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Saturday, January 28, 2006

Coaching Classes - A prisoner's dilemma this

Seeing full page advertisements of various coaching classes in newspapers reminds me of game theory and how in a classic prisoner’s dilemma, players with no collusion (tacit or otherwise) end up in way below optimal equilibrium.

The way this coaching class business works is this, advertisements are released driving home the point of how crucial even a single point is in this competitive world. Poor parents, have no option to opt in to these classes as they see their neighbors’ doing the same. They can’t be seen to be the one’s who don’t invest for their child’s future. The fact of the matter is that when everyone around you is going into these classes, a given parent has no option as his child is the one left behind then.

However, the irony is that it is not the absolute level of points scored that makes the difference but the relative level. Given that number of seats available in a given college is fixed, if the average points scored by the students increases, that makes no difference to the possibility of a student getting admission. What matters is where he lies relative to other applicants. Thus if all the students go to coaching classes for increasing their score, it makes no difference as long as the relative ranking does not alter, however if only some of them go to these coaching classes then the relative ranking changes (assuming of course that coaching classes and marks are at least slightly positively correlated) and thus a given particular parent has to enroll his/her child into a coaching class – a classic case of prisoner’s dilemma

Now you may wonder why I am singling out coaching classes. Surely this logic applies to schools also and to quite simply students studying. If all students collude and decide not to study at all, then things become quite different.

Let me clarify, I am not against coaching classes. But I am someone who believes that incremental thinking/approach taken to far leads to ridiculous situations like the one with coaching classes. Imagine a child of class X or class XII. He spends the better part of 12-14 hrs of a day in school/college, coaching classes etc. Then he further has to take practice tests. So, on an average he is doing nothing but study for 15-16 hrs a day and he is 15-16 years old! And on top of that at the end of the day, this does not put him in any greater advantage than when all the students were spending only half amount of the time. There are far better and important things for a child of that age to do than read text books, take notes and write exams. What a waste of youth this, what a waste...

However we cannot do anything about this. Every incremental hour a child spends in a coaching class can be justified and it increases his/her chances of success (success not in life but in getting admission to a better college/university). However when we compare the situation we find we are in today with what the ideal situation should or can be, we can see how far we have come and how little good all this is doing to our youth.

What’s the solution? Well, there ain’t one. May be if we have plenty of very good colleges/universities we could control the problem slightly, but I doubt it. Regulation through legislative action or otherwise would do no good and in fact raise public outcry against the action. All I can say is that I am extremely happy to not to have found my selves in that situation when I was of that age. The credit certainly goes to my parents as well, who did not want to push me into that rat race (whether by design or accident is immaterial). And I am not in too bad a position professionally to think that I lost something by not being in the top colleges!

That’s it for now….

Friday, January 27, 2006

Naive People

This continues to amaze me. Whenever I see any discussion or any talkshow or read any article, we seem so fixated in talking about how things should be, how people should behave. The talk always is that people should not do this, it is wrong or its immoral or its unethical or that it is not in the interest of society at large etc etc.

To me this sounds a lot like a bunch of zebras talking about deciding how/when/where tiger's should hunt or plants discussing things like how much sunlight they should get, how much rain should be there etc... (I agree that I am exaggerating things) but what we are doing is equally absurd.

I have found it ridiculous on the part of people to think in terms of how others should/should not behave. In fact people should think in terms of how a person is likely to behave and adjust one's behavior accordingly. It is far easier and efficient to think this way.

So, how do people behave? Simple, if there is an incentive to behave in a particular way, people would behave in a manner to exploit that incentive to their advantage - even if its immoral, unethical or not in society's interest. Sure there would be some people who would not behave in that manner as for them the ethical/moral consequences far outweigh the benefits of that action/inaction - but rest assured there will be a sizeable number of people who would behave the other way.

What are the implications of this? I don't believe or assume that there is anybody out there to do me a favor at his/her expense. People are out there to make ensure that their benefits are maximised and if in doing so, some good happens to others then thats fine. People are selfish, they are out there to further their aims/objectives at the expense of others and thats what I (and others need to) assume when evaluation any action of others.

The biggest lesson for us as a society is that whenever you are designing a system, you cannot leave anything to a person's goodwill or goodfaith. You have to either ensure that there are no incentives for him to not behave in a manner expected of him and if there are you have to make the costs of doing to exceed the potential benefits. You do so by having strong penalties and a strong detection rate (which is what we severly lack).

A simple example of how system can breakdown when we don't ensure this can be had in my previous post 'The Demolitions Must Continue'

That's it for now....

Sunday, January 15, 2006

The Demolitions Must Continue

Recently we have seen the courts order demolition of illegal structures in Ulhasnagar near Mumbai and in Delhi. The politicians (across party lines) as usual without going into the merits of the case are busy putting together ways and means to save these structures.

Firstly, let me admit that if indeed the court orders are followed (i.e. there is no appeal or there is no legislative process put in), then it would cause immense hardships to the people living/conducting business in those structures. Imagine one fine day someone comes and pulls down your house, its not a pretty situation to be in. Hence, the reaction of the politicians is entirely understandable.

