Ten Lessons for the Post Pandemic World

The title of the book and the author's name was enough to compel me to put this on my To-Read list and go through it before the subject got outdated. I like the overall tone of the book. Agreed with most of the lessons, appreciated some nuance on thorny topics and definitely benefitted from Fareed Zakaria's international worldview.

Here is a basic summary of the ten lessons - 

Lesson 1 - Buckle up : There will be more pandemics

• Not sure if we will see any global regulation of wet markets and meat factories. What may come out will probably be a patchwork. Hopefully, plant based meats are cheap enough to replace meat to some extent.

Lesson 2 - What matters is Quality of Government

• With so many health departments at state, local and tribal level (2,684) and then add county health departments on top of it - is one reason why the Covid-19 Response was so bad in the U.S
  
  
• If you look at other areas - lobbying and other ills plague the system.
  
  
• It is kinda depressing. It doesn't look like the two political parties, the media and the population have the intention or the "attention span" to indulge in conversations on institutional reform.

Lesson 3 - Markets are not enough

• People specially the young generation has realized that the capitalism in its current form isn't working at all. For example - why is the effect of "government spending" not a concern when Federal Reserve provides support to those with stocks and bonds.
  
  
• Why should "Essential workers" be just respected and not rewarded by the markets?

Lesson 4 - People should listen to the Experts and Experts should listen to the People

• This was a brilliant chapter. It summarized the political, social trends. 
  
  
• Experts have fared badly and seem to be out of touch with the lives of an average person.  Looking down upon those who are non-college educated, not from fancy schools is only going to depend this "anti-elitism" sentiment.
  
  
• How those who are college educated (meritocrats) who rule the rest (technocrats/bureaucrats) - and invite disdain from the rest of population. In other words, two thirds of people stand by and watch as the other third run everything. Experts these days can be vaguely described as = highly educated living in cities, holding professional jobs, tend to be socially liberal.

• Power kills empathy.

Lesson 5 - Life is Digital

• People would naturally adapt to this new world differently, some feeling liberated, others trapped.
  
  
• The pandemic showed us that technological revolutions are further along than we would have thought but also digital life can feel cramped, a poor simulacrum of the real world.

Lesson 6 - We are social animals

• Here the author said that "well managed cities" will thrive -why? Because people will stay because of their friends or because what's easy for their pocket. He also mentioned the "fifteen minute city" model that is coming up.
  
  
• This was slightly confusing as he said in the earlier chapter that life will become digital and just like life was 200 years ago when people used to farm - professional and personal life intertwined together.
  
  
• Not clear how the "social" part will manifest itself in a digital world? Will it be in the form of social gatherings? Educational lessons? Work in person?

Lesson 7 - Inequality will get worse

• The pandemic will push millions back into poverty over the next few years.
  
  
• Growing inequalities if not addressed by reforms, may result in unrest and revolutions.

Lesson 8 - Globalization is not done

• Even if the West wants to move away from Chinese suppliers, the best and easy way is to move factories to places where production costs are low and no such politics like Vietnam, Bangladesh, Romania or even Mexico. In short, globalization is here to stay.
  
  

Lesson 9 - The World is becoming Bipolar

• I agree that the world will become bipolar. However, I feel like U.S may become the weaker of the two powers if current status quo remains. China looks way strong at the moment.

Lesson 10 - Sometimes the Greatest Realists are the Idealists

• It is considered to be an idealism to hope that countries all across the world co-operate but the author reminds us that the world has seen 70 years of peace with intermittent wars in some corners - which has led to a lot of development and people moving out from poverty.
  
  
• He reminds us that the broader view after World War II - that collective security, and collective endeavors were in each nation's self-interest -still holds true today.
  
  
• Somehow a dysfunctional dynamic has set in under which politicians use multi-lateral institutions for their benefit but turn on them whenever problems emerge - and it harms people's faith in institutions and a global rule based order. He gives the example of European Union. 
  
