Reviewing the Year 2020 albeit belated.
MY LEARNINGS OF 2020
Have you ever entered into a deal where your counterpart did not have his/ her skin in the game? Simply put did they benefit or lose in the same proportion as you did? If yes, they had their skins in the game. No, if they didn't. To illustrate, On behalf of my company WeCarePg in 2019 I signed a contract with an Indian database co. named JUST DIAL LTD for recommending my business to potential student tenants. The deal was critical to fill up almost a dozen premium vacant beds. Since the business is located off-campus and does not serve the main campus, we enquired with the sales rep if his co. had premium leads for our business area. The reply was in the affirmative and we were doled out the main campus leads in freebies to sweeten the deal. We took it and paid 35000/ bucks for a quarter. The monthly payment option was not given. The Plan failed miserably as the business did not get a single potential lead. Numerous follow-ups with the co. went in vain. Nor did the sales rep take phone calls. The money and effort lost but 2 v. important lessons learned 1. Never pay the entire amount upfront to a service provider for they will not have their skin in the game. 2.In negotiations, if the salesperson. behaves altruistically, dump him there, and then. There isn't any free lunch. And since most businesses are short-sighted, short-term top and bottom lines trump customer retention. System of Skin in the game is a must to keep human hubris in check.
THE HAMMURABI LAW
This is one of the most important Greek codes of conduct. If a building collapses killing its occupants, the builder is sentenced to death too. This law is critical to enforce contracts on which modern life runs and functions To illustrate more real-life ex. Government employees, its corporations, Mutual fund managers, Car workshops, and many more. They do not have their skins in the game as their system is so by design. Rarely do you see a government engineer punished if a building collapses or a fund manager suffering a salary cut for blowing away the client's money or underperforming the markets. If Greeks needed to enforce it 38000 years ago, the complexity of modern life mandates the application of the Hammurabi code in utmost rigor. There is no optionality. The only thing here is randomness and how to navigate it successfully. Hammurabi law is great in so far it establishes a code of conduct for symmetries in transactions between people so that nobody can transfer hidden tail risks( a rare event of very high impact) in a complex system.
POSITIVE CONVEXITY BIAS
Most things in life strike us in convex or concave( negative convexity as we may call it) ways. If it is favorable it is convex else concave. To illustrate again, an options trader X infers from charts that the price of Crude oil will fall big. He shorts 4 lots of crude oil with a stop loss to sell if it goes up. The stop loss is triggered and he suffers a small loss of 1or 2percent of his total capital. He revisits his charts and again sells 4 lots with a deeper stop loss. Again the same result. He repeats it and this time the crude falls as he saw it in the charts and he nets huge gains equal to 15 percent of his impaired capital. This is Positive Convexity Bias. Downside low Upside is huge. To reap this bias reward you have to be antifragile to small losses. Another example, if you are lifting weights intermittently you are suffering bodily pain and muscle failure. Post lifting, you are dead as a dodo. But over time, after a cooling period of a week to ten days, your muscles become much stronger and fitter than when you started. Here too, you should be antifragile to small pain of weight training to reap its positive convexity bias. Its mathematical illustration is called Jensens Inequality that I will discuss in a later blog.
Another very vivid example is the latest Indian fad of Graduating business students opting for MBAs immediately. The obvious reason is the huge income disparity. Many families go down in debts to fund it. Post-MBA, the majority is placed at average salaries as they are raw and companies train them to suit their business objectives. Anybody can be trained and with due respect, most of them are bright students but not irreplaceable. Contrast it with say a Grad Girl A who instead takes a job, invests 5 years, earns while she learns the practical business, grows daily to become an expert in her domain. She joins a part-time MBA and funds it with her savings. With 7 years of work experience and a master's degree in her domain under her belt, she has created a strong personal monopoly. Her income increases exponentially and she trumps all her peers.. This is a positive convexity bias. She subsisted on a low salary for 7 years but was antifragile to gains that instant MBA would bring her. The debt was also averted. This is known as the Elementary convexity bias ie Confusing the properties of Average of Something( Average salary of fresh MBA)) with the properties of Convex function of something( here extraordinary earning Of girl A due to her monopoly coupled with an MBA.). You can use this inherent bias to profit big time in all spheres of your daily lives by practicing it mindfully. Be an OUTLIER.
NEGATIVE CONVEXITY BIAS
Now, this is another endemic bias and if you understand it you can be insulated. Let us say you are offroading in Jungle in 4X4 and you encounter a river. This is on Average only 2 ft deep. Will you cross it? I bet you wont coz the river could be 4 to 5 feet in depth at some point. You are fragile to it and this is Negative Convexity Bias. In fragile systems like Airlines Industry, City traffic, Big projects there is huge pervasive Negative convexity. Hardly does a flight reach its destination hours ahead of its scheduled arrival or how often do you reach your office ahead of time while driving? Averages are, redundant in decision-making here too.
MULTIPLE ORDER EFFECTS
This brings the discussion to the cadence of decision making in terms of Multiple order effects. When you are fragile to traffic jams, or an under-construction highway, or are traveling to Chicago from Newyork for an important business meeting, you cant decide on averages. You have to account for huge Variance while deciding. Jams can ruin your meeting, a deep spot in a river can drown you, Covid induced lockdowns in poor countries like India can ruin the economy and teeming millions. Most are naive to think about Multiple order effects of decision making .and probably it is in human biology. Negative convexity bias is formidable and can be averted with mindfulness. Learning to think in multiple order effects is a life-changing experience for me and near dears.
I shall continue in the next blog
Many Many thanks for reading me and If I add value do message me@
Neerajmahajan0770@gmail.com
Photo Credit by Samuel Reagan- Asante on Unsplash
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