Value creation v/s redistribution

Why do firms exist? There are two broad views. The capitalistic view pushed by the US until recently insists that a firm must create value to its shareholders. The European view, however, is that a firm must create value to its stakeholders, which includes employees, investors, customers, society etc. The difference between the two shows up when value is not “created” but simply “redistributed”. Typically, value creation, implies an improvement in status quo. Where such value is tangible, its creation is by way of making things or processes faster, better or cheaper. But where the said value is intangible, its creation is determined by the perception of customers or consumers.

When a bank implements an IT system that speeds up its processes, it definitely creates value. Employees work better, customers transact faster, and risks of improper or fraudulent transactions are reduced. Or a power plant for that matter so long as it does not disturb the natural ecosystem.

On the other hand, let’s take expressways, which reduce travel time, thus creating value for commuters. But we overlook the loss incurred by fuel pumps because of increased fuel efficiency, auto mechanics because cars are on the road for fewer hours, hotels because people reach their destination much faster and need to stop for the night, roadside eateries, which are not allowed on expressways, and even if there is one, commuters might give it a skip and so on. This is a case of value redistribution – from fuel pumps, hotels, restaurants, to commuters. This is also the case with IT outsourcing. In these cases, the first definition comes up as myopic, focusing solely on the firm and its shareholders with total disregard to other players. And sooner or later, such cases will inevitably lead to agitation and outcry.

Recently, the WSJ reported how Mumbai’s black-and-yellow cabbies resorted to physical protests and violence against fleet operators such as Meru. Meru offers incredible value to a certain class of commuters, by simply not screwing up. People don’t pay more for the air-conditioning, but for such basic manners as courtesy and promptness. Nonetheless, it is a case of value redistribution, and is bound to rankle the sentiments of certain groups. Not that I support the case of taximen. Rather, I am appalled at their stupidity for I don’t know what else it can be. The unique prepaid system in our country doesn’t benefit anyone. Passengers pay nearly 50% more than the normal rate and I am quite certain the cabbies get paid less than the regular fare. It is only the middlemen who make money. But how did we get here? Simply because our cabbies refused to be honest. I can pardon them for lack of polish and manners for it is a matter of upbringing, and even the burgeoning middle class is woefully short on this. But there can be no excuses for dishonesty, and unless they are willing to see this, no amount of agitations and protests will help.

What's in a game?

Soccer is easily the most popular sport in the world, both in terms of players and viewership. And possibly the only sport today that has remained indifferent to technological advances, because success continues to be determined by such elementary considerations as physical stamina, skill and teamwork. The sheer thrills and rushes of adrenalin offered by the game are unmatched. Fortunately or not, soccer is no longer a game but a national obsession as highlighted by the events following the world cup qualifier between Ireland and France.

After a 1-1 draw, France managed to scrape through in extra time with a golden goal set up by Thierry Henry, one of the game’s leading strikers. However, Henry used his arm to control the ball, which went unnoticed by the referee. The Irish were devastated, and to lose because of a refereeing error was too much to digest. The team protested the result and wanted a replay, which is understandable. What came as a surprise was the call for a replay from the Irish Prime Minister himself! And he even brought up the matter with Mr. Sarkozy on the sidelines of an EU meeting!! Now, Irish fans are protesting outside the French embassy.

My point is beyond how to deal with refereeing errors and the dying element of “sportsman spirit”. I find it incredible that an entire nation can take the result of a game so seriously. We have seen it happen in India too every time Sachin gets out on a dubious LBW decision, and more so if we go on to lose the game, which is often the case. Why are we unable to see these events as part of the game and move on? After all, India losing matches has no direct impact on our lives. If anything, we will stop following cricket and put our time to better use. Technically, even players should not bother much for they are rarely paid on the basis on the result (unless in a tournament or in a qualifier such as this where they lose out on games). But in a bilateral series such as the Ind-SL one currently underway, how does the result matter?

The answer probably lies in the structure of our brain, which has three components: the reptilian brain, limbic brain and neocortex. The reptilian brain is instinctive and reacts immediately to stimuli without thinking, which makes reflexes possible. On the flip side, it also leads us to automatically react without thinking, and probably explains the current Irish rage. We get attached to our team and become one with it. So when the team loses, we lose. But before we can step back and analyze, our reptilian brain has perceived this as a threat and forced us to respond. Once you make a move based on gut, it is nearly impossible to let things go and reconcile with reality. Instead, we end up with rationalizing and justifying our stance.

