Ten interesting things we read this week

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 Cannabis high’, ‘cheating crisis in America’ and ‘Boris Becker’s ‘slip’ of tongue’

Here are the ten most interesting pieces that we read this week, ended July 27, 2018.

1) Population-age ratio and monetary policy [Source: Livemint ]
How critical is the population-age structure of an economy to the effectiveness of monetary policy? Not very, if one were to go by the Reserve Bank of India (RBI), which, in its recent bimonthly monetary policy report, has identified six key factors that are likely to affect domestic inflation going forward. These include crude prices, global financial developments, household inflationary expectations, house rent allowance (HRA) revisions, revisions in the minimum support price (MSP), and good monsoons. However, a recent Bank for International Settlements paper by Mikael Juselius and Elod Takats, The Enduring Link Between Demography And Inflation, offers an interesting counter-perspective, at least as far as advanced economies are concerned.

Using long-panel data for 22 advanced economies over the period 1870-2016, the authors find a positive correlation between the share of dependent population and inflation, while working-age population share is negatively correlated with inflation. An increase in the proportion of dependants—by increasing consumption rates and lowering the savings rate—can be expected to increase inflation, while the reverse is expected to happen when the working-age population increases. Moreover, the degree of inflation tolerance and monetary policies of any central bank are also a function of political economy considerations such as the proportion of youth in the population, who, as borrowers, may prefer inflation, unlike the old, who, as savers, may dislike it.

The authors dismiss the role of conventional “endogenous inflation drivers”, especially inflationary expectations, in advanced economy contexts. In recent years, however, managing inflationary expectations has emerged as a critical success factor in inflation management in diverse countries like Japan and India. Is there something Indian policymakers are missing? How does India’s large working-age population, constituting its so-called demographic dividend, impact monetary policy? In India, over 2000-2017, working-age population has risen. But unlike in the case of developed economies (as posited by Juselius and Takats), the domestic household saving rate (relative to consumption) has fallen instead of rising. Despite this, inflation has fallen due to active inflation management by the RBI. This implies that the pressure on monetary policy has been considerable.

Employment data for the period January-April 2017 and January-April 2018 reveals the challenge that could be posed to monetary policy by the lack of adequate job creation. While the working-age population in India grew by 2% in January-April 2018 over January-April 2017, the employment rate in the working-age group has fallen—albeit marginally—over the period (from 95.3% to 94.4%). Such a marginal decline masks the marked decline in the proportion employed in the younger 15-24 cohort. Here, the employment rate has fallen from 79.8% to 72.9% over the relevant period. From the monetary management perspective, however, more worrisome is the decline in labour force participation rate in both the 15-24 age group and in the 65+ age group by 0.5% and 7.2%, respectively, in this period. The decline in labour force participation rate in the 15-24 age group becomes more pronounced when compared with the pre-demonetisation period—from 31.7% in January-April 2016 to 23% in January-April 2018.

The ramifications of population-age structure on monetary policy in the context of emerging economies have been relatively ignored by policymakers. Job creation would be an important mediator variable in this context, providing one more compelling reason why the government needs to pay attention to this political hot potato. Understanding lower labour force participation rates among the young and older cohorts, as also creating more productive jobs, may hold the key to reaping the demographic dividend for monetary management purposes. Policymakers need to recognise the genuine opportunity that our demographic dividend presents to mitigate inflationary concerns and reduce the reliance on excessive monetary management over time.

2) China is intent on overtaking the US to lead the world in AI [Source: Financial Times ]
When AlphaGo computer defeated Lee Se-dol at the mind-bendingly complex game of Go in 2016, many people hailed it as a demonstration of the power of human ingenuity and artificial intelligence. The significance of the match was certainly not lost on Chinese officials, who viewed the triumph of Google DeepMind’s AI team over the 18-times world champion in a different light: as a sign of their country’s technological vulnerability. Some described it as China’s “Sputnik moment”. The country has since been pouring money into AI research and pioneering its deployment in many areas. In some, such as the mass use of AI-enabled facial- and voice-recognition technology, it now leads the world, sometimes with disturbing implications for privacy.

