Mandated - Too important to fail

Recently, I visited Scotland and the first thing that I noticed (apart from the breathtaking view, that is) was the fact that currency notes were guaranteed by the Royal Bank of Scotland. It was extremely surprising given the fact that most banks that guarantee the payments of the amounts denominated are central banks. And central banks do not operate as commercial or investment banks (which RBS does).

And the fact that RBS was indeed rescued by the British taxpayer during the last crisis, gives more weight to my suspicion that it is mandated by the government to be too important to fail. A vast majority of the notes in circulation in Scotland are RBS guaranteed and hence the government can just not afford it collapsing.

Some thing even more surprising was the fact that England was one of the first countries to have a central bank and almost all of world's central banks are based on its model. Central banks operate in accordance to the government's fiscal policy and since they do not have any financial arms, they are immune to shocks from market crashes. This typically gives more credibility to a country's economic system. So if tomorrow the markets crash down, and RBS looses so much money that people lose trust in RBS's promise to pay the bearer an amount equal to the denominated pound value, a run on the bank occurs and all of the country's financial system stops working. To me that is a very scary thought. The only was the government can stop a run on the bank is such a case, is by mandating that RBS is too big and important to fail. So whatever happens, government will have to provide assets to back up all the banks that issue notes on its behalf.

As I later realised, "Clydesdale Bank" also issues currency notes. Now what is not clear to me is if all banks in Scotland are mandated to issue notes on their own or not. Though entirely possible,  this does not strike me as particularly prudent. Essentially the government then risks having the credit rating of the worst credit rating of the bank issuing notes.

It is possible that the government has only allowed banks to issue notes in return of some highly under valued collateral so that it can withstand the shocks, but I am not sure about it. Anyone who can enlighten me on that? Also I would really like to know how such a sytem evolved in Scotland when England had a central bank system. Any guesses?

Iran, Pakistan ink the gas pipeline deal without India

Pakistan signed a deal for the supply of natural gas 750 million metric cubic units a day to 1 billion cubic units a day. This deal was worth 7.5 billion USD. Though I really don't know the pricing of the gas.

The pipeline that was to come to India was to be 2700 Kms and now they have settled at only 900 Kms. Had India joined the deal, despite Pakistan's assurance that it will try to safeguard the pipeline, India can never be sure of the safety of the two-thirds of the pipeline that is non-critical to Pakistan.

Earlier India had made a statement saying that the transit tariff demanded by Pakistan is very high. It was speculated that this tariff would mean that Pakistan would have a significantly shorter investment recovery time than India.

And with the recent oil field investments by ONGC in Venezuela and Russia, and gas field discovery by RIL, India does not feel so pressed for energy as it once was.

Facebook surpasses Google in the number of hits

Facebook had more number of hits than Google for the first time (in US) last week (ending March 13th 2010).This marks a huge shift in the internet usage pattern from the past.
Going by the usage, now connection seems to be more important than information.

Though Google owned sites, Youtube, Gmail and Picassa are widely visited, most of Google's revenues are from its sponsored search results.
Such usage changes could mean that companies looking for online advertisement might first look at Facebook than Google. Since Facebook allows one to join many special interest groups, the chances of landing a relevant ad is higher there. In the world of internet marketing, making the ad relevant is as important as anything else.
Though Gmail also has better targeted ads, based on your email content.

Be that as it may, the market leader has been displaced, and in the time to come, we can be sure of heightened war for the eyeballs.

Banks deserting Mutual Funds?

Last fortnight of 2009 saw Indian banks pulling out as much as INR 104K crore from mutual funds - the largest in any fortnight.

It could be due to the fact that RBI had been urging banks to lend rather than park money in mutual fund investments. The central bank's advice is warranted because such activity adversely affects small sector industries and personal loans are undertaken by the banks.

But whether this change is for real or an eyewash remains to be seen. Banks could have taken such steps to improve their results for the quarter ending in dec. By investing this money in short term loans, banks can appear more compliant than they actually are.

Another reason for this act could be a fear of a W-shaped recession.