The trick, of course, is to suppress the reptilian instincts and let the limbic brain and neocortex take over. The limbic brain processes emotions whereas the neocortex is responsible for reasoning and thinking. Apparently, studies show that our neocortex is severely underutilized. There are ways to address this, some of which I learned in the MCC and AMCC courses at IIM-A, but more on that later.

Child Prodigies

Sachin recently completed 20 years in international cricket. He made his debut at the age of 16. Is it fair to subject a minor to the demands of international cricket? In his first Test series, he was hit by a Waqar bouncer on the nose. Thankfully, it wasn't serious, but if it was? Were his parents careless?

The other day I watched a news item on CNN IBN that showed a 9-year kid in Tamilnadu driving a car at speeds of 100 kmph. The incident took place sometime back, but only recently came to the attention of child rights activists, who vociferously and vehemently condemned the episode. It was sort of funny because the parents had spoken to the media after the incident and were proud of their child. Those clips were now being played with a child psychologist yelling her heart out on why such stunts are detrimental to the growth of kids.

For a moment, I was taken aback by the incident. The anchor wondered why parents were so enamored by records and went to such dangerous lengths. But full marks to the channel for presenting an alternative view. A certain gentleman named Hussaini, himself a stuntman, came on the show. Without beating around the bush, he said the act was justified if proper precautions and safety measures were taken. For good measure, he added that if we are not adventurous, we would never know the limits of human endurance. For example, how can we say that kids are not fit to drive? They are super comfortable with computers, then why not cars? Finally, and most logically, he pointed out that this was no different from teaching kids to swim at the age of 5 or enrolling them in tennis classes, which do have the risk of a child getting seriously injured.

In a few minutes, I took an about turn. Pushing children into music and sports as early as 3 is not only acceptable but is thought of as necessary if they have to get anywhere in life. Schoolkids are overloaded with study materials and tuitions in preparation for IITs. All of us has seen at least one kid that has lived up to the saying, "All work and no play makes Jack a dull boy." Can we wait until kids grow up and make their own choices? This is what happens in other developed countries where people try all sorts of things before even getting a college degree. But then we have too many hands chasing too little opportunities so to not do anything about a child's career appears unfair as well. I guess the line between guiding children towards their passions and thrusting our passions on them is thin. Very thin.

Buridan's Ass

I didnt know that donkeys had any analytical skills until I heard about Buridan's ass, which refers to a philosophical paradox. It states that a donkey placed exactly between two stacks of hay of equal size and quality will continuously evaluate its options and ultimately starve to death. That reminds me of computers running into infinite loops, but it also happens to us on several occasions. Only, we use the more acceptable euphemism of analysis paralysis. Now, more than ever, we are susceptible to this lunacy.

Every time I go shopping, I feel like an ass myself. The men's section usually spans an entire floor, and it sounds mighty stupid to pick up the first shirt I like without checking what else is out there. But by the time I have surveyed the entire section, I am only more confused. And its too late now to simply pick up my first choice because choice is always relative and never absolute. So I am running 2x2 matrices in my head comparing looks, price, brands and what not. And a clear winner is extremely rare. In the best case, I am too confused to choose so I drop everything and walk out of the store. Worst case, I pick up something as a compromise and then keep second guessing my choice until I reach home.

The proliferation of shopping malls and supermarkets has made matters worse. Not only do we have more choices for what we need (toothpaste, soap etc), we are also introduced to newer stuff that we dont need. So the process of buying has become inefficient and, more often than not, we buy stuff only to regret later. I remember the days when grocery shopping simply meant going to the neighborhood kirana store with a list of items - toothpaste, refined oil etc. Brands were mentioned sometimes, not out of loyalty but convenience, for a brand name always represented the category - Sunsilk meant shampoo and Surf meant detergent. Neither did the storeowner have the shelf space to stock multiple brands nor was the consumer adventurous enough to try something new. But the best part was the efficiency - it took hardly 10 minutes to buy provisions for the month despite having to manually add up the purchases. Sometimes, I had to wait an additional 5 or 10 minutes because of the rush, and that felt like an eternity. Now, I dont even blink after spending 5 hours at a Big Bazaar.

