to hold over time. The main risk is that your skills will attenuate over time, which can be solved by a skill maintenance/improvement routine like an aircraft simulator or an M&M conference for medical professionals. You must keep up with new knowledge, sure, but the new stuff tends to be additive, not revolutionary. The fundamentals of building a bridge don’t change a whole lot.

In the “human realm”, not only do we lack knowledge of the “rules” by which to operate, but we have no sense of how to stay at the top of our game. Consequently, the equivalent of the highly-trained pilots in the fields of investing, sociology research, business management, sales, economics, elementary education, PR/marketing, and many other soft fields crash the plane time and time again. Any casual reading of the news will provide plenty of examples.

So, if you’re a “softie” like most of us, how do you raise your standard? That’s where Munger comes in.

***

Charlie Munger addressed the problem in a 50th Reunion speech to his Harvard Law School Class in 1998. What he wanted to know was: How do we get the decision making skills of “broad scale” thinkers — managers, investors, lawyers, negotiators, leaders, politicians, economists, etc. — up to the ability of “narrow scale” thinkers like pilots, engineers, and surgeons?

He called it a Strict Six-Element System, pulled from pilot education. (Berkshire Hathaway owns the largest flight school in the world – FlightSafety International.)

Here it is:

1) His formal education is wide enough to cover practically everything useful in piloting.

2) His knowledge of practically everything needed by pilots is not taught just well enough to enable him to pass one test or two; instead, all of his knowledge is raised to practice-based fluency, even in handling two or three intertwined hazards at once.

3) Like any good algebraist, he is made to think sometimes in a forward fashion and sometimes in reverse; and so he learns when to concentrate mostly on what he wants to happen and also when to concentrate mostly on avoiding what he does not want to happen.

4) His training time is allocated among subjects so as to minimize damage from his later malfunctions; and so what is most important in his performance gets the most training coverage and is raised to the highest fluency levels.

5) “Checklist” routines are always mandatory for him

6) Even after original training he is forced into a special knowledge-maintenance routine: regular use of the aircraft simulator to prevent atrophy through long disuse of skills needed to cope with rare and important problems.

The need for this clearly correct six-element system, with its large demands in a narrow-scale field where stakes are high, is rooted in the deep structure of the human mind. Therefore, we must expect that the education we need for broad scale problem-solving will keep all these elements but with awesomely expanded coverage for each element. How could it be otherwise?

Charlie’s system for those of us in softer realms than piloting, rooted in the deep structure of the human mind, is to develop a multi-disciplinary synthesis and to use it regularly, thinking through problems forwards and backwards, applying mental checklists whenever possible. This means learning the truly important doctrines from the main disciplines and how to synthesize them. It’s only once we assimilate all the tools we need that we stop making so many mistakes.

The question of how is clearly the toughest one. Even if we have the will, what is the way? We would argue that practical worldly wisdom falls into a few major buckets — these act as the closest proxy of the fixed/knowable rules we discussed above:

1. Numeracy. The ability to understand and think in numbers and properly quantify. This would included a basic understanding of statistics and its limitations, of probability thinking and its limitations, and basic numerical and quantitative thinking applied to the real world.
2. Human nature. The ability to understand the true nature of the people around you, and of yourself, with heavy consideration given to human psychology.
3. History. The knowledge of what’s come before you in the world.
4. Natural science. An understanding of the physical world around us.
5. Business. An understanding of commerce and finance, concepts we must all regularly deal with unless we plan to live in a monastery.
6. Second-level thinking. The ability to think beyond the “first step” and think through consequences. And then what?

These six buckets have humongous areas of overlap, but we find them a useful way to group our various forms of knowledge and file them away. You may lump and organize in a different fashion. And of course, not included here are the narrow “technical” skills — how to write code, how to read an x-ray, and so on.

But most important is that we learn to file and synthesize with these buckets, because the world doesn’t respect artificial, if necessary, boundaries. Going back to our discussion above, it’s not just the fundamentals of bridge building that don’t change a whole lot: with “softer” concepts like human nature, business principles, lessons from history and quantitative filtering, the ideas are just as invariant.

