Why We End Up Buying Things We Normally Wouldn’t

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When I visit a supermarket or a large store to buy grocery, I inevitably end up buying stuff which I wouldn’t otherwise. On some days, it can be products like muffins or a chocolate bar, placed strategically near the billing counter. On other days, it can be a new flavour of ready to eat noodles.

What is happening here? Human beings look at purchasing decisions from the relative value lens. The question is, relative to what.

I buy grocery around once in three weeks. And on most occasions, I end up with a bill of around Rs 4,000-5,000. When I am buying something like a chocolate muffin which costs around Rs 100, it feels like a very small part of the overall bill. (Rs 100 is only 2 per cent of Rs 5,000). It is basically a useless unhealthy purchase, which one can easily buy at an outside bakery for Rs 30-40. But given that it feels like a very small part of the overall price, I simply go ahead and buy it.

The same stands true for the chocolate bars which supermarkets and large grocery stores tend to stock near their checkout counters. As Dan Ariely and Jeff Kreisler writes in Dollars and Sense: Money Mishaps and How to Avoid Them: “Supermarket checkout queues dare us to resist trashy tabloids and sugary sweets, using the same approach.”

This approach is also at work in hotel rooms where soft drinks which are placed inside the refrigerator in the room, are expensively priced. On a visit to Pune earlier this year, I paid around Rs 100 for a soft drink can which at that point of time was generally priced around Rs 30. My calculation was the same. The per day room rent was around Rs 5,000 and a charge of Rs 100 more wasn’t going to make a significant dent to it. Having said that, I would have never paid Rs 100 for a soft drink can, otherwise.

In fact, the same approach is at work in a restaurant, where soft drinks, water bottles and even bottles of wine, are more expensively priced. In fact, wine in a restaurant costs much more than in a wine shop.

As Ariely and Kreisler write: “It’s logical to pay more for the convenience of wine with dinner – we don’t want to take a bite, then have to run to our car to [take a ] swig… – but it’s also a tribute to relative versus absolute value.”

In all these situations we tend to find value in something, which we otherwise wouldn’t, by comparing it to the overall cost. Marketers make use of this and try to sell us things we wouldn’t have bought otherwise. This plays out almost every time one buys electrical goods like a washing machine or a refrigerator or a television or even a laptop.

The salesman on such occasions always tries to sell us something known as an extended warranty. This is a warranty over and above the one which is offered by the manufacturer of the product that we have bought. It is pretty much useless in most cases given that electrical goods these days tend to function well and rarely go bad.

But the pitch is that now that you are spending so much money, why not spend a little more and get yourself an extended warranty.

This approach is also at play when buying a car. As Ariely and Kreisler write: “Car dealers… know that when we’re spending $25,000, additional purchases, like a $200 CD changer, seem cheap, even inconsequential, in comparison. Would you ever buy a $200 CD changer? Does anyone listen to CDs anymore? No and no. But at just 0.8 per cent of the total purchase price, we hardly shrug.”

The overall point being that marketers are a devious lot and if there is a trick out there they can use to sell more, they are most likely to find it and use it. Beware!

The column originally appeared in the Bangalore Mirror on November 22, 2017.

 

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Demonetisation–The Unanswered Question

Time flies.

It has been one year since that fateful day last year, when prime minister Narendra Modi, suddenly announced that Rs 500 and Rs 1,000 notes, would be useless, in a matter of few hours.

Modi was lauded for this “brave” decision. In a country, where politicians do not like to take decisions, here was one politician who had decided to make one.

The trouble is that nobody told us on what basis had the decision been taken. Every decision, has consequences, especially a decision as disruptive as demonetisation turned out to be. And given this, there has to be some logic behind why the decision was made in the first place.

It doesn’t take rocket science to understand that if 86.4 per cent of the currency in circulation is made useless overnight, in a country where 80-98 per cent of the transactions happen in cash (depending on which estimate you would like to believe), the buying and selling of things is bound to crash. When economic transactions crash, it leads to a slowdown of the overall economy, which is precisely what happened in India.

As Jean Drèze writes in Sense and Solidarity—Jholawala Economics for Everyone: “For instance, a study by Nidhi Aggarwal and Sudha Narayanan… shows that mandi arrivals of non-perishable agricultural commodities crashed across the board within a week of demonetisation. The declines range from 23 per cent for cotton to 87 per cent for soybean.”