  
• In the author's words - It's not a flight of fancy to believe that co-operation can change the world. It is common sense.

Lockdown Reading - Adaptive Markets

I don’t remember from where I picked up a recommendation for this book but what a great investment buying this turned out to be. It will not be an exaggeration to say that I really enjoyed this book. It was indeed informative but what made it enjoyable was how easily the transition was between points - concepts supported by anecdotes, stories and research studies and how beautifully in the end they all tie together to frame a powerful, optimistic call to action. The author’s work does make him sound like a good professor. 😃

The book is a collection of a lot of interesting concepts - 

• It talks about how human behavior, emotions influence our financial decisions. It is one of the reasons why the Efficient Market Hypothesis(E.M.H) doesn’t hold true.

• It does critique E.M.H and provides two strong points -

• If the market is really efficient with all the info priced in then what’s the point for any investor to do some work getting new info or numbers when everything is already priced in ?

• Also, if the market is really efficient with all the info priced in then how come George Soros’, Jim Simons’ and Warren Buffets of the world have made billions of dollars?

• It gives a good glimpse on how the concept of “money” has not been around forever and is relatively recent on an evolutionary scale. So the idea of losing money generates similar emotions as “fight or flight” in case of a physical attack.

• Using advanced technologies such as fMRI it has been found that similar centers in the brain are activated when there are prospects of making/losing money.

• Humans are not rational beings and are influenced by emotions of fear, panic and pleasure and thus that is what makes them take irrational decisions in the context of money.

• Concept of probability matching with the help of an experiment:

• Consider the game Psychic Hotline. Either letter A or B will be shown on the screen. If you get it right +$1 else -$1. 

• After a few rounds, the participants observe that A appears more often than B. Say 75% of the times it is A, and B appears 25% times.

• So the optimal strategy is to always pick A.

• But people try to mix it up which is called “Probability Matching” and that is sub-optimal thus reducing the earnings to only 62.5% times.

• It is definitely worth pondering that our DNA is 97% similar to an orangutan but the 3% difference is big enough to keep us on different sides of the fence.
  
  
• Emotion isn't the source of irrationality. The author's proposition is that we wrongly conclude that emotions are the reason for our irrational actions when infact they are the reason of rationality.
  
  
• The author reminds us that although there were so many attempts to draw inspiration from Physics to apply to Economics - it is infact more similar to Biology. Both are equally complicated fields.
  
  
• The author puts forward a new theory to beat the E.M.H. He talks of Adaptive Market Hypothesis.
  This theory is about revolving around heuristics.  It blends in the concept of "bounded rationality" too. A very good example of this is how we may have 10 shirts, 10 pants, 5 ties and 5 jackets. We don't try out every single of them every day before going to work. Because in our minds already have a heuristic/idea about which shirt will shirt well enough with a pant. 
  
  
• Also, going by the word "adaptive" we continue to adapt and learn from our experiences and surroundings (dressing appropriately is an example - while going to a function we don't try out running shorts - adapting and cutting down our choices. This is another example of bounded rationality).

The example that blew my mind was around Biological Evolution. It was fascinating to see how the concepts of risks - system

ic and idiosyncratic can be tied to evolution.

Here's my attempt to summarize it -

Let's say a hypothetical creature which could produce only 3 offsprings (Tribble) has a choice to dwell on a plateau or a valley. Odds are such that in the

a) Valley - 3 offsprings are guaranteed.

b) Plateau - 50% chance for 2; 50% chance for 4 offsprings. Net being still 3.

Now if everyone of the tribble chooses to live in the valley - they will be safe from sunshine but not from floods. If everyone of the tribble chooses to live in the plateau - they will be safe from the floods but not from sunshine.

So which option should they choose? Let, f be probability of choosing the valley. 1-f be probability of choosing the plateau.

