A memory from my last trip to India

I lay on my bed in the warm humid Kolkata weather, gazing lazily at the clock on the wall. It's an old clock, perhaps twenty years old, runs on a single AA battery. It hung on the wall in our home in Bokaro, or was it Durgapur? It brought back memories...

My father had a childlike enthusiasm about some things. When the clock was still new, he would compare the time on the clock with that on TV before the news on Doordarshan - India's primary TV channel. This was before cable. Some days the clock showed near perfect time, other days it was a little off. I remember the day my father noticed that due to the influence of gravity, the second hand progressed much faster from 0 to 15 seconds past the minute, and considerably slower from 45 to 60 seconds. The clock was not in error! It was perfect! Well... ignoring gravity anyway... There was this look of triumph in his eyes.

My brother recently sent me some old family photos. The one above is from 1990...ish. We were not rich, not poor either. We hardly had any savings but I did not know that as a child and it did not bother me. We were happy. Now, I am probably worth several times what my father was worth at the end of his life. But I miss the simple happiness. In many ways, I have less than I had then. I need to find my way back.

Charles Ponzi, Bernard Madoff and the exponential function

The Ponzi scheme is a fraudulent investment scheme named after Charles Ponzi. The idea is simple. Investors are promised fabulous returns on money. A few investors cautiously bring in small change, and the money is returned with interest as promised. Reassured, these investors bring in larger amounts. Other investors join them. People ask questions on how the money can grow so fast. Answers range from gold and diamonds mines in Africa to philanthropic donors who crave anonymity. In reality, there is no investment. Money from new investors is paid to old investors, while the organizers of the scheme help themselves to some of it. As long as the returns are coming, few questions are asked. People who ask too many questions are even censured by others who have invested money in the scheme, and are reveling in their imaginary returns.

Ponzi schemes tend to be short-lived, with a few exceptions. One important exception may be Bernard Madoff, and we will get to him. In order to thrive, a Ponzi scheme requires a growing inflow of new investment, and to get this inflow, the returns have to be be large enough to induce greed. Charles Ponzi, for example, promised to double money in 90 days. At that rate, money grows to 16 times in a year, and 4000 times in 3 years - exponential growth. To be truthful, all investment at fixed interest rate grows exponentially. Money kept in a bank at 7% interest would double in 10 years, 16 times in 40 years and 4000 times in 120 years. Exponential growth is the norm. What is not normal is the fabulous rate promised by the Ponzi scheme. I suspect that a lot of Ponzi schemers lack an appreciation of the exponential function. Anyway, if Ponzi's scheme were to go on for three years, an investor who brought in a thousand dollars on the first day would be entitled to four million in three years. So long as the investor does not demand his money, all is well. But chances are that the investor of a thousand dollars, now thinking himself a rich millionaire, would want to spend a modest few hundred thousand of his millions. At this point, paying the investor becomes a challenge because inflow of investment money can never keep up with the rapid exponential growth of accounts payable. The game winds up.

It is not hard to see that the longevity of a Ponzi scheme is inversely related to the promised rate of return, but the rate of return must noticeably exceed that obtainable through legitimate sources so as to attract new investors. In this regard, Bernard Madoff took the game to the next level. His returns were consistent, and always better than the market, but not like Charles Ponzi's. His scheme lasted over a decade in the complete absence of investments, and swallowed over 50 billion dollars. His story carries a bold warning: A smart enough Ponzi schemer may get away with a lifetime of fraud. Madoff had no investment whatsoever. A combination of a mediocre investment scheme with fraudulent accounting that shows consistent returns could last many decades. The idea is similar to what Enron and other firms charged with accounting fraud did. Somehow, productive and deceptive activities tend not to co-exist harmoniously over time, which is a great blessing for investors. Still, it pays to be cautious.

There is only one effective antidote to the Ponzi bug - transparency. Never put money into an investment that hides information, whatever the excuse may be. Madoff hid information for decades claiming that his techniques were proprietary trade secrets - sounds legitimate, but no reason is legitimate enough. Another partially effective cure is diversification. There is something pitiful about people who lament the loss of their life's savings in a Ponzi scheme. It is as if they have failed to evolve in a fundamental manner. Not only were they naive or greedy or both, they never understood the eggs and baskets principle either. The law can and should punish predators, but it is impossible to protect those who willingly set themselves up as prey.