This happened because agricultural markets in India operated in cash and with no cash around, the farmers were in no position to sell what they had produced. The onion market in Lasalgaon (near Nashik, and India’s largest onion market) continues to face this problem, a year later.

Many informal markets crashed in the aftermath of demonetisation and haven’t been able to revive again. The growth of the non-government part of the economy, which forms close to 90 per cent of the economy, for the period April to June 2017, fell to a little over 4 per cent, in the aftermath of demonetisation.

On top of that the total amount of deposits with banks increased dramatically and because of that the interest rates crashed. This hurt many people (especially senior citizens) who depend on interest from deposits for their survival. It also hurt those who use fixed deposits to save for the long-term. At the same time, the fall in interest rates did not lead to an increase in bank lending. In fact, bank lending in the aftermath of demonetisation has crashed.

The question that remains is on what basis was the decision to demonetise taken? Was there any logic to it or was it just taken on a whim? The closest answer to this has come from Arjun Meghwal, a junior minister in the Modi government. He told the Lok Sabha in February 2017: “RBI held a meeting of its Central Board on November 8, 2016. The agenda of the meeting, inter-alia, included the item: “Memorandum on existing banknotes in the denomination of Rs500 and Rs1000 -Legal Tender Status.””

Meghwal passed the buck on to the Reserve Bank of India (RBI). A Right to Information query was filed with the RBI by a correspondent of the Press Trust of India (PTI). In the query, the central bank was asked to provide the minutes of the meeting in which the decision to demonetise Rs500 and Rs1,000 notes was taken. Over and above this, it was also asked to share its correspondence with the Prime Minister’s Office (PMO) and the Finance Ministry, on the issue of demonetisation.

The RBI replied: “The information sought in the query carries sensitive background information including opinions, data, studies/ surveys etc. made prior to the completion of the process of withdrawal of legal tender character of Rs500 and Rs1,000 notes… Disclosure of such information would detriment economic interest of the country from the viewpoint of the objectives sought to be achieved by such decision.”

Basically, the RBI refused to answer the RTI query. And a year later, we still don’t know on what basis was demonetisation carried out.

The column originally appeared in the Bangalore Mirror on November 8, 2017.

Success or Just One Thing After Another?

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Last week I finished reading an excellent book My Adventures with Satayjit Ray—The Making of Shatranj ke Khiladi. The book has been written by Suresh Jindal, who also produced Shatranj ke Khiladi (The Chess Players). Shatranj ke Khiladi was the only movie that Ray made in Hindi/Urdu and was based on a short story of the same name written by the great writer, Premchand.

Dear Reader, before you start wondering as to why am I talking about a film and a book based upon it, let me get to the point. Among other actors, the film also starred Richard Attenborough, who played the character of General Outram.

Attenborough went on to direct the movie Gandhi. Jindal, who had produced Shatranj ke Khiladi, also happened to be one of the producers of Gandhi. While, Jindal makes no explicit mention of how he got around to producing Gandhi, in this book, it is safe to assume that he and Attenborough got acquainted during the shooting of Shatranj ke Khiladi and then one thing led to another.

Many books are written on what makes people and projects successful. A lot of academic research is carried out as well. But very little of it concentrates on the chance part of it. Allow me to elaborate.

Jindal wasn’t an established Hindi film producer. He had produced one slightly offbeat movie Rajnigandha, which had become the sleeper hit of 1974. After this, he got the idea of making a movie with the great man Ray.

He approached Ray through his friend Tinnu Anand, who had been Ray’s assistant for five years. “”Tinnu, I have a strong feeling that Manik-da [as people close to Ray called him] will do a film in Hindi soon,” Jindal writes in the book. Anand, agreed. They approached Ray. And he agreed to direct a film, telling them: “Actually… I have been thinking of doing a film in Hindi.”

Now this wasn’t the first time that Ray had been approached to make a film in Hindi. Legendary Hindi film producers like Raj Kapoor, SS Vasan and Tarachand Barjatya, had approached Ray in the past to make a Hindi movie for them and he had refused.

Nevertheless, he said yes, to a rookie Hindi film producer, who had just produced one film before Shatranj ke Khiladi. If Ray hadn’t agreed, the film wouldn’t have got made. And if the film wouldn’t have got made, Jindal and Attenborough wouldn’t have met and possibly Gandhi wouldn’t have been made either.

