Keynes' Beauty Contest

One of the professors teaching us this semester is Prof. Amitava Bose. Prof. Bose teaches us macroeconomics, a subject which I still have to learn and appreciate as much as microeconomics. In any case, there was a general demand from the class that he cover certain issues relating to the present financial crisis. Now, this demand was a very practical one from the part of the students, focused towards understanding what exactly happened given that this question was likely to feature in the Summer placement interviews (naturally).

In any case, Prof. Bose obliged – but what he delivered was not a simple, bland explanation of the forces at work partly because he believed that he had not studied the issue at hand and partly because he had called another economist who gave us the “it all began when …” kind-of story. What Prof. Bose did end up doing, was delivering a lecture introducing us to behavioural aspects of the financial markets (something which a lot of people are trying to do) although in a very indirect and subtle way.

Here are some of the points that he made, which I thought I should share.

1. He discussed the notion of every financial asset being a “claim”, and that the whole system was based on a set of “beliefs”. Hence understanding the nature of these beliefs was important to understanding markets. While real assets always remained real assets, financial assets vanish once these “beliefs” are lost.

2. He discussed Ponzi Schemes through an interesting Shibram Charaborty story.

3.He discussed a different version of the so-called Cinderella Effect, one where everyone riding a bubble always believes that there will still be someone else after him who would buy from him what he bought from the previous guy (and not the one about stepchildren being maltreated). He discussed how these beliefs could be self-fulfilling prophecies, i.e. “If everyone believes that a stock price will rise, it will”.

4. The Keynesian Beauty Contest : I was not aware of this famous text in economic literature. I found the very idea of the contest amusing, and the fact that it models the stock market so well even more remarkable. This is the Keynes’ quote from the 12th Chapter of the famous General Theory of Unemployment, Interest and Money

“It is not a case of choosing those [faces] which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

5. Then Prof Bose invoked this para from Sherlock Holmes to discuss the notion of Common Knowledge

“Moriarty: All I have to say has already crossed your mind.
Holmes: Then possibly my answer has crossed yours.”

He left us with a bunch of questions like “Is Cash wealth?”, “Can rational agents agree to disagree?”. In particular there was this story of what happens when a man drops his wallet full of cash in the Ganges? Is India poorer? India should be poorer because after all India’s wealth is the sum of each Indian’s wealth. But all the real assets that money can buy still exist and hence India should not be any poorer. Someone else would buy the resources that the farmer could have.

I hope this was interesting to those who like me would like to follow economic though in a casual, “undercover economist” kind of way. I’ll try and get permission to upload the ppt for this lecture soon.

Cheer,

November 19th, 2008 / 1 Comment / Tags: amitava bose, macroeconomics, economics, sherlock, keynes, beauty contest / Trackback

Post Placement Update

Placement week has passed IIM Calcutta, and the campus has felt the impact of the global slowdown in a very real way. Contrasted with the better than usual summer placement figures for last year, this year was surely a let down. Apart from that, everyone got to undergo the high-pressure we’ll-find-a-job-for-each-one-of-you-in-5-days placement process. So I would not be wrong if I described the mood on campus as “solemn”. There are many reasons for this, something which I shall explore in the next post.

Elections are fast approaching (faster than I would like), and I for one am amazed at how big a deal it is. Potential candidates, their possible posts, their chances of winning are the stuff of corridor discussions. The mood is mostly very cynical, particularly given the fact that most people have not landed the kind of summer interns they would have hoped for.

Anyhoo, the eternal optimist in me tries to focus on the classes and the acads – something which is secondary, even tertiary here on campus. That is the saddest part really – a kind of disconnect between the admin, the faculty and the students. It’s rare for me to sound so gloomy but these are things that need to addressed. And sweeping problems under the carpet and pretending they don’t exist is a habit we seem to have become fond of.

In conclusion, what was probably the last paper-based CAT took place last Sunday. I’m glad that the weight assigned to the English section was substantially higher. And to top it all, friends from college who were taking it seem to have done quite well. Here’s wishing them good luck. FSM grant them the they have the power to make the right choices.

Cheers,

PS: I’m not prepared to tell where I will be interning this summer. You can of course ask me personally and I’ll be more than happy to share.

November 19th, 2008 / 0 Comments / Trackback

Diwali Update - or Halfway Hell

I’m currently sitting in the library typing this, relieved that most of my mid term examinations are over. I have taken the paper in Macroeconomics and Operations Research the two “main” papers in this term – and I can rest easy for “Information Technology Systems” which we take tomorrow. All we have to do is solve a case about how a particular organisation should incorporate technology into its operations. That should be simple enough, no? Well – tomorrow shall tell.