Domestic Terrorism

The recent shooting rampage in Texas by an army psychiatrist has complicated matters for the US. It was a simple open and shut case if the gunman was a Hispanic, European or a South East Asian. But he turned out to be a Muslim. Even then, had he refrained from taking the name of Allah, as some reports suggest, the matter could be conveniently sidelined. But the combination of these two facts poses a question that cannot be avoided: Was the Texas firing an act of terrorism? Apparently, there is now evidence that the gunman was in contact with an individual sympathetic to Al Qaeda. That may not mean much, but it is hard to ignore that the US Army, supposedly the mightiest in the world, has just been shown to be vulnerable.

Now this is precisely the problem India has faced since Independence. A small minority of our population has perpetrated terror attacks on our soil. Inevitably, they owe allegiance to Pakistan and happen to be Muslims. To separate the criminals from the innocent majority is no mean feat, and we have failed horribly. And as support, the US has offered nothing more than platitudes such as India being an important ally in the war against terror. The US had no idea how difficult it is to tackle domestic terrorism. Until now.

When you are attacked by foreign forces, the enemy is clear (not necessarily easy) and you can kindle the spirit of unity and patriotism and get into a war. But when attacked internally, you dont know who the enemy is. Where do you start?

It will be interesting to see what the US does now. I doubt if they will let this pass as a one-off incident. But then there is no way the US can create two classes of citizens based on religion - that will be a slap on the face of American values. Neither can it afford to assume that all US citizens are beyond doubt. The current case of David Headley is an example. Even pulling up Asians for additional security checks post-9/11 caused a huge backlash against "racial profiling".

One thing is certain. Whatever measures are adopted, we wont know the complete details. The American intelligence agencies are good at these things.

The Utility of Probability

We intuitively understand probability, but its application is incredibly complex. For the record, probability is defined as the likelihood of an event occurring, expressed in % terms. Textbook explanations talk of rolling a dice and predicting the chance of getting a 6. These are benign experiments with results of little consequence. But when probability is applied to real events, interesting, if slightly unnerving, possibilities emerge.

Let’s take power cuts as an example. In most Indian metros, we are used to 24-hour power, but there is always a probability of grid failures that will cause a blackout. I don’t think even power equipment manufacturers provide 100% uptime guarantee, although the probability of failure is extremely low. So if we didn’t have any grid failures in the last five years, the probability of such failure increases with each additional day. Yet, the way we look at it, if something hasn’t failed in the last five years, it probably won’t in the future.

This paradox is explained to an extent by the framing of the situation. Underlying every probability data is the assumption of a very large number of observations. We think five years is large enough, when apparently it is not, as is seen from the recent crisis. If property prices are rising over the last few years, it is probably time for a correction, but we believe otherwise. However, we do grasp probability pretty well in other areas. For example, when a batsman hits a century, we expect that he will soon get out. We know scores above 150 are very rare. (Why so many batsmen get out between 100 and 150 is another question altogether.) In a game of cricket, with a definite start and end, we can easily imagine possibilities and compute probabilities. But in life, defining a start and end period is easier said than done.

We shouldn’t feel too sorry for the theory itself is weirdly structured. It says, for example, that the probability of getting heads or tails when tossing a “fair coin” is 50% when the experiment is repeated a large number of times. So if I take a random coin, what’s the probability of heads? This dilemma is beautifully captured in one of my favorite Jay Leno punch lines, “George Bush’s popularity rating hit a low of 25%, which means, now only one in four people support his presidency. So when the President is having dinner with his wife and two daughters, he is the only one that thinks he is doing a good job.” The second statement logically flows from the first one, but one can immediately see the fallacy. So if autism affects 1 in 10 children, we know there is no way to rule out our kid by gathering a group of 10 children. The statistic is chilling, but it has no practical utility, which leads us to believe that our child is not the “1”, resulting in complacency and complications.