That leads us to a basic prescription: Read broadly and constantly across the fundamental areas of worldly knowledge, and practice synthesizing with them on a daily basis. Don’t shy away from what you’re not familiar with, attack it instead. Use the buckets as a guide to figure out what you need more of. And as you develop an understanding of the world, constantly seek to file away and apply what you’ve learned, both directly and by studying others vicariously.

Munger is clear also on the importance of explaining things in the most fundamental way possible — it’s through the search for more and more fundamental explanations that we improve our filing system. If you’re using a concept from physics, attribute it to physics. If you’re using a concept from chemistry (say, runaway feedback), call it chemistry. If you’re using an economics concept like opportunity cost, file it that way. Cut through faddy, new-age terms and concepts wherever possible in a search for an older, more fundamental way of explaining something. (See: Every management book written in the past twenty years, at least.) Through the process of learning, reducing, filing, and applying, you’ll eventually feel like an amateur golfer who’s finally taken a few thousand good swings: Hey, this kinda feels comfortable!

It isn’t easy, it’s hard. It takes some will and some discipline. But don’t forget to give yourself a break. Don’t worry about achieving this overnight. Just get 5% better every year. That’s plenty to leave your old self in the dust.

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Sponsored by: Slack - Making teamwork simpler, more pleasant, and more productive.

Every now and then, you will run across a mathematical analysis where if you use a certain screening, trading, or other investment method, it produces a high return in hindsight.

And now, you know about it, because it was just published.

But wait.  Just published?

Think about what doesn’t get published: financial research that fails, whether for reasons of error or luck.

Now, luck can simply be a question of timing… think of my recent post: Think Half of a Cycle Ahead.  What would happen to value investing if you tested it only over the last ten years?

It would be in the dustbin of failed research.

Just published… well… odds are, particularly if the data only goes back a short distance in time, it means that there was likely a favorable macro backdrop giving the idea a tailwind.

There is a different aspect to luck though.  Perhaps a few souls were experimenting with something like the theory before it was discovered.  They had excellent returns, and there was a little spread of the theory via word of mouth and unsavory means like social media and blogs.

Regardless, one of the main reasons the theory worked was that the asset being bought by those using the theory were underpriced.  Lack of knowledge by institutions and most of the general public was a barrier to entry allowing for superior returns.

When the idea became known by institutions after the initial paper was published, a small flood of money came through the narrow doors, bidding up the asset prices to the point where the theory would not only no longer work, but the opposite of the theory would work for a time, as the overpriced assets had subpar prospective returns.

Remember how dot-com stocks were inevitable in March of 2000?  Now those doors weren’t narrow, but they were more narrow than the money that pursued them.  Such is the end of any cycle, and the reason why average investors get skinned chasing performance.

Now occasionally the doors of a new theory are so narrow that institutions don’t pursue the strategy.  Or, the strategy is so involved, that even average quants can tell that the data has been tortured to confess that it was born in a place where the universe randomly served up a royal straight flush, but that five-leaf clover got picked and served up as if it were growing everywhere.

Sigh.

My advice to you tonight is simple.  Be skeptical of complex approaches that worked well in the past and are portrayed as new ideas for making money in the markets.  These ideas quickly outgrow the carrying capacity of the markets, and choke on their own success.

The easiest way to kill a good strategy is to oversaturate it too much money.

As such, I have respect for those with proprietary knowledge that limit their fund size, and don’t try to make lots of money in the short run by hauling in assets just to drive fees.  They create their own barriers to entry with their knowledge and self-restraint, and size their ambitions to the size of the narrow doors that they walk through.

To those that use institutional investors, do ask where they will cut off the fund size, and not create any other funds like it that buy the same assets.  If they won’t give a firm answer, avoid them, or at minimum, keep your eye on the assets under management, and be willing to sell out when they get reeeally popular.

If it were easy, the returns wouldn’t be that great.  Be willing to take the hard actions such that your managers do something different, and finds above average returns, but limits the size of what they do to serve current clients well.