Associating with the wise

When I was in tenth grade, I read the English translation of a small episode from the Indian Epic 'Mahabharat'. The God of Justice was quizzing his son. One of the questions he asked was :
'How does a man gain wisdom?'
The answer was :
'By associating with the wise'.

Reading a book enables one to associate with the author, a person wise enough to write a book. Reading is useful. My father would take me to a children's library and read to me when I was too young to read. Then I started reading, developed a love for it, and read story books for many hours each day as a child and as a teenager.

With age came focus. I did not read stories much more. I read things that would help me to achieve a goal - academic or otherwise. Whatever the subject, a book has probably been written on it.

Not all books are created equal. Some books are a lot better than others. They are written by wiser people. In the old days, when I went to a library or a bookstore, there was no alternative to judging a book by its cover, the author's reputation (if you knew the author), and from reading a few lines. One of the things I love about the Internet is that it has made the flow of information and opinions so easy. These days, I never buy or read a book before checking its reviews. Associating with the wisest has never been easier. And this is important, especially in fields where the world has very few real experts, and a lot of wagging tongues. This reminds me of the following experience:

I have purchased several books on finance from Amazon. Whenever I go to the website, it recommends other books along those lines, and I spend some time reading reviews of the recommended books. When the book 'Reminiscences of a Stock Operator ' was recommended, I was curious because the book has excellent reviews. It's a book on trading, or speculating, something I generally refrain from doing. But hey, reading a review cannot hurt.

The book is a biography of Jesse Livermore, a famed trader, or speculator. The reviewers heaped praise on the trading 'commandments' that the book offers, rules that any trader can repeat. Commandments such as -No stock is too high to buy or too low to sell. The book was crowned the grandfather of all books on trading, containing wisdom transferred from mothers to daughters(??) and winners to losers(!!). A sturdy foundation on which to build a successful trading career. WoW!

Another review spilled a few beans. Livermore made and lost millions throughout his life. He was worth 100 million after the 1929 crash and bankrupt by 1934. He ended up committing suicide in a bathroom.

(a moment of shocked silence)

God bless his soul. Clearly not my idea of associating with the wise...

Proof of address

The last time I visited India, I tried to open an account at the local branch of one of India's largest nationalized banks. In order to open an account you need, among other things, a 'proof of address'. It may be a passport, an electricity bill or any of a list of documents that carries the applicant's name and address. Having lived in the US for six years, I had no such document. My passport has a really old address on it, and I pay no bills in India. What the bank really needs is proof of citizenship, and an address for correspondence (which is rarely used since these banks seldom mail statements).

At first I thought that I would try reasoning with the bureaucracy although something told me that things would not go anywhere. As expected, I was thwarted by a clerk who asked 'How will the bank know where you live?'. I felt like replying 'How does the bank care where I live?', but I sensed triumph in his voice and decided to abandon this line of attack. I have seen this clerk coming to work and sitting on the same chair for the last ten years whenever I have been to the bank. The faces in a bureaucracy rarely change. They start young, grow wrinkles, and disappear after about four decades. When I arrived early at the bank one day, I saw this man arrive, sit on his chair, and open his books with a look of sheer annoyance on his face. He hates his job. Why add to his misery by arguing? He doesn't make the rules, he simply follows them; and he may have rightly concluded through experience that his life is simpler if he does not bring reason to the table.

Address does not prove citizenship, and most citizens in India do not have a home of their own, but then a lot of things in a bureaucracy don't make sense. But the not-making-sense part is only the tip of the iceberg. The real pain lies elsewhere. In order to get any of the 'proof of address documents', I would have to get an electricity or phone account, buy immovable property, procure one of the other items from the same list, or to go to an administrative officer, who supposedly knows every person in his particular densely populated locality of India. A clerk at the bank told me that some Bangladeshi citizens had accounts in their branch. Why not? How does the administrative officer know me from a Bangladeshi? All four of my grandparents were born in what is Bangladesh today before independence and the partition of India.

Somewhere during the process it struck me. If they weren't going to use the address, how did I care what address my passport had? I used my passport, and also let the manager know that this was not my current address. He sent me to a clerk who informally made a note of my true address and that was that. The system works, albeit not in a meaningful or foolproof way. It works in the traditional Indian ishtyle.

Being right all the time...

It is tempting to draw a line between the things we do and the things we don't and call it the line between right and wrong.

It is tempting because we get to do what we like, and we get to think of ourselves as being right all the time. We also get to think of ourselves as fair, applying the same uniform standard of righteousness to everyone. Then there is the joy of meeting the highest standard effortlessly, and seeing others fail frequently. Having a holier-than-thou attitude certainly has its perks!

