Against anti-corruption movement

One fine evening I saw one of my friends intently watching news channels showing “India against corruption”. He muttered, “ Efficiency has its price”. At that time, I found the comment shocking. But the more I think about it, the more I become convinced that our efforts to remove public corruption lack deep understanding of the malady. By public corruption I mean corruption that general public faces in his day-to-day business with government. Before bringing down a wall, it’s important to understand why it was put up in first place. Without this understanding, we may do much harm. So, why is there corruption in India? It’s simplistic to assume that Indians are inherently dishonest. In fact, corruption has evolved because of certain much deeper problems that must be solved first.

First, corruption is a natural response to shortages. In India, the demand for a service such as access to the courts, education, healthcare, or the attention of civil servants and politicians far exceeds the supply. To prevent the system from grinding to a complete halt, a way of rationing has to be found and corruption provides such a system. In effect it places a price upon a service and enables officials to prioritise the demand. This leads to economically efficient distribution of public resources by creating a capitalistic market, thereby bringing demand supply equilibrium.

Second, misguided socialist principles and lack of reforms in legal system have left us with complex and burdensome tangles of rules and regulations administered by huge inefficient state departments. This makes ordinary people highly dependent upon the actions of individual officials and gives the officials every incentive to exploit their power. This leaves common men with no choice but to bribe even to get their legal rights.

Finally, Corruption fights red tapism and speeds up the implementation of administration. Corruption gives incentive to poorly paid public servant to create a development-friendly system for the economy. As a result, corruption starts a chain of benefits for all the economic players, making obstructive bureaucracies much less harmful.

So what will happen if public corruption is suddenly stopped without addressing the real issues? My understanding is that economy will come to a grinding halt. First, poorly paid officials will have no incentive to do their work. Imagine the amount of time an entrepreneur will take in India to start his business? What incentive will babus have to clear licenses for his business?

Second, even if we believe that babus don’t need incentives, the overburdened government machinery will collapse. Our systems are simply not designed to cater to increasing demand. Most of public departments are badly mismanaged and are yet to see any computerization. So, if corruption goes away, demand for these services will shore as “price” reduces. This will lead to complete collapse of public machinery. Take for example, a totally corruption free RTO that is simply not able to cope with its job. If obtaining a Driving license or registering a vehicle takes years, will it do any good to economy?

Third, people will suffer greatly due lack of legal reforms. Take for example, an archaic law, The Bombay Prohibition Act that came into force on June 16, 1949 and is still in force in maharashtra. As per the act, a liquor permit is necessary for purchase, possession, transport, and consumption of liquor. The police can arrest anyone for consuming or buying alcohol in a restaurant or a store without the permit or even if the license of the store or restaurant is not valid. Now, how many people are aware of this law. Even if someone is aware of the law how is it possible for him to ensure that “all licenses and documents” of the restaurant are in order. So, what will happen if suddenly one fine day all the corrupt policemen become honest and start raiding bars and taking everyone one into custody? In fact, I may ask why they don’t do it when legally they must be doing it?. This is just one example of such laws. Indian laws are full of such examples. Indian Post Office Act 1898 confers monopoly on the post office for letter posts- can you do without courier services? That’s the “cost of efficiency.”

In the end, I guess, if corruption was removed without solving underlying issues, it’s the common man who will suffer. Rich have always found and they will always find a way around things. We must attack the basic problems that common man faces before taking away his only defence- bribing.

Let me make it very clear that i don't support corruption and i don't oppose anti corruption movements. But i just wanted to raise certain issues that are being ignored by us.

Probability, options, simple decisions and ignorance

I find it very funny that even well educated people are so ignorant of options and their implications. For example, a purchase is essentially an option that Indians often confuse with futures/forwards. A future/ forward is a binding agreement to execute a transaction in future. Whereas, an option is only an option to execute a transaction in future. An option holder has no “obligation” to execute the transaction in future.

Why is a purchase decision an option and not a forward/ future? And why exactly Indians confuse buying with forwards?

A buying decision is essentially a complex mathematical calculation based on calculation of cost of purchase and expected return. Cost of purchase is often straightforward but expected return is a mathematical nightmare. Expected return includes two variables and is defined as probability of the event multiplied by value of event. Here, both of the variables are highly subjective and indeterminate. Value of event is absolutely subjective. Of course, some mathematical calculation is possible for probability of event but its essentially indeterminate.

The problem with Indians is that they always forget that “probability of event” is an option. Indians somehow tend to think that whatever they have bought must be utilized to maximum. Historical deprivation maybe an explanation but I am not sure. The point I make here is that this probability essentially is an option, which you can exercise as per your convenience. It’s not a forward contract that you have to execute. That’s what Indians fail to understand.

Let me give examples. If a take house closer to office (costlier) instead of farther away, what am I buying? I am buying and option and not an obligation to save time when I travel to office. Does that mean I must travel to office every day because I have already “bought” time. Absolutely no. That’s foolish.

If I buy 5 different bikes what am I essentially buying? I am buying option to travel in my favorite bike when I feel like. Does that mean I must travel in every bike every day? What is weather is bad? That’s risky and of foolish.

What if join a gym? Must I go every day because I have already bought? Must I eat food everyday completely and finished every grain everyday just because it’s cooked?

But Indians just don’t get it. They want to get every penny out of their purchase. They have been deprived of things for so long that they have no concept of options. For them “wastage” is a sin. Even non-exercise of an option is a sin. If you buy an expensive shirt you must wear it every day. It’s not a choice. Its dictated by your purchase decision. Because, if you are not wearing it every day you are wasting!!! Only Gods knows when basics of Indians will be fully met so they can rise above all this.

The free versus paid anti virus

It seems that suddenly there are too many anti virus sellers- in India at least. If FM is on, I can’t drive home from office without at least few of them urging me to buy their products. That re-starts a perpetual debate between free versus paid anti virus in particular and freeware in general. The general impression that these ads try to create is that free security is just not good enough. But I will wait before parting with my hard earned money. Reasons-

1. There is not a shred of evidence to prove that paid anti virus provides better security. Numerous studies have been done and there is simply no way to prove that free anti viruses are worse than paid anti virus in basic security- that’s detecting and removing viruses. If you don’t trust me have a look here- http://news.softpedia.com/news/AntiVirus-Free-Vs-Paid-Detection-139005.shtml. My free avira was actually top detector.
2. Paid security systems somehow feel obligated to provide “complete” security. That means everything comes bundled- anti virus, anti spyware and firewall mostly. But sometimes more bell and whistle is like to be thrown in- like parental control and some other nonsense. But this is precisely what I don’t like. I don’t trust anti virus expert to manage my firewall. I would rather go for best in both individually.
3. Finally, I have found paid anti viruses to be a big resource hog. They provide too many useless features and clog my system. What I like is lean and fast machine. That’s what I get by using free security software.

So what do I use? Here is my free security system. I have been using them for many years without much trouble. Also rest assured that I have visited my fair share of Russian hacking sites. (I am not a hacker but I love to learn things)

1. Anti virus- Avira. I used AVG for quite some time before they decided that just because they are good in making anti virus they can make good firewall and bundled their anti virus into a “security suite”

2. Anti spyware- Spybot search and destroy

3. Firewall- Online Armour. I used to like comodo too. However they have also gone into security suite business. Still, you can get hold of old versions of standalone firewall if you do some search.

Finally, security is not ensured by software but by you. Use common sense-

1. Most of threat comes from Internet. Use a secure browser like firefox. Better still, use an unpopular browser- hackers have no incentive to target them. My browser is K-meleon. Its damn good and no hacker is likely to waste his time with it because very few use it and those who use it are most likely to be tough nuts to crack. There are easier targets!

2. Don’t install unnecessary software. Don’t click on executable files. When you do install something watch out- does it ask you to install some toolbar? Uncheck it. Periodically go to add and remove programs and see what all programs are installed.

3. Periodically check your startup queue and see which all programs are automatically starting up when you start your pc. Spybot has a tool to disable unknown startup programs.

Have a safe PC!

Random rewards and hooked monkeys

Mark Douglas brings out some interesting concepts in Trading In The Zone. One of the things he talks about is effect of random rewards. If you teach a monkey to do a task and consistently reward it every time the task is done, the monkey quickly learns to associate a specific outcome with the efforts. If you stop rewarding it for doing the task, within a very short period of time the monkey will simply stop doing the task. It won’t waste its energy doing something that it has now learned it won't be rewarded for. However, the monkey's response to being cut off from the reward is very different if you start out on a purely random schedule, instead of a consistent one. When you stop offering the reward, there's no way the monkey can know that it will never be rewarded again for doing that task. Every time it was rewarded in the past, the reward came as a surprise. As a result, from the monkey's perspective, there's no reason to quit doing the task. The monkey keeps on doing the task, even without being rewarded for doing it. Some will continue indefinitely. I think it’s very true even of humans. And this problem gets even more exaggerated in trading.

Suppose you observe some setup. When you trade it, there is always 50% chance that it will go in your favour. Now, that’s random reward. When a trade goes in the money you never know if it was because of your analysis or it was pure randomness. What makes things even more difficult for a trader is the “experiment” (the trade in this case) can rarely be reproduced because of dynamic nature of markets. Markets never provide exactly same conditions. For example, for a currency pair it’s it extremely difficult to find exactly same conditions at two different times. Within a day, for example, a pair will behave differently at different hours. Market characteristics will change dramatically as major markets open and close. Next day, obviously, very different conditions will prevail.

How does one, then, know if a particular setup is indeed working and rewards are not random. One solution is to be extremely skeptical of any results. For example one may reject anything that gives less that 80% positive trades. Another option is to be very specific about market conditions where a setup is applied so that trade can be reproduced with little variation in conditions. No surprise then, I have seen some accomplished traders using these techniques. One very good trader recently told me that any trade that goes against you even slightly is bad trade. That’s some strictness! But that was not all. Oce he suggested a trade and went on to add that trade expires in 15 minutes- meaning if entry trade is not activated in next 15 minutes don’t take the trade. No wonder, he has been exceptionally successful in filtering what works and what doesn’t work in trading.

Desclaimer: http://indiangridlock.blogspot.com/2010/12/disclaimers-for-all-posts-in-this-blog.html

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Profits, Losses and Nonsense

If you have been trading for some time then you must have heard someone talking about risk/reward ratio. In simple terms it is same as ratio of your stop loss/ take profit targets. It is often suggested by many that risk reward ratio of a trade must be Low- sometimes 1:2 is thrown as a rule of thumb. This means your TP should be twice of your SL How does one then explain many great traders not believing in concept of stop loss. (In case you are scratching your head, pick a copy of “one up on wall street” by peter lynch or “ bird watching in lion country” by Dirk Du Toit)

Job of a trader is to generate positive cash flows. Mathematically a trader should be solely concerned with “expected return” of the trade rather than individual components that determine this. One must optimize expected return rather than stop loss or take profit or their probabilities. For any trade,

Expected return= Probability of TP x TP- Probability of SL x SL

TP= Take profit, SL= Stop Loss

Logically, one should take a trade if this expected return is higher than costs incurred in trade( brokerage etc). (One must also consider, risk adjusted return.). Now if we assume random movements in markets then its easy to see that risk reward ratio has no bearing on expected return. In fact, no matter what ratio you use you will end up losing exactly brokerage/ spread. Increasing TP will only reduce probability of TP and increase probability of SL- linearly without giving you any advantage. So, concept of risk reward ratio is inherently useless in this case.

But traders don't believe in random walk or efficient markets or else they won’t be trading. There are few who believe in “momentum trading”. They believe that once a movement starts it will continue in same direction for a long time. In this case, it becomes very obvious that small risk reward ratio will give you enormous advantage because probability of SL and TP remains same irrespective of their levels ( 50%?). Once markets starts moving in your direction they will hit TP. Else they will hit SL irrespective of their ratio.

Then, there are traders who believe that markets have their own rhythm and they cannot move unidirectional. This means after every move there is correction and retracement bringing prices to a mean level. These traders will obviously believe in keeping very high sl/tp ratio. These are the kinds who say markets dont go anywhere. Mathematically what they mean is as SL becomes large, probability of it being hit falls not linearly but exponentially giving you an edge with large SL.

But who of these two are correct? I fired up my simulator this weekend to test these theories. (I used randomly generated trades with different risk/ reward ratios for last 20 years of hourly majors data ). As it turns out, High risk reward ratio maybe BENEFICIAL in short term and in ranging markets. However over time, the edge disappears and none tend to be correct in their beliefs. Random trades will lose money irrespective of risk reward ratio, although a HIGH risk/reward ratio will result in longer survival of the account.

Naturally, if trades are not random then results change dramatically. So it's not about risk reward ratio- its about your analysis. Worrying about TP and SL ratio will only give you headache. Observe, analyze and trade. If your observation is good you will make money else you will lose money. Trading is as simple as that. Anyone who talks jargon ought to get his facts right.

Afterthought: Ideal solution to this dilemma would be to somehow determine if markets are going to be range bound or moving directionally. Then one can shift one’s strategy to gain maximum advantage from probabilities.One such tool to determine market activity is Elliot wave analysis that tells you to keep low risk reward ratio in wave 3 and wave c. In other waves keep large risk reward ratio. No wonder most of good traders use some form of market structure analysis ( if not Elliot wave).

EDIT: I have found some interesting patterns when trades are non random. I found high risk reward ratio might actually be good. I took few momentum strategies like fractal. (Buy when daily high fractal breaks, exit at close of bar- very successful in moving majors like eur,gbp yen etc).Now, interesting part is even with this momentum strategy as you increase your sl pnl improves. For EURUSD, As sl approaches 400 pips, maximum pnl is achieved and thereafter there is no further improvement in pnl- again 20 years daily data. Yet to do enough analysis. Will need to go deeper. Meanwhile found an interesting analogy to myth of risk reward ratio- A roulette at the casino gives you a 35/1 risk/reward situation, every dollar you wager could bring you $35. So your risk here is "only" $1 but your profit (if your number comes up) is $35, a very good risk/reward scenario indeed.

Dealing with mobile Spam

Nuisance of mobile Spam is getting worse everyday. Here is my way of dealing with it if you want to save some harassment to yourself.

A. Nokia provides in built powerful call filtering functions, which I was not aware of until recently. Basically you need to make different “contact groups” of people whose call you would like to take urgently (Contacts> contact groups). For example make a contact group named “Meeting”. Add all the people whose call you would like to take even in a meeting. Next, Create a new “profile” and name it say Meeting. Now when you set different parameters for the profile, you can specify weather the phone rings for all calls or only for certain “contact group”. Deselect “all calls” and select the specifically created contact group Meeting. Set the tone or maybe vibrate only or beep once in tones section. Now you are ready to use the profile. When you step into a meeting just change your profile to meeting. You phone will ring/ vibrate only if someone from the contact group Meeting calls you. Fr all other calls it will remain silent. Later, you can check missed calls and call them back. You can create multiple profiles like this for every situation- sleeping driving or just pissed off. You can also make a contact group called known numbers and add all contacts there for use when you want to receive calls only from known numbers.

Note: In some new models, Nokia has made it difficult to add multiple contacts to contact groups. You have to select each contact one by one. You can also try PC suite to set up the contact group.

B. Try registering with national do not call registry. SMS to 1909 with keywords 'START DND' for registration. If you are being harassed by some specific company try and see if their website has a link to deregister from their database. Most of the irritating banks have a link on their website to stop them from calling you. These measures are rarely useful. But I still recommend it. It will have some minor effect at least. And in any case after registering in do not call registry if you still get a call, the caller is on wrong side of law, which can be useful.

C. Finally, for most paranoid amongst you, try using Spam software. To deal with SMS Spam I use Best Spam killer by smartphoneware. I have set it to filter all messages from unknown numbers unless they contain specific keywords like “ Account credited “ :)

To Avoid call Spam, I used to use Mobisy’s spam manager (Freeware). Basically once you add a number to its list, whenever that number calls you, Call will be automatically rejected- it wont ring / show in missed calls. He will hear “this number is busy. Please try again later.” You can later check the log of rejected calls if you wish. (I was very hesitant to disclose this software. Anyway, lets hope some people never read this blog lest they figure out why my phone is always busy) However recently I have switched to ballballer blacklist lite. It serves the same purpose with additional benefit of in built database of Spam numbers for your country. When a known Spam numbers calls you, it’s supposed to warn you. Am yet to receive many Spam calls after installing it. So, can’t comment on its effectiveness. Note that this one is not as fast as mobisys in rejecting calls. The caller actually hears one or two rings before call is disconnected. So it may seem to him that you have seen the call and then disconnected. Note: I am using these software on symbian. However, most of them have android, iphone and blackberry versions.

Together, these steps should make your life much more productive. However always be aware that Spam filtering is double edged sword and if you become too aggressive you may miss on some extremely urgent calls. Use these tools with discretion. You don’t want to miss your family’s frantic calls from a PCO. And you don’t even want too miss you Bais calls to wake you up when you are oversleeping.