So what to do with probability data? One could argue that we should strive to minimize the probability of adverse events (or failures). For example, the probability of traffic snarls can be minimized through electronic monitoring of traffic patterns and adjusting the timing of signals or diverting traffic through alternate routes. This will work, and brilliantly so, but here’s the problem. Once these things work on a consistent basis, we assume that they will never fail. So when they do fail for whatever reason, we are caught unawares. And my uneducated opinion is that as we keep minimizing the probability of failure, the magnitude of failure goes on increasing. If the traffic signals were coordinated and centrally controlled, a break down will result in unmanageable chaos. And with every day such a system works brilliantly, the probability of failure, infinitesimal as it may be, keeps mounting. But a high probability doesn’t mean the event will occur:)

The Consequences of Drunk Driving

We have seen several cases of negligent or drunk drivers losing control of their vehicles and running over pedestrians. In some cases, such as the recent one in Noida, the consequences are fatal. The outrage against the offenders is understandable, but the saddening outcomes prevent us from making an objective assessment.

First, one would say hit-and-runs must be punished severely for it shows utter disregard to the life of a fellow human being. But if you drive on Indian roads, you very well know the fate that awaits you should you stop to check on the victim. A mob quickly gathers and you are the target of all their pent up frustration. In several cases, mob assaults have caused deaths too. Can one really blame the driver for fleeing the crime scene?

On the question of negligent and drunk driving, there is no dispute that such offenders must be severely punished. But the most stringent penalty for such an offence is probably to revoke their driver’s license and levy a huge monetary fine, and possibly a few days in prison. Were the offence of rash/drunk driving committed in the day during heavy traffic, it could be argued that the driver put lives of fellow commuters at risk, and a more stringent penalty is required – possibly charging with intent to murder or something like that. But during the night, when the roads are deserted, is rash driving so bad? It is understandable that the victims and their survivors, and even the general public, will be in no mood to consider this. A life has been lost, and that implies the offender must be tried for murder.

Of course, the law makes a difference between murder and manslaughter. Murder implies premeditated killing whereas manslaughter denotes no prior intent. But even a manslaughter charge is harsh from the offenders’ perspective. You are returning from a late-night party with a nice buzz when you see a deserted patch of road and decide to let it go. The worst you expect is to crash against the pavement. Imagine your shock when you hit the pavement only to realize you have just crushed three people sleeping there.

My point is that harsh punishments in individual cases won’t change anything beyond providing emotional relief to the victims and survivors. The underlying risk of recurrence remains. The solution must be to create a strong disincentive against rash and drunk driving. And there must be an equally strong disincentive against squatting/occupying pavements and roadsides. I realize both are easier said than done, but the risks are worrisome if not addressed. If you drive on a regular basis, you know the feeling when you watch pedestrians crossing the road with no regard to the oncoming traffic.

LCDs and DTH

Flat screen LCD TVs are probably the most sought after gadget today. But their ads are beyond my comprehension. What's the point of showing attributes of clarity, fidelity etc on regular TVs? The Samsung ad, for example, shows a football game is immaculate detail - the emotion on the players' faces, sweat trickling off their bodies, the giant-sized football. Well, if I can see all this clearly in my 21", what's the point of getting an LCD TV?

Same goes for DTH ads that purpotedly claim to have better quality. I think Airtel has Saif watching a football game - half the screen is blurred to represent regular cable and other is bright to represent Airtel signal!! I feel insulted watching these ads. The BIG TV ad is much better. A wife is talking about the husband's excitement at purchasing an LCD TV followed by his disappointment when he saw much better picture quality at his friend's place. Apparently, BIG TV makes the difference, but in doing so the message conveyed is also that you only need such a connection if you have an LCD TV. Chances are, if you have an LCD TV, you are on DTH already and the switching costs are not negligible.

Sun DTH has found the right formula in my mind - the price. When one has to switch from a Rs. 300/mo cable connection, the biggest resistance is in the cost. Yes, there is a segment that wouldnt mind paying a premium for better quality, but I doubt if there is such a perceptible difference between the providers there. Tata is even smarter. They only advertise Tata SKY+ which is the premium offering that comes with a DVR. The ads are exciting but most people would balk at the high price. Oh no problem, sir, we have a cheaper option without the DVR. Bingo!