Tag: business and economy

Allison Schrager is an economist and award-winning journalist who has spent her career examining how people manage risk in their lives and careers. Stepping away from the stock market and other financial institutions, Schrager shares the real life (an often unusual) places she learned about risk;

Whether we realize it or not, we all take risks large and small every day. What most of us don’t know is how to measure those risks and maximize the chances of getting what we want out of life.

In An Economist Walks into a Brothel, Schrager equips readers with five principles for dealing with risk, principles used by some of the world’s most interesting risk takers.

Here are five essential rules from the book, to follow when undertaking any sort of major risk!

Rule 1- No Risk No Reward

‘Risking loss is the price we pay for the chances of getting more. But there are ways to maximize your chance of success. The biggest mistake people make when they take a risk is not having a well-defined goal. It may seem counterintuitive but the best way to define a risky reward is to start by defining the opposite of risk, whatever is risk free.’

Incredible Risk Taker

Kat Cole, COO of Focus Brands who own Cinnabon and Auntie Anne’s made a name for herself by popularising the Minibon and driving up sales exponentially. As sales of the full-sized cinnamon roll dropped owing to increasingly health-conscious consumers, the executive team became too focused on launching an-artificially sweetened option that just wasn’t yummy enough! Kat succeeded as she identified the goal clearly— ‘increase sales in a changing market’ rather than fixate on a low-calorie option and hit upon the lowest-risk option by expanding the small-size roll in all franchises!

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Rule 2- I am irrational and I know it

‘We want to think we are rational beings. And for the most part we are. But perhaps the most obvious place to witness our irrationality at work is when we make a risky decision. Our feelings about loss vs, gains can lead us to make decisions economists think are irrational. By knowing yourself, how to gauge risk, and your natural response to potentially losing , you can make better risky decisions.’

Incredible Risk Taker

Professional poker champion, Phil Hellmuth has ADHD and is highly emotional, generally not helpful qualities for a poker player. However he is considered one of the world’s best players, has won a record number of World Series of Poker gold bracelets and is worth $20 million. Hellmuth realized early on he had to overcome his own behavioural quirks, ‘I guess what it all meant was that I needed to have the discipline of a monk if I was to succeed in poker. I need to exercise patience relentlessly and to allow no negative emotions to affect my mood.’

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Rule 3-Get the biggest bang for your risk buck

‘Risk is the price we pay to get more, and just like anything else in life, there is no need to pay more for something than you have to. Financial economists consider unnecessary risk inefficient. They argue you can achieve more efficiency through diversification. The result is the same, or greater, reward for less risk—a bargain indeed in risk terms.’

Incredible Risk Taker

Harry Markowitz, an economics doctoral student set off a revolution in financial thinking, shifting the focus from return to risk in the financial market. He discovered that people often end up taking unnecessary risk when we try to pick only winners.. Markowitz argued that diversification—owning lots of stocks of different risk characteristics that offset each other was how investors could create efficient portfolios.

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Rule 4-Be the master of your domain

‘Risk management is how we can stack the odds in our favour. We can do this in two different ways-hedging and insurance. When we hedge we give up some of our potential gains in exchange for reducing the chance of loss; in statistical terms it cuts off the upper and lower tails of risk. With insurance, we pay someone else a fixed amount to take on our downside and we still keep the upside.’

Incredible Risk Taker

David Bowie is both a brilliant musician and a risk tactician.  In his 50s, advised by David Pullman he made a deal with EMI to re-release his catalog, between 1969 and 1990 valued at $100 million, and was guaranteed more than 24 per cent of the royalties on wholesale sales in the US.

They then securitized these royalties through the Bowie Bond! Prudential paid $55 million for 7.9 per cent payment on their principal for fifteen years. These interest payments were financed from the income generated by Bowie’s pre-1990 albums. This was a hedge because Bowie took $55 million to forgo his payments for fifteen years, but successfully managed his risk in a changing music industry.

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Rule 5-Uncertainty Happens

‘We might make calculated choices based on data based probability measures, it’s the best we can do 90 percent of the time. But how do we deal with the other 10 other cent or the Knightian uncertainty, which is the risk we can’t predict. But it is possible to plan for the unplannable. It often comes down to managing the risk you can imagine and retaining just the right amount of flexibility for the unexpected.’

Incredible Risk Taker

Captain H.R. Mc Master, who led the Eagle Troop in the decisive battle of 73 Easting in the 1991 Gulf War says that centralizing command shows an overconfidence in certainty. Preparing for uncertainty needs extensive training and practice so that soldiers have the confidence to make decisions on the fly and think creatively in stressful situations.  This kind of flexibility may come at a cost but is the most effective way of dealing with uncertainty.

Read An Economist Walks Into a Brothel to understand the principle of risk-taking in everyday life!

