Here is a link to the wonderfully written piece. No wonder, the essayist Eric Raymond has been writing on technical issues for decades, and has even written a sci-fi novel.

Kevin Drum at Motherjones has summarised the paper beautifully for all of us who don’t want to give time to understand the details of paper, and intricacies of argument.

Financial Innovation, Source Motherjones.com

So here is an article that says that, “Neoclassical economics is inconsistent with the laws of thermodynamics.” Two areas we never thought of in same breath.

http://www.scientificamerican.com/article.cfm?id=does-economics-violate-th

The burning question, we all will agree, is that not two board examination is similar in terms of  strictness in awarding marks. While, it’s easier, I mean relatively easier, to get 90% in CBSE and ICSE , it’s next to impossible to get similar marks in few state boards (Bihar Intermediate examination).

Now, if we want to have the effect of screening rule to be uniform, we need to account for this observed reality. This can be done through aligning a standard mark (CBSE) and state board marks.

Before getting into the details of approaches to accommodate the indiscrepancy, let us list down few business scenarios where we might have to do similar task.

Competitor Analysis:

a) An auto finance company gets number of request for refinance of auto loans. In this situation, the company would have data of interest rate charged by previous financier. It would have complete application data and bureau data for the customer. Interest rate charged is function of application data and internally developed risk score based on bureau data.  Now if an auto finance company is able to align its internal risk score with competitors risk score, it certainly has an edge over competitor. The detail will be clear from the paper linked below.

b) A similar problem for insurance company:  Please have a look at this patented method for aligning two scores. It can potentially help company to align the premium it will charge with competitor’s premium. Unfortunately, like all the patent filing document, it’s not very easy to get hold of methodology at one reading. Allow me to digress for a while; but it would be really helpful if law enforces patentee to file an easy- to- understand document along with the usual patent filing. It’s understandable why patentees constructs the claim the way they do, it’s necessary to prove infringement.

There are various examples in competitor analysis domain where we would have to perform similar task. Other scenario could be,  lets say risk team has developed a risk scorecard that is one of the input for pricing. Earlier risk team used traditional FICO score, but in newer model they have used Nextgen score for internal risk scorecard. Pricing team applies rule on FICO score and Internal risk score. With new risk score, pricing team has to apply rule on Nextgen score and internal score, but they don’t have access to Nextgen score of previous customers to reprice them.

Having explained few examples where aligning score is of paramount importance, we have to solve the problem of aligning marks. The details would be there in next post.

The major problem has been the obvious conflict of interest. CRAs are paid by institution who they have to rate, and to attract more businesses CRAs began assigning superior ratings to financial products and institution. A recent paper suggests that CRAs are more prone to inflate rating when there is a larger fraction of naive investors, and reputation risk of getting caught of CRAs is lower.

There has been suggestion like CRAs revenue source should be people who benefit from their service, that is investors. But, due to practical difficulty in implementing a model like this, the idea don’t have much supporter. The second idea that came to fore is, why shouldn’t we have number of small CRAs like equity research teams.  Now, we have only three CRAs, Moody’s, S&P and Fitch rating. The proposed suggestion relies on assumption that number of CRAs will make the market competitive, hence it will become efficient and honest. The concept was correct, but unfortunately it has not worked properly for equity research as well, and retail investors continue to be fed with misinformation.

Another idea is to have rotating raters. It says that every tenth rating  by a CRA would be subjected to back rating. The idea is good, but yet again it adds to complexity and there is a possibility of back rating agencies to be as lenient as first rating agency. Some are suggesting joint liability scheme where if one rating agency is sued and can’t pay investor restitution, then other rating agency should be forced to pick up the tab. They say it will force all three to raise their bar, but few doubt that it would have opposite effect, as rating agencies are getting insured for it’s bad performance.

We have to wait and watch that what are the measures SEC adopts to reform credit rating agencies.

Change is inevitable. Only thing constant about life is change. Such has been the world of business too. Businesses have to constantly design and align their starategies to remain profitable, and to survive in the fast changing landscape of the world. With advent of Television, and it’s increasing popularity Radio were in danger of becoming a product of yore. Until they rediscovered themselves. Trying not to compete with television, they looked out for niche customers. In cities they tried to target people in four wheelers. They restrategies the content of the show also.