Strength

As a youngster trying to discover myself, my instincts often headed in the direction of strength. 'I’d rather be a hammer than a nail'. Strength is cool. You get to do what you want, people respect you, a lot of positives and no negatives. So I began to act strong. Breaking rules is a sign of strength. So is rowdy behavior. Conforming to rules cannot be strong because someone else gets to dictate what I do. And this was not an original conclusion of mine, but a widespread belief that preceded and has outlived my adolescence. Notice that God is equated to kings, and His chosen ones have the ability to break nature's laws? They call it performing miracles, sounds more cool that way.

So strength lay in acting macho. But in my life I had received nothing but kindness from my parents, my teachers, and other adults around me. 'What is strength?' I asked myself. When two people arm-wrestle, and one wins, the winner is clearly stronger. If these two people were to meet in a dark alley, and one were to rob and kill the other, would the robber be stronger? Something seemed wrong. Bullies, robbers, rapists, child molesters, murderers, and particularly dictators who succeeded in oppressing millions of people would all have to be considerably stronger than their victims in the traditional sense.

There is something in us that revolts at the idea of admitting that wrong-doers are actually strong - nope, we should not give them a single point for what they did. Something as positive as strength cannot be associated with crime. Gandhi said 'The weak can never forgive. Forgiveness is the attribute of the strong'. He also said 'A weak man is just by accident. A strong but non-violent man is unjust by accident'. Wait a minute, we seem to be redefining strength here. There is no reason for the arm-wrestling winner to be just, or for the just to be forgiving. These are different character traits that may or may not be found in the same person. What Gandhi really meant is that justice, non-violence and forgiveness are good, and therefore he associated them with strength, which is also perceived as good.

I concluded that strength, as in the ability to succeed, is completely neutral on the scale from bad to good. Like a hammer, it totally depends on what you do with it.

Popular Elections

I believe in democracy. Power can be the means to a good end, but absolute power holds the greatest attraction for the worst people – who do not question themselves and seek not to be questioned by others. The kind and the fair rarely need power to achieve their ends. Democracy distributes power among many, and enables stability, which is valuable even at the cost of efficiency. Inefficiency is something I can live with. What bothers me is the lack of reasoning behind our collective democratic decisions.

America is heading towards another national election. I see the presidency as a 'job' of great power (therefore responsibility). Every American adult citizen is invited to have a say in filling up this position. Yet, some of America's top elected leaders seem to be the kind of people whom I would not hire as my financial advisor, security-expert, child's tutor, doctor, director of my company... But then, these leaders are the people’s choice.

In my opinion, most people perceive the election as a popularity contest. As time passes, I see more and more blatant deviations between the process of election, and the process of hiring. Apparently, a large majority of African Americans favor Obama. Women, especially elderly Caucasian women, favor Clinton more. One of the big problems in Romney's campaign was his Mormon religion. The allegation of Obama being Muslim is a serious concern to his campaign. Evidently, racial, gender and religious profiles play important roles in hiring the one person who will direct security, healthcare and education. All this in a country where if a company were to use these criteria in hiring, lawsuits would soon shut it down. I don't believe that people attach as much importance to criteria such as religion, race and gender when seeking services at a personal level. So what changes in an election? My conjecture is that most people don't see 'leading the country' as a job. Not surprisingly, the immeasurable acumen required in deciding policy is unfathomable to most people. Driven in part by blissful ignorance, and partly by the large optimism bias in humans, most people fail to consider the consequences of putting a person of inadequate ability and experience on the hot seat.

This monologue would not be complete without mentioning the role of the media. Media personnel have a strange job. They must produce eight (or however many) hours of news no matter what happens, or even if nothing happens. Watching these people discuss the campaign in painful detail each day from morning until night for nearly a year evokes pity. No wonder, even those who rarely follow the news encounter 'Is America ready for its first black president?', 'Why American women are empowered but not in power', and 'I can't believe we have a candidate who's middle name is Hussein'. The amount of time expended on the discussion of such topics would strongly suggest to the audience that somehow the biases that we strive to fight in our daily lives should acquire foremost importance in America's choice of its leaders.

This bizarre mismatch between political leadership being a crucial job, and the election process being a large-scale popularity contest is one of the greatest weaknesses of democracy. The case of America is just an example, and a relatively benign one by comparison with some other democracies.