Friday, December 28

Thinking – Fast and Slow




An amazing book by Daniel Kahneman on how we think and how we think we think! What makes the book great is the fact that it uses examples and anecdotes that are truly counter-intuitive for the first time. He has summarized almost all of his research that he did over 20 years and got him the Nobel Prize.

Two systems – Kahneman argues that we have two kinds of brains. Let’s call them System 1 and System 2. System 1 is where all the intuitive thinking and knee-jerk reactions come from. The interesting part is that this area of your brain is working all the time – beyond your realization. So the next time you think that you are acting greedily – it might not be in-grained in your nature. It could be your System 1 playing a huge part in you doing so because of your surroundings. He extends this idea and goes into the exciting world of priming – How minor perturbations to the environment can affect your behavior. His research shows that (as an example) people are more likely to believe in written words when they are in bold font, when they are written in simple words and even when they have a musical rhyme to them. (Woes unite foes against Woes unite enemies). Even thoughts that are easy to recollect are deemed more believable. This is the realm of “cognitive ease”. System 2 is where all the logical stuff goes on. So if you are asked to multiply 17 and 24 your System 1 would be stuck (unless you are one of those Human calculators!).

Amazingly, our System 2 relies a lot on System 1 and this is the cause of many cognitive biases/errors. This does not mean System 1 is all that bad. Remember the fact about – Laugh for sometime every-day.  Kahneman shows that this is true because of System 1. So when people are asked to hold pencils between their teeth in such a way that they smile – the show positivity when shown some pictures/videos. Holding it the other way – rubber between teeth – so that it makes you frown results in negative thoughts with same pictures/videos. However, we ought to train System 2 to be more self-sufficient and reliable – to not trust System 1 (intuition) all the time. If all this seems trivial consider this –

“People are more likely to solve problems/puzzles when they are written in small font – making it difficult to read. Why?”

Because difficulty in reading strains your brain and System 2 takes over. Once in action you would not be very likely to give the intuitively obvious answer straight-away. By virtue our System 2 is lazy! So lesson drawn – Moderate stress during exams is good! Get those System 2 horses running before the big exam!

“I’m in a very good mood today, and my System 2 is weaker than usual. I should be extra careful.”

On the other hand, your system 1 is happy when you are at ease – “Cognitive ease leads to positive emotion”. He shows that people are more likely to invest in stocks that have pronounceable ticker symbols – and such stocks do well in IPO’s. That has been tested statistically and it is indeed amazing! Other thing that System 1 is very good at doing is finding an explanation for anything that is a major event. Stock market movements and NEWS are often related everyday – NNT pointed this out very beautifully in his book Black Swan – How such events are random, consequential and unpredictable. Yet, almost always we seem to give explanations for this – the so called market gurus have made this a BIG business! All those CNN news can actually make you dumber (as Taleb pointed out). 

Kahneman calls this “associative cognition”, however I think this is more a fallacy that (I hope) can be corrected by training! Although it is true that an even will have a cause, System 1 will accept the most possible and intuitive cause – something that is easy to relate to, easy to explain but by no means the correct one. Worse still, deeming this explanation unbelievable is the Job of System 2. However, most of us just don’t use it. As Robert Shiller (I think) points out, unlearning stuff is important too! Something’s just don’t fit in to regular explanation framework and we should learn with it. The problem is – where do we draw the line? Be an oracle or an ignorant guy?

Making a good first impression – Yes! The age old saying is true. Kahneman studies this in the context of the halo effect. Traits which might be both positive and negative are interpreted depending on the notion we have about the person. So making a good impression would not only help you but it would transform your negative traits into good one. An intelligent – illustrious – stubborn guy is better that a stubborn – intelligent - illustrious guy. Order matters! Sadly we might not control that always!
“The sequence in which we observe characteristics of a person is often determined by chance. Sequence matters, however, because the halo effect increases the weight of first impressions, sometimes to the point that subsequent information is mostly wasted.”

Also, next time you ask someone for advice (which one to choose), do not give them your opinion first!
More on System 1 – Kahneman argues that System 1 is your intuitive brain and many times beyond your control. For example - Evaluating people as attractive or not is a basic assessment. You do that automatically whether or not you want to, and it influences you. He talks about Mental Shotgun – how a train of exogenous thoughts may cloud your judgment. As an example -
Evaluate (as quickly as possible) if the following statements are literally true.