Then pray that they never decide to hand your money back to you, and manage only for themselves.  At that point, the narrow door excludes all but geniuses inside.

by Ashish Aggarwal.

There are cost and commission differences in what are essentially investment products across insurance, mutual funds and pension. These tilt the market towards products with higher commissions. In insurance, the commissions are both high and front loaded. This causes serious problems, particularly in conjunction with poor persistency (high percentage of customers discontinuing their policies midway), which is often an outcome of mis-selling. Let us examine the evidence about these problems and the regulatory failures.

The large scale mis-selling in ULIPs was prompted by high front loaded commissions, helped by high costs and poor disclosures. Research shows that investors lost more than a trillion rupees on account of these mis-sales. Similar problems continue to plague the traditional insurance products, whose sales shot up after regulation of ULIPs was improved.

The Sumit Bose Committee on curbing mis-selling and rationalising distribution incentives had in August 2015, recommended:

1. Investment products and investment components of bundled products should have no upfront commissions.
   
   
2. All investment products and investment portions of bundled products should move to Asset Under Management (AUM) based trail fee.
   

Eight months later, IRDAI has not made progress in these directions. Even as SEBI has improved consumer protection, IRDAI has weakened consumer protection. Regulatory arbitrage between similar products is getting worse (Sebi tightens disclosure norms, versus IRDAI plans to increase commissions, and IRDAI removes persistency norms for distributors, specified in 2011).

High Costs

Life insurers are allowed to charge 90 percent of the first year and 15 percent of the renewal premium as cost for policies of over eleven years (Rule 17D prescribed by the Central Government under the Insurance Rules, 1939). Section 40B and 40C of the recently enacted Insurance laws (Amendment) Act, 2015 have made the above cost caps defunct and allowed IRDAI to regulate the same. Why did the government persist with such high cost structures for over 75 years? This continued even after IRDAI was established in 1999.

IRDAI's proposed reform as outlined in the draft on Expenses of management of Insurers transacting the business of life was released in December 2015. This suggests reducing the cap to 70 percent in the first year and 12 percent thereafter. The analysis that we present ahead shows that these numerical values are unjustifiable.

All insurance, other than protection (called term plans), are basically investment products with about 5 percent of the premium going towards protection. Consider a traditional plan with an annual premium of Rs 1 lakh and protection of Rs 10 lakhs. A standalone protection plan of same amount is priced between Rs 3,000-4,000 per annum (for 15 years, for a 40 year old). In other words, about Rs 96,000 of the premium is available for investment. No other product allows its manufacturer to charge upto 90/70 percent of this as cost in the first year.

High costs impact returns. This is amplified in case of traditional plans where the portfolio design is low risk. As shown by the table in Bose Committee report, the nominal returns on maturity can be very low. They can turn negative, even in nominal terms, if the policy is discontinued/ surrendered, after being held for many years!

Traditional Plan (Non Linked Participating)
This table shows the net yield on premiums (net of mortality costs) in case of premature exit for a 35 year tenure policy with an annual premium of Rs 2,881 and a sum assured of Rs 100,000. The customer age on joining is 30 years. For example, based on the above scenario, in case of surrender after 25 years, a customer would have earned a net negative yield of -0.1 percent on investment
Years	At 4% returns	At 8% returns
5	-27.2%	-23.5%
10	-9.7%	-6.3%
15	-4.8%	-2.6%
20	-2.5%	-0.9%
25	-1.3%	-0.1%
30	-0.4%	0.6%
35	2.4%	5.3%

 

High front loaded commissions

A life insurance product is usually for 15-25 years. In a 15 year traditional plan, the distributors could get 33 percent of the total commissions over 15 years in first year itself. In a ULIP, this could be 17 percent. On an NPV basis, they could earn 62 percent and 48 percent of the total commissions in the respective plans, in the initial three years. See:

UlIP/ Traditional Plans: Front loading of commissions
Particulars	Year 1	Year 2	Year 3	Year 15
Annual Premium	100,000	100,000	100,000	100,000
ULIP Commission	15%	7.5%	5%	5%
Yearly Commissions	15,000	7,500	5,000	5,000
Cumulative Commission (A)	15,000	22,500	27,500	87,500
Cumulative Commission on an NPV basis (discount rate of 10%) (B)	15,000	21,818	25,950	54,106
Cumulative Commission as a % of total commissions (A)/87,500	17.1%	25.7%	31.4%	100%
Cumulative Commission (NPV) as a % of total commissions (NPV) (B)/54,106	27.7%	40.3%	48%	100%
Traditional Plan Commission	35%	7.5%	5%	5%
Yearly Commissions	35,000	7,500	5,000	5,000
Cumulative Commission (A)	35,000	42,500	47,500	107,500
Cumulative Commission on an NPV basis (discount rate of 10%) (B)	35,000	41,818	45,950	74,106
Cumulative Commission as a % of total commissions (A)/107,500	32.6%	39.5%	44.2%	100%
Cumulative Commission (NPV) as a % of total commissions (NPV) (B)/74,106	47.2%	56.4%	62%	100%
Commissions: ULIPs - Y1 15%, Y2 7.5% and Y3 onwards 5%
Commissions: Traditional Plans - Y1 35%, Y2 7.5% and Y3 onwards 5%

While front loaded commissions drive sales, they leave distributors with little incentive to worry about investors staying put. For a long term product, this can be a recipe for mis-selling. In insurance, this usually means pushing low-return high-cost products. The front loading also incentivises churn, i.e. encourage customers to drop-off from the plan and then sell them a new policy, to make high commissions in the initial years, all over again.

Consumers interested in higher returns, could easily buy a term plan for protection, and mutual funds for investment. Clearly, most consumers do not understand this option. Even with online purchase removing the need for a distributor, the term segment constitutes less than 10 per cent of the insurance industry business. A pan India survey sponsored by IRDAI shows that only 38.23 percent of household replied felt that they were reducing risk by purchasing insurance products. The same survey reported that majority of insured perceived insurance as a bundle of savings and protection (see table).

Perception of Insurance
Perception	Insured Households			Uninsured Households
	Rural	Urban	Total	Rural	Urban	Total
Savings tool	10.5	9.3	9.9	10.0	10.0	10.0
Protection tool	20.5	20.8	20.7	15.6	17.6	16.8
Both	49.7	15.6	51.6	26.5	26.0	26.2
None	19.3	16.4	17.8	48.0	46.4	47.1
All	100.0	100.0	100.0	100.0	100.0	100.0
Total number of households	11,301	10,866	22,167	3,237	4,774	8,011
Source: IRDAI sponsored Pre-launch Survey Report of Insurance Awareness Campaign, NCAER, 2011

In a term plan, distributors earn about 25 percent commission in year one and five percent thereafter. In rupee value and in comparison to investment plans, this offers them no motivation. A Rs 10 lakh term plan, as described earlier, would earn Rs 750-1,000 in the first year. As against this, a traditional plan/ ULIP with an annual premium of Rs 1 lakh could earn Rs 35,000/ 15,000 in the first year.

The argument that customers make informed purchases does not tie up with the high discontinuance. The persistency is at just 65 percent at first year, meaning, 35 percent of the customers drop off within the first year. At the end of five years, 63 percent drop off. The Bose committee noted that, in the case of LIC, the 61st month persistency in 2013-14 was just 44 percent.

Source: McKinsey & Company, India Insurance Vision 2025, Prepared for Confederation of Indian Industry, 2015

Problem of partial fixes

IRDAI has since 2010, improved the regulation of ULIPs. These improvements include mandating charges to be evenly distributed during the lock-in, to reduce the high front end expenses. IRDAI also imposed cost cap as a percentage of the yield on the product. This resulted in the following trend in sales:

Shift in sales from ULIPS to traditional plans. Source:Bose Committee report

Sales of ULIP declined dramatically. The distributors shifted to sell the more toxic (expensive - no cap on reduction in yield; and opaque - customer is not explicitly disclosed costs or the the net return on investment) traditional products which were left out of the clean up. This phenomenon is also reflected through an audit study of insurance agents carried out by Anagol, Cole, and Sarkar (2012).