Anyway, this might be a long post as I have a lot to talk about. Once the midterms tomorrow are done, I shall be done with 3 of the six exams I take for this year. So that shall mean that I’ve done effectively half of year one. That’s pretty neat, considering that it’s certainly not felt like that long. I’m chugging along nicely academically too – and what is reassuring is the fact that I still have the appetite for a good intense mental workout before an exam. It’ needed, and it’s something which I had totally not done during the four years of engineering. There, so that covers the academics. In case you’re really interested in the subjects that we did in this half-term here they are : Organisational Structure and Design, Marketing Research, Operations Research, Macroeconomics and IT in Management. Maybe I’ll talk more about a few of these courses in forthcoming posts.

It’s ironic that I leave the commentary on the impending placements for the third paragraph. It’s certainly one thing which has been looming large on campus, and it’s something which is staring every first year straight in the eye, like it or not. For those who came in late this is what happens.

The Summers Process
Summer placements are placements for Summer internships that first year students are expected to complete as a part of their course. This internship will take place over April to June. Why is it such a big deal? Basically the top firms on campus, especially to do with consulting and banking use the internship route for final placements. This is especially true for investment banks which hire exclusively through this route. So if you land yourself a summer at one of these firms, and impress sufficiently (or as some say, don’t screw up) then it’s quite likely that you’ll get a final offer. This also means that you don’t have to worry too much about getting high grades for final placements in your second year, making life on campus much easier.

How does it work
Prior to placement week, firms come up with shortlists of students they would like to interview on the actual day. Making this shortlist with your CV speaking for you is the first step. Then, there is the actual placement week. Firms are ordered in order of priority and the top firms will come and hire on the first day, the next in row on the next day and so on. The firms which get chosen to recruit on the first day are called “Slot Zero” firms, the day going under the appellation of “Day Zero”. Obviously banks and consulting firms dominate this list, and I’m guessing its quite tough for people wanting to work for less “glamorous” professions to ignore the lure of Slot Zero firms. There are a lot of things wrong about how the process works from a philosphical point of view, but ground realities dictate the process – and the truth is most people would prefer these firms above any others.

I have heard a lot about Day Zero pressures when you are supposed to “crack” the interview. I have also heard a lot about the “magic” scheduling software which takes care of the firms preferences of students and vice versa and ensures that the right students interview at the right time. The main aim is to get students “out of the process” as quickly as possible (i.e. get them a job that they like) so that other people can try out earlier. I have very vague ideas about how this works, and it something that I shall definitely write about once the day has passed.

The Prep
Students are expected to prepare for the Summers process quite vigorously. There is a huge support system with senior students mentoring the first years on the kind of firms that they interviewed with, their experiences, tips and tricks etc. Senior students conduct mock interviews, give advice and conduct classes to help the juniors with theory. For students gunning for a job with on the finance firms the bible is the “Options, Futures and Derivatives” book by John.C.Hull and “Corporate Finance” by Brealy-Myers. There is also a huge emphasis placed on “personals”; basically personal questions about the interviewee, what he wants to do in life, and other such generic questions. They tell us that this makes all the difference.

What’s Happening Now
This year IIM Calcutta goes for summer placements on November 9th. The same(or similar) firms will then go to IIMA and IIMB immediately after. Currently as people get done with their midterms focus will shift to preparing for interviews, knowing more about the firms you have received shortlists for etc. Life shall resume to normal only after November 9th.

*PS: The objective of this article is meant to be mainly informative. I want to dispel a few myths about what exactly happens on campus during such times. I’ve taken care to avoid inserting my personal opinions even though I might have failed. I apologize in advance.

October 30th, 2008 / 1 Comment / Trackback

Fabulous Anecdote

I think this incident is going into my anecdote armoire.

The following is a very important guy (lets call him X) from an important investment bank (lets call it Y) trying to convince us that Banking is the one and only career we should consider. He was telling us about how a career in banking could be very lucrative. Why you ask? Well here is what he says

“My father-in-law runs a cloth mill. He has access to the best linen at the cheapest price. A guy who has a steel factory has access to the best steel at the cheapest cost with the minimum effort. A guy who has a car showroom has access to the best cars at the cheapest cost with the smallest effort.

It is the rule that whatever industry you are in, you have the best information about the products of that industry. Now, what are the main products of the financial sector?”

Getting the drift of his argument, most of us reply “Money”. Getting out his “Voila, I-told-you-so” look he says,

“That is why we make the most money. We have access to money at the cheapest cost with the smallest effort. And going by that logic, …” and here is the killer line “… if you are a consultant you have access to the cheapest and easiest advice!”

Very funny indeed. I wonder if he repeats it often. I know I will!

September 29th, 2008 / 4 Comments / Tags: ppt, placement, summers / Trackback

Blog Tip

Blog for the day. I present, The conservative Mr. T R Ram Mohan, professor from IIMA.

September 18th, 2008 / 0 Comments / Tags: linklove, iima / Trackback