Here, even though more tribbles chose to nest in the valley - all of them would be wiped out as soon as there is a heavy rainy season. So, what should be the optimal percentage of tribbles residing in a valley. This is where the principle of Probability Matching ties back in. f should be same as the probability of the sunlight. By probability matching, the reproductive bets will be hedged so that the expected number of offspring will be same, no matter whether it rains or shines. Sparing the complex maths behind it, so you've to trust this!

Another variation of this would be - every tribble family have their own individual experiences ie microclimate. Each family faces rain or shine in a separate and independent toss of a coin that is something like sunshine 75% of the time and rain 25%.

So the probability that all of them (say 10 tribble families) will be washed away is (1/4)^10 i.e 1 in a million. Basically, nature has diversified the risk of extinction via microclimates i.e diversification is necessary in an evolutionary cycle. It also explains why dinosaurs got extinct cause they didn't hedge their bets - they were all on one planet and got wiped out together when a meteor hit. Similarly, you can also argue why it's important for humans to inhabit some other planet too!

I thought this was a very cool thing I learned!

Something that gave me lot of optimism was how finance can actually help fund researches for life saving drugs or even the current Covid-19 crisis. We all are aware how governments are cutting funding for health and research. A cancer drug research takes 10 years and $200 million with a 5% chance of success. Clearly, no private investor would want to put their money in such a venture where they would lose their money 95% of the time. They would rather fund a tech startup and sell to FAANG later.

Better approach is to invest rather one project at a time than to invest in 150 such research projects. Even with 5% chance of success - you can to do the math to see that it is promising that atleast 3 of them will succeed. Now, the crucial part is funding $200mn x 150 i.e $30billion. Here's where you can issue bonds and finance more than half of the projects with long term debt; the intellectual property of 150 projects can be the collateral. And if you get fancy you can use derivatives - securitization, CDOs, Credit Default Swaps. Insurance companies can be invited to buy them too and it'd be a way for them to hedge their bets too considering they use an ugly term called "longevity risk". This $30 billion cancer bonds market will still be way smaller than the housing market. I wrote earlier here how this same principle can be used to fund Covid-19 research as well.

I'm still waiting to come across a logical argument of why this is not a feasible way to cure diseases like Cancer!

Overall, this was a fantastic book and worth my time reading during the lockdown. Hope it excited you to give it a try as well.

BookShop link - https://bookshop.org/books/adaptive-markets-financial-evolution-at-the-speed-of-thought/9780691191362

Covid Bonds

The World Health Organization declared Covid-19 as a global pandemic on March 11, 2020. The virus still is out floating around and the economic impact of everyone staying indoors is unfolding. While it is the right decision for everyone to stay indoors, and slow the spread, it has definitely brought the wheel of the economic cycle to a grinding halt. This is something that has never happened before and there is no playbook to follow. Re-starting the economic cycle will require some innovative, ingenious ways. 

 

Revenues for governments at the state level via taxes (sales tax etc) have almost dried up due to a sharp fall in economic activity. This has not only put at risk lots of government run programmes and schemes but also put severe strain on the exchequer. 

 

In a lot of ways, the current scenario draws similarities with WWII except this time the enemy is a microbe. Taking a leaf out of the history book - “War Bonds” were issued during WWII so as to finance the U.S government’s involvement. Over 85 million Americans bought those war bonds, and by 1946, it had raised over $185 billion dollars which translates to $2.4 trillion in present day terms. 

The same route can be adopted by the government. to finance its efforts to manufacture PPE, fund more clinical trials and studies for drugs to cure Covid-19 and when a cure or vaccine is found these bonds can help finance its large scale manufacture and distribution to every corner of the country. These bonds can range from a maturity period of 20-30 years, be tax-free and provide an interest rate of 3-4%.

In the current climate everyone is feeling the sting of the lockdown and even though social interactions have dropped to zero, the urge to help one another is at a peak. I’m sure such “Covid 19 bonds” will receive a very warm response from investors, hedge funds and even small households. This is not inherently a new concept - European Union is already considering it. India can move ahead and show the world how to cleverly manage its finances, care for its people and not let its institutions starve for much needed funds.