Problem of sectoral arbitrage

Mutual funds too faced similar problem, albiet on a smaller scale. Over the years, SEBI cleaned this up (removed initial issue expenses in 2008, banned upfront loads in 2009, required funds to offer direct plans in 2012). AMFI, the industry body, followed this up in 2015 and capped upfront commissions to one percent and banned payment of advance commissions. Anecdotal evidence suggests that some distributors are moving to an advisory or online sales model. The remainder have either exited the business or have shiftd to selling insurance plans. In less than four years of SEBI directions, retail investments in mutual funds from direct purchase (without any intermediary) have grown to 13 percent of the total.

However, with IRDAI not keeping keeping pace, the disclosure and product structure norms do not allow consumers to compare basic features like costs and returns with mutual funds and NPS. This further helps distributors to push insurance as the preferred long term investment instead of mutual funds (where the commissions are backloaded) or NPS (where the commissions are low and evenly spread).

Sectoral arbitrage: Front loading of commissions
First year commission as a percentage of total commissions payable (Nominal basis)
Tenure	Mutual Funds	ULIPS	Traditional Plans
30 yrs	0.35%	9%	19%
25 yrs	0.54%	11%	22%
20 yrs	0.91%	13%	26%
15 yrs	1.70%	17%	33%
The AUM based trail fee for mutual funds is assumed at one percent in the first year and 0.4 percent thereafter.

The point in the table above is not that the commissions in mutual funds are overall less than insurance. Since the commissions are back loaded, mutual funds would deliver higher commissions only if a consumer is persistent and the corpus grows over 20-25 years. When this happens, the incentive of the distributor are aligned with that of the consumer.

Conclusion

IRDAI needs to review the cost and commissions in investment oriented plans, specially the traditional plans, with the objective of making the products less expensive and more transparent. It needs to reduce the regulatory arbitrage by adopting SEBI's norms on costs and distribution incentives for investment portion of its bundled products.

The Bose Committee had representation from insurance and was a unanimous report. It is awaiting implementation.

We must ask deeper questions. IRDA is composed of intelligent people. Why has IRDA made mistakes in regulation of products sold by insurance companies, for decades? There are two factors at work. The first is the problem of the underlying legislations, which do not enshrine consumer protection as the central objective. The second is the problem of sectoral regulation, where persons in the organisation tend to get co-opted into the profit motive of the industry that they deal with. Both these problems are solved by the Indian Financial Code.


Ashish Aggarwal is a researcher at the National Institute for Public Finance and Policy.

The shareholders of a fund house, the managers of a fund house, the fund manager, the distributor and the end customer have the common interest of getting a good return for the unit holder, right? NO. Wrong. Completely wrong. The shareholders of a fund house have invested Rs. 10 crores and they want to exit […]

Our last set of articles on Uber and Ola got some serious attention – the Economics of Using Uber in India and the Counter Arguments.

Since then things have seen sudden changes:

• Uber and Ola have seen regulation hit them – with Karnataka banning surge pricing, and mandating fees on cabs and sharing services alike.
• Plus, while they can enlist cabs, they can’t own the vehicles, or prevent drivers from migrating to other services.
• Karnataka has started to seize cars that have surge charges
• Delhi has managed to arm twist Uber and Ola into removing surge charges while the Odd-Even scheme is going on

The Surge Deal: It Doesn’t Really Work in India To Bring Out More Cars

The idea of Surge pricing was that if there aren’t enough cars on the road, increasing prices will attract drivers.

It doesn’t work like that in India. The rest of this section is pieced together from Uber drivers I’ve had good conversations with over the last few months.… (Read On...)

For the ordinary military person, NOT FAILING in his financial second innings is step one. Most military people are not psychologically, physically or financially ready for a post defense services life. They have been protected and have led a very insulated life. They are trustworthy, lead an uncomplicated life, they get a salary which cannot […]

While I look for publishers for the manuscript that I’ve just finished (it’s in “alpha testing” now), I think it’s a good time to write about what it was like to write the book. Now, I should ideally be writing this after it has been published and declared a grand success.