President Xi Jinping has baldly declared China’s ambition to become the primary AI innovation superpower by 2030. The country’s powerful tech companies that are heavily intertwined with the state, such as Tencent, Alibaba and Baidu, are also investing massively in AI. All this means that for the first time since the end of the cold war, the US may be facing a serious threat to its technological hegemony, with unpredictable military repercussions. The Washington-based Center for a New American Security has warned of a forthcoming “innovation deficit” as the Chinese military use AI to dominate the battlefield.

The author feels it would be wrong to view this technological tussle as a rerun of the US-Soviet arms, or space, race. The AI competition may be better viewed as part of a broader struggle between a decentralized democratic model and a digital authoritarian system. Just as competition between liberal democratic, fascist and communist social systems defined much of the 20th century, so the struggle between liberal democracy and digital authoritarianism is set to define the 21st. To update a dictum from Carl von Clausewitz for the 21st century, war is the continuation of economics by other means. The Chinese are intent on winning that war; AI is one of the key weapons in their arsenal.

For the moment, though, the US probably retains a significant edge in AI. Jeffrey Ding, a University of Oxford researcher and author of a report on Beijing’s AI strategy, estimates that China’s current capabilities are only about half those of the US. He argues that the US boasts a clear advantage in terms of hardware design, algorithmic research and overall commercialization of ideas, thanks to Silicon Valley’s unique ecosystem. The one important area in which China leads the US is in the harvesting and pooling of data, often shared between notionally private companies and government agencies. Perhaps the biggest gap lies in the research field where the US dominates, largely because of its world-leading universities. US boasts about 78,000 AI researchers, compared with 39,000 in China. The US also remains open to the world and attracts many of the best academics from overseas. But Beijing has been stepping up its efforts to entice Chinese researchers working abroad to return home, the so-called sea turtles, and attract more foreign talent, too.

The decentralized approach of the US may prove more durable in developing and deploying AI technology in the long run. But it is also possible that China has learnt the lessons of western history better than America. After all, the first computers were developed for state-directed military purposes. The British built the Colossus computer as part of its code-breaking efforts at Bletchley Park during the Second World War while the Eniac, its US counterpart, was developed as part of the Manhattan Project.

3) The cannabis business is on a high, of the profitable kind [Source: Livemint ]
Forget Bitcoin, there’s another investment boom in the offing. It is cannabis—yes, that gentle flowering plant that has given us hashish, ganja, bhang, and perhaps the soma that our ancient gods used to imbibe. People are not just smoking it—they’re mixing it with the choicest of wines and even rubbing it into their skin. The legal marijuana market is currently worth $7.7 billion globally, and is expected to hit $31.4 billion by 2021. European investment bank Bryan, Garnier & Co. sees it growing to $140 billion by 2027. In the first six weeks of 2018, cannabis-related businesses raised $1.4 billion in capital, a nearly-six-times increase over the same period last year. On 19 June, even the Canadian Parliament passed a law legalizing the drug. It’s big money for Canada: financial services company Deloitte estimates that the country’s legal marijuana business would be worth more than $6 billion. Of the 42 fund raises that took place till mid-February, 30 involved Canadian marijuana businesses.

Even the world’s largest seeds company, Monsanto Co., is betting big on developing genetically modified strains of marijuana. After wheat, cotton and soya, the controversial US corporation sees marijuana as the next, well, pot of gold. However, global alcohol sales by volume have been dropping every year for the last few years—they fell by 1.3% in 2016 —and cannabis could seem an obvious add-on to liquor companies. American alcohol giant Constellation Brands, Inc. (owner of Corona beer) has bought a 9.9% stake in Canada’s largest licensed cannabis producer, Canopy Growth, for $190 million. Also, the legal status of cannabis varies widely from country to country, from totally legal (Uruguay), to legal for medicinal purposes (Australia, Chile, Germany, Italy, Israel, Mexico), and absolutely illegal (most of the world). In Spain, you can grow and smoke cannabis as long as you do so in private. In the Netherlands, sale of cannabis for personal use is allowed in “coffee shops”. In Jamaica, you can cultivate and smoke pot if you are a Rastafarian. In the US, possession of cannabis is illegal under federal law, but allowed for medical use in 28 states, and for recreational use in nine. It is estimated that in 2017, one in five American adults had access to legal marijuana.