But I think that a major incentive to pull out could be their plans for the road ahead.
There have been news of SBI looking for some merchant acquisition joint ventures and Union bank looking for some acquisitions in Indonesia. Canara bank has been trying to acquire the state-run Dena bank. Country's biggest bank, SBI's Chairman has openly stated that to provide world class services, Indian banks will have to go on the consolidation route. This pile of money, freed up in the last few days can be an indicator to the big things these guys are planning.

Adam Smith on academia

Below are some excerpts. Text in black is my own.

In The Wealth of Nations, Adam Smith developed an incisive criticism
of academia (pp. 758-81). He at least touches on all of the following familiar
criticism of academia:

• Academic societies  are  organized “not for the benefit of the
students, but for the  interest,  or more properly speaking, for  the
ease of the masters” (764).   In other words, an industry where customer is not the king but the people working in the industry. So this industry has incentive to produce goods that conform to ideals of the people in the industry rather than the ones paying for it.
• They self-organize as self-validating societies, in which members
indulge each other’s conveniences (761).  By mutual indulgence and appreciation, they stand to gain in stature. Trading thoroughly replenish-able resources they can increase their "value" - which is based only on trade volumes. Read trade can make everyone better off.
• Academics tend toward an esoteric language  that  excludes
outsider participation (765).   The esoteric language is one of the most potent arsenals available to project and protect an image of elitism.
• Democratic decision making by professional units fails to make
individuals accountable for their actions within the process of
collective decision making (779). It wasn't ME !
• The clubs are prone to groupthink and the lock-in of foolishness.
They were sometimes “the sanctuaries in which exploded systems
and obsolete  prejudices found shelter  and protection, after  they
had been  hunted out of every other corner  of the world” (772).  I belong to this special group of people, I know what to believe.
They  have generated sciences  that  are “a mere  useless and
pedantick heap of sophistry and nonsense” (781).  Knowledge and thinking are important goals in themselves. How are ordinary mortals to fathom the importance of figuring out the number of angels that can dance on a pinhead?

Cricket as an educator in India

Cricket is by far the most followed game in India. While watching the game last week, I realised how much learning can and is imbibed (though unintentionally).

When the game is well balanced, the whole nation is busy dividing numbers by six, substracting numbers, finding the number of ways to get to a certain sum in atmost certain number of variables - which are constrained by being non-negative and less than equal to 6. Even problems like assigning weights to different players and devising ways to maximise the rewards (runs) in a set of discreet steps.

Other than improving our mathematical skills, It is also responsible for improving our language skills. It accustoms us to "foreign" accent. (Who does not like to enjoy Geoffrey Boycott describe events in his wonderful style) Besides, there is our own homegrown Navjot Singh Sidhu - with his wonderfully crafted one-liners, He has added more of the creative imagination to the Indian masses than any other single source.

Cricket in itself adds to one and a half of the three R's (Read, wRite, aRithmetic). It helps people come up with things to say - hence the half of writing. Maybe its time government introduced cricket watching and playing programs in its schools. It will both help kids learn and keep them interested in school.

PS - The idea for this post came to me when I was talking to my friend Abhishek Gandhi.

Artificial markets are just that

First up, Asterix (and Obelix) turned fifty this week - and this line goes out to its creators for giving us such a wonderful hero to look up to. If its not known to the reader (or is not conspicuous by the name of the blog) I am a fan of Obelix. So I was re-reading their series and read this particular story "Obelix and Co."

In this story, Caesar send one of his economists to the Gaulish village to disrupt normal life there. This chap goes and buys Obelix's menhirs at exponentially rising prices and turns the village into a unit producing menhirs and hunting boars. The menhirs don't have an existing market so extensive marketing and brand building is used to create a market for them. But competition lowers the prices and trade unions force policy changes for even more entrants. The profits decline while menhirs are being bought at exorbitant prices. It causes a credit crunch at Caesar's.

Lessons to be learnt from the story -
1) Artificial Markets are Artificial. Only if you serve a genuine want of the customer, do you have a chance when the novelty of the product/idea goes out.
2) Relaying on predictions when the artificiality of the market is not recognised can be dangerous. Augmenting your inventory on rose-colored predictions which don't take into account competition and customer sentiments is as huge a folly as any one else.
3) If you don't have a niche, you wont survive. The competition will always catch up. the head start that you had might not be good enough in most cases - more so in the manufacturing sector than the services sector. The customer must be able to look at the product and say - hey, I want this brand. Not I want this product -any brand will do.