Some roads are snakes.
Some jobs are snakes.
Some jobs are jails.

Were you slow with the 1 and 3 statements? Probably because they might be true metaphorically and that made you stop – even though it was out of context and your mind meandered to a different question.

Taking this a step further the concept of Heuristics and their ability to bias our answers was one of the most interesting parts of the book. As he puts it –
“The normal state of your mind is that you have intuitive feelings and opinions about almost everything that comes your way. You like or dislike people long before you know much about them; you trust or distrust strangers without knowing why; you feel that an enterprise is bound to succeed without analysing it. Whether you state them or not, you often have answers to questions that you do not completely understand, relying on evidence that you can neither explain nor defend.”

The heuristics and bias approach simple means that you (your system 1) always needs to have an answer. Sadly, you always rephrase a difficult question with a substitute one – something that you think is an easier one to answer.

“We concluded that people must somehow simplify that impossible task, and we set out to find how they do it. Our answer was that when called upon to judge probability, people actually judge something else and believe they have judged probability. System 1 often makes this move when faced with difficult target questions, if the answer to a related and easier heuristic question comes readily to mind.”

For guys who have read – Polya (How to solve it) this might seem painful! Polya says - “If you can’t solve a problem, then there is an easier problem you can solve: find it”. But despair not! This is not the System 2 heuristic. Rather this is the System 1 heuristic – which is often in your sub-conscious mind and may be wrong more than often.

This is pretty much the first part of his book. He later digs deeper into this interesting study. Hopefully, it will change the way we think – maybe make the System 2 less lazy and System 1 less ambitious! 

This is a very good book to read. Also read Black Swan - one of the book that inspired Kahneman!


Saturday, December 15

Why I don't want what I don't have !

It was not long ago when Barclay's was involved in the LIBOR scandal. Recently, I read about an UBS trader who managed to lose a huge sum in a matter of one day. Being idle makes you intro-spect and wonder what all this means, especially to someone who was very excited about a career in the financial services industry not long ago. Finally I did not get that chance (for now) but I wonder if that was what I really want.

The likes of HSBC were in the news recently, for something as heinous as "money laundering". I was told that the bank's agents actually would come and collect money from you (your hard earned black money), deposit it in your Swiss Bank account and keep you updated! That affected me a lot. I for one was very excited about getting into the industry because of the rush it gives you (keeping you up on copious amount of caffeine), opportunities to meet genuinely smart people and ability to solve problems that are relevant. However, my perception has changed a lot. Maybe this is the "justification syndrome" that most of us suffer from. The idea of "sour grapes" comes to your minds I guess. But then, who gives a fudge? You should neither..

What really attracted me to the financial industry ?

1. Money - There is no denying that money is something that plays a key role in many people's life (all of us shallow mortals) and all the BIG bonus that one hears about is bound to attract them to the industry. Wall street is a dream from many of the graduates from IIT's (the other one being the Silicon valley!) and that is where you want to be, amidst all the happenings!

2. Fame - Probably not unless you are a Soros or Buffet who can make it really huge. The industry definitely does not give you the autonomy you enjoy as a entrepreneur! There is that hollow feeling - I am making money for a firm that might be using it to help drug lords in trafficking them, helping billionaires launder money or helping a rebel nation develop secret nuclear technology (See - Credit Suisse - one of the firms that actually rejected me - for good I guess !).

3. Impact - Again probably not unless you are a trader. But then one needs to define impact in a more narrow way. Is impact about changing something in the world/changing the lives of people or is it about being able to swell your organizations balance sheet (without getting caught)!

I remember this part form the movie Inside Job - A banker telling a regulator - "We will be greedy. You have got to bring in the rules and control us".

This might be the lowest I could go in my life. The question is - Can money fill a void created by such a shallowness?

Not the end of the story -

Do not despair! There are many other jobs where you still have a good overlap of all 3 things but it is difficult to find them since they are rare. I am amazed by way in which money can really blind us, especially someone who is just starting his/her career.

Moreover, that is how the society judges us. Slowly that becomes the way we start judging ourselves.