According to a report by New Frontier Data, a cannabis-related business intelligence firm, the industry could create a quarter of a million new jobs in the US by 2020, more than all manufacturing jobs. There is even a recruiting firm, vangst.com that specializes in hiring for the marijuana industry. Claiming that more than 400 companies have used its services, the website says: “Since launching in 2015, we’ve connected over 5,000 candidates with jobs in the rapidly emerging cannabis industry.” Last year, when marijuana delivery firm Eaze conducted a survey of its customers, it found that 91% of the respondents had jobs, more than 50% had at least a bachelor’s degree, and 49% earned $75,000 a year or more (US median household income in 2016 was $59,039). These are well-to-do people, hardly dropouts or hippies — and 58% of them said that they smoked pot every day!

Cannabis has also found its way into the beauty and healthcare industries. American Green, “a publicly traded company dedicated to the emerging cannabis market”, has purchased the town of Nipton in California. The company intends to turn Nipton into a “first-of-its-kind eco-tourism experience for conscious cannabis consumers”. When the project is up and running, visitors will be able to shop for marijuana products, tour a marijuana farm and enjoy various other pot-related pleasures. American Green is promising an immersive experience.

In 2017, a Pew Research Centre study found 61% Americans supporting legalization, up from only 30% in 2000. A telling indicator of the changing attitudes is that while Bill Clinton, when running for President in 1992, had to claim that though he had smoked a joint as a young man, he “did not inhale”. Barack Obama, during his campaign in 2008, admitted that he had smoked pot as a college student, and this confession didn’t hurt his chances at all.

4) Why are young billionaires so boring? [Source: Bloomberg ]
The legendary investor, Warren Buffet, 87, was surpassed in wealth by 34-year-old Mark Zuckerberg recently. The gap was closed in part by Facebook’s surging stock and in part by Buffett’s large charitable cash outflows. Today, the three richest people in the world, Jeff Bezos, Bill Gates and Zuckerberg, have all made their fortunes in tech. With 64 technology businessmen and women on Bloomberg's list, which tracks the world’s 500 richest people, the industry has produced more billionaires than any other (unless you count inheritances—there’s a lot of inherited wealth on the list, too). This year alone, tech has created 11 new billionaires. But there's something missing from the foundational stories of this new group of self-made men. Where earlier generations' formative experiences revolved around paper routes and pathos, today's prototypical founding story involves an upper-middle-class childhood, early access to a computer, and an elite education—even if that education was abandoned.

The self-made man has always played a profound role in the American imagination. Horatio Alger wrote stories of plucky, lower-class strivers who made their way in the world by dint of honesty and hard work. Hollywood has fetishized the underdog since movies were invented. And for years, the business world offered real stories too. But the modern rise of the Harvard dropout (or New York University in Dorsey's case, or UCLA in Kalanick's case), complicates that story. Today's founders are long on brilliance, but short on hardship. It's difficult, after all, to become a computer prodigy without a computer. That dollop of privilege speaks to a larger trend in the American economy: For millions of low-income people, it's getting harder to build something from nothing. In order to drop out of Harvard, first you have to get in. For many leaders of Buffett’s generation, dorm rooms weren’t a part of the origin story.

In some ways, it's great to live in the age of the nerd. And it’s tough to mourn the decline of Wall Street-style corporate machismo. But a poor kid growing up today may find it much harder to emulate the life path of someone like Zuckerberg, who coded an instant messaging system before hitting puberty, than that of even Goldman Sachs CEO Lloyd Blankfein, who grew up in Brooklyn housing projects and at one point served concessions at Yankee Stadium to earn extra money. Statistically as well as anecdotally, true American rags-to-riches stories are getting rarer. Class mobility, as defined by the percentage of children who earn more than their parents, has been in a state of mostly uninterrupted decline since the 1940s. Economist Raj Chetty found that only about half of the children born in 1980 have surpassed their parents’ income. In 1940, that number exceeded 90%. Of course, most successful entrepreneurs have earnings that vastly outstrip their parents’. In fact, they outstrip the earnings of nearly every human in history. Last year Oxfam International found that more than 80% of earnings went to the top 1% of the world population.
 