Fascinating how much one can notice when one is not looking!

Reader's digest files for bankruptcy

A sad news indeed.
I remember being a fan of RD as a kid. But it has succumbed, to the rise of internet, more than recession. Print media has been struck real bad by the free content on th enet.

And there is no looking back. I dont think there is anyway that people can be coaxed into reading, and paying for, something that they can read on the internet for free.

The younger generation, the ones who have seen computer from an early age, are often more comfortable reading off the screen than from a printed version. Add to that the ubiquitous nature of free content, you know that the print media is fighting a losing battle.
The only way print media can tide over to the profit side is by providing content on the net. Right now, most media houses have free content on the net.

But this is not sustainable - because it requires the same amount of effort to produce content for the net, as it does for printing. The first thing that media houses must realize s that popularity is not revenue. You might be the most popular news agency on the internet - but that does not give you anything. Sure, you can find some advertiser on the web - but arent there too many websites vying for the same set of advertisers? The law of diminishing returns sets in very soon in such a market.

The only way out for the media houses is to have a free and a premium section, where the free section drives the masses . And the premium section catering to specialized news requirements.

Random signals and parameterization

During my internship at IBM, I was working on a process of verification of hardware implementations by injecting signals into the design under test. Here the verification engineer has to be smart enough to guess the potential breakdown points of the hardware and inject those signals. To further test for robustness, random signals are injected. For another level of robustness, partialy random signals - biased towards the "guessed" potential breakdown points.

The whole idea when applied to life, seems to make so much sense that I was startled when I first thought about it. To test other persons' reaction, dont we drop hints suggesting things that we are not sure of the reaction from the other person?

This same thing, in a different setting sounds so much like a pre-product launch market survey. "Have a look at the need to be catered to(hardware) - Guess the ways which the market may respond in the way we want it to(guess the potential breakdown signals) - Give the market some products that hover around the previous guesses, see how the market reacts(Random signals biased towards the guessed potential breakdown points) - All this is done before the final product (chip) is launched into the market"

Fascinating, how concepts learnt in one sphere of life can be used in other spheres as well.

More popular are the ones more talked about

Just read this interesting article which says that people look for common grounds to talk rather than talking about the better things. This is in a way a reiteration of "Matthew Effect" (The rich get richer, the poor get poorer).

But this research being done in the social domain, could mean a lot about the way marketing is perceived. The gurus knew all along that it works, but to be proved that it does work is a different thing.

Understanding this concept can help a lot in marketing, especially on the web. If somehow one could get their product to be discussed on the "right" forums - it automatically starts generating traffic. If you pay a battery of people to discuss your product on twitter, and it features on the twitter search list, it is very likely that other people will start discussing it - as it will seem like the "IN" thing. Or if you can get your product discussed on slashdot or technorati, it is very likely that it will be discussed beyond that as well.

In fact this love for likeliness is seen in at the school and college level : A popular guy/girl is talked more about, and he/she gets more popular. If a group of 5 people start saying out loud that a certain dress is cool, the whole school gradually comes to accept the same as cool. So it can be used in adolescent marketing too. FMCG markets typically have a huge chunk of the demand coming from teens and just-left-teens . To be able to project the product as cool, they need to be able to make an impression at school, colleges, FaceBook, MySpace - and in all likelyhood, it will catch up.

Functionality is NOT the king!

I was thinking, what makes a product a hands down market leader and an also-ran. One thing I realised was that functionality is not the only criteria. If it were the same, FriendFeed would be much bigger than Twitter. Or for that matter, LinkedIn wouldn't be the market leader either. Or Google might have been oust by one of the many search engines that came up after it.
Same is true for mobile phones too. If functionality was the only criteria, the lot of "prettier" phones would have been replaced by the more "functional" ones. iPhone might just have gone extinct if it were only to be compared on functionalities with the blackberries. I had read somewhere that SAP proudly stated that they never show the product during the selling stage. Reason - because "nobody ever got sacked for buying SAP " !

The race for functionality is never ending. You could go on adding features to your product. It will never reach the marketing stage in this way. Functionality is not the main thing and the marketing people know it too! The product has to be only "good enough" on functionality. The rest is about the acceptability, portability and the perception. "If the whole industry uses SAP, then it must be good enough". "All my friends use Twitter, I don't want to use something else."