But there are two problems with that. Firstly, the book may not be a success of any kind. Secondly, it will be way too long after having finished it to remember what it was like to write it. In fact, a week after the first draft, I’ve almost already forgotten what it was like. So I’m writing this now.

1. Writing is a full-time job. I got this idea for the book in October 2014 when I was visiting Barcelona for the first time. I wrote the outline in November 2014. Despite several attempts to write, nothing came out of it.

   During a break from work in October 2015 I managed to get started, but I’ve re-written all that I wrote then. Part-time effort doesn’t just cut it. It wasn’t until I came to Barcelona in February that I could focus completely on the book and write it.

2. You need discipline. This probably doesn’t need to be explicitly stated, but writing a book, unlike writing a blog post, is a fighter process, and you need a whole load of discipline and focus. After a week or two of preparing the outline, I prepared fairly strict deadline regarding when I would finish the book. I had to reset the deadline a couple of times, but finally managed it.
3. There is no feedback. I think I wrote about this a few days back. The big problem with writing a book is that you spend a significant amount of effort before even a small fraction of your customers have seen the product. So you soldier on without any feedback, and it can occasionally be damn frustrating.
4. You feel useless. Writing a book can introduce tremendous amounts of self-doubt. One day you think you’ve completely cracked it, and your book will change the world. The next day you start wondering if there’s any substance at all to what you’re writing, and there’s any point in going ahead with it. On several occasions, I’ve had thoughts on abandoning it.
5. Getting away helps. The only reason I didn’t abandon the book when I had my bouts of self-doubt was that I was away in Barcelona with nothing else to do. It wasn’t as if I could ditch the book and find some work to do the next day. Being away meant that the TINA factor pushed me on. There was no alternative but to write the book.
6. Getting in a draft is important. You are likely to have bad days when you’re writing. On those days you feel like giving up. On putting things off for another day. Reams have been written about great writers stalling their books for several days because they couldn’t find the “right word”. I don’t buy that.

   Found that when I’m in a rut, it’s better I simply push through and finish the chapter. Editing it later on is far easier than writing it again from scratch.

7. There is a limit to how much you can write. When I said it’s a full time job you might think I spent 8 hours a day on the book. I took around 70 days to write it (including a 10-day vacation), and the draft weighs in at 75,000 words (I intend to cut it before publication). So it’s less than 1200 words per day on an average.

   That doesn’t sound like a lot, but trust me, writing on a continuous basis is quite hard. A lot of time goes in fact checks and in getting links (I don’t think I still have all the footnotes and endnotes I need for the book). Writing a book is far more complex than writing a blog post.

8. Writing is tiring. This isn’t something I figured out while writing the 2000 odd posts I’ve put on this blog. When you’re writing a book, and for an audience, you realise that you get tired pretty quickly. I don’t think I was able to work more than four hours a day on any of my “writing days”. And four hour-days would leave me a zombie.
9. You need a schedule, and a workplace. I did the pseud romantic thing. The entire book was written at this WiFi enabled cafe near my place in Barcelona. Pseud value apart, the point of having the workplace was that it brought a schedule and some discipline to my days. I would go there every morning on writing days (exact time varied), get a coffee and sit down to write. And not rise until I had finished my target for the session.

   Two days back I went there to work on something else. I figured I couldn’t – that cafe is now forever tied to my writing the book. The kind of focus required there was of a different kind.

I’ll stop for now. I hope to republish this blog post once the book has hit the stands!

“Men ought either to be indulged or utterly destroyed,
for if you merely offend them they take vengeance,
but if you injure them greatly they are unable to retaliate,
so that the injury done to a man ought to be such
that vengeance cannot be feared.”
— Machiavelli, The Prince.