On 1 July 2017, Goods and Services Tax (GST) became a reality. The government hailed it as the biggest tax reform of independent India which would herald a new freedom for the nation and unify it with ‘One Nation One Tax’. Some of the claims made by the government were that GST would bring about ease of doing business; increase tax collection; lower inflation; increase GDP growth by 1-2 per cent; and check the black economy.  More than a year later, we have more questions than answers.
Why did the economy slow down? Is the government likely to collect more taxes? Why have prices continued to rise? Why has Malaysia withdrawn GST?

It turns out that problems with GST are both transitional and structural. To correct for these there have been a few hundred notifications and orders from the government which have added to the confusion.
In Ground Scorching Tax, well-known economist and India’s leading expert on the black economy, Arun Kumar systematically and lucidly explains the reality behind GST, demystifying this complex tax for ordinary citizens.

Known for not pulling any punches, the author explains why GST is truly a ‘ground scorching tax’ and  a double-edged sword for the common man, why it will increase inequality across sectors and regions, why it will hurt small businesses – everything the government does not want you to know.

He also proposes an alternative which will convert this tax into a `Ground Nourishing Tax’.

Read on to learn how the common man is affected by the ‘Ground Scorching Tax’

The unorganized sector employs the vast majority of the workforce so the setback caused to this sector by the GST renders a large number of people unemployed and lowers the overall real wage rate

GST and digitization accelerate this ongoing process of marginalization of the unorganized sectors. As pointed out in the previous section, marketization marginalizes the weak in the market—it favours the large over the small businesses. While in economic terms this may seem to be ‘efficient’ with growth being fuelled by the large scale sector, it leads to growing inequality which has political and social implications. Since it is the unorganized sector that employs the vast majority of the work force, any setback to this sector leads to growing under employment and crisis in the lives of these people. With the growth of the organized sector, while wage rate may rise, employment available declines since the large and medium sectors are far more automated than the small sectors. Thus, the overall wage received by workers would fall. The purchasing power of those employed in the unorganized sectors and of workers as a whole would decline. (p. 186)

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Small businesses are financially affected by not being able to receive or offer Input Tax Credit.

The concern for the small suppliers led to their being exempted from registration under GST. So, suppliers with turnover of up to Rs 20 lakh have been exempted. But they will not be able to get input credit (ITC) and if they sell to any other business they cannot offer ITC. A very big disadvantage indeed. Similarly, those with a turnover between Rs 20 lakh and Rs 1 crore will fall under the Composition Scheme and will neither get ITC nor be able to offer ITC. They would also not be able to make inter-state sales. Further, the tax that they should have paid under GST but did not pay since they are exempt will have to be paid by the business purchasing from them. This is the reverse charge mechanism (RCM). Thus, the purchasers’ cost would go up. (Pp. 103-4)

(Subsequently, due to changes announced, units with turnover up to Rs.40 lakh are exempt from registration and the limit for Composition Scheme has been raised to Rs.1.5 crore)

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Some of the GST rates are higher than the rate they were paying under the earlier system which has increased prices and expenses for the common man

The GST rate on goods and services have been fixed close to the rate they were already paying under the old regime. So, if some good was being taxed at the rate of say, 15 per cent then it was moved largely to 18 per cent under GST. Most services were at the rate of 15 per cent and that has increased to 18 per cent. This has proved to be inflationary. (p. 104)

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Since indirect taxes are applied on goods and services consumed, they affect all sections of society unlike direct taxes which are collected from those who are well off and can afford to pay it. Indirect taxes are also regressive as they typically result in the impoverished sections paying a greater proportion of their income then the well off. The overwhelming focus on GST and indirect taxes as opposed to direct taxes is antithetical to the interests of the common man.

It was argued that indirect taxes are stagflationary while direct taxes are the opposite and hence more desirable. Thus, it would have been more desirable for the nation to collect more of direct taxes than indirect taxes. In 2005, the UPA I government had also talked of the need to introduce the direct tax code (DTC) to reform direct taxes. However, little headway has been made in that direction. The emphasis has been on GST and collecting more of indirect taxes—indicating a political bias. It was also shown that indirect taxes tend to be regressive while the direct taxes can be progressive. Thus going for more collection of indirect taxes increases the regressive component of India’s tax system. It also does not put greater pressure to tackle the black economy and collect more of direct taxes. Again this benefits the elite sections of society. They can continue to earn large sums of incomes through the black economy on which they do not have to pay taxes. (p. 172)

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 The local bodies have been deprived of their sources of revenue from taxation under the new regime.

As some of the important sources of revenue of local bodies (like Octroi and entertainment tax) have been absorbed in GST, they needed to be also provided with independent source of revenue. This has not happened. There is no mention of devolution to the local bodies. It is not clear whether the Centre or the states are to pass on a share of the resource. (p.190)

In Ground Scorching Tax, well-known economist Arun Kumar explains the reality behind GST.