If it is all about functionality then it is an argument about diminishing returns, marginal differences and small variations. And often this is not nearly enough to win a client, cause a revolution, or shift opinions.


Frankly, as long as our needs (present, and foreseeable in the near future) are met, do we really care what more is on offer? After this point, perception takes over. If something is viewed as the "poor man's cow", it will not be bought by someone who wants to project a rich image. If google is the in-thing, why would someone use AOL?

The next thing is the change. The trouble of moving from one product to another. People love familiarity. Getting people to switch without showing them the huge advantages is not going to work. That's the reason that analysts claim that despite Wolfram Alpha's great features, it might not be able to overtake google. For the cost and disruptions would be too huge given the present slight edge in functionality.

Suicide Vs Murder

Of late, I have been having many murderous thoughts. And I really dont know how to get rid of them. So this post, so that I can vent out the thoughts.

I remember having discussions with my friends about whether or not one should commit suicide in the event of insurmountable difficulties. I held the view that one should rather murder than commit suicide. But now I see why people choose suicide over murder.

So what is it that invokes suicidal thoughts in humans? When a person is subjected to double talk - when on the surface everything seems very friendly and cordial but dig just a little bit and the irony glares on your face. In such a situation, the person might find it disturbing to kill someone who has been so friendly. But the person is being subjected to utter frustration of not doing anything and no one being able to tell him why. In such a situation, where the guilt of killing someone else is substantial but the person finds himself in an situation frustrating to death - the person can find suicide a better option.

Of modelling Human beings and pseudo random number generators

While have a chat with my friend Abhishek over my previous post on irrational behavior of humans, I started thinking on how and if humans can be represented by random numbers (Afterall each one us is unique and essentially random).

I believe (as do a lot of evolutionary scientists) that our reaction to any stimulus depends on a lot of factors, like the genes we carry, the natural environment we have lived in, the kind of thoughts we have, our experiences, stimuli from the recent past etc. Evidently, there are far too many variables that can affect our decisions.

So is there a way to this apparent madness ? Can we call these effects totally random? Abhishek sure seems to think so. But I doubt it. If everyone had totally random characteristics, then we would have had a zero (neutral) average reaction to any stimulus. But, on the contrary, masses behave more in unison. So the seemingly random "personality trait numbers" have a non-zero mean. But this mean can only be seen in a "large enough" group.

So can traits of human beings be thought of as being generated by a pseudo-random number generator? After all, these can have a mean, are random for all practical purposes but everyone knows that these have been derived from some determinstic method. I really dont know. But the idea itself seemed too good not to be posted

Irrational Pessimism

One of my close friends has written about irrational pessimism driving the economy down. Though I would like to take partial credit for injecting the thought into his head. He mainly talks about how people behave irrationally and how it affects markets.

My point-of-view is that people go with their animal instincts much more than their deterministic models. When someone senses danger, his/her reaction gets biased (for most people towards damage control and for a few others, towards risk taking). This precise difference in the nature and the magnitude of bias makes each one of us unique - and a pain for the economists to model.

If the economists also include this feature into the decision model (As the behavioral economics guys have been saying for sometime now ), then they wont be caught in awkward situations where the masses behave in a manner completely different from what they predict.

People don't always make choices based on their precise calculation of the odds. They go with what the feel is right - and the fact that most things can not be put in numbers directly also means that in translating things to numerical terms itself brings in the bias that the numerical analysis sought to avoid. Maybe the next step would be to model people based on a the major bias that they have - maybe conduct a survey and see in which direction and how much are people biased. And then predict things - that would certainly do a better job than what it does right now.


PS- (kidding alert )Irrational pessimism is the kind which can not be put in the form of p/q where p and q are integers and q is not 0. (/kidding alert)

The top 10 reasons due to which Sun failed

Sun Microsystems - once upon a time a $200 billion company and the owners of Java was bought out by Oracle for $7.4 billion a few days back.

Dan Baigent, was a senior director at Sun microsystems when the company got acquired. He started out to write the top ten reasons why Sun failed. Unfortunately he could write only 3. The company cracked down on it and took the posts off. However, the good (?) google is here to help us.
It has stored a cache of those pages.