***

In the ancient world, wars were wars of conquest or survival. The Persian, Macedonian and Roman empires were the spear-won fruits of conquest, resulting in the total annihilation of their enemies. By the seventeenth century, however, the increased cost of war made such triumphs nearly impossible. The victors of the Thirty Years War (1618-48) were as devastated as the defeated. Nations lacked the infrastructure to mobilize for total war, and so it became a more limited activity. Small, expensive professionally-trained armies fought campaigns to obtain limited benefits in a series of king-of-the-hill conflicts between dynasties. Total victory, and the accompanying hatred and annihilation of the loser, was rare.

This pattern changed again with the rise of the nation-in-arms. Mass conscript armies, supported by large-scale propaganda campaigns at the home front, fought the wars of Napoleon, the American Civil War, and, approaching the Twentieth Century, the wars of German unification. During the Franco-Prussian War (1870-71), after defeating the regular French army, the Germans had to face a people’s militia; Paris was besieged and bombarded. When the war finally ended, Germany annexed the provinces of Alsace and Lorraine, claiming that they were historically German. But German Chancellor Bismarck himself recommended against the annexation, stating that it would cause continued enmity, and jeopardize any hope for long-term peace between the two nations.

Bismarck was correct; the annexation created resentment that only increased and helped generate the momentum leading to the First World War. (At least someone understood the Hydra.) Four years later, the horrific devastation of the war reinforced the victors’ attitude of debellation – harsh and absolute punishment of the losers to ensure that they are never able to rise again. The Paris Peace Talks were awkward as they tried to balance the ideals of the League of Nations, to create a unified bond of peace and mutual recognition, with the reality of seizures and break-ups of territory, and the reparations to be paid by the losers.

In The Economic Consequences of the Peace, John Maynard Keynes argued that the reparations inflicted on Germany were unjust and would lead to future conflict, the opposite of their intent. Historians continue to debate his arguments. What is true is that the sense of injustice created by the reparations was a major element of Hitler’s rhetoric, and this emotion echoes throughout his speeches in his rise to power. The causes of the Great War had been murky, and it was not clear who was the aggressor. Was Germany forced into aggression by Russian mobilization? Was it right that Germany should have to pay so much, and furthermore, later see the French occupy the Ruhr, the center of Germany’s industry? Hitler used this resentment – an emotion he himself felt to his core – along with the general economic collapse of the 1930s, to create the anger for justice and revenge that brought him public support and the role of Chancellor. Human beings have a strong desire to see justice – that is, our very limited emotional interpretation of it – carried out to restore our belief in fairness in the world.

Fast forward to 1945, and the end of the second global conflict in thirty years, unimaginably worse than the first one. This time the destruction of the defeated was as utter as any nation has suffered since Carthage. The French proposed that Germany’s industrial heartland be annexed, to ensure that France would have the industrial power to always serve as a check on future German ambition. US Treasury Secretary Henry Morgenthau Jr. went even further, proposing to completely de-industrialize Germany, turning it into an agrarian society, incapable of waging modern war.

For the first few years, a variation of Morgenthau’s plan was used to guide post-war policy. However, by 1947, it was apparent that a crippled West Germany was delaying European recovery in general, and the continent would be unable to defend against Soviet encroachment. US Secretary of State George Marshall introduced the plan that bears his name, providing $1.5 billion to West Germany (and over $2.3 billion to France). Between 1948 and 1951, seventeen European nations obtained a total of almost $13 billion ($130 billion in today’s money) in aid through the Marshall Plan. Substantial sums were also provided to Asia, including Japan, during the same period.

Did the Marshall Plan fuel Europe’s post-war recovery? In the two decades after the war, France spent at least the same amount of money fighting two unnecessary wars in Vietnam and Algeria. It’s hard to say that they earned much benefit from the aid. West Germany was better able to invest the money, but economic historians argue that their growth had more to do with their own internal policies on currency stabilization, low taxes for the middle class, and investment in both capital stock and education. But all those polices had to operate in the context of investment, and much of that investment came from the Marshall Plan.

Which was the more peaceful Europe? The Europe of the 1920s or the Europe of the 1950s? Many factors led to the rise of Hitler, the global depression being one of them, but Hitler was molded by his experience living homeless on the streets of Vienna before the First World War, and the turmoil of anger and unemployment that followed the end of the war.