Now, newspaper industry faces similar challenges. With advent of internet, and it’s exponential popularity, newspapers tried to be in the same note, and created their online version. With people spending bulk of their waking hours online, number of people who prefer not to have physical newspaper is bound to increase. Now newspaper, to maintain their profitability in future have to think of some novel strategies, as revenue generated from advertisements is not enough. Few newspapers, The NewYork Times (2005-07), for a while tried to implement subscription model. It didn’t go well with online readers who already have vast amount of information available online for free, and who prefer to have any online content for free.

In an article published in www.editorandpublisher.com, it’s argued that the cause is embedded at sub-conscious mind. We attach monetary value to things we can own, we don’t attach value to things that are ephemeral (online news content). We pay for newspapers because of it’s physical presence. It’s immaterial whether it’s worthless afterwards or not.

With the assumption that the above theory is correct, it was suggested that online news providers might try their luck with building application. Application that enhances the user experience of reading information. It could be application for blackberry, mobile also, as number of users in these platforms are increasing rapidly.

Another way for them, to generate revenue would be through social, networking pressure. There are two way: a:) Freenium strategy: Offer free content as well as paid content with obvious difference in quality. b:) Pursuade people to voluntarily donate money. Here social pressure, that your contribution is known to all ,will play a vital role in generating revenue .

If I recall it correctly, The New York Times tried model B as well. But they failed. The reason for failure was attributed to the fact that the news provider is a publicaly traded profitable enterprise. Now,it’s highly unlikely that people will make donation, a vicarious way of doing social service, to a publically traded profitable enterprise. If it would have been  privately owned, and they would have projected themselves as someone who provides news content in the service of  public, the chances of success would have been higher.

1) Recently banks declared that their NPA are not over Rs 20k crore, and government announced that they are writing off loans of Rs 60k crore issued to farmers. These two figures of 20k and 60k crore imply that either banks have understated their NPA (20k is total NPA, not loans only to farmers) or government has written off loans to farmers who were diligently paying their debt.  Third possibility is major chunk of money those 60k crore is warming pockets of politicians and bureaucrats. (from BW editorial)

2) Banks were nationalized to give credit to government’s favorite sectors (agriculture and small industries). But they didn’t do so. Later on government imposed them to lend 40% of their credit to these sectors, they did so for a while, but ironically soon ran out of worthy borrowers.

3) In last ten years, banks have been financing infrastructure sectors – power, telecommunication, roads, ports. Almost 25% of their loan goes to these sectors. This goes against traditional rules that required banks to give short term loans against liquid collateral. These sectors should have raised loan from capital market. On pretext of it’s lack of development in India nationalized bank financed long term loans to them, though for long term financing government had created -IDBI,ICICI,UTI.  Consequently, these three entities got converted into banks.

4) It was envisaged that nationalized bank will expand their operation in rural areas. They did expanded their business, but more in urban area than in rural areas.

Note: One may question, why should we raise question over what they have done as long as they are profitable. The point is they are not profitable, and they have not done what they have been nationalized (insurance of getting bailed out) for.

He concludes his article with following words.

My findings are based on a cursory analysis of easily available banking statistics. So much more could be inferred from the masses of statistics accumulated by the Reserve Bank of India. All it needs is a good, elementary economist. The RBI employs economists by the hundreds; the finance ministry gives generous grants to many more. But their minds are focused on higher matters; looking at easily available figures and calculating simple ratios would not occur to them. So we continue to have one of the world’s best documented and least analysed banking systems.

We, as customers, felt cheated. In fact, when dynamic pricing was first introduced, consumers considered it a rogue method of doing business. Consequently, businesses lost business (amazon.com). Though at that time also airlines were doing dynamic pricing. This could be explained as  a) Double standard of business morality set by consumers. or b) morality based on product (dynamic morality).

Currently, dynamic pricing is prevalent in number of industries. Airlines, hotels, e-business, Insurance, banking all rely on this model. There are different models to calculate the price; most basic of those is inventory based approach. For airlines, at broad level it would be function of seats available and number of days left in journey.

Anyway, the purpose of this entry is to introduce a start-up that came forward to help customer to decide when to buy airline ticket. Though the company is not very new, I came across it recently. A great idea that solves a real life problem and makes profit. The company is Live search farecast/ farecast.com. They have patented their model to predict price. Last year, microsoft acquired farecast, and now it’s Bing Travel.

