December 30, 2013

Genetic Memory - Our Preconditioned Mind

Hi Guys,

In the past few months, I have read at many places that Human Brain reacts in a manner that cannot be rationally explained in certain situations. Many psychologists explain that this may be due to ‘Genetic Memory’

What is a Genetic Memory? It is the memory that has been passed on to you from your ancestors through genes. Generally, your brain remembers things that happens to you after a certain age and makes you react to certain situations based on that. For example, read the words below

                                                Banana                                                                                 Sick

Your mind correlates an incident that happened when you were sick and ate banana or vice versa. This is because of the memory that is stored in your brain.

But, there are situations where you react for no particular reason. When you meet a new person, your mind quickly builds an impression on the person. You might think that, it is due to the memories from the past. But, actually even if you meet a new person who is so completely different, you tend to create an impression and that tends to be correct more than 90% of the times. And how long does your mind takes to build that impression – 1/5th of a second. Amazing, isn’t it?

How does this happen? No one knows how. The most plausible explanation is that it has been passed to you by your ancestors. Remember Darwin’s ‘Survival of the fittest’. For us to survive we need to know who our enemy is and hence it has been the most important part of our evolution. This principle has been studied even candidates standing in elections. Most people select people based on their intuition and feeling. Dangerous, isn’t it? It happens in interviews too. It has been found that to correct a wrong first impression, you need nine good impressions. No doubt that it is said, ‘First Impression is the best Impression’

I am currently reading the book ‘Quiet’ by Susan Cain. In a part, she explains why humans are afraid of Public Speaking. The initial stage of Human evolution was in the forests and deserts of Africa. Humans had to be sharp to defend from Animals. Speaking was not an integral part of Human Beings for so long. It has become difficult for many people to come out suddenly and speak.

The most interesting concept from ‘Genetic Memory’ is ‘Loss Aversion’. Human Beings have been conditioned to avoid Losses. It again goes back to the Darwinian Theory. To survive, you cannot lose something. Loss Aversion works in many interesting ways. Consider an example – A dangerous virus has spread in a hospital. You have two different drugs with the following outcome

A: 100 people can be saved
B: 20% probability that 500 people can be saved

Which option would you choose? Most people would go with Option A. Now consider the options C, D

C: 400 people would die
D: 80% probability that 500 would die

Now which option would you choose? Most people would choose Option D. Interestingly options A and C are same as well as B and D are same. When it comes to survival, we choose the definite one and when it comes to loss, we tend to choose a more probabilistic one.

It reflects in our day today behavior. Before entering into a work, we are neutral. But after entering the work, you tend to think more about positives of the work. Daniel Kahneman in his book ‘Thinking, Fast and Slow’ would have described a beautiful situation. There are twin brothers A and B. When they join work, they are given two options – ‘One extra leave per month or additional salary of $1000’. But only one person can opt for an option. Initially, both options seem equal to the brothers. After some time, the firm says if they want to interchange their positions, they can. Now, the option with one extra leave means losing $1000 and it doesn’t look good. Similarly, losing an extra day off also doesn’t sound good. So, they remain in their positions.

It has been found that, in such situations, the loss looks highly valuable and human mind wants something 2.5 times its size to compensate (i.e. $2500 for the extra leave or 2.5 days leave for the extra $1000). Intriguing, isn’t it? That is why we often find out the advantage other people have. But, if we are put into that position, we forget the advantages and speak about the sufferings. Our mind reminds us of the things we lose and not what we gain.

It is interesting to know, how deeply ingrained our thought process is, isn’t it? As Brad Pitt once said, ‘I’m one of those people you hate because of Genetics. That is the truth’

Happy Reading!

December 14, 2013

The Root Cause of Indian Stagflation

Hi Guys,

Two days back, the Economic Indicators of Indian performance in October was out and we reached a new low with CPI Inflation going to 11.24% and IIP dropping to -1.8%. Food Inflation was at 14.72% and Manufacturing growth was -2%. GDP growth was 4.8% for Q2, 2013. RBI is all set to increase interest rates (probably by another 25 basis points) and industries are all set to oppose it.

So, why does RBI want to increase Interest Rates? To understand that, we need to understand Inflation first. Inflation is caused by changes in demand and supply. Generally, Inflation can be said to be a situation where, ‘Too much money chasing too few goods. It can either be a state where too much of money is there in the economy or when the availability of a product goes down.

So, when inflation exists in an economy, a central bank (RBI) tries to play with interest rate. When interest rates are low, people take loans and the money comes into economy. When interest rates go up, people do not take loans. Rather people deposit their money and money supply would be reduced in the economy. This is done in order to bring Supply and demand to Equilibrium.

Generally it is said that Inflation should be lower than Interest rate by approximately 2% in a country. Only then does a business performs well and would be able to sustain its growth. People would not be affected too much by inflation. In India, Inflation is way above the current interest rate. RBI feels that increasing interest rates would reduce money supply in the economy. On the other hand, Industries feel that it would affect the already faltering Industry growth.