Of course, there is another side to it. While, Attenborough agreed to act in Shatranj ke Khiladi, he also happened to want to make a movie on Gandhi. And he ended up meeting Jindal. What do they say about, being at the right place at the right time?

Gandhi was nominated for Oscars (the Academy Awards) in 11 categories and won eight of them, including best director, best film and best actor. It also had the rare instance of an Indian winning an Oscar (Bhanu Athaiya shared the Oscar for best costume design).

The larger point here is that a lot of success in life is about people meeting by chance and then going on to do great things. The trouble is that this aspect doesn’t get talked about at all, when analysing the reasons behind the success of a person or a project or a company or simply even an idea.

While, we do talk a lot about hard-work and planning and everything else, which are also necessary for success, we don’t like to talk about chance. And the reason for that is very simple. The moment we start mixing chance with success, it dilutes all the hard work and the planning that has gone behind the success. And that is why we don’t like talking about it.

The column was originally published on November 1, 2017.

India’s Real Estate Conundrum

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Economic forecasting is a difficult business. It is even more difficult when one has to answer something as specific as: “when will home prices become affordable?”

Almost, anyone interested in buying a home currently knows that home prices are expensive. This, despite the fact that homes aren’t selling, and builders are sitting on a large number of unsold homes. But, they don’t seem to be in a hurry to cut prices.

Conventional economic theory suggests that when something is not selling, prices need to be cut, to attract prospective buyers.

But this does not seem to apply in the case of Indian real estate. Why? In the period between 2002 and 2012, real estate prices in India went up at a break neck speed. A significant portion of the real estate transactions was carried out in black.

Hence, while buying a home 20-30 per cent of the price had to be paid in black (i.e. in the form of cash). The money that the builders made in this form, has ensured that they continue to be liquid i.e. they have enough cash going around to meet their day to day expenses.

In the process, they are in no hurry to cut prices. But builders are not the only one who have a stake in this real estate game. Over the years, many individuals have become real estate investors as well. ”

Real estate returns across the country have either been very low or in negative territory, over the last few years. Also, once we take the risk involved in owning real estate and inflation, into account, investing in real estate starts to make financial sense only when the returns are greater than 10 per cent per year. Now that kind of return has been elusive on this investment.

Hence, the question is why are real estate investors holding on to the homes they bought as an investment, even when that investment is really not throwing up any return. It would simply make more sense for them to sell the home and invest the money somewhere else. Even something as simple as a fixed deposit is likely to earn more.

But before we figure out why these investors are not selling, let me tell you a little story. Recently, I was in Bali for a small family holiday. I wanted to buy a wooden carving, which I had taken a fancy to. The seller’s asking price was 6,00,000 Indonesian rupiah (around Rs 3,000). I started at 2,00,000 rupiah (Rs 1,000) and stuck to it. The seller kept dropping his price, till he came down to 2,50,000 rupiah (Rs 1,250).

After that we kept haggling for a good five minutes, but he stuck to his price. He wouldn’t drop it further, come what may. He had become “anchored” to that number, due to some reason. And this anchor ensured that finally I had to up the price I was willing to pay to 2,50,000 rupiah and seal the deal.

Anchoring is a very important concept in real estate. In his book A Man for All Markets, Edward O Thorp writes: “Anchoring is a subtle and pervasive aberration in investment thinking. For instance, a former neighbour, Mr Davis (as I shall call him), saw the market value of his house rise from his purchase price of $2,000,000 or so in the mid-1980s to $3,500,000 or so when the luxury home prices peaked in 1988-1989. Soon afterward, he decided he wanted to sell and anchored himself to the price of $3,500,000.

Mr Davis became anchored to this price of $3.5 million. The trouble was that home prices started to fall pretty soon. But Mr Davis had become anchored to the high price and he wouldn’t sell.

The Indian real estate investors are going through a similar phase right now. They are anchored on to the high real estate prices they saw nearly five to six years back. The trouble is no buyer is willing to buy at that kind of price.

In fact, this psychological dimension in real estate, makes it even more difficult to predict, when home prices will become affordable, despite it being very clear that real estate prices are due for a huge correction.

The column originally appeared in Bangalore Mirror on October 25, 2017.