So does that mean I have given up on breaking into the financial industry? No way! I will probably become a regulator and screw all these guys for their evil-deeds someday!


Thursday, December 13

From black to grey to (I wish) white swans!


I finally managed to finish reading the much hyped book by Mr. Taleb - "Black swans". 

I had not known that getting a Job would be such a big deal if one was graduating from (supposedly) one of India's top school. Nevertheless  the last few months kept me very busy with all the "preparations" for the Job interviews, learning how to be "The guy" that the hiring firm wants! 

On-to the book now - 

Black swans and the G.I.F - 

It was an interesting read for me. It had a lot of grounding in things that I thought were intuitive but ignored by us lesser mortals in our daily lives. On of the few things that I will remember from the book after an year would be that way he denounced the ubiquitous "Gaussian Bell Curve" as a "Great Intellectual Fraud". His reasoning is as follows - 

-- The Gaussian distribution is (sadly) such that it does not allow for extreme events to happen ( more technically - the odds of an extreme event are very low). However,  our lives are shaped by such extreme events - be it hurricanes, stock market crashes or un-foreseen inventions. Why then do we use the "bell curve" to predict the future ? Worse still we justify such shocks and never learn the basic fact that we cannot predict! The world would be a much better place if we could learn to exploit uncertainty, embrace it in it's wildest form. Interestingly, such events have a black (unexpected) connotation to them - Black Thursday, Black Monday. How ignorant can we humans be?

He has come down heavily on the Nobel Laureates such as Merton-Scholes for being a phony - making up theories that have assumptions conjured up by a guy from some dream-land, far fetched from reality. I agree a lot with this point. Many of our theories today are based on un-realistic assumptions (read "Gauss bell curve"), but the question is - Can we do better? Since I know a bit about financial markets (I think!) I'll take an example from that domain - 

Say you invested in Microsoft in 1999. The stock was doing better that good and you see good returns. The black swan is the "Dot-com crash". It is true that not many people saw this improbable event and it had a high (negative) impact on many people. But two questions arise - 

1. Do we learn ? I think we (read some good economists) do. A few good people were able to predict the housing crisis. (Eg. "Has financial development made the world riskier" - R. Rajan). We do realise that such things exist and we can possibly do something about them. Maybe this does not extend this to other domains but the idea is certainly there. 

2. Do we stop going out because on some bad day we might be killed in a road accident or struck by thunderbolts? No !  Black swans are a part of life (as he says). Whether he is concerned about us being ignorant about it or being oblivious to it is unclear.

"Why we don't learn that we don't learn"

This is another interesting chapter that further exemplifies our ignorance towards events. The so-called pundits make predictions, fail miserably and then justify it. They are worse off than a cab driver who has the guts to say "I don't know" when asked about the weather tomorrow. 

Take away point - It is as important (if not more) to know what you don't/cannot know (and not be foolish about it) as it is to know things and make predictions. 

"So what to do about it?"

Almost all the interesting stuff happens in the Extremistan world - where the improbable (one freak occurrence) can invalidate your whole theory, mess up your predictions. We still tend to think that we are in the Mediocristan world - where things "average" out. 

Barbell strategy - "Hedge yourself from such black swans by investing your money/time/energy in low risk places. Assess the Black swan - if it has a possible positive outcome (shorting something and it crashes - George Soros style) invest 10-15 % of your money in it. (I apologize for the proclivity for the financial markets) Otherwise, stay away from it. Financial market analysts know about markets as much as a cab driver but somehow people (foolishly) put a lot of faith in them! He recommends the use of "Fractals", demonstrating beautifully how they can give you hints about black swans and make them grey. 

Last piece of advise - Be a sceptic. This was one of the key take-away's for me. If you have a theory, do not discard the outliers. Search for the one data point that can screw up your theory (We usually do it the other way round - confirmation bias is ingrained in us). Don't fall for the Ludic fallacy (read the book to know what it means!). 

P.S - Next time someone says - "Dude! This follows the normal distribution, have a good laugh at the fool. "

Sunday, April 1

Should you be betting your money on Apple ?

