Oct 10, 2011

A lesson in Economics...

For the extremely jobless people wondering where your trusted kiruku had vanished, let me assure you (and simultaneously disappoint those who were rejoicing about the silence here) that it was a temporary break caused by one of the following (guess which):
  1. I moved to a new place and have been too lazy to get myself an internet connection;
  2. I have moved in with my parents, and have been busy being pampered with home cooked food and great conversation, and hence have not found time for the blog;
  3. I have been very busy work-wise closing multi-million dollar deals for building the nation’s infrastructure, bringing light to a billion lives;
  4. I have run out of ideas to post on.
Anyways, there has been an idea for a post which has been germinating in my mind for quite some time and it is time I inflicted it on all the three people who still check this space for updates.

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It all started one evening when my mom, in one of our usual after-dinner chats on the not-so-usual-non-marriage topic, asked “I want to join a chit scheme at the local jeweler.”

“Oh, what is this cheat scheme?”

“Not cheat scheme, chit scheme! We join a chit system, where we agree to pay, say 5000 rupees, to the local jeweler for 12 months. At the end of every month, there is a draw, and if your name comes up, you don’t have to pay any longer, and you get jewels worth Rs.60000.”

“You mean, if your name comes up in the very first month, you pay only 5000 bucks but get jewels worth Rs.60000?”

“Yes.”

“And if your name doesn’t come for the next 12 months at all?”

“Then, at the end of the year, you get jewels worth Rs.60000. Either ways, you don’t lose money.”

“You lose float…”

“What is float?”

“Never mind. It is the interest you’d have earned if you had put in 5000 bucks every month in the bank. No, that doesn’t make up for the lottery. There has to be some other catch…”

“Why do you have to doubt everybody? This kind of scheme runs in every jeweler’s shop across the country.”

Now, dear readers, take a pause. A brief background of yours truly is required. I am a banker. And we don’t trust anybody. Part of the profession. Plus, we know that there are no free lunches and no risk-free super-normal returns. 

“No, how does the jeweler make money?”

“By selling his goods.”

“That is his normal business. How can he afford to give away 55000 worth of jewels just like that? How come he does not run out of money?”

“He does not give away. There are always some or the other people joining the scheme, and so the jeweler does not run out of money.”

“You mean, he takes money from you to pay someone who is already in the scheme? And then takes money from someone else to pay you when your time comes?”

“Something like that…”

“You just described a Ponzi scheme. Or rather, the US Treasury nowadays…”

“What's Ponzi?’

“Not what, who. An old swindler. Never mind. Just tell me, what happens if someone else doesn’t join the chit scheme some day? How will the jeweler pay you?”

“It never happens. People always join the scheme. People in India will always buy gold!”

“True enough. But why would they buy gold from this jeweler? What if some competing jeweler attracts them with some other chit scheme?”

“Every jeweler has his loyal buyers. They usually come back to the same guy once they are happy with his service.”

“Even so, why put in money in a Ponzi scheme? Why not pay the jeweler in one shot when we need to buy gold?”

“We have always bought gold like this. We were not MBAs with fancy pay to buy gold in one shot. And we trust people. Besides, what’s wrong in saving up gradually to buy gold?”

“Ok, why not save up in a Bank RD, where at least we know the money is safe?”

“Because at the jeweler, you might get lucky and have your name come up in the first month!"

“Ok, how does this lucky draw work? Does he invite all the chit scheme investors on a particular day and draw the names from some box like they show in those TV shows?”

“No, he draws in his shop, I don’t know when."

“Wow, you want to put money with an unknown guy, in a Ponzi scheme, where even the lottery is not transparent? Somehow, I am a bit uneasy.”

“Ennavo po! You are always negative. Always doubting people. Forget it, I’ll not join.”

“I didn’t say no. All I am saying is, when you take a leap of faith, don’t do it blind.”

“Forget it. I don’t want to discuss this further!”

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I don’t know whether my mom learnt a lesson in economics. But I learnt a very important lesson in psychology. 

It doesn’t matter how many times one says “there is no my money or your money. It is ours, and you can choose to spend the way you want. Just because dad’s retired doesn’t mean you have to check with me for every penny spent…”, if one doesn’t practice it. Even if the venture is not economically sound. Especially if the venture is not economically sound. 

Because only if you let people you care about lose money and not worry about it, will they ever feel free enough to take the money you give them and treat it as theirs.

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In closing, a good economics student knows to win any argument. Rationally. But a good psychology student knows which arguments to not get into. Emotionally.