The top 10 reasons why Sun failed to leverage its market potential. (Only #10, 9 and 8 are there, Dan never got to write more than that.)

The #10 Reason that Sun is Setting: We failed to understand the x86 Market - "We approached the market in the only way we knew how - as an extension of our high-end, low-volume, high-value approach to network computing. And not just in terms of product features and capabilities, but in terms of sales, partnerships, channel programs and supply chain management."

The #9 Reason that Sun is Setting: Messing with the Java Brand - "numerous attempts by well-meaning marketing folks at Sun to try exploit the value of the Java brand itself and how that ultimately reduced the very value they tried to exploit. To some degree, this is as much about the lack of value in the Sun brand (at least outside our loyal customer base) as it is about Java" ".... and the changing of our stock symbol to JAVA . (It) was a sad attempt to make Sun's stock more recognizable on Wall Street, as if that's what we created the Java brand for."

The #8 Reason that Sun is Setting: Fumbling Jini - "The real problem was that the engineers had built this technology using the latest Java platform...When launched, Jini could not run in anything smaller than a device with 64MB of memory and a Pentium-class processor.... Meanwhile, Marketing and PR were off describing uses of the technology that were all about small devices (cameras, printers, cell phones, etc.) that were completely unable to run RMI, nonetheless the Jini on which it was built. Jini should have been first-and-foremost about distributed computing. ... worse still, we left the door so wide open on distributed computing that Microsoft and others were able to walk through it."

Probably Sun does not believe in learning from mistakes or worse, thinks that letting the mistakes out in the open could mean lower respect for the brand image. The only way that is possible is when while knowing your mistakes, you still go on commiting them.

The naivety of the Indian energy policy makers

I just read this news on India proposing a new gas pipeline from Turkmenistan. The country is gas-rich and theoretically has a great potential to abate our energy crisis.

All of the less-informed, low-intellect, mortal, aam-aadmi know that you can NOT trust an Islamic militant country to protect our lifeline. But out dear 'IAS-babus' seem to know better.

I assume that their rational is that economic powers will keep the pipeline safe. But if they could not secure their pipeline to Russia, a fortnight back - I don't see how they can guarantee the safety of this project. Turkmenistan is riddled with foreign policy troubles - being bullied by both US and Russia while it tries to stand up to Russia with US aid. And the fact that it shares a large part of its border and culture with Afghanistan does not sound too well for the prospects of the pipeline. Any pipeline that goes through Afghanistan & Pakistan and comes to India just doesn't feel safe enough.

The incumbent energy policy makers probably were weighing only the economic benefits from the project when they decided to pursue it. But the fact remains that many decisions involve other considerations - especially those taken by extremists, value schadenfreude very highly. And to give them access to something that could staunch our economy seems particularly foolish -if not diabolical.

And aside from the militant threat, we would rather not be the proverbial grass (When two elephants fight, its the grass that gets trampled - African proverb) in the fight between Russia and US over the dominance in the region. US has been trying hard to cut into the soviet dominance in the central Asian region, and Russia is not willing to let go of its strategic buffer. And the fact that we have been "friends" with both of these countries while still managing to keep the other around means that we could be "reprimanded" slightly by either. Though I strongly believe that they would not want to curtail India - We are a big source of income for both the countries. But why give them an opportunity?

Business Scalability in the Manufactoring sector

As promised earlier, here's my post on how to shape your business for scaling up, if you are in the manufacturing domain.
Most of the articles that I have read talk about up scaling the business in the web or the software domain. None really talked about applying the same principles to achieve scalability in business in the manufacturing domain.

I strongly believe that the principles of business scalability transcend the boundaries of the business domain. When we say that we need to structure the business model for scalability, we need a revenue model that is self perpetuating. One first needs to find out who the customer is. The next thing to figure out (and this is the most important thing) is to figure out what is it that will further your product's demand. And create your revenue model based on these answers.

Now lets focus on the manufacturing industry, If lets say it is a electrical machines manufacturer - that specialises in precision control. The company would probably then want to create a assembly line type product chain. So that each product sold in the market would create demand for more similar products. (If you want to have a more detailed/customised revenue model, you will have to pay me)

Logic of a "free" customer

For the past few days, I have been thinking about how much is a 'free' customer worth.
For example, All the social networking sites like Facebook, Orkut, MySpace offer free logins for anyone. Similar is the case for eBay.