Which Europe are we more grateful for? The idea of a unified Europe was almost unimaginable in the context of the perceived injustice of punishment for losing. Only after the second war did it become real. A Frenchman in 1913, or a German in 1919, would have laughed in disbelief if you described to them how close their two nations are now.

When we win, we often want to be like Machiavelli’s Prince, and win utterly. It is when your opponent is defeated that he is weakest, helpless, and you can take the most from him. And, if somehow he rises to confront you again, then that means you were not severe enough in your punishment, and you should only punish him harder.

But it seems that no victory is complete, now. For every terrorist leader struck down, another pops up to replace him. The Marshall Plan looked at the idea of punition and decided that it wouldn’t work. The only way to make your enemy incapable of revenge would be to wipe them out completely. Or, conversely, rebuild them and take away the cause for anger. Make them more like you, not as a nation, but as a victor.

Still Curious? Check out why win-win relationships are the only ones that stand the test of time. 

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If you saw pictures of ‘famous’ people born in the early to mid 1800s you saw them with long beards. Till of course 1900. When 7 o’clock, and other brands of blades had to be marketed, they told you (very convincingly) that beards were gross. It worked. Gillette is the biggest beneficiary of course. Then […]

World economic growth in 2016 will be poorer than thought earlier. Ditto in 2017- so says the IMF.

In terms of market values, world output will grow at 2.4 % in 2016-  growth of around 3% is considered modest. Is this a short-term thing or does it presage a long-term trend?

Many economists think it's the latter. The world is entering a period of low growth- what IMF Managing Director Christian Lagarde calls the 'new mediocre. Why is the world sliding into a low growth era. There are several competing hyptheses:

i Secular stagnation: This is a term coined by Alvin Hansen, an economist, in the 1930s. It has been resurrected of late by Larry Summers. The basic idea is that demand for goods is declining for a number of reasons. One is low population growth in the developed world.Another is that modern industry is less capital intensive and hence demand for investment goods is lower per unit of output than before- consider that   Facebook is worth billions in market cap while employing a fraction of what GM or GE employ. Thirdly, inequality is rising. This means the rich appropriate more and more of incremental income. They can consume only so much, so spending is impacted and so is investment. We have high savings and low investment, which is what explains why real interest rates are so low today.

ii. Liquidity trap: This is Krugman's view and it's a variant on the above. Monetary policy is ineffective at the low interest rates we have today and hence can't do much to stimulate output

iii. Falling productivity: Richard Gordon argues that economic growth is simply population growth multiplied by productivity growth. Both are falling. So, we have to accept that growth will be low in the years to come.

iv. Debt overhang: This is the view propounded by economists Rogoff and Reinhart. There's excess debt in the world economy following the financial crisis. Coming out of the debt overhang typically takes very long.

Now, if you accept any of the above, it means that it's futile for policies to push growth (although Summers think that public spending on infrastructure in the developed world can still make a difference).

The IMF in, its latest World Economic Outlook, seems to think that current growth rates represent policy failures- too much reliance on monetary policy and too little on fiscal policy and structural reforms. A combination of these along with moves to put life into banking systems in the Eurozone and elsewhere could make a difference.

I doubt that the political will exists for the purpose. I also believe that geo-political risks are pretty high, given the return of the  Cold War. So, we're going to be stuck with the 'new mediocre' for a while. That's bad news for those hoping for a return to 8 per cent plus growth rates in India.

More in my article in the Hindu, How to better the 'new mediocre'.

I have to say the title is rather deceptive- I argue there's little you can do to better the 'new mediocre'.

A friend recently quoted SS Ravi Shankar’s profound proclamation. It goes:

“There are people who are married and unhappy and there are people who are unmarried and unhappy. Then there are people who are married and happy and there are people who are unmarried and happy. You better be in the second category. Whether you are married or not, if you are happy, if you are centered, then you are close to enlightenment.”

I read it and I am forced to agree with the German historian Johann Christoph Friedrich von Schiller (1759 – 1805) that against stupidity, even the gods struggle in vain. We mere mortals are powerless to resist such inanities.