Why are Indian vegetables more expensive in my town these days?

Imagine you have carefully planned your wedding for three years and are all set to fly to Antigua to get married. Along with your fiancé and the best man and three bridesmaids you reach Gatwick airport in London where you are told that your flight has been cancelled. This is exactly what happened to Kelly Williams and her fiancé Barry Stephens in April 2010. The couple had to call off their wedding. Why? Because of Eyjafjallajökull! Now imagine you are a famous cookery expert. You have been invited to visit Washington to do a special meal for the First Lady of US, Michelle Obama and her family. You find on the day of your travel from London, UK to Washington that your flight is cancelled. Sally Bee, the famous cooker expert, felt heartbroken. Why me? Because of Eyjafjallajökull!

Sun at 10.30 p.m. in Reykjavik, Iceland, June 2007.

Photo: Devendra Kodwani

Eyjafjallajökull is a volcano that I saw on the Icelandic map lying down in the hotel room at Reykjavik in 2007. Little did I realize then that the small beautiful country of 300,000 people in the middle of north Atlantic ocean will be making global news in the following two-three years. The first big news it made relates to consequences of 2007-2008 the banking crisis in the US and Western Europe which led to global economic recession. The second relates to eruption of Eyjafjallajökull in April 2010 that caused gridlock in the air space over Europe. Why do I mention these two events and what do they tell us about taking, planning and managing risk in life, business and career?

What are the chances of a volcano under Icelandic glacier erupting and releasing clouds of ash containing little rocks, ash and glass particles into atmosphere at the height of 20,000 to 30,000 feet in one of the busiest airspaces in the world over northern Europe? The chances of such an event are very few. It is what a statistician would call a very low probability event. The impact of some rare event could be very high. The ashy, rocky and glassy clouds hovering high in the flight paths could get into the powerful jet engines of wonderful flying machines we call airplanes. The heat of these engines would melt the glass and rock which in turn will choke the engines themselves and stop them making the Boeings into gliders in no time. Obviously the consequences could be tragic. That’s why for the first time in history of civil aviation the European air traffic controllers banned the flights for days. Till few days ago very few travelers would have thought that such an event would take place. But it did.

Overlooking the sulpher springs (Hot water) on volcanic surface in Iceland, June 2007
Photo: Devendra Kodwani


Now think about municipal councils of various cities in the UK, treasurers of many reputed universities in the UK, including Oxford and Cambridge, end up making huge deposits running into millions of dollars with Icelandic banks finding that their deposits are nearly lost because of Icelandic banks collapsing in the aftermath of global banking crisis.

Be it holiday makers and other travelers or the finance experts managing the funds of universities, councils and pension funds none considered that a very low probability event such as banking collapses or a volcanic eruption grounding 20000 flights could happen. These are what Nassim Taleb calls Black Swans. You may spot a million white swans over the years but that is no guarantee that there are no Black Swans. This phenomenon in statistics is a called finding an observation with a very very low probability. Remember a very low probability is not same as impossibility. There are some important lessons that Black Swans have for business managers and individuals when thinking about risk.

At a hiltop revolving restaurant overlooking Reykjavik, Iceland,

About 11.30 p.m., June 2007

Photo: Someone sitting next to me at the restaurant 

Risk is chance of something happening other than expected. Risk is a fact of life in any walk of life. Highly improbable events from winning a lottery from 10 million tickets to being struck by a lightning do happen. The world leader in automobile engineering and known for their quality Toyota may mess up breaking and accelerator pedals. So the first lesson is to recognize we are all exposed to risk. Second, too much reliance on the historical trends is not advisable. History may repeat itself but that does not give you competitive advantage. Why? Because everyone knows that history repeats itself hence you knowing it is no special knowledge that you possess and others don’t. Knowledge may provide edge to your organization only when you have exclusive access.

Actually a third more important lesson is that claims of business and economic knowledge and expertise have to be taken not with pinch but fist full of salt. There is a philosophical reason behind this. One of the greatest philosophers of 20th century, Karl Popper gave us a big idea of ‘indeterminacy’. Roughly his argument is that it is humanly impossible to know everything. There is limit to how much we can rationally know and understand. This leads to some practical ideas that you may find useful.

First, do not rely much on forecasts based on the historical trends. Since risk is inevitable part of life, do take risks (because otherwise you take it without your knowing) but know the potential consequences of the worst possible outcome. Second develop the ability to see the unintended consequences of any event. Here are some unintended consequences of shutting down the European airspace for few days in light of Icelandic volcano. We saw the hardships of travelers but now consider this.

Few days back I went  to the market to buy vegetables with my wife. Usually we get most green vegetables in this small town market in southeast of England where we live. But that day there were no good quality fresh vegetables available and what was available was expensive. No surprises the Icelandic volcano in the middle of north Atlantic island had direct impact on our dining table! Most vegetables come to the UK through aerial route.

In future the travel insurance contracts will have to include or to exclude more explicitly 'travel chaos caused by volcanic ash' as a risk covered!

Several business and academic conferences were cancelled.

The Royal Mail took its mail from UK to Spain by train before flying it from there to the US.

But there is other side to problems, as always. The disasters bring out best in human creativity and compassion also. Read this and reflect how creative we could become if viewed remote risks as near possibilities. Tom Noble, a marketing director from north London, wanted to reach UK from France but was stuck because of flight cancellation. He had option to cross English channel on ferry. But he found at Dunkirk in France where he went to board the ferry that there was no space left for passengers on foot. There were though few seats available for the cyclists. Tom went back to streets of Dunkirk and bought a woman’s bicycle for 40 Euro and caught the Norfolkline ferry to UK in time to reach for his wife’s birthday. Another executive with British Airways gold card came riding a children’s bike!

The biggest risk is not to take any. The biggest mistake is not to make any. How? Think of one invention in history of human civilization that might have been done perfectly right in the first attempt. I am sure you will struggle to find one. Einstein once said that if an idea does not sound absurd in first instance then it is perhaps not worth pursuing.

Photo: Devendra Kodwani    
                            

What do you think about relevance of above article to life, profession, business? Anything that you takeaway that's worth sharing with others? Share if you ever converted a  problem into an opportunity to think or do something different which resulted in unintended positive development?

Could we have learned from history the banking crisis of 2007-08 and the economic crisis that followed? To listen to my views follow this link 

80-20 Principle, G-20 Summit and Your Life

103 years ago in 1906 Vilfredo Pareto made a remarkable observation that 80 per cent of land in Italy was owned by 20 per cent of the population. Little did he realise then that he had unwittingly hit upon the ratio which will be found in so many different walks of life.

The Pareto principle of the vital few causing maximum consequences is a frequently mentioned rule of thumb in economics and management classes. For example, 20 per cent of customers contributing 80 per cent of profits, 20 per cent of employees contributing to 80 per cent of profits (and losses if they happen to be in banks one may say these days!). Try thinking about your life, does 80% of your happiness depend on 20% activities you do? Just count those vital few things you do or vital few people in your life who make your life feel good. Does 80% of your income get spent on 20% of habits? Does 20% of your knowledge contribute to 80% of your productivity?

Where the Pareto principle may not apply perhaps is the number of financial institutions that caused the financial crises. Perhaps it was less than 20 per cent of banks that created more 80 per cent of bad assets that subsequently caused havoc in financial world. Anyway, let’s see if 80-20 principle can be applied to G20 summit outcomes.

A group of leaders from 20 countries and regions representing 80 per cent of global trade came together in London to fix global economic recession. The deliberations over two days and many preceding weeks resulted in a statement by G20 leaders published on Thursday. The statement runs into nine pages, 29 numbered paragraphs and contains 3,077 words. I am going to look for those vital few 20 per cent of the statements made and try to make 80 per cent of sense! Applying the principle strictly I am going to search for maximum six paragraphs that seem vital to me.

The first vital paragraph is number five which says that the global lender of last resort for countries, the International Monetary Fund, will be provided additional resources of about $1.1 trillion; reasoning being that this will provide money to various countries’ governments to spend on public projects, green technologies and so on to boost demand and create jobs in hope of reviving the economy. The Keynesian economic principles applied on a global scale! Vital issue: The evidence of public management of infrastructure in most cases is far from satisfactory.

Second vital paragraph is number 13 which identifies the failures by financial sector players, watchdogs and regulators as the primary causes of crises. Fair enough. Response is in vital paragraphs 14 and 15 which call for setting up of tougher regulatory regimes nationally and internationally. These super regulators will regulate financial sector players, watchdogs and will coordinate with other national regulators to reduce unnecessary risk taking, improve global financial system and accountability. Vital issue: Regulatory capabilities and effectiveness would need to leap frog to higher level. Regulating smart bankers will require smart regulators who are as good as bankers. But if they are as good as bankers why would they work as regulators?

Fifth vital paragraph is number 22. It declares the intention of G20 countries to protect the world from economic protectionism. No issues with this so long as the most European countries and the USA follow this.

Sixth and final vital paragraph for me is number 25 which refers back to the problem that disturbed Pareto 100 years ago. The G20 statement promises help for the poorest countries. It is recognised that problems caused by vital few have serious immediate consequences for many. Steps announced to this end are most welcome.

Finally, there are vital signs in the communiqué that address many issues addressed by the protestors on London’s streets over the two days. Pushing for greener developmental options, promoting the interests of the poorest, controlling exorbitant compensations in financial industry and improving the transparency in tax systems are all ambitious statements. Has the G20 summit promised far too much? On the face of it this appears to be the case. Let’s wait and watch till the next summit which is likely to be in 2009 itself.

Foolish ‘nice’ and Sub-prime Monarchs!

I would be very happy if you said after reading this article that it is a ‘nice’ article as it would mean a compliment. But if I wrote some article few centuries ago and you said it’s a ‘nice’ article, it would be not be compliment; it would be an insult to me! Why?

Well few centuries ago, ‘nice’ did not mean ‘nice’ or good but it meant ‘foolish’ or ‘ignorant’! Surprised. Don’t be. Look carefully at the word ‘nice’. The word comes from Latin word nescius. Travelling through the old French nescius reached English and ended up as nice. Nescius is derived from nescre which means to be ignorant. In root of nescius is scire that means ‘to know’ and gives us so many words related to knowledge such as science, omniscient (all knowing), conscience, conscious and prescient. However, over centuries the meaning and the form of nescience has changed from foolish or ignorant to nice. But nescient is still usable adjective which means ignorant. Isn’t this a ‘nice’ story about journey of word ‘nice’? Bye the way there is also a nice town called Nice in southeast France! Let’s move from Nice to Venice and Florence in Italy the hotbed of commerce and banking in middle ages.

Venicians and Florentians contributed a lot to modern banking development. The word bank comes from banca meaning a bench on which the money lenders and exchangers sat and did the lending, borrowing and guaranteeing payments for facilitating trade. However, if a banker incurred losses and was unable to honour the agreements, he would be taken out of the business and his bank (bench) would be literally broken. Latin word rupta means broken. Combine bench+rupta and you get bankrupt that we use today to describe a business enterprise or individuals who have more to pay than what they own.

Everyone reading this, I am sure by now knows that some American and European banks collapsed in 2007-08 after their borrowers, particularly the US house-owners failed to pay their housing loan instalments. These banks went bankrupt or were taken over by the governments with tax payers’ money. In this case the cause of bankruptcy of some of the banks was poor business judgement and or greed to make quick money. But in the middle ages (roughly 5th century to 16th century AD) the biggest risk of bankruptcy for European banks came from the kings and the queens. The monarchs used to borrow very heavily from banks to finance the innumerable wars which went on. Some monarchs paid as high as 45% interest rate. However, if the monarchs could not return the loan, the bankers could not do much, they simply went bankrupt. Lending to monarchs was as big a gamble (or unavoidable risk if they were forced to lend) by those middle ages’ banks as some of the contemporary banks took by lending to poor quality borrowers in the US housing markets. Many monarchs of middle ages in Europe and the humble households of the present day US thus share a poor creditworthiness, an equality not very welcome. Sub-prime loans are not new!

What explains the financial crisis of 21st century?

Literally millions of words have already been written to talk about financial crisis of 2007-08 that has caused global economic recession. So one is unlikely to say something which is new on this issue now! One explanation is that savings from fast growing Asian economies and Middle Eastern savings from rising oil prices found their way into spending spree by the consumers in the developed west where, in particular, the US, these savings also fuelled housing boom. So when that unsustainable boom arising from consuming west and saving east burst we got the financial crisis. Therefore, why bother reading any more about it you may ask.

That’s perfectly valid question to ask. Here are some questions for you to check. What explains this crisis? why did highly paid and highly ‘qualified’ risk managers of some of the biggest banks in the world goof up? what is the meaning of moral hazard? and how that affects our daily life decisions? If you know the answers to these questions, please don’t read further. But if you are interested in exploring the answers to these questions with me, read on.

We begin by noting that social innovations have impact and many unintended consequences too on the society. The present financial crisis is an example of how the financial instruments that were invented to manage risks ended up creating financial risk for whole world. Let’s see how.

On the last day of 16th century, 31 December 1600, Queen Elizabeth I of England granted a charter to group of merchants from England forming a joint stock trading company called East India Company (EIC). The EIC lasted 258 years and did much more than just trading. The point is that joint stock company form of organising and managing trade got quickly replicated by Dutch and French too. Eventually, company as a form of organisation would transform the way business is done throughout the world. The limited liability public company is one of the most important social innovations of the last 4 centuries as it ensured that large scale business operations could be undertaken and that the smallest amounts of savings could used to finance those operations with the liability for the shareholder restricted to the nominal value of the equity share. Equity share in this way offers a maximum downside loss equal to the purchase price but the potential gains are unlimited if company performs well. But large number of shareholders meant that business of companies is managed by managers who may or may not be the shareholders. This results in potential conflict of interests between the shareholders (owners also called principals) and managers (agents). This agency problem can be very severe if the agents have far more knowledge about the business than the principals. And this is true in case of public limited companies. The knowledge and information advantage can create a moral hazard situation.

What is moral hazard? Moral hazard occurs when one of the two parties to a transaction behaves in a way that may potentially harm the interest of other party. This could happen when say a seller has more information about a product than a buyer has. For example, if as an insurance salesman I sell you an insurance policy which is of little real use in protecting your interests or I sell you a mortgage knowing that you may not be in position to honour the payments in time. Why will I do so? Well if my employment contract offers me incentives based on how many mortgages I sell I will do so. Moral hazard is very common in many day to day situations for example between professional advisors and their clients in medical, law or accounting and finance settings. Associated with moral hazard is the agency problem.


To deal with moral hazard and agency problems, most professions have their codes of conduct and so it is true for the managers of commercial companies, there are what is called corporate governance codes such as Combined Code in the UK and Sarbanes Oxley Act in the US which try to align the interests of principals and agents. However, the recent experience with the banking industry taking enormous levels of risks, has highlighted that the agency problem and moral hazard when they occur, can have devastating effects on not only the shareholders’ wealth but also on the wider community. Managers of banks giving housing loans to those borrowers who were not creditworthy enough were essentially taking business risks far beyond what prudential bankers would do. How does one explain this behaviour by not one odd small bank but by some of the biggest banks managed by highly qualified people? It can not be that they were unaware of the level of risks they were taking.

What would explain this behaviour is a combination of things. First is that there were incentives built into the remuneration packages of managers to maximise lending to earn higher returns by lending to high risk borrowers. But this alone was not sufficient condition. There are banking regulations and norms on capital requirements that would work as inherent check on the amount of lending that a bank could do. What helped the expansion of lending was the ability of banks to sell existing loans on their balance sheets to other investors and restart one more cycle of lending. This is a financial innovation called securitisation but it is not new and has been around for quite sometime. However, this process is not easy, before those bundles of loans can be sold to other investors, they have to be seen as worthy investments. For this, the prospective investors look at the credit ratings given by the agencies such as Standard and Poor and Moody’s. These ratings effectively are a judgement by these agencies about the soundness of those bundles of loans. In this case it turned out that many such assets with high ratings, called investment grades, later turned out to be much more risky than their ratings indicated. A further boost to the market for such mortgage based securities was provided by another financial innovation. Investors investing in securitised assets knew that there are always chances of some mortgage borrowers defaulting and therefore, the investments comprising such assets would be worthless in such situation. So companies like American International Group (AIG) would offer insurance protection against such assets becoming worth less. This is called Credit Default insurance. Thus the recipe for taking big risks by loan originating banks was complete and most banks participated in the housing finance boom in the US until it burst.

The cycle worked like this: Easy funding for banks from wholesale money markets, incentives for bank managers to lend more without due regard to creditworthiness of the borrowers, transfer the risky loans from balance sheet by selling them as bundles of loans (called asset backed assets or securitised assets) to other investors, those investors bought those because credit rating agencies gave them 'investment worthy grades' based in part on the fact that many of these loans were protected against the risk of defaults assured by insurance companies such as AIG, Freddie Mac and Fannie Mae. The cycle went on till 2006-07 when the borrowers of home loans started defaulting.

Everyone now knows the amount of risk that these banks took and its consequences are still unfolding. However, one big consequence of this has been a breakdown of trust between borrowers and lenders. Growth of finance and banking, just like the rest of the economy depends critically on the trust between the parties. If you reflect on the process we described earlier about expansion of lending it shows that managers of banks were entrusted by their principals, shareholders to manage the banks prudently, but they put their legally allowed remuneration interests ahead of overall risk they were creating. This brings into question the effectiveness of the remuneration committees in approving such compensation packages. Credit rating agencies failed in understanding the complexity and risks of the securitised products they were rating. Insurance companies offering insurance for products that were inherently very risky also failed their principals. The net result is crisis of confidence which has lingered on as lost trust among all stakeholders. This trust was built over decades but was destroyed in few months.

What is the way forward? For a start, individual incentives and behaviour cannot be ignored in analysing the current crisis. Hence remuneration policies and accountability will need to be factored into any new policy measures that the governments may consider. There is a simple but most powerful principle in economics and it is the relation between risk and reward. The remuneration policies in the banking industry simply violated this principle. While rewards were given in the short term, risks borne were of long term nature. The accountability in future must be individualised. Private gains and private losses both should be captured in the managerial compensation deals. The rebuilding of trust is bound to be a slow process and it can not be simply achieved by more and international regulation. The present crisis has shown there were regulatory failures and they need to be understood as well. More regulation, whether of national or supra-national character, will suffer from limitations of regulatory capabilities and competence. Confidence in markets where prudent management is rewarded will be slow to build, but that would seem more appropriate response.

Social innovations and their impact

The word ‘invention’ usually bring up image of science and technology in our mind. But there are social inventions, purists may disagree and say no they are innovations. Granted! There are social innovations. For example, innovation to manage things differently, concept of money, concept of a limited liability company, concept of family and so on. These social innovations have made human life more orderly and generally enhanced quality of life. It is generally true that necessity is mother of inventions/innovations. Born of necessity, innovations are legitimate children but born of greed and other motivations they could be ‘weapons of mass destruction’.

Financial Innovations:

Necessity: How to overcome difficulty of barter system in trade? Innovation: Imagine I have got 2 litres of milk from my cow and you have got 4 eggs from your stock of hen and the third person has got 10 kgs of wheat from her farm. We all need bit of each of these commodities. How to decide exchange rates? What if I don’t want eggs? Or you don’t like milk? So there was need for some common medium of exchange. After many trials and errors the social innovation: CONCEPT of MONEY arrived. This is a fantastic innovation if you think about it. It introduced a huge social change. It separated the production from the consumption. With money around I could now sell milk today and use part of money to buy eggs today and part to use buy eggs after one week. In other words it helped to conserve my wealth (ability to consume my income) over time. We see separation between production and consumption most clearly in form of pension fund. One saves during the working life to provide one’s pension after retirement. But what do you do with savings meanwhile? Give it to businesses who can invest in real business. But how?

Necessity: How to pool small savings to mobilise large sums to take up large scale business investments?

Innovation: Company form of organisation. There is more to be said about this in the next posting.

Necessary: How do you bring together small savers in touch with business promoters (funds deficit) who need funds?

Innovation: Several innovations made it possible. Intermediary players and rules/legislation made it possible. Collectively this is called financial system including bankers, brokers, stock exchanges and so on.

Necessity: What surety do small savers and depositors have about getting their money back and some return on their investments?

Innovation: Safety/surety depends on where one invests saving. Several innovations here.

A.For those who don’t want to take any risk, deposit the savings with government by buying certificates guaranteed by the government i.e., Treasury Notes or Treasury bills or bonds issued by government. (By the way government securities are considered ‘risk free’ because government has coercive powers to tax people. Takeaway that power, government securities are worse than junk bonds because government’s only real source of revenue is tax!)

B. For those who want little more return and are ready to take little more risk: There are deposit certificates offered by the banks not as safe as those offered by the central bank or the sovereign banks.

C. For those who want little more risk than savers in category B, they could buy the fixed income securities such as bonds issued by companies.

D. For those who want to take more risk than savers in category C, they could buy equity shares of companies.

Necessity: There is a farmer, growing potatoes, harvesting season is three months away. She is not sure of weather or attack of pests or demand for potatoes in three months time. All this means farmer is not sure how much she will realise per quintal of potatoes. Chances are that the price might be $ 20 for quintal or it could be $ 40 per quintal. She wants some certainty about her sale price in three months time. Now suppose there is a potato crisp producer who is in opposite situation as the farmer and wants to ascertain the cost of potatoes that he will have to pay in three months’ time. Both meet and strike a financial innovation.

Innovation: A contract between the farmer and the potato crisp producer that says that the farmer will sell potatoes at $ 25 per quintal to crisp producer in three months’ time is called Forward Contract. So one more innovation which is need based.

Necessity: Suppose the crisp producer thinks that the price of potato may be less than $ 25 in 3 months’ time in that case if he went for Forward Contract there is a risk that he would lose money as the market price will be less than $25 but he's agreed to buy potatoes at $25 per quintal. Is there a better way he could lock in a price of potato at maximum $25 or less.

Innovation: Suppose the farmer agrees to a contract whereby the crisp producer will have a right to buy potatoes at $ 25 per quintal after 3 months but not an obligation to buy. The contract further stipulates that the farmer will be obliged to sell at $25 if the crisp producer decides to buy the potatoes at $25. So this is a right to buy for potato crisp maker and an obligation for the farmer. Obviously the farmer is exposed to risk of losing money if price turns out to be more than $ 25 in three months time therefore, the farmer will expect some compensation for entering into such a contract.

That compensation in above situation is called premium and this contract is called an Option. The crisp producer buys an option from the farmer say for $ 0.5 per quintal. These contracts are also called derivatives. Why? Because the premium (value) of option $ 0.5 will vary with the underlying asset, in other words here the value of option is ‘derived’ from the value of potato. Valuation of options involves complex equations and the gentlemen who worked those equations out got Nobel Prize for Economic Sciences.

Options are not new though. They are as old as trade via sea or other dangerous routes but they appeared in a different form. When the goods moved by sea for example there was always a risk that they may be lost on the way due to piracy or accidents. Traders needed some protection against such losses. Some people who could understand the likelihood of such events occuring offered insurance contracts to the traders and this must have started very early on. But modern marine insurance contracts can be regarded as main predecessors of today's insurance industry. Insurance contract is nothing but an option for the policy holder. A car insurance policy for example provides a policy holder an option to surrender (a right to sell) a junk (after accident) car to the insurance company who are obliged to ‘buy’ the junk for agreed amount stated in the insurance policy.

We’ll stop with description of financial innovations here by just noting that the markets create new financial contracts to meet the varying needs of investors. Investors have different risk tolerance levels and return expectations. Financial markets thus innovate to meet those needs. Before we move on a note of caution: Never forget a simple and elegant rule of economics applicable to all the financial contracts: Higher rewards imply higher risks. There are no free lunches out there including this blog (you thought may be it is free because you are using your office computer and power connection! Well at least the time is yours and the confusion that you build up and the pain of trying to understand by reading what is written here are exclusively yours, that’s your cost, so no free lunch).

The above write up is 1291 words excluding the title. Now if you were reading to memorise it, it would take average 12-13 minutes or so, if your were reading to understand it would have taken about 5-6 minutes and if you have been skimming then perhaps you read it in about 3-4 minutes (how do I know this? well Wikipedia tells me the average reading rates). But trust me the rates for writing 1291 words will vary significantly. Anyway trivia apart, the above was written to make the readers familiar with some of the financial innovations as in my next blog posting I want to touch upon the role of options and derivative contracts and another important social innovation to discuss the financial and banking crisis. So this posting is a preparation for the uninitiated for the next posting which hopefully will be done during coming weekend. I’ll also mention what seems to me to be some of the biggest ever option contracts written after the banking crisis. Till that time ciao!

DISCLAIMER: NOTHING MENTIONED IN THIS POSTING OR ANYWHERE ON THIS BLOG SHOULD BE CONSIDERED PROFESSIONAL ADVICE. THE BLOGGER DOES NOT TAKE RESPONSIBILITY FOR ANY DECISIONS BY THE READERS AND THEIR CONSEQUENCES IF ANY WHATSOEVER.

Economic and eco-friendly kissing zones

Economics is science of understanding unintended consequences of decisions. Most of the time we look out for intended consequences of economic choices and fail to see unintended consequences. That’s why most of us don’t understand economics fully. It has been called ‘dismal science’ but that is because we ignore the above principle. Apply this principle to many decisions of several communist governments around the world and you get many horrible unintended economic consequences. The path to hell can be paved with noble intentions. Apply unitended consequences principle to managerial decisions of many banks in the past ten years and you have unintended consequence of global banking crisis arising from intended focus on the short term profitability. Apply this to decision to marry, hmm.. few intended consequences but unitended.. keep counting.

Gary S Becker, Chicago economist, thinks social and family issues can be understood and explained through econmic rational choice approach. He has done research and published a lot on family, divorce, investment in children and so on including A Treatise on the Family published in 1981. Prof. Becker's interests in issues 'non-economic'-divorce, marriage, altruism- were not necessarily appreciated by mainstream economists, but hey, he ended up getting The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1992! So one could discuss a social-cultural sounding issue from an economic point of view. So let's get going and see the the unintended consequences of 'no kissing zone'.

Recently in a north western town of Warrington in England ‘No Kissing’ signs were put up near drop off zones outside the railway station to suggest to people not to stop car for long to ‘kiss long goodbyes’. The station authorities do not want to stop people from kissing but wants people to move to ‘Kissing Zone’ if they have to, for which also signs are put up. The reason is to help smooth flow of cars and taxis streaming in to drop off or pick up people. A potential solution to ease traffic near the station but it took 11 years of convincing and arguing by the Warrington Chamber of Commerce to implement. The consequences of this decision to put two little sign boards on the walls of station include at least one intended and three unintended. This is a stone which kills four birds! An intended one and the other three unintended ones! Let’s start the journey with economic logic.

Time saved is money saved, congestion means more pollution. The decision for no kissing zone was based on the argument that people spending time in cars kissing each other long goodbyes was causing congestion and wasting people’s time in the car queues. These queues can be really long in developed countries like the UK. Thus reduced congestion would save time. This is going to be intended consequence if people follow the rule. Now Warrington is not the first in this case. As reported they borrowed the idea from Deerfield, in Illinois, USA. A hospital in Norway did the same thing in 2003 when they went for four lanes near reception area and the fourth lane, which was farthest from the reception gates was designated as see you later-goodbye ‘kissing’ lane for the staff being dropped off! So the first intended bird killed. Time saved, money saved, assuming all other things are equal as they say in economics.

Second bird, unintended, reduced congestion means less pollution. This makes ‘no kissing zones’ eco-friendly. I know what some of you are thinking. People kissing in the cars in ‘kissing zones’ are unlikely to switch off their car engines so pollution will not be reduced. But at least their cars will not be obstructing other cars in the queue hence I suspect there will be net reduction in pollution.

Third bird, unintended or not, I can’t say. But it is publicity advantage for Virgin group. Advertisers and brand builders know the importance of being in the news for right reasons or wrong! Controversy or praise, whatever attracts consumer attention goes (almost in most cases). Imagine how many TV programmes will not attract attention of people if they did not court controversies! Let’s get back to third bird.

The colour red usually is associated with warmth or danger depending what you fancy reading this now. If you combine that with images of advertisers of Valentine events red also means much more than warmth. Those who are aware of Virgin brand, the colour red is quite prominent part of the brand. I’ve travelled several times on Virgin Trains in England, every thing is red about it. The train colour, the dresses of stewards and stewardesses, the train manager (it is a new name for old Train Conductor or Guard) wears red jacket and/or red tie and indeed the colour paper napkins and the paper cups that you buy coffee in. Red is there. In England train companies are private and manage stations also. All train stations managed by Virgin Trains are painted, you guessed it right…, predominantly red. Warrington Bank Quay station where ‘no kissing’ and ‘kissing’ zone signs have been kept happens to be managed by Virgin. Now look back at 'no kissing' sign above: red is un-missable.

In addition publishers of romantic novels Mills and Boon have launched a poster campaign using Virgin’s name. One can understand the Mills and Boon’s anguish at discouraging ‘no kissing zone’ sign from their perspective, but like most of us, they have failed to notice the other sign, the ‘kissing zone’ side of the coin. Had they seen this unintended opportunity, they would perhaps be launching supporting campaign rather than opposing the decision. But whatever the campaign, Virgin gets publicity through Mills and Boon!

The fourth bird, the unintended consequence number three, is right here! I am writing about it to explain economics and you are reading about this. Millions have read and heard about the decision already through several media.

Let me conclude by saying that on one of the BBC’s blogs a caption competition was launched about the image of no kissing zone sign. It received more than 400 responses. Here are few funny ones but with serious message too:

Station pays lip service to public freedom by some one called SundayParkGeorge.

Walls may have ears, but lips are right out. By someone called OGNash.

WARNING: Kissing causes large lumps to appear all over your head. Wear a HAT. By someone called Pedro_fusball

Fun apart, the last one is good caution too as one woman in Italy had to be taken to hospital with swollen lips after a kiss by her husband because she was allergic to some chemicals used in the medicine her husband had taken half an hour before they had their expression of love for each other! Human body can be mega sensitive to things such as even peanut butter smell!