According to recent Federal Reserve data, the median family's net worth had not recovered its pre-recession value by 2016, while the top 10% gained double digits since 2007. Of course, you can still find evidence of rough patches and plenty of hard work in the early childhoods of today's wealthiest tech luminaries. Elon Musk, 47, an immigrant from South Africa, came from wealth, but was bullied as a kid before moving to Canada alone at just 17, where he enrolled in Queens University and transferred to the University of Pennsylvania, before eventually dropping out of a Stanford University PhD program. Jeff Bezos, 54, was born when his mother was 16 years old, and was adopted by her second husband, a Cuban immigrant and an engineer. And Sergey Brin, 44, came to the U.S. as a six-year-old, when his parents traded the anti-Semitic backdrop of Moscow academia for a new life in the U.S. But even these founders, who all had at least one parent with a science background, stand in contrast to an earlier era.

The so-called "digital divide" between rich and poor households, has reinforced the gap between haves and have-nots. Despite the pervasiveness of personal computing, poor kids today are less likely to have access to the programs that could help them develop early coding genius. According to Pew Research Center data, 87% of households with an income of $75,000 or higher use broadband at home. But for households making less than $30,000, it's only 45%. That inequality of opportunity is rising is hardly a matter of debate. And unlike yesterday's titans, the newest of generation billionaires don’t have histories likely to assuage popular resentment.

5) Heavy industry turns to renewables in drive to go green [Source: Financial Times ]
In Sweden, construction is about to begin on a giant wind farm with a single purpose: to supply power to the aluminium smelters of Norsk Hydro, one of the world’s biggest producers, for the next 29 years. The wind farm, which cost Euro 270m to build, highlights an important new development in renewable energy: a growing number of investments from heavy industry. A recent spate of deals from cement plants and aluminium smelters signals how a new market is developing for renewable energy, particularly during a time of volatility for traditional energy prices, as some of the world’s most carbon-intensive industries try to go green.

Corporate buyers of renewable power have been on the rise and emerged as one of the main drivers for new renewables projects, because long-term power supply deals typically enable construction to begin on a large wind or solar project. Tech companies such as Microsoft and Amazon, which have big data centre power needs, were among the first to do these deals, but the trend has now spread across sectors and even to heavy industry, which has been one of the slowest sectors to decarbonise. The wind farm in Sweden will sell power into the electric grid, which will then supply the aluminium smelters on the west coast of Norway. The intermittent wind power will be complemented by hydropower stations, which can adjust their output levels through the 24-hour day-ahead bidding system that governs the Nordic power market.

According to Arvid Moss, vice-president of energy at Norsk Hydro, the low price and long duration of the wind power contract made it ideal for aluminium smelters. By 2021 about 30% of the power used in Norsk Hydro’s aluminium smelters would come from wind power, he added. Other industrial sectors are starting to make similar moves. Earlier this month Acwa Power, the Saudi Arabian power company, inaugurated a wind project in northern Morocco that will supply electricity to three cement kilns nearby. And in Sweden, construction began last month on a pilot plant to produce “green steel”. The plant, operated by SSAB, LKAB and Vattenfall, will use renewable energy and hydrogen to produce iron ore pellets without using fossil fuels.

One reason for slow adoption by industrial sector has been that many industrial processes do not directly use electricity. For example, only 10-15% of a cement plant’s energy demand is for electricity. Most of the energy needed is in the form of heat — usually from burning coal or gas — to power the cement kiln. At present, the technology does not exist to use electricity to heat a cement kiln in an economically feasible way, said Bernard Mathieu, director of climate change at the World Cement Association. However, Mr. Mathieu expects more renewables developments in the sector. “The electrification of energy intensive industry is on the agenda,” he said. “And in parallel we see, slowly but surely, a development of projects working with energy from renewable sources and investing in their own renewable production.”