For example on eBay, all buyers are free registrants . Only the sellers pay - and that too when they get a product to sell. This gives rise to an interesting situation - without 'free' buyers, there are no sellers - and without the sellers the revenue model fails.

Similar is the case with Orkut - without the free users, there are no ads, and hence no money. But its slightly complicated here as Orkut is owned by Google. so there might be opportunity costs involved. like for example, when someone clicks on ads by google from a third party site, google must be paying something to that site as well (as it does in adsense). So when Google values its Orkut users, it will also factor in these savings.

Facebook epitomizes this type of revenue model - it allows advertisers to select their target group very effectively. Allowing them to streamline their ad via features such as
* Location
* Age
* Sex

* Keywords
* Education
* Workplace

* Relationship Status
* Relationship Interests
* Languages



But exactly how useful are these customers? there might be some customers who never click on any ads. Or for that matter, sell products on eBay. So these people never make money for the company. On second thoughts, these might still generate some revenue for eBay - by increasing the selling price through competitive bidding.


This thought cropped up in my head while listening to a presentation on the revenue models followed by browsers. Since then I have not been able to stop thinking about it. So HAD to publish it. Anyone who has some idea on this, please do comment/ contact me. I wish to learn more about this fascinating concept.

How frank should our leaders be?

Last night I read Mohinish Sinha's article on leadership. It talks about a situation where leaders dont either see the bad picture (due to their own rosy glasses) or dont want to let it out in the open lest everyone else comes to know of it. He says "...Leaders, whose self concept is brittle, hesitate to call the truths lest they will be found out. ..."

However, as I see it, there is another side of the story. As he writes in the preceding line, " Organisations tend to mimic the behaviors of the leaders at the top." So a leader might want to shield the bad news from the employees - just to keep them motivated. This, however noble it appears, is not without its flaws. A leader has to be able to see the whole picture, and know the short-comings well. So even if the bad news is not let out in the open, it has to be dealt with - firmly.

HBS too had a similar article/ opinion poll sometime back. They talk about the National leaders during times of crisis. The question posed is if or how frank or deceptive should the leaders be during crisis. The leader showing negative sentiments is not a good sign and it tends to reduce the general morale. However no one wants a leader who lives in a cocoon of self-deception and believes that everything is fine.

As is reported elsewhere, about 70% communication happens via non-verbal means. So the self-deceptive will come out as more natural and more convincing while the one who understands realty will show some signs of distress. But human brain is pretty good at understanding cues from fellow human beings. We can understand if someone is in a slight distress and still very optimistic. Most people would trust such a person more than someone who shows no signs of crisis.

Irony - as (or do ) we understand it

I had heard this classical hindi song called "पानी में मीन प्यासी | मोहे सुन सुन आवत हांसी ||..." - when I was kid - when translated to English, it reads "I find it really funny that the fish feels thirsty despite being in water..." . It somehow surfaced from my subconscious to the 'everyday-mind' a few days back. And from there on, I could always recognise some irony that reminded me of the song.

The fact is that we are so obsessed with our own understanding of the world and its accompanying prejudices that we tend to ignore/discredit things that do not fit into our instinctive model. Like the other day, I was talking with my friends about the potential for extra-terrestrial life - and almost everyone seemed to believe that they will need an organic photosynthesis (or its sillicon analogous compound). But why cant it be that case that they derive their energy not from a external sun- but from its core itself. We tend to ignore this possibility simply because we assume that life will not be sustainable at those temperatures. When I first proposed this, the audience was startled and started rubbishing it even without thinking. Then when we discussed it with some cool head, it turns out that everyone was convinced that it could indeed be the case. This is a classic case of prejudices blocking our vision.

In a general case, just because others covet a particular thing, it does not mean that the person having it will find it of any or much use. A typical case would be that of abundance - if someone has more money than what he/she finds sufficient, any incremental money has very little potential for making the person happy. Same could be the case with the protagonist fish in the afore mentioned song. Its our own inability to judge the drive of others that induces laughter at the situation - so in a way we are mocking ourselves.