However, notwithstanding the immense loss it would cause to lots (thousands of people, considering that in Ulhasnagar alone more than 800 buildings have been ordered to be pulled down) I think that these buildings be indeed brought down and not a single rupee in compensation be paid to these people in any sort by the government. Am I being harsh, insensitive, maybe - but thats what is needed.

Here is the way I see this situation. Illegal structures, encroachment on reserved lands, roads etc is not something unique to either Ulhasnagar or some areas of Delhi. It is common knowledge that this is a malaise which pervades the entire country. Given this backdrop the question to be asked is why are we in this situation?

And the answer is simple, most of the people involved in this menace know it perfectly well, that what they are involved is illegal. However they still proceed with their operations - why? becuase they assign a very low probability of their being caught and if at all they are caught, they assign a low probability to the actual costs they would incur. Thus simply, the benefits of violating the law exceed the costs associated with getting caught.

Thus the only way to get out of this situation is to increase the costs associated with this illegal operation. This involves, making detection of such people much more liklier and further having detected, making them pay more heavily.

And our experience in doing so is pathetic. We periodically see what happens with slum demolition. The cut off date for grandfathering existing slums gets pushed ahead every few years with the effect that allows new slums to be set up, a few years later and an agitation or two will get your slum grandfathered and you are protected.

A similar problem exists with black money. No one argues that there is tremendous amount of black money in the country. But every few years we get a 'Voluntary Disclosure of Income Scheme' or a clone of its where by evaders of tax can declare their black money and get away paying significant low amount of fines and penalties. What does this do? Well, its an open invitation for people to continue to evade taxes, hide their wealth and a few years later disclose it in some scheme and get way vietually scot free!

The problem lies not in the fact that we don't have laws, the problem lies in the fact that no body believes in their implementation. No body believes that when the law says that you should not do this, people who actually do so will actually be dealt with.

In my view, if there is a serious problem pervading in the country, then to get rid of that problem one needs to do two things. Punish the perpetrators of that crime disproportionately and secondly make the punishment as public as possible. What this would do is that it would raise the stakes of breaking the law in the minds of those others involved. Yes, it is harsh on those who get caught and get disproportionate and public treatment. It may be humiliating also, but thats a small price to pay at the country level to get rid of a problem.

Its game theory at work here and as protectors of law one is playing a simple game with those breaking the law. You have to play the game strategically and work on their mind.

However, in this case, just bringing down the structures will be just the beginning. The people who have built these buildings are in a sense at the bottom of the pyramid and are the least at fault. If the only way you could do business is by violating the law and thats the way everyone around you is doing business, then its 'rational' on your part to violate the law.

Thus the real people, the contractors, the architects and the politicians must be caught and treated in the similar manner described above - punishment must be disproportionate and public. Thats the only way you can raise the stakes of breaking law!

Thats it for now...

Saturday, January 07, 2006

Here we go again...

It's that time of the year again. Union budget is just under two months away and the pink papers have already started their 'crystal gazing'. I have observed over the last 4-5 years that leading into the budget the media (and pink papers in particular) go into a crystal gazing spree and try and predict the contents of the budget proposals.

Things go to such an extent that at times one finds two different newspapers carrying two opposing stories of what the finance minister is likely to announce. Almost all of the times these stories are carried prominently by them on the cover page and almost all of the times, they get it wrong.

The mad craze amongst the newspapers to publish these stories is really ludicrous. At times their stories contain proposals which I am sure the finance ministry would not even consider in their wildest dreams. A similar story appeared yesterday in one of the newspapers regarding exemption for interest on bank deposits etc. So the season has begun.

I have two possible explanations for this mad craze. Firstly, I don't believe that these stories are what they claim to be. The information I am pretty sure does not come from 'genuine' sources within the finance ministry. My first possible explanation is that the source is actually interested groups lobbying indirectly for/against a particular proposal under the garb of a news item and getting it published as such. The second possible explanation is that, the news stories appear based on incomplete information and are then exaggerated purely to make it attractive and make the publication/program sell. The logic would be that if they don't do this, other newspapers/media would and thus the newspapers/media are locked in this zero sum game in which every party publishes rubbish stories just because if they don't someone else might (by the way, this logic is not restricted to budget alone).

On my part, I do enjoy reading these stories; they are a good source of having a nice laugh early morning and start your day!

On a serious note, my advice to the newspapers is to just apply their mind (simple commonsense would do) before they carry such stories. In their haste to be first to inform the reader, they run the risk of losing credibility in the market place. And if that happens (it will not happen overnight, but it will over the long term), regaining credibility would be a very costly (both in terms of money and time) affair.

Remember that if you are reporting on non-frivolous matters (certainly matters pertaining to business, finance, government policy etc can reasonably be assumed to fall under this category), then credibility is everything and you will first lose it amongst your most profitable customers. Now, if you are a tabloid publication and not a serious media (nothing wrong in that, I am not at all implying one is better – both have their own places) even then, I am sure consumers in the long run would not want to read a magazine or paper which gets some of its most important stories wrong.

That's it for now...