So, is RBI right in saying that increasing interest rates would stop the inflation? In my perception, increasing interest rates would have no effect on the money supply. The main reason is that Inflation is not happening due to the increasing money supply from borrowings. The root cause of the problem lies somewhere else.

The central government in the name of Rural Empowerment, provided lot of subsidies and money transfers. The key among them is the NREGA or the Guaranteed employment scheme. As one of my professor says, it unskilled the people. People who were working stopped working for wages were guaranteed. So, he didn’t have any incentive to work and productivity went down.

For any country to grow from Agrarian to developed economy, Manufacturing is important. Manufacturing doesn’t require much of skills and the employment it generates is tremendous. For once, India thought it leapfrogged that stage and can conquer growth based on Services. The main problem with services is that you need to be educated and it does not generate too much of Employment (26.6% of Labor force accounting for 56.9% of GDP).

The NREGA scheme spoiled an entire community of workforce. They got paid for doing literally nothing. As many people would say, the job of this workforce was to dig and fill holes. Government’s intention of ensuring wages was good, but they should have allocated a suitable work. All this money came back to the economy. The rural consumption pattern changed. From normal diet, they moved into protein diet. Food consumption increased and food prices skyrocketed. When growth came down, Government had no idea of what was happening.

Though our Finance Minister says that Food prices are reason behind inflation, I don’t think he has a solution. Now, Government wants to increase the minimum wages in order to improve the rural conditions. RBI increasing interest rates would affect industries and it would be too difficult for them to recover.

Even if a new government comes to power, they won’t have the audacity to pull back all the subsidies and money transfer schemes. One thing that can be done is to improve their skills and make the rural people productive. Pay them, but get some work out of them.

India is into the trap of low growth and high inflation or what is known as Stagflation and it is not going to be easy to come out of it. Let’s hope something good happens.

Happy Reading!

December 9, 2013

Thinking, Fast and Slow - Daniel Kahneman - Book Review

Thinking, Fast and Slow

My rating: 5 of 5 stars

Are Human Beings rational? Most of us know that we are not. Daniel Kahneman has collated his detailed research work into a single book and describes how our mind works. Daniel Kahneman won Nobel Prize for Economics in 2002 for his works in Behavioural Economics.

The book starts with an introduction to our thinking and how we work. Daniel Kahneman speaks about two systems inside our mind, namely System 1 and 2. System 1 is the fast thinking system that works based on intuition. System 2 is the slow thinking system that takes decisions rationally. More often, we take decisions based on System 1. System 1 is so powerful that it overrides System 2 in most of the cases.

The author has divided the book into five parts. The first part is about the two systems and how our mind works. He gives us many famous perceptions and concludes that no matter, how much our mind knows that the perception is false, System 1 will make us believe that it is true. More often than not, we are shown two lines which are of similar size, but appears unequal in appearance. By now, our mind should have understood that they are equal. But, we continue to perceive that they are unequal. This famous Muller Lyer Experiment is a result of our System Conflict.

The second part is on Heuristics and Biases. In this part, the author says how we are susceptible to biases and how our mind plays with it. For example, car accidents result in more deaths than flight accidents. Still, the nature of flight accidents make us fear flight travel. Similarly, rare disasters make us fear about those events rather than normal events. He also says how statistics can turn if wrong base is used and how often we use statistics wrongly to make it comply with our intuition.

The third part is on Overconfidence. Here, the author writes about various illusions. He says that our mind fits in patterns to the success stories and make us think that we need to repeat them in order to be successful. But, more often than not, it doesn't result in a success. He also writes about how intuitions are more often wrong and how we continue to believe them. But, he also writes about when intuitions can be correct sometimes.

The next part is on choices. This is a part where he has written about most of his significant research works in the field of Economics. He says how Utility theory has some errors and how Prospect theory aims to correct them. He writes about the difference between Economists and Human Beings. Reference point is important to find impact and we don't use it very often. Getting rich by $10 is different for a millionaire and a poor guy.

In the final part, he concludes by writing about two type of selves - Experiencing self and Remembering Self. He says that more often, people do works based on Remembering self, though it might be more painful for experiencing self.

He uses the term 'Loss Aversion' in the book often. Human Mind is oriented towards avoiding losses, rather than seeking gains. Gains must outnumber losses in the ratio of 2.5: 1 for us to accept the gamble. He refers this to the evolution of mankind. In order to survive, organisms have been trained to avoid losses and this has been imprinted in our mind.

Overall, the book is a good one for people who want to know about Psychology. The author is very humble and associates all those people who were present with him during that approach. He also writes about the limitations of his theories and says that he might be bound by some the theories and may not be right. The author has understood very well about human mind works and he has presented the book with a lot of examples and practical approaches. The book is a must read, if you are interested in knowing how you make decisions.

So if we read this book, will we think differently? Well, this is what Daniel Kahneman has to say,

It's not a case of: 'Read this book and then you'll think differently. I've written this book, and I don't think differently'

Happy Reading!!!