Paddy Padmanathan, chief executive of Acwa Power, said generating steam from wind and solar farms, rather than generating electricity, could be one way to help integrate more renewables into industrial plants. “There are a lot of industrial processes that use steam — a lot of them use low-grade steam, which is perfect to be captured by these parabolic troughs that we are using,” he said, referring to concentrated solar plants that use the power of the sun to heat a liquid.

6) The most unkind cut of all [Source: Livemint ]
In this article, the author talks about the Indian cinema and its censorship. In June 1954, Jawaharlal Nehru received an unusual petition signed by 13,000 housewives in Delhi warning him of a creeping public calamity. There was, the aggrieved ladies argued, a grave threat to the “moral health of the country”, one that had become a “major factor in incitement to crime and general unsettlement of society”. The children of India, they explained, were finding themselves susceptible to all kinds of absurd notions, not least of which was the kind of sexual awakening that still makes many an Indian mother restless. Something had to be done to curb such naked evil, and the prime minister was the only man who could assuage their fears. It was to him, then, that they looked to rein in the medium responsible for this imminent disaster, and he would, they hoped, be the voice of moral correctness in this age of immorality. As for the enemy medium—it was that odious, dangerous thing shrouded in an innocent name: cinema.

It was in July 1896 that the Lumiere Brothers first brought this “miracle of the century” to Mumbai, introducing to Indian audiences the motion picture. Feature films arrived soon after, with Raja Harishchandra (1913) marking the birth of the film industry. By the time the 13,000 Delhi housewives knocked on Nehru’s door, India was already the second largest global producer of films, making two-thirds the number of movies as the US, twice as many as Japan and five times more than Italy—Britain had been left far behind as early as 1925. By then, India had over 2,000 screens, selling 250 million tickets annually. Like the bureaucracy, the English language, cricket and tea, independent India also inherited from the British a great fondness for censorship—the only difference being that the latter were more honest about why they imposed it. Before laws were passed in 1918 and 1920, establishing regional censor boards, films fell under the purview of a variety of rules. When electric lights were used for projection, for instance, the state insisted on the right to regulate the business under the Indian Electricity Act of 1910.

The 1921 film Bhakta Vidur tried to pass itself off as an innocent story about a character from the Mahabharat. It did not take censors long to notice the resemblance to a certain South Africa-returned Indian: He wore the Gandhi cap, had a charkha, and told peasants they needn’t feel awkward about denying taxes to the state. Understandably, Bhakta Vidur was banned. Then there was another British preoccupation in preventing the screening of Western films in India which might, as the chairman of a 1927 committee noted, “lower the prestige of the Westerner in the East”. After all, how could the white man civilize the barbaric Asiatic, if the Asiatic saw on the movie screen that whites were also mere mortals? In the five years before 1948, censors in Mumbai had ordered cuts in a total of 705 films; now, in the first half of 1949 alone, they demanded changes in 242 cases. The Bengal authorities were proudly puritanical, rejecting films as “repulsive” or “distasteful”—a more moralistic tone compared to 1931, when the British banned a film calling it, more bluntly, “stupid”. The government of independent India also decided to create a central board of censors, and by 1960 there were more rules to guide Indian cinema away from touchy areas.

“No picture shall be certified for public exhibition,” the information and broadcasting ministry commanded that year, “which will lower the moral standards of those who see it.” Films that lowered “the sacredness of the institution of marriage” were disallowed, and characters with “indecorous or sensuous posture” could also invite a ban. In keeping with the sarkari love for detail, anything affecting “the confidence of a child in its parents” was also liable for censorship. Squashed between bureaucratic pomposity and public melodrama, meanwhile, cinema itself suffered. As the film historian Theodore Bhaskaran writes, “hemmed in on all sides by sensitive areas of endless variety”, cinema often got stuck in a time warp. And since anything interesting brought down the wrath, either of the state or howling mobs or both, many film-makers fell back on a song-and-dance formula that upset nobody—a tradition still in vogue, depicting not so much reality as much as an “escape” from it, helping also its producers to minimize the snipping of the self-righteous censor.

7) How a tiny bank from the Ozarks got big and outpaced Wall Street’s real estate machine [Source: Bloomberg ]
This piece revolves around George Gleason, who runs Bank of the Ozarks, an institution in Little Rock with $22 billion in assets, and how he went on to become one of the well-known banks on the Wall Street. “They suck all of the oxygen out of the room,” says John Allison, chairman of Home BancShares Inc., a competitor in Conway, Ark., and a friend of Gleason’s since the 1980s. This year, industry watcher the Real Deal named it the city’s third-biggest construction lender. Reaching the big leagues has required an unusually concentrated bet: Eighty percent of Ozarks’ portfolio is in real estate, and half of that is in construction and land development, which is historically the riskiest sector and has led to a disproportionate share of bank failures.

Since 2014, Ozarks’ profit has jumped almost fourfold, and the return on assets is double the industry average. But an old banking adage holds that the lender who grows fastest is the lender who someday loses most, and Gleason’s rise has brought plenty of skeptics. In a 2016 presentation in New York, Carson Block—the founder of investment adviser Muddy Waters Capital LLC and a short seller then anticipating the bank’s shares would fall—argued that Ozarks’ growth would flag as the hottest property markets cooled. Goldman Sachs Group Inc. economist Spencer Hill said this spring that commercial real estate is overvalued by as much as 16% and that next year it could approach the “bubble-period peaks” of a decade ago.

On business operations, Gleason holds to the belief that, if you lend to the right projects, there is no boom-and-bust cycle. Ozarks doesn’t change its underwriting standards in good times or bad, Gleason says. And it doesn’t base decisions on headlines. It examines population growth, household formation, and job creation around proposed projects, virtually down to the street. “If you do the work, you can predict those items with some degree of precision,” he maintains.

While the CEO should has been enjoying his remarkable 39-year rise, the concern raised by Muddy Waters’ Block in May 2016, that Ozarks’ growth will prove unsustainable, hadn’t gone away. Among other things, he’d been having to explain, or at least downplay, Dan Thomas’s July 2017 departure from RESG (Real Estate Specialties Group), a unit Gleason started in Dallas in 2003 with the help of Dan Thomas. Thomas by then was the bank’s chief lending officer, and he’d complained about the regulatory burdens Ozarks faced as it grew past the $10 billion asset threshold, according to Bill Koefoed, a bank board member. It wasn’t just the media getting under Gleason’s skin. In March, UBS Group AG analyst Brock Vandervliet had become one of the few to put a sell rating on Ozarks’ stock, saying the bank was likely to fall victim to the end of cheap money. As rates rise, Vandervliet predicted, the spread between what Ozarks pays out to depositors and collects in interest will shrink. And as projects become more expensive, it will be harder for the bank to maintain its remarkable loan growth.

However, Gleason says Ozarks goes for the first, least risky, part of debt: a loan that’s secured by a lien on the property. It also protects itself by requiring developers to put their own capital into the deal first. At the end of 2017, regulatory filings show, the typical Ozarks loan covered only $49 of every $100 spent; the developer had to come up with the other $51. This is sufficient cushion, Gleason said, for his bank to withstand a drop in property values greater than the dips of the Great Recession: “It’s almost impossible for it to end badly.” But above the bank was another box, for the so-called mezzanine lender. In some cases this lender, accounts for perhaps $25 of the developer’s $51 in equity. But Gleason is not worried as the other lender doesn’t have a lien on the property and is required to put all of its money in before Ozarks. Also, multiple legal guarantees protect the bank. However, such assurances have humbled lenders in the past. When projects fail, they tend to fail hard. If developers don’t have enough skin in the game, they cut their losses and move on. The bank holding the lien can foreclose, but then it’s holding a half-finished building. On paper the building might be worth more than the loan; in practice, selling it could require a fire sale.

8) America has a cheating crisis – Why leaders should worry about it [Source: Medium ]
In this article, the author emphasizes on “cheating”, its outcome and how America is facing cheating crisis. So, who cheats? Almost everyone, if the risk is worth the reward. There’s a cheating crisis in America’s schools. 74% of high-school students admitted cheating on an exam at least once. However, the problem goes well beyond — teachers cheat as much as kids do. In the book Freakonomics, Steven Levitt and Stephen Dubner describe how incentives lower the bar, rather than encourage us to do the right thing. School test scores determine more than students’ performance; they define the fate of the institution. Schools are held accountable for the results — low scores could mean being placed under probation and face the threat of being shut down. Teachers are more concerned about “high stakes” testing than everyone else. Their jobs, not just their students future, are on the line.

The authors performed an analysis of Chicago Public School to detect if teachers cheated but, most importantly, how. To catch a cheater, they decided to think like one. First, they look for unusual answer patterns in a given classroom. If poor students gave correct answers to the most difficult questions, that would raise a flag. Secondly, they identified uneven spikes — if one classroom shows a one-year peak with a dramatic fall to follow, there’s a likelihood that the improvement was ‘artificial.’ A third indicator is the class’s overall performance — if the average score dramatically spiked compared to the previous year, something was not right. To validate the hypothesis, the Board of Education decided to readminister the standardized test. The classrooms where no cheating was suspected performed similarly or slightly better. Those who were suspected of cheating scored far worse.

In a research by the University of Georgia, about 55% of people acknowledged manipulating work for self-gain — e.g., falsifying statistics, inflating production numbers or altering timesheets. Another 31% recognized sabotaging coworkers and or stealing their ideas. Additional studies show that half of workers fake sick days. Unfortunately, the “everyone does it” mentality can drive social acceptance — lowering the bar creates long-term consequences. The authors of Freakonomics reduce the explanation to a simple economic formula: people cheat to get more for less (effort). Cheating is a byproduct of high-performance cultures. There are three aspects that accelerate cheating: 1) The culture of an organization - When financial goals are the one and only metric, companies ask little questions about how things get done; 2) The context - When everyone is breaking the rules, why should one bother? The “everyone does it” motto becomes an excuse for one to cheat too. 3) Illusory anonymity - Research shows that, in darker environments, people feel more prone to cheat. When no one is watching, we think we won’t get caught.
 
When you cheat, the first person that you fool is yourself. Shortcuts are a superb cheating mechanism — we expect a high reward at barely any cost or effort. Unfortunately, most shortcuts don’t deliver the magic solution they promised. Seth Godin refers to this as the ‘shortcut crowd’ — people who crave for things that are too good to be true. He mentioned how his grandmother was disappointed by a $99 exercise machine she bought — she expected it would do the exercise for her. As the author explains, these people cheat themselves because they don’t really want to change. They buy into shortcuts that, deep inside, they know they won’t work. That gives them the excuse to blame the manufacturer — it was its fault, not theirs.

Daniel Pink in his book Drive says that we need to upgrade our reward system. He proposes a new approach with three essential elements: Autonomy, Mastery, and Purpose. Autonomy: Our brain is wired for us to behave autonomously and be self-directed. Pink explains how this autonomy is necessary over tasks (what we do), time (when we do it), team (who we do it with), and the technique (how we do it). Mastery: Making progress in what we do is the single most important motivation. Mastery is the opposite of shortcuts — we put effort into something because we seek personal growth, not just success. Purpose: Our human nature is to contribute to something more significant and more enduring than ourselves. We want to make the world a better place, not just reap the benefits. Organizations are rediscovering the value of purpose. They are realizing that people want to accomplish a higher mission, not just do their jobs.

9) Diversity versus merit is a false choice for recruiters [Source: Financial Times ]
It is well established that diversity boosts creativity and reduces groupthink. But while people believe that workplace diversity is valuable, they also think recruiters should choose the best person for the job. The problem is that these propositions have a nasty habit of jarring. How many times have you heard an organisation say they would have loved to close their diversity deficit, but selected “on merit”? This is a false trade-off. It stems from using too narrow a definition of “best person for the job”. This can make for faulty hiring decisions and a less diverse workplace. According to the author, Andy Haldane, if relatively simple steps are taken to widen the definition, this could transform organisational strength.

Andy starts by considering a different decision problem. Imagine you are choosing between two assets — shares in two companies. One company’s share promises a return of 10 and has volatility of 6, the other a return of 10 with volatility of 8. The choice of best asset is an easy one, right? The first company offers the same return at lower risk. But is it the best asset for the portfolio? That depends on more than just the individual characteristics of the two shares. It also depends, importantly, on how these characteristics compare with the other assets in the portfolio. Assume the first asset has a correlation with the existing portfolio of 0.75; it has similar, if not identical, characteristics to the portfolio. Asset two has a correlation of minus 0.75; its characteristics are very different. Imagine the original portfolio delivers a return of 5 with volatility 5. Adding the first asset, in equal amounts to the existing portfolio, delivers returns of 7.5 and volatility just under 5. Asset two delivers the same returns with volatility of just under 1. In other words, asset two is now clearly the better bet, delivering those returns at lower risk.

Using the same analogy in the hiring decisions, Andy recommends comparison of candidates’ characteristics relative to existing employees. The less similar they are to the pool, the greater the diversification gains and the larger the risk-return benefits for the organisation. While this sounds simple, it is a world away from our existing recruitment procedures, which compare individual candidates’ characteristics. Some organisations seek to avoid choices based on background. But that has not prevented subtle filters from screening out diverse candidates. Comparing one individual with the next is an ideal method for picking Wimbledon winners, but it is ineffective for running organisations which by definition are a team sport. Picking a team with 11 Lionel Messis does not win a World Cup; it builds in a diversity deficit. To close those deficits, recruiters need to be playing a whole new ball game.

10) How Boris Becker’s slip of the tongue gave Andre Agassi the upper hand in their rivalry [Source: Herald Sun ]
Sometimes victory comes down to the tiniest and strangest of details. For three years, Andre Agassi agonised over what he needed to do to his game, what approach needed changing up in his quest to beat Boris Becker. Between 1988 and 1989, the pair met on three occasions, the German claiming a hat-trick of wins. While not the longest stint for any player to have gone without beating their biggest rival, competition between the pair continued to grow, the spotlight on the pair intensified and so too did Agassi’s obsession with breaking the hoodoo.

And then came a breakthrough. On the hard courts of Indian Wells in 1990, Agassi put a new theory to the test. A small, but ever so important observation he had made after endless hours of watching replays of Becker in action. He watched for the German’s tongue! “Becker beat me the first three times we played because he had a serve the type of which the game had never seen before,” Agassi said. “I watched tape after tape of him and stood on the other side of that net three different times, and I started to realise he had this weird tick thing with his tongue.” Agassi explained that just before Becker tossed the ball on his serve he would stick his tongue out. If it went to the left of his mouth he was serving wide towards the tramlines, if it remained in the middle the ball was staying central.

Agassi’s fortunes against Becker improved markedly after he clocked his ‘tell’. The discovery transformed Agassi’s record against Becker. In the 11 meetings which followed, the German managed just one victory (Wimbledon semi-final 1995) before ending his career in 1999 with a 4-10 record against the American. During that time, Agassi says the biggest problem was discretion. He had to allow Becker to win certain points with his thunderous serve in a bid to ensure “his tongue still poked out”. “The hardest part wasn’t returning his serve,” Agassi said. “The hardest part was not letting him know that I knew this. So I had to resist the temptation of reading his serve for the majority of the match and choose the moment when I was going to use that information. I didn’t have a problem breaking his serve, I had a problem hiding the fact I could break it at will, I just didn’t want him keeping that tongue in his mouth.”

Becker retired seven years before Agassi, and it was only once the German was firmly out of the game that the secret was revealed. “I told Boris after he retired. I told him at Oktoberfest, we had a pint and I couldn’t help but say “do you know you used to do this’ “He fell off the chair. “He said ‘I used to go home and tell my wife — it’s like he reads my mind’. Little did I know you were just reading my tongue’.

-Prashant Mittal is Strategist, at Ambit Capital. Views expressed are personal