Numbers and US

Story that numbers tell us

How To Ask Questions The Smart Way

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Recently looking to find an answer to my “R” ( programming language for statistical computation) query, I stumbled upon an article written by Eric Steven Raymond on how to ask questions effectively on public forum.  For an essay written as user guide/help for asking questions, unexpectedly, the article is a great read. As much interesting as any fiction novel. In fact, it got me hooked, and I kept reading the article for an hour, completely unaware that I was searching for solution of a problem.

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.

Written by SK

March 13, 2010 at 6:05 pm

Posted in Tools

Tagged with , ,

Financial Innovation, Did it really help!

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Bob Litan of Brookings Institution has come out with a very provocative paper   “ In Defence of Much, But Not all Financial Innovation.” Therein he discusses “good vs bad” that has happened with financial innovations.

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

Financial Innovation, Source Motherjones.com

Written by SK

March 8, 2010 at 4:00 pm

Does Economics Violate the Laws of Physics?

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They say , now at this age I have realized it also, that exercise is necessary to keep body fit. Thinking along the last line, if it applies to the body, it must apply to the brain and mind.

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

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

Written by SK

October 24, 2009 at 7:52 pm

Aligning Scores

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Past few days, IITs have been in news again. HRD minister Kapil Sibal wants to give weightage to class twelfth performance also for selection.  He wants minimum marks to be eighty percent to qualify for the test.  While this proposal has been topic of hot discussion, I kept thinking about the execution of this proposal from statistical perspective.

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 a few state boards, like Bihar Intermediate examination.

Now, if we want the screening rule to be unbiased, we need to account for the reality that 80% in one board examination is not 80% in another board examination. This can be done by creating a unbiased methodology to  project all the scores on same axis – that is by aligning the scores of different board examination.

Before getting into the details of approaches to accommodate the bias, 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.

Written by SK

October 20, 2009 at 7:05 pm

How to Reform the Credit Rating agencies

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Major credit rating agencies are severely criticized for beautifying the bad credits of financial institutions with AAA ratings that led to financial crisis. There has been lots of discussion on reform of CRAs. There was a round table organized by SEC to examine oversight of agencies. Recently, they met on September and came up with a paper with adopted rule and proposed rule. World bank maintains a page devoted to ideas on CRAs reform. There has been deluge of working papers identifying the loophole in earlier set up, and proposing remedial measures.

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.

Written by SK

October 9, 2009 at 3:50 pm

News about Newspaper Industry

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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 http://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 black
berry, 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 will play a vital role in generating revenue
where in a social network this information is known to all.
If I am not wrong, The Newyork 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 a
privately owned, and they would have projected themselves as someone who provides news content for the public, the chances of
getting donation would have been higher.

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 http://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.

Written by SK

September 19, 2009 at 8:05 pm

Posted in Media

Tagged with , ,

40 Years of Bank Nationalization

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Here are  major points raised by Ashok V Desai on an article written on telegraph on forty years of bank nationalization. Ashok V. Desai is consultant editor of The Telegraph, and a columnist in Businessworld. He was my favorite columnist in 2002-03, when I used to read BW. Later on I came to know that he is a highly respected personality, and I took pride in myself that I do have an eye for talent. 🙂

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.


Written by SK

September 17, 2009 at 7:49 pm

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