Ten interesting things that we read this week

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At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, including investment analysis, psychology, science, technology, philosophy, etc. We have been sharing our favourite reads with clients under our weekly ‘Ten Interesting Things’ product. Some of the most interesting topics covered in this week’s iteration are related to ‘Why a tranquil VIX poses a huge danger for the equity markets’, ‘How informal economy affects the economic prospects of a country’ and ‘Game theory in International diplomacy’.

Here are the ten most interesting pieces that we read this week, ended April 28, 2017.

1) The fearless market ignores perils ahead [Source: Financial Times] 
Volatility was once merely a mathematical measure for investors of how sharply markets moved. Today, volatility is a complex multi-billion-dollar market in its own right. Vix has become a rock star index, even inspiring a best-selling thriller about an artificial intelligence-powered hedge fund called Vixal-4 that runs amok. But Vix is also one of the finance industry’s biggest enigmas. This should be a moment of potential peril for markets, with US interest rates rising, heightened geopolitical tension and a populist outsider in the White House. Yet Vix has remained largely tranquil. If the current performance of the index is sustained, the gauge’s average level this year would be the lowest in its 24-year history. Financial engineers have used Vix futures to develop a cornucopia of “exchange traded products” that allow investors to bet on or against the Vix. The VXX ETP was the fifth-most actively traded security in the US stock markets last year, and an even more leveraged cousin, the UVXY, was the 10th-most traded security. While there are number of reasons why Vix has been so calm since 2009 including central bank stimulus and corporate buybacks, many analysts are worried that markets are too sanguine about the prospect of renewed turbulence. For people betting on tranquility, the pain can be intense when turmoil erupts. Investors who bet on low volatility would suffer damaging losses and be forced to cover their exposure by shorting the broader market. That would in turn push stocks even lower and volatility higher again, sparking a negative feedback loop.

2) The difficult transition from informal to formal [Source: Livemint] 
This article discusses how the average Indian enterprise is more an act of desperation than a burst of entrepreneurship. The lack of viable job opportunities elsewhere has led to the creation of millions of tiny enterprises that offer families dignity but not much of an income. The transition from farm to factory that drove rapid development in many Asian countries has been stymied in India because of regulatory policies that have made it difficult for firms to grow in size. In its latest Fiscal Monitor, the International Monetary Fund (IMF) has provided interesting data on how the high prevalence of tiny firms outside the tax system hurts economic performance. The multilateral lender argues that firms outside the tax system—informal firms as well as bigger firms that evade taxes—have an implicit subsidy that encourages them to stay in business despite low productivity. Countries with wide dispersion in firm productivity usually have some process by which enterprises that ought to fail continue to survive. The productivity in an economy tends to be negatively correlated to the degree of self-employment in that economy. In other words, countries with high levels of self-employment (a proxy for informality) are further away from the productivity frontier.

3) Cheap ways to prevent executive burnout  [Source: Financial Times]
Lucy Kellaway in this piece describes how expensive anti-burnout programmes are not the way to make a CEO’s life less miserable. Such a programme, she says, does not solve a thing. It merely adds to the problem. We put someone under inhuman pressure by placing impossible demands on them. They often crack. Then instead of wondering how to lessen the pressure, we tell them all will be fine if they eat every three hours, exercise more, behave differently and fill up their already full schedule with a trio of quacks. She says that there is a better, more obvious and cheaper alternative to this. Instead of attempting to shore up the incumbent, we should change the job specifications. Being a CEO is awful for four reasons. First, people think that you are in control, but you are not. All organisations are dysfunctional and even if you have the right idea of what you want to do, doing it is practically impossible. Second, everything is always your fault, even when you have had nothing to do with it. Third, it is very lonely. No one tells you the truth and you cannot tell anyone else the truth either. Finally, you spend your life in two of the most depressing spaces on earth — meeting rooms and aeroplanes. The best way of lifting pressure, she says, is to spread the load. The next is to do less. Does the CEO really need to speak at a conference on the other side of the world? The answer is almost always no. But the most important thing — which no one company can do alone — is to change expectations of what a single person can achieve.

4) Game theory in International diplomacy  [Source: Livemint]
This article describes the game theory in international espionage. Think of a situation in which two countries have captured each other’s alleged spies. Each country has to simultaneously decide whether to defend its spy or to abandon him (defence usually involves claiming the spy is innocent, except in rare cases). Each country’s incentives are such that they will defend their spy only if the other country does so too. If the other country abandons their spy, then each country would do the same. Further, both countries prefer the situation of mutual abandonment of spies to that of mutual defence. This is because international espionage, by and large, operates outside the purview of international law, and the countries would prefer that to continue. The game described above has the structure of an “assurance game” where there are two equilibria—one in which both countries defend, and the other in which both countries abandon their spies. Since both countries get higher pay-offs in the equilibrium where they abandon their spies that is the equilibrium we expect to see in the real world. This, indeed, is the pitiable situation many spies find themselves in. The recent stand-off between India and Pakistan can’t be understood using the assurance game as the two countries have different incentives. India would like to keep things quiet, as they have not captured an agent working in Kashmir, a red flag for international observers, but one operating in the Baloch-Iran area. On the other hand, Pakistan’s main motive is to establish moral equivalence with India by proving that India meddles in their country.

5) Cities offer sanctuary against the insularity of nationalism [Source: Financial Times]
Many believe, quite correctly, that national identity is an insufficient idea, an outdated construct in today’s world. And yet aggressive nationalism, one of the many instances of countries reversing gear in search for some sort of identity, is on the rise across Asia, and could sweep through Europe as well. After all, countries offer a clear-cut identity, easily perceived and branded. But as nationalism has risen, we’ve seen its dangers first-hand in India and elsewhere. Love for the nation should be a free choice, not enforced with an iron fist. In contrast to the creation of national identity, people create modern tribes quite easily and fluidly. These sub-societies rise from workplaces, restaurants and bars, virtual games, Facebook groups and so on. Many of them are based on shared values rather than common identities. Cities reflect this reality far better than nations do.

6) Learning for innovators from Charles Darwin [Source: inc.com] 
Charles Darwin wasn’t the first one to come up with the idea of evolution. He was merely the first to come up with a workable hypothesis. More than 150 years after he first published On the Origin of Species, his theory remains one of the most essential and pervasive scientific tools we have. But it is not only the product of his work that's valuable; Darwin's innovation process is something that we can all still learn from as well. This piece describes four key takeaways from his research.

7) How Facebook, fake news and friends are warping your memory [Source: nature.com]  Memory is notoriously fallible, but some experts worry that a new phenomenon is emerging. “Memories are shared among groups in novel ways through sites such as Facebook and Instagram, blurring the line between individual and collective memories,” says psychologist Daniel Schacter, who studies memory at Harvard University in Cambridge, Massachusetts. “The development of Internet-based misinformation, such as recently well-publicized fake news sites, has the potential to distort individual and collective memories in disturbing ways.” Collective memories form the basis of history, and people's understanding of history shapes how they think about the future. The fictitious terrorist attacks, for example, were cited to justify a travel ban on the citizens of seven “countries of concern”. Although history has frequently been interpreted for political ends, psychologists are now investigating the fundamental processes by which collective memories form, to understand what makes them vulnerable to distortion. They show that social networks powerfully shape memory, and that people need little prompting to conform to a majority recollection — even if it is wrong.

8) To fight the rise in populism, mainstream leaders need to raise their ethical game [vox.com ]
Former President Barack Obama's decision to accept a $400,000 fee to speak at a conference organised by the bond firm Cantor Fitzgerald is easily understood given the precedent set by the likes of former Presidents Bill Clinton and George W. Bush and even former Federal Reserve Chairs Ben Bernanke and Alan Greenspan. Indeed, to not take the money might be a problem for someone in Obama's position. It would set a precedent. Obama would be suggesting that for an economically comfortable high-ranking former government official to be out there doing paid speaking gigs would be corrupt, sleazy, or both. He'd be looking down his nose at the other corrupt, sleazy former high-ranking government officials and making enemies. This is exactly why the author believes, he should have turned down the gig. The election in France earlier this week shows that the triumph of populist demagogues is far from inevitable. But to beat it, mainstream politicians and institutions need to shape up — not just with better policies, but with the kind of self-sacrificing spirit and moral leadership that successful movements require. The author lists four mechanisms to make this happen.

9) How did Dracula become the world’s most famous vampire?  [Source: TED] 
More than 100 years after his creator was laid to rest, Dracula lives on as the most famous vampire in the history. But this Transylvanian noble, neither the first fictional vampire nor the most popular of his time may have remained buried in obscurity if not for a twist of fate. Dracula's first appearance was in Bram Stoker's 1897 novel of the same name. By then blood sucking monsters had already been part of folklore for 800 years. Bram Stoker's Dracula was only a moderate success in its day. It was not even Stoker's most well-known work. But a critical copyright battle would completely change Dracula's fate and catapult the character into literary renown. In 1922, a German studio adapted the novel into the now classic silent film "Nosferatu" without paying royalties. Despite character name changes, the parallels were obvious and the studio was sued into bankruptcy. To prevent more plagiarism attempts Stoker's widow decided to establish copyright over the stage performance of "Dracula". The stage performance was a runaway success and the name Dracula stuck to all performances and feature films that were based on the characters defined by novel.

10) A caterpillar that eats and digests plastic in record time [dw.com ] 
Federica Bertocchini, an evolutionary biologist and a beekeeper might have chanced upon a discovery to solve our plastic garbage problem. The greater wax moths (Galleria mellonella), a parasite, lays its eggs inside the honeycomb. The larvae live for six to seven weeks until they form cocoons and finally hatch as a new butterfly. One day, the passionate amateur beekeeper removed the parasitic caterpillars from the beehive and stuffed them into a plastic polyethylene garbage bag. But, within a short time the larvae had eaten their way through the bag and out into freedom. Bertocchini suggests that the wax moth possesses a specific enzyme, which is able to break up chemical bonds that occur both in beeswax and polyethylene molecules. This was confirmed when larvae were mashed and resulting substance was applied to plastic bags only to see holes appearing again. Now, the researchers are hoping to identify the enzyme. If it is one day possible to produce it in industrial quantities, one could either use it to decompose plastic bags or even apply it to landfill sites, which still hold large quantities of plastic.