The Problem With Rs 10 Coin

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It costs Rs 60 to cross the Bandra-Worli sealink in Mumbai. If you pay for this using a Rs 100 note, chances are you will get four Rs 10 coins in return, as change. These coins tend to make the wallet a little heavy, hence, whenever I order food, I tend to tip the delivery boy using these coins. At least, I used to do this, until very recently.

Whenever I tipped the delivery boy using Rs 10 coins, I got a weird look back. This happened multiple times, until I came up with an explanation for it. Coins just don’t feel like money earned. They feel more like small change. Paper notes feel more like money. And this I thought led to the weird look from the delivery boys.

Last week I was in Visakhapatnam and was simply roaming around the city, until I saw a paanipuri (also referred to as phuchka, golgappa etc., in different parts of the country) stall. I ordered one plate of paanipuri and handed over a Rs 10 coin to the stall owner. He refused to take it and asked me to give him a Rs 10 note.

While, people had refused to take torn notes before, nobody had ever refused a coin.

This was the first time. I got talking to the stall owner and tried telling him that the coin was issued by the government and there is no reason he should be refusing it.
He told me that many Rs 10 coins were nakli (counterfeited) and hence, people don’t take them. Anyway, I handed him a Rs 10 note and walked back to my hotel.

As I was walking back, I wondered, why would anyone in their right mind, take the risk of counterfeiting a Rs 10 coin. Given the risk involved, it just did not make any economic sense. If anyone wanted to counterfeit, it simply made sense to counterfeit the highest denomination note, which happens to be the Rs 2,000 note.

On the social media, I was told that many people believe that Rs 10 coins are counterfeited and hence, they refuse to accept it. It seems, the ministry of finance, which is in charge of minting coins, has introduced Rs 10 coins of different designs. Like there are Rs 10 coins with the rupee symbol as well as without the rupee symbol. This has created the confusion among people.

This also brings us to a more important point regarding fiat money. In an earlier era, money used to have a value on its own. Metals like gold, silver, copper and iron, were money at different points of time in history. So, were agri-commodities like rice, salt and tobacco. In fact, tobacco was money in large parts of United States, longer than gold was.

This started to change around the time of the First World War. Since then the world has gradually moved towards paper money, or a form of money which the government decrees as money, which includes coins as well. A Rs 10 coin has a value of Rs 10 because the government says so. If you were to melt it and sell the metal(s) it is made of, you will not end up recovering Rs 10.

But at the same time, the government decreeing a coin to have a value of Rs 10, is just not enough. People should also be ready to accept it.

As Charles Wheelan writes in Naked Economics—Undressing the Dismal Science: “Rational people refuse legal tender because they believe that it might not be accepted by someone else…The whole bizarre phenomenon underscores the fact that our faith in paper currency [coin in this particular case] is predicated on the faith that others place in the same paper.”

Hence, in order to restore this confidence it is important that the government and the Reserve Bank of India, communicate regularly on this issue, and tell the people that all is well with the Rs 10 coin.

The column originally appeared in the Bangalore Mirror on October 18, 2017.

 

The Orwellian Economics of Modi Govt

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Almost, every other day I get an email or an sms from banks asking me to link my accounts and my Aadhar number.

The email typically says: “The Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules 2005”) have been amended with effect from June 1, 2017 to require Aadhaar for every bank account. All existing Bank accounts have to be verified with Aadhaar by the banks by 31st December,2017, failing which the accounts will become inoperative.”

At the same time, a mobile phone company also sends out reminders at regular intervals asking me to link my phone number with my Aadhar number. The couple of times I visited their office in the recent past, I have been reminded of the same.

The last time I logged on to an airline website to carry out a web-checkin, I was asked for my Aadhar number, though this was optional.

When I applied for an ISBN (International Standard Book Number) for my last book, I was asked for my Aadhar number. An Aadhar number is now required for access to a whole host of government welfare programmes. The idea is to ensure that only those who genuinely qualify for the programme have access to it.

On the whole, the idea seems to be to use Aadhar to identify those people who are not paying their share of income tax, by figuring out their spending patterns.

On August 23, 2017, a notification was introduced which brought jewellers with a turnover of more than Rs 2 crore, under the Prevent of Money Laundering Act.