Recently, two weeks ago, I observed the count of swine flu victim in Pune was reduced by 2. The officials said that the virus HINI was misappropriately considered guilty of two deaths. Likewise, and for the fact of the matter, it’s more difficult to establish the casuality of these suicides and heart attacks. Even, tougher is to deny the causality sitting far from AP when people residing over there would die for number greater than humdred.

The number 344 (46 suicide+ 298 heart attacks) came from Kadapa MP Y S  Jaganmohan Reddy. I can think of following reason for people like YSJR coming with this high number

a) Sense of self importance on divulging an information unknown to whole world. b) proving YSR was a superstar, though he was; and YSJR worked for the  superstar, and only star works for superstar.c) this information has  surprise/shock element in it, this  is reason why we all like to discuss about it, and so did YSJR.

Doubt over the validity of numbers didn’t make me write a blog entry, the reason I set out to write this that I have seriously started doubting that AP has been inflicted with suicide pandemic.  This suicide virus must have been reason behind all 48 suicides, it must have been reason behind  farmers committing suicide.

First time I came  across the idea of suicide being infectious is in novel Snow of Orhan Pamuk.  It made me think, and I realized that suicide must be infectious. For a person it becomes easier to commit suicide when he has thousands cases before him. The more the cases, the easier it becomes. After all, with all due respect to the beauty of world, a person doesn’t looses anything by committing suicide, and in fact he unburdens him of all the expectations, failures that has wounded his heart thoughout his existence. Once a person realizes it becomes easier. Farmers in AP have attained this wisdom.

Few days ago, I came across a video featuring Vandana Siva where she was playing blame game on farmers suicide with Monsanto. The fact that needs to be known is that Monsanto sells BT cotton seeds, farmers in AP are using them, BT cotton seeds require regular supply of water, and it’s highly senitive to regular supply of water, it’s not adjusting like traditional seeds which still gives good result when monsoon is late. So farmers didn’t get much from their land, and few of them committed suicide. Now Vandana Siva is blaming Monsanto for that. Though Monsanto has more logical arguments in favour of them, like they have mentioned the precondition in package of seeds, that with good farming the result is better, so they must not be held responsible for illiteracy of farmers.

I have one more argument in favor of Monsanto. That farmers in AP might be inflicted with suicide virus. And as days is passing it is becoming easier for them to commit suicide. Think of a hypothetical situation, say you have few people in your family who have committed suicide, won’t it be easier for you. Have researchs  not shown us that kid from divorced parents are more likely have divorce. It’s about psychology of overcoming the mental threshhold.

If it’s true then we must act on it, because this local suicide epidemic might become a pandemic, and would be more deadly than spanish flu of 1918.

Even if your product is son of a big brand, stardom doesn’t come easy. It requires marketing, it requires investment, it requires money. Now when there is investment, most certainly there would be talk of ROI.

To have a picture of gigantic money thrown in for advertisement. Have a look at 2008 estimate and trend of advertisement expenditure by ZenithOptomedia. The chart is taken from Indiantelevision.com

Here it would be better to keep one economic concept in mind, that marketing/advertisement is necessary or more important  for products that are not innately different from competitor’s products. Through advertisement, organisation wants to create product differentiation in mind of consumers. Thus  advertisement budget/ total budget  for CPG industries would be considerably high compared to IT company, say, Infosys.

Now, if you observe the chart above, or rather think about the channels of advertisement on your own. You will jot down, TV, Newspaper, Online Media, Magazine, Radio, Cinema. Yes, cinema also. It’s not just what we see before the beginning of a movie in theatres. Advertisement is there in the content of a movie also. It was advertisement that Rekha as Rithik’s grandma in krish uses Tide for washing. Recently, I observed a very prominent hoarding of Cinthol in an old Amitabh’s movie, Akela. The way the hoarding is shown, I am certain it’s not by chance. So advertisement through content manipulation goes back to seventies, even in bollywood.

Coming back to what we have been discussing, let’s suppose you are launching a product  X in market. The budget that you have for marketing is Rs. 10 crores. The question that confronts you now is that how are you going to allocate your budget among different mediums. After all medium is message.

The answer lies in market mix optimization/ market mix modelling. The title of this post is “Math Marketing” because it’s not through intuition that marketeers today decide the budget allocation, but it’s through boring statistical analysis/modelling.  Maths will help you determine the sales driver, maths will help you determine ( later on justify your decision) that with unit increase in marketing expenditure in TV what is unit increse in sales volume for your product.

The process of market mix modelling: