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Ten interesting things that we read this week

Some of the most interesting topics covered in this week's iteration are related to the 'psychology behind the urge to splurge', 'Why the poor don't kill us?', and how people pretend that they are not rich

Published: Jul 29, 2017 06:43:25 AM IST
Updated: Jul 29, 2017 02:31:11 PM IST

Ten interesting things that we read this weekImage: Shutterstock.com

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 the ‘psychology behind the urge to splurge’, ‘Why the poor don’t kill us?’, and how people pretend that they are not rich.

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

1) Stitched up by robots: the threat to emerging economies [Source: Financial Times]
With automation sweeping through established industries, experts are warning that it is only a matter of time before technology undermines the economic model of large parts of the developing world. South Asia is especially at risk, given how much of the region’s economic plans rely on mopping up the international manufacturing work for which China is becoming too expensive. The “demographic dividend” in countries like India is beginning to increasingly look like “demographic curse”.  Several years ago academics noticed that something strange had been happening in parts of Asia, Latin America and sub-Saharan Africa.

While many countries had been growing strongly, the share of jobs in the manufacturing industry had barely risen since the 1980s, and in some cases had begun to fall — long before economists expected it to happen. In 2015 Dani Rodrik, a Harvard economist, coined the phrase “premature deindustrialisation”, arguing that many developing countries were becoming service-based economies much earlier in their histories than their western equivalents. Technological change had a large part to play, he said, warning that the trend could have grave consequences for economic growth and political stability in those regions.

2) Paradoxes of probability and other statistical strangeness [Source: quillette.com]
Nowadays, researchers can access a wealth of software packages that can readily analyse data and produce the results of complex statistical tests. While these are powerful resources, they also open the door to people without a full statistical understanding to misunderstand some of the subtleties within a dataset and to draw wildly incorrect conclusions. We discuss a few common statistical fallacies and paradoxes and how they can lead to results that are counterintuitive and, in many cases, simply wrong.

Simpson’s paradox: This is where trends that appear within different groups disappear when data for those groups are combined. When this happens, the overall trend might even appear to be the opposite of the trends in each group. Base rate fallacy: This fallacy occurs when we disregard important information when making a judgement on how likely something is. Will Rogers paradox: This occurs when moving something from one group to another raises the average of both groups, even though no values actually increase. Berkson’s paradox: Berkson’s paradox can make it look like there’s an association between two independent variables when there isn’t one. Multiple comparisons fallacy: This is where unexpected trends can occur through random chance alone in a data set with a large number of variables.

3) Chemicals groups gear up for electric car revolution [Source: Financial Times]
The world’s leading chemical companies that for decades have made catalysts that cut harmful and toxic emissions in vehicle exhausts are switching focus. Their aim: to become key players in powering the electric cars of the future. The big three groups in the area — Umicore of Belgium, UK-listed Johnson Matthey and German chemicals giant BASF — are now preparing for the eventual decline of the traditional internal combustion engines that today they help to filter. So far, Umicore is ahead in the race for market share. Some investors and analysts think Umicore will be the overall winner from the technological disruption of the car market as they have the lead in so-called nickel manganese cobalt batteries (NMC), which are likely to become the standard for electric vehicles as they allow motorists to drive for longer on a single charge.

In contrast, Johnson Matthey has only a modest position in battery materials and BASF has also so far failed to establish itself in the NMC market. In the case of Johnson Matthey, it produces another cathode variety called lithium iron phosphate (LFP) commercially, but is scaling up in other materials. Although LFP does not have the range of NMC batteries in terms of distance on a single charge, it is perceived as safer and has a better life cycle — meaning how many times a battery can be charged without serious degradation. LFP batteries are bigger and found in heavy-duty vehicles such as buses and delivery vans. Critically, it is the ability to travel further with the more dense NMC batteries that gives it the most potential for mass-market, light-duty passenger vehicles.

4) The psychology behind the urge to splurge  [Source: Livemint]
Research shows that shopping may be an effective way to minimize feelings of sadness and help repair mood. So what is about sadness that makes us loosen our purse strings like there is no tomorrow? The underlying reason is both fascinating and intuitive. Sadness, more than any other emotion, engenders a sense of lack of control over one’s surroundings. It is associated with a feeling of helplessness—of not being able to control what is happening in the environment. This is where shopping comes to the rescue.

A 2014 paper in the Journal of Consumer Psychology showed that shopping works to alleviate this feeling of sadness and helplessness by restoring a sense of control. Researchers found that the mere act of making shopping-related choices (and rejecting what was not liked) was enough to make people happy. They did not actually need to buy anything. In a fascinating paper published in Psychological Science, researchers found that when feeling sad, people were willing to pay up to 30% more money to get their hands on a product relative to those in a neutral mood. While sadness is one manifestation of feeling a loss of control over life’s outcomes, many other factors in the environment can engender a sense of lacking control. Not surprisingly, some are by design. Research shows that crowded supermarkets can diminish one’s sense of control, leading to excessive buying.

5) Stop pretending you’re not rich [Source: NY Times]
The author of this piece shares his finding that the United States is more calcified by class than Britain, especially toward the top. The big difference is that most of the people on the highest rung in America are in denial about their privilege. The American myth of meritocracy allows them to attribute their position to their brilliance and diligence rather than to luck or a rigged system. At least posh people in England have the decency to feel guilty. He says that beneath a veneer of classlessness, the American class reproduction machine operates with ruthless efficiency. In particular, the upper middle class is solidifying. This favored fifth at the top of the income distribution, with an average annual household income of $200,000, has been separating from the 80 percent below. Collectively, this top fifth has seen a $4 trillion-plus increase in pre-tax income since 1979 compared to just over $3 trillion for everyone else.

Some of those gains went to the top 1 percent. But most went to the 19 percent just beneath them. The rhetoric of “We are the 99 percent” has in fact been dangerously self-serving, allowing people with healthy six-figure incomes to convince themselves that they are somehow in the same economic boat as ordinary Americans, and that it is just the so-called super rich who are to blame for inequality. Politicians and policy wonks worry about the persistence of poverty across generations, but affluence is inherited more strongly. Most of the children born into households in the top 20 percent will stay there or drop only as far as the next quintile. There’s a kind of class double-think going on here. On the one hand, upper-middle-class Americans believe they are operating in a meritocracy on the other hand, they constantly engage in anti-meritocratic behavior in order to give their own children a leg up.

6) Intelligent machines are asked to explain how their minds work [Source: Financial Times]
Researchers at Parc, a laboratory with links to some of Silicon Valley’s biggest breakthroughs, have just taken on a particularly thorny challenge: teaching intelligent machines to explain, in human terms, how their minds work. The project, one of several sponsored by the US Defense Advanced Research Projects Agency (Darpa), is part of the search for an answer to one of the hardest problems in artificial intelligence. Deep learning systems, the most advanced form of machine learning that is at the heart of recent breakthroughs in AI, have shown they can match humans in recognising images or driving a car. But even the experts cannot tell exactly why they come up with the answers they do.

7) QE: The largest transfer of wealth in history? [Source: rt.com]
It appears that the massive, almost decade-long transfer of wealth to the rich known as 'quantitative easing' is coming to an end. By 'injecting' money into the economy, QE was supposed to get banks lending again, boosting investment and economic growth. However, overall bank lending in fact fell following the introduction of QE in the UK, whilst lending to small and medium sized enterprises (SMEs) - responsible for 60 percent of employment - plummeted. The fact that QE on the whole has failed to revive economic growth, according to the author, is unsurprising. The reason banks were not funneling money into productive investment was not because they were short of cash  (on the contrary, by 2013, well before the final rounds of QE, UK corporations were sitting on almost £1/2trillion of cash reserves) but because the global economy was (and is) in a deep overproduction crisis. This meant that the new money created by QE and ‘injected’ into financial institutions - such as pension funds and insurance companies - was not invested into productive industry, but rather went into stock markets and real estate, driving up prices of shares and houses, but generating little in terms of real wealth or employment. Holders of assets such as stocks and houses, therefore, have done very well out of QE, which has increased the wealth of the richest 5 percent of the UK population by an average of £128,000 per head. How did this happen when QE failed to create ‘real’ wealth? The answer is simple.

The wealth which QE has passed to asset-holders has come, first of all, directly out of workers’ wages. QE, by effectively devaluing the currency, has reduced the buying power of money, leading to an effective decrease in real wages, which, in the UK, still remain 6 percent below their pre-QE levels. The money taken out of workers’ wages therefore forms part of that £128,000 dividend. But it has also come from new entrants to the markets inflated by QE - primarily, first time buyers and those just reaching pension age.

8) Why the poor don’t kill us?  [Source: Livemint]
The master-servant equilibrium of Indian society is collapsing. The poor are becoming socially and politically more empowered than ever before. What is surprising is why they do not attack the rich. How does vast poverty tolerate the wealth of a few?  Order suits the rich. Chaos is a leveller. Do the poor overestimate the defences of the rich? Why are we safe? The author, Manu Joseph, believes that India’s poor shun violence for the same reasons most human beings abhor violence. They wish to be humane. There is something far less pleasant that guards the rich—the near absence of human rights for the poor in a police station or a prison, or in the rest of the judicial process. India is not a safe place for the rich but it is safer than it should be, or even compared to more mature economies like South Africa, because the consequences of crimes against the rich are severe in India. Mumbai’s underworld, for example, was an organized attempt by gangs to steal from the rich, but when they began to employ efficient lawyers and use the legal process to free their captured men, society responded through extrajudicial killings of criminals. What India lacks through order it often makes up through informality.

The less democratic a nation, the safer it is for the rich. Street safety in China, it will not surprise us, is much better than in India. But the most important reason why it is hard for anyone to organize India’s poor against the rich is that such a system already exists—in the form of electoral politics. As long as the poor believe that they own politics, they will find greater release in that legitimate revolution than in self-destructive rage. Indian politics thus is largely a revenge of the poor, or at least an attempt. That is one of the reasons why demonetization did not destroy the Bharatiya Janata Party (BJP), as the liberals had hoped. The party has won more than 10 elections since that announcement. The poor thought the rich suffered more than them.

9) Amazon is going underwater [Source: Fortune]
Amazon has filed a patent for using either man-made pools or natural bodies of water to store goods while waiting for fulfillment orders. This sounds crazy. After all, every box would need to be either waterproof or put into a watertight container. And each container would be fitted with a device that could communicate with a network for retrieval. More problematically, the device/container has to be capable of sinking to the bottom of the pool for storage and then rising to the surface on command to be pulled out and put on a delivery vehicle. Extra steps, extra materials, and more cost all around. But e-commerce is exploding, and with it, the need for storage and space to stage goods and quickly get them to customers.

So there are some interesting aspects to this proposal: a) each individual item moves itself as the container/balloon and box expands or contracts and the product floats up or down in the water, so all or most of the handling goes away in the ideal setting; b) the whole process of moving goods around the fulfillment center takes less energy because the water supports the box, and currents in the water push the goods, just like barges take less energy than trucks; and c) it gives extra flexibility. If you need more space, you don’t build walls; you fill up what amounts to a wading pool and just back up conveyors to both or all sides. And since many big cities are close to water, you might actually be able to store the goods near your customers.

10) How Google fiber won by failing [Source: thenextweb.com ]
Google Fiber, for all intents and purposes, was a failure. For all the promise of Gigabit speeds nationwide, Google managed to install its super-fast internet in just 20 cities while burning through billions of dollars and numerous staffers — including two CEOs in just nine months. But even in failure, a few things are black and white. Google may have failed as an ISP, but we’ve all won — including Google. From day one, journalists speculated Fiber was less about competing with established ISPs like Comcast and AT&T, and instead leaving them vulnerable to failure. Failure is an accurate portrayal of internet service providers before Google got involved. They’d failed to upgrade critical infrastructure, speeds were lagging other developed nations, and large swatches of the country lacked access to anything resembling broadband speeds. Google, a company that still derives most of its revenue from online ad sales, saw an opportunity to do what it does best: innovate. This innovation had the added benefit of increasing profit. Faster internet speeds, as you might imagine, means more ads viewed per hour of surfing.

In 2010, Google announced Fiber — calling it an “experiment” — was coming to Kansas City, Missouri starting in 2012. By 2015, AT&T, Time Warner, and others were petitioning city leaders to bring their own fiber offerings to the city. AT&T even wanted to match Google’s blisteringly-fast Gigabit service offering. As a result, Raleigh, North Carolina — another Google Fiber city — now has AT&T and Frontier offering similar service — same in Austin, Charlotte, and Atlanta. Options are a luxury for consumers in this space. ISPs operated for over a decade without a clear competitor even offering the same level of service to specific communities. But when Google came to town, so did its rivals. It’s hard to believe the search giant ever wanted to be an ISP, but by providing a threat to the major players in this industry the company ultimately got what it was after all along - faster speeds, more surfing and hence more value for its ads.

- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.

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