Hi all,

The new ipad (ipad 3 as we call it.. I still wonder whay they did'nt name it that) was launched this month. They managed to sell 3 million in under a week. I kind of felt very low that day. The price of my ipad (ipad 2) fell by some 15k and if I had waited longer I could have got the "Retina displa" to woo my eyes. Hard luck.

Much like Bill gates said a decade ago at a dinner party when some powerful guys were talking about the presidential campaign - "I am as powerful as the president". Now we might think that he was just being cocky owing to his dream of having a desktop (running windows) on every desk was about to come true. Today the situation is quiet similar - the small difference is that the guy who could have boasted this is not alive.

Apple has grown in the past few years to be the largest company in the world today. I heard somewhere that it has more money than the Fed. It is well on its way to becoming a trillion dollar company.. Damn! thats like 12 zeros :). The cool thing about all this that, reporting Apples profit can undermine the fact that the US economy is not doing so well after all. Apple is today larger than the complete retail sector of US put together. Many of the hedge funds own apple shares and they have booked huge profits due to this position. Apple's stock has shown a rally in the past few years, growing by more than 83 % this year...

So far so good. But the question that would really trouble us (at least a rational investor) is whether this is just an another bubble.

It might be a good idea to take lessons from the 2000 dot com bubble. The big problem with all this is that Apple relies on innovation for these super-profits. The technology sector is a "Innovate and stand out" thing. However, how long will this go on. With the magic-in-chief Steve Jobs resting in peace, can apple sustain this long enough. The whole market is bullish on the Apple share. A call option will cost you a fortune today.The bubble is definitely growing and its a good time to make a short investment in the shares probably half an year - before apple runs out of out of the box ideas. According to me, its never a good idea to hold a position in any tech share for a long time because of the technological cycle.

The only market that Apple has a real say in is the Tablet market. It is losing out in the smartphone and the laptop arena. I mean your chances of finding a mac with someone, atleast in the Indian or Chinese market are really low - the simple reason is that even today computer is a luxury in developing nations - and Apple is really pricy when it comes to anything.

Although I have high regards when it comes to Apple products but I would rather not stay invested in the company for a long time. It is evident that we might have an emotional attachment towards Apple. They do bank on the loyalty of their customers. I mean the Tech talk they hold every now and then - "I have something and You really needs to see this". Just those words coming out of Tim cook is so catchy.

Anyways its not a bad idea to own an Apple product. They really have a lot of difference when it comes to what they offer you. Although the compatibility can really be a headache at times.

Adios.

Saturday, March 17

On Sachin's hundered and foolish fans

And finally we have the 100th ton from the Little master. An year was definitely not worth the wait for many of us.. for many reasons. Three rare things happened on that fine day in Bangladesh -

1. Sachin got a 100th hundered.. which makes him stand heads and shoulder above everyone
2. Bangladesh defeated India convincingly
3. 1 & 2 happened in the same match.


I think it's sad that people are giving all sorts of reasons as to why Sachin should retire. Like he said - "No one remembers the 99 centuries that I made..Everywhere I went, all people could talk about was the 100th century which was yet to come" .. I think (including many other rationals) that he has earned the right to define his cricketing future. Even without going into the Statistics, I can say that Ponting and Lara would be way behind him..

Many of us might say that Sachin has become slower and this 100's are rarely the winning ones. What we forget here is the persistence and grit that he has shown for the past 23 years. He started playing when I was not yet born.. a time when the likes of Ponting and Clarke were still in teens. Consider Lara and his 400.. I don't think he ever played for his team more than for personal records. When it comes to Sachin, a team win is more satisfying then a double hundred and a century is nothing if the team loses. How many of us would be willing to go ahead with the career when we can safely quit - you have loads of money and loads of fans.

Its foolish to question the unfathomable passion of Sachin for the game. It is not us who decides on his Cricketing future, it is he himself who holds the steering.. just like he has steered the team to so many victories. Respect the man and respect his achievement. It is very easy to sit in front of a television and say that the straight drive was not perfect..It's easy to forget all those perfect pulls and hooks that he used to demolish the best bowling attacks of the world..Its easy to forget all those towering sixes that he hit against the best spinners in the world..Its easy to ignore how he was such a gentleman and managed to have a clean career in every aspect when the likes of Ponting, Warne and Dhoni managed to get into controversies..

What is not easy is to last for 23 years in competitive cricket..under the expectations of a billion fans who expect you to be a for GOD..someone who performs every time he is on the field..fans who are so irrational that they can forget 23 years of passion and performance just because you do poorly in a series..



Sunday, March 11

The Mathematics of Love - Part 1


I had been thinking about this for a while. A 2 hour break in the morning between classes makes for a perfect setting. I don't know if there is this kind of work in the world somewhere done already.. I'll proceed anyway.

Okay, I would want to start with the very basics . Demand and Supply.
Demand for love (Pampering) is from the Guy's side. Supply of love is from the Girls side. To see how the supply function works (Girl showering it on the boy) focus on Graph below.


 Now this is pretty trivial and most of the guys (including me) would agree that it is never possible that the curve would be linear, leave alone bulge upwards. Diamonds are your typical point. Once she meets her best friends, she lets it loose. This is in stark contrast to what the boy expects when he is too naive about stuff. His expectation might look like something shown below.

There is no tipping point and the graph is that of an optimist. In most cases the graph will pass through the origin - unless you are George Clooney - in which case it's just a point (0,Sex). Being ugly means that the curve would be a lot flatter - and you would have to be filthy rich to reach the pinnacle.

I think I will stop here maybe.. maybe I will focus on monopolistic markets (IITs/Engineering colleges) next time. Till then have a nice time.

Bharat

What (can) make(s) Nerds so cool?

Hi all,


Since we are dealing with nerds I would first narrow down my focus to science. Then we have Physics, Chemistry and Maths. Although the first two of the sciences have numerous examples of nerds, I will focus on maths to exemplify their exploits.


I want to start with something that is very central to maths - Number theory. Even if you are studying arts, it is unlikely that you have not heard of Fermat and his last theorem. If not, here it goes:


No three positive integers ab, and c can satisfy the equation an + bn = cn for any integer value of n greater than two.


That seems pretty simple right? If you are a nerd, you should stop here and start some number crunching. If you are a regular guy, continue.


The problem is simple but when you start doing the math (trust the nerds) you realize that it is difficult to comprehend. The problem is in-fact so complex that the math guys had to develop two separate branches just to prove it because Fermat was too proud to prove it. The reason cited was (he wrote this on the margin of his notebook) - " The space seems too small to write the proof. You better accept it!". I think he did try it out with large numbers - (9)^3 + (10)^3 = 1729. Missed by 1 ! ( 12^3 = 1728) and then gave up and wrote it as a theorem. That's one advantage you have when you are born in the 16th century and their is no one to question you. In essence Fermat stated -  "Hey, if I claim to discover some really stupid mathematical theorem and don't give the proof for it, then people will spend a shit-load of time over the next forever years trying to prove it."


But wait! Fermat is not the protagonist of this little story of mine. It is someone you probably haven't heard of -  Andrew Wiles. It would be interesting to note that many math greats like Gauss, Lame, Euler tried wrapping their heads around it. They proved it for some numbers and gave up. Gauss even said - "The problem is of little interest to me" - Ya right!. This went on for a good 300 years and then Wiles made it to the scene - who as a child dreamed of solving the theorem - What a wasted childhood it seems ! 


He used a conjecture given by a bunch of Japs and in 1993, put together some complex elliptic equations, developed a new branch in Mathematics, Introduced some new number system..and  at the Newton Institute in Cambridge declared that he had proved the Fermat theorem. He did not get the Noble prize for that - You don't get one just for doing something that helps you vent out your frustration due to a long struggle!


What I wonder is that -  Is their a simpler proof that lurks out there.. waiting for someone to stumble upon.. The proof given by Wiles cannot be the same as what Fermat had thought (if he ever thought of one).. because all this did not exist in that time..Maybe some day, some nerd will come up with it.. 


They say that "The fun is in not knowing". How many of us would dig deep in-to the conjecture or the equations that Wiles used to solve the theorem. We are in-fact just mystified (I hope) that he did something that many of u can't even dream of.  And yeah that's a classic example of a cool nerd who would get a lot of chicks - your typical debatable stereotype. 


Although he did not have a eureka moment while giving the proof-  Don't you think coolness is all around him?


Bharat