An exhilarating manifesto for the future, Leapfrogging to Pole-vaulting by Dr. R.A. Mashelkar and Mr. Ravi Pandit convinces readers to make the shift from reactive leapfrogging to proactive pole-vaulting through radical transformation.

Here are a few pole-vaulting ideas which pose as an example for further development with challenges relating to energy, environment and employment – the 3Es, in India:

One of the most important aspect of pole-vaulting is to not better a sector in order to compete but to genuinely feel the need to develop the sector for a better future. One of the example for this is the White Revolution in India which ended up providing better means of earning for small farmers and milk producers. As in the formation of AMUL where technological improvements of storing and increasing the milk production also played an important role, India needs more of such efficient initiatives in order to generate an all-round development.

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With the advent of new-age technological developments today’s common man has come a long way to living a better life as compared to that experienced by the Kings and Queens of the olden days. One such example is the establishment of Uber in India. It has resulted in creating more job opportunities. Such innovative ideas not only help with significant decrease in the fuel consumption per capita but also help in reducing the impact of vehicular pollution on the environment.

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One of the main reasons for air-borne health problem in rural India is due to the domestic burning of biomass for cooking purposes in such areas. However, the introduction of electricity on these areas has essentially followed a decrease in kerosene and the polluting biomass-fuel consumption. Thus, the replacement of such methods with clean energy resources could further reduce the risk of high pollution levels in the country.

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There is a dire need of alternate sources of clean energy in India. The government could be a great tool in influencing a boosting an innovative and an energy efficient idea. A good example of this is India’s Unnat Jyoti by Affordable LEDs for All (UJALA). While it was a market-driven initiative, the valuable support from the government has lead it to result in reduced carbon emissions and brought in an increased investment in the manufacturing of LED bulbs, thereby resulting in a growth in employment rates.

Dr. Mashelkar and Mr. Pandit ably show in this must-read book that, as an interplay of global issues constantly raise the bar for innovation today, there has never been a better time to use our learnings to pole-vault over those bars into a new future!

The Cambridge Dictionary defines leapfrogging as ‘making improvements to your position by going past other people quickly or by missing out some stages’.

By definition, pole-vaulting requires you to go over a bar. In innovation, such bars are set by one’s limited aspirations or by the perceived limitations of current technologies. The core idea of ‘pole-vaulting’ as opposed to ‘leapfrogging’ is the only way forward that expresses the deeply felt need for speed, considering our keen awareness of the fact that time is running out fast.

Dr Mashelkar and Mr Pandit ably show in Leapfrogging to Pole-Vaulting: Creating the Magic of Radical yet Sustainable Transformation that-as an interplay of global issues constantly raise the bar for innovation today-there has never been a better time to use our learnings to pole-vault over those bars into a new future! An exhilarating manifesto for the future, this book convinces readers to make the shift from reactive leapfrogging to proactive pole-vaulting through radical transformation.

Here is an insightful excerpt:

In a corporate world, the pole is the supporting talent, technologies and tools. However, the question still remains: Why does one need to go from leapfrogging to pole-vaulting? A shift away from leapfrogging and approaching innovations with an attitude of a pole-vaulter will take us towards progress in the true sense of the word. A 10 per cent increase in performance is an incremental innovation.

It is easy. You are doing what everyone is doing, but only slightly better. A 100 per cent increase in performance in a short time is more difficult. It requires innovation at another level. This is, still, leapfrogging.

When this increase is 1000 per cent however, a 10x improvement, it is then that we are talking of transformational innovation, progress in its true sense. This is what we would call pole-vaulting. We need a 10x change in the demands of ourselves as a community of innovators, creators, sellers, buyers and policymakers.

It is time we stop being happy with a 20 per cent reduction in price, but instead look at twenty fold price improvement.

This is not unachievable. Such aspirations have led to unimagined cost reductions. For instance, until ten years ago an ECG machine used to cost around $10,000.*

When an innovative mind, Rahul Rastogi, applied himself, a $70 version was developed that made ¢8 tests possible. This is not all. This machine is portable and can be used in the remotest corners of the world.

Similarly, a business challenged itself to make high-speed, 4G Internet available at ¢10 per GB, with free voice calls, for a billion people, and did it—that is Jio in India. Only when we set ourselves such lofty aims are today’s successes—such as 1 billion Aadhaar registrations in India—conceivable. This book is all about pole-vaulting towards a new future, a future that is radically and not just marginally different, a future that is radically transformed and is yet sustainable. And this has to be achieved notwithstanding all the formidable obstacles, either perceived or real. We capture the essence of the pole-vaulting innovation processes, products and people, which has made the seemingly impossible, possible.

Leapfrogging to Pole-Vaulting: Creating the Magic of Radical yet Sustainable Transformation is dotted with inspiring case studies that can instil confidence in people from across the world to put this framework into practice for assured success.