The limit for reporting transactions under the Act is at Rs 50,000. Basically, anyone using cash to buy gold jewellery over Rs 50,000 had to show his or her PAN card. Before this, since December 2015, anyone buying gold above Rs 2 lakh, had to show a PAN card.
With the August notification, the limit for showing the PAN card was lowered from Rs 2 lakh to Rs 50,000. Recently, the August 23 notification was rescinded. In doing so, the limit till which gold could be bought in cash without providing any identification jumped up again to Rs 2 lakh.

This, brings multiple questions to the fore. First and foremost, when every bank account holder needs to link his bank account to the Aadhar number, why doesn’t the same rule apply to anyone buying gold using cash. When every mobile phone user is being pestered to link his mobile number to his Aadhar number, why doesn’t the same rule apply to anyone buying gold using cash.

If it is important to clearly identify bank accounts and mobile numbers, it is also important to clearly identify who is buying gold. The question that arises here is that who buys gold in cash.

As the report titled A Study in Widening of Tax Base and Tackling Black Money produced by the business lobby FICCI points out: “The black money holders invest in bullion and Jewellery to protect the value of their black money from inflationary depreciation. Cash sales in the gold and Jewellery trade gives the buyer an option to convert black money into gold and Jewellery, while it gives the trader the option of keeping his unaccounted wealth in the form of stock, not disclosed in the books or valued at less than market price.”

The point being those who have black money like to buy gold in its various forms, using cash. If cash sales of gold need to be attacked it is important that some sort of identity of the individual buying gold be established.

Nevertheless, the Narendra Modi government doesn’t seem to think like that. Different rules for different people. As George Orwell writes towards the end of his brilliant book Animal Farm: “There was nothing there now except a single Commandment. It ran: All animals are equal but some animals are more equal than others.”

The column was originally published in the Bangalore Mirror on October 11, 2017.

Why Most Cars Look the Same

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A few days back I was at a friend’s party. I was introduced to other men at the party and soon they were all talking about the latest cars to hit the market. This basically played into the stereotype of putting four men in a room and once they are done talking about their jobs, they will be talking about cars.

I find it difficult to be a part of any such conversation because my ability to differentiate between two different car models is fairly limited. Well, I can differentiate between small cars and sedans, and less expensive cars and more expensive cars, but that is where it all ends. Of course, I do recognise the Mercedes Benz logo.

And to be very honest, the only two cars that I can confidently recognise at any point of time are the Ambassador and the Premier Padmini (better known as the Fiat). Both these cars aren’t produced anymore.

This inability to recognise car models gets me into a problem while coordinating with app based cab services. So, unlike others who keep a lookout for the model and colour of the car, I keep lookout for the number of the car.

For a long time, I felt that I was one of the few people who thought that modern cars look very similar. It turns out I was wrong. Cars that are produced these days do look the same. In his book Scale—The Universal Laws of Growth, Innovation and Sustainability in Organisms, Economies, Cities and Companies, Geoffrey West, talks about how different the 1927 Rolls-Royce and the 1957 Studebaker Hawk were from the “relatively boring-looking 2006 Honda Civic or a 2014 Tesla”. The modern cars might be far superior machines than the cars made earlier, but it is difficult to differentiate one from the other, unless you are really into them.

What has happened here? As West writes: “It represents the transition from a primitive trial-and-error, rule-of-thumb approach that served us well for thousands of years towards a more analytic and principled scientific strategy for solving problems and designing modern artifacts ranging from computers and ships to airplanes, buildings, and even companies… Sophisticated computer analysis are now central in the design process… The phrase “computer model” is now an integral part of our vocabulary.” It is also used to design cars.

This has led to an unintended consequence, something which wasn’t really planned for but has happened and become a part of our lives, without us really realising about it.

As West writes: “One of the curious unintended consequences of these advances is that almost all automobiles, for example, now look alike because all manufacturers are solving the same equations to optimize similar performance parameters. Fifty years ago, before we had access to such high-powered computation and therefore less accuracy in predicting outcomes, and before we became so concerned about fuel performance and exhaust pollution, the diversity of car design was much more varied and consequently much more interesting.”

The point being that most companies that produce cars are using more or less the same science to produce it, and given that most cars now look more similar than they did in the past, when trial and error was a part of the solution. Now, it isn’t.

As a result, what we have now are much superior machines, but their sameness makes them all so boring to look at. And cars, after all, aren’t all about acceleration, though some people may not agree on this.

The column originally appeared in the Bangalore Mirror on October 4, 2017.